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RegulatoryGLOBAL
UPDATE
January 2014, Volume 4, Issue 1
Confederation of Indian Industry
InsideARTICLES AND UPDATES CII'S RECENT INITIATIVESlIndian Companies - Moving closer to a US Listing
lInfrastructure Projects - Capitalization challenges
lWith infra, banking needing trillions, regulatory innovation critical
lCorporate bond markets in India – Challenges and Opportunities
lCorporate debt market – future prospects
lDomestic and International Updates
lNew Appointments
lCII's 9th International Corporate Governance Summit
lInteraction with SEBI Chairman
lCII Recommendations on Draft Rules under Companies Act, 2013
lCII Representation on Prohibitions and Restrictions Regarding Political Contributions
lComments on the Justice Sodhi Committee Report on Insider Trading Regulations
lCII Representation on Need for Exemptions for Private Companies
1
DISCLAIMER This Regulatory Update has been compiled with a view to update readers and CII membership of international as well as the domestic changes relevant to the domain of Corporate Governance & Regulatory Affairs. The compilation must not be taken as an exhaustive coverage of announcements and news nor should it be used as professional advice. Although, every endeavour has been made to provide exhaustive information, no claim would be entertained in the event any information/data/details/text is found to be inaccurate, incomplete, at variance with official data/information/details released through other sources prior or subsequent to release of the issue. CII does not necessarily subscribe to the views expressed in the items. These reflect the author's personal views and in the event of any violation of IPR by the subscribers, CII would not be held responsible in any manner. Further, no part of this Update may be reproduced, copied or used without the prior permission of CII.
Contents
Expert Speak
Ms. Roopa Kudva, Managing Director & CEO, . . . . . . . . . . . 19CRISIL Ltd on “With Infra, Banking NeedingTrillions, Regulatory Innovation Critical"
Mr Nirmal Jain, Chairman, India Infoline Limited on. . . . . . . 22 “Corporate Bond Markets in India – Challenges and Opportunities”
Mr Mohan Shenoi, President, Group Treasury and . . . . . . . . 25Global Markets Kotak Mahindra Bank on “Corporate Debt Market – Future Prospects”
NATIONAL UPDATES . . . . . 2
APPOINTMENTS . . . . . . . . . 9
GLOBAL UPDATES . . . . . . 10
lIndian Companies - . . . . 14
Moving Closer to a
US Listing
lInfrastructure . . . . . . . . 16
Projects -
Capitalization
Challenges
CII's Recent Initiatives
Events:
CII's 9th International Corporate Governance Summit . . . . 27
Interaction with SEBI Chairman . . . . . . . . . . . . . . . . . . . . 29
Representations:
CII Recommendations on Draft Rules under . . . . . . . . . . . . 30Companies Act, 2013
Prohibitions and . . . . . . . . . . . . . . . 32Political Contributions
Justice Sodhi Committee . . . . . . . . . . . . . . . . . . 34Insider Trading Regulations
Need for Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 for Private Companies
Restrictions Regarding
Report on
A host of developments are scheduled to take place in 2014.Here is a list of some of
the most important ones.
General Elections
India will have general elections for the 16th Lok Sabha. The current Lok Sabha will
complete its constitutional term on 31 May 2014.
Assembly Elections
The tenure of the assemblies of Andhra Pradesh, Arunachal Pradesh, Haryana,
Maharashtra, Odisha and Sikkim is due to expire during the year. These states
would have elections between May and December 2014.
Elections would also take place in the following countries:
February- Thailand
March- Colombia
April-Afghanistan, Iraq, South Africa
August -Turkey
October-Brazil
December-New Zealand
Appointments
Ms Janet Louise Yellen would be the Chairman of the Board of Governors of the
Federal Reserve System. The first woman to run the central bank of the United
States, she will assume office on 1 February 2014.
G-20 Summit
9th meeting of the G-20 heads of governments will be held in Brisbane, the capital
city of Queensland, Australia, on 15 and 16 November 2014. The hosting venue will be
the Brisbane Convention & Exhibition Centre.
l
l
l
Indonesia,
In The Coming Months…
1
DISCLAIMER This Regulatory Update has been compiled with a view to update readers and CII membership of international as well as the domestic changes relevant to the domain of Corporate Governance & Regulatory Affairs. The compilation must not be taken as an exhaustive coverage of announcements and news nor should it be used as professional advice. Although, every endeavour has been made to provide exhaustive information, no claim would be entertained in the event any information/data/details/text is found to be inaccurate, incomplete, at variance with official data/information/details released through other sources prior or subsequent to release of the issue. CII does not necessarily subscribe to the views expressed in the items. These reflect the author's personal views and in the event of any violation of IPR by the subscribers, CII would not be held responsible in any manner. Further, no part of this Update may be reproduced, copied or used without the prior permission of CII.
Contents
Expert Speak
Ms. Roopa Kudva, Managing Director & CEO, . . . . . . . . . . . 19CRISIL Ltd on “With Infra, Banking NeedingTrillions, Regulatory Innovation Critical"
Mr Nirmal Jain, Chairman, India Infoline Limited on. . . . . . . 22 “Corporate Bond Markets in India – Challenges and Opportunities”
Mr Mohan Shenoi, President, Group Treasury and . . . . . . . . 25Global Markets Kotak Mahindra Bank on “Corporate Debt Market – Future Prospects”
NATIONAL UPDATES . . . . . 2
APPOINTMENTS . . . . . . . . . 9
GLOBAL UPDATES . . . . . . 10
lIndian Companies - . . . . 14
Moving Closer to a
US Listing
lInfrastructure . . . . . . . . 16
Projects -
Capitalization
Challenges
CII's Recent Initiatives
Events:
CII's 9th International Corporate Governance Summit . . . . 27
Interaction with SEBI Chairman . . . . . . . . . . . . . . . . . . . . 29
Representations:
CII Recommendations on Draft Rules under . . . . . . . . . . . . 30Companies Act, 2013
Prohibitions and . . . . . . . . . . . . . . . 32Political Contributions
Justice Sodhi Committee . . . . . . . . . . . . . . . . . . 34Insider Trading Regulations
Need for Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 for Private Companies
Restrictions Regarding
Report on
A host of developments are scheduled to take place in 2014.Here is a list of some of
the most important ones.
General Elections
India will have general elections for the 16th Lok Sabha. The current Lok Sabha will
complete its constitutional term on 31 May 2014.
Assembly Elections
The tenure of the assemblies of Andhra Pradesh, Arunachal Pradesh, Haryana,
Maharashtra, Odisha and Sikkim is due to expire during the year. These states
would have elections between May and December 2014.
Elections would also take place in the following countries:
February- Thailand
March- Colombia
April-Afghanistan, Iraq, South Africa
August -Turkey
October-Brazil
December-New Zealand
Appointments
Ms Janet Louise Yellen would be the Chairman of the Board of Governors of the
Federal Reserve System. The first woman to run the central bank of the United
States, she will assume office on 1 February 2014.
G-20 Summit
9th meeting of the G-20 heads of governments will be held in Brisbane, the capital
city of Queensland, Australia, on 15 and 16 November 2014. The hosting venue will be
the Brisbane Convention & Exhibition Centre.
l
l
l
Indonesia,
In The Coming Months…
GLOBAL REGULATORY UPDATE
2 3
F u r t h e r t h e a m o u n t
corresponding to the Mark to
Market value of the Contract as on
the transfer date should be
e x c h a n g e d b e t w e e n t h e
Transferor and the Transferee,
with no cash flow being given to
the Remaining Party.
iv. Other Conditions:
The Transferor will be able to
novate the Contract subject to the
said contract being held by it for a
period of 6 months in case of the
original maturity date being for 1
year and for at least 9 months in
case the original maturity date is
beyond 1 year. The said condition
not being applicable in case the
Transferor is winding up its
business or is under liquidation.
The MCA has accorded statutory
s t a t u s t o t h e S e r i o u s F r a u d
Investigative Office ("SFIO") vide its
Press Release dated December 06,
2013.
As per the release the ministry would
also be taking steps to improve the
functioning of the SFIO by inducting
n e w t e c h n o l o g y a n d s k i l l e d
manpower. The government had
approved the establishment of the
SFIO in 2003 based on the Naresh
C h a n d r a c o m m i t t e e
recommendations. The SFIO is a multi-
disciplinary organization consisting of
experts from various fields including
the capital markets, financial sector,
tax, forensic audit, law, customs and
investigation.
By according the statutory status the
ministry hopes that the SFIO would be
empowered in taking the necessary
and effective action in ensuring
greater regulatory compliance and
protecting investor rights.
3. SFIO ACCORDED
STATUTORY STATUS
4. CLARIFICATION WITH
REGARD TO DISCLOSURES
TO BE MADE FOR POLITICAL
CONTRIBUTIONS MADE BY
COMPANIES
5. TRANSFER OF SHARES IN
FINANCIAL SECTOR-
RELAXATION OF
REGULATION
The Ministry of Corporate Affairs by its
circular dated 10 December 2013 has
issued a clarification with respect to
the companies that need to make
d i s c l o s u r e s o f t h e p o l i t i c a l
contributions made by them under
Section 182 (3) of the Companies Act
2013 ("Disclosure Section").
As per the circular, the companies
contributing amounts to the 'Electoral
Trust Company' who in turn make
contributions to political parties need
not make disclosures under the
Diclosure Section which they would
have to in the event of them making
the contributions directly to the
political parties. Further, alongside
companies making disclosures, the
clarification states that the Electoral
Trust Company would also be required
to make disclosures in their books of
accounts as regards the amounts
received from the companies for
political contribution along with
details of the amounts contributed by
them to the political parties.
The Reserve Bank of India ("RBI") by
its notification dated November 11,
2 0 1 3 h a s m o d i f i e d t h e f i l i n g
requirements in respect of the
transfer of shares from Residents to
Non - Residents where the investee
company is in the Financial Sector.
Earlier, for any such transfer to occur
between the parties there has to be a
No Objection Certificate (NOC) to be
obtained from the respective financial
sector regulator of the investee
company as well as transferor and
t r a n s f e r e e e n t i t i e s , w h i c h
requirement has now been dispensed
with i.e. to say that NOC's need not be
filed while submitting the form FC-TRS
to the AD bank.
However, any 'fit and proper/ due
diligence' requirement as regards the
non-resident investor as stipulated by
the respective financial sector
regulator shall have to be complied
with.
In light of the Ministry of Corporate
Affairs notifying 98 sections of the
new Companies Act, 2013 vide its
circular dated November 19, 2013 it has
brought about a clarification with
regard to the applicability of provision
of Section 372A of the Companies Act,
1956 which deals with inter-corporate
loans and investments, which inter
a l i a e x e m p t s g r a n t o f
l o a n / i n v e s t m e n t s b y h o l d i n g
companies to their wholly owned
subsidiaries.
This circular now clearly clarifies that
the old section of the Companies Act,
6. APPLICABILITY OF SECTION
372A PERTAINING LOANS
AND INVESTMENTS MADE
BY COMPANIES
NATIONAL
By :
1. Extension of ESOP
compliance deadline again
2. NOVATION OF OTC
DERIVATIVE CONTRACTS
SEBI has decided to extend the time
l ine for al ignment of existing
employee benefit schemes with the
SEBI (ESOS and ESPS) Guidelines,
1999, to June 30, 2014. SEBI had earlier
e x t e n d e d t h e d e a d l i n e t o 3 1
December 2013 from the 30 June 2013
mandate.
Accordingly, in Clause 35C (ii) of the
Equity Listing Agreement, the words
"December 31, 2013" shall be replaced
with "June 30, 2014".
The RBI has by its circular dated
December 9, 2013 permitted novation
o f O T C d e r i v a t i v e c o n t r a c t s
("Contract").
Highlights of the circular include:
i. N o v a t i o n : N o v a t i o n i . e .
replacement of one of the existing
parties ("Transferor") to the
Contract is possible subject to the
prior consent of the other party to
the Contract ("Remaining Party").
T h e n o v a t i o n p e r m i t s t h e
Transferor to transfer all his rights,
liabilities, duties and obligations to
a third party ("Transferee").
ii. Purpose of Novation: Novation
may be used for management of
counter-party exposure and
counter-party credit risk; and to
deal with events such as winding-
up of business by banks and in
cases of mergers/acquisitions.
iii. Mechanism for Novation: For
executing the novation the 3
parties namely the Transferor, the
Transferee and the Remaining
Party are to enter into a Tri Partite
Agreement by which the Contract
will stand extinguished and a new
contract having identical terms
and conditions as the Contract
including the terms pertaining to
notional amount and maturity
date shall hold good as between
the Transferee and the Remaining
Party.
The execution of the new contract
will release the Transferor from its
obligations and liabilities under the
Contract which would now be
reinstated in the new contract
executed between the Transferee
and the Remaining Party and
assumed by the Transferee under
the said contract.
GLOBAL REGULATORY UPDATE
2 3
F u r t h e r t h e a m o u n t
corresponding to the Mark to
Market value of the Contract as on
the transfer date should be
e x c h a n g e d b e t w e e n t h e
Transferor and the Transferee,
with no cash flow being given to
the Remaining Party.
iv. Other Conditions:
The Transferor will be able to
novate the Contract subject to the
said contract being held by it for a
period of 6 months in case of the
original maturity date being for 1
year and for at least 9 months in
case the original maturity date is
beyond 1 year. The said condition
not being applicable in case the
Transferor is winding up its
business or is under liquidation.
The MCA has accorded statutory
s t a t u s t o t h e S e r i o u s F r a u d
Investigative Office ("SFIO") vide its
Press Release dated December 06,
2013.
As per the release the ministry would
also be taking steps to improve the
functioning of the SFIO by inducting
n e w t e c h n o l o g y a n d s k i l l e d
manpower. The government had
approved the establishment of the
SFIO in 2003 based on the Naresh
C h a n d r a c o m m i t t e e
recommendations. The SFIO is a multi-
disciplinary organization consisting of
experts from various fields including
the capital markets, financial sector,
tax, forensic audit, law, customs and
investigation.
By according the statutory status the
ministry hopes that the SFIO would be
empowered in taking the necessary
and effective action in ensuring
greater regulatory compliance and
protecting investor rights.
3. SFIO ACCORDED
STATUTORY STATUS
4. CLARIFICATION WITH
REGARD TO DISCLOSURES
TO BE MADE FOR POLITICAL
CONTRIBUTIONS MADE BY
COMPANIES
5. TRANSFER OF SHARES IN
FINANCIAL SECTOR-
RELAXATION OF
REGULATION
The Ministry of Corporate Affairs by its
circular dated 10 December 2013 has
issued a clarification with respect to
the companies that need to make
d i s c l o s u r e s o f t h e p o l i t i c a l
contributions made by them under
Section 182 (3) of the Companies Act
2013 ("Disclosure Section").
As per the circular, the companies
contributing amounts to the 'Electoral
Trust Company' who in turn make
contributions to political parties need
not make disclosures under the
Diclosure Section which they would
have to in the event of them making
the contributions directly to the
political parties. Further, alongside
companies making disclosures, the
clarification states that the Electoral
Trust Company would also be required
to make disclosures in their books of
accounts as regards the amounts
received from the companies for
political contribution along with
details of the amounts contributed by
them to the political parties.
The Reserve Bank of India ("RBI") by
its notification dated November 11,
2 0 1 3 h a s m o d i f i e d t h e f i l i n g
requirements in respect of the
transfer of shares from Residents to
Non - Residents where the investee
company is in the Financial Sector.
Earlier, for any such transfer to occur
between the parties there has to be a
No Objection Certificate (NOC) to be
obtained from the respective financial
sector regulator of the investee
company as well as transferor and
t r a n s f e r e e e n t i t i e s , w h i c h
requirement has now been dispensed
with i.e. to say that NOC's need not be
filed while submitting the form FC-TRS
to the AD bank.
However, any 'fit and proper/ due
diligence' requirement as regards the
non-resident investor as stipulated by
the respective financial sector
regulator shall have to be complied
with.
In light of the Ministry of Corporate
Affairs notifying 98 sections of the
new Companies Act, 2013 vide its
circular dated November 19, 2013 it has
brought about a clarification with
regard to the applicability of provision
of Section 372A of the Companies Act,
1956 which deals with inter-corporate
loans and investments, which inter
a l i a e x e m p t s g r a n t o f
l o a n / i n v e s t m e n t s b y h o l d i n g
companies to their wholly owned
subsidiaries.
This circular now clearly clarifies that
the old section of the Companies Act,
6. APPLICABILITY OF SECTION
372A PERTAINING LOANS
AND INVESTMENTS MADE
BY COMPANIES
NATIONAL
By :
1. Extension of ESOP
compliance deadline again
2. NOVATION OF OTC
DERIVATIVE CONTRACTS
SEBI has decided to extend the time
l ine for al ignment of existing
employee benefit schemes with the
SEBI (ESOS and ESPS) Guidelines,
1999, to June 30, 2014. SEBI had earlier
e x t e n d e d t h e d e a d l i n e t o 3 1
December 2013 from the 30 June 2013
mandate.
Accordingly, in Clause 35C (ii) of the
Equity Listing Agreement, the words
"December 31, 2013" shall be replaced
with "June 30, 2014".
The RBI has by its circular dated
December 9, 2013 permitted novation
o f O T C d e r i v a t i v e c o n t r a c t s
("Contract").
Highlights of the circular include:
i. N o v a t i o n : N o v a t i o n i . e .
replacement of one of the existing
parties ("Transferor") to the
Contract is possible subject to the
prior consent of the other party to
the Contract ("Remaining Party").
T h e n o v a t i o n p e r m i t s t h e
Transferor to transfer all his rights,
liabilities, duties and obligations to
a third party ("Transferee").
ii. Purpose of Novation: Novation
may be used for management of
counter-party exposure and
counter-party credit risk; and to
deal with events such as winding-
up of business by banks and in
cases of mergers/acquisitions.
iii. Mechanism for Novation: For
executing the novation the 3
parties namely the Transferor, the
Transferee and the Remaining
Party are to enter into a Tri Partite
Agreement by which the Contract
will stand extinguished and a new
contract having identical terms
and conditions as the Contract
including the terms pertaining to
notional amount and maturity
date shall hold good as between
the Transferee and the Remaining
Party.
The execution of the new contract
will release the Transferor from its
obligations and liabilities under the
Contract which would now be
reinstated in the new contract
executed between the Transferee
and the Remaining Party and
assumed by the Transferee under
the said contract.
GLOBAL REGULATORY UPDATE
4 5
Key features of the ITP Regulations:
I. Eligibility criteria:
lNo past action by Authority:
The promoters, directors or
group company of the SME and
the SME itself should not be in
the list of wilful defaulters of
RBI. No winding up petition
against the SME should have
been admitted by a competent
court. The group companies or
subsidiaries of the SME and the
SME itself should not have been
referred to the Board for
I n d u s t r i a l a n d F i n a n c i a l
Reconstruction within a period
of five years prior to the date of
application. Also, no regulatory
action should have been taken
against the SME, its promoter
or director, by the prescribed
regulatory authority within a
period of five years prior to the
date of application;
lAudited Statements: The SME
should have at least one full
y e a r ' s a u d i t e d f i n a n c i a l
statements for the immediately
preceding financial year and
should not have completed a
period of more than ten years
since incorporation;
lRevenue of SME: The revenue
of the SME should not exceed
Rs. 1,000,000,000 (Rupees One
Billion Only) in any of the
previous financial years and the
paid-up capital of the SME
s h o u l d n o t e x c e e d I N R
250,000,000 (Rupees Two
Hundred Fifty Million Only) in
any of the previous financial
years; and
lMinimum Investments: SME is
required to meet any one of the
following criteria - (i) at least
one alternative investment
fund, venture capital fund or
o t h e r c a t e g o r y o f
8. SELF-REGULATORY
ORGANIZATION
REGULATIONS, 2013
INTRODUCED AND
ENACTED
9. FINANCING OF
"INFRASTRUCTURE
LENDING" SCOPE EXTENDED
SEBI by its circulars dated 7 January
2013 and 8 January 2013 have
introduced and enacted the Securities
and Exchange Board Of India (Self
R e g u l a t o r y O r g a n i z a t i o n s )
(Amendment) Regulations, 2013
("Regulations") which shall be
applicable to distributors engaged by
asset management companies of
mutual funds and distributors
engaged by portfolio managers from
8 January 2013.
The highlights of the Regulations
include the following:
i. New Definitions: New definitions
of "distributor" and "issuer" have
been introduced.
ii. I n t e r m e d i a r y : T h e e x i s t i n g
definition of "Intermediary" has
been substituted with a new
definition wherein an intermediary
will be as defined under the SEBI
(Intermediaries) Regulations,
2008 to now include asset
management companies within
the scope of the definition and will
exclude foreign institutional
investors, foreign venture capital
investors and mutual funds.
iii. D i s t r i b u t o r d e e m e d t o b e
Intermediary: For the purposes of
registration as a self regulatory
organization, a distributor is also
deemed to be an intermediary.
The RBI by its notification dated
November 29, 2013 has widened
the ambit of the Infrastructure
sub- sectors to include the
following:
1956 will rather apply then Section 186
of the New Companies Act, 2013
("New Act") until the section of the
New Act is notified. This query had
arisen in light of the fact that of the 98
notified sections Section 185 was one
of them but Section 186 was not and
whether it was the old act or the
corresponding provision in the new
one which had to be complied with.
MCA has clarified that the shares held
by a company or power exercisable by
it in another company in a 'fiduciary
capacity' shall not be counted for the
purpose of determining the holding-
subsidiary relationship in terms of the
provision of section 2(87) of the
Companies Act, 2013.
For the purpose of simplifying the
process of opening an account for
trading as well as a demat account, the
RBI by its circular dated December
2013 replaced the existing Beneficial
O w ne r - De p os i t ory Part i c i p ant
A g r e e m e n t s w i t h a c o m m o n
document namely the "Rights and
Obligations of the Beneficial Owner
a n d D e p o s i t o r y P a r t i c i p a n t "
("Document"). This will not only
harmonize the account opening
process but also rationalize the
number of signatures that the
investor is required to affix.
The DP has to provide a copy of the
Document to the beneficial owner and
has to ensure that any other voluntary
document executed is not conflicting
with the regulations and guidelines
prescribed by SEBI or such other
regulator.
CLARIFICATION WITH REGARD
TO HOLDING OF SHARES OR
EXERCISING POWER IN A
FIDUCIARY CAPACITY
7. SIMPLIFICATION OF DEMAT
ACCOUNT OPENING
PROCESS
i. Hotels with project cost of more
than Rs.200 crores each in any
place in India and of any star
rating; and
ii. Convention Centres with project
cost of more than Rs.300 crores
each.
1. Mutual Funds permitted to hold
Gold Certificates in physical form
The SEBI by its circular dated
October 18, 2013 has now allowed
mutual funds to hold Gold
certificates issued by banks in
respect of investments made by
Gold ETFs in Gold Deposit Scheme
in physical form as well. Earlier,
they were allowed to be held in
only dematerialised form.
2. SEBI allows direct listing of SME
on ITP
The SEBI has by its circular dated
October 24, 2013 allowed small
and medium enterprises to list
their securities without an Initial
Public Offering (IPO). It has
notified the SEBI (Listing of
Specified Securities on
Institutional Trading Platform)
Regulations, 2013 (ITP
Regulations) as a new Chapter to
the SEBI (Issue of Capital and
Disclosure Requirements)
Regulations, 2009 (ICDR
Regulations).
public financial institution as
defined under section 4A of the
Companies Act, 1956 must have
invested in its equity capital.
II. Process of Listing:
lInformation document: An
application to a recognised
stock exchange along with an
i n f o r m a t i o n d o c u m e n t
containing certain specific
disclosures relating to, inter
alia, description of business,
specified financial information,
r i s k f a c t o r s , a s s e t s a n d
properties, ownership of
beneficial owners, details of
directors, executive officers,
p r o m o t e r s a n d l e g a l
proceedings.
lRestriction on further issue of
securities: Listing of specified
securities on the ITP cannot be
accompanied by any issue of
securities to the public in any
manner. Further, the SME
cannot undertake an IPO while
its specified securities are listed
on the ITP.
III. Capital raising
The SME listed on ITP may raise
capital through private placement
or rights issue without an option
for renunciation of rights. Before
raising money through private
placement, SME should procure an
in-principle approval from the
investors/lenders approved by
SEBI should have invested a
minimum amount of INR
5,000,000 (Rupees Five Million
Only) in its equity shares; (ii) at
least one angel investor who is a
member of an association or
group of angel investors should
have invested a minimum
amount of INR 5,000,000
(Rupee s Five Million Only) in its
equity shares; (iii) the SME
should have received finance
from a scheduled bank for its
project financing or working
capital requirements and a
period of three years should
have passed from the date of
such financing and the funds so
received have been ful ly
util ized; (iv) a registered
merchant banker should have
exercised due diligence and has
invested not less than Rs.
5,000,000 (Rupees Five Million
Only) in its equity shares which
shall be locked in for a period of
three years from the date of
l i s t i n g ; ( v ) a q u a l i f i e d
institutional buyer should have
invested not less than INR
5,000,000 (Rupees Five Million
Only) in its equity shares which
shall be locked in for a period of
three years from the date of
listing; or (vi) a specialized
internat ional mult i lateral
agency or domestic agency or a
GLOBAL REGULATORY UPDATE
4 5
Key features of the ITP Regulations:
I. Eligibility criteria:
lNo past action by Authority:
The promoters, directors or
group company of the SME and
the SME itself should not be in
the list of wilful defaulters of
RBI. No winding up petition
against the SME should have
been admitted by a competent
court. The group companies or
subsidiaries of the SME and the
SME itself should not have been
referred to the Board for
I n d u s t r i a l a n d F i n a n c i a l
Reconstruction within a period
of five years prior to the date of
application. Also, no regulatory
action should have been taken
against the SME, its promoter
or director, by the prescribed
regulatory authority within a
period of five years prior to the
date of application;
lAudited Statements: The SME
should have at least one full
y e a r ' s a u d i t e d f i n a n c i a l
statements for the immediately
preceding financial year and
should not have completed a
period of more than ten years
since incorporation;
lRevenue of SME: The revenue
of the SME should not exceed
Rs. 1,000,000,000 (Rupees One
Billion Only) in any of the
previous financial years and the
paid-up capital of the SME
s h o u l d n o t e x c e e d I N R
250,000,000 (Rupees Two
Hundred Fifty Million Only) in
any of the previous financial
years; and
lMinimum Investments: SME is
required to meet any one of the
following criteria - (i) at least
one alternative investment
fund, venture capital fund or
o t h e r c a t e g o r y o f
8. SELF-REGULATORY
ORGANIZATION
REGULATIONS, 2013
INTRODUCED AND
ENACTED
9. FINANCING OF
"INFRASTRUCTURE
LENDING" SCOPE EXTENDED
SEBI by its circulars dated 7 January
2013 and 8 January 2013 have
introduced and enacted the Securities
and Exchange Board Of India (Self
R e g u l a t o r y O r g a n i z a t i o n s )
(Amendment) Regulations, 2013
("Regulations") which shall be
applicable to distributors engaged by
asset management companies of
mutual funds and distributors
engaged by portfolio managers from
8 January 2013.
The highlights of the Regulations
include the following:
i. New Definitions: New definitions
of "distributor" and "issuer" have
been introduced.
ii. I n t e r m e d i a r y : T h e e x i s t i n g
definition of "Intermediary" has
been substituted with a new
definition wherein an intermediary
will be as defined under the SEBI
(Intermediaries) Regulations,
2008 to now include asset
management companies within
the scope of the definition and will
exclude foreign institutional
investors, foreign venture capital
investors and mutual funds.
iii. D i s t r i b u t o r d e e m e d t o b e
Intermediary: For the purposes of
registration as a self regulatory
organization, a distributor is also
deemed to be an intermediary.
The RBI by its notification dated
November 29, 2013 has widened
the ambit of the Infrastructure
sub- sectors to include the
following:
1956 will rather apply then Section 186
of the New Companies Act, 2013
("New Act") until the section of the
New Act is notified. This query had
arisen in light of the fact that of the 98
notified sections Section 185 was one
of them but Section 186 was not and
whether it was the old act or the
corresponding provision in the new
one which had to be complied with.
MCA has clarified that the shares held
by a company or power exercisable by
it in another company in a 'fiduciary
capacity' shall not be counted for the
purpose of determining the holding-
subsidiary relationship in terms of the
provision of section 2(87) of the
Companies Act, 2013.
For the purpose of simplifying the
process of opening an account for
trading as well as a demat account, the
RBI by its circular dated December
2013 replaced the existing Beneficial
O w ne r - De pos i t ory Part i c i pant
A g r e e m e n t s w i t h a c o m m o n
document namely the "Rights and
Obligations of the Beneficial Owner
a n d D e p o s i t o r y P a r t i c i p a n t "
("Document"). This will not only
harmonize the account opening
process but also rationalize the
number of signatures that the
investor is required to affix.
The DP has to provide a copy of the
Document to the beneficial owner and
has to ensure that any other voluntary
document executed is not conflicting
with the regulations and guidelines
prescribed by SEBI or such other
regulator.
CLARIFICATION WITH REGARD
TO HOLDING OF SHARES OR
EXERCISING POWER IN A
FIDUCIARY CAPACITY
7. SIMPLIFICATION OF DEMAT
ACCOUNT OPENING
PROCESS
i. Hotels with project cost of more
than Rs.200 crores each in any
place in India and of any star
rating; and
ii. Convention Centres with project
cost of more than Rs.300 crores
each.
1. Mutual Funds permitted to hold
Gold Certificates in physical form
The SEBI by its circular dated
October 18, 2013 has now allowed
mutual funds to hold Gold
certificates issued by banks in
respect of investments made by
Gold ETFs in Gold Deposit Scheme
in physical form as well. Earlier,
they were allowed to be held in
only dematerialised form.
2. SEBI allows direct listing of SME
on ITP
The SEBI has by its circular dated
October 24, 2013 allowed small
and medium enterprises to list
their securities without an Initial
Public Offering (IPO). It has
notified the SEBI (Listing of
Specified Securities on
Institutional Trading Platform)
Regulations, 2013 (ITP
Regulations) as a new Chapter to
the SEBI (Issue of Capital and
Disclosure Requirements)
Regulations, 2009 (ICDR
Regulations).
public financial institution as
defined under section 4A of the
Companies Act, 1956 must have
invested in its equity capital.
II. Process of Listing:
lInformation document: An
application to a recognised
stock exchange along with an
i n f o r m a t i o n d o c u m e n t
containing certain specific
disclosures relating to, inter
alia, description of business,
specified financial information,
r i s k f a c t o r s , a s s e t s a n d
properties, ownership of
beneficial owners, details of
directors, executive officers,
p r o m o t e r s a n d l e g a l
proceedings.
lRestriction on further issue of
securities: Listing of specified
securities on the ITP cannot be
accompanied by any issue of
securities to the public in any
manner. Further, the SME
cannot undertake an IPO while
its specified securities are listed
on the ITP.
III. Capital raising
The SME listed on ITP may raise
capital through private placement
or rights issue without an option
for renunciation of rights. Before
raising money through private
placement, SME should procure an
in-principle approval from the
investors/lenders approved by
SEBI should have invested a
minimum amount of INR
5,000,000 (Rupees Five Million
Only) in its equity shares; (ii) at
least one angel investor who is a
member of an association or
group of angel investors should
have invested a minimum
amount of INR 5,000,000
(Rupee s Five Million Only) in its
equity shares; (iii) the SME
should have received finance
from a scheduled bank for its
project financing or working
capital requirements and a
period of three years should
have passed from the date of
such financing and the funds so
received have been ful ly
util ized; (iv) a registered
merchant banker should have
exercised due diligence and has
invested not less than Rs.
5,000,000 (Rupees Five Million
Only) in its equity shares which
shall be locked in for a period of
three years from the date of
l i s t i n g ; ( v ) a q u a l i f i e d
institutional buyer should have
invested not less than INR
5,000,000 (Rupees Five Million
Only) in its equity shares which
shall be locked in for a period of
three years from the date of
listing; or (vi) a specialized
internat ional mult i lateral
agency or domestic agency or a
GLOBAL REGULATORY UPDATE
6 7
II. Withdrawal of requirement
to upload bids on date-time
priority effective from
November 1, 2013 : In light of
the operational difficulties
being faced for making
allotment on date-time
priority basis, it has been
decided that the allotment in
the public issue of debt
securities should be made on
the basis of date of upload of
each application into the
electronic book of the stock
exchange. However, on the
date of oversubscription, the
allotments should be made
t o t h e a p p l i c a n t s o n
proportionate basis.
III. Disclosure of unaudited
financials with l imited
review report effective from
November 1, 2013: To avoid
hardships to frequent debt
issuers, listed issuers who are
in compliance with the listing
agreement, may disclose
unaudited financials with
limited review report in the
offer document, as filed with
the stock exchanges in
accordance with the listing
agreement, instead of
audited financials, for the
stub period, subject to
m a k i n g n e c e s s a r y
disclosures in this regard in
offer document including
risk factors.
IV. Disclosure of contact details
of Debenture Trustees in
Annual Report effective
from December 1, 2013: To
enable investors to forward
their grievances to the
debenture trustee, the
Listing Agreement for Debt
Securities has been amended
by inserting a clause which
requires that the companies,
which have listed their debt
securities, have to disclose
the name of the debenture
trustees with contact details
in their annual report and on
an ongoing basis, on their
website.
RBI UPDATES
1. RBI releases framework for setting
up of Wholly Owned Subsidiaries
by Foreign Banks in India
On the principles of reciprocity and
single mode of presence, the RBI on
November 6, 2013 released a policy
framework for setting up of Wholly
Owned Subsidiaries (WOS) by
foreign banks in India.
Overview of the Policy: The policy
gives the WOS's a treatment almost
at par with the national banks along
with providing incentives to those
which contribute to the Indian
economy. Measures have been
incorporated to contain the
expansion of the foreign banks
along with ensuring corporate
governance compliance.
Main Features of the Framework:
lInitial minimum paid-up capital or
minimum net worth for a WOS:
Initial minimum paid up voting
equity capital to be Rs. 5 billion for
new entrants. a minimum net worth
of Rs.5 billion in case of existing
foreign banks desiring to convert
into WOS.
l
m o d e : B a n k s w i t h c o m p l e x
structures, which do not provide
adequate disclosure in their home
jurisdiction, which are not widely
held, banks giving a preferential
claim to depositors of home country
in a winding up proceedings would
be permitted entry in India only
through the WOS mode.
lContinue as branches: Foreign
banks having commenced banking
business in India before August 2010
shall have the option to continue
their banking business through the
branch mode. However the nearly
national bank treatment incentive
would be given in case of the branch
converting into a WOS.
lR e s t r i c t i o n s o n f u r t h e r
entry/capital infusion: Setting up of
additional WOSs will be restricted
when the capital and reserves of the
WOSs and foreign bank branches in
India exceed 20% of the capital and
reserves of the banking system.
Banks allowed entry only in WOS
l
letter of comfort to be issued by the
parent to the RBI stating that it
would meet the liabilities of its
WOS.
lBoard Composition - (i) not less
than 2/3rd of the directors should be
non-executive directors; (ii) a
minimum of 1/3rd of the directors
should be independent of the
management of the subsidiary in
India, its parent or associates; (iii)
not less than 50% of the directors
s h o u l d b e I n d i a n n a t i o n a l s
/NRIs/PIOs.
lParental guarantee/ credit rating:
On arm's length basis the WOS
would be permitted to use parental
guarantee/ credit rating, for the
purpose of providing custodial
services and for their international
operations. However, the WOS
should not provide counter
guarantee to its parent for such
support.
lDiluting stake to 74% or less: WOSs
may, at their option, dilute their
stake to 74 per cent or less in
Parent to meet liability of WOS: A
time to the SME to delist from the
platform on occurrence of the
e v e n t s s p e c i f i e d i n t h i s
paragraph.
VI. Non-applicability of the Takeover
C o d e a n d t h e D e l i s t i n g
R e g u l a t i o n s : T h e S E B I
(Substantial Acquisition of Shares
and Takeovers) Regulations, 2011
(Takeover Code) shall not apply
to direct and indirect acquisition
of shares or voting rights in, or
control over, a company listed on
the ITP of a recognised stock
exchange. Similarly, the SEBI
(Delisting of Equity Shares)
Regulations, 2009 (Delisting
Regulations) shall not apply to
securities listed on the ITP of a
recognised stock exchange.
The ITP Regulations will enable
angel investors and venture
capital ists to explore this
opportunity and thereby seek an
easy and efficient exit and will
encourage a number of start-ups
and SMEs to explore the option of
getting their specified securities
listed on the ITP.
3. P R O C E D U R E F O R
TRANSMISSION OF SECURITIES
SIMPLIFIED
SEBI has by its circular dated
O c t o b e r 2 8 , 2 0 1 3 i s s u e d
guidelines for Share Transfer
Agents (STAs)/issuer companies
and depositories to make the
process for transmission of
securities efficient and investor
friendly.
lHighlights of the Guidelines:
vSecurities held in demat
form: In case of transmission
of securities held in demat
form and not having a
n o m i n e e t h e e x i s t i n g
threshold limit for such
account has been revised
from Rs. 1,00,000 (Rupees
One lakh only) to Rs.
5,00,000 (Rupees Five lakh
only).
vSecurities held in physical
form: In case of transmission
of securities held in a single
name with a nominee or
without a nominee for a
threshold l imit of Rs .
2,00,000 (Rupees Two lakh
only) per issuer company,
the company is transmit the
securities in accordance with
the rules as prescribed with
the guidelines. The issuer
c o m p a n y m a y i n i t s
discretion enhance the value
of the securities.
lRight of Nomination: STAs and
R e g i s t r a r s t o p u b l i c i z e
nomination as an additional
right available to investors.
4. I S S U E S P E R T A I N I N G T O
PRIMARY ISSUANCE OF DEBT
SECURITIES RESOLVED
The SEBI by its circular dated
October 29, 2013 has addressed
several issues relating to issuance
of debt securities which are as
follows:
I. D i s c l o s u r e a n d
standardization of Cash
F l o w s e f f e c t i v e f r o m
December 1, 2013: The cash
flows emanating from the
debt securities shall be
m e n t i o n e d i n t h e
P r o s p e c t u s / D i s c l o s u r e
Document, by way of an
illustration. Further, it has
also been decided that if the
coupon payment date and
redemption date of the debt
securities, is falling on a
Sunday or a holiday, it shall
be made on the next working
day or on the previous
working day respectively.
recognised stock exchange and
also a shareholders approval by
s p e c i a l r e s o l u t i o n a n d
subsequently the allotment of
securities has to be completed
within two months of obtaining
such approval. Such an in-principle
approval from the recognised
stock exchange is also required
prior to a rights issue.
IV. Lock-in of promoter shareholding
At least 20% of the post listing
capital is required to be held by the
promoters of the SME which shall
be locked-in for a period of three
years from the date of listing on the
ITP.
Ticket size: The minimum trading lot
on the ITP has been set at INR
1,000,000 (Rupees One Million
Only).
V. Exit from the ITP
lSME listed on the ITP may exit
from it if: (i) its shareholders
approve such exit through a
special resolution with 90% of
total votes and the majority of
non-promoter votes in favour of
such proposal; (ii) the recognised
stock exchange where its shares
are listed approves such exit.
lFurther, an SME listed on the ITP
shall exit from it if: (i) the
specified securities have been
listed on ITP for a period of ten
years; (ii) the SME has paid-up
capita l of more than INR
250,000,000 (Rupees Two
Hundred Fifty Million Only); (iii)
the SME has revenue of more
than INR 3,000,000,000 (Rupees
Three Billion Only) as per the last
audited financial statement; or
( i v ) t h e S M E h a s m a r k e t
capitalization of more than INR
5,000,000,000 (Rupees Five
Billion Only). However, the stock
exchange may grant 18 months'
GLOBAL REGULATORY UPDATE
6 7
II. Withdrawal of requirement
to upload bids on date-time
priority effective from
November 1, 2013 : In light of
the operational difficulties
being faced for making
allotment on date-time
priority basis, it has been
decided that the allotment in
the public issue of debt
securities should be made on
the basis of date of upload of
each application into the
electronic book of the stock
exchange. However, on the
date of oversubscription, the
allotments should be made
t o t h e a p p l i c a n t s o n
proportionate basis.
III. Disclosure of unaudited
financials with l imited
review report effective from
November 1, 2013: To avoid
hardships to frequent debt
issuers, listed issuers who are
in compliance with the listing
agreement, may disclose
unaudited financials with
limited review report in the
offer document, as filed with
the stock exchanges in
accordance with the listing
agreement, instead of
audited financials, for the
stub period, subject to
m a k i n g n e c e s s a r y
disclosures in this regard in
offer document including
risk factors.
IV. Disclosure of contact details
of Debenture Trustees in
Annual Report effective
from December 1, 2013: To
enable investors to forward
their grievances to the
debenture trustee, the
Listing Agreement for Debt
Securities has been amended
by inserting a clause which
requires that the companies,
which have listed their debt
securities, have to disclose
the name of the debenture
trustees with contact details
in their annual report and on
an ongoing basis, on their
website.
RBI UPDATES
1. RBI releases framework for setting
up of Wholly Owned Subsidiaries
by Foreign Banks in India
On the principles of reciprocity and
single mode of presence, the RBI on
November 6, 2013 released a policy
framework for setting up of Wholly
Owned Subsidiaries (WOS) by
foreign banks in India.
Overview of the Policy: The policy
gives the WOS's a treatment almost
at par with the national banks along
with providing incentives to those
which contribute to the Indian
economy. Measures have been
incorporated to contain the
expansion of the foreign banks
along with ensuring corporate
governance compliance.
Main Features of the Framework:
lInitial minimum paid-up capital or
minimum net worth for a WOS:
Initial minimum paid up voting
equity capital to be Rs. 5 billion for
new entrants. a minimum net worth
of Rs.5 billion in case of existing
foreign banks desiring to convert
into WOS.
l
m o d e : B a n k s w i t h c o m p l e x
structures, which do not provide
adequate disclosure in their home
jurisdiction, which are not widely
held, banks giving a preferential
claim to depositors of home country
in a winding up proceedings would
be permitted entry in India only
through the WOS mode.
lContinue as branches: Foreign
banks having commenced banking
business in India before August 2010
shall have the option to continue
their banking business through the
branch mode. However the nearly
national bank treatment incentive
would be given in case of the branch
converting into a WOS.
lR e s t r i c t i o n s o n f u r t h e r
entry/capital infusion: Setting up of
additional WOSs will be restricted
when the capital and reserves of the
WOSs and foreign bank branches in
India exceed 20% of the capital and
reserves of the banking system.
Banks allowed entry only in WOS
l
letter of comfort to be issued by the
parent to the RBI stating that it
would meet the liabilities of its
WOS.
lBoard Composition - (i) not less
than 2/3rd of the directors should be
non-executive directors; (ii) a
minimum of 1/3rd of the directors
should be independent of the
management of the subsidiary in
India, its parent or associates; (iii)
not less than 50% of the directors
s h o u l d b e I n d i a n n a t i o n a l s
/NRIs/PIOs.
lParental guarantee/ credit rating:
On arm's length basis the WOS
would be permitted to use parental
guarantee/ credit rating, for the
purpose of providing custodial
services and for their international
operations. However, the WOS
should not provide counter
guarantee to its parent for such
support.
lDiluting stake to 74% or less: WOSs
may, at their option, dilute their
stake to 74 per cent or less in
Parent to meet liability of WOS: A
time to the SME to delist from the
platform on occurrence of the
e v e n t s s p e c i f i e d i n t h i s
paragraph.
VI. Non-applicability of the Takeover
C o d e a n d t h e D e l i s t i n g
R e g u l a t i o n s : T h e S E B I
(Substantial Acquisition of Shares
and Takeovers) Regulations, 2011
(Takeover Code) shall not apply
to direct and indirect acquisition
of shares or voting rights in, or
control over, a company listed on
the ITP of a recognised stock
exchange. Similarly, the SEBI
(Delisting of Equity Shares)
Regulations, 2009 (Delisting
Regulations) shall not apply to
securities listed on the ITP of a
recognised stock exchange.
The ITP Regulations will enable
angel investors and venture
capital ists to explore this
opportunity and thereby seek an
easy and efficient exit and will
encourage a number of start-ups
and SMEs to explore the option of
getting their specified securities
listed on the ITP.
3. P R O C E D U R E F O R
TRANSMISSION OF SECURITIES
SIMPLIFIED
SEBI has by its circular dated
O c t o b e r 2 8 , 2 0 1 3 i s s u e d
guidelines for Share Transfer
Agents (STAs)/issuer companies
and depositories to make the
process for transmission of
securities efficient and investor
friendly.
lHighlights of the Guidelines:
vSecurities held in demat
form: In case of transmission
of securities held in demat
form and not having a
n o m i n e e t h e e x i s t i n g
threshold limit for such
account has been revised
from Rs. 1,00,000 (Rupees
One lakh only) to Rs.
5,00,000 (Rupees Five lakh
only).
vSecurities held in physical
form: In case of transmission
of securities held in a single
name with a nominee or
without a nominee for a
threshold l imit of Rs .
2,00,000 (Rupees Two lakh
only) per issuer company,
the company is transmit the
securities in accordance with
the rules as prescribed with
the guidelines. The issuer
c o m p a n y m a y i n i t s
discretion enhance the value
of the securities.
lRight of Nomination: STAs and
R e g i s t r a r s t o p u b l i c i z e
nomination as an additional
right available to investors.
4. I S S U E S P E R T A I N I N G T O
PRIMARY ISSUANCE OF DEBT
SECURITIES RESOLVED
The SEBI by its circular dated
October 29, 2013 has addressed
several issues relating to issuance
of debt securities which are as
follows:
I. D i s c l o s u r e a n d
standardization of Cash
F l o w s e f f e c t i v e f r o m
December 1, 2013: The cash
flows emanating from the
debt securities shall be
m e n t i o n e d i n t h e
P r o s p e c t u s / D i s c l o s u r e
Document, by way of an
illustration. Further, it has
also been decided that if the
coupon payment date and
redemption date of the debt
securities, is falling on a
Sunday or a holiday, it shall
be made on the next working
day or on the previous
working day respectively.
recognised stock exchange and
also a shareholders approval by
s p e c i a l r e s o l u t i o n a n d
subsequently the allotment of
securities has to be completed
within two months of obtaining
such approval. Such an in-principle
approval from the recognised
stock exchange is also required
prior to a rights issue.
IV. Lock-in of promoter shareholding
At least 20% of the post listing
capital is required to be held by the
promoters of the SME which shall
be locked-in for a period of three
years from the date of listing on the
ITP.
Ticket size: The minimum trading lot
on the ITP has been set at INR
1,000,000 (Rupees One Million
Only).
V. Exit from the ITP
lSME listed on the ITP may exit
from it if: (i) its shareholders
approve such exit through a
special resolution with 90% of
total votes and the majority of
non-promoter votes in favour of
such proposal; (ii) the recognised
stock exchange where its shares
are listed approves such exit.
lFurther, an SME listed on the ITP
shall exit from it if: (i) the
specified securities have been
listed on ITP for a period of ten
years; (ii) the SME has paid-up
capita l of more than INR
250,000,000 (Rupees Two
Hundred Fifty Million Only); (iii)
the SME has revenue of more
than INR 3,000,000,000 (Rupees
Three Billion Only) as per the last
audited financial statement; or
( i v ) t h e S M E h a s m a r k e t
capitalization of more than INR
5,000,000,000 (Rupees Five
Billion Only). However, the stock
exchange may grant 18 months'
GLOBAL REGULATORY UPDATE
8 9
available information" (essentially,
i n f o r m a t i o n t o w h i c h n o n -
discriminatory public access would
be available). A list of types of
information that may ordinarily be
regarded as pr ice sens i t ive
information has also been provided.
4 Trading in listed securities when in
possession of UPSI would be
prohibited except in certain
s i t u a t i o n s p r o v i d e d i n t h e
regulations.
5 Insiders who are liable to possess
UPSI all round the year would have
the option to formulate pre-
scheduled trading plans. In such
cases, the new UPSI that may come
into their possession without
having been with them when
formulating the plan would not
impede their ability to trade.
Trading plans would, however, be
required to be disclosed to the stock
exchanges and have to be strictly
adhered to.
6 Conducting due diligence on listed
companies would be permissible for
purposes of transactions entailing
an obligation to make an open offer
under the Takeover Regulations. In
all other cases, due diligence would
be permissible subject to making
t h e d i l i g e n c e f i n d i n g s t h a t
constitute UPSI generally available
prior to the proposed trading. In all
cases, the board of directors would
need to opine that permitting the
conduct of due diligence is in the
best interests of the company, and
would a lso have to ensure
execution of non-disclosure and
non-dealing agreements.
7 Trades by promoters, employees,
directors and their immediate
relatives would need to be disclosed
internally to the company. Trades
within a calendar quarter of a value
beyond Rs. 10 lakhs or such other
amount as SEBI may specify, would
be required to be disclosed to the
stock exchanges.
8 Every entity that has issued
securities which are listed on a stock
exchange or which are intended to
be so listed would be required to
formulate and publish a Code of Fair
Disclosure governing disclosure of
events and circumstances that
would impact price discovery of its
securities.
9 Every listed company and market
intermediary i s required to
formulate a Code of Conduct to
regulate, monitor and report
t rad ing in secur i t ies by i ts
employees and other connected
persons. All other persons such as
auditors, law firms, accountancy
firms, analysts, consultants etc.
who handle UPSI in the course of
business operations may formulate
a code of conduct and the existence
of such a code would evidence the
ser iousness with which the
organization treats compliance
requirements.
10Companies would be entitled to
require third-party connected
persons who are not employees to
disclose their trading and holdings
in securities of the company.
APPOINTMENTS
l
l
l
l
l
l
l
Ms Usha Ananthasubramanian has been appointed as CMD of Bharatiya Mahila Bank
Mr Deepak Kapoor has been appointed as India Chairman, PwC
Mr Ajit Prakash Shah has been appointed as Chairman of Law Commission of India
Mr Nitish Kapoor has been appointed as Managing Director, Reckitt Benckiser India
M r N e e r a j S a h a i h a s b e e n appointed as President, Standard & Poor's Ratings Services
Ms Arundhati Bhattacharya has been appointed as Managing Director, SBI
M r M i k e Ye a g e r h a s b e e n appointed as Chairman, Cairn India
l
l
l
l
l
l
Mr P Madhusudan appointed as CMD, Rashtriya Ispat Nigam
Ms Sushma Singh has been appointed as Chief Information Commissioner (CIC), India
Mr Sumit Bose has been appointed as Finance Secretary, Finance Ministry, GOI
Mr D Shivakumar has been appointed as CEO, PepsiCo India
Mr Shaktikanta Das has been appointed as Special Secretary, Department of Economic Affairs, GOI
Mr C V R Rajendran has been appointed as Chairman and Managing Director, Andhra Bank
l
l
l
l
l
Ms Usha Sangwan has been appointed as Managing Director, LIC
Mr P. K. Malhotra has been appointed as Secretary (Additional Charge), Department of Legal Affairs, Ministry of Law and Justice, GOI
Mr Pradeep Kumar has been appointed as Managing Director (Corporate Banking), SBI
Mr P Madhusudan has been appointed as Chairman and Managing Director, Rashtriya Ispat Nigam Limited (RINL)
Ms Sunita Sharma has been appointed as MD & CEO of LIC Housing Finance Ltd
ADRs/GDRs shall be as prescribed by Government of India;
lThe capital raised abroad could be utilised for retiring outstanding overseas debt or for bona fide operations abroad including for acquisitions;
lIn case the funds raised are not utilised as stipulated, the company shall repatriate the funds to India within 15 days and such money shall be deposited only with AD Category-I banks and will be used for eligible purposes;
3. Waiver of NOC requirement under Foreign Direct Investment in Financial Sector - Transfer of Shares
The RBI by its Circular dated November 11, 2013 has decided to waive the requirement of NoC(s) to be filed along with form FC-TRS in case of transfer of shares from Residents to Non-Residents where the investee company is in the financial services sector. However, any 'fit and proper/ due diligence' requirement as regards the non-resident investor as stipulated by the respective financial sector regulator shall have to be complied with.
4. Foreign investment in India - participation by SEBI registered FIIs, QFIs and SEBI registered long term investors in credit enhanced bonds
The RBI by its circular dated November 11, 2013 has now permitted Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs) and long term investors registered with SEBI, Multilateral Agencies, Pension/ Insurance/ Endowment Funds, foreign Central Banks to invest in the credit enhanced bonds up to a limit of USD 5 billion within the overall limit of USD 51 billion earmarked for corporate debt.
Justice Sodhi Committee on Insider Trading Regulations submits report to SEBI
The High Level Committee to Review the SEBI (Prohibition of Insider T r a d i n g ) R e g u l a t i o n s , 1 9 9 2 constituted under the Chairmanship of Justice (Shri.) N.K. Sodhi, former chief justice of Karnataka and Kerala High Courts and former presiding officer of the Securities Appellate Tribunal, submitted its report to SEBI Chairman, Shri U.K. Sinha, on December 7, 2013 at Chandigarh.
The Committee has made a range of recommendations to the legal framework for prohibition of insider trading in India and has focused on making this area of regulation more predictable, precise and clear by s u g g e s t i n g a c o m b i n a t i o n o f principles-based regulations and rules that are backed by principles. The Committee has also suggested that each regulatory provision may be backed by a note on legislative intent.
Some of the salient features of the proposed regulations are set out below:-
1 While enlarging the definition of "insider", the term "connected person" has been defined more clearly and immediate relatives are presumed to be connected persons, w i t h a r i g h t t o r e b u t t h e presumption. The term "immediate relative" would cover close relatives w h o a r e e i t h e r f i n a n c i a l l y dependent or consult an insider in c o n n e c t i o n w i t h t r a d i n g i n securities.
2 Insiders would be prohibited from communicating, providing or allowing access to UPSI unless required for discharge of duties or for compliance with law.
3 The regulations would bring greater
c lar i ty on what const i tutes
"unpublished price sensit ive
information" ("UPSI") by defining
what const itutes "general ly
accordance with the existing FDI
policy. In the event of dilution, they
would have to list themselves.
l The issue of permitting WOSs to enter into M&A transactions with any private sector bank in India would be considered after a review of the extent of foreign investment in Indian banks and functioning of foreign banks in India.
2. Amendment to the existing policy for issue of shares by unlisted Indian companies
The RBI by its Circular dated November 8, 2013 has allowed unlisted Indian companies to raise capital abroad by accessing the Global Depository Receipts/ Foreign Currency Convertible Bonds route for a period of 2 years subject to the conditions stated in the said circular.
Conditions for Investment:
lUnlisted Indian companies are required to list abroad only on e x c h a n g e s i n I O S C O / F A T F compliant jurisdictions or those jurisdictions with which SEBI has signed bilateral agreements;
lThe issuing of ADRs/ GDRs shall be subject to the sectoral cap, entry route, minimum capitalisation norms, pricing norms, etc. as per the notified FDI regulations;
lThe number of underlying equity shares offered for issuance of ADRs/GDRs to be kept with the local custodian shall be determined upfront and ratio of ADRs/GDRs to equity shares shall be decided upfront based on applicable FDI pricing norms of equity shares of unlisted company;
lThe unlisted Indian company is required to comply with the instructions on downstream investment;
lThe criteria of eligibility of unlisted company raising funds through
M&A by WOS:
GLOBAL REGULATORY UPDATE
8 9
available information" (essentially,
i n f o r m a t i o n t o w h i c h n o n -
discriminatory public access would
be available). A list of types of
information that may ordinarily be
regarded as pr ice sens i t ive
information has also been provided.
4 Trading in listed securities when in
possession of UPSI would be
prohibited except in certain
s i t u a t i o n s p r o v i d e d i n t h e
regulations.
5 Insiders who are liable to possess
UPSI all round the year would have
the option to formulate pre-
scheduled trading plans. In such
cases, the new UPSI that may come
into their possession without
having been with them when
formulating the plan would not
impede their ability to trade.
Trading plans would, however, be
required to be disclosed to the stock
exchanges and have to be strictly
adhered to.
6 Conducting due diligence on listed
companies would be permissible for
purposes of transactions entailing
an obligation to make an open offer
under the Takeover Regulations. In
all other cases, due diligence would
be permissible subject to making
t h e d i l i g e n c e f i n d i n g s t h a t
constitute UPSI generally available
prior to the proposed trading. In all
cases, the board of directors would
need to opine that permitting the
conduct of due diligence is in the
best interests of the company, and
would a lso have to ensure
execution of non-disclosure and
non-dealing agreements.
7 Trades by promoters, employees,
directors and their immediate
relatives would need to be disclosed
internally to the company. Trades
within a calendar quarter of a value
beyond Rs. 10 lakhs or such other
amount as SEBI may specify, would
be required to be disclosed to the
stock exchanges.
8 Every entity that has issued
securities which are listed on a stock
exchange or which are intended to
be so listed would be required to
formulate and publish a Code of Fair
Disclosure governing disclosure of
events and circumstances that
would impact price discovery of its
securities.
9 Every listed company and market
intermediary i s required to
formulate a Code of Conduct to
regulate, monitor and report
t rad ing in secur i t ies by i ts
employees and other connected
persons. All other persons such as
auditors, law firms, accountancy
firms, analysts, consultants etc.
who handle UPSI in the course of
business operations may formulate
a code of conduct and the existence
of such a code would evidence the
ser iousness with which the
organization treats compliance
requirements.
10Companies would be entitled to
require third-party connected
persons who are not employees to
disclose their trading and holdings
in securities of the company.
APPOINTMENTS
l
l
l
l
l
l
l
Ms Usha Ananthasubramanian has been appointed as CMD of Bharatiya Mahila Bank
Mr Deepak Kapoor has been appointed as India Chairman, PwC
Mr Ajit Prakash Shah has been appointed as Chairman of Law Commission of India
Mr Nitish Kapoor has been appointed as Managing Director, Reckitt Benckiser India
M r N e e r a j S a h a i h a s b e e n appointed as President, Standard & Poor's Ratings Services
Ms Arundhati Bhattacharya has been appointed as Managing Director, SBI
M r M i k e Ye a g e r h a s b e e n appointed as Chairman, Cairn India
l
l
l
l
l
l
Mr P Madhusudan appointed as CMD, Rashtriya Ispat Nigam
Ms Sushma Singh has been appointed as Chief Information Commissioner (CIC), India
Mr Sumit Bose has been appointed as Finance Secretary, Finance Ministry, GOI
Mr D Shivakumar has been appointed as CEO, PepsiCo India
Mr Shaktikanta Das has been appointed as Special Secretary, Department of Economic Affairs, GOI
Mr C V R Rajendran has been appointed as Chairman and Managing Director, Andhra Bank
l
l
l
l
l
Ms Usha Sangwan has been appointed as Managing Director, LIC
Mr P. K. Malhotra has been appointed as Secretary (Additional Charge), Department of Legal Affairs, Ministry of Law and Justice, GOI
Mr Pradeep Kumar has been appointed as Managing Director (Corporate Banking), SBI
Mr P Madhusudan has been appointed as Chairman and Managing Director, Rashtriya Ispat Nigam Limited (RINL)
Ms Sunita Sharma has been appointed as MD & CEO of LIC Housing Finance Ltd
ADRs/GDRs shall be as prescribed by Government of India;
lThe capital raised abroad could be utilised for retiring outstanding overseas debt or for bona fide operations abroad including for acquisitions;
lIn case the funds raised are not utilised as stipulated, the company shall repatriate the funds to India within 15 days and such money shall be deposited only with AD Category-I banks and will be used for eligible purposes;
3. Waiver of NOC requirement under Foreign Direct Investment in Financial Sector - Transfer of Shares
The RBI by its Circular dated November 11, 2013 has decided to waive the requirement of NoC(s) to be filed along with form FC-TRS in case of transfer of shares from Residents to Non-Residents where the investee company is in the financial services sector. However, any 'fit and proper/ due diligence' requirement as regards the non-resident investor as stipulated by the respective financial sector regulator shall have to be complied with.
4. Foreign investment in India - participation by SEBI registered FIIs, QFIs and SEBI registered long term investors in credit enhanced bonds
The RBI by its circular dated November 11, 2013 has now permitted Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs) and long term investors registered with SEBI, Multilateral Agencies, Pension/ Insurance/ Endowment Funds, foreign Central Banks to invest in the credit enhanced bonds up to a limit of USD 5 billion within the overall limit of USD 51 billion earmarked for corporate debt.
Justice Sodhi Committee on Insider Trading Regulations submits report to SEBI
The High Level Committee to Review the SEBI (Prohibition of Insider T r a d i n g ) R e g u l a t i o n s , 1 9 9 2 constituted under the Chairmanship of Justice (Shri.) N.K. Sodhi, former chief justice of Karnataka and Kerala High Courts and former presiding officer of the Securities Appellate Tribunal, submitted its report to SEBI Chairman, Shri U.K. Sinha, on December 7, 2013 at Chandigarh.
The Committee has made a range of recommendations to the legal framework for prohibition of insider trading in India and has focused on making this area of regulation more predictable, precise and clear by s u g g e s t i n g a c o m b i n a t i o n o f principles-based regulations and rules that are backed by principles. The Committee has also suggested that each regulatory provision may be backed by a note on legislative intent.
Some of the salient features of the proposed regulations are set out below:-
1 While enlarging the definition of "insider", the term "connected person" has been defined more clearly and immediate relatives are presumed to be connected persons, w i t h a r i g h t t o r e b u t t h e presumption. The term "immediate relative" would cover close relatives w h o a r e e i t h e r f i n a n c i a l l y dependent or consult an insider in c o n n e c t i o n w i t h t r a d i n g i n securities.
2 Insiders would be prohibited from communicating, providing or allowing access to UPSI unless required for discharge of duties or for compliance with law.
3 The regulations would bring greater
c lar i ty on what const i tutes
"unpublished price sensit ive
information" ("UPSI") by defining
what const itutes "general ly
accordance with the existing FDI
policy. In the event of dilution, they
would have to list themselves.
l The issue of permitting WOSs to enter into M&A transactions with any private sector bank in India would be considered after a review of the extent of foreign investment in Indian banks and functioning of foreign banks in India.
2. Amendment to the existing policy for issue of shares by unlisted Indian companies
The RBI by its Circular dated November 8, 2013 has allowed unlisted Indian companies to raise capital abroad by accessing the Global Depository Receipts/ Foreign Currency Convertible Bonds route for a period of 2 years subject to the conditions stated in the said circular.
Conditions for Investment:
lUnlisted Indian companies are required to list abroad only on e x c h a n g e s i n I O S C O / F A T F compliant jurisdictions or those jurisdictions with which SEBI has signed bilateral agreements;
lThe issuing of ADRs/ GDRs shall be subject to the sectoral cap, entry route, minimum capitalisation norms, pricing norms, etc. as per the notified FDI regulations;
lThe number of underlying equity shares offered for issuance of ADRs/GDRs to be kept with the local custodian shall be determined upfront and ratio of ADRs/GDRs to equity shares shall be decided upfront based on applicable FDI pricing norms of equity shares of unlisted company;
lThe unlisted Indian company is required to comply with the instructions on downstream investment;
lThe criteria of eligibility of unlisted company raising funds through
M&A by WOS:
GLOBAL REGULATORY UPDATE
10 11
Merger Review process
simplified- European
Commission
The European Commission (EC) has
announced rules to restructure
procedure for mergers which shall be
effective from 1 January, 2014. The
significant changes include bringing
more mergers under review and
significantly reducing the information
required for merger review by asking a
number of questions upfront.
The amendments introduced by the
new framework include changes at
two levels mainly being :
(i) R e g u l a t o r y F r a m e w o r k
Amendments: The regulatory
framework which governed the
mergers are eligible for review
under the simplified review
procedure wherein the now the
scope of mergers eligible for
review has been widened in cases
where the activities of the parties
overlap horizontally, and their
combined market share of
activities of parties constitute 20%
instead of the earlier 15% of the
market share; and in case their
activities overlapping vertically
and their market share is
constitutive of 30% instead of
earlier 25% of the aggregate
market share shall be subject to
review.
(ii) Procedural Amendments: the
regulat ions pertaining the
formalities (i.e. the filing and
i n f o r m a t i o n s u b m i t t i n g
requirements to be complied
with) for each of the mergers
under review. The amendments
have been designed primarily to
reduce the volume of information
required to be provided by the
p a r t i e s . A d d i t i o n a l l y , t h e
Commission now asks for certain
information upfront, so as to
reduce the number of questions it
has to ask the parties later on in
the review.
The amendments have also
permitted the parties to seek
waiver from the Commission in
respect of furnishing information
pertaining to (i) acquisitions
made during the last 3 years by
group undertakings active in
affected markets; (ii) estimates of
the total size of the market in
terms of sales value and volume;
and (iii) details of the most
i m p o r t a n t c o - o p e r a t i v e
agreements engaged in by the
parties to the concentration in
affected markets.
The package comprises amended
versions of the (i) Notice on
Simplified Procedure and (ii)
Commiss ion Implement ing
Regulation and its accompanying
Annex 1 (Form CO), Annex 2
(Short Form CO), and Annex 3
(Form RS).
The representatives of France and the
United States of America have on 14
November, 2013 signed a bilateral
Inter-Governmental Agreement (IGA)
intended to implement the Foreign
Account Tax Compliance Act (FATCA)
which was a flagship legislation
introduced by the US in 2010 to
France and USA sign the FATCA
tax information
By :
GLOBAL
According to the Amendment, these
requirements on minimum registered
capital will be abolished, unless the
law, administrative regulations or
decisions of the State Council provide
otherwise for companies in certain
industrial sectors. Thus, theoretically
speaking, investors can now establish
a company with a registered capital of
one RMB.
On capital contributions, prior to the
Amendment, the investor of a
company had to contribute at least
20% (15% for FIEs) of the registered
capital within 3 months upon the
issuance of the first Business License
of the company and the remaining
amount had to be paid in within 2
years. According to the Amendment,
such deadlines for capital contribution
China amends company law
On 28 December 2013, the Standing
Committee of the People's Congress
adopted a resolution to approve the
Amendment to the PRC Company Law
("Amendment"). The Amendment will
become effective on 1 March 2014. It
refers to changes of the capital
contribution of companies in China
with the aim to ease the financial
burdens on investors for establishing
companies in China. According to the
current PRC Company Law, the
minimum registered capital of a
limited liability company shall be RMB
30,000 or RMB 100,000 (in case the
company is wholly owned by one
shareholder). For a company limited
by shares, the minimum registered
capital shall be RMB 5 million.
no longer exist, unless the law,
ad min istrat ive re gulat ions or
decisions of the State Council provide
otherwise for certain companies.
Now, the amount of the paid-in
registered capital is no longer subject
to registration with the competent
AIC and it also will not be a must to
engage a certified public accountant
to issue a capital verification report for
the capital contribution. Furthermore,
in the past, the amount of cash
contribution shall not be less than 30%
of the total amount of registered
c a p i t a l o f a c o m p a n y . S u c h
requirement on minimum cash
contribution has also been abolished
by the Amendment.
combat offshore tax evasion by US
persons. The key points of the IGA
are:
(i) "Most favoured nation' clause to
be adopted to favour the french
financial institutions;
(ii) Exemption related to employee
savings plans and a special status
to the asset management
industry that can ensure absence
of US investors and non-
p a r t i c i p a t i n g i n s t i t u t i o n a l
customers;
(iii) Exemption for certain local banks
with an almost exclusively local
client base which could be
b e n e f i c i a l t o t h e F r e n c h
institutions especially in light of
the mutual banking model;
(iv) Insurance products and pension
funds dedicated to retirement
planning to receive special
exemptions under FATCA.
These exemptions are likely to affect
the sectors including the banking, life
insurance and asset management
industries along with certain holding
companies as well as hedging, finance
and treasury centers of non-financial
groups which could also be impacted
depending on the nature of their
activities.
Thus, the IGA is intended to simplify
the requirements but will require
GLOBAL REGULATORY UPDATE
10 11
Merger Review process
simplified- European
Commission
The European Commission (EC) has
announced rules to restructure
procedure for mergers which shall be
effective from 1 January, 2014. The
significant changes include bringing
more mergers under review and
significantly reducing the information
required for merger review by asking a
number of questions upfront.
The amendments introduced by the
new framework include changes at
two levels mainly being :
(i) R e g u l a t o r y F r a m e w o r k
Amendments: The regulatory
framework which governed the
mergers are eligible for review
under the simplified review
procedure wherein the now the
scope of mergers eligible for
review has been widened in cases
where the activities of the parties
overlap horizontally, and their
combined market share of
activities of parties constitute 20%
instead of the earlier 15% of the
market share; and in case their
activities overlapping vertically
and their market share is
constitutive of 30% instead of
earlier 25% of the aggregate
market share shall be subject to
review.
(ii) Procedural Amendments: the
regulat ions pertaining the
formalities (i.e. the filing and
i n f o r m a t i o n s u b m i t t i n g
requirements to be complied
with) for each of the mergers
under review. The amendments
have been designed primarily to
reduce the volume of information
required to be provided by the
p a r t i e s . A d d i t i o n a l l y , t h e
Commission now asks for certain
information upfront, so as to
reduce the number of questions it
has to ask the parties later on in
the review.
The amendments have also
permitted the parties to seek
waiver from the Commission in
respect of furnishing information
pertaining to (i) acquisitions
made during the last 3 years by
group undertakings active in
affected markets; (ii) estimates of
the total size of the market in
terms of sales value and volume;
and (iii) details of the most
i m p o r t a n t c o - o p e r a t i v e
agreements engaged in by the
parties to the concentration in
affected markets.
The package comprises amended
versions of the (i) Notice on
Simplified Procedure and (ii)
Commiss ion Implement ing
Regulation and its accompanying
Annex 1 (Form CO), Annex 2
(Short Form CO), and Annex 3
(Form RS).
The representatives of France and the
United States of America have on 14
November, 2013 signed a bilateral
Inter-Governmental Agreement (IGA)
intended to implement the Foreign
Account Tax Compliance Act (FATCA)
which was a flagship legislation
introduced by the US in 2010 to
France and USA sign the FATCA
tax information
By :
GLOBAL
According to the Amendment, these
requirements on minimum registered
capital will be abolished, unless the
law, administrative regulations or
decisions of the State Council provide
otherwise for companies in certain
industrial sectors. Thus, theoretically
speaking, investors can now establish
a company with a registered capital of
one RMB.
On capital contributions, prior to the
Amendment, the investor of a
company had to contribute at least
20% (15% for FIEs) of the registered
capital within 3 months upon the
issuance of the first Business License
of the company and the remaining
amount had to be paid in within 2
years. According to the Amendment,
such deadlines for capital contribution
China amends company law
On 28 December 2013, the Standing
Committee of the People's Congress
adopted a resolution to approve the
Amendment to the PRC Company Law
("Amendment"). The Amendment will
become effective on 1 March 2014. It
refers to changes of the capital
contribution of companies in China
with the aim to ease the financial
burdens on investors for establishing
companies in China. According to the
current PRC Company Law, the
minimum registered capital of a
limited liability company shall be RMB
30,000 or RMB 100,000 (in case the
company is wholly owned by one
shareholder). For a company limited
by shares, the minimum registered
capital shall be RMB 5 million.
no longer exist, unless the law,
ad min istrat ive re gulat ions or
decisions of the State Council provide
otherwise for certain companies.
Now, the amount of the paid-in
registered capital is no longer subject
to registration with the competent
AIC and it also will not be a must to
engage a certified public accountant
to issue a capital verification report for
the capital contribution. Furthermore,
in the past, the amount of cash
contribution shall not be less than 30%
of the total amount of registered
c a p i t a l o f a c o m p a n y . S u c h
requirement on minimum cash
contribution has also been abolished
by the Amendment.
combat offshore tax evasion by US
persons. The key points of the IGA
are:
(i) "Most favoured nation' clause to
be adopted to favour the french
financial institutions;
(ii) Exemption related to employee
savings plans and a special status
to the asset management
industry that can ensure absence
of US investors and non-
p a r t i c i p a t i n g i n s t i t u t i o n a l
customers;
(iii) Exemption for certain local banks
with an almost exclusively local
client base which could be
b e n e f i c i a l t o t h e F r e n c h
institutions especially in light of
the mutual banking model;
(iv) Insurance products and pension
funds dedicated to retirement
planning to receive special
exemptions under FATCA.
These exemptions are likely to affect
the sectors including the banking, life
insurance and asset management
industries along with certain holding
companies as well as hedging, finance
and treasury centers of non-financial
groups which could also be impacted
depending on the nature of their
activities.
Thus, the IGA is intended to simplify
the requirements but will require
GLOBAL REGULATORY UPDATE
12 13
Belgium: Competition
Authority Issues Guidelines For
Dawn Raids
The Belgian Competition Authority
("BCA") has announced that when
i n v e s t i g a t i n g v i o l a t i o n s o f
competition law, they can carry out
unannounced on-site inspections at
the premises of undertakings,
associations of undertakings and
natural persons. Such inspections are
known as dawn raids. The following
points should be noted:
lBCA can start the inspection as
s o o n a s t h e u n d e r t a k i n g
concerned receives the orders
i ssued by the compet i t ion
prosecutor and the investigating
magistrate. It is not obliged to
await the arrival of external
counsel. In practice, however, the
BCA will usually wait 30 minutes in
order to allow external counsel to
reach the premises.
l
increasingly crucial when it comes
to proving potential violations of
competition law. The guidelines
explain in detail the methods the
BCA applies to search for such
documents and data.
The guidelines provide much-needed
insight into the various methods used
to search for electronic documents
and data during a dawn raid and
appear to apply the best practices for
seizing digital data established by the
Brussels Court of Appeal in its
judgment of 18 April 2013. Pursuant to
this judgment, the documents must
be selected in the company's
presence. Secondly, the selection
should be made using keywords,
which should be closely connected to
the practices under investigation.
Hence, general keywords covering a
wide array of subjects are not allowed.
In addit ion, the se lect ion of
documents on the basis of keywords
Electronic data and documents are should be double checked using
another set of keywords and spot
checks. Finally, the company should
be given sufficient time to review the
selection, taking into account the
c o m p l e x i t y o f t h e c a s e . T h e
prosecutors should permanently
delete documents deemed to fall
outside the scope of the investigation.
On 2 December 2013, the State Council
issued a 2013 version of Catalogue of
Investment Projects that Require
Government Verification. Now, only
investments of US$1 billion or more, or
that involve sensitive countries or
industries, still require verification by
Chinese governmental authorities.
Other outbound investments are
subject on ly to record f i l ing
requirements. The Catalogue is
currently effective; however, the
a u t h o r i t i e s m a y w a i t u n t i l
implementing rules have been issued
before applying the Catalogue in
practice.
China: approval requirements
for outbound investment
projects relaxed
www.verus.net.in
New DelhiE-177 Lower Ground FloorEast of Kailash New Delhi 110065
E: delhi@verus.net.in
T: +91 11 26215601 / 02
F: +91 11 26215603
Kolkata10 Old Post Office StreetGround FloorKolkata 700001
E: kolkata@verus.net.in
T: +91 33 22308909
F: +91 33 22487823
HyderabadChamber#103 Ground Floor 6-3-252/A/10 Sana Apartments, ErramanzilHyderabad 500082
E: hyderabad@verus.net.in
T: +91 40 39935766
Winner: Best Newcomers: India Business Law Journal Awards2012
Mumbai24 M. C. C. LaneFortMumbai 400023
E: mumbai@verus.net.in
T: +91 22 22834130 / 01
F: +91 22 22834102
India member firm of:
CONTACT
Krishnayan Sen / Dipankar Bandyopadhyay
partners@verus.net.in
significant efforts to maintain
compliance necessary for foreign
financial institutions.
On November 8, 2013, the US
Department of Justice (USDOJ)
announced that SAC Capital Advisors
LP, SAC Capital Advisors LLC, CR
Intrinsic Investors, Sigma Capital
Management (collectively 'SAC
Companies') that are responsible for
the management of a group of
affiliated hedge funds has agreed to
plead guilty to charges of insider
trading. SAC has agreed to an
additional penalty of US$1.184 billion
and to terminate its investment
advisory business. The earlier penalty
of US$616 million have already been
agreed to be paid.
As alleged, from 1999 to 2010,
n u m e r o u s e m p l o y e e s o f S A C
Companies obtained and traded non-
public information or recommended
trades based on information of more
than 20 publically traded companies
across multiple sectors to SAC
Portfolio Managers.
The Competit ion and Markets
Authority (CMA) has replaced the
existing competition
agencies namely the Office of Fair
Trad ing and the Compet i t ion
Commission for becoming United
Kingdom's exclusive authority to
regulate competition. The CMA will
not only replicate the powers of its
predeceasing authorities but assume
new ones as well including:
i. I n v e s t i g a t i v e P o w e r s : To
invest igate into suspected
i n f r i n g e m e n t s i n c l u d i n g
i n t e r r o g a t i n g i n d i v i d u a l s
associated with businesses over
which the suspicion cloud looms.
Largest ever US Insider Trading
Case settlement
United Kingdom gets a new
competition authority
ii. Order Interim Measures: CMA has
wider powers to pass interim
orders including requiring a
company under suspicion to
suspend or terminate relevant
businesses under investigation.
iii. Merger Control: CMA will have a
right to order the reversal of
integration of businesses that
have already occurred.
The conclusion of the Comprehensive
Economic Trade Agreement ("CETA")
between Canada and the European
Union has finally made the four year
old negotiations between the two
parties see the light of the day.
Though the CETA structure is already
in place, formalit ies including
conversion of the agreement into the
treaty languages and complying with
the legal formalities could take
another 24 months.
Scope of CETA:
i. Agronomy: Seeming to be the
most critical of the issues and a
possible "deal-breaker", the
agrarian front saw Canada
pressing for diverting from the
ground rule of fair trade and
seeking a significant increase in
the quota of beef and pork, in
return EU increasing the cheese
imports from Canada.
ii. Investments: After the EU
negotiators pressed for key
i s s u e s i n c l u d i n g g a i n i n g
investment access to Canadian
banking and removal of EU
investment reviews under the
Investment Canada Act has now
reaped to the EU banks doing
business in relation to deposits
excluding that the Canadian
banks still be in ownership of the
Class A banks.
Canada- EU trade agreement
liberalizes existing trade
practices
iii. Government Approval: The
Government concessions that
can be procured now have
exceeded those already existing
under the NAFTA. EU Companies
can now bid on the federal
government contracts and
reciprocal rights have been
convened on the Canadian
companies to bid on contracts
tendered by all EU institutions, as
well as with all 28 member
countries and their regional and
local governments.
iv. Trade-in Services: Reciprocal
preferential access to sectors
including information technology
workers, professionals (e.g.
a c c o u n t a n t s , e n g i n e e r s ) ,
i n v e s t o r s , e n v i r o n m e n t a l
services, scientific/technical
personnel, and workers in the
energy distribution sector have
been introduced under the CETA.
Therefore the outcome may not have
satisfied all the stakeholders on each
of the issues, but the parties have
understood that the agreement
necessarily has positive impact on
each of their economic sectors.
The Minister of Industry has
announced a public consultation on
the Canada Business Corporations Act
with a view to improving the
governance of corporations subject to
the statute.The key areas identified
for consultation include executive
compensation, shareholder rights,
s h a r e h o l d e r a n d b o a r d
communication, securities transfers,
corporate transparency, combating
bribery and corruption, diversity of
boards and management, the use of
the legis lat ion's arrangement
provisions, and corporate social
responsibility. The comment period is
open until March 11, 2014.
Canadian corporate governance
under review
GLOBAL REGULATORY UPDATE
12 13
Belgium: Competition
Authority Issues Guidelines For
Dawn Raids
The Belgian Competition Authority
("BCA") has announced that when
i n v e s t i g a t i n g v i o l a t i o n s o f
competition law, they can carry out
unannounced on-site inspections at
the premises of undertakings,
associations of undertakings and
natural persons. Such inspections are
known as dawn raids. The following
points should be noted:
lBCA can start the inspection as
s o o n a s t h e u n d e r t a k i n g
concerned receives the orders
i ssued by the compet i t ion
prosecutor and the investigating
magistrate. It is not obliged to
await the arrival of external
counsel. In practice, however, the
BCA will usually wait 30 minutes in
order to allow external counsel to
reach the premises.
l
increasingly crucial when it comes
to proving potential violations of
competition law. The guidelines
explain in detail the methods the
BCA applies to search for such
documents and data.
The guidelines provide much-needed
insight into the various methods used
to search for electronic documents
and data during a dawn raid and
appear to apply the best practices for
seizing digital data established by the
Brussels Court of Appeal in its
judgment of 18 April 2013. Pursuant to
this judgment, the documents must
be selected in the company's
presence. Secondly, the selection
should be made using keywords,
which should be closely connected to
the practices under investigation.
Hence, general keywords covering a
wide array of subjects are not allowed.
In addit ion, the se lect ion of
documents on the basis of keywords
Electronic data and documents are should be double checked using
another set of keywords and spot
checks. Finally, the company should
be given sufficient time to review the
selection, taking into account the
c o m p l e x i t y o f t h e c a s e . T h e
prosecutors should permanently
delete documents deemed to fall
outside the scope of the investigation.
On 2 December 2013, the State Council
issued a 2013 version of Catalogue of
Investment Projects that Require
Government Verification. Now, only
investments of US$1 billion or more, or
that involve sensitive countries or
industries, still require verification by
Chinese governmental authorities.
Other outbound investments are
subject on ly to record f i l ing
requirements. The Catalogue is
currently effective; however, the
a u t h o r i t i e s m a y w a i t u n t i l
implementing rules have been issued
before applying the Catalogue in
practice.
China: approval requirements
for outbound investment
projects relaxed
www.verus.net.in
New DelhiE-177 Lower Ground FloorEast of Kailash New Delhi 110065
E: delhi@verus.net.in
T: +91 11 26215601 / 02
F: +91 11 26215603
Kolkata10 Old Post Office StreetGround FloorKolkata 700001
E: kolkata@verus.net.in
T: +91 33 22308909
F: +91 33 22487823
HyderabadChamber#103 Ground Floor 6-3-252/A/10 Sana Apartments, ErramanzilHyderabad 500082
E: hyderabad@verus.net.in
T: +91 40 39935766
Winner: Best Newcomers: India Business Law Journal Awards2012
Mumbai24 M. C. C. LaneFortMumbai 400023
E: mumbai@verus.net.in
T: +91 22 22834130 / 01
F: +91 22 22834102
India member firm of:
CONTACT
Krishnayan Sen / Dipankar Bandyopadhyay
partners@verus.net.in
significant efforts to maintain
compliance necessary for foreign
financial institutions.
On November 8, 2013, the US
Department of Justice (USDOJ)
announced that SAC Capital Advisors
LP, SAC Capital Advisors LLC, CR
Intrinsic Investors, Sigma Capital
Management (collectively 'SAC
Companies') that are responsible for
the management of a group of
affiliated hedge funds has agreed to
plead guilty to charges of insider
trading. SAC has agreed to an
additional penalty of US$1.184 billion
and to terminate its investment
advisory business. The earlier penalty
of US$616 million have already been
agreed to be paid.
As alleged, from 1999 to 2010,
n u m e r o u s e m p l o y e e s o f S A C
Companies obtained and traded non-
public information or recommended
trades based on information of more
than 20 publically traded companies
across multiple sectors to SAC
Portfolio Managers.
The Competit ion and Markets
Authority (CMA) has replaced the
existing competition
agencies namely the Office of Fair
Trad ing and the Compet i t ion
Commission for becoming United
Kingdom's exclusive authority to
regulate competition. The CMA will
not only replicate the powers of its
predeceasing authorities but assume
new ones as well including:
i. I n v e s t i g a t i v e P o w e r s : To
invest igate into suspected
i n f r i n g e m e n t s i n c l u d i n g
i n t e r r o g a t i n g i n d i v i d u a l s
associated with businesses over
which the suspicion cloud looms.
Largest ever US Insider Trading
Case settlement
United Kingdom gets a new
competition authority
ii. Order Interim Measures: CMA has
wider powers to pass interim
orders including requiring a
company under suspicion to
suspend or terminate relevant
businesses under investigation.
iii. Merger Control: CMA will have a
right to order the reversal of
integration of businesses that
have already occurred.
The conclusion of the Comprehensive
Economic Trade Agreement ("CETA")
between Canada and the European
Union has finally made the four year
old negotiations between the two
parties see the light of the day.
Though the CETA structure is already
in place, formalit ies including
conversion of the agreement into the
treaty languages and complying with
the legal formalities could take
another 24 months.
Scope of CETA:
i. Agronomy: Seeming to be the
most critical of the issues and a
possible "deal-breaker", the
agrarian front saw Canada
pressing for diverting from the
ground rule of fair trade and
seeking a significant increase in
the quota of beef and pork, in
return EU increasing the cheese
imports from Canada.
ii. Investments: After the EU
negotiators pressed for key
i s s u e s i n c l u d i n g g a i n i n g
investment access to Canadian
banking and removal of EU
investment reviews under the
Investment Canada Act has now
reaped to the EU banks doing
business in relation to deposits
excluding that the Canadian
banks still be in ownership of the
Class A banks.
Canada- EU trade agreement
liberalizes existing trade
practices
iii. Government Approval: The
Government concessions that
can be procured now have
exceeded those already existing
under the NAFTA. EU Companies
can now bid on the federal
government contracts and
reciprocal rights have been
convened on the Canadian
companies to bid on contracts
tendered by all EU institutions, as
well as with all 28 member
countries and their regional and
local governments.
iv. Trade-in Services: Reciprocal
preferential access to sectors
including information technology
workers, professionals (e.g.
a c c o u n t a n t s , e n g i n e e r s ) ,
i n v e s t o r s , e n v i r o n m e n t a l
services, scientific/technical
personnel, and workers in the
energy distribution sector have
been introduced under the CETA.
Therefore the outcome may not have
satisfied all the stakeholders on each
of the issues, but the parties have
understood that the agreement
necessarily has positive impact on
each of their economic sectors.
The Minister of Industry has
announced a public consultation on
the Canada Business Corporations Act
with a view to improving the
governance of corporations subject to
the statute.The key areas identified
for consultation include executive
compensation, shareholder rights,
s h a r e h o l d e r a n d b o a r d
communication, securities transfers,
corporate transparency, combating
bribery and corruption, diversity of
boards and management, the use of
the legis lat ion's arrangement
provisions, and corporate social
responsibility. The comment period is
open until March 11, 2014.
Canadian corporate governance
under review
GLOBAL REGULATORY UPDATE
14 15
Financial Action Task Force (FATF)
compliant, or those with whom
Securities and Exchange Board of
India (SEBI) has a bilateral agreement.
That gives Indian unlisted companies a
choice of over 100 jurisdictions
including those of the U.S., U.K.,
Singapore and Hong Kong.
The money raised via an overseas
listing can only be utilised to repay
overseas debt or fund acquisitions
abroad. In case the funds are not
utilised for these two purposes, they
would have to be remitted back to
India within 15 days and deposited
with an RBI recognised authorised
dealer.
further in order to keep pace with and
to restore U.S.'s leading position in
overseas listings, in April 2012, the U.S.
Enacted the Jumpstart Our Business
Startups ('JOBS') Act. This Act which
received the assent of President
Obama was a significant step that
provided a thrust to simplifying
listings in the US.
One of the aims of the JOBS Act was to
increase the number of companies
electing to complete an IPO and to
provide those companies with a
transition period to the public
markets, allowing them to focus
resources on growth of their
businesses and reduce financial,
corporate governance and other
r e g u l a t o r y r e q u i r e m e n t s f o r
'emerging growth companies' (EGCs),
a new class of issuer. An EGC is a
company that had gross revenues of
less than USD1 billion during most
recently completed fiscal year.
The JOBS Act has brought about
several changes to make a new IPO
playing field for several companies.
These provisions have reduced the
costs and risks associated with IPO in
emerging growth companies in three
distinct areas; namely in the IPO
process, in the IPO Registration
Statement Disclosure requirement
and in the Post IPO Reporting
requirements.
The fact that JOBS Act now permits
companies to make a confidential
submission of the IPO Registration
Statement with the SEC has indeed
helped companies that are reluctant
to publicly disclose proprietary
information, market data and financial
data
In terms of the IPO Registration
Statement Disclosure Requirements,
only two years of audited financial
statements and two years of selected
financial data is now required as
compared to the earlier requirement
to file three years of audited financial
statements and five years of selected
financial data. The rules related to
Executive Compensation Disclosure
have also been relaxed for EGCs.
The reporting requirements with
respect to financial statements,
selected financial information and
audit firm rotation apply equally even
in case of Post IPO Reporting
Requirements
The process of planning and executing
an IPO is time-intensive and, typically
t a k e s s e v e r a l m o n t h s f r o m
organisational meeting to closing,
though the exact time taken can vary
widely and depends on the complexity
of the transaction, the company's
readiness prior to embarking on the
IPO process, market conditions and
many other factors. Some of the
frequently encountered hurdles in the
IPO process relate to legal and tax
structuring, governance, having
adequate reporting tools and
management team's availability.
In summary, though the JOBS Act is
only a year old, early results show it is
having an impact by providing an "on-
ramp" to public markets for smaller
companies. Given the initiative by the
Ministry of Finance for overseas
listing, and the favourable response to
the JOBS Act, there is an opportunity
for increased number of companies to
make use of the initial two year
window for accessing the U.S. Capital
Market.
Mr. Gaurav VohraDirector
Accounting Advisory Services KPMG, India
Authored by:
The U.S. capital markets have long
been a favoured destination for
companies wishing to raise capital or
to establish a trading presence for
their securities. A U.S. listing can help
foreign private issuers (FPIs) to
significantly improve their chances to
attract capital. Several companies in
India, especially in new age sectors
such as information technology and
financial services, made good use of
this opportunity and listed their
securities in the U.S. market.
However, in the recent past the pace
of overseas listings reduced primarily
due changes in the financial and
regulatory environment in the U.S.
which lead to increased cost of
compliance. In particular, some of the
key challenges include being subject
to the U.S. regulatory environment,
increased cost of compliance on
account of provisions of the Sarbanes
Oxley Act and the r igorous
accounting, disclosure and review by
the Securities Exchange Commission
(SEC).
Another reason for lack lustre
overseas listings was an impediment
in the Indian regulations which
required companies to list first in India
before they could list overseas. To this
end, the Ministry of Finance in India
has issued a press release on 27
September 2013 on allowing unlisted
companies to raise capital abroad
without the requirement of prior or
simultaneous listing in India, allowing
Indian companies to capitalise on this
demand for diversification from
investors. The approval for listing is
however subject to the condition that
the Stock Exchanges would have to be
Internat ional Organisat ion of
Securities Commissions (IOSCO) or
Indian Companies- Moving Closer to a US Listing Indian Companies- Moving Closer to a US Listing
GLOBAL REGULATORY UPDATE
14 15
Financial Action Task Force (FATF)
compliant, or those with whom
Securities and Exchange Board of
India (SEBI) has a bilateral agreement.
That gives Indian unlisted companies a
choice of over 100 jurisdictions
including those of the U.S., U.K.,
Singapore and Hong Kong.
The money raised via an overseas
listing can only be utilised to repay
overseas debt or fund acquisitions
abroad. In case the funds are not
utilised for these two purposes, they
would have to be remitted back to
India within 15 days and deposited
with an RBI recognised authorised
dealer.
further in order to keep pace with and
to restore U.S.'s leading position in
overseas listings, in April 2012, the U.S.
Enacted the Jumpstart Our Business
Startups ('JOBS') Act. This Act which
received the assent of President
Obama was a significant step that
provided a thrust to simplifying
listings in the US.
One of the aims of the JOBS Act was to
increase the number of companies
electing to complete an IPO and to
provide those companies with a
transition period to the public
markets, allowing them to focus
resources on growth of their
businesses and reduce financial,
corporate governance and other
r e g u l a t o r y r e q u i r e m e n t s f o r
'emerging growth companies' (EGCs),
a new class of issuer. An EGC is a
company that had gross revenues of
less than USD1 billion during most
recently completed fiscal year.
The JOBS Act has brought about
several changes to make a new IPO
playing field for several companies.
These provisions have reduced the
costs and risks associated with IPO in
emerging growth companies in three
distinct areas; namely in the IPO
process, in the IPO Registration
Statement Disclosure requirement
and in the Post IPO Reporting
requirements.
The fact that JOBS Act now permits
companies to make a confidential
submission of the IPO Registration
Statement with the SEC has indeed
helped companies that are reluctant
to publicly disclose proprietary
information, market data and financial
data
In terms of the IPO Registration
Statement Disclosure Requirements,
only two years of audited financial
statements and two years of selected
financial data is now required as
compared to the earlier requirement
to file three years of audited financial
statements and five years of selected
financial data. The rules related to
Executive Compensation Disclosure
have also been relaxed for EGCs.
The reporting requirements with
respect to financial statements,
selected financial information and
audit firm rotation apply equally even
in case of Post IPO Reporting
Requirements
The process of planning and executing
an IPO is time-intensive and, typically
t a k e s s e v e r a l m o n t h s f r o m
organisational meeting to closing,
though the exact time taken can vary
widely and depends on the complexity
of the transaction, the company's
readiness prior to embarking on the
IPO process, market conditions and
many other factors. Some of the
frequently encountered hurdles in the
IPO process relate to legal and tax
structuring, governance, having
adequate reporting tools and
management team's availability.
In summary, though the JOBS Act is
only a year old, early results show it is
having an impact by providing an "on-
ramp" to public markets for smaller
companies. Given the initiative by the
Ministry of Finance for overseas
listing, and the favourable response to
the JOBS Act, there is an opportunity
for increased number of companies to
make use of the initial two year
window for accessing the U.S. Capital
Market.
Mr. Gaurav VohraDirector
Accounting Advisory Services KPMG, India
Authored by:
The U.S. capital markets have long
been a favoured destination for
companies wishing to raise capital or
to establish a trading presence for
their securities. A U.S. listing can help
foreign private issuers (FPIs) to
significantly improve their chances to
attract capital. Several companies in
India, especially in new age sectors
such as information technology and
financial services, made good use of
this opportunity and listed their
securities in the U.S. market.
However, in the recent past the pace
of overseas listings reduced primarily
due changes in the financial and
regulatory environment in the U.S.
which lead to increased cost of
compliance. In particular, some of the
key challenges include being subject
to the U.S. regulatory environment,
increased cost of compliance on
account of provisions of the Sarbanes
Oxley Act and the r igorous
accounting, disclosure and review by
the Securities Exchange Commission
(SEC).
Another reason for lack lustre
overseas listings was an impediment
in the Indian regulations which
required companies to list first in India
before they could list overseas. To this
end, the Ministry of Finance in India
has issued a press release on 27
September 2013 on allowing unlisted
companies to raise capital abroad
without the requirement of prior or
simultaneous listing in India, allowing
Indian companies to capitalise on this
demand for diversification from
investors. The approval for listing is
however subject to the condition that
the Stock Exchanges would have to be
Internat ional Organisat ion of
Securities Commissions (IOSCO) or
Indian Companies- Moving Closer to a US Listing Indian Companies- Moving Closer to a US Listing
16
GLOBAL REGULATORY UPDATE
17
Which costs to be capitalised?
Feasibility studies
'Accounting Standard 10: Accounting
for Fixed Assets' provides guidance on
recognition of costs for capitalization.
The Accounting Standard defines
'fixed asset' as an asset held with the
intention of being used for the
purpose of producing or providing
goods or services and is not held for
sale in the normal course of business.
The Standard further states that the
cost of an item of fixed asset should
comprise all directly attributable costs
incurred to bring the asset to its
working condition for its intended
use.
The Standard gives limited guidance
on what constitutes "directly
attributable costs" but gives a few
examples of such costs:
a) site preparation;
b) initial delivery and handling costs;
c) installation cost, (like special
foundations for plant); and
d) professional fees, (like fees of
architects and engineers).
Following are some costs that are
common to most infrastructure
projects and an analysis on their
eligibility for capitalization:
G e n e r a l l y , c o m p a n i e s i n c u r
expenditure in carrying out a
feasibility study before deciding
whether to invest in a project or in
deciding which project to pursue.
Generally, expenses incurred for
feasibility assessment should be
expensed as incurred because they
are not linked to a specific item of
capital project. However, the cost of
c a p i t a l p r o j e c t d o e s i n c l u d e
expenditure that is incurred only if an
asset is acquired, such as a fee paid to
a broker or agent only if a suitable
property is identified and purchased.
Labour costs
Operating lease costs
Start-up and commissioning
costs
Labour costs typically are a large
component of many infrastructure
projects, and it is appropriate that the
internal effort expended by technical
engineers and other in-house
specialists be included in the cost of
assets built.
O f t e n t h e r e a r e p r a c t i c a l
complications in determining how
much internal labour to capitalise.
Common difficulties exist when, for
example, a resource pool is used for
more than one project or when there
are overlaps between construction
and maintenance activities. Strong
project management and time
recording systems therefore are
important in tracking such costs and in
ensuring that the proportion relating
to construction and extension of
infrastructure can be measured
reliably.
If a project is constructed on land that
is leased under an operating lease,
then the operating lease costs
incurred during the construction
period can be capitalised as part of the
cost of the project if these costs are
directly attributable to bringing the
asset to its working condition for its
intended use.
Training
The cost of training staff is not
capitalised. Even if staff training is
included as part of a larger contract
with a third party in connection with
the acquisition or construction of
capital asset, it is appropriate that the
training cost component of the
contract to be expensed as the
training occurs.
The expenditure incurred on start-up
and commissioning of the project,
including the expenditure incurred on
t r i a l r u n s , a n d e x p e r i m e n t a l
production, is usually capitalised as an
indirect element of the construction
cost. However, it is of foremost
importance to first establish that
those activities are necessary to bring
the asset to its working condition.
Borrowing costs are interest and
other costs incurred by an entity in
connection with the borrowing of
funds. They include interest and
commitment charges on bank
borrowings and other short-term and
long-term borrowings, exchange
differences on foreign currency
borrowings and other related costs.
Borrowing costs are eligible for
capitalization only when they are
i n c u r r e d o n f u n d s b o r r o w e d
specifically for the purpose of the
concerned project. If the funds are
borrowed generally and used for the
purpose of the capital project, the
amount of borrowing costs eligible for
capitalization should be determined
by applying a capitalization rate to the
expenditure on that asset.
Capitalization of borrowing costs
should start only when the project
work is in progress, even if the
borrowing costs are being incurred
before the commencement of project
work.
Borrowing costs
Infrastructure Projects - Capitalization ChallengesInfrastructure Projects - Capitalization Challenges
The infrastructure sector in India is
developing at a rapid pace and is
attracting attention and capital from
both domestic and foreign players
alike. This includes not only public
utilities such as roads, bridges,
tunnels, hospitals, airports, railways,
telecom and power but also real
e s t a t e , b o t h r e s i d e n t i a l a n d
c o m m e r c i a l . A p a r t f r o m t h e
regulatory, technical and commercial
issues that infrastructure projects
face, there are also a number of
significant accounting challenges.
These accounting issues come up
since the transactions and events that
take place as part of these projects are
complex in nature and the Indian
accounting framework sometimes
does not cover the unique aspects of
such transactions. As a result,
accountants are left to assumptive
interpretation and judgment to
conclude on such financial reporting
issues.
In any infrastructure project,
capitalization of costs is one of the
most crucial areas of accounting.
Simply put, capitalization means
inclusion of a cost incurred in the value
of a fixed asset. As the concept of
'Earnings Before Interest, Tax,
Depreciation and Amortisation' gains
popularity, companies increasingly
desire to capitalize as many costs as
possible. This has a favourable impact,
effectively reclassifying expenditure
from operating expenses (within
'Earnings Before Interest, Tax,
Depreciation and Amortisation') to
depreciation (outside 'Earnings
Before Interest, Tax, Depreciation and
Amortisation'). Accountants shoulder
the respons ib i l i ty to ba lance
management's inclination towards
capitalization and adherence to
accounting principles.
T h e k e y a c c o u n t i n g i s s u e s
infrastructure projects face during the
construction and development
phases are:
lWhich costs are to be capitalized?
lTill when are these costs to be
capitalized?
16
GLOBAL REGULATORY UPDATE
17
Which costs to be capitalised?
Feasibility studies
'Accounting Standard 10: Accounting
for Fixed Assets' provides guidance on
recognition of costs for capitalization.
The Accounting Standard defines
'fixed asset' as an asset held with the
intention of being used for the
purpose of producing or providing
goods or services and is not held for
sale in the normal course of business.
The Standard further states that the
cost of an item of fixed asset should
comprise all directly attributable costs
incurred to bring the asset to its
working condition for its intended
use.
The Standard gives limited guidance
on what constitutes "directly
attributable costs" but gives a few
examples of such costs:
a) site preparation;
b) initial delivery and handling costs;
c) installation cost, (like special
foundations for plant); and
d) professional fees, (like fees of
architects and engineers).
Following are some costs that are
common to most infrastructure
projects and an analysis on their
eligibility for capitalization:
G e n e r a l l y , c o m p a n i e s i n c u r
expenditure in carrying out a
feasibility study before deciding
whether to invest in a project or in
deciding which project to pursue.
Generally, expenses incurred for
feasibility assessment should be
expensed as incurred because they
are not linked to a specific item of
capital project. However, the cost of
c a p i t a l p r o j e c t d o e s i n c l u d e
expenditure that is incurred only if an
asset is acquired, such as a fee paid to
a broker or agent only if a suitable
property is identified and purchased.
Labour costs
Operating lease costs
Start-up and commissioning
costs
Labour costs typically are a large
component of many infrastructure
projects, and it is appropriate that the
internal effort expended by technical
engineers and other in-house
specialists be included in the cost of
assets built.
O f t e n t h e r e a r e p r a c t i c a l
complications in determining how
much internal labour to capitalise.
Common difficulties exist when, for
example, a resource pool is used for
more than one project or when there
are overlaps between construction
and maintenance activities. Strong
project management and time
recording systems therefore are
important in tracking such costs and in
ensuring that the proportion relating
to construction and extension of
infrastructure can be measured
reliably.
If a project is constructed on land that
is leased under an operating lease,
then the operating lease costs
incurred during the construction
period can be capitalised as part of the
cost of the project if these costs are
directly attributable to bringing the
asset to its working condition for its
intended use.
Training
The cost of training staff is not
capitalised. Even if staff training is
included as part of a larger contract
with a third party in connection with
the acquisition or construction of
capital asset, it is appropriate that the
training cost component of the
contract to be expensed as the
training occurs.
The expenditure incurred on start-up
and commissioning of the project,
including the expenditure incurred on
t r i a l r u n s , a n d e x p e r i m e n t a l
production, is usually capitalised as an
indirect element of the construction
cost. However, it is of foremost
importance to first establish that
those activities are necessary to bring
the asset to its working condition.
Borrowing costs are interest and
other costs incurred by an entity in
connection with the borrowing of
funds. They include interest and
commitment charges on bank
borrowings and other short-term and
long-term borrowings, exchange
differences on foreign currency
borrowings and other related costs.
Borrowing costs are eligible for
capitalization only when they are
i n c u r r e d o n f u n d s b o r r o w e d
specifically for the purpose of the
concerned project. If the funds are
borrowed generally and used for the
purpose of the capital project, the
amount of borrowing costs eligible for
capitalization should be determined
by applying a capitalization rate to the
expenditure on that asset.
Capitalization of borrowing costs
should start only when the project
work is in progress, even if the
borrowing costs are being incurred
before the commencement of project
work.
Borrowing costs
Infrastructure Projects - Capitalization ChallengesInfrastructure Projects - Capitalization Challenges
The infrastructure sector in India is
developing at a rapid pace and is
attracting attention and capital from
both domestic and foreign players
alike. This includes not only public
utilities such as roads, bridges,
tunnels, hospitals, airports, railways,
telecom and power but also real
e s t a t e , b o t h r e s i d e n t i a l a n d
c o m m e r c i a l . A p a r t f r o m t h e
regulatory, technical and commercial
issues that infrastructure projects
face, there are also a number of
significant accounting challenges.
These accounting issues come up
since the transactions and events that
take place as part of these projects are
complex in nature and the Indian
accounting framework sometimes
does not cover the unique aspects of
such transactions. As a result,
accountants are left to assumptive
interpretation and judgment to
conclude on such financial reporting
issues.
In any infrastructure project,
capitalization of costs is one of the
most crucial areas of accounting.
Simply put, capitalization means
inclusion of a cost incurred in the value
of a fixed asset. As the concept of
'Earnings Before Interest, Tax,
Depreciation and Amortisation' gains
popularity, companies increasingly
desire to capitalize as many costs as
possible. This has a favourable impact,
effectively reclassifying expenditure
from operating expenses (within
'Earnings Before Interest, Tax,
Depreciation and Amortisation') to
depreciation (outside 'Earnings
Before Interest, Tax, Depreciation and
Amortisation'). Accountants shoulder
the respons ib i l i ty to ba lance
management's inclination towards
capitalization and adherence to
accounting principles.
T h e k e y a c c o u n t i n g i s s u e s
infrastructure projects face during the
construction and development
phases are:
lWhich costs are to be capitalized?
lTill when are these costs to be
capitalized?
GLOBAL REGULATORY UPDATE
18 19
India's infrastructure and banking
sectors will require a total Rs 10.4
trillion from the bond market over the
next 5 years.
That's about Rs 2.1 trillion a year or 50%
more than what was mopped up by
these sectors in the last fiscal.
Which begs the question, how will
such humongous amounts be raised?
I believe this can be done only through
regulatory support in three areas:
deepening of India's corporate bond
m a r k e t i n c l u d i n g t h r o u g h
innovations, developing credit-
enhancement mechanisms for
infrastructure projects and building
investor appetite for banks' non-
equity capital.
We will need to complement this by
facilitating greater foreign investor
participation and more liberal norms
for long-term investors, apart from
addressing issues of low trading
volumes, issuer concentration and a
weak securitisation market.
On the innovation side, there have
been several encouraging initiatives
this year, such as the first 50-year
rupee bond and the first inflation-
indexed debentures by Indian
companies, five Basel III compliant
issues by banks, and the launch of two
infrastructure debt funds (See box on
page 21).
The requirement & the
challenges
Let us first look at the investment
needs. CRISIL Research presages a
total investment of Rs 26.4 trillion in
the infrastructure sector over the next
five years. Four sectors need the bulk
of this money: the power sector Rs 8.4
trillion, roads Rs 6.3 trillion, railways
Rs 4.3 trillion and urban infra Rs 4
trillion.
About Rs 8.1 trillion of the funding will
be through equity, while debt funding
would be around Rs 18.3 trillion.
While banks will continue to be the
largest financiers of the infrastructure
sector contributing Rs 8.7 trillion,
another Rs 2.6 trillion need to be
raised through external commercial
borrowings. The remaining Rs 7 trillion
With Infra, Banking Needing Trillions, Regulatory Innovation Critical
With Infra, Banking Needing Trillions, Regulatory Innovation CriticalIndia's development over the next five years hinges on how the policy and rules framework facilitates the corporate bond market
Foreign exchange differences
Abnormal wastages
Administration and other
general overhead costs
Companies have an option to
c a p i t a l i z e f o r e i g n e x c h a n g e
differences arising on all long term
borrowings either as an adjustment to
the cost of a related depreciable asset
or by accumulating these differences
in a Foreign Currency Monetary Item
Translation Difference Account, if the
borrowing does not relate to a
depreciable asset.
The balance in Foreign Currency
Monetary Item Translation Difference
Account is subsequently amortised
through the profit and loss account
over the life of the borrowing.
Companies are allowed to continue
such capitalization even subsequent
to the completion of construction of a
qualifying asset, unlike borrowing
costs which are required to be
charged to the profit or loss account
subsequent to construction.
Abnormal amounts of wasted
material, labour and other resources
to be expensed as incurred instead of
being capitalized. A determination of
what should be considered abnormal
is subjective, but some of the factors
to consider include the level of
technical difficulty involved with the
construction, the scale of the project,
the estimates and timelines included
in the project planning, and the usual
construction process for that type of
project.
Administration and other general
overhead expenses are usually
excluded from the cost of fixed assets
because they do not relate to a
specific fixed asset. However, in some
circumstances, such expenses may be
s p e c i f i c a l l y a t t r i b u t a b l e t o
construction of a project or to the
Mr. Akil MasterDirector
Accounting Advisory Services KPMG, India
Authored by:
and generally an engineer's certificate
to the effect of its completion is
obtained. In many cases the interval
between the date a project is ready to
c o m m e n c e c o m m e r c i a l
use/production and the date at which
commercial use/production actually
begins is prolonged, all expenses
incurred during this period are
charged to the profit and loss
statement.
The date of capitalization should be
carefully determined since it is critical
from the accounting perspective as all
expenditures cease to be capitalized
and depreciation of the asset
commences.
The size and duration of infrastructure
projects makes it crucial for a
c o m p a n y t o u n d e r s t a n d t h e
accounting issues these projects face
and their impact on the financial
statements. Therefore systems and
processes need to be prepared to deal
with these accounting challenges in
order to manage the complexities
effectively.
To summarise…
acquisition of a fixed asset or bringing
it to its working condition, may be
included as part of the cost of the
construction project or as a part of the
cost of the fixed asset
Some other common issues which
need careful analysis before deciding
on capitalization are as follows:
lProject support costs - Companies
incur costs to build houses, roads,
water and electricity facilities and
other utilities to support the living
conditions of employees, labour
and general public in the locality
near the project.
lRedevelopment cost - Cost
i n c u r r e d i n a c t i v i t i e s l i k e
negotiation with the tenant to exit
the property (including lease
cancellation cost), obtaining
necessary regulatory approvals
for change in use, redeployment
c o s t o f u s e d a s s e t s , s i t e
restoration cost, etc.
lGovernment incentive - Capital
projects receive grants in the form
of land lease at nominal rentals or
in the form of tax exemption.
lLiquidated damages - Penalties
received from project contractors
for delay in achieving agreed
milestones.
Capitalization of costs should end
when the asset is ready for its
intended use. In case of infrastructure
projects, this happens when the
project is ready for commercial use
Till when are these costs to be
capitalized?
EXPERT SPEAK
GLOBAL REGULATORY UPDATE
18 19
India's infrastructure and banking
sectors will require a total Rs 10.4
trillion from the bond market over the
next 5 years.
That's about Rs 2.1 trillion a year or 50%
more than what was mopped up by
these sectors in the last fiscal.
Which begs the question, how will
such humongous amounts be raised?
I believe this can be done only through
regulatory support in three areas:
deepening of India's corporate bond
m a r k e t i n c l u d i n g t h r o u g h
innovations, developing credit-
enhancement mechanisms for
infrastructure projects and building
investor appetite for banks' non-
equity capital.
We will need to complement this by
facilitating greater foreign investor
participation and more liberal norms
for long-term investors, apart from
addressing issues of low trading
volumes, issuer concentration and a
weak securitisation market.
On the innovation side, there have
been several encouraging initiatives
this year, such as the first 50-year
rupee bond and the first inflation-
indexed debentures by Indian
companies, five Basel III compliant
issues by banks, and the launch of two
infrastructure debt funds (See box on
page 21).
The requirement & the
challenges
Let us first look at the investment
needs. CRISIL Research presages a
total investment of Rs 26.4 trillion in
the infrastructure sector over the next
five years. Four sectors need the bulk
of this money: the power sector Rs 8.4
trillion, roads Rs 6.3 trillion, railways
Rs 4.3 trillion and urban infra Rs 4
trillion.
About Rs 8.1 trillion of the funding will
be through equity, while debt funding
would be around Rs 18.3 trillion.
While banks will continue to be the
largest financiers of the infrastructure
sector contributing Rs 8.7 trillion,
another Rs 2.6 trillion need to be
raised through external commercial
borrowings. The remaining Rs 7 trillion
With Infra, Banking Needing Trillions, Regulatory Innovation Critical
With Infra, Banking Needing Trillions, Regulatory Innovation CriticalIndia's development over the next five years hinges on how the policy and rules framework facilitates the corporate bond market
Foreign exchange differences
Abnormal wastages
Administration and other
general overhead costs
Companies have an option to
c a p i t a l i z e f o r e i g n e x c h a n g e
differences arising on all long term
borrowings either as an adjustment to
the cost of a related depreciable asset
or by accumulating these differences
in a Foreign Currency Monetary Item
Translation Difference Account, if the
borrowing does not relate to a
depreciable asset.
The balance in Foreign Currency
Monetary Item Translation Difference
Account is subsequently amortised
through the profit and loss account
over the life of the borrowing.
Companies are allowed to continue
such capitalization even subsequent
to the completion of construction of a
qualifying asset, unlike borrowing
costs which are required to be
charged to the profit or loss account
subsequent to construction.
Abnormal amounts of wasted
material, labour and other resources
to be expensed as incurred instead of
being capitalized. A determination of
what should be considered abnormal
is subjective, but some of the factors
to consider include the level of
technical difficulty involved with the
construction, the scale of the project,
the estimates and timelines included
in the project planning, and the usual
construction process for that type of
project.
Administration and other general
overhead expenses are usually
excluded from the cost of fixed assets
because they do not relate to a
specific fixed asset. However, in some
circumstances, such expenses may be
s p e c i f i c a l l y a t t r i b u t a b l e t o
construction of a project or to the
Mr. Akil MasterDirector
Accounting Advisory Services KPMG, India
Authored by:
and generally an engineer's certificate
to the effect of its completion is
obtained. In many cases the interval
between the date a project is ready to
c o m m e n c e c o m m e r c i a l
use/production and the date at which
commercial use/production actually
begins is prolonged, all expenses
incurred during this period are
charged to the profit and loss
statement.
The date of capitalization should be
carefully determined since it is critical
from the accounting perspective as all
expenditures cease to be capitalized
and depreciation of the asset
commences.
The size and duration of infrastructure
projects makes it crucial for a
c o m p a n y t o u n d e r s t a n d t h e
accounting issues these projects face
and their impact on the financial
statements. Therefore systems and
processes need to be prepared to deal
with these accounting challenges in
order to manage the complexities
effectively.
To summarise…
acquisition of a fixed asset or bringing
it to its working condition, may be
included as part of the cost of the
construction project or as a part of the
cost of the fixed asset
Some other common issues which
need careful analysis before deciding
on capitalization are as follows:
lProject support costs - Companies
incur costs to build houses, roads,
water and electricity facilities and
other utilities to support the living
conditions of employees, labour
and general public in the locality
near the project.
lRedevelopment cost - Cost
i n c u r r e d i n a c t i v i t i e s l i k e
negotiation with the tenant to exit
the property (including lease
cancellation cost), obtaining
necessary regulatory approvals
for change in use, redeployment
c o s t o f u s e d a s s e t s , s i t e
restoration cost, etc.
lGovernment incentive - Capital
projects receive grants in the form
of land lease at nominal rentals or
in the form of tax exemption.
lLiquidated damages - Penalties
received from project contractors
for delay in achieving agreed
milestones.
Capitalization of costs should end
when the asset is ready for its
intended use. In case of infrastructure
projects, this happens when the
project is ready for commercial use
Till when are these costs to be
capitalized?
EXPERT SPEAK
GLOBAL REGULATORY UPDATE
20 21
Recent innovations
India's first 50-year bond
India's first NBFC
Infrastructure Debt Fund
In early July this year, CRISIL
assigned its 'CRISIL AA+/Stable'
rating to Mahindra & Mahindra Ltd's
(M&M's) Rs 500 crore, 50-year non-
convertible debenture issue -- the
first 50-year, plainvanilla rupee-
denominated instrument by an
Indian corporate. The issue
u n d e r s c o r e d t h e i n c r e a s i n g
confidence of investors in corporate
India's long-term prospects. CRISIL
believes investors such as pension
funds and insurance companies can
use such long-tenure instruments to
better align the duration of their
portfolios. The salient features of
the instrument are a tenure of 50
years with bullet redemption,
interest rate of 9.55% per annum,
annual payment of interest, and no
call or put option
In another landmark development in
July this year -- which will enhance
the avai labi l ity of funds for
infrastructure projects through the
Indian debt markets -- CRISIL
assigned its CRISIL AAA/Stable
rating to the Rs 500 crore debenture
issue of India Infradebt Ltd. The
company, which received its licence
in February 2013, is India's first
infrastructure debt fund set up as a
non-banking financial company
under the guidelines issued by the
Reserve Bank of India. An IDF-NBFC
is a new vehicle designed to
facilitate the flow of low-cost, long-
term funds from domestic and
global debt investors to capital-
intensive infrastructure projects.
Late in June, CRISIL assigned its
CRISIL AA+/Stable rating to the Rs
500 crore Tier-II bonds of United
Bank of India. This was the first Tier-
II capital instrument issued in India
u n d e r t h e B a s e l - I I I c a p i t a l
regulations. Five more public sector
undertakings followed suit. The
Reserve Bank of India had advised
the implementation of Basel-III
capital regulations for Indian banks
from April 1, 2013, based on the final
guidelines issued in May 2012. CRISIL
be l ieves the guidel ines wi l l
structurally strengthen India's
banking sector by enhancing the
quantity and quality of capital.
India's first Basel-III compliant
Tier-II bonds
Additionally, with the introduction
of a capital conservation buffer,
banks will be in a better position to
absorb potential losses during
financial crises.
In May this year, CRISIL assigned its
CRISIL AAA/Stable rating to Larsen &
Toubro Ltd's (L&T's) Rs 100 crore
inflation-linked capital-indexed non-
convertible debenture issue, the
first of its kind in the country. These
debentures, which were issued in
the same month, were unique in that
they offered inflation-adjusted
returns to investors based on the
movement in the wholesale price
index (WPI) over the tenure of the
instrument. While the real interest
rate is fixed, the instruments
provide for annual indexation of the
principal, leading to a variable
interest payout. At the end of the
tenure, the redemption value will be
the principal adjusted for the
prevail ing WPI, subject to a
prescribed floor and cap. The salient
features of the debentures are a
tenure of 10 years with bullet
redemption and a real yield of 1.65
per cent per annum.
India's first inflation-indexed
debentures
Ms. Roopa KudvaManaging Director & CEO
CRISIL Ltd
Authored by:
will have to come from the corporate
bond market.
Currently, bond market funding for
infrastructure is primarily indirect, in
the sense that 5 specialised financial
institutions issued nearly 60 per cent
of Rs 1.3 trillion bonds raised in the last
fiscal to fund infrastructure. Another
25 per cent bonds were raised by
central and state government public
sector enterprises.
Only 15 per cent of the funding was
available directly to the private sector
issuers. It is for this segment of the
market that regulatory attention is
needed, with the objective to
encourage direct access of private
infrastructure projects to the bond
market.
This will be possible by focusing on
credit-enhanced structures such as
partial guarantees, securitisation of
annuity and toll collections for
operational roads, and of property tax
receivables of municipal corporations.
Another to-do is to ensure successful
scale-up of the recently launched
infrastructure debt funds (IDFs) in the
form of NBFCs. Two such IDF-NBFCs
have already been launched, both of
which have been rated by CRISIL.
Banks, on the other hand, will seek to
raise Rs 3.4 trillion in non-equity
capital till March 31, 2018. We have
already seen a decent beginning on
this front, with five banks raising Rs 60
billion by issuing Tier II bonds -- all of
which were rated by CRISIL.
But the key challenge will be in raising
money through Tier I non-equity
instruments due to their riskier
features of coupon discretion and
principal loss absorption at specified
capital thresholds.
So to build investor appetite for such
instruments, guidelines for long-term
investors will need to include eligibility
for Tier I instruments.
The regulatory facilitation so far
lIRDA has created headroom for
insurer investments in AA-rated
corporate bonds by clubbing
investment limits in government
s e c u r i t i e s w i t h A A A - r a t e d
corporate bonds.
lIRDA has also taken many enabling
steps, such as approving the issue
of NCDs of India Infradebt Ltd to be
reckoned as investment in
infrastructure sector by insurers.
lThe Employees' Provident Fund
Organisation, India's largest
investor with a corpus of Rs
5,46,000 crore, has made its
investment policy a little more
inclusive by adding more names for
investment in bonds.
lRecently, the Reserve Bank of
India (RBI) proposed allowing
banks to offer partial credit
enhancements to corporate bonds
by way of providing credit and
l i q u i d i t y f a c i l i t i e s t o t h e
corporates, and not by way of
guarantee. Guidelines in this
regard are expected shortly.
lThe RBI has also allowed foreign
institutional investors (FIIs),
qualified foreign investors and
long-term investors registered
with the Securities and Exchange
Board of India - such as sovereign
w e a l t h f u n d s , m u l t i l a t e r a l
agencies, pension/ insurance/
endowment funds and foreign
central banks to invest up to $5
billion in credit-enhanced bonds
issued locally by Indian companies.
In the circular, the RBI said the $5
billion limit would be part of the
overall $51 billion quota for
corporate debt investment by FIIs.
Meanwhile, the bond market stirs
Recent issuance trends have been
encouraging and follow policymakers'
efforts to remove impediments.
Fiscal 2012 saw a 31% increase in
issuances to Rs 2,51,000 crore over
fiscal 2011, while in the last fiscal, they
rose 39% to Rs 3,50,000 crore. The
number of issuers, too, increased
from 182 to 267 in the period.
However, adverse domestic business
environment, currency volatility and
high interest rates have led to a
decline in issuance volume in the first
half of the current fiscal by 13% to Rs
1.22 trillion as regular issuers stepped
back.
Yet, even though the total issuance
volume fell, there is visible growth in
both the number of issuers and
issuances. This is because private
sector issuers have been accessing the
bond market despite adverse
conditions.
To be sure, there are other enabling
factors, too, today. With 24,000 firms
rated by local rating agencies - the
largest number in the world-
availability of credible information and
analysis in the public domain has never
been so high.
All of the above, I believe, are signs of
a structural strengthening of India's
bond market. Truly, an inflection
point could be at hand -- conditions
enabling.
GLOBAL REGULATORY UPDATE
20 21
Recent innovations
India's first 50-year bond
India's first NBFC
Infrastructure Debt Fund
In early July this year, CRISIL
assigned its 'CRISIL AA+/Stable'
rating to Mahindra & Mahindra Ltd's
(M&M's) Rs 500 crore, 50-year non-
convertible debenture issue -- the
first 50-year, plainvanilla rupee-
denominated instrument by an
Indian corporate. The issue
u n d e r s c o r e d t h e i n c r e a s i n g
confidence of investors in corporate
India's long-term prospects. CRISIL
believes investors such as pension
funds and insurance companies can
use such long-tenure instruments to
better align the duration of their
portfolios. The salient features of
the instrument are a tenure of 50
years with bullet redemption,
interest rate of 9.55% per annum,
annual payment of interest, and no
call or put option
In another landmark development in
July this year -- which will enhance
the avai labi l ity of funds for
infrastructure projects through the
Indian debt markets -- CRISIL
assigned its CRISIL AAA/Stable
rating to the Rs 500 crore debenture
issue of India Infradebt Ltd. The
company, which received its licence
in February 2013, is India's first
infrastructure debt fund set up as a
non-banking financial company
under the guidelines issued by the
Reserve Bank of India. An IDF-NBFC
is a new vehicle designed to
facilitate the flow of low-cost, long-
term funds from domestic and
global debt investors to capital-
intensive infrastructure projects.
Late in June, CRISIL assigned its
CRISIL AA+/Stable rating to the Rs
500 crore Tier-II bonds of United
Bank of India. This was the first Tier-
II capital instrument issued in India
u n d e r t h e B a s e l - I I I c a p i t a l
regulations. Five more public sector
undertakings followed suit. The
Reserve Bank of India had advised
the implementation of Basel-III
capital regulations for Indian banks
from April 1, 2013, based on the final
guidelines issued in May 2012. CRISIL
be l ieves the guidel ines wi l l
structurally strengthen India's
banking sector by enhancing the
quantity and quality of capital.
India's first Basel-III compliant
Tier-II bonds
Additionally, with the introduction
of a capital conservation buffer,
banks will be in a better position to
absorb potential losses during
financial crises.
In May this year, CRISIL assigned its
CRISIL AAA/Stable rating to Larsen &
Toubro Ltd's (L&T's) Rs 100 crore
inflation-linked capital-indexed non-
convertible debenture issue, the
first of its kind in the country. These
debentures, which were issued in
the same month, were unique in that
they offered inflation-adjusted
returns to investors based on the
movement in the wholesale price
index (WPI) over the tenure of the
instrument. While the real interest
rate is fixed, the instruments
provide for annual indexation of the
principal, leading to a variable
interest payout. At the end of the
tenure, the redemption value will be
the principal adjusted for the
prevail ing WPI, subject to a
prescribed floor and cap. The salient
features of the debentures are a
tenure of 10 years with bullet
redemption and a real yield of 1.65
per cent per annum.
India's first inflation-indexed
debentures
Ms. Roopa KudvaManaging Director & CEO
CRISIL Ltd
Authored by:
will have to come from the corporate
bond market.
Currently, bond market funding for
infrastructure is primarily indirect, in
the sense that 5 specialised financial
institutions issued nearly 60 per cent
of Rs 1.3 trillion bonds raised in the last
fiscal to fund infrastructure. Another
25 per cent bonds were raised by
central and state government public
sector enterprises.
Only 15 per cent of the funding was
available directly to the private sector
issuers. It is for this segment of the
market that regulatory attention is
needed, with the objective to
encourage direct access of private
infrastructure projects to the bond
market.
This will be possible by focusing on
credit-enhanced structures such as
partial guarantees, securitisation of
annuity and toll collections for
operational roads, and of property tax
receivables of municipal corporations.
Another to-do is to ensure successful
scale-up of the recently launched
infrastructure debt funds (IDFs) in the
form of NBFCs. Two such IDF-NBFCs
have already been launched, both of
which have been rated by CRISIL.
Banks, on the other hand, will seek to
raise Rs 3.4 trillion in non-equity
capital till March 31, 2018. We have
already seen a decent beginning on
this front, with five banks raising Rs 60
billion by issuing Tier II bonds -- all of
which were rated by CRISIL.
But the key challenge will be in raising
money through Tier I non-equity
instruments due to their riskier
features of coupon discretion and
principal loss absorption at specified
capital thresholds.
So to build investor appetite for such
instruments, guidelines for long-term
investors will need to include eligibility
for Tier I instruments.
The regulatory facilitation so far
lIRDA has created headroom for
insurer investments in AA-rated
corporate bonds by clubbing
investment limits in government
s e c u r i t i e s w i t h A A A - r a t e d
corporate bonds.
lIRDA has also taken many enabling
steps, such as approving the issue
of NCDs of India Infradebt Ltd to be
reckoned as investment in
infrastructure sector by insurers.
lThe Employees' Provident Fund
Organisation, India's largest
investor with a corpus of Rs
5,46,000 crore, has made its
investment policy a little more
inclusive by adding more names for
investment in bonds.
lRecently, the Reserve Bank of
India (RBI) proposed allowing
banks to offer partial credit
enhancements to corporate bonds
by way of providing credit and
l i q u i d i t y f a c i l i t i e s t o t h e
corporates, and not by way of
guarantee. Guidelines in this
regard are expected shortly.
lThe RBI has also allowed foreign
institutional investors (FIIs),
qualified foreign investors and
long-term investors registered
with the Securities and Exchange
Board of India - such as sovereign
w e a l t h f u n d s , m u l t i l a t e r a l
agencies, pension/ insurance/
endowment funds and foreign
central banks to invest up to $5
billion in credit-enhanced bonds
issued locally by Indian companies.
In the circular, the RBI said the $5
billion limit would be part of the
overall $51 billion quota for
corporate debt investment by FIIs.
Meanwhile, the bond market stirs
Recent issuance trends have been
encouraging and follow policymakers'
efforts to remove impediments.
Fiscal 2012 saw a 31% increase in
issuances to Rs 2,51,000 crore over
fiscal 2011, while in the last fiscal, they
rose 39% to Rs 3,50,000 crore. The
number of issuers, too, increased
from 182 to 267 in the period.
However, adverse domestic business
environment, currency volatility and
high interest rates have led to a
decline in issuance volume in the first
half of the current fiscal by 13% to Rs
1.22 trillion as regular issuers stepped
back.
Yet, even though the total issuance
volume fell, there is visible growth in
both the number of issuers and
issuances. This is because private
sector issuers have been accessing the
bond market despite adverse
conditions.
To be sure, there are other enabling
factors, too, today. With 24,000 firms
rated by local rating agencies - the
largest number in the world-
availability of credible information and
analysis in the public domain has never
been so high.
All of the above, I believe, are signs of
a structural strengthening of India's
bond market. Truly, an inflection
point could be at hand -- conditions
enabling.
GLOBAL REGULATORY UPDATE
22 23
secondary market expansion and
going by these numbers, the
current situation needs to improve
drastically.
Why do Indian companies not access
the debt markets regularly? One of the
reasons has to do with a mindset issue
amongst Indian promoters. A
combination of a strong equity culture
and persistently high and rising
interest rates has biased the promoter
community against large scale
issuance of fixed-rate securities. Some
of the other factors are:
a. Tax Arbitrage claims its pound of
flesh
Along with the development of a
sound and efficient bond market,
the taxation system should keep
p a c e a n d e n s u r e i t c a n
accommodate structural changes.
Unfortunately, the current tax
system has also contributed to the
limited participation in corporate
bond markets by creating an
artificial incentive to invest in
equity or debt Mutual Funds as
opposed to direct bonds.
Interest earned on investment in
bonds is taxed at Maximum
Marginal Rate (MMR), while
dividends on equity are tax free.
Further, the benefits of indexation
and lower capital gains tax on Debt
mutual funds creates a tax
disadvantage for corporate and
individuals while investing directly
in bonds.
b. Bank monopoly crowds out
smaller players
The lack of depth in debt market
leaves large companies dependent
upon the banking system, giving
them a quasi-monopoly position.
Banks, then, have less and more
Many challenges plaguing the
sector
costly capital to lend to the small
and medium-size enterprises.
Ultimately, this raises the overall
cost of financing as other debt
instruments take cues from bank
rates and deters corporate
borrowers from tapping debt
markets.
c. Absence of a sound credit rating
ecosystem
One of the most important
elements missing in India is a
robust, transparent, easy-to-
access credit rating industry, which
makes bond markets attractive
and accessible. A well-supervised
and established credit rating
industry can provide investors with
information, comfort and relative
surety regarding the type of
securities they are trading in. This
will undoubtedly lead to more
issuances as well as secondary
market transactions. Further, the
benefits would accrue to non-AAA
rated bonds as well, thereby
deepening the market.
d. Other systemic weaknesses
Factors such as lack of benchmark
securities, shallow secondary
market, lack of market participants
other than banks and insurance
companies, etc conspire to make
the bond market unattractive for
private issuers as well as investors.
The regulator is cognizant of these
challenges and seems to be taking
steps to alleviate the situation. A few
positive developments include
removal of the Rs.70,000Cr cap on
outstanding government issuances,
reduction in withholding tax to 5%for
FIIs/QIBs, deregulation of interest
rates on savings account and
increasing FII limits, to mention a few.
The woods are lovely, dark and
deep, but I have miles to go
before I sleep...
There has also been talk of including
India in the JPMorgan Government
Bond Emerging Markets Index. This
could be a game-changer for flows
into Indian bonds as this index is
tracked by an AUM of almost USD
240bn, potentially attracting between
USD 20-40bn a year to India.
However, a lot still needs to be done
to bring Indian debt markets at a level
comparable to global markets. Some
of these steps may be as follows:
a. Unified Trading Platform
SEBI recently underscored the
need for unified trading platform
for deepening the corporate debt
market, and said it is working with
all stakeholders, including the
Reserve Bank of India (RBI), to
usher in such a facility. Just as
government securities have the
Clearing Corporation of India Ltd.
(CCI) platform to report and settle
a transaction, the corporate bond
market also requires a unified
platform, SEBI Chairman Mr U.K.
Sinha said recently. Underlining
the need for integration, he cited
the case of commercial papers and
certificate of deposits, saying the
settlements happen in one
particular stock exchange, while
t h e r e p o r t i n g h a p p e n s
Corporate Bond Market in India – Challenges and Opportunities
Corporate Bond Market in India – Challenges and Opportunities
C
Size a reflection of maturity?
orporate Bond markets play a
crucial role in the development of
an economy, by efficiently allocating
capital across the economy, providing
diversification of risk to the investor
community and also strengthening
the stability of the investment
ecosystem.
It is a well-known fact that the
Government and Corporate Bond
market in India lag not only the
developed world but also China and
other Asian countries. According to
the Asian arm of the Securities
Industry and Financial Markets
Association, the total size of the bond
market in India at about USD 100bn in
2012 is approx. 25% of the Chinese
bond market and 69% of the Korean
bond market.
Another interesting statistic is the
bond outstanding to GDP ratio. India,
which is Asia's third largest economy,
has a ratio of merely 5.5%. This puts us
behind every country in Asia (apart
from Indonesia). To put this in
perspective, China that has a bond-to-
GDP ratio of about 24%. A CII survey
suggests our ratio may rise from
approx. 5.5% to 15% by the end of the
12th Plan, but that is tough to imagine.
a. Indian corporate bonds fare poorly
Indian Corporate Bond market
fare even worse when compared
to Government bonds. India's
corporate bond issuance is less
than one-fifth of China's and less
than one-quarter of Korea's
corporate bond market. Corporate
securities comprise only 20% of the
total amount of outstanding
bonds in India, with a mere 5% of
that raised through Public Issues.
b. Dismal secondary market volumes
An analysis of secondary market
trading also paints a sad picture for
Indian corporate bonds. In FY13,
the ratio of total volumes traded to
outstanding debt was 0.57 times
for corporate debt and 1.58 times
for Government Securities. The
volume to debt ratio is regarded as
a measure of the potential for
GLOBAL REGULATORY UPDATE
22 23
secondary market expansion and
going by these numbers, the
current situation needs to improve
drastically.
Why do Indian companies not access
the debt markets regularly? One of the
reasons has to do with a mindset issue
amongst Indian promoters. A
combination of a strong equity culture
and persistently high and rising
interest rates has biased the promoter
community against large scale
issuance of fixed-rate securities. Some
of the other factors are:
a. Tax Arbitrage claims its pound of
flesh
Along with the development of a
sound and efficient bond market,
the taxation system should keep
p a c e a n d e n s u r e i t c a n
accommodate structural changes.
Unfortunately, the current tax
system has also contributed to the
limited participation in corporate
bond markets by creating an
artificial incentive to invest in
equity or debt Mutual Funds as
opposed to direct bonds.
Interest earned on investment in
bonds is taxed at Maximum
Marginal Rate (MMR), while
dividends on equity are tax free.
Further, the benefits of indexation
and lower capital gains tax on Debt
mutual funds creates a tax
disadvantage for corporate and
individuals while investing directly
in bonds.
b. Bank monopoly crowds out
smaller players
The lack of depth in debt market
leaves large companies dependent
upon the banking system, giving
them a quasi-monopoly position.
Banks, then, have less and more
Many challenges plaguing the
sector
costly capital to lend to the small
and medium-size enterprises.
Ultimately, this raises the overall
cost of financing as other debt
instruments take cues from bank
rates and deters corporate
borrowers from tapping debt
markets.
c. Absence of a sound credit rating
ecosystem
One of the most important
elements missing in India is a
robust, transparent, easy-to-
access credit rating industry, which
makes bond markets attractive
and accessible. A well-supervised
and established credit rating
industry can provide investors with
information, comfort and relative
surety regarding the type of
securities they are trading in. This
will undoubtedly lead to more
issuances as well as secondary
market transactions. Further, the
benefits would accrue to non-AAA
rated bonds as well, thereby
deepening the market.
d. Other systemic weaknesses
Factors such as lack of benchmark
securities, shallow secondary
market, lack of market participants
other than banks and insurance
companies, etc conspire to make
the bond market unattractive for
private issuers as well as investors.
The regulator is cognizant of these
challenges and seems to be taking
steps to alleviate the situation. A few
positive developments include
removal of the Rs.70,000Cr cap on
outstanding government issuances,
reduction in withholding tax to 5%for
FIIs/QIBs, deregulation of interest
rates on savings account and
increasing FII limits, to mention a few.
The woods are lovely, dark and
deep, but I have miles to go
before I sleep...
There has also been talk of including
India in the JPMorgan Government
Bond Emerging Markets Index. This
could be a game-changer for flows
into Indian bonds as this index is
tracked by an AUM of almost USD
240bn, potentially attracting between
USD 20-40bn a year to India.
However, a lot still needs to be done
to bring Indian debt markets at a level
comparable to global markets. Some
of these steps may be as follows:
a. Unified Trading Platform
SEBI recently underscored the
need for unified trading platform
for deepening the corporate debt
market, and said it is working with
all stakeholders, including the
Reserve Bank of India (RBI), to
usher in such a facility. Just as
government securities have the
Clearing Corporation of India Ltd.
(CCI) platform to report and settle
a transaction, the corporate bond
market also requires a unified
platform, SEBI Chairman Mr U.K.
Sinha said recently. Underlining
the need for integration, he cited
the case of commercial papers and
certificate of deposits, saying the
settlements happen in one
particular stock exchange, while
t h e r e p o r t i n g h a p p e n s
Corporate Bond Market in India – Challenges and Opportunities
Corporate Bond Market in India – Challenges and Opportunities
C
Size a reflection of maturity?
orporate Bond markets play a
crucial role in the development of
an economy, by efficiently allocating
capital across the economy, providing
diversification of risk to the investor
community and also strengthening
the stability of the investment
ecosystem.
It is a well-known fact that the
Government and Corporate Bond
market in India lag not only the
developed world but also China and
other Asian countries. According to
the Asian arm of the Securities
Industry and Financial Markets
Association, the total size of the bond
market in India at about USD 100bn in
2012 is approx. 25% of the Chinese
bond market and 69% of the Korean
bond market.
Another interesting statistic is the
bond outstanding to GDP ratio. India,
which is Asia's third largest economy,
has a ratio of merely 5.5%. This puts us
behind every country in Asia (apart
from Indonesia). To put this in
perspective, China that has a bond-to-
GDP ratio of about 24%. A CII survey
suggests our ratio may rise from
approx. 5.5% to 15% by the end of the
12th Plan, but that is tough to imagine.
a. Indian corporate bonds fare poorly
Indian Corporate Bond market
fare even worse when compared
to Government bonds. India's
corporate bond issuance is less
than one-fifth of China's and less
than one-quarter of Korea's
corporate bond market. Corporate
securities comprise only 20% of the
total amount of outstanding
bonds in India, with a mere 5% of
that raised through Public Issues.
b. Dismal secondary market volumes
An analysis of secondary market
trading also paints a sad picture for
Indian corporate bonds. In FY13,
the ratio of total volumes traded to
outstanding debt was 0.57 times
for corporate debt and 1.58 times
for Government Securities. The
volume to debt ratio is regarded as
a measure of the potential for
GLOBAL REGULATORY UPDATE
24 25
Corporate Debt Market – Future ProspectsCorporate Debt Market – Future Prospects
Development of the corporate debt
market has always been a focus area
for the regulators as this is seen as an
important segment to address
corporate funding needs. With the
increasing focus on the infrastructure
sector and its requirement for long
term funds, it is felt that corporate
debt market can play an important
role here.
G i v e n t h i s b a c k g r o u n d , t h e
Government set up the R H Patil
c o m m i t t e e t o c o m e u p w i t h
recommendations for development
of the corporate debt market. The
Committee in the year 2006 came out
with a series of recommendations to
address many of the issues pertaining
to the market structure, regulations,
trading infrastructure etc. Many of
these recommendat ions were
implemented by the regulators over
the last few years. Some of these
steps have started yielding dividends
as the corporate debt market has seen
robust growth in the last few years. In
the years 2011-12 and 2012-13, based on
data from CRISIL, corporate debt
issuances surged 31% and 39%
respectively over the previous years.
The reasons for the surge have been
attributed to steps like simplification
of the issuance process, changes in
investment norms for insurance
companies and provident funds,
growth in mutual fund assets etc.
However despite this growth, the
market still has a long way to go.
Firstly, in terms of size the corporate
bond market as estimated by CRISIL is
still only 14% of GDP compared with 40-
70% for developed market. Secondly,
issuances are largely in short and
medium term buckets with long term
issuances far and few between.
Thirdly, the market is dominated by
higher credit quality issuers and
issuers from the BFSI segment. The
share of issuers of rating AA - and
above has increased over the last few
years. Corporate debt market
continues to be out of reach for the
infrastructure sector.
The issues that are hindering the
growth of the corporate debt market
are both macro and micro.
Macro-level issues
To understand the macro issues there
is a need to analyze the sources of
household savings in India.
Source: RBI
Amount (Rsbn) as on 31 March 2013 Percent
Banks 5,966 54.4
Non- banking deposits 204 1.9
Insurance Companies 1,795 16.4
Provident Funds 1,596 14.6
Shares & debentures 344 3.1
Claims on Government -90 -0.8
Trade Debt(Net) 32 0.3
Currency 1,121 10.2
TOTAL 10,969 100.0
Table i
somewhere else. Removal of these
anomalies will go a long way in
increasing the depth in the debt
markets.
b. Benchmark yield curve aids fair
pricing, increases confidence
Benchmark yield curve and rates
define the structure of interest
rates, influence investors' future
e x p e c t a t i o n s a b o u t r a t e
fluctuations, and are used as
hedging tools. A liquid benchmark
at every level of the yield curve
reflects the risk-free rate and
enables more transparent and
efficient pricing of risk in primary
as well as secondary markets. Low
liquidity in secondary markets
result in volatility and even small
trades can move the market price
significantly. Needless to say, this
acts as a deterrent for serious
investors. Fair pricing in secondary
market will lead to realistic,
transparent price discovery and
trading, leading to more market
participation.
c. Introduce Futures, Interest rate
and currency swaps, derivatives
In addition to the secondary
market, we also need to develop a
event of a counterparty default,
the terminated transactions are
valued and netted under close-out
netting. India could learn from this
and incorporate a localised version
of the same.
a. There has been some growth in the
corporate debt market in terms of
both primary issuances and
secondary market activity.
b. However, primary issuances are
still dominated by the private
placement segment and further,
the financial sector is more active
here.
c. The GSec market still dominates
the overall debt market and the
volumes traded are still a little less
than 10 times that in the corporate
debt market.
d. The focus must be on improving
liquidity in the corporate debt
market as this is a prerequisite for
more interest in the primary
segment.
e. While the regulator has taken
some steps, it can reduce the tax
arbitrage by bringing the taxation
on corporate bonds at par with
equity or listed debt, thereby
encouraging far more companies
to come to the market, and far
more investors from considering
direct bond investments.
Summary
bond futures market as it helps
primary dealers and market
participants to hedge risks. Bond
futures will promote large volume
active calls on the market, facilitate
the growth of OTC derivatives
market and contribute to its
stability and security.
Low liquidity has also led to high
and dysfunctional Bid-Ask spreads,
which amount to 10 bps on
average, compared to less than
3bps in China. A well-oiled
secondary market with access to
derivatives should wipe out these
a n o m a l i e s . I n v e s t o r s n e e d
derivatives in order to hedge,
speculate and offset risk, which in
turn enhances liquidity. Interest-
rate swaps, currency swaps and
credit derivatives are important
parts of international debt markets
and India should take the
experience of the developed world
and introduce them as well.
d. Close-out netting
An important factor in global debt
markets is the recognition of close-
out netting, which is a well-
established practice in the most
advanced financial markets. In the Mr Nirmal Jain
ChairmanIndia Infoline Limited
Authored by:
GLOBAL REGULATORY UPDATE
24 25
Corporate Debt Market – Future ProspectsCorporate Debt Market – Future Prospects
Development of the corporate debt
market has always been a focus area
for the regulators as this is seen as an
important segment to address
corporate funding needs. With the
increasing focus on the infrastructure
sector and its requirement for long
term funds, it is felt that corporate
debt market can play an important
role here.
G i v e n t h i s b a c k g r o u n d , t h e
Government set up the R H Patil
c o m m i t t e e t o c o m e u p w i t h
recommendations for development
of the corporate debt market. The
Committee in the year 2006 came out
with a series of recommendations to
address many of the issues pertaining
to the market structure, regulations,
trading infrastructure etc. Many of
these recommendat ions were
implemented by the regulators over
the last few years. Some of these
steps have started yielding dividends
as the corporate debt market has seen
robust growth in the last few years. In
the years 2011-12 and 2012-13, based on
data from CRISIL, corporate debt
issuances surged 31% and 39%
respectively over the previous years.
The reasons for the surge have been
attributed to steps like simplification
of the issuance process, changes in
investment norms for insurance
companies and provident funds,
growth in mutual fund assets etc.
However despite this growth, the
market still has a long way to go.
Firstly, in terms of size the corporate
bond market as estimated by CRISIL is
still only 14% of GDP compared with 40-
70% for developed market. Secondly,
issuances are largely in short and
medium term buckets with long term
issuances far and few between.
Thirdly, the market is dominated by
higher credit quality issuers and
issuers from the BFSI segment. The
share of issuers of rating AA - and
above has increased over the last few
years. Corporate debt market
continues to be out of reach for the
infrastructure sector.
The issues that are hindering the
growth of the corporate debt market
are both macro and micro.
Macro-level issues
To understand the macro issues there
is a need to analyze the sources of
household savings in India.
Source: RBI
Amount (Rsbn) as on 31 March 2013 Percent
Banks 5,966 54.4
Non- banking deposits 204 1.9
Insurance Companies 1,795 16.4
Provident Funds 1,596 14.6
Shares & debentures 344 3.1
Claims on Government -90 -0.8
Trade Debt(Net) 32 0.3
Currency 1,121 10.2
TOTAL 10,969 100.0
Table i
somewhere else. Removal of these
anomalies will go a long way in
increasing the depth in the debt
markets.
b. Benchmark yield curve aids fair
pricing, increases confidence
Benchmark yield curve and rates
define the structure of interest
rates, influence investors' future
e x p e c t a t i o n s a b o u t r a t e
fluctuations, and are used as
hedging tools. A liquid benchmark
at every level of the yield curve
reflects the risk-free rate and
enables more transparent and
efficient pricing of risk in primary
as well as secondary markets. Low
liquidity in secondary markets
result in volatility and even small
trades can move the market price
significantly. Needless to say, this
acts as a deterrent for serious
investors. Fair pricing in secondary
market will lead to realistic,
transparent price discovery and
trading, leading to more market
participation.
c. Introduce Futures, Interest rate
and currency swaps, derivatives
In addition to the secondary
market, we also need to develop a
event of a counterparty default,
the terminated transactions are
valued and netted under close-out
netting. India could learn from this
and incorporate a localised version
of the same.
a. There has been some growth in the
corporate debt market in terms of
both primary issuances and
secondary market activity.
b. However, primary issuances are
still dominated by the private
placement segment and further,
the financial sector is more active
here.
c. The GSec market still dominates
the overall debt market and the
volumes traded are still a little less
than 10 times that in the corporate
debt market.
d. The focus must be on improving
liquidity in the corporate debt
market as this is a prerequisite for
more interest in the primary
segment.
e. While the regulator has taken
some steps, it can reduce the tax
arbitrage by bringing the taxation
on corporate bonds at par with
equity or listed debt, thereby
encouraging far more companies
to come to the market, and far
more investors from considering
direct bond investments.
Summary
bond futures market as it helps
primary dealers and market
participants to hedge risks. Bond
futures will promote large volume
active calls on the market, facilitate
the growth of OTC derivatives
market and contribute to its
stability and security.
Low liquidity has also led to high
and dysfunctional Bid-Ask spreads,
which amount to 10 bps on
average, compared to less than
3bps in China. A well-oiled
secondary market with access to
derivatives should wipe out these
a n o m a l i e s . I n v e s t o r s n e e d
derivatives in order to hedge,
speculate and offset risk, which in
turn enhances liquidity. Interest-
rate swaps, currency swaps and
credit derivatives are important
parts of international debt markets
and India should take the
experience of the developed world
and introduce them as well.
d. Close-out netting
An important factor in global debt
markets is the recognition of close-
out netting, which is a well-
established practice in the most
advanced financial markets. In the Mr Nirmal Jain
ChairmanIndia Infoline Limited
Authored by:
GLOBAL REGULATORY UPDATE
26 27
CII's 9th International Corporate Governance Summit focuses
on the need to adapt to changing social & political structures
The 9th International Corporate
Governance Summit, organized on
20th December at Mumbai, was
inaugurated by Mr. U K Sinha,
Chairman, Securities & Exchange
Board of India (SEBI). During the
Inaugural Address, Mr Sinha drew
attention to the strong upsurge
towards democracy, accountability
and transparency across the world in
the last five years. He advised the
corporates not to ignore these social
and political happenings in the larger
society as corporates are also
governed by the same considerations
and guiding principles that govern the
rest of society. Explaining this further,
Mr Sinha said, "Adding to this is the US
financial crisis where it was found that
many corporations acted recklessly,
took too much risk, went for short
term gains, had lax monitoring and
had policies not in the best interest of
shareholders. These have led to
shareholder impatience and the
strengthening of regulatory actions
against corporates".
Chairman, SEBI also announced that
the new set of corporate governance
guidelines for listed companies were
being finalized and were expected to
be announced shortly. Mr. Sinha also
referred to international corporate
governance practices with the
intention of driving the need to be in
L to RMr P R Ramesh, Chairman, Deloitte India; Mr Chandrajit Banerjee, Director General, CII; Mr U K Sinha, Chairman, Securities & Exchange Board of India; Mr K V Kamath, Past President and Chairman, Council on Corporate Governance & Regulatory Affairs, CII; at the 9th International Corporate Governance Summit held on 20th December 2013 at Mumbai.
CII's Recent InitiativesCII's Recent InitiativesThe following observations can be made from the data in table i:
lIndia remains a primarily a bank driven market despite the growth of the mutual fund and insurance sectors in the last few years. With the increasing focus on financial inclusion, the share of banks as a source of savings is bound to stay high.
lThe growth in mutual funds has also been largely led by equity, liquid and short term funds. The share of mutual fund money devoted to medium and long term bond funds is still not significant.
lThe insurance and PF segments are restr icted to the organized segments of the market and thus have their own limitations.
lD i r e c t r e t a i l i n v e s t m e n t i n corporate debt has been and will continue to be miniscule and cannot be the driver for corporate debt growth.
lWhile foreign investment in Indian debt remains an option, there are certain concerns in increasing dependency on this segment. This will be discussed in detail in the following sections.
Thus any strategy for growth of the corporate debt market has to consider the role of banks in this segment and the issues faced by them in this regard. Some of these issues are structural in nature and have their roots in long standing problems faced at the macroeconomic level.
Fiscal deficit:
The Indian government has a track record of running high fiscal deficits over the years. While fiscal deficit had marginally reduced in the early and mid-2000s, following the crisis of 2008 the government had to resort to fiscal stimulation to keep the economy afloat. The net impact of the high fiscal deficit is a classic "crowding out" effect.Thus with the biggest pool of domestic savings having only limited participation in the corporate debt market, the growth of the market is muted to that extent.
High reserve requirements:
Banks have to invest 23% of their liabilities in government securities as part of their Statutory Liquidity Reserve (SLR) requirements. This not only pre-empts the bank's funds but also increases the bank's overall cost of funds, given the lower yields on government securities as compared to the cost of bank deposits. This severely restricts the ability of banks to participate in corporate debt, especially the high quality credit. The same holds true for investments by insurance companies and provident funds also who are mandated to invest in government securities as per their regulatory requirements.
Current account deficit:
The current account deficit also restricts the ability of the country to rely on investments by foreign investors in Indian debt. As long as the country is running a current account def ic i t , the currency remains vulnerable to any external shock and consequent withdrawal of foreign investors from the domestic debt market. The sharp depreciation of the rupee in mid-2013 following the Fed taper fears and the selloff by FIIs will make the regulators cautious about completely opening up the Indian debt market to foreigners.
Micro-level issues
At a micro level, there are certain preferences of both borrowers and lenders that also act as deterrents for the development of a corporate debt market. Borrowers, especially the weaker credits, prefer to borrow directly from banks by way of loans even if it involves paying a slightly higher cost. This is because loans give corporates the flexibility to negotiate terms with a single lender not only at the time of taking the loan but also at a later date if there is a need to restructure the loan.
From the bank's perspective the single biggest benefit that loans provide is that they need not be marked to market unlike corporate debt. This helps protect the bank's
Profit & Loss when interest rates are volatile. In addition, provisioning norms in case of loans provide flexibility to the banks while in case of corporate debt any kind of default gets reflected in the mark to market immediately. This issue will partly get addressed once banks start marking to market the loan portfolios also. However t i l l that t ime banks participation in corporate debt may be restricted to top credits only.
Banks also have constraints in terms of the tenor of the structure of their liabilities which are largely short and medium term in nature. Thus banks do not have the ability to invest in long term debt to fund the infrastructure sector.
Any steps taken for the development of the corporate debt market cannot be to the exclusion of the banking system as banks are the biggest channels of disintermediation. However banks themselves are constrained because of both macro level and micro level issues/ At the macro level, till the government addresses the twin deficit problem, this will be one of the biggest drags on t h e b a n k i n g s y s t e m i n t h e i r participation in the debt market. In addition, because of preferences of both banks and corporates, the corporate debt market will initially show growth only for top rated credits and for short to medium maturities. Only when these segments fully develop, we are likely to see growth in the infrastructure debt segment.
Conclusions
Mr Mohan Shenoi, PresidentGroup Treasury and Global Markets
Kotak Mahindra Bank
Authored by:
Disclaimer: The views expressed in the article are personal and do not reflect the views of Kotak Mahindra Bank Ltd.
GLOBAL REGULATORY UPDATE
26 27
CII's 9th International Corporate Governance Summit focuses
on the need to adapt to changing social & political structures
The 9th International Corporate
Governance Summit, organized on
20th December at Mumbai, was
inaugurated by Mr. U K Sinha,
Chairman, Securities & Exchange
Board of India (SEBI). During the
Inaugural Address, Mr Sinha drew
attention to the strong upsurge
towards democracy, accountability
and transparency across the world in
the last five years. He advised the
corporates not to ignore these social
and political happenings in the larger
society as corporates are also
governed by the same considerations
and guiding principles that govern the
rest of society. Explaining this further,
Mr Sinha said, "Adding to this is the US
financial crisis where it was found that
many corporations acted recklessly,
took too much risk, went for short
term gains, had lax monitoring and
had policies not in the best interest of
shareholders. These have led to
shareholder impatience and the
strengthening of regulatory actions
against corporates".
Chairman, SEBI also announced that
the new set of corporate governance
guidelines for listed companies were
being finalized and were expected to
be announced shortly. Mr. Sinha also
referred to international corporate
governance practices with the
intention of driving the need to be in
L to RMr P R Ramesh, Chairman, Deloitte India; Mr Chandrajit Banerjee, Director General, CII; Mr U K Sinha, Chairman, Securities & Exchange Board of India; Mr K V Kamath, Past President and Chairman, Council on Corporate Governance & Regulatory Affairs, CII; at the 9th International Corporate Governance Summit held on 20th December 2013 at Mumbai.
CII's Recent InitiativesCII's Recent InitiativesThe following observations can be made from the data in table i:
lIndia remains a primarily a bank driven market despite the growth of the mutual fund and insurance sectors in the last few years. With the increasing focus on financial inclusion, the share of banks as a source of savings is bound to stay high.
lThe growth in mutual funds has also been largely led by equity, liquid and short term funds. The share of mutual fund money devoted to medium and long term bond funds is still not significant.
lThe insurance and PF segments are restr icted to the organized segments of the market and thus have their own limitations.
lD i r e c t r e t a i l i n v e s t m e n t i n corporate debt has been and will continue to be miniscule and cannot be the driver for corporate debt growth.
lWhile foreign investment in Indian debt remains an option, there are certain concerns in increasing dependency on this segment. This will be discussed in detail in the following sections.
Thus any strategy for growth of the corporate debt market has to consider the role of banks in this segment and the issues faced by them in this regard. Some of these issues are structural in nature and have their roots in long standing problems faced at the macroeconomic level.
Fiscal deficit:
The Indian government has a track record of running high fiscal deficits over the years. While fiscal deficit had marginally reduced in the early and mid-2000s, following the crisis of 2008 the government had to resort to fiscal stimulation to keep the economy afloat. The net impact of the high fiscal deficit is a classic "crowding out" effect.Thus with the biggest pool of domestic savings having only limited participation in the corporate debt market, the growth of the market is muted to that extent.
High reserve requirements:
Banks have to invest 23% of their liabilities in government securities as part of their Statutory Liquidity Reserve (SLR) requirements. This not only pre-empts the bank's funds but also increases the bank's overall cost of funds, given the lower yields on government securities as compared to the cost of bank deposits. This severely restricts the ability of banks to participate in corporate debt, especially the high quality credit. The same holds true for investments by insurance companies and provident funds also who are mandated to invest in government securities as per their regulatory requirements.
Current account deficit:
The current account deficit also restricts the ability of the country to rely on investments by foreign investors in Indian debt. As long as the country is running a current account def ic i t , the currency remains vulnerable to any external shock and consequent withdrawal of foreign investors from the domestic debt market. The sharp depreciation of the rupee in mid-2013 following the Fed taper fears and the selloff by FIIs will make the regulators cautious about completely opening up the Indian debt market to foreigners.
Micro-level issues
At a micro level, there are certain preferences of both borrowers and lenders that also act as deterrents for the development of a corporate debt market. Borrowers, especially the weaker credits, prefer to borrow directly from banks by way of loans even if it involves paying a slightly higher cost. This is because loans give corporates the flexibility to negotiate terms with a single lender not only at the time of taking the loan but also at a later date if there is a need to restructure the loan.
From the bank's perspective the single biggest benefit that loans provide is that they need not be marked to market unlike corporate debt. This helps protect the bank's
Profit & Loss when interest rates are volatile. In addition, provisioning norms in case of loans provide flexibility to the banks while in case of corporate debt any kind of default gets reflected in the mark to market immediately. This issue will partly get addressed once banks start marking to market the loan portfolios also. However t i l l that t ime banks participation in corporate debt may be restricted to top credits only.
Banks also have constraints in terms of the tenor of the structure of their liabilities which are largely short and medium term in nature. Thus banks do not have the ability to invest in long term debt to fund the infrastructure sector.
Any steps taken for the development of the corporate debt market cannot be to the exclusion of the banking system as banks are the biggest channels of disintermediation. However banks themselves are constrained because of both macro level and micro level issues/ At the macro level, till the government addresses the twin deficit problem, this will be one of the biggest drags on t h e b a n k i n g s y s t e m i n t h e i r participation in the debt market. In addition, because of preferences of both banks and corporates, the corporate debt market will initially show growth only for top rated credits and for short to medium maturities. Only when these segments fully develop, we are likely to see growth in the infrastructure debt segment.
Conclusions
Mr Mohan Shenoi, PresidentGroup Treasury and Global Markets
Kotak Mahindra Bank
Authored by:
Disclaimer: The views expressed in the article are personal and do not reflect the views of Kotak Mahindra Bank Ltd.
GLOBAL REGULATORY UPDATE
28 29
Transparency, Accountability, Minority Protection are the
three Growth Mantras of SEBI: U K Sinha, Chairman, SEBI
CII National Council was addressed by Mr U K Sinha, Chairman, SEBI on 15th November 2013 at Mumbai. The address was followed by an insightful interaction with the captains of the industry present at the meeting.
During his address, Mr U K Sinha underscored that the three growth m a n t r a s - T r a n s p a r e n c y , Accountability and Minority - are the pivot of SEBI Regulations. He said that capital market can contribute to growth of the economy only if these principles are not compromised with. He urged the industry to implement regulations in letter and spirit pointing out that 11000 companies are in violation of the clause pertaining to shareholder pattern and around 900 companies in violation of the corporate governance clause of the Listing Agreement, asserting the need to implement regulations both in letter and spirit.
Speaking about the state of the primary market, Chairman, SEBI a t t r i b u t e d t h e s i g n i f i c a n t improvement in the corporate bond market in the past couple of years to the investment by Employees' Provident Fund Organisation in the bond markets due to liberalization of investor class. He emphasized the importance of inflow of pension money into the equity market for it to take the next big leap. Mr Sinha further advised that over-dependence on Foreign Institutional Investors can be rectified only by mobilizing domestic investors into equity market. He called upon the industry to channelize retirement savings into the market, which would help stabilize the volatility in the market.
Mr Sinha also praised the report on the Financial Sector Legislative Reforms Commission (FSLRC) for its f o c u s o n f o r m u l a t i o n o f comprehensive consumer protection
Earlier welcoming Mr U K Sinha, Mr S Gopalakrishnan, President, re-iterated that CII continues to unflinchingly focus on adoption of good corporate governance by Indian industry. He also mentioned while CII has constituted a Council on Financial Sector Development to study the subject of regulatory oversight - particularly in cases, where there are potential overlaps and also the recommendations of the FSLRC, he also sought SEBI chairman's guidance on the stated subject.
Mr Adi Godrej, Immediate Past President, CII highlighted the need to create an environment that promotes "ease of raising capital" along with "ease of doing business" in India. The stringency of delisting regulations was also brought to the Regulator's notice. Mr Uday Kotak, Chairman, CII Financial Sector Development Council pointed to the need to correct the tendency of Indian investors to divert savings in not-so transparent markets (gold and real estate) that block a significant amount of funds which could have otherwise flowed into a more transparent equity market.
laws. He also appreciated the proposed interaction between i n d u s t r y a n d r e g u l a t o r s f o r formulation of regulations envisaged in the report.
Mr Sinha also spoke on the state of regulatory architecture being influenced by the state of affairs in other economies, the role and functioning of the other regulators in the country and the interface between the two. He stated, "Globally the investors are in a state of unrest and this is intensifying. The usage of technology i s adding to th is intensification. While this is helping strengthening of shareholders' democracy, even small violations don't go unnoticed". He also added that the Regulators around the world have started to lay emphasis on transparency and more accountability with regulations being framed extending to other jurisdictions as well. On the impact of such extra-territorial regulations on Indian companies, Mr Sinha, urged the industry to make a representation to the Government on the issues arising because of these regulations.
Mr U K Sinha, Chairman, SEBI addressing the Fourth meeting of the CII National Council for 2013-14 held on 15 November 2013 at Mumbai
sync with the rest of the world and for
corporates to go beyond how
business is done in India and adopt
international best practices in a
globalised world.
Responding to the submission by Mr
Chandrajit Banerjee, Director General,
CII that the regulations should not be
framed keeping the outliers in mind,
Mr Sinha responded that non-
compliance was becoming quite
rampant. Chairman, SEBI also pointed
out that many companies are not
complying with the Listing Agreement
- Clause 40A on minimum public
shareholding and Clause 49 on
Corporate Governance and that SEBI
would we well within its right to take
action against them.
The Summit was chaired by Mr K V
Kamath, Past President and Chairman,
National Council on Corporate
Governance & Regulatory Affairs, CII.
While delivering the Theme Address,
Mr Kamath advised that corporate
governance is a naturally evolving
process and should be internalized. He
further added that the regulatory
nudge in the offing may turn out to be
a hard shout to turn such practices
from mere form to due processes.
A joint CII- Deloitte publication titled
' G l o b a l Tr e n d s i n C o r p o r a t e
Governance - since the financial crisis'
was released by Mr. U K Sinha at the
Summit. The paper gives an overview
not only of the national trends but also
g l o b a l t r e n d s i n c o r p o r a t e
governance.
P o s t t h e I n a u g u r a l S e s s i o n ,
discussions were held on effective
boardroom behavior and how to
manage diverse stakeholders'
expectations. The panel comprising
Mr Y M Deosthalee, Chairman &
Managing Director, L&T Finance
Holdings; Mr Y H Malegam, Chairman -
Emeritus, S B Billimoria & Co; Mr Leo
Puri, Managing Director, UTI Asset
Management Co. Ltd and Mr Shailesh
Haribhakti, Professional Independent
Director shared their experiences in
an insightful discussion moderated by
Dr Janmejaya Sinha, Chairman - Asia
Pacific, Boston Consulting Group.
With the renewed focus of the
Companies Act, 2013 on disclosures
and governance practices, discussions
during the Panel titled 'Board
Governance and Challenges in the
Current Environment' focused on how
companies can take a strategic
approach to the challenge of
complying with the new corporate
governance requirements and use
compliance efforts to build greater
business value. Panel members - Mr
Keki Mistry, Vice Chairman & CEO,
HDFC; Mr Arun Nanda, Non Executive
Director, Mahindra & Mahindra; Ms
Dipti Neelakantan, Managing Director
& Group COO, J M Financial and Mr
Bharat Vasani, Chief, Legal & Group
General Counsel, Tata Sons Ltd -
explained the combined impact of the
provisions of the new Companies Act
and SEBI Regulations on listed
companies and how these divergent
provisions could be reconciled. Mr P R
Ramesh, Chairman, Deloitte India
moderated this insightful interaction.
The Panel led by Mr Suresh Senapaty,
Executive Director & CFO, WIPRO and
comprising Mr Dipankar Chatterji;
Senior Partner, L B Jha & Co; Mr Amit
Ta n d o n , M a n a g i n g D i r e c t o r ,
Institutional Investment Advisory
Services and Mr Abhay Gupte, Senior
Director, Deloitte India, deliberated if
the disclosure requirements were
excessive and obscuring meaningful
information and also on the possibility
of reforms in these requirements.
The Summit saw a high level of
participation from senior industry
representatives, compliance and audit
practitioners, institutional investors
and other stakeholders.
GLOBAL REGULATORY UPDATE
28 29
Transparency, Accountability, Minority Protection are the
three Growth Mantras of SEBI: U K Sinha, Chairman, SEBI
CII National Council was addressed by Mr U K Sinha, Chairman, SEBI on 15th November 2013 at Mumbai. The address was followed by an insightful interaction with the captains of the industry present at the meeting.
During his address, Mr U K Sinha underscored that the three growth m a n t r a s - T r a n s p a r e n c y , Accountability and Minority - are the pivot of SEBI Regulations. He said that capital market can contribute to growth of the economy only if these principles are not compromised with. He urged the industry to implement regulations in letter and spirit pointing out that 11000 companies are in violation of the clause pertaining to shareholder pattern and around 900 companies in violation of the corporate governance clause of the Listing Agreement, asserting the need to implement regulations both in letter and spirit.
Speaking about the state of the primary market, Chairman, SEBI a t t r i b u t e d t h e s i g n i f i c a n t improvement in the corporate bond market in the past couple of years to the investment by Employees' Provident Fund Organisation in the bond markets due to liberalization of investor class. He emphasized the importance of inflow of pension money into the equity market for it to take the next big leap. Mr Sinha further advised that over-dependence on Foreign Institutional Investors can be rectified only by mobilizing domestic investors into equity market. He called upon the industry to channelize retirement savings into the market, which would help stabilize the volatility in the market.
Mr Sinha also praised the report on the Financial Sector Legislative Reforms Commission (FSLRC) for its f o c u s o n f o r m u l a t i o n o f comprehensive consumer protection
Earlier welcoming Mr U K Sinha, Mr S Gopalakrishnan, President, re-iterated that CII continues to unflinchingly focus on adoption of good corporate governance by Indian industry. He also mentioned while CII has constituted a Council on Financial Sector Development to study the subject of regulatory oversight - particularly in cases, where there are potential overlaps and also the recommendations of the FSLRC, he also sought SEBI chairman's guidance on the stated subject.
Mr Adi Godrej, Immediate Past President, CII highlighted the need to create an environment that promotes "ease of raising capital" along with "ease of doing business" in India. The stringency of delisting regulations was also brought to the Regulator's notice. Mr Uday Kotak, Chairman, CII Financial Sector Development Council pointed to the need to correct the tendency of Indian investors to divert savings in not-so transparent markets (gold and real estate) that block a significant amount of funds which could have otherwise flowed into a more transparent equity market.
laws. He also appreciated the proposed interaction between i n d u s t r y a n d r e g u l a t o r s f o r formulation of regulations envisaged in the report.
Mr Sinha also spoke on the state of regulatory architecture being influenced by the state of affairs in other economies, the role and functioning of the other regulators in the country and the interface between the two. He stated, "Globally the investors are in a state of unrest and this is intensifying. The usage of technology i s adding to th is intensification. While this is helping strengthening of shareholders' democracy, even small violations don't go unnoticed". He also added that the Regulators around the world have started to lay emphasis on transparency and more accountability with regulations being framed extending to other jurisdictions as well. On the impact of such extra-territorial regulations on Indian companies, Mr Sinha, urged the industry to make a representation to the Government on the issues arising because of these regulations.
Mr U K Sinha, Chairman, SEBI addressing the Fourth meeting of the CII National Council for 2013-14 held on 15 November 2013 at Mumbai
sync with the rest of the world and for
corporates to go beyond how
business is done in India and adopt
international best practices in a
globalised world.
Responding to the submission by Mr
Chandrajit Banerjee, Director General,
CII that the regulations should not be
framed keeping the outliers in mind,
Mr Sinha responded that non-
compliance was becoming quite
rampant. Chairman, SEBI also pointed
out that many companies are not
complying with the Listing Agreement
- Clause 40A on minimum public
shareholding and Clause 49 on
Corporate Governance and that SEBI
would we well within its right to take
action against them.
The Summit was chaired by Mr K V
Kamath, Past President and Chairman,
National Council on Corporate
Governance & Regulatory Affairs, CII.
While delivering the Theme Address,
Mr Kamath advised that corporate
governance is a naturally evolving
process and should be internalized. He
further added that the regulatory
nudge in the offing may turn out to be
a hard shout to turn such practices
from mere form to due processes.
A joint CII- Deloitte publication titled
' G l o b a l Tr e n d s i n C o r p o r a t e
Governance - since the financial crisis'
was released by Mr. U K Sinha at the
Summit. The paper gives an overview
not only of the national trends but also
g l o b a l t r e n d s i n c o r p o r a t e
governance.
P o s t t h e I n a u g u r a l S e s s i o n ,
discussions were held on effective
boardroom behavior and how to
manage diverse stakeholders'
expectations. The panel comprising
Mr Y M Deosthalee, Chairman &
Managing Director, L&T Finance
Holdings; Mr Y H Malegam, Chairman -
Emeritus, S B Billimoria & Co; Mr Leo
Puri, Managing Director, UTI Asset
Management Co. Ltd and Mr Shailesh
Haribhakti, Professional Independent
Director shared their experiences in
an insightful discussion moderated by
Dr Janmejaya Sinha, Chairman - Asia
Pacific, Boston Consulting Group.
With the renewed focus of the
Companies Act, 2013 on disclosures
and governance practices, discussions
during the Panel titled 'Board
Governance and Challenges in the
Current Environment' focused on how
companies can take a strategic
approach to the challenge of
complying with the new corporate
governance requirements and use
compliance efforts to build greater
business value. Panel members - Mr
Keki Mistry, Vice Chairman & CEO,
HDFC; Mr Arun Nanda, Non Executive
Director, Mahindra & Mahindra; Ms
Dipti Neelakantan, Managing Director
& Group COO, J M Financial and Mr
Bharat Vasani, Chief, Legal & Group
General Counsel, Tata Sons Ltd -
explained the combined impact of the
provisions of the new Companies Act
and SEBI Regulations on listed
companies and how these divergent
provisions could be reconciled. Mr P R
Ramesh, Chairman, Deloitte India
moderated this insightful interaction.
The Panel led by Mr Suresh Senapaty,
Executive Director & CFO, WIPRO and
comprising Mr Dipankar Chatterji;
Senior Partner, L B Jha & Co; Mr Amit
Ta n d o n , M a n a g i n g D i r e c t o r ,
Institutional Investment Advisory
Services and Mr Abhay Gupte, Senior
Director, Deloitte India, deliberated if
the disclosure requirements were
excessive and obscuring meaningful
information and also on the possibility
of reforms in these requirements.
The Summit saw a high level of
participation from senior industry
representatives, compliance and audit
practitioners, institutional investors
and other stakeholders.
GLOBAL REGULATORY UPDATE
30 31
Sixth Tranche:
The sixth tranche covers draft rules on
Cost Audit.
S o m e h i g h l i g h t s o f t h e C I I
recommendations are as follows:
lCII strongly recommended
approval of the draft as placed on
the MCA website for further
implementation. The following
justifications were provided to
support this:
vThe classification of companies
in Strategic sectors, those
R e g u l a t e d b y a n o t h e r
Regulator, etc are the correct
m e t h o d o f d e t e r m i n i n g
applicability of cost Audit.
vThe rules are a fair recognition
of the fact that for many
i n d u s t r i e s , m a n d a t i n g
maintenance of cost records
and directing an audit of such
accounts is a futile, costly and
time-consuming exercise. The
provisions which were clearly
anachronistic in the post-
liberalization era have been
r i g h t l y l i b e r a l i z e d .
L i b e r a l i z a t i o n i s t h u s
pragmatic, progressive and in
keeping with the times.
vCost Audit is not relevant for
most sectors and Ministry's
Draft Cost Rules have correctly
captured the areas and
industries which are strategic
a n d h a v e a r e g u l a t o r y
oversight requirement and
having a material impact in
economic value chain.
vW h e n C o s t R e c o r d
maintenance Rules were
introduced during the licensing
regime a few decades back,
they might have served a
different purpose. They may
still be useful where issues of
Government subsidies are
involved.
vBenefits of cost management
can be achieved even without
cost audit which only results in
duplication of efforts.
vMaintenance of cost records in
l i n e w i t h C o m p a n y ' s
requirements should come out
from the company's need,
objectives and intended use.
This may, at best, be a Board
approved process rather than a
mandated rule.
vThe attempt to set up around
C o s t r u l e s a r e g u l a t o r y
environment similar to the one
in the area of f inancia l
accounting and reporting was
basically flawed because it
missed the fundamental
difference between Financial
A c c o u n t i n g r e c o r d s a n d
reporting and Cost Accounting
records and their reporting.
vCost Audit does not carry much
value for businesses, investors
and customers and it does not
e n h a n c e t h e c h a n c e o f
detecting errors, frauds and
misappropriation since "it is a
duplication of a part of financial
auditing process," nothing
more.
vFurther, considering the time
and resources involved in
complying with cost audit
orders, the regulations hardly
served any valuable purpose
and such audit even does not
add any value to the Company.
vThe idea behind the collection
of data from the corporates is
also not clear. Furnishing such
statistics does not serve any
purpose to public at large.
vMandatory cost audit in India
has not enhanced the level of
t r u s t o f i n v e s t o r s a n d
preparers of such financial
statements. It has not brought
those benefits expected by
regulators. Cost audit has no
relevance to the income tax
authority together with other
government authorities and
they only refer to financial
audit. Even the concerned
G o v t . d e p t t s w h i c h a r e
regulating prices under the
Essential Commodities Act
have their own format for cost
related information.
vIt also has little or no impact in
minimising the perceived risks
of investors with respect to
financial statement numbers,
and the process of cost audit
does not impact their choice of
investment decision.
lExcept in case of companies
engaged in Strategic Industry, the
rule provides for a uniform
turnover threshold of 100 crores.
Considering the capital intensive
requirements of business, a
higher turnover threshold of 500
crores should be provided
lMandating cost audit for all
companies of a sector may be
reconsidered.
H i g h l i g h t s o f C I I
recommendations on tranches 1
and 2 were published in the
October issue of the CII Global
Regulatory Update.
CII Recommendations on Draft Rules under rd th
Companies Act, 2013 (3 -6 Tranches)
C I I h a s s u b m i t t e d d e t a i l e d
recommendations on the draft rules
prepared under various provisions of
the Companies Act, 2013. The Act
re l ies heavi ly on subordinate
legislation for the implementation of
these sections.
The third tranche covers draft rules on
Deposits, SFIO and National Financial
Regulatory Authority
S o m e h i g h l i g h t s o f t h e C I I
recommendations are as follows:
lThere should be a mechanism to
ensure that in certain cases, NFRA
and the inspected firm will agree
on the need for and nature of
remedial actions to be taken by
the firm.
lConsent Mechanism should be
provided under the NFRA Rules
lThe expression 'person resident
outside India' should also be
expressly excluded from the
definition of what constitutes
deposits given that this category
covers all the persons falling
under the purview of the Foreign
Exchange Management Act, 1999
and rules and regulations made
thereunder (the "FEMA").
Additionally, exemption to 'SEBI
registered Alternate Investment
Funds' may also be considered
The last and fourth tranche covers
draft rules on IEPF Authority.
S o m e h i g h l i g h t s o f t h e C I I
recommendations are as follows:
lShares should not be required to
be transferred to IEPF even if the
Third Tranche:
Fourth Tranche:
dividend in respect of those
s h a r e s i s t r a n s f e r r e d o n
completion of seven years from
the date of declaration and the
amount of dividend has remained
unclaimed.
The fifth tranche covers draft rules on
Winding up.
S o m e h i g h l i g h t s o f t h e C I I
recommendations are as follows:
lThe National Company Law
Tr ibunal and the National
Company Law Appellate Tribunal
to be established and constituted
under the National Company Law
Tribunal Rules, 2013 and the
National Company Law Appellate
Tribunal Rules 2013, respectively,
to govern and monitor the
Winding up procedure - needs
more clarity in terms of definite
timelines for setting up the
Company Law Tribunal and the
Company Law Appellate Tribunal,
else, the whole purpose of
implementing the procedural and
substantive Rules would get
defeated.
lThe number and geographical
spread of benches needs to be
carefully considered as access to
justice should not be hampered
by logistics.
lDraft Rules are not clear as to
how liquidation proceedings of
companies which may not have
any assets will be taken up,
h a n d l e d a n d e v e n t u a l l y
dissolved. This needs to be
provided
Fifth Tranche:
lIt would be helpful if the Central
Government initiates the action
f o r e m p a n e l m e n t o f
profess ionals who can be
appointed as Provisional /
Company Liquidator. Similarly,
the panel of professionals who
c a n a s s i s t t h e C o m p a n y
Liquidator should be created by
the Tribunal and not left to the
Company Liquidator.
lIn case of winding up of a
company, the sums towards
wages or salary referred in
Section 325 (3) (b) (i) of the draft
Rules, required to be payable to
the employees for a period of two
years preceding the winding up
order: should be reduced to 6
months, keeping in view the
i n v o l v e m e n t o f m u l t i p l e
stakeholders and a share could be
offered to each of them to settle
their respective claims.
lPart VII of the National Company
Law Tribunal Rules, 2013, deals
with the matters earlier dealt by
the Company Law Board, wherein
all the cases on such date pending
with the Company Law Board or
s u c h B e n c h e s s h a l l s t a n d
transferred to the respective
b e n c h e s o f t h e Tr i b u n a l
exercising respective territorial
jurisdiction as if the case had been
originally filed in the Tribunal or
its Bench. The Rules needs more
clarity in terms of the appellate
a u t h o r i t y f o r t h e c a s e s
adjudicated by the Company Law
Board prior to the formulation of
the National Company Law
Tr ibunal and the National
Company Law Appellate Tribunal
GLOBAL REGULATORY UPDATE
30 31
Sixth Tranche:
The sixth tranche covers draft rules on
Cost Audit.
S o m e h i g h l i g h t s o f t h e C I I
recommendations are as follows:
lCII strongly recommended
approval of the draft as placed on
the MCA website for further
implementation. The following
justifications were provided to
support this:
vThe classification of companies
in Strategic sectors, those
R e g u l a t e d b y a n o t h e r
Regulator, etc are the correct
m e t h o d o f d e t e r m i n i n g
applicability of cost Audit.
vThe rules are a fair recognition
of the fact that for many
i n d u s t r i e s , m a n d a t i n g
maintenance of cost records
and directing an audit of such
accounts is a futile, costly and
time-consuming exercise. The
provisions which were clearly
anachronistic in the post-
liberalization era have been
r i g h t l y l i b e r a l i z e d .
L i b e r a l i z a t i o n i s t h u s
pragmatic, progressive and in
keeping with the times.
vCost Audit is not relevant for
most sectors and Ministry's
Draft Cost Rules have correctly
captured the areas and
industries which are strategic
a n d h a v e a r e g u l a t o r y
oversight requirement and
having a material impact in
economic value chain.
vW h e n C o s t R e c o r d
maintenance Rules were
introduced during the licensing
regime a few decades back,
they might have served a
different purpose. They may
still be useful where issues of
Government subsidies are
involved.
vBenefits of cost management
can be achieved even without
cost audit which only results in
duplication of efforts.
vMaintenance of cost records in
l i n e w i t h C o m p a n y ' s
requirements should come out
from the company's need,
objectives and intended use.
This may, at best, be a Board
approved process rather than a
mandated rule.
vThe attempt to set up around
C o s t r u l e s a r e g u l a t o r y
environment similar to the one
in the area of f inancia l
accounting and reporting was
basically flawed because it
missed the fundamental
difference between Financial
A c c o u n t i n g r e c o r d s a n d
reporting and Cost Accounting
records and their reporting.
vCost Audit does not carry much
value for businesses, investors
and customers and it does not
e n h a n c e t h e c h a n c e o f
detecting errors, frauds and
misappropriation since "it is a
duplication of a part of financial
auditing process," nothing
more.
vFurther, considering the time
and resources involved in
complying with cost audit
orders, the regulations hardly
served any valuable purpose
and such audit even does not
add any value to the Company.
vThe idea behind the collection
of data from the corporates is
also not clear. Furnishing such
statistics does not serve any
purpose to public at large.
vMandatory cost audit in India
has not enhanced the level of
t r u s t o f i n v e s t o r s a n d
preparers of such financial
statements. It has not brought
those benefits expected by
regulators. Cost audit has no
relevance to the income tax
authority together with other
government authorities and
they only refer to financial
audit. Even the concerned
G o v t . d e p t t s w h i c h a r e
regulating prices under the
Essential Commodities Act
have their own format for cost
related information.
vIt also has little or no impact in
minimising the perceived risks
of investors with respect to
financial statement numbers,
and the process of cost audit
does not impact their choice of
investment decision.
lExcept in case of companies
engaged in Strategic Industry, the
rule provides for a uniform
turnover threshold of 100 crores.
Considering the capital intensive
requirements of business, a
higher turnover threshold of 500
crores should be provided
lMandating cost audit for all
companies of a sector may be
reconsidered.
H i g h l i g h t s o f C I I
recommendations on tranches 1
and 2 were published in the
October issue of the CII Global
Regulatory Update.
CII Recommendations on Draft Rules under rd th
Companies Act, 2013 (3 -6 Tranches)
C I I h a s s u b m i t t e d d e t a i l e d
recommendations on the draft rules
prepared under various provisions of
the Companies Act, 2013. The Act
re l ies heavi ly on subordinate
legislation for the implementation of
these sections.
The third tranche covers draft rules on
Deposits, SFIO and National Financial
Regulatory Authority
S o m e h i g h l i g h t s o f t h e C I I
recommendations are as follows:
lThere should be a mechanism to
ensure that in certain cases, NFRA
and the inspected firm will agree
on the need for and nature of
remedial actions to be taken by
the firm.
lConsent Mechanism should be
provided under the NFRA Rules
lThe expression 'person resident
outside India' should also be
expressly excluded from the
definition of what constitutes
deposits given that this category
covers all the persons falling
under the purview of the Foreign
Exchange Management Act, 1999
and rules and regulations made
thereunder (the "FEMA").
Additionally, exemption to 'SEBI
registered Alternate Investment
Funds' may also be considered
The last and fourth tranche covers
draft rules on IEPF Authority.
S o m e h i g h l i g h t s o f t h e C I I
recommendations are as follows:
lShares should not be required to
be transferred to IEPF even if the
Third Tranche:
Fourth Tranche:
dividend in respect of those
s h a r e s i s t r a n s f e r r e d o n
completion of seven years from
the date of declaration and the
amount of dividend has remained
unclaimed.
The fifth tranche covers draft rules on
Winding up.
S o m e h i g h l i g h t s o f t h e C I I
recommendations are as follows:
lThe National Company Law
Tr ibunal and the National
Company Law Appellate Tribunal
to be established and constituted
under the National Company Law
Tribunal Rules, 2013 and the
National Company Law Appellate
Tribunal Rules 2013, respectively,
to govern and monitor the
Winding up procedure - needs
more clarity in terms of definite
timelines for setting up the
Company Law Tribunal and the
Company Law Appellate Tribunal,
else, the whole purpose of
implementing the procedural and
substantive Rules would get
defeated.
lThe number and geographical
spread of benches needs to be
carefully considered as access to
justice should not be hampered
by logistics.
lDraft Rules are not clear as to
how liquidation proceedings of
companies which may not have
any assets will be taken up,
h a n d l e d a n d e v e n t u a l l y
dissolved. This needs to be
provided
Fifth Tranche:
lIt would be helpful if the Central
Government initiates the action
f o r e m p a n e l m e n t o f
profess ionals who can be
appointed as Provisional /
Company Liquidator. Similarly,
the panel of professionals who
c a n a s s i s t t h e C o m p a n y
Liquidator should be created by
the Tribunal and not left to the
Company Liquidator.
lIn case of winding up of a
company, the sums towards
wages or salary referred in
Section 325 (3) (b) (i) of the draft
Rules, required to be payable to
the employees for a period of two
years preceding the winding up
order: should be reduced to 6
months, keeping in view the
i n v o l v e m e n t o f m u l t i p l e
stakeholders and a share could be
offered to each of them to settle
their respective claims.
lPart VII of the National Company
Law Tribunal Rules, 2013, deals
with the matters earlier dealt by
the Company Law Board, wherein
all the cases on such date pending
with the Company Law Board or
s u c h B e n c h e s s h a l l s t a n d
transferred to the respective
b e n c h e s o f t h e Tr i b u n a l
exercising respective territorial
jurisdiction as if the case had been
originally filed in the Tribunal or
its Bench. The Rules needs more
clarity in terms of the appellate
a u t h o r i t y f o r t h e c a s e s
adjudicated by the Company Law
Board prior to the formulation of
the National Company Law
Tr ibunal and the National
Company Law Appellate Tribunal
GLOBAL REGULATORY UPDATE
32 33
not only to a political party but also to
such other person to whom the
contribution is made.
On a strict reading of the provisions of
the 2013 Act, it is evident that the
name of the political party to whom
the contribution is made is necessarily
required to be disclosed. However, if a
contribution is made to an Electoral
Trust or any other person and not to a
political party directly, the manner of
disclosure is not specified in the 2013
Act. It may be pertinent to note that as
per section 293A of the 1956 Act, in
case of indirect political contribution,
a company could possibly disclose the
name of the person to whom the
money is given. However, the
disclosure requirement under section
182 of the 2013 Act has become stricter
as the name of the political party to
which the money is contributed has to
be necessarily mentioned.
Thus, while political contribution can
be made indirectly to a third party, this
e n a b l i n g p r o v i s i o n d o e s n o t
correspond with the disclosure
requirements.
Given the fact that contributions can
be made only to political party
registered under section 29A of the
Representation of People Act, 1951 or
for their benefit indirectly, it is humbly
submitted that the disclosure
requirement with respect to the name
of the political party be made non-
obligatory. Companies be required to
disclose the amount of contribution
made to a political party or for a
political purpose in the Profit & Loss
Account without being required to
disclose the name of the party or
person.
While this would take care of requisite
disclosure, it would also place the
company in a comfortable position vis-
à-vis demands from various political
parties for contributions.
I n a n y c a s e , S e c t i o n 2 9 C o f
Representation of People's Act states
that the treasurer of a political party or
any other person authorised by the
political party in this behalf shall, in
each financial year, prepare a report in
respect of the contribution in excess
of twenty thousand rupees received
by such political party from any person
in that financial year. Furthermore,
under Section 29-C of the RPA, it is
made mandatory for the political
parties to submit to the Election
Commission a list of donations they
received of over Rs. 20,000 in Form 24-
A and where such a political party fails
to submit a report then such political
party shall not be entitled to any tax
relief under that Act.
In view of the above, it is submitted
that the requirement on part of the
company to disclose the name of the
recipient of political contribution in
the Profit & Loss Account of the
Company be dispensed with.
Section 182 provides that political
contributions can be made by a
company either directly or indirectly
to a political party. All contributions
made for a political purpose, whether
directly or indirectly would qualify as
political contributions, in terms of sub-
section (1) of section 182 of the
Companies Act, 2013 ("the 2013 Act").
Unlike corresponding section 293A of
the Companies Act, 1956 ("the 1956
Act"), section 82 of the 2013 Act does
not explicitly provide made for any
political purpose. However that a
c o n t r i b u t i o n a h a r m o n i o u s
interpretation of Sub can be Sub-
section (1) and Sub section (2) of the
2013 Act, shows that to a third party
which can reasonably be regarded as
likely to affect public support for a
political party or for a publication f
contribution made by a company for
the advantage of a political party or
will be covered under the section 182
p o l i t i c a l c o n t r i b u t i o n , t h e
requirements of section 182 of the
2013 Act become applicable. The
requirements under section 182 of the
2013 Act. Once an amount qualifies as
a include a ceiling on the amount of
contributions that can be made by a
company and disclosure about the
contr ibut ion made by such a
company.
H o w e v e r , t h e d i s c l o s u r e
requirements under sub-sub-section
(3) of section 182 of the 2013 Act are
significantly different from those
under the corresponding provisions
under sub-section (4) of section 293A
of the 1956 Act. The relevant extracts
are as under:
"182(3) of the Companies Act, 2013
Every company shall disclose in its
profit and loss account any amount or
amounts contributed by it to any
political party during the financial year
to which that account relates, giving
particulars of the total amount
contributed and the name of the party
to which such amount has been
contributed.
293A(4) of the Companies Act, 1956
Every company shall disclose in its
profit and loss account any amount or
amounts contributed by it to any
political party or for any political
purpose to any person during the
financial year to which that account
relates, giving particulars of the total
amount contributed and the name of
the party or person to which or to
whom such amount has been
contributed."
Sub-section (3) of section 182 of the
2013 Act above only refers to the
disclosure of the name of the political
party, to be disclosed in the profit and
loss account of a company, whereas
under the 1956 Act reference is made
THE COMPANIES ACT, 2013
PROHIBITIONS AND RESTRICTIONS REGARDING POLITICAL CONTRIBUTIONS
Views and Suggestions
GLOBAL REGULATORY UPDATE
32 33
not only to a political party but also to
such other person to whom the
contribution is made.
On a strict reading of the provisions of
the 2013 Act, it is evident that the
name of the political party to whom
the contribution is made is necessarily
required to be disclosed. However, if a
contribution is made to an Electoral
Trust or any other person and not to a
political party directly, the manner of
disclosure is not specified in the 2013
Act. It may be pertinent to note that as
per section 293A of the 1956 Act, in
case of indirect political contribution,
a company could possibly disclose the
name of the person to whom the
money is given. However, the
disclosure requirement under section
182 of the 2013 Act has become stricter
as the name of the political party to
which the money is contributed has to
be necessarily mentioned.
Thus, while political contribution can
be made indirectly to a third party, this
e n a b l i n g p r o v i s i o n d o e s n o t
correspond with the disclosure
requirements.
Given the fact that contributions can
be made only to political party
registered under section 29A of the
Representation of People Act, 1951 or
for their benefit indirectly, it is humbly
submitted that the disclosure
requirement with respect to the name
of the political party be made non-
obligatory. Companies be required to
disclose the amount of contribution
made to a political party or for a
political purpose in the Profit & Loss
Account without being required to
disclose the name of the party or
person.
While this would take care of requisite
disclosure, it would also place the
company in a comfortable position vis-
à-vis demands from various political
parties for contributions.
I n a n y c a s e , S e c t i o n 2 9 C o f
Representation of People's Act states
that the treasurer of a political party or
any other person authorised by the
political party in this behalf shall, in
each financial year, prepare a report in
respect of the contribution in excess
of twenty thousand rupees received
by such political party from any person
in that financial year. Furthermore,
under Section 29-C of the RPA, it is
made mandatory for the political
parties to submit to the Election
Commission a list of donations they
received of over Rs. 20,000 in Form 24-
A and where such a political party fails
to submit a report then such political
party shall not be entitled to any tax
relief under that Act.
In view of the above, it is submitted
that the requirement on part of the
company to disclose the name of the
recipient of political contribution in
the Profit & Loss Account of the
Company be dispensed with.
Section 182 provides that political
contributions can be made by a
company either directly or indirectly
to a political party. All contributions
made for a political purpose, whether
directly or indirectly would qualify as
political contributions, in terms of sub-
section (1) of section 182 of the
Companies Act, 2013 ("the 2013 Act").
Unlike corresponding section 293A of
the Companies Act, 1956 ("the 1956
Act"), section 82 of the 2013 Act does
not explicitly provide made for any
political purpose. However that a
c o n t r i b u t i o n a h a r m o n i o u s
interpretation of Sub can be Sub-
section (1) and Sub section (2) of the
2013 Act, shows that to a third party
which can reasonably be regarded as
likely to affect public support for a
political party or for a publication f
contribution made by a company for
the advantage of a political party or
will be covered under the section 182
p o l i t i c a l c o n t r i b u t i o n , t h e
requirements of section 182 of the
2013 Act become applicable. The
requirements under section 182 of the
2013 Act. Once an amount qualifies as
a include a ceiling on the amount of
contributions that can be made by a
company and disclosure about the
contr ibut ion made by such a
company.
H o w e v e r , t h e d i s c l o s u r e
requirements under sub-sub-section
(3) of section 182 of the 2013 Act are
significantly different from those
under the corresponding provisions
under sub-section (4) of section 293A
of the 1956 Act. The relevant extracts
are as under:
"182(3) of the Companies Act, 2013
Every company shall disclose in its
profit and loss account any amount or
amounts contributed by it to any
political party during the financial year
to which that account relates, giving
particulars of the total amount
contributed and the name of the party
to which such amount has been
contributed.
293A(4) of the Companies Act, 1956
Every company shall disclose in its
profit and loss account any amount or
amounts contributed by it to any
political party or for any political
purpose to any person during the
financial year to which that account
relates, giving particulars of the total
amount contributed and the name of
the party or person to which or to
whom such amount has been
contributed."
Sub-section (3) of section 182 of the
2013 Act above only refers to the
disclosure of the name of the political
party, to be disclosed in the profit and
loss account of a company, whereas
under the 1956 Act reference is made
THE COMPANIES ACT, 2013
PROHIBITIONS AND RESTRICTIONS REGARDING POLITICAL CONTRIBUTIONS
Views and Suggestions
GLOBAL REGULATORY UPDATE
34 35
Need for Exemptions for Private Companies
The Companies Act, 2013 has
p r e s c r i b e d v a r i o u s s t r i n g e n t
provisions for companies including
private companies. These include
many new concepts included for the
first time in law and also provisions
that were not applicable to private
companies under the 1956 Act. Some
of these include rotation of auditors,
directors, provisions relating to loans
and investments, insider trading, etc.
CII is of the opinion that private
companies - which are neither
subsidiaries of listed companies nor
have substantial borrowings (as may
be defined) from banks or financial
institutions - should be exempt from
some of the stringent provisions of
the Act. Applicability of these
provisions, as are listed hereunder,
tantamount to treating such private
companies at par with other public
interest entities.
It is humbly submitted that such class
of private companies, as may be
prescribed, be kept out of the purview
of the following sections, either
through exemption notifications
under section 462 or through the
Companies Rules , as may be
appropriate:
1 Reference to a private company in this document means a private company, which is neither a subsidiary of a listed company nor has substantial borrowings (as per thresholds that may be specified) from banks or other financial institutions.
Section Provision Rationale162 Further Issue of Share Capital Considering the limited number of members a private company can
have, imposition of these restrictions would only create unnecessarycompliances and procedural delays for private companies.
92 Annual Return The information required to be provided is too detailed and toocumbersome for a private company to furnish.
101-109 Provisions regarding GeneralMeetings public companies and other public interest entities, in case of
private companies, these would only cause unnecessary delayswithout commensurate benefits.
While the procedures set out under these sections serve a purpose for
110 Postal Ballot In view of the limited membership of the private companies, thisrequirement may be unnecessary.
134 (3) Statements required to be The statements are too detailed and for a private company too attached to the report of the cumbersome to furnish. Board of Directors
137 Copies of financial statements Profit & Loss Accounts of private companies were not treated as to be filed with the Registrar public document under the 1956 Act and such a privilege should be
continued under the new law.
139 Rotation of auditors In case of companies with no public interest, the requirement isunnecessary.
149 (1) Requirement to have a In case of companies with no public interest, the requirement is Woman Director on Board unnecessary. Boards of private companies should have the
prerogative to decide upon its directorships.
152, Requirements to file consent, In case of companies with no public interest, these requirements are
161, retirement by rotation, filling of unnecessary.
162 casual vacancy, additional directors
lThe definition of connected person is too wide and should be streamlined. The definition puts a responsibility on the company to cover the connected persons (eg. a judge who is hearing a case or government official who is processing file of the company i n v o l v i n g p r i c e s e n s i t i v e information, lenders of the company) also under the internal code of conduct of the company governing dealing in securities, w h i c h i s a d m i n i s t r a t i v e l y impossible. The company cannot t a k e r e s p o n s i b i l i t y f o r compliance of company's code by such connected persons like government officials, bank officials, other lenders of the company etc. The term 'officer' should be defined to mean Key Managerial Personnel under the Companies Act, 2013 i.e. Chief Executive Officer, Managing Director, Manager, Company Secretary, whole-time director and Chief Financial Officer. Other senior officers of the company should not be covered.
lGenerally available information should only mean any information which is available in public domain and it should not include any research and analysis based thereon since research and analysis is subjective and is not generally available information.
lThe current wording of the clause defining Immediate relative leads to an interpretation that 'spouse' is compulsorily covered under the definition of 'immediate relative'. There is a need to clarify that 'spouse' will be covered in the definition of 'immediate relative' only when she is financially dependent on the person or consults him/her. Otherwise not.
lIt should be clarified that "trading" d o e s n o t i n c l u d e p l e d g e ,
mortgage, exercise of ESOP, gift, etc. There needs to be a specific exemption to these. For example in the case of securities pledged by an insider, while the act of pledging securities is under control of an Insider, the actual sale of shares by the lender (against the pledge) who more likely is a non-insider is not in his hands. Therefore the consequent sale which is not under the control of an Insider should not be regulated.
lThe requirements for disclosure of due diligence findings should be r e s t r i c t e d t o t r a n s a c t i o n s involving stake sale by way of equity shares. Due diligence may reveal various findings, which may also contain confidential business information. If all findings are made publ ic, i t may cause irreparable harm to the business of the company. In the event the transaction does not go through, for which the due diligence is done, there should be a provision of some time limit. Cooling period of say 6 months, is required to be prescribed so that the party who had done due diligence, shall not be banned forever from trading in the shares of the company.
lThe onus of showing that the c o n n e c t e d p e r s o n w a s i n possession of unpublished price sensitive information at the time of trading should be on the person leveling the charge.
lApproval of the trading plan of an insider by the compliance officer would not be appropriate and thus the basis of any such approval should be self declaration by the concerned insider. Also, such trading plan should be only submitted to the compliance officer and the requirement of making the trading plan available
in public domain through stock exchanges should be deleted. The regulations need to be modified to require disclosure of Trading Plan only for Designated Insiders holding more than 2% of voting power. Sale of shares arising from exercise of Stock Options under Employee Stock Option Schemes of companies should be kept outside the purview of 'Trading Plans'.
lM a k i n g t h e t r a d i n g p l a n irrevocable and mandating the insider to deal in terms thereof, is unfair. It is suggested that trading plans once disclosed shall be amenable to revisions, subject to happening of certain situations, requisite internal approvals like approval of the Compliance Officer.
" The disclosure obligations under the Regulations should not cover all employees and be restricted to the insiders who are reasonably expected to have access to any unpublished price sensit ive information or are in possession of any such information. If at all each and every employee is sought to be covered under the disclosure requirements, suitable threshold say Rs. 10 lacs in value, may be prescribed.
lConnected persons' should be excluded from the purview of internal insider trading code of companies. The Regulations should differentiate between an act of insider trading under the Regulations and mere errors or t e c h n i c a l v i o l a t i o n s b y a n employee under the company's Code of Conduct. Whether mere errors or technical violations by employees under the Code of Conduct are required to be reported to SEBI needs to be clarified.
Comments on the Justice Sodhi Committee Report on Insider Trading Regulations
GLOBAL REGULATORY UPDATE
34 35
Need for Exemptions for Private Companies
The Companies Act, 2013 has
p r e s c r i b e d v a r i o u s s t r i n g e n t
provisions for companies including
private companies. These include
many new concepts included for the
first time in law and also provisions
that were not applicable to private
companies under the 1956 Act. Some
of these include rotation of auditors,
directors, provisions relating to loans
and investments, insider trading, etc.
CII is of the opinion that private
companies - which are neither
subsidiaries of listed companies nor
have substantial borrowings (as may
be defined) from banks or financial
institutions - should be exempt from
some of the stringent provisions of
the Act. Applicability of these
provisions, as are listed hereunder,
tantamount to treating such private
companies at par with other public
interest entities.
It is humbly submitted that such class
of private companies, as may be
prescribed, be kept out of the purview
of the following sections, either
through exemption notifications
under section 462 or through the
Companies Rules , as may be
appropriate:
1 Reference to a private company in this document means a private company, which is neither a subsidiary of a listed company nor has substantial borrowings (as per thresholds that may be specified) from banks or other financial institutions.
Section Provision Rationale162 Further Issue of Share Capital Considering the limited number of members a private company can
have, imposition of these restrictions would only create unnecessarycompliances and procedural delays for private companies.
92 Annual Return The information required to be provided is too detailed and toocumbersome for a private company to furnish.
101-109 Provisions regarding GeneralMeetings public companies and other public interest entities, in case of
private companies, these would only cause unnecessary delayswithout commensurate benefits.
While the procedures set out under these sections serve a purpose for
110 Postal Ballot In view of the limited membership of the private companies, thisrequirement may be unnecessary.
134 (3) Statements required to be The statements are too detailed and for a private company too attached to the report of the cumbersome to furnish. Board of Directors
137 Copies of financial statements Profit & Loss Accounts of private companies were not treated as to be filed with the Registrar public document under the 1956 Act and such a privilege should be
continued under the new law.
139 Rotation of auditors In case of companies with no public interest, the requirement isunnecessary.
149 (1) Requirement to have a In case of companies with no public interest, the requirement is Woman Director on Board unnecessary. Boards of private companies should have the
prerogative to decide upon its directorships.
152, Requirements to file consent, In case of companies with no public interest, these requirements are
161, retirement by rotation, filling of unnecessary.
162 casual vacancy, additional directors
lThe definition of connected person is too wide and should be streamlined. The definition puts a responsibility on the company to cover the connected persons (eg. a judge who is hearing a case or government official who is processing file of the company i n v o l v i n g p r i c e s e n s i t i v e information, lenders of the company) also under the internal code of conduct of the company governing dealing in securities, w h i c h i s a d m i n i s t r a t i v e l y impossible. The company cannot t a k e r e s p o n s i b i l i t y f o r compliance of company's code by such connected persons like government officials, bank officials, other lenders of the company etc. The term 'officer' should be defined to mean Key Managerial Personnel under the Companies Act, 2013 i.e. Chief Executive Officer, Managing Director, Manager, Company Secretary, whole-time director and Chief Financial Officer. Other senior officers of the company should not be covered.
lGenerally available information should only mean any information which is available in public domain and it should not include any research and analysis based thereon since research and analysis is subjective and is not generally available information.
lThe current wording of the clause defining Immediate relative leads to an interpretation that 'spouse' is compulsorily covered under the definition of 'immediate relative'. There is a need to clarify that 'spouse' will be covered in the definition of 'immediate relative' only when she is financially dependent on the person or consults him/her. Otherwise not.
lIt should be clarified that "trading" d o e s n o t i n c l u d e p l e d g e ,
mortgage, exercise of ESOP, gift, etc. There needs to be a specific exemption to these. For example in the case of securities pledged by an insider, while the act of pledging securities is under control of an Insider, the actual sale of shares by the lender (against the pledge) who more likely is a non-insider is not in his hands. Therefore the consequent sale which is not under the control of an Insider should not be regulated.
lThe requirements for disclosure of due diligence findings should be r e s t r i c t e d t o t r a n s a c t i o n s involving stake sale by way of equity shares. Due diligence may reveal various findings, which may also contain confidential business information. If all findings are made publ ic, i t may cause irreparable harm to the business of the company. In the event the transaction does not go through, for which the due diligence is done, there should be a provision of some time limit. Cooling period of say 6 months, is required to be prescribed so that the party who had done due diligence, shall not be banned forever from trading in the shares of the company.
lThe onus of showing that the c o n n e c t e d p e r s o n w a s i n possession of unpublished price sensitive information at the time of trading should be on the person leveling the charge.
lApproval of the trading plan of an insider by the compliance officer would not be appropriate and thus the basis of any such approval should be self declaration by the concerned insider. Also, such trading plan should be only submitted to the compliance officer and the requirement of making the trading plan available
in public domain through stock exchanges should be deleted. The regulations need to be modified to require disclosure of Trading Plan only for Designated Insiders holding more than 2% of voting power. Sale of shares arising from exercise of Stock Options under Employee Stock Option Schemes of companies should be kept outside the purview of 'Trading Plans'.
lM a k i n g t h e t r a d i n g p l a n irrevocable and mandating the insider to deal in terms thereof, is unfair. It is suggested that trading plans once disclosed shall be amenable to revisions, subject to happening of certain situations, requisite internal approvals like approval of the Compliance Officer.
" The disclosure obligations under the Regulations should not cover all employees and be restricted to the insiders who are reasonably expected to have access to any unpublished price sensit ive information or are in possession of any such information. If at all each and every employee is sought to be covered under the disclosure requirements, suitable threshold say Rs. 10 lacs in value, may be prescribed.
lConnected persons' should be excluded from the purview of internal insider trading code of companies. The Regulations should differentiate between an act of insider trading under the Regulations and mere errors or t e c h n i c a l v i o l a t i o n s b y a n employee under the company's Code of Conduct. Whether mere errors or technical violations by employees under the Code of Conduct are required to be reported to SEBI needs to be clarified.
Comments on the Justice Sodhi Committee Report on Insider Trading Regulations
GLOBAL REGULATORY UPDATE
36
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Corporate Governance & Regulatory Affairs DepartmentConfederation of Indian Industry
The Mantosh Sondhi Centre23 Institutional Area, Lodi Road, New Delhi - 110 003
Tel: 011-41506492 Fax: 011-24615693 Email: prabhat.negi@cii.in
37
The newsletter is circulated to the entire membership of CII; direct membership of over 7000 organisations from the
private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies
from around 400 national and regional sectoral associations.
T
160 (1) Requirement to deposit In case of companies with no public interest, the requirement is Rs 1 lakh along with the proposal unnecessary.signifying candidature of a person other than the retiring director to stand for directorship
170 Register of directors and key This requirement entails unnecessary compliance.managerial personnel and theirshareholding, filing of return with RoC
173 (3) Requirement of giving 7 days’ Private companies are closely held and managed by family members. notice for a meeting of the Further these are not obligated to appoint independent directors. In Board view thereof, this requirement would be cumbersome and restrictive.
180 Restrictions on power of the Since shareholders in a private company are usually its directorsBoard and their relatives, such restrictions are unnecessary in case of
companies with no public interest.
185 Loans to Directors, etc. In case of companies with no public interest, the requirement whichprohibits giving loans to directors, not even with shareholders’approval, is restrictive.
186 Loans and investments by a Private Companies with no public interest should be allowed tocompany operate in accordance with their internal policies and should not be
obligated to follow the same compliances as are applicable to other public companies.
188 Related Party Transactions In private companies with no public interest, such requirement arerather cumbersome. Further, such restrictions could lead to deadlockswhere the directors and their relatives are shareholders too and thusprevented from voting on the transactions.
195 Prohibition on Insider Trading The consequence of applying principles of prohibition of forwarding of Securities trading or insider trading to unlisted companies, which do not have
published information can affect their ability to raise funds. SEBI has on3rd October, 2013 vide notification issued under Section 16 and 28 ofthe Securities Contract Regulation Act, 1956 clearly demonstrated thatthe option agreements, wherein the valuation is determined based onprice sensitive information of unlisted companies, where there is nopublication of such information required, do not get affected.
Additionally, it may be noted that ‘insider trading’ is not relevant fromthe perspective of a private company and unlisted public company(except where such public company intends to get its shares listed) asthe shares of such companies are not traded on any stock exchange,and the person, who has any price sensitive information, cannot usesuch information in ‘deal in such securities’.
203 Appointment of Key Managerial In case of non-public interest entities, company should have thePersonnel discretion to decide whether to appoint KMPs or not depending on the
scale of operations.
245 Class Action Given the shareholding pattern of the private companies under review,this level of investor protection would not be required and would onlyprotract resolution of matters.
Section Provision Rationale
GLOBAL REGULATORY UPDATE
36
ADVERTISEMENT FOR CII'S GLOBAL REGULATORY UPDATE
The Global Regulatory update is now in its second year. After successfully bringing out 12 issues, the monthly
newsletter has been revamped and bears a fresh look.
We invite you to get associated with CII Global Regulatory Update by way of creating your own space in the update:
CATEGORY Members Non-Members
Back Cover Page (Inside) ` 50,000 55,000
Full Page 30,000 35,000
Half Page 20,000 25,000
Section Sponsorship Also available; you may contact the undersigned.e.g xyz (Company name) presents “Global Udate”
Benefits include an advertisement, write up about the contributor and logo)
`
` `
` `
corporate
For further queries:Prabhat Negi
Corporate Governance & Regulatory Affairs DepartmentConfederation of Indian Industry
The Mantosh Sondhi Centre23 Institutional Area, Lodi Road, New Delhi - 110 003
Tel: 011-41506492 Fax: 011-24615693 Email: prabhat.negi@cii.in
37
The newsletter is circulated to the entire membership of CII; direct membership of over 7000 organisations from the
private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies
from around 400 national and regional sectoral associations.
T
160 (1) Requirement to deposit In case of companies with no public interest, the requirement is Rs 1 lakh along with the proposal unnecessary.signifying candidature of a person other than the retiring director to stand for directorship
170 Register of directors and key This requirement entails unnecessary compliance.managerial personnel and theirshareholding, filing of return with RoC
173 (3) Requirement of giving 7 days’ Private companies are closely held and managed by family members. notice for a meeting of the Further these are not obligated to appoint independent directors. In Board view thereof, this requirement would be cumbersome and restrictive.
180 Restrictions on power of the Since shareholders in a private company are usually its directorsBoard and their relatives, such restrictions are unnecessary in case of
companies with no public interest.
185 Loans to Directors, etc. In case of companies with no public interest, the requirement whichprohibits giving loans to directors, not even with shareholders’approval, is restrictive.
186 Loans and investments by a Private Companies with no public interest should be allowed tocompany operate in accordance with their internal policies and should not be
obligated to follow the same compliances as are applicable to other public companies.
188 Related Party Transactions In private companies with no public interest, such requirement arerather cumbersome. Further, such restrictions could lead to deadlockswhere the directors and their relatives are shareholders too and thusprevented from voting on the transactions.
195 Prohibition on Insider Trading The consequence of applying principles of prohibition of forwarding of Securities trading or insider trading to unlisted companies, which do not have
published information can affect their ability to raise funds. SEBI has on3rd October, 2013 vide notification issued under Section 16 and 28 ofthe Securities Contract Regulation Act, 1956 clearly demonstrated thatthe option agreements, wherein the valuation is determined based onprice sensitive information of unlisted companies, where there is nopublication of such information required, do not get affected.
Additionally, it may be noted that ‘insider trading’ is not relevant fromthe perspective of a private company and unlisted public company(except where such public company intends to get its shares listed) asthe shares of such companies are not traded on any stock exchange,and the person, who has any price sensitive information, cannot usesuch information in ‘deal in such securities’.
203 Appointment of Key Managerial In case of non-public interest entities, company should have thePersonnel discretion to decide whether to appoint KMPs or not depending on the
scale of operations.
245 Class Action Given the shareholding pattern of the private companies under review,this level of investor protection would not be required and would onlyprotract resolution of matters.
Section Provision Rationale
NotesNotes
NotesNotes
Notes
Notes
Confederation of Indian Industry
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to
the development of India, partnering industry, Government, and civil society, through advisory and
consultative processes.
CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a
proactive role in India's development process. Founded over 119 years ago, India's premier business
association has over 7100 members, from the private as well as public sectors, including SMEs and
MNCs, and an indirect membership of over 90,000 enterprises from around 257 national and regional
sectoral industry bodies.
CII charts change by working closely with Government on policy issues, interfacing with thought
leaders, and enhancing efficiency, competitiveness and business opportunities for industry through
a range of specialized services and strategic global linkages. It also provides a platform for
consensus-building and networking on key issues.
Extending its agenda beyond business, CII assists industry to identify and execute corporate
citizenship programmes. Partnerships with civil society organizations carry forward corporate
initiatives for integrated and inclusive development across diverse domains including affirmative
action, healthcare, education, livelihood, diversity management, skill development, empowerment
of women, and water, to name a few.
The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation,
Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the
growth trajectory of the nation, while retaining a strong focus on accountability, transparency and
measurement in the corporate and social eco-system, building a knowledge economy, and broad-
basing development to help deliver the fruits of progress to all.
With 63 offices, including 9 Centres of Excellence, in India, and 7 overseas offices in Australia, China,
Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart
organizations in 90 countries, CII serves as a reference point for Indian industry and the international
business community.
Confederation of Indian Industry
The Mantosh Sondhi Centre
23, Institutional Area, Lodi Road, New Delhi – 110 003 (India)
T: 91 11 45771000 / 24629994-7 F: 91 11 24626149
E: info@cii.in W: www.cii.in
Reach us via our Membership Helpline: 00-91-11-435 46244 / 00-91-99104 46244
CII Helpline Toll free No: 1800-103-1244