MCA widens CSR for defence personnel

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Measures for the CAPF and CMPF veterans and dependants now a part of CSR activity

Ankit Vashishth, Executive, Vinod Kothari and Company; corplaw@vinodkothari.com

Introduction

Schedule VII of the Companies Act, 2013 (‘Act’) currently includes measures taken for the armed forces veterans, war widows and their dependants as one of the CSR activities. The Ministry of Corporate Affairs (“MCA”) vide its Notification[1] dated 23rd June, 2020 has included contribution made towards the benefit of Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans and their dependents including widows, within the ambit of CSR.

MCA has issued several notifications either to clarify or broaden the ambit of Schedule VII. This Notification is yet another step taken by the MCA for widening the scope of CSR activities to include CAPF and CMPF veterans and their dependants and war widows.

This note tries to provide a quick coverage on the said amendment.

Difference between Armed Forces and CAPF/CPMF

Armed Forces CAPF CPMF
The term “armed forces” basically means – Indian Armed Forces which are the military forces of the Republic of India. It comprises three professional uniformed services :

1.   The Indian Army

2.   The Indian Navy

3.   The Indian Air Force

 CAPF (Central Armed Police Force)[2]  consists of :

1.         Assam Rifles (AR);

2.         Border Security Force (BSF);

3.         Central Industrial Security    Force (CISF);

4.         Central Reserve Police Force (CRPF);

5.         Indo Tibetan Border Police (ITBP);

6.         National Security Guard (NSG); and

7.       Sashastra Seema Bal (SSB)

 The nomenclature CAPF will be used uniformly for CPMF as per the Office Memorandum [3]issued by the Ministry of Home Affairs issued on March 18, 2011

Current CSR spending pattern and changes expected due to the amendment

The current pattern for CSR spending for armed forces veterans, war widows and their dependants include contributions to several funds like:

  1. Armed Forces Flag Day Fund (AFFDF)[4]
  2. Army Wives Welfare Association (AWWA)[5]
  3. The Army Welfare Fund Battle Casualties[6]

Apart from donating to these funds, companies have also provided financial relief to the martyr’s families and have conducted workshops for the children of war widows as a part of their CSR projects.

Further, in addition to the above, contribution to “National Defence Fund” which is used for the welfare of the members of the Armed Forces (including Para Military Forces) should be eligible for being a CSR activity.

As a result of the enhanced scope for CSR spending for CAPF/ CAMF, contribution to the fund “Bharat Ke Veer Corpus Fund”[7], which was previously not eligible for CSR considering the fact that it specifically benefits CAPF, will now be covered as per the amendment. Accordingly, any contribution to this fund will now qualify as a CSR activity.

High Level Committee on CSR

MCA had constituted[8] a High Level Committee (HLC) on CSR in February, 2015 under the Chairmanship of Secretary (Corporate Affairs) to review the existing CSR framework and formulate a coherent policy on CSR and further make recommendations on strengthening the CSR ecosystem, including monitoring implementation and evaluation of outcomes. Later, the HLC on CSR was re-constituted[9] in November, 2018. The scope of HLC was widened to include recommendation of guidelines for enforcement of CSR provisions. Though the Report discussed on amending Schedule VII in line with promoting sports, senior citizens’ welfare, welfare of differently abled persons, disaster management, and heritage, however, it did not consider widening the clause relating to the scope of armed forces in the Schedule.

Further, as evident from the data given in the HLC Committee Report[10], CSR expenditure made on armed force veterans, war widows/ dependents have seen an upward trend over the years, however it forms a very small proportion of the total CSR expenditure made.

Concluding Remarks

The service spirit of CAPF is no less than that of the Indian Army. Acknowledging this fact MCA has brought this amendment. While all the areas for CSR are extremely important for the overall socio-economic welfare and development, the measures taken for the benefit of veterans and dependants of the armed forces and CAPF/ CPMF is an extremely noble activity.

Link to our other articles:

CSR: A ‘Corporate Social Responsibility’ or a ‘Corporate Social Compulsion’?

http://vinodkothari.com/2019/08/csr-a-corporate-social-responsibility-or-a-corporate-social-compulsion/

Proposed changes in CSR Rules

http://vinodkothari.com/2020/03/proposed-changes-in-csr-rules/

FAQs on Corporate Social Responsibility

http://vinodkothari.com/2019/11/faqs-on-corporate-social-responsibility/

Read our other articles on Corplaw : http://vinodkothari.com/category/corporate-laws/

Link to our Youtube Channel : https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

 

[1] http://egazette.nic.in/WriteReadData/2020/220133.pdf

[2] https://www.mha.gov.in/about-us/central-armed-police-forces

[3] Office Memorandum can be viewed here

[4] http://ksb.gov.in/armed-forces-flag-day-fund.htm

[5] https://awwa.org.in/contribution-under-csr-awwa

[6] The Army Welfare Fund Battle Causalities

[7] https://www.bharatkeveer.gov.in/about

[8] https://www.mca.gov.in/Ministry/pdf/General_Circular_01_2015.pdf

[9] https://www.mca.gov.in/Ministry/pdf/OfficeOrderCommitteeOnCorporate_26112018.pdf

[10] https://www.mca.gov.in/Ministry/pdf/CSRHLC_13092019.pdf

 

 

RBI guidelines on governance in commercial banks

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Vinita Nair | Senior Partner

Vinod Kothari & Company

vinita@vinodkothari.com

MoF rolls out draft rules for foreign investment in Pension Funds

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After 4 years of providing sectoral cap for the same.

Aanchal Kaur Nagpal | Executive

corplaw@vinod kothari.com

Pension Funds (‘PF’) are responsible for receiving contributions and managing pension corpus through various schemes[1] under National Pension System (‘NPS’) in accordance with the provisions specified by the PFRDA and carry out functions as per the directions of the NPS Trust. Presently, there are 3 companies registered as PF for government sector and 7 companies registered as PF for private sector. According to regulation 8(e) of the PFRDA (Pension Fund) Regulations, 2015[2], a sponsor of a PF is required to incorporate the pension fund as a separate limited company under the Companies Act, 2013. As on date, all existing PFs are unlisted companies.

Foreign investment in pension sector is permitted upto 49% under automatic route as per para F.9 of Schedule I to Foreign Exchange Management (Non-debt instruments) Rules, 2019 (‘NDI rules’). This was inserted in 2016 vide DIPP press note no. 2 of 2016[3].  Foreign investment in PF is required to be in accordance with Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013 (‘PFRDA Act’). Foreign investment in PF is subject to the condition that entities investing in capital instruments issued by an Indian Pension Fund as per section 24 of the PFRDA Act are required to obtain necessary registration from the PFRDA and comply with other requirements as per the PFRDA Act[4] and Rules and Regulations framed under it for so participating in Pension Fund Management activities in India. An Indian pension fund needs to ensure that its ownership and control remains at all times with resident Indian entities as determined by the Government of India/ PFRDA as per the rules or regulation issued by them.

With a view to regulate foreign investment in PFs, the Ministry of Finance has introduced draft rules viz. Pension Fund (Foreign Investment) Rules, 2020 (‘Draft PF Rules’) on 19th June, 2020 for public comments[5]. The Draft PF Rules continue to refer to FEMA (Transfer of Issue of Securities by a Person Resident outside India) Regulations, 2000 (‘TISPRO Regulations’) which was repealed in 2017 vide FEMA (Transfer of Issue of Securities by a Person Resident outside India) Regulations, 2017 and thereafter by FEMA (Non-Debt Instrument) Rules, 2019. Accordingly, the anomalies arising out of reference to TISPRO Regulations instead of NDI Rules are pointed in Annexure I.

Components of foreign investment

Foreign investment has been defined under rule 2(d) of the Draft PF Rules that means and includes investment made by following in the equity shares of a Pension Fund in India:

  • a foreign company, either by itself or through its subsidiary companies or its nominees; or
  • an individual; or
  • an association of persons, whether registered or not, under any law or a country outside India;
  • Foreign Venture Capital Invesment;
  • other eligible entities .

*Equity capital has been defined to have the same mean as section 43 of the Companies Act, 2013.

The total foreign investment will include both direct as well as indirect investment made by foreign investment.

Comment: The definition of foreign investment should be aligned with NDI Rules. The extent of foreign investment should be basis the investment made in equity instruments, as opposed to equity share capital.

Ceiling on quantum of foreign investment

Both, the PFRDA Act and NDI Rules restrict foreign investment in PFs upto 49%. The Draft PF Rules also follow the lead of these provisions and state that the aggregate holding in a PF by foreign investors, including foreign portfolio investors, should not exceed 49% of its paid-up equity share capital. [Rule 3 of the Draft PF Rules]. Further, foreign investment up to 49% is allowed through automatic route. [Rule 5 of the Draft PF Rules]

The total foreign investment would be a total of direct and indirect foreign investment calculated as per the PFRDA regulations read with the FDI policy. [Rule 2 (p) of the Draft PF Rules]

Indian ownership and control at all times

Rule 4 of the Draft PF Rules lays down that PFs in India must at all times ensure that their ‘ownership and control’ remains in the hands of resident Indian entities. For this purpose the rules have also defined ‘Indian Control’ and ‘Indian Ownership’ in Rule 2 (i) and (j) respectively. The same has been illustrated in the figure below:

This dual condition of ownership and control has been laid down to ensure that the decision making power of PFs stays with Indian investors at all times. PFs are vital institutional investors in the equity, debt and G-secs market. Handing out the controlling power to a foreign investor would affect the Indian capital markets and in turn the economy as a whole.

Foreign Portfolio Investment in PFs

FPI in PFs will be governed by the FEMA Regulations, 2000 along with SEBI (FPI) Regulations, 2019. [Rule 6 of the PF Rules]

Comment: The definition of foreign portfolio investment should be aligned with NDI Rules.

Increase in Foreign Investment in PFs

Pricing guidelines specified under FEM Regulations will have to be followed for increase in foreign investment of PFs.  [Rule 7 of the PF Rules]

Comment: Reference of Rule 21 of NDI Rules to be inserted.

The great wall for China

As a consequence of the COVID-19 pandemic lockdown as well as the increasingly strained relations between India and China, the former has imposed various restrictions on foreign investment by the latter.

The government has, vide the FEMA (NDI) Amendment Rules, 2020 dated 22nd April, 2020 posed the requirement of prior approval for any foreign investment by an entity of a country that shares land border with India in order to avoid opportunistic takeovers. This would even apply in cases where the beneficial ownership of the investment is situated in any of the restricted countries as well as to any case of transfer of ownership[1].

[1] To read out write-up on the same- http://vinodkothari.com/wp-content/uploads/2020/04/India-seals-its-borders-to-corporate-acquistions-ver-30.04.2020.p

In furtherance to this the Draft PF Rules specify that government approval will be required for investment in PF by foreign investors (entities as well as individuals) from any bordering countries including China. [Rule 8 of the Draft PF Rules]

Comment: Need to align with recent amendments made in Rule 6 (a) of NDI Rules restricting investments from countries sharing land border with India.

Link to our other articles:

  • MoF amends FDI norms for rights issue and insurance sector:

http://vinodkothari.com/2020/04/mof-amends-fdi-norms-for-rights-issue-and-insurance-sector/

 

  • Introduction to FEMA (NDI) Rules, 2019 and recent amendments

http://vinodkothari.com/2020/04/introduction-to-fema-ndi-rules-2019-and-recent-amendments/

 

  • India seals its borders to corporate acquisitions

http://vinodkothari.com/2020/04/india-seals-its-borders-to-corporate-acquisitions/

 

  • FPI can invest up to the sectoral cap in an Indian Company

http://vinodkothari.com/2020/04/fpi-can-invest-upto-the-sectoral-cap-in-an-indian-company/

Annexure I

Suggested amendments

Sr. no. Provision Details of the provision Remarks
1. Rule 2(d) ‘Foreign Investment means…..

xx

in the equity shares of a PF in India under clause (i) of sub regulation (1) of regulation 5 of the Foreign Exchange Management (Transfer of issue of security by a person resident outside India) Regulations, 2000

 

 The definition of foreign investment makes reference to guidelines as specified under the TISPRO Regulations which have been repealed.

 

The corresponding provisions are covered under rule 6(a) of the NDI Rules.
2. Proviso to Rule 2(d) Provided that for the purpose of these rules, foreign investment shall include investment by Foreign Venture Capital Investment (FVCI) as permissible under regulation 6 of FEMA Regulations, 2000 As stated above, reference has been made to the repealed regulations.

 

Investments made by an FVCI are governed by rule 16 read with Schedule VII of the NDI Rules. As per the schedule, PFs are not included in the list of sectors permitted for investment by an FVCI. However, in the Draft PF Rules, the same is permitted and included under foreign investment.

 
3. Rule 2(f) Foreign portfolio investment means and includes investments in the equity share of a pension fund in India by Foreign Institutional Investors, Foreign Portfolio Investors, Non-Resident Indian, Qualified Foreign Investors and other eligible portfolio investor entities or persons in accordance with provisions contained in sub-regulations 2, (2A), 3, and 8 of Regulation 5 of FEMA Regulations, 2000

 

 Firstly, reference has been made to the repealed regulations.

 

Secondly and more importantly, the definition is not in line with that provided under the NDI Rules and thus creating conflict.

 

According to the NDI Rules, foreign portfolio investment means any investment made by a person resident outside India through equity instruments where such investment is less than 10% of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of equity instrument of a listed Indian company;

 

The Draft PF Rules consider FPI in equity shares (as defined under rule 2(c) which states that equity share capital will have the same meaning as defined under section 43 of the Companies Act, 2013) of the Company while the NDI Rules compute FPI on the basis of equity instruments (as defined under rule 2k of the NDI Rules).

 

Accordingly reference of ‘investing in equity shares’ should be substituted with ‘investing in equity instruments’ of PF in India.

 

Further, as per NDI rules, any foreign investment in an unlisted Company is treated as a foreign direct investment (FDI) irrespective of the quantum. In case of listed companies, investment up to 10% is treated as FPI. However, in case of the definition as provided under the Draft PF Rules, investment in equity shares of a PF would be treated as FPI. Furthermore, most of the PFs in India are unlisted companies. This creates huge discrepancy as to the fact whether foreign investment would be treated as FDI if it exceeds 10 % (as per NDI Rules) or PFI (as per Draft PF Rules)

 

Hence, alignment with the existing definition specified under rule 2(t) of the NDI Rules does not seem to be a relevant solution.

 
4. Rule 2(i) “Indian Control” of a pension fund means Control of a pension fund in India by resident Indian citizens or Indian Companies, which are owned and controlled by resident Indian citizens. According to Rule 23(7)(e) of the NDI Rules, “company controlled by resident Indian citizens” means an Indian company, the control of which is vested in resident Indian citizens and/ or Indian companies which are ultimately owned and controlled by resident Indian citizens……

 

According to Rule 23(7)(d) of the NDI Rules “control” shall mean the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreement…….

 

The definition under the Draft PF Rules more or less are similar to that provided under the NDI Rules. However, the term used in the former is ‘Indian control’ which should be aligned with the NDI Rules using the term ‘controlled by resident Indian citizens’.

 

Also, control has not been defined under the Draft PF Rules.

 
5. Rule 2(j) “Indian Ownership” of a pension fund in India means more than 50% of the equity capital in it is beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens provided that the manner of the computation of foreign holding of such Indian promoter or Indian investment company shall be construed with the relevant Rules and PFRDA Regulations/ Guidelines.

 

 According to Rule 23(7)(b) of the NDI Rules, “company owned by resident Indian citizens” shall mean an Indian company where ownership is vested in resident Indian citizens and/ or Indian companies, which are ultimately owned and controlled by resident Indian citizens……

 

According to Rule 23(7)(a) of the NDI Rules, “ownership of an Indian company” shall mean beneficial holding of more than fifty percent of the equity instruments of such company…

 

Both the definitions specify the same percentage. However, the Draft PF Rules make reference to equity capital which has been defined therein to have the same meaning as that specified in section 43 of the Companies Act, 2013.  As per section 43, “equity share capital”, with reference to any company limited by shares, means all share capital which is not preference share capital. This means in case of Draft PF Rules, only equity capital will be considered. As opposed to this, the NDI Rules refer to equity instruments which include shares, convertible debentures, preference shares and share warrants subject to conditions specified.

 

The same should be aligned with the NDI Rules along with the terminology used.

 
6. Rule 2 (n) ‘Resident Indian investment’ shall have the same meaning assigned to it in the FDI policy issued from time to time.

 

 In case there is a specific clause to that effect in the FDI Policy, then the same may be retained else, the definition should be modified to mean ‘investment made by a person resident in India not resulting in indirect foreign investment’.
7. Rule 2 (q) All other words and expression used in these rules but not defined, and defined in the Act and Rules, regulations made thereunder shall have the same meanings respectively assigned to them.

 

 As certain terms may not be defined in PFRDA Act, Rules and Regulations but may be defined in NDI Rules, reference of NDI Rules should be included.
8. Rule 6 Foreign Portfolio Investment in a Pension Fund in India shall be governed by the provisions contained in sub-regulations 2, (2A), 3, and 8 of Regulation 5 of FEMA Regulations, 2000 and Securities Exchange Board of India (Foreign Portfolio Investors) Regulations

 

 Reference has been made to the repealed TISPRO Regulation, 2000.

 

Corresponding provisions under NDI Rules

·     For regulation 5(2A) of the TISPRO regulations for investment by Foreign Portfolio investors- Chapter 4 read with Schedule II of the NDI Rules;

·     For regulation 5(3) of the TISPRO  regulations dealing with investment by Non-resident Indians and Overseas Corporate Body – Chapter V read with Schedule III and Chapter VI read with Schedule V of the NDI Rules;

·     For regulation 5(8) of TISPRO regulations dealing with investment in depository receipts- rule 6(d) read with Schedule IX of the NDI Rules.

 

Further, the TISPRO Rules mention of the Foreign Portfolio Scheme which was foregone in the TISPRO Regulations, 2017 and later by the NDI Rules as well.

 
9. Rule 8 A Government approval will be required for the investing entity or individual from any of the bordering countries including China.

 

 While the Draft PF Rules make use of the term ‘bordering countries’, the same should be aligned with the NDI rules that makes reference to ‘a country which shares land border with India’.

 

 

[1] https://www.pfrda.org.in/index1.cshtml?lsid=187

[2] http://www.npstrust.org.in/sites/default/files/PFRDA_PFReg2015.pdf

[3] https://dipp.gov.in/sites/default/files/pn2_2016_1.pdf

[4] http://legislative.gov.in/sites/default/files/A2013-23.pdf

[5] By July 18, 2020.

Another couple of stepladders for the MSMEs

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-Kanakprabha Jethani (kanak@vinodkothari.com)

Background

On June 24, 2020, Ministry of Finance (MoF) issued two press releases with respect to further measures to support the MSME sector during the current situation of crisis. One of these launched the Credit Guarantee Scheme for Subordinate Debt (CGSSD)[1] (‘Debt Scheme’) and the other one announced an interest subvention of 2% for a period of 12 months, to all Shishu loan accounts under Pradhan Mantri Mudra Yojana (PMMY) to eligible borrowers[2] (‘Subvention Scheme’).

The COVID-19 disruption and subsequent downfall of the economy has impacted the MSME sector drastically. MSMEs are a crucial component of the Indian economy and hence, it is necessary to uplift them, so as to bring the economy back on track. In this backdrop, the Government of India (GoI) has been taking various measures and introducing schemes to provide the much needed liquidity to MSME sector. The recently introduced schemes are yet another step in that direction. The following write-up provides runs through the basics of these schemes focusing on the practical issues that may arise while implication.

Read more →

SEBI’s measures towards resuscitation of financially “stressed” companies

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Henil Shah | Executive

corplaw@vinodkothari.com

Introduction & Background

In layman’s term, a company with falling share prices, inability to pay off its obligations is said to be a company with financial distress. In most of the times, it is seen that the conventional means of fund raising such as borrowings, issuance of debt securities etc. do not work for such companies due to their ongoing stressed status even though generating cash is the foremost priority for them to fund their operations. Additionally, insolvency/ bankruptcy also becomes a matter of concern which may be caused due to the lack of funding and the resultant disruption in operation.

SEBI’s Primary Market Advisory Committee (PMAC) deliberated on the topic and came out with a Consultation Paper dated April 22, 2020[1] providing for the proposed measures for resuscitation of the stressed companies. The changes so proposed were w.r.t certain amendments under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) and SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 2011 (SAST Regulations). Based on the public comments, SEBI vide Notifications dated June 23, 2020 has prescribed the final text of the amendments under the ICDR Regulations[2] and SAST Regulations[3]

The article covers a brief synopsis and the relevant impact/ actionable pursuant to the said amendments.

Rationale behind the proposed changes

Preferential issue seems to be one of the most sought options of fund raising by the companies due to the administrative as well as regulatory convenience it carries. Further, knowing the probable investors ready to invest in the company makes a preferential issue one of the most commonly used ways for raising funds.

For a listed company, under a preferential issue, the issue price has to be determined as per the pricing provisions of Chapter V of ICDR Regulations. The ICDR Regulations provides the pricing mechanism for both frequently traded shares and infrequently traded shares.

In case of frequently trades shares, the price shall be determined as per the provisions of Regulation 164(1) (a) & (b) of the ICDR Regulations which are as follows.

Even though a preferential issue may be a convenient way of fund raising for a well performed company, the same may not be the case for a company with financial distress for the following reasons:

1.      Onerous pricing mechanism

Considering the continuous falling prices of the shares over a period of 26 weeks due to the company being in stress, the determination of the price as per the pricing mechanism provided in Regulation 164(1) (a) becomes too onerous for the investor. Further, the price under Regulation 164(1) (a) is much higher than that as determined as per Regulation 164(1) (b). Hence, the pricing mechanism acts as a major deterrent for the investors from subscribing to the shares offered under the preferential issue.

2.      Exemptions only to 5 QIBs restricting investor pool

Though the ICDR Regulations allow issuance to QIBs at a price determined as per regulation 164(1) (b) however, the same is restricted to only 5 QIBs and is not applicable to the investors other than QIBs thereby restricting the investor pool.

3.      Open offer obligations for the acquirer

Another roadblock which the issuers tend to face is from the view point of the investors i.e. an incoming investor who has an impending burden on complying with an open offer obligation in case where the subscription to the preferential offer leads to the triggering of the open offer obligations under SAST Regulations. In view of the procedural requirements and the huge costs involved, making an open offer discourages the investors seeking to have a substantial stake in the company in order to take control and thereby reverse the stress.

As per the extant provisions, the acquisition pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 is exempted from meeting the open offer obligations but no such exemption has been provided in case for acquisition in the financially distressed entity which are not under any resolution plan.

Rescue mechanism brought through the amendments

Insertion of regulation 164A in ICDR Regulations

The newly inserted provisions incorporate the changes that were proposed by PMAC into the existing regulations as discussed below:

When to consider a company at ‘stress’?

For a company to be classified as financially stressed and issue equity share in pursuance of regulation 164A of ICDR regulations it has meet certain conditions. Below is a comparative presentation between the text of the Consultation Paper and the final text of the Regulations. Further, any two of the three conditions shall have to be satisfied for considering a company as stressed.

PMCA Recommendations Final text of the Regulations Remarks
A listed company which has made disclosure of defaults on payment of interest/ principal amount of loans from banks/ financial institutions and listed and unlisted debt securities for 2 consequent quarters in terms of the SEBI Circular dated November 21, 2019[4] issued in this regard.

 

 The issuer has disclosed the default relating to the payment of interest/ repayment of principal amount on loans from banks/ financial institutions/ NBFCs- ND-SI and NBFCs-D and/ or listed on unlisted debt securities in terms of SEBI circular dated November 21, 2019 and such default is continuing for a period of at least 90 days after occurrence of such default.

 

 The amendment regulation in slight contrast to the PMAC recommendations provided shorter timeline for calculating continuity of the default.

 

Further, even though NBFCs-ND-SI and NBFCs- D already get covered under the definition of Financial Institution provided under RBI Act, they have been specifically covered under the list of creditors.
Existence of Inter-Creditor agreement in terms of Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019[5] (RBI Directions)

 

 Same as PMCA Recommendations Inter-Credit agreement as provided in the RBI Directions stands for the agreement executed among all the lenders of a defaulting borrower, providing for ground rules for finalisation and implementation of resolution plan in respect to the borrower.
Credit rating of the listed instruments of the company has been downgraded to “D”. The credit rating of the financial instruments (listed or unlisted), credit instruments/ borrowings (listed or unlisted) of the listed company has been downgraded to “D” The final text of the amendments, in addition to the listed instruments, also brings unlisted instruments and as well as borrowings under its purview.

Pricing of preferential issue of shares of companies having stressed assets

Unlike the current pricing requirements as provided in Regulations 164(1) (a) & (b) of ICDR Regulations for a preferential issue, the price of the shares to be issued by a stressed company as aforesaid shall be a price which shall not be less than the average  of  the  weekly  high  and  low  of  the volume  weighted  average  prices  of  the  related  equity  shares quoted  on  a  recognised  stock  exchange  during  the  two  weeks preceding the relevant date. Therefore, the price as determined under Regulations 164(1) (a) & (b) of ICDR Regulations shall not be considered.

Negative list of proposed investors

The following person(s) shall not be eligible to participate in the preferential issue under Regulation 164:

  1. Persons/entities part of promoter or promoter group will not be eligible to participate in the preferential issue;
  2. Undischarged insolvent in terms of Insolvency and bankruptcy Code, 2016 (IBC, 2016);
  3. Wilful defaulter as per RBI guidelines issued under the Banking Regulations Act, 1949;
  4. A person disqualified to act as director as per Companies Act, 2013
  5. Person debarred from trading in securities or accessing securities market by SEBI and period of debarment has not been over
  6. Person declared as fugitive economic offender
  7. Person is convicted of offence punishable with imprisonment
    1. For a period of 2 years or more under any as specified under 12th schedule of IBC, 2016
    2. 7 years or more under any law for time being in force

and a period of 2 years has not been subsisted from his release form imprisonment.

  1. Person who has executed a guarantee in favour of a lender of the issuer and such guarantee has been invoked by the lender and remains unpaid in full or part.

Approval from shareholders falling under ‘public’ category

For companies with identifiable promoters

The amendments provides for an approval for the preferential issue by the majority of the shareholders in the ‘public’ category. The ‘public’ category of shareholders does not include promoter shareholders and also any proposed allottee who is already a holder of specified securities of the issuer. Therefore, the same is said to be an approval with majority of the minority.

For companies with identifiable promoters

For companies with no identifiable promoters, the resolution shall have to be passed by 3/4th majority. Though in this case, there is no specific mention in the Regulation as regards the eligibility of voting by the proposed allottees being a security holder in the issuer, the same should apply here also.

Contents of explanatory statement annexed with the notice of shareholder’s meeting

The proposed use of the issue proceeds shall be mentioned in the explanatory statement sent for the purpose of the shareholders resolution. This requirement is already in existence as the provisions of regulation 163 of ICDR Regulations and Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014 do provide for mandatorily mentioning object for which the preferential issue is being made in the explanatory statement of the notice.

Restriction on use of proceeds

Additionally it’s restricted to use the issue proceeds for the purpose of repayment of loans from promoters/ promoter group/ group companies effectively deterring the companies to raise funds to pay-off its promoters.

Appointment of public financial institution or schedule commercial bank as monitoring agency:

As per the amendments, it shall be mandatory for the issuer company to appoint a monitoring agency whoc shall be responsible to submit report on quarterly basis to the issuer until 95% of the proceeds are utilised in the format as specified in Schedule XI ICDR Regulations. All though there is no requirement of appointing a monitoring agency as per the provisions of chapter V (Preferential Issue) requirement of ICDR Regulations, the concept of the monitoring agency is not new as several chapters of the regulations provide for appointment and functions to be performed by the monitoring agency in case where offer size exceeds a predefined limit.  However the considering issue by a financially stressed company there is no monetary limit set for the purpose of appointment of monitoring agency.

Responsibilities of Board of Directors

The board of directors and the management of the issuer shall be required to provide their comments on the findings in the report of monitoring agency and disseminate the same within 45 days of end quarter by publishing it on the website of the company as well as submitting the same with the stock exchange(s) were equity shares of the company are listed.

Responsibilities of Audit Committee

Additionally the audit committee of the issuer is entrusted with responsibility to monitor the utilization of the proceeds. This is nothing new the same already falls under the responsibility of the audit committee as laid in the SEBI (Listing Obligations and Disclosure Requirements), 2015.

Further, the audit committee of the company shall also be required to certify about the meeting of all conditions at the time of dispatch of notice and at the time of allotment.

Responsibilities of statutory auditors

The amendments require the statutory auditor also to certify about the meeting of all conditions at the time of dispatch of notice and at the time of allotment.

Lock in period

The allotment shall be lock-in for a period of 3 years from the date of trading approval.

Amendments to SAST Regulations

On same lines as mentioned in the Consultations Paper, SEBI has vide its amendments under the SAST Regulations inserted regulation 10 (2B) of SAST Regulations thereby granting immunity from open offer obligations to the investors under the preferential issue in compliance with regulation 164A of ICDR Regulations. Irrespective of the fact that equity shares are frequently traded or not.

Conclusion

Considering the stressed status of the company, it is believed that aligning the pricing requirement with that of pricing requirement in case of preferential issue to QIBs, shall effectively increase the pool of investors. Similarly, the proposed exemption from making of an open offer shall lessen the additional burden on an incoming investor to comply with the stringent requirements thereby attracting investors to put in money in such companies.

Accordingly, SEBI’s intention behind the changes may be said to be a welcome move as it will definitely help the financially stressed companies to revive.

Link to our other articles:

SEBI’s proposal to aid financially “stressed” companies: http://vinodkothari.com/2020/04/sebis-proposal-to-aid-financially-stressed-companies/

Prudential Framework for Resolution of Stress Assets: New Dispensation for dealing with NPAs: http://vinodkothari.com/2019/06/fresa/

[1] https://www.sebi.gov.in/reports-and-statistics/reports/apr-2020/consultation-paper-preferential-issue-in-companies-having-stressed-assets_46542.html

[2] http://egazette.nic.in/WriteReadData/2020/220093.pdf

[3] http://egazette.nic.in/WriteReadData/2020/220094.pdf

[4] https://www.sebi.gov.in/legal/circulars/nov-2019/disclosures-by-listed-entities-of-defaults-on-payment-of-interest-repayment-of-principal-amount-on-loans-from-banks-financial-institutions-and-unlisted-debt-securities_45036.html

[5] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&Mode=0

RBI amends mode of payment and remittance norms for units of Investment vehicles

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Permits FPIs and FVCIs to use Special Non-Resident Rupee (SNRR) account 

CS Burhanuddin Dohadwala| Manager, Aanchal Kaur Nagpal| Executive

corplaw@vinodkothari.com

The Reserve Bank of India (‘RBI’) vide notification dated October 17, 2019 had  notified the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt instrument) Regulations, 2019[1] (‘the Regulations’) governing the mode of payment and reporting of non-debt instruments consequent to the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019[2] framed by the Ministry of Finance, Central Government.

RBI has recently vide its notification dated June 15, 2020 notified Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Amendment) Regulations, 2020[3] amending Reg. 3.1 dealing with Mode of Payment and Remittance of sale proceeds in case of investment in investment vehicles.

Let us discuss few terms to understand the recent amendments to the Regulations.

Investment Vehicles under FEMA:

According to FEMA (Non-Debt Instruments) Rules, 2019, investment vehicles mean:

Different types of account available under FEMA (Deposit) Regulations, 2016[1] (‘Deposit Regulations’)

The following are the major accounts that can be opened in India by a non-resident:

Particulars Eligible Person
Non-Resident (External) Rupee Account Scheme-NRE Account

Non-resident Indians (NRIs) and Person of Indian Origin (PIOs)
Foreign currency (Non-Resident) account (Banks) scheme – FCNR (B) account
Non-Resident ordinary rupee account scheme-NRO account

Any person resident outside India.
Special Non-Resident Rupee Account – SNRR account

Any person resident outside India.

A significant advantage of SNRR over NRO is that the former is a repatriable account while the latter is non-repatriable.

What is Special Non-Resident Rupee (‘SNRR’) Account?

Any person resident outside India, having a business interest in India, may open SNRR account with an authorised dealer for the purpose of putting through bona fide transactions in rupees. The  business  interest,  apart  from  generic  business  interest,  shall  include the  following INR transactions, namely:-

  • Investments made  in  India  in  accordance  with  Foreign  Exchange  Management  (Non-debt Instruments)  Rules,  2019  dated  October  17,  2019  and  Foreign  Exchange  Management  (Debt  Instruments)
  • Import of  goods  and  services  in  accordance  with  Section  5  of  the  Foreign  Exchange  Management  Act  1999 Regulations,   2019;
  • Export of  goods  and  services  in  accordance  with  Section  7  of  the  Foreign  Exchange  Management  Act  1999;
  • Trade credit   transactions   and   lending   under   External   Commercial   Borrowings   (ECB)   framework;
  • Business related  transactions  outside  International  Financial  Service  Centre  (IFSC)  by  IFSC  units  at  GIFT  city  like  administrative  expenses  in  INR  outside  IFSC,  INR  amount  from  sale  of  scrap,  government  incentives  in  INR,  etc;

Rationale behind the amendment:

Position under Master Direction – Foreign Investment in India by RBI

According to Annex 8 of Master Direction – Foreign Investment in India by RBI, investment made by a PROI was permitted with effect from 13th September, 2016. The provisions specify that the amount of consideration of the units of an investment vehicle should be paid out of funds held in NRE or FCNR(B) account maintained in accordance with the Deposit Regulations as one of the modes of payment.

Further it also specifies that the sale/ maturity proceeds of the units may be remitted outside India or credited to the NRE or FCNR(B) account of the person concerned.

Position under the erstwhile provisions of the Regulations

Schedule II of the Regulations (Investments by FPIs) stated earlier that of units of investment vehicles other than domestic mutual fund may be remitted outside India.

However, balances in SNRR account were permitted to be used for making investment only in units of domestic mutual fund and not in Investment Vehicles.

As discussed above, the NRO account is a non-repatriable account while the SNRR account is a repatriable account. Due to the above provisions, investment in Investment Vehicles could not be transferred to the SNRR account for repatriation resulting in ambiguity.

Owing to the above and to increase the inflow of foreign investment, the Government has amended the said provision and allowed FPIs & FVCI to invest in listed or to be listed units of Investment vehicle.

Brief comparison of the pre and post amendment is covered in our Annexure I.

Annexure-I

Comparison of the pre and post amendment

Schedule Post amendment Prior to amendment Remarks
Schedule II w.r.t Investments by Foreign Portfolio Investors A.     Mode of payment

1.       The  amount  of  consideration  shall  be  paid  as  inward  remittance  from  abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

 

2.       Unless otherwise  specified in these regulations or the  relevant Schedules, the foreign  currency  account  and  SNRR  account  shall  be  used  only  and  exclusively for transactions under this Schedule.

 

 

 

 A.     Mode of payment

1.       The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

Provided balances in SNRR account shall not be used for making investment in units of Investment Vehicles other than the units of domestic mutual fund.

2.       The foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule.

 

 

 The erstwhile provisions restricted use of SNRR account balance for making investments in investment vehicles other than mutual funds.

As a result FPIs could not use their SNRR account and had to resort to other types of accounts for investment in investment vehicles such as REITs, and InViTs. The recent amendment has removed this restriction.

The amendment has been made to provide for the amendment made in Schedule VIII dealing with Investment     by     a     person resident outside India in an Investment Vehicle.
B.     Remittance of sale proceeds

The sale proceeds (net of taxes) of equity instruments and units of REITs, InViTs and domestic mutual fund may be remitted outside India or credited to the foreign currency account or a SNRR account of the FPI.

 B.     Remittance of sale proceeds

The sale proceeds (net of taxes) of equity instruments and units of domestic mutual fund may be remitted outside India or credited to the foreign currency account or a SNRR account of the FPI.

The sale proceeds (net of taxes) of units of investment vehicles other than domestic mutual fund may be remitted outside India.

 To align with the amendment made in Schedule VIII dealing with Investment     by     a     person resident outside India in an Investment Vehicle.
Schedule VII w.r.t Investment by a Foreign Venture Capital Investor (FVCI) For Para A(2):

Unless otherwise specified in these regulations or the relevant Schedules, the foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule.

 For Para A(2):

The foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule.

  

The insertion has been made to align with the amendments proposed in Schedule VIII dealing with Investment     by     a     person resident outside India in an Investment Vehicle.
Schedule VIII w.r.t Investment     by     a     person resident  outside  India  in  an Investment Vehicle A.     Mode of payment:

The  amount  of  consideration  shall  be  paid  as  inward  remittance  from  abroad through  banking  channels  or  by  way  of  swap  of  shares  of  a  Special  Purpose Vehicle   or   out   of   funds   held   in   NRE   or   FCNR(B)   account   maintained   in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

Further,  for  an  FPI  or  FVCI,  amount  of  consideration  may  be  paid  out  of  their SNRR  account  for  trading  in  units  of  Investment  Vehicle  listed  or  to  be  listed (primary issuance) on the stock exchanges in India.

 A.     Mode of payment:

The amount of consideration shall be paid as inward remittance from abroad through banking channels or by way of swap of shares of a Special Purpose Vehicle or out of funds held in NRE or FCNR(B) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

  

Further, it is clarified that the SNRR account may be used for trading in units of listed as well as to be listed units of investment vehicles and the sale/ maturity proceeds can be credited to the said account.
B.     Remittance of Sale/maturity proceeds:

The  sale/  maturity  proceeds  (net  of  taxes)  of  the  units  may  be  remitted  outside India or may be credited to the NRE or FCNR(B) or SNRR account, as applicable of the person concerned.

 B.     Remittance of sale/maturity proceeds

The sale/maturity proceeds (net of taxes) of the units may be remitted outside India or may be credited to the NRE or FCNR(B) account of the person concerned.

  

 

Link to our other articles:

Introduction to FEMA (NDI) Rules, 2019 and recent amendments:

http://vinodkothari.com/2020/04/introduction-to-fema-ndi-rules-2019-and-recent-amendments/

RBI rationalises operation of Special Non-Resident Rupee A/c:

http://vinodkothari.com/wp-content/uploads/2019/11/RBI-rationalises-operation-of-SNRR-Account.pdf

 

[1] http://vinodkothari.com/wp-content/uploads/2019/11/RBI-rationalises-operation-of-SNRR-Account.pdf

[1] http://egazette.nic.in/WriteReadData/2019/213318.pdf

[2] http://egazette.nic.in/WriteReadData/2019/213332.pdf

[3] http://egazette.nic.in/WriteReadData/2020/220016.pdf

Extension of FPC on lending through digital platforms

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A new requirement or reiteration by the RBI?

– Anita Baid (finserv@vinodkothari.com)

Ever since its evolution, the basic need for fintech entities has been the use of electronic platforms for entering into financial transactions. The financial sector has already witnessed a shift from transactions involving huge amount of paper-work to paperless transactions[1]. With the digitalization of transactions, the need for service providers has also seen a rise. There is a need for various kinds of service providers at different stages including sourcing, customer identification, disbursal of loan, servicing and maintenance of customer data. Usually the services are being provided by a single platform entity enabling them to execute the entire transaction digitally on the platform or application, without requiring any physical interaction between the parties to the transaction.

The digital application/platform based lending model in India works as a partnership between a tech platform entity and an NBFC. The technology platform entity or fintech entity manages the working of the application or website through the use of advanced technology to undertake credit appraisals, while the financial entity, such as a bank or NBFC, assumes the credit risk on its balance sheet by lending to the customers who use the digital platform[2].

In recent times many digital platforms have emerged in the financial sector who are being engaged by banks and NBFCs to provide loans to their customers. Most of these platforms are not registered as P2P lending platform since they assist only banks, NBFCs and other regulated AIFIs to identify borrowers[3]. Accordingly, electronic platforms serving as Direct Service Agents (DSA)/ Business Correspondents for banks and/or NBFCs fall outside the purview of the NBFC-P2P Directions. Banks and NBFCs have th following options to lend-

  1. By direct physical interface or
  2. Through their own digital platforms or
  3. Through a digital lending platform under an outsourcing arrangement.

The digitalization of credit intermediation process though is beneficial for both borrowers as well as lenders however, concerns were raised due to non-transparency of transactions and violation of extant guidelines on outsourcing of financial services and Fair Practices Code[4]. The RBI has also been receiving several complaints against the lending platforms which primarily relate to exorbitant interest rates, non-transparent methods to calculate interest, harsh recovery measures, unauthorised use of personal data and bad behavior. The existing outsourcing guidelines issued by RBI for banks and NBFCs clearly state that the outsourcing of any activity by NBFC does not diminish its obligations, and those of its Board and senior management, who have the ultimate responsibility for the outsourced activity. Considering the same, the RBI has again emphasized on the need to comply with the regulatory instructions on outsourcing, FPC and IT services[5].

We have discussed the instructions laid down by RBI and the implications herein below-

Disclosure of platform as agent

The RBI requires banks and NBFCs to disclose the names of digital lending platforms engaged as agents on their respective website. This is to ensure that the customers are aware that the lender may approach them through these lending platforms or the customer may approach the lender through them.

However, there are arrangements wherein the platform is not appointed as an agent as such. This is quite common in case of e-commerce website who provide an option to the borrower at the time of check out to avail funding from the listed banks or NBFCs. This may actually not be regarded as outsourcing per se since once the customer selects the option to avail finance through a particular financial entity, they are redirected to the website or application of the respective lender. The e-commerce platform is not involved in the entire process of the financial transaction between the borrower and the lender. In our view, such an arrangement may not be required to be disclosed as an agent of the lender.

Disclosure of lender’s name

Just like the lender is required to disclose the name of the agent, the agent should also disclose the name of the actual lender. RBI has directed the digital lending platforms engaged as agents to disclose upfront to the customer, the name of the bank or NBFC on whose behalf they are interacting with them.

Several fintech platforms are involved in balance sheet lending. Here, the lending happens from the balance sheet of the lender however, the fintech entity is the one assuming the risk associated with the transaction. Lender’s money is used to lend to customers which shows up as an asset on the balance sheet of the lending entity. However, the borrower may not be aware about who the actual lender is and sees the platform as the interface for providing the facility.

Considering the risk of incomplete disclosure of facts the RBI mandates the disclosure of the lender’s name to the borrower. In this regard, the loan agreement or the GTC must clearly specify the name of the actual lender and in case of multiple lender, the name along with the loan proportion must be specified.

Issuance of sanction letter

Another requirement prescribed by the RBI is that immediately after sanction but before execution of the loan agreement, a sanction letter should be issued to the borrower on the letter head of the bank/ NBFC concerned.

Issue a sanction letter to the borrower on the letterhead of the NBFC may seem illogical since the lending happens on the online platform. The sanction letter may be shared either through email or vide an in-app notification or otherwise. Such sanction letter shall be issued on the platform itself immediately after sanction but before execution of the loan agreement.

Further, the FPC requires lender NBFCs to display annualised interest rates in all their communications with the borrowers. However, most of the NBFCs show monthly interest rates in the name of their ‘marketing strategy’. This practice though have not been highlighted by the RBI must be taken seriously.

Sharing of loan agreement

The FPC laid down by RBI requires that a copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement must be furnished to all borrowers at the time of sanction/ disbursement of loans. However, in case of lending done over electronic platforms there is no physical loan agreement that is executed.

Given that e-agreements are generally held as valid and enforceable in the courts, there is no such insistence on execution of physical agreements. The electronic execution versions are more feasible in terms of cost and time involved. In fact in most of the cases, the loan agreements are mere General Terms and Conditions (GTC) in the form of click wrap agreements.

Usually, the terms and conditions of the loan or the GTC is displayed on the platform wherein the acceptance of the borrower is recorded. In such a circumstance, necessary arrangements should be made for the borrower to peruse the loan agreement at any time. The loan agreement may also be in the form of a mail containing detailed terms and conditions, along with an option for the borrower to accept the same.

The requirement from compliance perspective is to ensure that the borrower has access to the executed loan agreement and all the terms and conditions pertaining to the loan are captured therein.

Monitoring by the lender

Effective oversight and monitoring should be ensured over the digital lending platforms engaged by the banks/ NBFCs. As RBI does not regulate the platform entities, hence the only way to regulate the transaction is though the lenders behind these platforms.

The outsourcing guidelines require the retention of ultimate control of the outsourced activity with the lender. Further, the platform should not impede or interfere with the ability of the NBFC to effectively oversee and manage its activities nor shall it impede the RBI in carrying out its supervisory functions and objectives. These should be captured in the servicing agreement as well as be implemented practically.

Grievance Redressal Mechanism (GRM)

Much of the new-age lending is enabled by automated lending platforms of fintech companies. The fintech company is the sourcing partner, and the NBFC is the funding partner. However, the grievance of the customer may range from issue with the usage of platform to the non-disclosure of the terms of loan.

A challenge that may arise is to segregate the grievance on the basis of who is responsible for the same- the platform or the lender. There must be proper mechanism to ensure such segregation and adequate efforts shall be made towards creation of awareness about the grievance redressal mechanism.

[1] Read our detailed write up here- http://vinodkothari.com/2020/03/moving-to-contactless-lending/

[2] Read our detailed write up here- http://vinodkothari.com/2020/03/fintech-regulatory-responses-to-finnovation/

[3] RBI’s FAQs on P2P lending platform- https://www.rbi.org.in/Scripts/FAQView.aspx?Id=124

[4] Read our detailed write up here- http://vinodkothari.com/2019/09/the-cult-of-easy-borrowing/

[5] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11920&Mode=0

 

 

Fifty years of global securitisation – list of chapters

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List of chapters for the anthology on fifty years of global securitisation –

Go back to fifty years of securitisation page.

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