SEBI to provide debenture holders the right to object material related party transactions

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Complicates approval process for closely held High Value Debt Listed Entities

– Vinita Nair, Senior Partner | vinita@vinodkothari.com

SEBI continues to tighten the regulatory regime for debt listed entities as it aims to promote corporate bond market. After equating debt listed entities with outstanding value of listed non-convertible debt securities of Rs. 500 crore and above with equity listed entities for the purpose of corporate governance norms, SEBI proposes a stricter approval regime for Related Party Transactions (‘RPTs’) under Reg. 23 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’) vide Consultation paper on review of Corporate Governance norms for a High Value Debt Listed Entity (‘HVDLE’)[1]. This has been rolled out just before the corporate governance provisions become applicable on a mandatory basis effective from April 1, 2023. The composition of 138 HVDLEs, in terms of shareholding pattern, as on March 31, 2022 was as under:

Figure 1: Analysis of shareholding pattern of the HVDLE
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Online workshop on Recent amendments relating to Corporate Bonds

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Click here to register for the workshop: https://forms.gle/V8SRUpDpsSMYraBx9

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Comments on the MCA Discussion Paper on changes being considered to IBC, 2016

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– Team Resolution, Vinod Kothari and Company | resolution@vinodkothari.com

The Ministry of Corporate Affairs (‘MCA’) issued a Discussion Paper on 18th January, 2023 on changes being considered to the Insolvency and Bankruptcy Code, 2016 (‘Discussion Paper’). Since the very inception of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), it has undergone six amendments besides, several amendments in the respective regulations. However, the proposals in this Discussion Paper seem to be the most comprehensive one – covering all major aspects of the law.

Broadly speaking, the amendments proposed in the Discussion Paper can be categorized as follows:

  1. Proposals that try to overcome past difficulties:
    1. Voting in CoCs, direct dissolution, etc
    2. Enhancing the scope of pre-packs and fast track insolvency
  2. Proposals that codify amendments in regulations already done or IBBI circulars:
    1. Mandatory filing of information of default with IU
    2. Presumption of relinquishment of security interest
  3. Proposals to override or respond to some court rulings:
    1. Vidarbha Industries Power Limited v. Axis Bank Limited
    2. State Tax Officer v. Rainbow Papers Limited
    3. Gujarat Urja Vikas Nigam Limited v. Amit Gupta & Ors
  4. Fundamental or progressive amendments:
    1. Partial resolution
    2. Collapsing the levels in the waterfall
    3. Separation of resolution and distribution
    4. Resurrection of entity from liquidation to resolution
    5. Aggregation of assets of guarantors
    6. Collaboration for the purpose of group insolvency
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India Factoring Report 2023

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Sample Report

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Team Finserv | finserv@vinodkothari.com

Identification Of Related Parties Of Subsidiaries

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Which law to follow? – Listing Regulations or laws applicable to subsidiaries?

– Aisha Begum Ansari, Manager | aisha@vinodkothari.com

The RPT provisions under the SEBI Listing Regulations were substantially amended by SEBI on November 9, 2021. Pursuant to the amendment, the definitions of related party, RPT, material RPT, requirements of obtaining audit committee, and shareholders’ approval were changed.

The definition of ‘RPT’ was amended to include cross RPTs. Earlier, only transactions between the listed entity and its related parties were covered, but now, the following transactions are also covered:

  1. Transaction between listed entity and its related parties;
  2. Transaction between the subsidiaries of listed entity and its related parties;
  3. Transaction between listed entity and related parties of subsidiaries;
  4. Transaction between subsidiaries and related parties of listed entity;
  5. Transaction between subsidiaries and related parties of other subsidiaries.
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SEBI amends NCS Regulations – DT nominated director | Green Debt Securities | Public issue offer period

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– Ajay Ramanathan, Executive | ajay@vinodkothari.com

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Simplifying the KYC process and business identifier

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Anita Baid, Vice President | finserv@vinodkothari.com

Backdrop

The regulations for conducting customer identification and due diligence by financial sector entities have been laid down by RBI and SEBI, in accordance with the provisions of Prevention of Money Laundering Act and Rules. Under the current regime, the KYC process extends from physical KYC to digital and video-based KYC as well. The physical process of collecting KYC documents and verifying the same involves a lot of paperwork. On the other hand, the Digital KYC Process is a facility that allows lenders to undertake the KYC of custom​​ers via an authenticated application, specifically developed for this purpose, hence making it a paperless process. The Digital KYC process, however, also requires physical interaction. Video-based KYC is both paperless and without any physical intervention.

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Budget 2023 and Gift IFSC: Making Things Happen

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Anirudh Grover, Executive | finserv@vinodkothari.com

Background and Existing Framework

The International Financial Services Centre (“IFSC”) situated in the GIFT city is deemed to be a quasi-foreign territory from the lens of Foreign Exchange Management Act, 1999 however a domestic area under the tax regime. The objective of setting up specified territory lies in the benefits an IFSC jurisdiction provides in the form of free flow of foreign transactions and investor confidence; this setting up is commonly termed as onshoring the offshore. 

In order to materialize the underlying objective, a specific regulatory framework has been designed which includes the incorporation of the following major entities:

  1. Finance Companies: The concept of Finance Companies are pari materia to the concept of non-banking financial companies, the unified regulator IFSCA has issued regulations specifically dealing with the concept of Finance Companies. The detailed write up of which can be found in our write up.
  2. Fund Management Entities (‘FMEs’): FMEs are entities which act as pooling vehicles for various kinds of investors, this concept of FME’s is equivalent to the concept of Alternative Investment Fund. A designated regulatory framework has been specially established by the unified regulatory for governing the framework of FMEs in IFSC, the details of which can be captured from our write up
  3. Banking Units: As far as Banking Units are concerned, the IFSCA has outlined a framework through which Indian banks or foreign banks can set up their shop in the form of branches in IFSC GIFT City. The IFSCA (Banking) Regulations, 2020 are the principal regulations governing the Banking Units established in the IFSC GIFT City. My colleague has already covered the regulatory overview on this aspect in our write up. 

Apart from these entities there are other entities as well which are running their businesses from IFSC GIFT City which includes Fintech Entities, Capital Market Intermediaries and Insurance Intermediaries. The Union Budget of 2022 paved the way for bringing fundamental changes in the IFSC jurisdiction which resulted in the establishment of a regulatory framework namely IFSCA (Setting up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022. By virtue of these regulations now Foreign Universities have been allowed to set up their base in IFSC. Further the Union Budget 2022 also laid the ground for establishment of an Arbitration Centre which would allow disputes to be resolved in record time. 

Albeit these announcements came out to be a key in evincing interest in the IFSC jurisdiction however it is perceived that there are certain pivotal areas of law which require further modifications/clarifications which is expected to be a part of the Union Budget of 2023.

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National financial information repository: One more or one for all?

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– Lovish Jain, Executive | lovish@vinodkothari.com

Some days ago, Mr. Vinod Kothari had commented on a LinkedIn post :

“Do we realise how many places does a lender (NBFC, Bank) register information about a loan? There are 4 credit information companies (such as CIBIL) where the credit data, including performance history, is uploaded. If the exposure is Rs 5 crores or above, in the aggregate over the banking system, information goes on CRILC too.

RBI has recently written to NBFCs reminding them of the obligation to register details with NeSL, an information utility under IBC, irrespective of whether the provisions of Code apply (for example in case of individuals), or whether the lender in question is at all contemplating resorting to IBC as a remedy (for example, consumer loans).

If the loan is a secured loan, the details need to be filed with CERSAI. If the secured loan borrower is a company, details need to be filed with RoC too. If the security interest is on immovable property, one needs to file particulars with land registry. If the security interest is on motor vehicles, the hypothecation is registered with Vahan portal too.

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A shocker for the bond markets: Withholding tax to apply on listed bonds, without grandfathering 

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Team Financial Services | finserv@vinodkothari.com

Section 193 of the Income Tax Act[1] provides for TDS payment in case of interest on securities. Currently listed debentures are exempt from TDS without any limit. The exemption comes way of clause (ix) of the proviso to sec. 193.

The said clause is now sought to be deleted. The deletion, if affirmed by the statute, will be effective from 1st April, 2023, thereby meaning that any interest paid by companies on listed bonds will now be subject to tax.

The amendment has a retroactive effect, as it applies even to bonds that may have already been issued. If the issuer and the investor have both entered into a securities transaction on the strength of the law then existing, and the bondholder suddenly comes under the purview of deduction of tax at source, this will be like acquiring a security with no safe harbor. It is notable that certainty of tax treatment for capital market transactions is an essential mainstay for the healthy growth of capital markets.

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