Amend Fema regulations: SC
BS REPORTER & AGENCIES
New Delhi, 15 October
The wait for international retail majors to set up shop in India may
be extended.
While refusing to stay foreign direct investment (FDI) in the retail
sector, the Supreme Court today said the government policy on the
issue didn't have a legal sanction. It added this could be resolved by
the Reserve Bank of India (RBI) amending regulations in the Foreign
Exchange Management Act (Fema).
The court has given the Centre two weeks to get the regulations amended.
An RBI spokesperson explained the role of the central bank in enabling
multibrand retail FDI: RBI has to come out with a circular, which
could be done immediately. A Fema notification also has to be issued.
As the notification would be a legal amendment, RBI would require the
government's permission for this. While RBI would approach the finance
ministry for approval, other ministries, too, may be consulted. After
the government nod, the central bank would place the notification on
the gazette.
How quickly the regulations are amended would depend on the time the
government takes to approve the Fema notification. The amendment
doesn't require the Parliament's approval.
Last month, the Cabinet had cleared 51 per cent FDI in multi-brand
retail. But lawyer ML Sharma had filed a public interest litigation
challenging the Centres policy on the grounds that retail trading was
strictly prohibited under Fema, for which the power to come out with a
circular was vested with RBI. The central bank hadn't issued any
regulation in this regard after 2008.
Today, judges R M Lodha and A R Dave said the policy suffered from
"curable" irregularity, as RBI had not amended Fema regulations, which
should have been done before the Centre had issued its notification.
The judges said, "It is a legal process which has to be taken to the
logical conclusion." Foreign investors in the retail sector have
already raised concern over the conditions on investment. Contentious
issues in the sector include a state-wise rollout of FDI, the
criterion that only cities with a population of more than a million
can allow foreign retail set-ups and the clause of at least
$100-million fresh investment, 50 per cent of which would have to be
in back-end infrastructure.
FDI IN RETAIL
Sebi moves spook IPO mkt
SAMIE MODAK& NSUNDARESHASUBRAMANIAN
Mumbai, 15 October
Two recent 'investor-friendly' moves by the Securities and Exchange
Board of India (Sebi) in the primary market have spooked market
players and potential issuers. While Sebi says the moves are aimed at
protecting investors from potential losses, issuers are worried some
provisions could alter the fundamental attributes of equity as a risk
asset, delivering a death blow to a market that is already struggling.
Last week, Sebi issued rules for rejecting draft offer documents of
companies that did not meet its standards on several criteria. Last
month, it floated a discussion paper on the safety net provisions for
individual retail investors, through which companies have to buy back
shares at the issue price in case of a steep fall, following listing.
Experts said these measures would make it more challenging for bankers
and issuers to bring new companies to the market. So far this
financial year, only ~770 crore has been raised from 19 issues,
according to Prime Database.
The moves may also lead to arise in litigation, as the rejection rules
provide discretionary powers to Sebi. B Madhuprasad, executive
vice-chairman, Keynote Corporate Services, which specialises in
small-size initial public offerings, says, "The rejection framework
will give rise to SAT (Securities Appellate Tribunal) matters. More
issuers will now go to SAT to appeal against Sebi's rejection grounds.
The concept of a safety net is unheard of in equity markets across the
world." Bankers say some rejection criteria are vague and
all-encompassing. For instance, Sebi says it would reject companies
with business models that are "exaggerated, complex or misleading, and
the investors may not be able to assess the risks associated with such
business models." Other such criteria are so common that practically
everyone would be rejected. The order says the offer document can be
rejected if the purpose for which the majority of the issue proceeds
would be utilised "is vague"; hundreds of companies have raised money
from the market for "general corporate purposes".
Turn to Page 8 >Safety net, rejection criteria worry issuers and
intermediaries TIGHTENING THE SCREWS
Sebi has issued rules for rejecting draftoffer documents and has
floated adiscussion paper on safetynetin IPOs. Keyhighlights on the
two:
>Offer document rejection framework |Quality of disclosures inadequate |High risk associated with the issue |Ultimate promoters unidentifiable |Proceeds are used towards repayment of loan or inter-corporate deposits |Business model of companies exaggerated, complex or misleading |Sudden spurt in financial performance of a company ahead of filing
>Safety net framework (proposed) |To be triggered if stock underperforms broader market by 20% |Price to be calculated on volume-weighted basis |Maximum refund on up to ~50,000 investment |Maximum total refund to be 5% of issue size |Provision available for three months post-listing
________________________________________
Click here to read more...Turn to Page 8
Click: Article continued from…Sebi moves spook IPO mkt
________________________________________
Sebi moves...
Experts fear this may lead to a situation in which people do not stop
'bad-boy' activities, but simply stop disclosing those. There are also
doubts on whether Sebi has the resources to detect cases of
non-disclosure/wrong disclosure/cleverly-worded disclosures.
Somasekhar Sundaresan, partner, JSA, said, "Sebi could have shot
itself in the foot with this regime. When Sebi does not reject an
offer document, it would only be logical to assume (regardless of the
disclaimers it may write) that Sebi has been adequately satisfied the
issuer's business model is not exaggerated, complex or misleading, and
that investors are able to assess it well." Madhuprasad added bankers
would have to be very conscious with disclosures and the company's
business model. "They cannot exaggerate. It is not necessary to put so
many prerequisites, when monitoring so many things would be difficult
at Sebi's end," he said.
However, Prithvi Haldea of Prime Database said these measures were
necessary because of the conduct of issuers. "The world over, a
principle/disclosure-based system has not worked. People are focused
on the short term and greedy. Therefore, everything has to be
prescribed. We are all moving towards a rulesbased system. It is
inevitable."
>FROM TSI, PAGE 1
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CS A RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai
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