MCA important notice
3rd and 4th TRANCHE OF DRAFT RULES ON DEPOSIT, SFIO , NATIONAL
FINANCIAL REGULATORY AUTHORITY AND IEPF AUTHORITY HAS BEEN POSTED ON
THE WEBSITE FOR SUGGESTIONS/ COMMENTS. LAST DATE FOR SUBMITTING
SUGGESTIONS/ COMMENTS IS 05/11/2013
'Convertibles' could replace IPO safety net
BS REPORTER
Mumbai, 28 October
The Securities and Exchange Board of India ( Sebi) is considering
convertible securities as an option to protect investors from downside
risks in initial public offerings ( IPOs), after negative feedback
from market players on implementation of the safety net.
On Monday, Sebi Chairman UK Sinha said the board's regulatory
committee on primary markets was considering whether " convertibles"
could be introduced as an alternative to the safety net.
A convertible debenture blends the features of debt and equity into a
single security. Typically, these instruments have a fixed coupon rate
paid to the holder, with an option of conversion into equity at the
conversion price fixed during the issuance.
"Predominately, the response we have received is against a safety net.
One alternative the primary market advisory committee is debating is
allowing corporates to issue convertibles — they issue convertibles
and after a certain time, these have to be converted into equity, or
it is treated as adebt instrument," Sinha said on the sidelines of a
conference jointly organised by Sebi and BaFin, Germany's financial
regulatory authority. Sinha, however, didn't provide the details of
the proposal.
Experts said convertible equity would be a good option to protect
small investors and help restore their confidence in the stock market.
" Retail investors can be issued convertibles instead of equity shares
at the time of an IPO. In case the company performs poorly after
listing, the investor may not exercise the option to convert it into
equity and redeem at maturity," said B Madhuprasad, chairman, Keynote
Corporate Services, an investment banking firm. He added retail
investors would have to be provided clarity on the instrument.
"Though convertibles would help safeguard investors, these could
result in complications for issuers, who would find it difficult to
get a handle on how much of the fund- raising would be equity or
debt," said a senior official at asecurities law firm, on condition of
anonymity.
Experts said Sebi's Issue of Capital and Disclosure Requirements (
ICDR) regulations already had provisions that allowed the issuance of
innovative instruments Sebi could expand further. The participation of
retail investors in capital markets is at multi- year lows; most
investors have turned wary of investing in IPOs, following many poor
performances in this space.
Sinha said, " About twothirds of the IPOs in the last three years were
trading below the issue price. Naturally, it led to a situation in
which investors were no longer interested in coming to the market.
There were two very strong views on the safety net. First, IPO was a
risk investment; how could anyone assure capital protection on that?
Second, what was Sebi doing if two- thirds of the IPOs were trading
below the issue price for months?"
After unfavourable response to the safety net, Sebi considers
instruments with an option of conversion into equity Sebi seeks tax
incentives for REITs
The capital markets regulator, Securities and Exchange Board of India
( Sebi), will ask tax authorities to consider incentives for real
estate investment trusts ( REITs), Chairman U K Sinha said on Monday.
" For REITs to be successful, they have to be tax efficient. There's
no question about it," he told reporters on the sidelines of a
conference. " We'll talk to the Income- Tax department to make it
happen," he added, referring to the income tax department. Sinha did
not provide more details. Sebi had issued draft guidelines for
launching REITs in the country earlier this month. REUTERS
UK Sinha, Sebi chairman SEEKING NEW CONVERTS
|Convertibles are a hybrid of debt and equity |Investors earn interest
on these securities |They are also an option to convert bonds into
shares if share price performs well |If share price fares poorly,
investors can instead redeem bonds, get principal and interest
Source Business line
SEBI bowls a googly
LOKESHWARRI S. K.
SEBI has recently come out with new rules for Foreign Portfolio
Investors (FPI) that may appear innocuous at first glance.
But a closer look reveals that these can have a substantial impact on
the kind of foreign investors who register in India for buying and
selling in its stock markets. The capital markets regulator, in its
latest regulations, has shortened the list of eligible FPIs, making it
more difficult for the riskier categories to enter the country.
SEBI has now ruled that all foreign investors (barring foreign
individuals) registering as FPIs have to be incorporated entities that
are regulated by their respective country's stock market, banking or
any other relevant regulators.
This rule would make many foreign investors currently registered as
'sub-accounts' ineligible to register as FPIs.
Under the older rules, SEBI allowed even unregulated entities to
register as sub-accounts – investors on whose behalf foreign
institutional investors (FIIs) trade, but who were virtually treated
on par with them.
The regulator has also corrected the anomaly that existed in FII
regulations, under which the riskier category of investors
(sub-accounts) had to submit to lax KYC (know-your-customer) rules
while the relatively safer class — FIIs — had tighter compliance
rules. The new rules also give the banks, which now have the onus of
registering the new FPIs, the power to reject applications found
unsuitable.
The fallout
The effect of these changes is already being felt. The number of FIIs
registered with SEBI was 1,753 on September 2, this year. This
declined to 1,746 by October 25. Foreign investors registered as
sub-accounts declined more sharply from 6,416 to 6,365 in this period.
Another data-set that points towards impending change is the
participatory notes (PN) issuances. The outstanding amount of such
notes, offshore derivative instruments issued by FIIs to overseas
entities who wish to invest in Indian markets without registering
themselves with SEBI, jumped to Rs 1,71,154 crore towards the end of
September, a 10-month high.
But this could be just the beginning. The number of foreign investors
investing into India through the sub-account route is expected to
decline further even as inflows through PNs increase.
While this move is expected to sanitise the foreign investor channel,
there could be temporary pain as some investors choose to move out of
India.
The overall flow of foreign portfolio flows might, however, not be all
that greatly affected. There are enough authentic foreign investors
who will be willing to invest into Indian equity. Inflow of around $15
billion in Indian stock market so far this year is a testimony to
that.
Looking back
If you are wondering why SEBI allowed unregulated foreign investors
such easy entry into India, this is how it happened.
Indian stocks were in a roaring bull market in 2006 and 2007, fuelled
by FII money. But both SEBI and the RBI were worried at that point
since over half of FII money flowing into India by August 2007 came in
as PNs.
PNs, as pointed out, are opaque instruments where the end-owners of
the assets aren't easy to trace, making them a potential conduit for
money launderers. In October 2007, SEBI clamped down on issue of PNs
and at the same time made the norms for registering as sub-accounts
easier; thus giving the users of PNs the invitation to register with
SEBI and invest in Indian stocks directly.
The FII regulations
In order to understand the latest changes, the old rules for foreign
investors need to be examined first. Earlier, foreign investors could
register as FIIs, sub-accounts or qualified foreign investors (QFI).
FIIs could, in turn, be foreign funds, pension funds, sovereign wealth
funds and so on – all incorporated outside India and regulated in
their country of origin.
Sub-accounts included foreign companies, proprietary funds and high
net worth individuals on whose behalf the FIIs would invest. QFIs were
foreign residents who could invest directly into India.
While FIIs were required to be regulated entities, this was not
required of sub-accounts. Again, while FIIs were required to furnish
audited accounts of at least one year and other documents while
registering, no documents were asked from sub-accounts.
Despite these lax regulatory requirements, sub-accounts were treated
on par with FIIs on most matters and even allowed to issue
participatory notes to entities outside the country.
The changes
SEBI has now sought to rectify the shortfalls in the FII regulations.
It has classified FPIs into three categories. The first category
consists of government-owned investment funds, central banks or
multi-lateral investment arms.
These are the safest and need to submit to least checks. The second
category is made up of all regulated investment funds, including
university, insurance and pension funds. The first two categories can
now issue PNs. All the others, including foreign individual investors,
hedge funds, foreign companies and so on, fall in the third category.
This class of investors cannot issue PNs and have to submit to
stricter KYC checks. It needs to be noted that foreign investors who
could earlier register as sub-accounts would mostly fall in the third
category of FPIs.
The regulator has allowed the investors currently registered as FIIs
or sub-accounts to continue to buy and sell equity, as long as their
registration remains valid.
Since FIIs and sub-accounts need to renew their registration after
five years, there will not be an immediate exodus.
But as the registration expires, sub-accounts will now have to check
if they will be accepted under the new regime. Even if they are
accepted, sub-accounts might prefer the more opaque PN route to invest
in to India.
The GAAR setback
Foreign investors have also received a blow with the notification of
the General Anti Avoidance Rules this September.
The rules come into force from FY 16. So all tax benefits earned from
April 2015 from arrangements made with the intention of saving tax can
come under the taxman's lens.
The greater worry is that the rules have exempted only benefits earned
prior to August 2010 from scrutiny.
That means that any tax benefits earned — by routing investments
through countries with which India has double-tax agreements — from
August 2010 can be investigated.
The rules have also retained the clause that tax residency
certificates are necessary but not sufficient for claiming tax benefit
under double tax treaties.
These rules could be another reason why FIIs or sub-accounts might now
want to shut down the current arrangement and look up alternate route
to investing into Indian equity.
________________________________
The number of foreign investors investing into India through the
sub-account route is expected to decline further even as inflows
through P-notes increase.
________________________________
Supreme Court to Sahara: deposit title deeds worth Rs. 20,000 crore with SEBI
New Delhi, Oct. 28:
Holding that it was playing "hide and seek" and cannot be trusted any
more, the Supreme Court on Monday directed the Sahara group to hand
over title deeds of properties worth Rs 20,000 crore to SEBI, warning
that failure to comply would mean Subrata Roy cannot leave India.
Making it clear that there is no "escape" from depositing the
investors' money with the market regulator, the apex court also asked
the group to give valuation reports of the properties to SEBI which
will verify the worth of the assets.
The court was hearing three contempt petitions filed by SEBI against
Roy, the two firms — Sahara India Real Estate Corp Ltd (SIREC) and
Sahara India Housing Investment Corp Ltd (SHIC) — and their directors.
A Bench of Justices K. S. Radhakrishnan and J. S. Khehar, which was
about to restrain Roy from leaving the county till documents are
handed over, however, said that he will not be allowed to go abroad
without its permission if the order is not complied within three
weeks.
Roy's counsel had earlier pleaded that his reputation and business will be hit.
"You have driven everybody round. From day one restraint was ours,"
the Bench replied when Roy's counsel C. A. Sundaram pleaded that his
behaviour has never caused any suspicion. "You indulge too much in
hide-and-seek. We cannot trust you any more," the Bench said, adding,
"there is no escape for you and the money has to come."
The Bench, however, assured Sahara that its interests will be
protected if investor money is paid. "Rest assured that we will
protect you if you give the money," it said, and posted the case for
hearing on November 20 when it would consider passing further orders
on what is to be done to the properties whose title deeds will be
handed over to SEBI.
At the outset, Sundaram submitted that it is not possible to pay Rs
20,000 crore in cash and that the company would go into liquidation if
it was directed to pay cash.
He gave details of properties including Aamby Valley and said that
title deeds of various assets would run into thousands of pages as
there were 30,000 title deeds.
SEBI, however, expressed reservation over accepting the title deeds
and said that Sahara itself should sell the properties and hand over
the cash. But the Bench asked SEBI to go through the title deeds and
valuation records of the properties to be handed over to it by Sahara.
"Examine the title deeds and find out its worth. You can also examine
how safe it is," the Bench told SEBI's counsel Arvind Datar, who
submitted that proceedings for evaluation of property would give rise
to many other issues and amount to going into a "minefield".
(This article was published on October 28, 2013)
Source Hindu
Walking a tightrope between depositors and deposits
Raghuvir Srinivasan
While the proposed rules under the new Companies Act 2013 are
laudable, the government must not end up closing an investment avenue
Learning its lessons from the collapse of several collective
investment schemes in recent times run by fly-by-night "companies,"
the government has proposed stringent rules under the new Companies
Act 2013 to protect depositors. Notified last week, these rules
propose that companies (other than non-banking finance companies)
should henceforth insure the deposits that they take from the public.
Rule 13 of the draft Companies (Acceptance of Deposit Rules) 2013
stipulates that every company that invites public deposits should have
in place an insurance scheme at least a month before it advertises for
deposits. Every deposit and interest accrued thereon should be insured
against default in repayment. As per the proposed rules, where the
deposit value is below Rs.20,000, the insurance should cover the
entire deposit plus interest thereon. In case of deposits over this
amount, the insurance should cover repayment of at least Rs.20,000.
In other words, public company deposits will henceforth be insured for
a maximum of Rs.20,000. This is similar to the existing scheme for
bank deposits which are insured up to a maximum of Rs.1 lakh by the
Deposit Insurance and Credit Guarantee Corporation.
Not just this. Companies are also required to set aside a portion of
the public deposits they hold, whether secured or unsecured, in a
Deposit Repayment Reserve Account (DRRA) with a scheduled commercial
bank. Before April 30 each financial year, companies have to put away
in the DRRA 15 per cent of the deposits maturing during the financial
year and the one following that.
Adverse impact
Companies have also been barred from advertising abnormal returns and
from paying agent commissions that are not in line with Reserve Bank
of India regulations.
The objective of these rules — protecting depositors — is indeed
laudable. There have been far too many instances in recent times where
the public has been hoodwinked by the promise of above-normal returns.
Yet, the point is that the government should not end up closing an
investment avenue while trying to make it safer.
The regulations could have an adverse effect on the corporate deposits
market which is popular with senior citizens and other conservative
investors who shy away from riskier alternatives such as the stock
market.
The necessity to insure deposits and maintain a balance in a reserve
account will push up costs for companies. With the regulations clearly
specifying that the cost of insurance cannot be passed on to
depositors, companies may have to absorb the premium as a cost on
their balance sheets. The deposit repayment reserve account will also
tie down funds for the company. It is not clear if the company will
earn interest on this but even if it does, the rate may not be very
high. Together, these proposals will make public deposits an expensive
source of funds for companies.
Limited options
Given this, companies have just two options. Either they have to opt
out of the public deposits market or they have to build in the extra
cost of insurance into the interest rate they propose to pay. If they
decide to offer lower rates to compensate for the insurance cost, then
it will become difficult to attract fixed deposits as investors have a
range of options to choose from.
Company fixed deposits are not attractive even now given that the
interest received is subject to tax at the maximum marginal rate,
which is why they are limited to a select category of investors. Bank
deposits, which come with the same tax liability, are more popular for
the simple reason that they are insured. Given these, the proposed
regulations might end up making the corporate fixed deposits market
unviable.
Of course, it can be argued that the big, well-capitalised and safe
companies anyway do not accept deposits from the public. The main
reason for this is that the cost of compliance and servicing of
deposits is high. However, there are a lot of small and medium-sized
companies from well-established industrial groups that still use
public fixed deposits as a means of finance. It is this group that
will now feel the heat especially because they have a faithful
investor base.
Striking a balance
So, how does one strike a balance between the important objective of
investor protection and preserving a popular investment option? One
way will be to do away with income tax on interest from fixed
deposits, be they with banks or companies.
Alternatively, the government can have a slab up to which fixed
deposits will be free of tax on interest. Companies can then have the
flexibility to offer reduced rates to adjust for compliance costs and
still keep their deposit schemes attractive. In the process, all the
three stakeholders will gain: investors will have safety; companies
can continue to access the fixed deposit market and the government
will have less to worry about safety of the financial system.
raghuvir.s@thehindu.co.in
Keywords: Companies Act 2013, public company deposits, DRRA, public
deposits, insurance, income tax, fixed deposit interest
--
CS A Rengarajan
9381011200
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