BANKING- DRAFT GUIDELINES FOR EQUITY INVESTMENTS IN SUBSIDIARIES AND OTHER COMPANIES (“Guidelines”)
Banks are permitted to make investments in companies which are not subsidiaries under section 19(2) of the Banking Regulations Act, 1949 (“Act”). There is no requirement for obtaining prior approval of the Reserve Bank of India (“RBI”) for such investments except in cases where the investee company is a financial services company. Due to the same there is a possibility that banks could through their holdings in other entities, influence or exercise control on such companies and thus engage indirectly in activities not permitted to banks, contrary to the provisions of section 6(1) of the Act which provides for the activities that banks are permitted to undertake. The same would be against the spirit of the Act. Hence the RBI vide Circular No. DBOD.FSD.BC. / /2011-12 (“Circular”) dated 6 July 2011 has issued draft prudential guidelines for banks’ investments in companies which are not subsidiaries and are not ‘financial services companies’. The Guidelines define various terms such as financial services company, subsidiary, joint venture etc.
Some of the significant provisions of the Guidelines can be summarised under the following two broad headings:
1) Prudential regulations for investments in subsidiaries and Financial Services Companies
2) Prudential regulation for banks’ investments in non-financial services companies which are not subsidiaries
Prudential regulations for investments in subsidiaries and Financial Services Companies
Banks are required to obtain prior approval of the RBI for setting up subsidiary companies and for any equity investment in financial services companies. It is to be noted that as per the Guidelines equity investments by a bank in a subsidiary company, or a financial services company including financial institution, stock and other exchanges, depositories, etc., which is not a subsidiary should not exceed 10 per cent of the bank’s paid-up share capital and reserves. Further, total investments made in all subsidiaries and all non-subsidiary financial services companies should not exceed 20 per cent of the bank’s paid-up share capital and reserves. However, the cap of 20 per cent neither applies, nor prior approval of RBI is required, if investments in financial services companies are held under ‘Held for Trading’ category, and are not held beyond 90 days.
Prudential regulation for banks’ investments in non-financial services companies which are not subsidiaries
Some of the important guidelines with reference to banks’ investments in non-financial companies which are not subsidiaries inter alia, include the following:
i) Equity investments in companies engaged in non-financial services activities would be subject to a limit of 10 per cent of the investee company’s paid-up capital or 10 per cent of the bank’s paid-up capital and reserves, whichever is lower. For the purpose of this limit, the RBI said that equity investments held under the ‘Held for Trading’ category would also be reckoned. Such investments within these limits would not require prior approval of the RBI.
ii) Bank’s request for investments in excess of 10 per cent of such investee company’s paid-up capital would be considered by the RBI if the investee company is engaged in activities permitted to banks in terms of Sec. 6(1) of the Banking Regulation Act, 1949. It is to be noted that banks are permitted to set up subsidiaries for undertaking activities which are conducive to the spread of banking in India or useful or necessary in public interest in accordance with the provisions of Sec.19(1) (c) of the said Act. For example, banks setting up IT subsidiaries catering to banking sectors’ IT requirement may fall in this category.
Further, the Circular importantly points out that while these measures would limit the investments of banks in non-subsidiary companies engaged in non-financial services activities, there is still a possibility that banks may exercise control or significant influence in companies through other arrangements such as having more than half of the voting rights indirectly through subsidiaries/joint ventures/associates or having control over the composition of the board of directors. These companies would under such circumstances be actually subsidiaries or associates or joint ventures of banks. Such arrangements may result in banks’ indirectly undertaking activities not permitted to them under the Banking Regulation Act. Banks should, therefore, desist from exercising control or significant influence over such companies.
The Guidelines further provide that banks should also carry out a review of their subsidiaries, associates, joint ventures (i.e., entities in which they have control or significant influence) within a period of three months. If the investments do not conform to the parameters mentioned in the Circular, banks may ensure that:
i) their investments are brought down to 10 per cent of the paid-up share capital of the investee company and/or give up control or exercising significant influence as the case may be
ii) they seek RBI’s approval
REDEMPTION OF FOREIGN CURRENCY CONVERTIBLE BONDS (“FCCBs”) – Indian Companies Allowed to Refinance their Outstanding FCCBs
Due to the economic meltdown and the scarcity of economic resources at their disposal Indian companies are finding it very difficult to meet their FCCBs redemption obligations. In order to facilitate the same the Reserve Bank of India (“RBI”) in consultation with the Government of India has decided to allow Indian companies to refinance/restructure the outstanding FCCBs issued by them under the automatic route vide Circular No. 1, dated 4 July 2011. The circular provides that Indian companies are permitted to raise fresh External Commercial Borrowing (“ECB”)/FCCB as per the extant ECB guidelines under the automatic route to refinance their outstanding FCCBs. However, the same is subject to the satisfaction of the conditions mentioned therein. Some of the important conditions, inter alia, include the following:
i) Fresh ECBs/ FCCBs shall be raised with the stipulated average maturity period and applicable all-in-cost being as per the extant ECB guidelines
ii) The amount of fresh ECB/FCCB shall not exceed the outstanding redemption value at maturity of the outstanding FCCBs
iii) The fresh ECB/FCCB shall not be raised six months prior to the maturity date of the outstanding FCCBs
iv) The purpose of ECB/FCCB shall be clearly mentioned as ‘Redemption of outstanding FCCBs’ in Form 83 at the time of obtaining Loan Registration Number from the Reserve Bank
Further, it is to be noted that restructuring of FCCBs involving change in the existing conversion price is not permissible. Proposals for restructuring of FCCBs not involving change in conversion price will, however, be considered under the approval route depending on the merits of the proposal.
INTEGRATION OF DIRECTOR IDENTIFICATION NUMBER (“DIN”) AND DIRECTOR PARTNERSHIP IDENTIFICATION NUMBER (“DPIN”)
The Ministry of Corporate Affairs (“MCA”) is taking a lot of steps to give ease to entrepreneurs and business owners. Presently, DIN is issued for people who wish to be directors for a company and DPIN is issued for people who wish to be partners in a Limited Liability Partnership (“LLP”). To avoid duplicity the MCA vide General Circular No. 44/2011 dated 8 July 2011 has decided to integrate the DIN and DPIN. Integrating these two identification numbers would mean issuing a single number that can be used for the purpose of both kinds of organisations. Keeping in mind the above the MCA has amended the
i) Companies (Director Identification Number) Rules, 2006
ii) Limited Liability Partnership Rules, 2009
COMPANIES DIRECTOR IDENTIFICATION NUMBER (THIRD AMENDMENT) RULES, 2011 (“Rules”)
The Ministry of Corporate Affairs (“MCA”) vide Notification No. F.NO. 2/1/2011 – CL.V dated 5 July 2011 has amended the Companies (Director Identification Number) Rules, 2006. The definition of the term Director Identification Number (“DIN”) has been substituted under the Rules. It has been defined as
“Director Identification Number” (DIN) means an identification number which the Central Government may allot to any individual, intending to be appointed as director or to any existing directors of a company, for the purpose of his Identification as such and includes Designated Partnership Identification Number (DPIN) issued under section 7 of the Limited Liability Partnership Act, 2008 and rules made thereunder.”
The new definition brings within its ambit the DPIN issued under the Limited Liability Partnership Act, 2008. Further, Form No. DIN-1 and DIN-4 have also been substituted to bring them in line with the new definition of the term DIN.
These Rules have come into effect from 9 July 2011.
LIMITED LIABILITY PARTNERSHIP (AMENDMENT) RULES, 2011 (“Rules”)
The Ministry of Corporate Affairs (“MCA”) vide Notification No. G.S.R. 506(E) F.NO. 2/1/2011-CL.V dated 5 July 2011 has amended the Limited Liability Partnership Rules, 2009. The definition of the term Designated Partnership Identification Number (“DPIN”) has been amended. The term DPIN has been defined as
“Designated Partnership Identification Number (DPIN) means an identification number which the Central Government may allot to any individual, intending to be appointed as designated partner of a Limited Liability Partnership for the purpose of his identification as such, and includes Directors Identification Number (DIN) issued under sections 266A, 266B and 266E of the Companies Act, 1956 and rules made thereunder.”
Further, some of the other significant changes can be summarized as follows:
i) Every individual, who is intending to be appointed as designated partner of a limited liability partnership, shall make an application electronically in Form DIN-1 under Companies (Director Identification Number) Rules, 2006 to the Central Government for obtaining DPIN under Limited Liability Partnership Act, 2008 and such DIN shall be sufficient for being appointed as designated partner under Limited Liability Partnership Act, 2008
ii) If a person holds both DIN and DPIN, then the DPIN stands cancelled and the DIN shall be sufficient for the appointment as a Partner under the Limited Liability Partnership Act, 2008.
These Rules have come into effect from 9 July 2011.
COMPANIES (CENTRAL GOVERNMENT’S) GENERAL RULES AND FORMS (AMENDMENT) RULES, 2011 (“Amendment Rules”)
The Ministry of Corporate Affairs (“MCA”) vide Notification F. NO. 17/174/2011-CL.V (“Notification”) dated 7 July 2011 has amended Rule 10C of the Companies (Central Government’s) General Rules and Forms, 1956 (“Rules”). Rule 10 C lays down the total monthly remuneration to be paid for the purposes of section 314 of the Companies Act, 1956 (“Act”).
Further, section 314 of the Act provides for the office or place of profit. The relevant parts of section 314 for the purpose of this Notification are reproduced below:
314. Director, etc., not to hold office or place of profit
(1) Except with the consent of the company accorded by a special resolution,-
(a) no director of a company shall hold any office or place of profit, and
(b) no partner or relative of such director, no firm in which such director, or a relative of such director, is a partner, no private company of which such director is a director or member, and no director or manager of such a private company shall hold any office or place of profit carrying a total monthly remuneration of such sum as may be prescribed,
except that of managing director or manager, banker, or trustee for the holders of debentures of the company-
(i) under the company;
(ii) under any subsidiary of the company, unless the remuneration received from such subsidiary in respect of such office or place of profit is paid over to the company or its holding company:
(1B) Notwithstanding anything contained in sub-section (1),-
(a)no partner or relative of a director or manager,
(b) no firm in which such director or manager, or relative of either, is a partner,
(c) no private company of which such a director or manager, or relative of either, is a director or member,
shall hold any office or place of profit in the company which carries a total monthly remuneration of not less than such sum as may be prescribed except with the prior consent of the company by a special resolution and the approval of the Central Government:
The new rule 10 C lays down that for the purposes of section 314(1)(b) the total monthly remuneration shall be at least Rupees fifty thousand. Prior to the amendment the total monthly remuneration stood at a minimum of Rupees ten thousand. Further, for the purposes of section 314(1B) the total monthly remuneration shall be at least Rupees two lakhs and fifty thousand. Prior to the amendment the total monthly remuneration stood at a minimum of twenty thousand.
LIMITED LIABILITY PARTNERSHIPS’ (“LLP’s”) ADMISSION AS MEMBERS OF STOCK EXCHANGES
The Securities and Exchange Board of India (“SEBI”) had received requests from various stock exchanges to permit LLP’s to be admitted as members of the stock exchanges so as to enable them to get registration as stock broker under SEBI (Stock brokers and Sub-brokers) Regulations, 1992.
SEBI vide Circular No. MIRSD/12/2011 (“Circular”) dated 11 July 2011 has permitted LLP’s to get admitted as members of stock exchanges. The Circular states that LLP’s are a body corporate and would be considered similar to Limited Liability Companies and partnership firms. Further membership would be granted only upon the LLP’s satisfying the conditions laid down in rule 8 (4A) of the Securities Contract Regulation Rules, 1956 so far as it can apply to LLP’s. Rule 8 provides for the qualifications for membership of a recognized stock exchange. Rule 8(4A) states
A company as defined in the Companies Act, 1956 (“Act”), shall also be eligible to be elected as a member of a stock exchange if—
(i) such company is formed in compliance with the provisions of section 12 of the said Act;
(ii) such company undertakes to comply with such financial requirements and norms as may be specified by the Securities and Exchange Board of India for the registration of such company under sub-section (1) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(iii) the directors of the company are not disqualified from being members of a stock exchange under 13[clause (1) [except sub-clause (b) and sub-clause (f) thereof] or clause (3) [except sub-clause (a) and sub-clause (f) thereof]] and the Directors of the company had not held the offices of the Directors in any company which had been a member of the stock exchange and had been
declared defaulter or expelled by the stock exchange; and
(iv) not less than two directors of the company are persons who possess a minimum two years’ experience:
(a) in dealing in securities; or
(b) as portfolio managers; or
(c) as investment consultants.
SEBI also asked the stock exchanges to make the necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision in coordination with one another to achieve uniformity in approach.
ISSUE OF CERTIFICATES BY DIGITAL SIGNATURE
In order to cut timelines and protect the environment the Ministry of Corporate Affairs (“MCA”) has taken a Green Initiative in Corporate Governance by allowing paperless compliance by the companies under the Companies Act, 1956 (“Act”). The most recent initiative by the MCA is with reference to the Issue of Digital Certificate by the Registrar of Companies (“ROC”). The MCA vide General Circular No. 39/2011, dated 21 June 2011 has decided that all certificates and standard letters issued by the Registrar of Companies will now be issued electronically under the Digital Signature of the Registrar of Companies. With reference to the same the MCA has already developed thirteen such digitally signed certificates and the same has been implemented under MCA-21 system as mentioned below:
|Sr.No.||Description of the Certificate||Form ID||Implementation Date|
|Certificate of Registration for Modification of Mortgage, etc., under section 132 read with section 135 of the Companies Act, 1956. (STP)||Form 8||29 May 2011|
|Memorandum of Satisfaction of Mortgage, etc., section 140 of the Companies Act, 1956 (STP)||Form 17||29 May 2011|
|Certificate of Registration of Mortgage, etc., under section 132 of the Companies Act, 1956 (STP)||Form 8||29 May 2011|
|Certificate of Incorporation||Form 1||12 June 2011|
|Certificate for Establishment of Place of Business in India||Form 44||12 June 2011|
|Certificate of Registration for Modification of Mortgage, etc., under section 132 read with section 135 of the Companies Act, 1956. (NON STP)||Form 8||12 June 2011|
|Memorandum of Satisfaction of Mortgage, etc., section 140 of the Companies Act, 1956 (NON STP)||Form 17||12 June 2011|
|Certificate of Registration of Mortgage, etc., under section 132 of the Companies Act, 1956 (NON STP)||Form 8||12 June 2011|
|Fresh Certificate of Incorporation Consequent upon Change of name||Form 1B||12 June 2011|
|Fresh Certificate of Incorporation Consequent upon Change of Name on Conversion to Public Limited Company||Form 62||12 June 2011|
|Certificate of Registration of Company Law Board order for Change of State||Form 18||12 June 2011|
|Certificate of Registration of the Special Resolution Confirming Alteration of Object Clause(s)||Form 23||12 June 2011|
|Fresh Certificate of Incorporation Consequent upon Change of Name on Conversion to Private Limited Company||Form 1B||12 June 2011|
The remaining certificates will be implemented on 3 July 2011.
Some of the other important green initiatives include:
1) Service of Documents including Balance Sheets and Auditors report etc. through e-mail– service of documents through electronic mode has been permitted under section 53 of the Act instead of service of documents under certificate of posting. Similarly, copies of Balance Sheets and Auditors Report etc., to the members of the company as required under section 219 of the Act can be served through electronic mode.
2) Participation by Directors and shareholders in meetings through video conferencing – to provide larger participation and for curbing the cost borne by the Company, Directors, and shareholders to attend various meetings under the provisions of the Companies Act, 1956, participation through video conferencing has been permitted subject to certain compliances.
3) Voting in General Meeting of Companies through electronic mode – In order to have secured electronic platform for capturing accurate electronic processes, Central Depository Services (India) Ltd (CDSL) and National Securities Depositories Limited (NSDL) are being given approval by the Ministry of Corporate Affairs to provide their electronic platform for capturing accurate electronic voting in General meetings of the company.
FOREIGN DIRECT INVESTMENT (FDI) IN INDIA- ISSUE OF EQUITY SHARES/PREFERENCE SHARES UNDER THE FDI SCHEME ALLOWED UNDER THE GOVERNMENT ROUTE:
Presently, an Indian company may, under the automatic route, issue equity shares/preference shares to a person resident outside India, being a provider of technology/technical know-how and against royalty/lump sum fees due for payment subject to certain conditions like entry route, sectoral cap, pricing guidelines and compliance with the applicable tax laws.
The existing guidelines for issue of equity shares/preference shares under the Government route have been reviewed vide Reserve bank of India (“RBI”) Circular No. 74 dated 30 June 2011. Issue of equity shares/preference shares under the Government route of the FDI scheme is now permitted for the following categories of transactions:
1) Import of capital goods/machineries/equipment’s (including second hand machineries).
2) Pre-operative/pre-incorporation expenses (including payments of rent, etc.).
The issue of equity shares/preference shares under the Government route will be subject to the compliance of the conditions mentioned in the circular which inter alia, include the following:
1) For Import of capital goods/machineries/equipment’s (including second hand machineries)
a) The import of capital goods, machineries, etc., made by a resident in India, is in accordance with the Export/Import Policy issued by the Government of India as notified by the Directorate General of Foreign Trade (“DGFT”) and the regulations issued under the Foreign Exchange Management Act (“FEMA”), 1999 relating to imports issued by the Reserve Bank
b) There is an independent valuation of the capital goods/machineries/equipments (including second-hand machineries) by a third party entity, preferably by an independent valuer from the country of import along with production of copies of documents/certificates issued by the customs authorities towards assessment of the fair-value of such imports
c) All such conversions of import payables for capital goods into FDI should be completed within 180 days from the date of shipment of goods.
2) For Pre-operative/pre-incorporation expenses (including payments of rent, etc.)
a) Submission of Foreign Inward Remittance Certificate for remittance of funds by the overseas promoters for the expenditure incurred
b) Verification and certification of the pre-incorporation/pre-operative expenses by the statutory auditor
c) The capitalization should be completed within the stipulated period of 180 days permitted for retention of advance against equity under the extant FDI policy.
Further, it is to be noted that all requests for conversion should be completed through a special resolution and the Government’s approval would be subject to pricing guidelines of the Reserve Bank and appropriate tax clearance.
It is believed, that although the liberalization in the FDI norms by the RBI does not open new sectors for FDI it will provide a certain operational flexibility in the issue of shares.
BUYBACK/PREPAYMENT OF FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBS) -EXTENSION OF TIME LIMIT IN CASE OF APPLICATIONS FOR BUYBACK OF FCCBS BY INDIAN COMPANIES, BOTH UNDER THE AUTOMATIC AND APPROVAL ROUTES
The Reserve Bank of India (“RBI”) in its financial stability report has expressed concerns over the ability of FCCB issuers to meet their obligations. Most FCCB’s were issued by companies when the economy was booming and companies were confident about appreciation in their share prices. It was believed that the appreciation in the share prices would prompt investors to convert their bonds into equities rather than redeem them. However, due to the economic meltdown for several FCCB’s the strike price (the price at which the bond can be converted into equity at a future date) is higher than the market price. Due to the same investors are opting to demand repayment rather than converting the bonds. Since companies have not set aside resources for the same. The investors are selling the bonds in the secondary markets at a discount due to the fear of a default.
Keeping in mind the same and with a view to benefit several companies facing funding problems the existing policy on the premature buyback of FCCBs has been reviewed vide Circular No. 75 dated 30 June 2011 and it has been decided to extend the time limit for such facility and liberalize the procedure. Accordingly, the applications for buyback, both under the Automatic route and Government route will be considered as detailed below:
- I. Automatic Route:
The designated AD-Category I may allow Indian companies to prematurely buyback FCCB subject to the compliance with the terms and conditions mentioned hereunder:
i) Buyback value of FCCB should be at a minimum discount rate of 8 per cent.
ii) The funds used for the buyback should be out of existing foreign currency (including funds held in Exchange Earner’s Foreign Currency account) or abroad and/or out of fresh External Commercial Borrowing (“ECB”) raised in conformity with the current ECB norms.
iii) Where the fresh ECB is co-terminus with the outstanding maturity of the original FCCB and is for less than three years the all-in-cost ceiling should not exceed 6 months Libor plus 200 bps as applicable to short term borrowings.
- II. Approval Route:
Indian companies may be permitted to buyback FCCBs to USD 100 million of the redemption value per company, out of their internal accruals with the prior approval of the RBI, subject to:
i) minimum discount of 10 per cent of book value for redemption value up to USD 50 million.
ii) minimum discount of 15 per cent of book value for the redemption value over USD 50 million and up to USD 75 million; and
iii) minimum discount of 20 per cent of book value for the redemption value of over USD 75 million and up to USD 100 million.
Further, it is to be noted that this facility shall come into force with immediate effect and the entire process of buyback should be completed by March 31, 2012.