Global Regulatory Update, January 2014


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“Global Regulatory Update” is a compilation of global and domestic news, opinions on regulatory issues, CII initiatives and representations on regulatory issues. The Update is aimed at keeping CII membership apprised of developments in the international and domestic corporate governance and regulatory landscape.

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Global Regulatory Update, January 2014

  1. 1. Confederation of Indian Industry GLOBAL Regulatory E PDAT U January 2014, Volume 4, Issue 1 Inside ARTICLES AND UPDATES Indian Companies - Moving closer to a US Listing l Infrastructure Projects - Capitalization challenges l infra, banking needing trillions, regulatory innovation critical With l Corporate bond markets in India – Challenges and Opportunities l Corporate debt market – future prospects l Domestic and International Updates l Appointments New l CII'S RECENT INITIATIVES CII's 9th International Corporate Governance Summit l Interaction with SEBI Chairman l CII Recommendations on Draft Rules under Companies Act, 2013 l CII Representation on Prohibitions and Restrictions Regarding Political Contributions l Comments on the Justice Sodhi Committee Report on Insider Trading Regulations l CII Representation on Need for Exemptions for Private Companies l
  2. 2. In The Coming Months… A host of developments are scheduled to take place in 2014.Here is a list of some of the most important ones. l 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. l 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. l Elections would also take place in the following countries: February- Thailand March- Colombia April-Afghanistan, Indonesia, 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.
  3. 3. Contents NATIONAL UPDATES . . . . . 2 APPOINTMENTS . . . . . . . . . 9 GLOBAL UPDATES . . . . . . 10 Expert Speak Ms. Roopa Kudva, Managing Director & CEO, . . . . . . . . . . . 19 CRISIL Ltd on “With Infra, Banking Needing Trillions, 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 . . . . . . . . 25 Global Markets Kotak Mahindra Bank on “Corporate Debt Market – Future Prospects” CII's Recent Initiatives l Companies Indian . . . . 14 Moving Closer to a US Listing l Infrastructure . . . . . . . . 16 Projects Capitalization Challenges Events: CII's 9th International Corporate Governance Summit . . . . 27 Interaction with SEBI Chairman . . . . . . . . . . . . . . . . . . . . 29 Representations: CII Recommendations on Draft Rules under . . . . . . . . . . . . 30 Companies Act, 2013 Prohibitions and Restrictions Regarding . . . . . . . . . . . . . . . 32 Political Contributions Justice Sodhi Committee Report on . . . . . . . . . . . . . . . . . . 34 Insider Trading Regulations Need for Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 for Private Companies 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. 1
  4. 4. GLOBAL REGULATORY UPDATE NATIONAL By : 1. Extension of ESOP compliance deadline again SEBI has decided to extend the time line for alignment of existing employee benefit schemes with the SEBI (ESOS and ESPS) Guidelines, 1999, to June 30, 2014. SEBI had earlier extended the deadline to 31 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". 2. NOVATION OF OTC DERIVATIVE CONTRACTS The RBI has by its circular dated December 9, 2013 permitted novation of OTC derivative contracts ("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"). The novation permits the 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 windingup of business by banks and in cases of mergers/acquisitions. iii. Mechanism for Novation: For executing the novation the 3 2 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.
  5. 5. Further the amount corresponding to the Mark to Market value of the Contract as on the transfer date should be exchanged between the 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. 3. SFIO ACCORDED STATUTORY STATUS The MCA has accorded statutory status to the Serious Fraud 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 new technology and skilled 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 multidisciplinary 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. 4. CLARIFICATION WITH REGARD TO DISCLOSURES TO BE MADE FOR POLITICAL CONTRIBUTIONS MADE BY COMPANIES company as well as transferor and transferee entities, which 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. 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 disclosures of the political contributions made by them under Section 182 (3) of the Companies Act 2013 ("Disclosure Section"). 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. 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. 5. TRANSFER OF SHARES IN FINANCIAL SECTORRELAXATION OF REGULATION The Reserve Bank of India ("RBI") by its notification dated November 11, 2013 has modified the filing 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 3 6. APPLICABILITY OF SECTION 372A PERTAINING LOANS AND INVESTMENTS MADE BY COMPANIES 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 alia exempts grant of loan/investments by holding companies to their wholly owned subsidiaries. This circular now clearly clarifies that the old section of the Companies Act,
  6. 6. GLOBAL REGULATORY UPDATE 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. CLARIFICATION WITH REGARD TO HOLDING OF SHARES OR E X E RC IS ING POWE R IN A FIDUCIARY CAPACITY 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 holdingsubsidiary relationship in terms of the provision of section 2(87) of the Companies Act, 2013. 7. SIMPLIFICATION OF DEMAT ACCOUNT OPENING PROCESS 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 Owner-Depository Participant Agreements with a common document namely the "Rights and Obligations of the Beneficial Owner and Depository Participant" ("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. 8. SELF-REGULATORY ORGANIZATION REGULATIONS, 2013 INTRODUCED AND ENACTED SEBI by its circulars dated 7 January 2013 and 8 January 2013 have introduced and enacted the Securities and Exchange Board Of India (Self Regulatory Organizations) (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. 9. FINANCING OF "INFRASTRUCTURE LENDING" SCOPE EXTENDED The RBI by its notification dated November 29, 2013 has widened the ambit of the Infrastructure sub- sectors to include the following: 4 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).
  7. 7. Key features of the ITP Regulations: I. Eligibility criteria: l No 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 Industrial and Financial 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; l Statements: The SME Audited should have at least one full year's audited financial statements for the immediately preceding financial year and should not have completed a period of more than ten years since incorporation; l Revenue 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 should not exceed INR 250,000,000 (Rupees Two Hundred Fifty Million Only) in any of the previous financial years; and 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 fully utilized; (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 listing; (v) a qualified 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 international multilateral agency or domestic agency or a l Minimum Investments: SME is required to meet any one of the following criteria - (i) at least one alternative investment fund, venture capital fund or other category of 5 public financial institution as defined under section 4A of the Companies Act, 1956 must have invested in its equity capital. II. Process of Listing: l Information document: An application to a recognised stock exchange along with an information document containing certain specific disclosures relating to, inter alia, description of business, specified financial information, risk factors, assets and properties, ownership of beneficial owners, details of directors, executive officers, promoters and legal proceedings. l Restriction 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
  8. 8. GLOBAL REGULATORY UPDATE recognised stock exchange and also a shareholders approval by special resolution and 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). time to the SME to delist from the platform on occurrence of the events specified in this paragraph. from Rs. 1,00,000 (Rupees One lakh only) to Rs. 5,00,000 (Rupees Five lakh only). VI. Non-applicability of the Takeover Code and the Delisting Regulations: The SEBI (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. v held in physical Securities The ITP Regulations will enable angel investors and venture capitalists 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. V. Exit from the ITP l SME 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. l an SME listed on the ITP Further, 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 capital of more than INR 2 5 0 , 0 0 0 , 0 0 0 ( R u p e e s Tw o 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 (iv) the SME has market capitalization of more than INR 5,000,000,000 (Rupees Five Billion Only). However, the stock exchange may grant 18 months' 3. P R O C E D U R E F O R TRANSMISSION OF SECURITIES SIMPLIFIED SEBI has by its circular dated October 28, 2013 issued guidelines for Share Transfer Agents (STAs)/issuer companies and depositories to make the process for transmission of securities efficient and investor friendly. l Highlights of the Guidelines: v Securities held in demat form: In case of transmission of securities held in demat form and not having a nominee the existing threshold limit for such account has been revised 6 form: In case of transmission of securities held in a single name with a nominee or without a nominee for a threshold limit 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 company may in its discretion enhance the value of the securities. l Nomination: STAs and Right of Registrars to publicize nomination as an additional right available to investors. 4. ISSUES PERTAINING TO 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 Flows effective from December 1, 2013: The cash flows emanating from the debt securities shall be mentioned in the Prospectus/Disclosure 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.
  9. 9. 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 to the applicants on proportionate basis. 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: lminimum paid-up capital or Initial 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 III. Disclosure of unaudited financials with limited 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 making necessary disclosures in this regard in offer document including risk factors. foreign banks desiring to convert into WOS. Banks l allowed entry only in WOS mode: Banks with complex 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. l Continue 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 i c t i o n s Rest on further 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. 7 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. Parent l to meet liability of WOS: A letter of comfort to be issued by the parent to the RBI stating that it would meet the liabilities of its WOS. l Composition - (i) not less Board 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 should be Indian nationals /NRIs/PIOs. l guarantee/ credit rating: Parental 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. l stake to 74% or less: WOSs Diluting may, at their option, dilute their stake to 74 per cent or less in
  10. 10. GLOBAL REGULATORY UPDATE accordance with the existing FDI policy. In the event of dilution, they would have to list themselves. M&A l by WOS: 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: l Unlisted Indian companies are required to list abroad only on exchanges in IOSCO/FATF compliant jurisdictions or those jurisdictions with which SEBI has signed bilateral agreements; l The 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; l The 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; l The unlisted Indian company is required to comply with the instructions on downstream investment; ADRs/GDRs shall be as prescribed by Government of India; l The capital raised abroad could be utilised for retiring outstanding overseas debt or for bona fide operations abroad including for acquisitions; l the funds raised are not In case 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 nonresident 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. l The criteria of eligibility of unlisted company raising funds through 8 Justice Sodhi Committee on Insider Trading Regulations submits report to SEBI The High Level Committee to Review the SEBI (Prohibition of Insider Trad i ng) Re gul at ions , 19 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 suggesting a combination of 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, with a right to rebut the presumption. The term "immediate relative" would cover close relatives who are either financially dependent or consult an insider in connection with trading in 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 clarity on what constitutes "unpublished price sensitive information" ("UPSI") by defining what constitutes "generally
  11. 11. available information" (essentially, information to which nondiscriminatory public access would be available). A list of types of information that may ordinarily be regarded as price sensitive information has also been provided. 4 Trading in listed securities when in possession of UPSI would be prohibited except in certain situations provided in the regulations. 5 Insiders who are liable to possess UPSI all round the year would have the option to formulate prescheduled 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 the diligence findings that 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 also 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 is required to formulate a Code of Conduct to regulate, monitor and report trading in securities by its 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 seriousness 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 Ms Usha l Ananthasubramanian has been appointed as CMD of Bharatiya Mahila Bank Mr Deepak Kapoor has been l appointed as India Chairman, PwC Mr Ajit l Prakash Shah has been appointed as Chairman of Law Commission of India Mr Nitish Kapoor has been l appointed as Managing Director, Reckitt Benckiser India Mr N l eeraj Sahai has been appointed as President, Standard & Poor's Ratings Services Ms Arundhati Bhattacharya has l been appointed as Managing Director, SBI Mr M l i k e Ye a g e r h a s b e e n appointed as Chairman, Cairn India Mr P l Madhusudan appointed as CMD, Rashtriya Ispat Nigam Ms Sushma Singh has been l appointed as Chief Information Commissioner (CIC), India Mr Sumit Bose has been appointed l as Finance Secretary, Finance Ministry, GOI Mr D l Shivakumar has been appointed as CEO, PepsiCo India Mr Shaktikanta Das has been l appointed as Special Secretary, Department of Economic Affairs, GOI Mr C l V R Rajendran has been appointed as Chairman and Managing Director, Andhra Bank 9 Ms Usha Sangwan has been l appointed as Managing Director, LIC Mr P. has been l K. Malhotra appointed as Secretary (Additional Charge), Department of Legal Affairs, Ministry of Law and Justice, GOI Mr Pradeep Kumar has been l appointed as Managing Director (Corporate Banking), SBI Mr P l Madhusudan has been appointed as Chairman and Managing Director, Rashtriya Ispat Nigam Limited (RINL) Ms Sunita Sharma has been l appointed as MD & CEO of LIC Housing Finance Ltd
  12. 12. GLOBAL REGULATORY UPDATE GLOBAL By : 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. 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 10 no longer exist, unless the law, administrative regulations 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 capital of a company. Such requirement on minimum cash contribution has also been abolished by the Amendment.
  13. 13. 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. 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 important co-operative 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) Commission Implementing Regulation and its accompanying Annex 1 (Form CO), Annex 2 (Short Form CO), and Annex 3 (Form RS). France and USA sign the FATCA tax information 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 (ii) Procedural Amendments: the regulations pertaining the formalities (i.e. the filing and information submitting 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 parties. Additionally, the Commission now asks for certain information upfront, so as to reduce the number of questions it 11 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 nonparticipating institutional customers; (iii) Exemption for certain local banks with an almost exclusively local client base which could be beneficial to the French 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
  14. 14. GLOBAL REGULATORY UPDATE significant efforts to maintain compliance necessary for foreign financial institutions. Largest ever US Insider Trading Case settlement 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, numerous employees of SAC Companies obtained and traded nonpublic information or recommended trades based on information of more than 20 publically traded companies across multiple sectors to SAC Portfolio Managers. 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. Canada- EU trade agreement liberalizes existing trade practices 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, formalities including conversion of the agreement into the treaty languages and complying with the legal formalities could take another 24 months. Scope of CETA: i. United Kingdom gets a new competition authority The Competition and Markets Authority (CMA) has replaced the existing competition agencies namely the Office of Fair Tr a d i n g a n d t h e C o m p e t i t i o n 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 investigate into suspected infringements including interrogating individuals associated with businesses over which the suspicion cloud looms. ii. 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. Investments: After the EU negotiators pressed for key issues including gaining 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. 12 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. accountants, engineers), investors, environmental 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. Canadian corporate governance under review 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, shareholder and board communication, securities transfers, corporate transparency, combating bribery and corruption, diversity of boards and management, the use of t he l e gi s l at i on' s arrange m e nt provisions, and corporate social responsibility. The comment period is open until March 11, 2014.
  15. 15. Belgium: Competition Authority Issues Guidelines For Dawn Raids The Belgian Competition Authority ("BCA") has announced that when investigating violations of 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: l BCA can start the inspection as soon as the undertaking concerned receives the orders issued by the competition 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. Electronic data and documents are 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 addition, the selection of documents on the basis of keywords 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 complexity of the case. The prosecutors should permanently delete documents deemed to fall outside the scope of the investigation. China: approval requirements for outbound investment projects relaxed 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 only to record filing requirements. The Catalogue is currently effective; however, the authorities may wait until implementing rules have been issued before applying the Catalogue in practice. CONTACT Krishnayan Sen / Dipankar Bandyopadhyay Mumbai 24 M. C. C. Lane Fort Mumbai 400023 E: T: +91 22 22834130 / 01 F: +91 22 22834102 India member firm of: New Delhi E-177 Lower Ground Floor East of Kailash New Delhi 110065 E: T: +91 11 26215601 / 02 F: +91 11 26215603 Kolkata 10 Old Post Office Street Ground Floor Kolkata 700001 E: T: +91 33 22308909 F: +91 33 22487823 Winner: Best Newcomers: India Business Law Journal Awards 2012 13 Hyderabad Chamber#103 Ground Floor 6-3-252/A/10 Sana Apartments, Erramanzil Hyderabad 500082 E: T: +91 40 39935766
  16. 16. GLOBAL REGULATORY UPDATE Indian CompaniesMoving Closer to a US Listing T he 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 rigorous 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 14 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 International Organisation of Securities Commissions (IOSCO) or
  17. 17. 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 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. corporate governance and other regulatory requirements for '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. 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. 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 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, 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 15 The process of planning and executing an IPO is time-intensive and, typically takes several months from 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 "onramp" 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. Authored by: Mr. Gaurav Vohra Director Accounting Advisory Services KPMG, India
  18. 18. GLOBAL REGULATORY UPDATE Infrastructure Projects Capitalization Challenges T he 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 estate, both residential and commercial. Apart from the 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 16 from operating expenses (within 'Earnings Before Interest, Tax, Depreciation and Amortisation') to depreciation (outside 'Earnings Before Interest, Tax, Depreciation and Amortisation'). Accountants shoulder the responsibility to balance management's inclination towards capitalization and adherence to accounting principles. The key accounting issues infrastructure projects face during the construction and development phases are: l costs are to be capitalized? Which l Till when are these costs to be capitalized?
  19. 19. Which costs to be capitalised? Labour costs '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. 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. 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: Feasibility studies Generally, companies incur 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 capital project does include 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. Often there are practical 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. Operating lease costs 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. Start-up and commissioning costs The expenditure incurred on start-up and commissioning of the project, 17 including the expenditure incurred on trial runs, and experimental 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 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 incurred on funds borrowed 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.
  20. 20. GLOBAL REGULATORY UPDATE Foreign exchange differences Companies have an option to capitalize foreign exchange 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 wastages 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 costs 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 specifically attributable to construction of a project or to the 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: l Project 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. l Redevelopment cost - Cost incurred in activities like negotiation with the tenant to exit the property (including lease cancellation cost), obtaining necessary regulatory approvals for change in use, redeployment cost of used assets, site restoration cost, etc. l Government incentive - Capital projects receive grants in the form of land lease at nominal rentals or in the form of tax exemption. l Liquidated damages - Penalties received from project contractors for delay in achieving agreed milestones. 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 commence commercial 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. To summarise… The size and duration of infrastructure projects makes it crucial for a company to understand the 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. Authored by: Till when are these costs to be capitalized? 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 18 Mr. Akil Master Director Accounting Advisory Services KPMG, India
  21. 21. EXPERT SPEAK With Infra, Banking Needing Trillions, Regulatory Innovation Critical India's development over the next five years hinges on how the policy and rules framework facilitates the corporate bond market I ndia'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 market including through innovations, developing creditenhancement mechanisms for infrastructure projects and building investor appetite for banks' nonequity 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 inflationindexed 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 19 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
  22. 22. GLOBAL REGULATORY UPDATE 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. The regulatory facilitation so far l IRDA has created headroom for insurer investments in AA-rated corporate bonds by clubbing investment limits in government securities with AAA-rated corporate bonds. l has also taken many enabling IRDA steps, such as approving the issue of NCDs of India Infradebt Ltd to be re ck one d as inve stme nt in infrastructure sector by insurers. l The 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. l Recently, the Reserve Bank of India (RBI) proposed allowing banks to offer partial credit enhancements to corporate bonds by way of providing credit and liquidity facilities to the corporates, and not by way of guarantee. Guidelines in this regard are expected shortly. lRBI The 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 wealth funds, multilateral agencies, pension/ insurance/ endowment funds and foreign central banks to invest up to $5 billion in credit-enhanced bonds issued locally by Indian companies. 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. 20 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 worldavailability 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.
  23. 23. Additionally, with the introduction of a capital conservation buffer, banks will be in a better position to absorb potential losses during financial crises. Recent innovations India's first 50-year bond 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 nonconvertible debenture issue -- the first 50-year, plainvanilla rupeedenominated instrument by an Indian corporate. The issue underscored the increasing 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 India's first NBFC Infrastructure Debt Fund In another landmark development in July this year -- which will enhance the availability 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 India's first inflation-indexed debentures facilitate the flow of low-cost, longterm funds from domestic and global debt investors to capitalintensive infrastructure projects. India's first Basel-III compliant Tier-II bonds 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 TierII capital instrument issued in India under the Basel-III capital 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 believes the guidelines will structurally strengthen India's banking sector by enhancing the quantity and quality of capital. 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 nonconvertible 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 prevailing 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. Authored by: Ms. Roopa Kudva Managing Director & CEO CRISIL Ltd 21
  24. 24. GLOBAL REGULATORY UPDATE Corporate Bond Market in India – Challenges and Opportunities C 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. Size a reflection of maturity? 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-toGDP 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 22 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
  25. 25. secondary market expansion and going by these numbers, the current situation needs to improve drastically. Many challenges plaguing the sector 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 pace and ensure it can 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 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-toaccess 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 woods are lovely, dark and deep, but I have miles to go before I sleep... 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. 23 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 the reporting happens
  26. 26. GLOBAL REGULATORY UPDATE 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. Summary 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. 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 expectations about rate 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 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 anomalies. Investors need derivatives in order to hedge, speculate and offset risk, which in turn enhances liquidity. Interestrate 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. 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. Authored by: d. Close-out netting An important factor in global debt markets is the recognition of closeout netting, which is a wellestablished practice in the most advanced financial markets. In the 24 Mr Nirmal Jain Chairman India Infoline Limited
  27. 27. Corporate 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. Given this background, the Government set up the R H Patil committee to come up with 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 recommendations 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 Table i Amount (Rsbn) as on 31 March 2013 Banks 5,966 still only 14% of GDP compared with 4070% 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. Percent 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 TOTAL 1,121 10,969 Source: RBI 25 10.2 100.0
  28. 28. GLOBAL REGULATORY UPDATE The following observations can be made from the data in table i: l India 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. l The 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. l The insurance and PF segments are restricted to the organized segments of the market and thus have their own limitations. lc t Dire retail investment in corporate debt has been and will continue to be miniscule and cannot be the driver for corporate debt growth. l While 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 deficit, 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 till that time 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. Conclusions 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 the banking system in their 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. Authored by: Mr Mohan Shenoi, President Group Treasury and Global Markets Kotak Mahindra Bank Disclaimer: The views expressed in the article are personal and do not reflect the views of Kotak Mahindra Bank Ltd. 26
  29. 29. CII's Recent Initiatives CII's 9th International Corporate Governance Summit focuses on the need to adapt to changing social & political structures L to R Mr 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. 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 27 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
  30. 30. GLOBAL REGULATORY UPDATE 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 noncompliance 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. global trends in corporate governance. 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. Post the Inaugural Session, 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. 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. 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 The Summit saw a high level of participation from senior industry representatives, compliance and audit practitioners, institutional investors and other stakeholders. 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 28
  31. 31. 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 mantras - Transparency, 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 attributed the significant 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 focus on formulation of comprehensive consumer protection laws. He also appreciated the proposed interaction between industry and regulators for 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 is adding to this 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 extraterritorial regulations on Indian companies, Mr Sinha, urged the industry to make a representation to the Government on the issues arising because of these regulations. 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. Mr U K Sinha, Chairman, SEBI addressing the Fourth meeting of the CII National Council for 201314 held on 15 November 2013 at Mumbai 29