Corporate Cue - March 2010

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Corporate CueMake the cut

March 2010


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Contents

Snapshot 3

Foreign Investment & Exchange Management 5

Corporate Law 8

Securities Law 10

Non-Banking Financial Companies 15

Insurance 18


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Snapshot

Foreign Investment & Exchange Management

Infrastructure Finance Companies [IFCs] will now be

able to avail External Commercial Borrowings [ECBs]

for on-lending to infrastructure sector under approval

route subject to satisfaction of prescribed conditions.

On-line reporting system of Overseas Direct

Investment [ODI] is operationalised effective

2 March 2010.

Corporate Law

Criteria for identification of a vanishing company

provided by Ministry of Corporate Affairs [MCA].

Provisions relating to winding-up of a company under

the Companies Act, 1956 [Companies Act] made

applicable to a Limited Liability Partnership [LLP]

formed under the Limited Liability Partnership Act,

2008.

Securities Law Application Supported by Blocked Amount [ASBA]

facility extended to various categories of investors.

Stock exchanges are mandated to disclose prescribed

details of allottees in Qualified Institutional Placement

[QIP] who have been allotted more than 5% of the

securities offered in the QIP, on the website of stock

exchanges along with the final placement document.

It is mandatory for the transferees of shares held in

a physical form in a listed company to furnish a copy

of Permanent Account Number [PAN] in the specified

cases.

Non-Banking Financial Companies [NBFCs]

Infrastructure Finance Company included as 4th

category of NBFCs.

NBFCs having FDI are required to submit a certificate

from their Statutory Auditors on half yearly basis for

compliance with the existing terms and conditions of

FDI.


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5/205Corporate Cue

Foreign Investment &

Exchange Management

External Commercial Borrowings [ECBs] policy

revised

Reserve Bank of India [RBI] has, on 2 March 2010, made

the following amendments in the ECB policy:

Infrastructure Sector

As per the extant ECB policy, ECB is permissible for

infrastructure sector as defined in the policy.

Infrastructure sector is defined as (i) power, (ii)

telecommunication, (iii) railways, (iv) road including

bridges, (v) sea port and airport, (vi) industrial parks,

(vii) urban infrastructure (water supply, sanitation

and sewage projects) and (viii) mining, refining and

exploration.

As stated in the para 54 of the Union Budget for the

year 2010-11, it has now been decided to expand

the definition and to include cold storage or cold

room facility, including for farm level pre-cooling,

for preservation or storage of agricultural and alliedproduce, marine products and meat within the

meaning of the term infrastructure sector for the

purpose of availing ECB.

ECB for Non-Banking Finance Companies [NBFCs]

engaged in financing infrastructure sector

As per the extant ECB policy, NBFCs, which were

exclusively engaged in financing of infrastructure

sector, were permitted to avail ECB from the

recognized lender category including international

banks, under the approval route, for on-lending to the

infrastructure sector.

In view of a separate category of NBFC viz.

Infrastructure Finance Companies [IFCs] introduced in

terms of the RBI guidelines, IFCs will be able to avail

ECBs for on-lending to infrastructure sector under

approval route subject to satisfaction of prescribed

conditions.

Structured Obligations

As per the extant policy, domestic Rupee denominated

structured obligations have been permitted to be

credit enhanced by non-resident entities under the

approval route.

In view of the growing needs of funds in the

infrastructure sector, a comprehensive policy

Foreign Direct Investment [FDI] regime eased

Policy of cases under Government of India [GOI]

route for making foreign investments reviewed

Cabinet Committee on Economic Affairs [CCEA] has,

on 11 February 2010, approved the proposal of the

Department of Industrial Policy & Promotion, Ministry of

Commerce & Industry, to liberalize the approval process

for foreign investment. Consequently, GOI has, on

25 March 2010, issued Press Note No. 1 (2010 Series)

to give effect to the above proposal. Following are the

liberalization measures taken up by GOI:

Currently, the recommendations of Foreign Investment

Promotion Board [FIPB] on proposals with total

investment upto Rs. 6 billion are considered by the

Minister of Finance whereas proposals involving total

investment of more than Rs. 6 billion are put-up

to CCEA. It has now been decided to allow FIPB to

recommend the proposals involving foreign equity

inflow of upto Rs. 12 billion to the Minister of Finance

for approval, without any need to go to CCEA.

CCEA would also consider the proposals which may

be referred to it by the FIPB / Minister of Finance.

There will be no requirement to approach FIPB for

a fresh approval for bringing in additional foreign

investments into the same entity, in cases where:

FIPB approval had been taken for initial foreign

investment because the activities required prior

approval and subsequently the sectors / activities

have been placed under automatic route;

FIPB approval had been taken for initial foreign

investment because there were sectoral caps and

subsequently the sectoral caps have been removed

/ increased and the activities were placed under

the automatic route provided that such additional

foreign investment along with the initial / original

investment does not exceed the sectoral caps.

Similarly, there will be no requirement to approach

FIPB / GOI for fresh approval where the approval was

already obtained in terms of Press Note 18/1998 and

Press Note 1/2005 provided prior approval of the

GOI under the FDI policy is not required for any other

reason / purpose. As per Press Note 1 / 2005 a foreign

company is required to obtain prior approval from theGOI in cases where the foreign investor had an existing

joint venture or technology transfer / trademark

agreement in the same field.


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framework on credit enhancement to domestic debt

has been now put in place.

The facility of credit enhancement by eligible

non-resident entities now has been extended to

domestic debt raised through issue of capital market

instruments, such as debentures and bonds, by Indian

companies engaged exclusively in the development

of infrastructure and by IFCs subject to satisfaction of

certain prescribed conditions.

The reporting arrangements as applicable to ECBs

would be applicable to the novated loans.

The modifications to the ECB policy have come into

force with immediate effect.

Other conditions of ECB policy

All other conditions under the ECB policy, such as USD

500 million limit per company per financial year under

the Automatic route, eligible borrower, recognisedlender, end-use, all-in-cost ceiling, average maturity

period, prepayment, refinancing of existing ECB and

reporting arrangements remain unchanged.

Liberalization of ECB Policy

RBI has, on 9 February 2010, l iberalized the ECB Policy

wherein Designated Authorised Dealer [AD] CategoryI

banks, inter alia, have been allowed to approve the

following requests of the ECB borrowers for change in

terms and conditions of the ECB:

Changes / modifications in the drawdown /

repayment schedule

Designated AD CategoryI banks are allowed to approve

changes in or modify the drawdown / repayment

schedule of ECBs already availed, both under the

approval and the automatic routes, provided the

average maturity period as declared while obtaining the

Loan Registration No. [LRN] is maintained. However,

any rollover in the repayment on expiry of the original

maturity of the ECB would require prior approval of RBI.

Changes in the currency of borrowing

Designated AD CategoryI banks are authorized to

allow changes in the currency of borrowing, if sodesired, by the borrower company, in respect of ECBs

availed of both under the automatic and the approval

routes, subject to all other terms and conditions of

the ECB remaining unchanged. Designated AD banks

should, however, ensure that the proposed currency of

borrowing is freely convertible.

Change of the Designated AD bank

Designated AD CategoryI banks are authorized to

allow change of the existing Designated AD bank by

the borrower company for effecting its transactions

pertaining to the ECBs subject to No-Objection

Certificate from the existing Designated AD bank and

after due diligence.

Changes in the name of the Borrower Company

Designated AD CategoryI banks are authorized to allow

changes in the name of the borrower company subject

to production of supporting documents evidencing the

change in the name from the Registrar of Companies

[ROC].

Revision of Conversion Price of Foreign Currency

Convertible Bonds [FCCBs] as per new pricingnorms

GOI has amended the scheme for Issue of Foreign

Currency Convertible Bonds and Ordinary shares

(Through Depository Receipt Mechanism) Scheme,

1993, to enable interested companies which had

issued FCCBs prior to 27 November 2008 to revise their

conversion price as per new pricing norms. The pricing

norms upto 27 November 2008 and new pricing norms

are as under:

Old norms New norms

The pricing should not be less than thehigher of the following two averages:

average of the weekly high and low of

the closing prices quoted on the stock

exchange during 6 months preceding

the relevant date;

average of the weekly high and low of

the closing prices quoted on a stock

exchange during 2 weeks preceding

the relevant date.

the relevant date means 30 days

prior to the date on which the meeting

of the general body of shareholders

is held, in terms of section 81(1A) of

the Companies Act, to consider the

proposed issue.

The pricing should not be less than: the average of the weekly high and

low of the closing prices of the related

shares quoted on the stock exchange

during 2 weeks preceding the relevant

date;

the relevant date means the date

of meeting in which the Board of

the Company or the Committee of

Directors duly authorized by the Board

of the Company decides to open the

proposed issue.


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The application for overseas investment under the

approval route would continue to be submitted to RBI

in physical form, in addition to the on-line reporting as

mentioned above, for approval purposes;

Transactions relating to closure / disinvestment /

winding up / voluntary liquidation of the overseas

Joint Ventures / Wholly Owned Subsidiaries under the

automatic and approval routes would continue to be

submitted to RBI in physical form.

Introduction of e-filing portal for seeking FIPB

approval

GOI has, on 15 March 2010, launched the e-filing portal

of FIPB. It enables applicants to file proposals seeking

FIPB approval online. The website can be accessed

though http://finmin.nic.in or directly at www.fipbindia.

com.

Trading of Currency Futures in Recognized Stock

Exchanges [RSEs]In order to facilitate direct hedging of currency risk in

currency pairs other than US Dollar [USD] - Indian Rupee

[INR] currency, RBI has, on 19 January 2010, amended

the Currency Futures (Reserve Bank) Directions, 2008

and has allowed the recognized stock exchanges to

offer currency futures contracts in the currency pairs of

Euro-INR, Japanese Yen [JPY]-INR and Pound Sterling

[GBP]-INR, in addit ion to the USD-INR contracts. Further,

the settlement price for USD-INR and Euro-INR contracts

shall be RBIs Reference Rates and the settlement price

for GBP-INR and JPY-INR contracts shall be the exchange

rates published by RBI in its press release on the last

working day.

Securities and Exchange Board of India [SEBI] has, on

19 January 2010, permitted eligible stock exchange in

India to introduce currency futures on Euro-INR,

GBP-INR and JPY-INR.

The window to revise conversion price is available only

for 6 months from the date of issue of press note and is

subject to the fulfillment of the following conditions:

The revision of price and consequent issue of shares is

within FDI limit.

Approval from the Board as well as the shareholders is

obtained.

Fresh agreement is entered with the FCCB holders in

terms of renegotiation of the conversion price.

Approval of RBI for the revision is obtained.

Further, GOI has, on 15 March 2010, clarified that the

relevant date for the limited purpose of revision of

conversion price as mentioned above, would mean the

date of the meeting in which the Board of the Company

or the committee of Directors authorized by the Board

of the Company decides to revise the conversion price

of the existing FCCBs.

Online reporting of Overseas Direct Investment

[ODI]

RBI has, on 24 February 2010, notified

operationalization of the on-line reporting system of ODI

in a phased manner effective from 2 March 2010, to

simplify the existing reporting framework.

The salient features of the on-line reporting system,

inter alia, are hereunder:

The new system would enable on-line generation of

Unique Identification Number [UIN], acknowledgment

of remittance/s, filing of the Annual Performance

Reports and easy accessibility to data at the AD banks

level for reference purposes;

AD banks would continue to receive ODI forms in

physical form in the specified manner which should be

preserved, UIN wise, for onwards submission to RBI, if

specifically required;

Transactions in respect of Mutual Funds, Portfolio

Investment Scheme [PIS] and Employees Stock Options

Scheme are also required to be reported on-line in the

Overseas Investment Application;


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Corporate Law

Criteria for identification of a vanishing company

As per the information available on the website of the

Ministry of Corporate Affairs [MCA], GOI, a company

would be deemed to be a vanishing company, if it is

found to have:

1. Failed to file returns with Registrar of Companies

[ROC] for a period of 2 years;

2. Failed to file returns with Stock Exchange [SE] for a

period of 2 years (if it continues to be a listed company);

3. It is not maintaining its registered office at the address

notified with the ROC / SE; and

4. None of its Directors are traceable.

MCA has clarified that all the conditions mentioned

above would have to be satisfied before a listed

company is declared as a vanishing company. Further,

the conditions mentioned at (1), (3) & (4) would suffice

to declare a company as vanishing if such company has

been de-listed from the SE.

E-filing of Corporate Social Responsibility [CSR]report on the portal of MCA

GOI has, on 11 March 2010, announced that MCA is

in the process of designing an e-form under MCA-21

which will enable the corporates to file their CSR report

on the portal of the Ministry. The availability of these

reports at a single place will enable the GOI to take

policy decisions.

Amendment to Limited Liability Partnership Act,

2008 [LLP Act] and rules issued there under

GOI has, on 6 January 2010, notified that certain

provisions relating to winding-up of a company under

the Companies Act shall be applicable to a Limited

Liability Partnership [LLP] formed under the LLP Act. The

notification also provides details of modification in the

provisions of the Companies Act relating to winding up

for its applicability to winding up of LLP under the LLP

Act.

MCA has further, on 11 January 2010, notified the

Limited Liability Partnership (Amendment) Rules, 2010

[LLP Amendment Rules]. The salient features of the

amendment, inter alia, are as under:

Application for allotment of Designated Partner

Identification Number is now required to be submittedonline on the LLP website along with the necessary

proof duly attested and certified as prescribed in the

LLP Amendment Rules.

Certification requirements as applicable to foreign

LLP have been extended in cases where the intending

partner is a foreign national residing outside India / a

foreign body corporate registered outside India.

LLP shall file with ROC, the LLP agreement ratified

by all the partners within 30 days of incorporation

of LLP as against the earlier requirement of filing the

LLP agreement within 30 days of ratification by all

partners.

Key judicial decisions

Right to file appeal for refusal to transfer shares of

a public company available to transferee and not to

transferor

The Andhra Pradesh High Court has held that in case

of refusal to register transfer of shares in a public

company, the right of appeal under Section 111A of the

Companies Act is available only to the transferee and

not to the transferor.

Fenoplast Ltd. v. A. Mallikarjuna Rao [2010] 154 CompCas 386 (AP)

Member of a Section 25 company not having

share capital cannot prefer complaint against the

Company under section 621 of the Companies Act

The Madras High Court has held that in case of a

Section 25 company not having share capital, a member

thereof cannot prefer complaint against such a company

under Section 621 of the Companies Act since he is not

a shareholder.

Section 621 of the Companies Act provides that no

court can take cognizance of any offences against

the Companies Act which is alleged to have been

committed by any company or any officer unless a

complaint in writing is made by ROC or by a shareholder

or by a person authorized by the Central Government.

Court distinguished the term - member of a section 25

company (not having share capital) and shareholder

and stated that a member of a section 25 company

(not having share capital) is neither a subscriber to the

memorandum of association who has agreed to become

member of a company, nor a person who has agreed in

writing to become member of a company.

Madras Cricket Club & Others v. M. Subbiah [2010] 154Comp Cas 353 (Mad)


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Transfer of shares of a public company

In a recent judgment of Western Maharashtra

Development Corporation Limited vs. Bajaj Auto Limited,

the Bombay High Court has held (among other things)

that in case of a public company, its shares are freely

transferrable under the Companies Act, 1956 (the Act)

even if the Articles of Association (the Articles) contain

restrictive provisions relating to transfer of shares.

Background:

One of the distinctions between private companies and

public companies is with regard to freedom to transfer

shares in terms of their definitions in the Act.

In case of unlisted public companies, the Articles

could contain restrictions inter se the shareholders

with respect to transfer of shares in such companies.

The conditions relating to transfer of shares as agreed

between the shareholders under a joint venture

agreement / shareholders agreement or similar

arrangements are generally incorporated in the Articlesof such companies so as to make them binding on the

companies.

The Bombay High Court interpreted provision of section

111A of the Act and held that the shares of public

companies are freely transferable irrespective of any

restriction contained in its Articles.

Section 111A of the Act is applicable to public

companies. Section 111A was enacted in the Act as

a consequence of enactment of the Depositories Act

1996 to allow free transferability of shares. The relevant

extract of the provisions of Section 111A (2) of the Act

is as under:

(2) Subject to the provisions of this section, the shares

or debentures and any interest therein of a company

shall be freely transferable:.

Rationale of decision:

The summary of the rationale given by the Bombay High

Court with regard to the interpretation of provisions of

Section 111A of the Act is as under:

1. In case of a public company, the Act provides that

the shares or debentures or any interest therein of acompany shall be freely transferable. The provision

of the Act for free transferability of shares in a

public company is founded on the principle that the

members of public must have f reedom to purchase

and, every shareholder, freedom to transfer.

2. The incorporation of a Company as public company,

as distinguished from the private company, leads

to specific consequences and the imposition of

obligations envisaged in law. Corresponding to those

obligations are rights, which the law recognizes as

inhering in the members of the public who subscribe

to shares.

3. The principle of free transferability must be given

a broad dimension in order to fulfil the object of

the law. An agreement between the shareholders

of a public company which has been incorporated

in the Articles, to preclude sale to or purchase by

the members of the public of the shares, impose a

restriction on the free transferability of shares. This

would be contrary to the provisions of section 111A

of the Act read with Section 9 of the Act. Section 9

of the Act gives over riding force and effect to theprovisions of the Act, notwithstanding anything to the

contrary contained in the Memorandum or Articles

of a company or in any agreement executed by it or

any resolution of the company in general meeting

or its board of directors. A provision contained in

Memorandum or Articles, agreement or resolution is

to the extent to which it is repugnant to the provisions

of the Act is regarded as void. The Court analysed

and considered the decisions of V. B. Rangraj vs.

V. B. Goplakrishnan [(1992) 1 SCC 160] and M. S.

Madhusoodhanan vs. Kerala Kaumudi Private Limited

[(2003) 117 Com Cases 19].

4. The provisions of Section 111A cannot be read as

being subject to a contract between shareholders.

Firstly, because such a restriction is not mentioned

in section 111A of the Act, secondly, the word

transferable is of the widest import and the context

in which the provision has been introduced requires to

be given a wide meaning.

Judgment of the Bombay High Court dated 15th

February 2010 in case of Western Maharashtra

Development Corpn. Ltd. vs. Bajaj Auto Limited


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11/2011Corporate Cue

of the investee companies in respect of the

following matters -

Corporate governance matters, including

changes in the state of incorporation, merger and

other corporate restructuring and anti takeover

provisions.

Changes to capital structure, including increases

and decreases of capital and preferred stock

issuances.

Stock option plans and other management

compensation issues.

Social and corporate responsibility issues.

Appointment and Removal of Directors.

Any other issue that may affect the interest of the

shareholders in general and interest of the unit-

holders in particular.

Additional management fees by AMC in case of

schemes launched on no load basis

AMC shall not collect any additional management

fees. Currently, in case of scheme launched on a noload basis, AMC can collect additional management

fees not exceeding 1% of the weekly average net

assets outstanding in each financial year.

Fund of Funds Scheme

AMC shall not enter into any revenue sharing

arrangement with the underlying funds in any manner

and shall not receive any revenue by whatever means

/ head from the underlying fund.

Any commission or brokerage received from the

underlying fund shall be credited into concerned

schemes account.

Provisions of SEBI (Mutual Fund) Regulations, 1996

would be suitably amended in due course.

Valuation of Debt and Money Market Instruments

SEBI has, on 2 February 2010, modified the valuation

method of debt and money market instruments in

case of mutual fund to ensure that the value of money

market and debt securities in the portfolio of mutual

fund schemes reflect the current market scenario.

Salient features of the revised valuation norms which are

applicable from 1 July 2010 are as under: Valuation of money market and debt securities

(including floating rate securities) with residual

maturity of upto 91 days -

To be valued at the weighted average price at which

they are traded on the particular valuation day. If

securities are not traded on a particular valuation

day, they shall be valued on amortization basis.

Valuation of money market and debt securities

(including floating rate securities) with residual

maturity of over 91 days -

To be valued at weighted average price at which

they are traded on the particular valuation day. If

securities are not traded on a particular valuation

day, they shall be valued at benchmark yield / matrix

of spread over risk free benchmark yield obtained

from agency(ies) entrusted for the said purpose by

Association of Mutual Funds in India [AMFI].

Valuation of securities not covered under the current

valuation policy -

In case of securities purchased by mutual funds

do not fall within the current framework of the

valuation of securities then such mutual fund shallreport immediately to AMFI regarding the same.

AMC shall ensure that the total exposure in such

securities does not exceed 5% of the total asset

under management of the scheme.

AMFI has been advised that valuation agencies

should ensure that the valuation of such securities

gets covered in the valuation framework within

6 weeks from the date of receipt of intimation

from mutual fund. Till such provisions are made,

mutual funds shall value such securities using their

proprietary model which has been approved by their

independent trustees and the statutory auditors.

Revision in Securities Lending and Borrowing

[SLB] Framework

SEBI has, on 6 January 2010, revised framework for SLB.

The broad revisions are as under:

Tenure of contracts in SLB can be upto a maximum

period of 12 months (earlier 30 days).

Lender / borrower will have a facility for early recall /

repayment of shares.

In case lender recalls the securities anytime before

completion of the contract -

Approved Intermediary [AI] shall, on a best effortbasis, try to borrow the security for the balance

period and pass it onward to the lender.


12/2012

AI will collect the lending fee from the lender who

has sought early recall.

Original contract between lender and AI will

exist till the contract with the new lender for the

balance period is executed and the securities

returned to the original lender.

In case of early repayment of securities by the

borrower -

Margins shall be released immediately on the

securities being returned by the borrower to the

AI.

AI shall, on a best effort basis, try to onward lend

the securities and the income arising out of it shallbe passed on to the borrower making the early

repayment of securities.

In case AI is unable to find a new borrower for the

balance period, the original borrower will have to

forego lending fee for the balance period.

In case the borrower fails to meet the margin

obligations, AI shall obtain securities and square off

the position of such defaulting borrower, failing which

there shall be a financial close-out.

In case of early recall / repayment of securities, the

lending fee for the balance period shall be at a market

determined rate.

Disclosure of details of the allottees in QIP

SEBI has, on 5 March 2010, mandated stock exchange

to disclose the following details of allottes in QIP who

have been allotted more than 5% of the securities

offered in the QIP, on the website of stock exchanges

along with the final placement document -

Names of the allottees;

Number of securities allotted to each of them; and

Pre and post issue shareholding pattern of the issuer

in the format specified in clause 35 of the Equity

Listing Agreement.

Requirements of furnishing copy of PAN for

transmission of shares in physical form

SEBI has, on 7 January 2010, inter alia clarified that it

shall be mandatory for the transferees of shares held in

physical form of a listed company to furnish a copy of

PAN in the following cases -

Deletion of name of the deceased shareholder(s),

where the shares are held in the name of two or more

shareholders.

Transmission of shares to the legal heir(s), where

deceased shareholder was the sole holder of shares.

Transposition of shares when there is a change in

the order of names in which physical shares are held

jointly in the names of two or more shareholders.

Revised format for half yearly reporting by

portfolio managers

SEBI has, on 15 March 2010, revised the format of

reporting on portfolio management activity required

to be submitted by portfolio manager. All portfolio

managers are required to submit the half yearly report

to SEBI in the revised format within 30 days after the

end of respective period ended 30th September and

31st March each year.

Revision in timeline and quarterly reporting

format by Venture Capital Funds [VCF] & Foreign

Venture Capital Investors [FVCI]

SEBI has, on 11 January 2010, revised the format

of quarterly report on venture capital activity to be

submitted by VCF & FVCI effective from the quarter

ended 31 March 2010. The timeline for uploading the

report online on SEBI portal has been made uniform i.e.

within 7 days f rom the end of each calendar quarter.

It is clarified that physical copies of the report are not

required to be submitted.



SEBI Informal Guidance scheme

Consecutive two offer for buyback of shares

SEBI has, in response to the request for an interpretative

letter, on applicability of the provisions of SEBI (Buyback

of Securities) Regulations, 1998 [Buyback Regulations]

and Section 77A of Companies Act, for second buyback

of shares, inter alia, clarified as under:

Background:

As per the provision of Section 77A(2) - first proviso

and Section 77A(2)(b) of the Companies Act, once the

buyback has been made with the authorization of the

board and not that of shareholders, no further offer of

buyback of any securities can be made within 365 days

reckoned from the date of preceding offer.

A listed company (say, X Ltd.) completed its first offer of

buyback through open market under the authorization

of its Board of Directors. The Board of Directors

authorized buyback commenced on 31 December

2008 after corrigendum to public announcement was

published. Buyback offer opened on 27 December 2008and closed on 4 December 2009.

Issues:

1. Whether the period of 365 days is to be reckoned

from the date of the public announcement or from

the date of opening of the offer or from any other

date?

2. Whether the company can immediately proceed with

the second buy-back offer pursuant to the special

resolution passed by the members or whether the

cooling period of 365 days will be applicable to the

second offer through the members resolution also?

SEBI Response:

SEBI Response 1 - The period of 365 days has to

be reckoned from the date of completion of the

preceding offer of buy back made pursuant to the

Board resolution.

SEBI Response 2 - A second buyback authorized by

special resolution passed by the shareholders can

be made after completion of the first buy-back offer

made pursuant to Board resolution. However, other

conditions provided in Buyback Regulations andsection 77A of Companies Act e.g. the buy-back

should not exceed 25% of the total paid up equity

capital in the financial year, must be complied with.

Applicability of SEBI (Stock Brokers & Sub-Brokers)

Regulations, 1992 [the Brokers Regulations] to the

subsidiaries of stock exchanges

SEBI has, in response to the request for an interpretative

letter clarified that provisions of Regulation 15A of the

Brokers Regulations are not applicable to the subsidiaries

of RSEs, which are registered as stock brokers under

the Regulations. The provisions of Regulation 15A, inter

alia, provides that no director of the stock broker can

act as a sub broker to the same stock broker.

Key judicial decision

Protective rights under shareholders agreement

would not necessarily results into acquisition

of control under Regulation 12 of the Takeover

Regulations

Acquirer alongwith persons acting in concert had

acquired, on preferential basis, 17.90% of the post issue

equity share capital of the Target Company and had

made open offer of 20% to public under Regulation 10

(open offer is required when acquirer alongwith personsacting in concert acquires shares or voting rights of

15% or more of the target company) of the Takeover

Regulations. The acquirer had entered into Share

Subscription and Shareholders Agreement [Agreements]

with the existing promoters which, inter alia, provided

for following:

right to appoint 1 nominee of the acquirer on the

board of directors / committee of the Target Company

quorum for a board meeting shall be 3 directors of

which 1 director shall be nominee of the Acquirer

affirmative vote of the Acquirer director on reserved

matters like approval of annual business, acquisition of

securities of any other body corporate, amalgamation/

splitting/ re-organization / consolidation of target

company, appointment of key officials of the target

company like CEO, CFO, COO etc. and determination

of their remuneration and powers etc.

Acquirer is only a financial investor in the target

company and shall not be considered to be a promoter

of the target company and this acquisition will not

result in a change in the control and management of

the target company and the control and managementof the target company shall continue to vest with the

promoters of the Target Company etc.


14/2014

The question for consideration was whether rights

available to the Acquirer pursuant to the Agreements

would results into acquisition of control over the Target

Company under Regulation 12 (open offer is required

when acquirer acquires control over the target company,

irrespective of acquisition of shares or voting rights) of

the Takeover Regulations?

On facts, Securities Appellate Tribunal [SAT] held that

Control under Regulation 2(1)(c) of Takeover

Regulations, is a proactive and not a reactive power.

It is a power by which an acquirer can command the

target company to do what he wants it to do. Control

means creating or controlling a situation by taking the

initiative. Power by which an acquirer can only prevent

a company from doing what the latter wants to do is

by itself not control. In that event, the acquirer is only

reacting rather than taking the initiative. It is a positive

power and not a negative power. In a board managed

company, it is the board of directors that is in control.

In other words, the question to be asked in each

case would be whether the acquirer is the driving

force behind the Company and whether he is the one

providing motion to the organization? If the answer is

yes, he is in control but not otherwise. In short control

means effective control.

Right to nominate only 1 director can by no stretch

of reasoning exercise control over the affairs of the

Target Company or control its board of directors. The

single nominee would be in a microscopic minority

and has no veto powers. It may be noted that where

the quorum is 3 or more directors, the presence of

1 nominee of the Acquirer would always be in a

minority and have no veto power.

Protective provisions in the Agreement are meant

only to protect the interest of the Acquirer for the

investment made by it. It is clear that through such

protective provisions, Acquirer does not want the

Target Company to undergo any paradigm shift from

its present position without Acquirers knowledge

and approval. These are meant to ensure standards

of good corporate governance and to protect

the interests of the shareholders including that of

Acquirer from the whims and fancies of the promoters

who manage the Target Company. The protective

provisions are not in the nature of the day to day

operational control over the business / management /

policy decisions of the Target Company.

Even if the entire open offer of 20% to the public

is tendered, the Acquirer would still be far short of

a simple majority that is necessary for getting an

ordinary resolution passed.

Thus, based on the facts, SAT held that aforesaid

acquisition of shares or voting rights by the acquirer

would not result into acquisition of control over the

Target Company and Regulation 12 does not get

triggered.

M/s. Subhkam Ventures (I) Private Limited vs. SEBI (SAT

order dated 15 January 2010)



Introduction of 4th category of NBFC

Infrastructure Finance Company [IFC]

RBI has, on 11 February 2010, amended the Non-

Banking Financial (Non-Deposit Accepting or Holding)

Companies Prudential Norms (Reserve Bank) Directions,

2007 [NBFC Directions] to introduce a 4th category of

NBFC viz. Infrastructure Finance Company. This is

in addition to the existing 3 categories of NBFCs viz.

Asset Finance Company [AFC], Loan Company [LC] and

Investment Company [IC].

Salient features of the amendments to the NBFC

Directions are as under:

Meaning of IFC:

IFC has been defined to mean a NBFC which deploys at

least 75% of its total assets in infrastructure loans.

The definition of infrastructure loan has been

amended to include credit facility extended to a project

of laying down and / or maintenance of gas, crudeoil and petroleum pipelines. However, credit facility

extended by NBFC to a project of construction of

educational institutions and hospitals has been excluded

from the definition of the term an infrastructure loan.

The amended definition of infrastructure loan under

the NBFC Direction is as under:

Infrastructure loan means a credit facility extended

by NBFC to a borrower, by way of term loan, project

loan subscription to bonds / debentures / preference

shares / equity shares in a project company acquired

as a part of the project finance package such that such

subscription amount to be in the nature of advance

or any other form of long term funded facility provided

to a borrower company engaged in:

Developing or

Operating and maintaining, or

Developing, operating and maintaining

any infrastructure facility that is a project in any of the

following sectors:

(a) a road, including toll road, a bridge or a rail system;

(b) a highway project including other activities being anintegral part of the highway project;

(c) a port, airport, inland waterway or inland port;

(d) a water supply project, irrigation project, water

treatment system, sanitation and sewerage system or

solid waste management system;

(e) telecommunication services whether basic or cellular,

including radio paging, domestic satellite service

(i.e., a satellite owned and operated by an Indian

company for providing telecommunication service),

network of trunking, broadband network and

internet services;

(f) an industrial park or special economic zone;

(g) generation or generation and distribution of power;

(h) transmission or distribution of power by laying a

network of new transmission or distribution lines;

(ha) laying down and/or maintenance of gas, crude oil

and petroleum pipelines*

(i) construction relating to projects involving agro-

processing and supply of inputs to agriculture;

(j) construction for preservation and storage of

processed agro-products, perishable goods such

as fruits, vegetables and flowers including testing

facilities for quality; and

(k) [ ** ](l) any other infrastructure facility of similar nature.

* Inserted w.e.f. 11 February 2010.

** Construction of educational institutions and hospitals

deleted w.e.f. 11 February 2010.

Requirements for IFC:

IFC shall have net owned fund of Rs. 3 billion or

more.

Under NBFC Directions, Non-Banking Finance

Companies-Non-Deposit Taking-Systemically Important

[NBFCs-ND-SI] has been defined to mean a NBFCs

not accepting / holding public deposits and

having total assets of Rs 1 billion or more as per

latest audited balance sheet.

Having regard to the condition that the net owned

fund of IFC to be not less than Rs. 3 billion, it

follows that an IFC would be a NBFCs-ND-SI.

IFC shall have minimum credit rating of A or

equivalent of CRISIL, FITCH, CARE, ICRA or equivalent

rating by any other accrediting rating agencies; and

IFC shall have Capital to Risk Assets Ratio of 15% (with

a minimum Tier I capital of 10%);

IFC shall not accept deposits from the public.

Non-Banking Financial

Companies [NBFCs]


16/2016

NBFC satisfying the above conditions may approach

the Regional Office of RBI for classification as IFC. The

application is to be supported by the certificate from

Statutory Auditors of such NBFC confirming the asset /

income pattern of the company as on March 31 of the

latest financial year.

Concentration of credit limits for IFCs relaxed:

Limits on lending to a single borrower or single group of

borrowers by IFC have been relaxed.

IFC may lend to -

any single borrower upto 25% of its owned fund;

any single group of borrowers upto 40% of its owned

fund.

Further, IFC may lend to and invest in (loans /

investments taken together) -

any single borrower upto 30% of its owned fund;

any single group of borrowers upto 50% of its ownedfund.

Present norms relating to concentration of credit limits

in respect of infrastructure loan as laid out in NBFC

Directions will continue to be applicable to NBFCs-ND-SI

that do not meet the criteria to be classified as IFC.

Existing provisions of NBFC Directions which are based

on asset specification viz. income recognition, asset

classification and provisioning norms shall be applicable

to IFC.

Comparative chart of concentration of credit and

investment:

A comparative chart showing limits on concentration of

credit and investments in respect of various NBFCs-ND-

SI after the amendment of NBFC Directions is as under:

Credit / Investment AFC / LC/ IC

(limits as

a % to its

owned fund)

AFC / LC/ IC giving

loans / making

investments in

infrastructure

sector (note 1)

(limits as a % to its

owned fund)

IFCs

(limits as

a % to its

owned

fund)

Lending to

any single borrower 15% 20% 25%

any single group of borrowers 25% 35% 40%

Investments in (note 2)

shares of another company 15% 20% 15%

shares of single group of

companies

25% 35% 25%

Lending to and investments in

single party 25% 30% 30%

single group of parties 40% 50% 50%

Notes:

1) The higher limits would be available only for exposure to infrastructure related loan and / or

investments.

2) Investment limits will not be applicable for investment in the equity capital of an insurance company

upto the extent permitted by RBI.

3) In case of AFC, above limits to a single party / single group of parties may be increased by 5% of its

owned funds in exceptional circumstances with the approval of such AFCs Board of Directors.

4) NBFCs-ND-SI not accessing public funds (commercial papers, public deposits, debentures, inter-

corporate deposits and bank finance), either directly or indirectly, may make an application to RBI for

modifications in the above limits.



Risk weights and exposure norms for bank exposure

to IFCs:

RBI has, on 12 February 2010, also made separate

amendments to the master circulars to banks with

regard to assigning risk weightage and exposure norms

for banks exposure to IFCs and bank finance to NBFCs.

Accordingly

the banks exposure to IFCs will be risk weighted as

per the rating assigned to IFCs by rating agencies

registered with SEBI and accredited by RBI. Banks are

required to assign risk weight similar to corporate /

corporate bonds while computing capital for credit

risk and specific risk under market risk.

banks exposure to IFCs should not exceed

15% of its capital funds as per its last audited

balance sheet,

20% of its capital funds, if such exposure is

on account of funds on-lent by IFCs to the

infrastructure sector.

Withdrawal of Short-term Forex Loans facility for

NBFCs and Housing Finance Companies [HFCs]

RBI had, as a temporary measure, allowed NBFC-ND-

SI on 31 October 2008 and HFCs on 17 November

2008, to raise short-term foreign currency borrowings

not exceeding 50% of the Net Owned Funds or USD

10 million, whichever was higher, for refinancing their

short-term liabilities. The facility was extended to these

companies under the approval route, subject to certain

terms and conditions. However, effective from

3 February 2010, RBI has withdrawn the facility of short-

term foreign currency borrowings provided to NBFC-ND-

SI and HFCs.

Compliance requirement of NBFCs

RBI has, on 4 February 2010, clarified that NBFCs having

FDI, whether under automatic route or under approval

route, are required to submit a certificate from their

Statutory Auditors on half yearly basis (half year ending

September and March) certifying compliance with the

existing terms and conditions of FDI. Such certificate isrequired to be submitted within one month from the

close of the half year to which the certificate pertains,

to the Regional Offices in whose jurisdiction the head

office of the company is registered.


18/2018

Insurance

Amendment to Corporate Governance Guidelines

for Insurance Companies

Insurance Regulatory and Development Authority [IRDA]

has, on 29 January 2010, amended the Corporate

Governance Guidelines for Insurance Companies [CG

Guidelines] which were issued on 5 August 2009. The

amendments, inter alia, include:

As a matter of prudence, not more than one member

of a family, or a close relative as defined in the

Companies Act or an associate (partner, director, etc.,)

should be on the Board of an Insurer as Independent

Director.

The reports of the Policyholders Protection

Committee should be on the agenda of every Board

meeting of the company.

The company must disclose, inter alia, the following

in their annual report:

Number of the meetings held of the Board of

Directors and Committees mandated under the CGGuidelines in the financial year.

Details of the composition of the Board of Directors

and Committees mandated, setting out name,

qualification, field of specialization, status of

directorship held etc.

Number of the meetings attended by the Directors

and the members of the committee.

Detail of the remuneration paid, if any to the

independent director.

All the mandatory committees should meet at least

4 times in a year and not more than 4 months shall

elapse between two successive meetings. The quorum

shall be either 2 members or 1/3rd of the members

of the committee whichever is greater, but in case an

independent director is mandated to be in any of the

Committees, he/she should be necessarily present to

form the quorum.

Each insurer should designate their Company

Secretary as the Compliance Officer whose duty will

be to monitor continuing compliance with the CG

Guidelines.

CG Guidelines applicable to insurance companies andreinsurance companies except that reinsurance company

will not require to have the Policyholders Protection

Committee.

Guidelines on Licensing of Corporate Agents by

the Insurance companies

IRDA has, on 2 March 2010, issued the instructions for

compliance by the Insurance companies while issuing

license to the Corporate Agents. The applications for

corporate agency license from such a person or group

of persons who is / are already engaged in any insurance

business shall be dealt with, inter alia, in the following

manner:

All such applications shall be referred to IRDA by the

designated person concerned and licenses shall be

issued by the designated person only after approval by

IRDA.

Persons from any group which is having a broking

license shall not be eligible for corporate agency.

Any of the persons which are regulated by RBI within

the group may apply and obtain a corporate agency

license provided they have substantial client base

of their own or access to data which would facilitateidentification of prospects.

Persons who are not regulated by RBI, shall not be

eligible for corporate agency license, unless they have

a substantial client base of their own or access to

data to identify the prospective policyholders and

have a turnover, assets or income of at least Rs. 15

crores.

Only those persons which are part of a group having

Indian Insurance Company or a scheduled commercial

Bank within the group shall be eligible for issue of

corporate agency license to do insurance distribution

as the principle business, provided this shall be the

only corporate agency amongst all the entities in the

group, subject to fulfillment of conditions of licensing

of Corporate Agency guidelines.

In addition to above, all other conditions issued under

IRDA (Licensing of Corporate Agency) Regulations, 2002

and the Guidelines issued shall be applicable.


19/20


20/20

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Corporate Cue - March 2010

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