Sunday, July 31, 2011

National Competition Policy

Shri Dharmendra Kumar committee which was constituted by the MCA for framing the National Competition Policy (NCP) has submitted a draft policy. At first blush one may question the rationale for a National Competition Policy considering that we have a Competition Law (Competition Act, 2002) already in place. Perhaps the answer to this ticklish question lies in the Raghavan Committee Report which observed as follows:

An effective competition policy promotes the creation of a business environment which improves static and dynamic efficiencies and leads to efficient resource allocation, and in which the abuse of market power is prevented mainly through competition. Where this is not possible, it requires the creation of a suitable regulatory framework for achieving efficiency. In addition, competition law prevents artificial entry barriers and facilitates market access and complements other competition promoting activities. Trade liberalisation alone is not sufficient to promote competition and there is a need for a separate competition policy

In other words Competition Law is only a subset of an overarching Competition Policy. Be that as it may, the committee lays down the NCP as under:

-Rule bound, fair, transparent and non discriminatory market regulatory procedures.

-Independence of the regulatory body.

-Establishing a ‘level playing field’ for both the government enterprises and the private sector.

-Fair pricing of public utilities and third party access to ‘essential facilities’. In other words it requires the dominant infrastructure owners (electricity, communications etc.) to grant to third parties access to their infrastructure on reasonable and competitive terms and conditions.

-Promotion of competition through regional, national and international co-operation.

The draft policy also mandates the Central and the State Government to undertake a Competition Impact Assessment of the existing policies, statutes, regulation that prima facie undermines competition (an illustrative list of parameters for conducting Competition Impact Assessment has been provided). Further for the implementation of the policy the government is mandated to set up a National Competition Policy Council (NCPC). The role of the NCPC is primarily to provide technical assistance in conducting the Competition Impact Assessment.

The NCP is indeed a necessary and welcome move. However, one may question the legal relevance of such policies i.e. extent to which they are legally enforceable. 

Friday, July 29, 2011

Takeover Code Revamp: Update

In a recent board meeting SEBI considered and accepted most of the recommendations of the TRAC. Some of the major recommendations that has been accepted by SEBI includes the following:

-Initial trigger threshold increased to 25 % from the existing 15 %

-scrapping of non compete fee. (the issue of non compete fee has been discussed on this blog previously and is available here and here)

-In cases of competitive offers, the successful bidder can acquire shares of other bidder(s) after the offer period without attracting open offer obligations.

-Voluntary offers have been introduced subject to certain conditions.

-A recommendation on the offer by the Board of Target Company has been made mandatory.

The two important recommendations that has not been accepted in totality are:

-offer size increased from a minimum 20% to 26% of the total issued capital. It is to be noted that TRAC had recommended an offer size of 100%.

-existing definition of 'control' retained. TRAC had proposed a broader definition of 'control' i.e. not just the right but also the ability to manage the company and appoint majority directors.

A summary and initial reaction on the development is available here.

Saturday, July 16, 2011

Convertible Debentures: New Rules

The 2011 rules are more or less similar to the 1977 rules albeit one significant difference. As per the 2011 rules a public financial institution or a bank can now only convert all or any part of the debentures, if (a) the company has defaulted in the repayment of, or payment of interest on, such loans and debentures; and (b) the bank or public financial institution has given the company a notice of its intention to convert the debentures at least 30 days prior to the intended date of conversion.     

Thursday, July 7, 2011

Micro Finance Institutions: Draft Bill

Micro Financial Institutions (MFIs) are entities which provide small credits to individual(s) or groups. Typically MFIs provide micro credit facilities, assist in remittance of funds, provide pension and insurance services etc. MFIs do not strictly fall within the category of a banking company or a co operative society engaged primarily in agricultural operation or industrial activity. The MFIs are seen more as an extended arm of the banking system which provides credit or other financial services to the poor households and their micro enterprises.

Last year the Andhra Pradesh Government introduced the Micro Finance Institutions (Regulations and Money Lending) Act, 2010 which had thrown the industry into crisis by imposing several restrictions. As a result the Reserve Bank of India appointed an expert committee lead by Y.H. Malegam. The Malegam Committee submitted its report on January 19, 2011 and based on the recommendations of the committee the government has introduced the Micro Finance Institutions (Development and Regulation) Bill, 2011. The object of the bill is “to provide a formal statutory framework for the promotion, development, regulation and orderly growth of the micro finance sector and thereby to facilitate universal access to integrated financial services for the unbanked population.”

Some of the salient features of the Bill are as follows:

-Establishing a Micro Finance Development Council which will advice and assist the government in framing policies for the sector. The bill also seeks to establish a State Advisory Council.

-The MFIs can only operate business after obtaining a certificate of registration from the Reserve Bank of India. The existing MFIs will also have to apply for the registration within three months from the commencement of the Act.

-Any MFI which becomes ‘systemically important’ will have to convert its institution into a Company registered under the Companies Act, 1956. An MFI can become ‘systemically important’ if it deploys a certain amount of funds for providing micro credit to a minimum number of clients. The exact figures relating to the amount and the clients are not specified in the bill and rightly so. The RBI has been delegated the power to frame rules in this regard.

-The Bill gives wide powers to the RBI. Some of the specific powers conferred on the RBI are (i) to formulate policies (ii) to prescribe minimum standards required to be followed by MFIs in relation to method of operation, recovery, management and governance (iii) calling for information and data from the MFIs, among others.

-Any restructuring of the MFIs will require the prior approval of the RBI.

-The Bill mandates the establishment of a Micro Finance Development Fund. The fund will be applied towards providing the MFIs with financial assistance.

-The Bill once it comes into force will override the provisions of all other existing laws. Further, the Bill provides that any MFI registered with the RBI under the provisions of this Act (now bill) will not be treated as a money lender for the purposes of any state enactment. In effect this implies quite clearly that the Andhra Pradesh Micro Finance Institutions (Regulations and Money Lending) Act, 2010 would not be applicable to the MFIs holding a certificate of registration under the provision of this Act/Bill.

The Bill is of immense socio economic importance. The views of the Industry and further analysis of the Bill is available on live mint and the Wall Street Journal.

Tuesday, July 5, 2011

Pledge of Shares, FDI

In recent times Government/RBI has made several attempts to liberalize, rationalize and simplify the processes associated with FDI flows to India and reduce the transaction time. In furtherance of this, the RBI vide a circular dated May 2, 2011 has delegated its powers to AD Category-I banks to allow non resident investors to pledge their shares held in an Indian Company, subject to certain conditions. The conditions prescribed are as follows:

In case shares are pledged in favour of an Indian bank the following conditions are applicable:

  1. In case of invocation of pledge, the transfer of shares should be in accordance with the FDI Policy existing at the time of creation of pledge.
  2. A declaration from the statutory auditor that the loan proceeds would be applied for the declared bona fide  business purpose.
  3. The Indian company whose shares are pledged will have to comply with the SEBI disclosure norms. In other words the Indian Company would have to comply with Regulation 8A of the Takeover Code and Clause 35/41 of the Listing Agreement.  
  4. The lender bank will have to comply with the provisions of S. 19 of the Banking Regulation act, 1949. In other words the lender bank cannot hold shares as a pledge of an amount exceeding thirty percent paid up share capital of that company or thirty percent of its own paid up share capital and reserves, whichever is less.
In case shares are pledged in favour of an overseas bank the following conditions are applicable:

  1. Loan is utilized for genuine business purpose overseas and not for any investments either directly or indirectly in India.
  2. Overseas investment should not result in any capital inflow into India.
  3. In case of invocation of pledge, the transfer of shares should be in accordance with the FDI Policy existing at the time of creation of pledge.
  4. A declaration from the statutory auditor that the loan proceeds would be applied for the declared bona fide business purpose.

A VCCIRCLE article analyzes the effect of the circular in detail. On a parting note though, the circular comes at a time when pledging of shares may not be commercially viable due to the prevailing market prices of these shares.