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BS REPORTERS
New Delhi/ Mumbai, 22 March India on Sunday moved a step closer to having a Singapore- or Dubai- like financial hub, with the Securities and Exchange Board of India ( Sebi) approving a framework for international financial centers ( IFCs). After its board meeting in New Delhi, the market regulator issued broad guidelines for IFCs, aimed primarily at reversing the export of India's financial markets. And, for the first time, the Sebi board allowed listing and trading of municipal bonds, also referred to as ' muni' bonds, to aid the government's smartcity initiatives. Sebi, among other things, eased the pricing formula for financial institutions to convert debt to distressed borrowers into equity. A framework to enable local fund managers to simultaneously manage foreign funds was issued, and some key initiatives planned for the coming financial year were also unveiled. Sebi said IFCs, to be set up under the Special Economic Zone ( SEZ) Act of 2005, would allow subsidiaries of both domestic and foreign stock exchanges to set up shop here. Issue of depository receipts and other securities by foreign issuers under the Foreign Currency Depository Receipts Scheme, 2014, will also be allowed. "The guidelines provide for listing and trading of equity shares issued by companies incorporated outside of India, depository receipts, debt securities, currency and interest- rate derivatives, index- based derivatives and other such securities as might be specified by Sebi from time to time. Non- resident Indians, foreign investors, institutional investors, and resident Indians eligible under the Foreign Exchange Management Act ( Fema) might participate in IFCs," Sebi said in a press release. Leading domestic bourses — the National Stock Exchange (NSE) and BSE — have already agreed, in principle, to set up international exchanges at the Gujarat International Finance Tec- city ( GIFT), an equal joint venture between the Gujarat government and IL& FS that is likely to be the country's first IFC. Turn to Page 4 > Norms for debt- equity conversion, foreign funds eased; municipal bonds introduced On IFC |Guidelines to be set up under the SEZ Act, 2005 |Subsidiaries' domestic & foreign stock market intermediaries to be allowed to undertake business at IFCs |Issue of depository receipts, debt securities to be permitted under the FCDR scheme |Listing of foreign firms' shares, other derivative products to be allowed |All investor categories eligible under Fema to be allowed |MFs, AIFs set up in IFCs to be allowed to trade |GIFT to be India's first IFC CONVERTING DEBT INTO EQUITY |Formula eased for banks to convert debt to distressed borrowers into equity |Conversion to be allowed at face value or new fair- price formula |New rules to give lenders more flexibility to get control of distressed assets DISCLOSURE FOR LISTED FIRMS |To be made first to stock exchanges not later than 24 hours after an event |Board meeting outcomes to be made public within 30 minutes of meetings |Listed entities to proactively clarify rumours, reports DECISIONS AT A GLANCE Finance Minister Arun Jaitley on Sunday sought to dispel talks of the government's rift with the Reserve Bank of India (RBI) over control of money markets, saying there was no 'disconnect'. " We ( RBI and the government) have completely free and frank discussions... there is no question of any disconnect," the minister said after a meeting of the central board of RBI in New Delhi. No rift with RBI: Jaitley MARKETS, P6 E- voting complaints under Sebi scrutiny Sebi is taking a close look at complaints of irregularities in implementation of the e- voting facility, made mandatory in April last year. Its concerns arise from recent instances of the facility not being offered by some large firms. N SUNDARESHA SUBRAMANIAN reports | Sebi clears rules for IFCs | |
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"Sebi is one of the important regulators and it certainly opens up chances for setting up international exchanges. We are hoping other regulators like the Reserve Bank of India and the Insurance Regulatory and Development Authority of India will also frame rules by the end of this month," said GIFT Managing Director Ramakant Jha. With tax concessions and a relaxed regulatory framework, IFCs will aim at reversing —or at least stemming — the export of India's financial market. Due to an easy regulatory environment and lower costs, a major portion of trading on Indias benchmark stock indices and currency has shifted to markets like Singapore and Dubai. "We should also have a liberal tax regime and a more efficient legal system comparable with Singapore and Dubai, because we are in a direct competition with them. The government is working on these issues right now," said Jha. According to Sebi Chairman UK Sinha, the stock exchanges in IFCs will need an initial net worth of ₹ 25 crore, as against the ₹ 100- crore requirement for bourses present in India. For clearing corporations, the initial requirement has been revised from ₹ 300 crore to ₹ 50 crore. However, these market infrastructure institutions will be required to meet the net worth criterion under the Sebi Act over three- five years. The Sebi board also proposed to relax certain norms in its takeover code, to allow banks to convert their debt into equity. The regulator said the conversion could now take place through a " fair- price formula", with face value as the floor price. Under the current framework, the conversion formula has often made it unviable for banks to go ahead with conversion. Both Sebi and RBI have been working together to arrive at a new framework to provide a balance to both lenders and the existing shareholders of companies. "This is to revive such listed companies and provide more flexibility to lending institutions to acquire control over the company in the process of restructuring, for the benefit of all stakeholders," said Sebi. The market regulator also approved regulations for listing and issue of debt by municipalities through ' muni' bonds. Municipal ' muni' bonds are a debt instrument issued by a state or municipality to finance its capital expenditure for construction of highways, bridges, schools, etc. Globally, there is a huge market for these bonds, as these offer higher coupon rates than government securities. "Investors like insurance companies, and foreign and domestic pension funds, which earlier shied away from being part of this market ( muni bonds), will now get the adequate comfort in these regulations," said Sebi chief Sinha. A few municipal corporations raised capital through issue of such bonds in the past, under guidelines from the Union government. But trading in those was not allowed. The regulations for muni bonds stipulate that an issuer's contribution to a project shall not be less than 20 per cent of the project cost. These issuances will have a minimum tenure of three years, and will have to mandatorily obtain credit ratings. The Sebi chief added the board reviewed the requirement for continuous disclosures by listed entities. The regulator clarified the outcome of board meetings at listed firms would have to be disclosed to exchanges within 30 minutes of the meetings. All other disclosures would have to be made to stock exchanges within 24 hours of the events. Also, before the Sebi board meeting, Finance Minister Arun Jaitley was briefed on the issues around implementation of Budget proposals and the progress on those. "The Forward Markets Commission's merger with Sebi was discussed. Certain steps are required; we are working on those," said Sinha. MUNI BONDS |Municipalities to issue, to be listed and traded |Will need to obtain rating from credit rating agencies |Minimum tenure will be three years |A municipality must not have defaulted in the previous 365 days |Should have positive net worth for three preceding years LOCAL FUND MANAGERS HANDLING FOREIGN MONEY |Investment objective of both domestic and foreign fund to be the same |At least 70% portfolio to be replicated |Fund should be broad- based with at least 20 investors, single investor holding less than 25% INITIATIVES PLANNED FOR FY16 |Extensive use of technology to ease investing process ( eIPO, eKYC) |New framework to help start- ups, young entrepreneurs in financing, listing needs |Augmenting investor awareness & education initiatives, use of social media |Improving enforcement processes, upgrading website THE RECOMMENDATIONS | | E- voting lapses under Sebi lens | |
NSUNDARESHA SUBRAMANIAN
New Delhi, 22 March The Securities and Exchange Board of India ( Sebi) is taking a close look at complaints about the irregularities in implementation of the e- voting facility, made mandatory in April last year. The regulator's concern arises from several recent instances of the facility not being offered by large companies, according to officials in the know. Though most large companies have been offering this electronic facility for their annual general meetings, lapses are being increasingly seen in supplementary meetings such as extraordinary general meetings ( EGMs) and meetings called to approve restructuring and merger schemes sanctioned by courts. The latest on the list is State Bank of India ( SBI). Its EGM, scheduled for Tuesday, does not offer the facility to investors. SBI has called the meeting to approve a preferential issue of shares. This is the second time in a month the country's largest bank has called for a shareholders' meet without the e- voting provision. An EGM on February 26 also did not provide e- voting; only 638 of its 1.1 million shareholders participated. SBI's associate entity, State Bank of Bikaner and Jaipur, also conducted an EGM in February without providing an e- voting facility. Only 92 of its 60,190 shareholders attended. An email sent by Business Standard to the group compliance officer at SBI, with a copy marked to the chairman and managing director, did not elicit a response. Last month, this newspaper had reported how Jaiprakash Power Ventures did not provide the facility for its proposal to approve a restructuring process approved by a court. The management's proposals sailed through, with only 174 of the 332,000 public shareholders (0.05 per cent) attending. NTPC's meet in February is another recent instance of shareholder meets to clear court- approved schemes for restructuring skipping the evoting requirement. Only 659 of the 717,121 NTPC shareholders attended. Companies such as Jaiprakash Power have cited a circular that predates the new listing agreement, taking a view that the provisions do not apply to ' court- convened' meetings. However, shareholder activists are taking a view that no such exemption is expressly spelt out in the listing agreement or any other subsequent communication from the regulator. Shareholders argue the narrower view taken by companies is against the spirit of the amendments to the listing agreement, which seek to improve shareholder participation on key resolutions. Court- approved schemes are critical, as these could involve transfer of assets worth hundreds of crores of rupees. "Non- provision of e- voting facility to shareholders is not only non- compliance with the listing agreement. It is an extremely poor governance practice, as it restrains shareholders who cannot access the meeting venue easily from exercising their right," said J NGupta, founder of Stakeholders' Empowerment Services (SES), a proxy advisory firm. Gupta cites the poor attendance figures of these meetings to back SES' opinion that disclosures made by the companies in their notices are meaningless unless all shareholders are enabled to participate. He argues the e- voting requirement applies to all shareholder resolutions, regardless of the ' nomenclature' of the meeting. The electronic voting facility was made mandatory by Sebi for all shareholder meetings and postal ballots in April last year, as part of the new listing agreement. Clause 35B of the agreement, as in its circular CIR/ CFD/ POLICY CELL/ 2/2014, of April 17, clearly stipulates: "The issuer agrees to provide e- voting facility to its shareholders, in respect of all shareholders' resolutions, to be passed at General Meetings or through postal ballot. Such e- voting facility shall be kept open for such period specified under the Companies (Management and Administration) Rules, 2014, for shareholders to send their assent or dissent." Under the system, each shareholder is given a unique password allowing him or her to log on. Investors can cast their votes till the final day from the comfort of their home or office, while eliminating the chances of their vote being declared invalid. E- voting platforms are offered by the two main depositories — National Securities Depository and Central Depository Services. Karvy Computershare, a registrar and transfer agent, also provides an e- voting platform. These are all approved by the Union ministry of corporate affairs. State Bank of India's extraordinary general meeting tomorrow is the latest case where the facility has not been allowed for shareholders, despite last year's circular Attendance atmeetings without e- voting Shareholders Company Nature of meet Date ( in mn)* Public # (%)** NTPC Court convened meet Feb 10 0.71 659 0.09 State Bank of Bikaner& JaipurEGM Feb 20 0.06 92 0.15 SBI EGM Feb 26 1.1 638 0.06 JP Power Court convened Venture meet Feb 28 0.33 174 0.05 *Total number of shareholders ; # Public shareholders attendance; ** Attendance by public shareholders as % of total shareholders Source: BSE | | | | | 'Board composition may not undergo much change' | |
There are stirrings in the insurance sector — foreign joint venture firms are raising their stake to 49 per cent while their Indian partners retain management control. Experts discuss how the control issue is likely to play itself out
The Union government's Insurance Laws (Amendment) Bill, 2015, passed by both Houses of Parliament earlier this month, has the condition that management and control of insurance companies should be with the Indian partners. The term " control" here has the same meaning as in foreign direct investment (FDI) — the power or right to appoint most of the directors, or control management and policy decisions. This power is provided by virtue of their shareholding, management rights, shareholders' agreements or voting agreements. The insurance sector is eagerly awaiting the interpretation of the Act by the Insurance Regulatory and Development Authority of India (Irdai). Some of the emerging views are: [1]Even if the foreign promoter increases its shareholding from 26 per cent to 49 per cent, the board composition may not undergo much change. [1]Key management positions such as managing director, chief executive officer, chief finance officer, and actuary have to be held by Indians. [1]Clarity is also required as to whether or not Indians should have the majority strength on the board, as required in the telecom sector. If existing foreign partners with 26 per cent shares are already permitted to exercise veto rights and nomination rights of key employees, it is expected that they — now allowed to increase their stake to 49 per cent — can continue exercising these rights. They are for " minority protection" rather than "control". Until Irdai's clarifications are out, it is premature to start amending existing joint venture/ shareholder agreements, with respect to day- to- day management and operations. SHAILAJA LALL Partner, Amarchand & Mangaldas & Suresh A Shroff & Co WINDS OF CHANGE IN INSURANCE BOARDROOMS The issue of Indian- owned and controlled entities has been discussed often. The Department of Industrial Policy and Promotion, the Companies Act, 2013, as well as the regulators have had views on its definitions, revised with time. Until recently, control was defined as either having a majority of directors or having more than 50 per cent of the shareholding. Both were measurable, and hence had less ambiguity. With the advent of press note 4 and more recently, the Act, the definition also includes management rights, veto rights, etc. This seems to increase the level of ambiguity on its interpretation. However, the industry should be able to interpret the rules and whether the management rights are either protective or substantive. The Companies Act, 2013, mainly defines control from the point of view of governance and accounting. Accounting requires consolidation, which would present results of companies, controlled by a management and would define its span of actual control. Board decisions are influenced by the presence of independent directors who bring in the requisite governance standards. The Foreign Investment Promotion Board ( FIPB) mainly monitors sectorial caps and its definition of control came in on the basis that foreign holders multiple entities with the intent Hence, to take a control is obtained through veto rights is not necessarily looking at the issue in its right spirit. That, I presume, is the reason shareholder agreements have been accepted especially in the insurance sector in the past where the sectoral caps according to FIPB have been met. Shareholder agreements just define shareholder rights to protect respective investments. Views are of the authors 'Management control need not be through veto rights' Partner & National Leader – Financial Services, EY | | BRIEF CASE | |
SC to the rescue of directors
Turning civil disputes into criminal offences against directors of a company has two perceived advantages: The prosecution is supposed to move faster and the harassment caused to them could lead to a lucrative settlement. But the Supreme Court has come to the rescue of such directors in distress in two sets of judgments in recent days. Last week, in the judgment, Vesa Holdings Ltd vs state of Kerala, the court stated that a given set of facts might make out a civil wrong as well as a criminal offence. If an aggrieved person takes the criminal court choice, the complaint must specifically make out a criminal offence. In this case, a consultant offered to negotiate the payment default of the firm with the Industrial Investment Bank of India. However, he did not get the payment and it became a matter of dispute. He moved the criminal court, which summoned the directors. They appealed to the Kerala High Court without success. But the Supreme Court quashed the complaint stating that it did not disclose any offence at all. In the other judgment, Sharad Kumar vs Sangita Rane, the latter bought a vehicle from an Indore company. When she examined the voucher, the engine number in it differed from that of the vehicle delivered. It was found that the vehicle had met with an accident in transit and the engine was changed midway. She filed a criminal complaint of cheating against the managing director. The magistrate issued summons. The MD moved the Madhya Pradesh High Court, which dismissed the appeal. But the apex court quashed the prosecution stating that the allegations were vague and that too against the company only. There was nothing to implicate the MD to fasten vicarious liability on him. HC order on aircraft release set aside The Supreme Court last week set aside the order of the Delhi High Court releasing eight aircraft of Kingfisher Airlines detained at Delhi and Mumbai airports for non- payment of dues in 2013. The airport authorities had detained the aircraft as the airline defaulted to the tune of ₹ 10 crore. The owners of the aircraft, aCalifornia leasing company, challenged the action in the high court. It ordered the release of the aircraft on payment of parking charges. Delhi International Airport Ltd ( DIAL) appealed against the order to the Supreme Court. It held that the high court was wrong. In the judgment, DIAL vs International Lease Finance Corporation, the apex court stated that the release was ordered on the basis of the minutes of a meeting held by DIAL and other administrative authorities. But the court ruled that the minutes of a meeting of the authorities could not override statutory regulations. According to the Business Rules governing administration, a decision of this type should have been sanctioned by the concerned minister. Moreover, in this case, stakes of different departments headed by different ministries are involved. Therefore, the decision should have been taken by the concerned committee of the Cabinet. The concurrence of the finance department was necessary. " It cannot be finalised merely at the level of officers of civil aviation or the Central Board of Excise and Customs," the judgment said. Educational institutions get tax relief Supreme Court has reaffirmed its stand that where an educational institution carried on the activity of education primarily, the fact that it made a surplus did not mean that its purpose was to make profit. The court stated so while allowing the tax appeal case, Queen's Education Society vs CIT, setting aside the ruling of the Uttarakhand High Court. The test in such cases is the "predominant object" — the purpose of education should not be submerged by a profit- making motive. If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes, the judgment said while interpreting section 10 of the Income Tax Act. Compensation formula for larger bench While computing compensation for road accident deaths, one of the factors to be taken into account is the future prospects of the victims. If the deceased person was employed on salary which increases with age and experience in the government or a private firm, it is easy to calculate the loss of financial prospects. But if the person is self- employed, it is difficult to guess how much more — or less — he would have made in the later part of his life. This dilemma has split Supreme Court judges in various judgments. Last week, this issue was referred to a larger bench in the case, Shashikala vs Gangalakshamma, because two judges differed in their views. Chief Justice has to constitute a larger bench to decide the principle to be followed when the victim is self- employed. Meanwhile, the judges unanimously raised the compensation in this case for the widow and children to ₹ 19 lakh. The tribunal had awarded ₹ 8 lakh, which was raised by the Karnataka High Court to ₹ 15 lakh. In another case, Surti Gupta vs United India Insurance, the apex court raised the amount from ₹ 6.30 lakh awarded by the Punjab and Haryana High Court to ₹ 11 lakh, observing that the courts below had gone wrong in their calculation on several heads. LIC officers not workmen Development officers of LIC Corporation are not ' workmen' as defined in the Industrial Disputes Act and therefore they cannot invoke the benefits of the law, the Supreme Court stated while setting aside the judgment of the Allahabad High Court in the case, Chauharya Tripathi vs LIC. The labour court has no jurisdiction to deal with their complaints. In this case, several development officers were punished with reduction of salary by three steps. When they moved the labour court, it ordered their restitution and payment of arrears. LIC appealed to the high court in vain. But the apex court asserted that they were not entitled to the benefits of the Industrial Disputes Act, and an earlier judgment of the court to the contrary was a mistake. Puff is alright in ad campaigns The Delhi High Court last week rejected the application of Havells India Ltd for apermanent injunction against a rival manufacturer of LED bulbs on the ground that the advertisement campaign of the latter disparaged its product. It was claimed by the manufacturers of Eveready LED bulbs that their product was cheaper and brighter than Havells'. The court held that it was comparative advertising with a little puff, which was permissible in commercial speech. | | | | |
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