FAQs on Purpose and Effect test for RPTs
-Team Vinod Kothari and Company | corplaw@vinodkothari.com
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Archive for month: March, 2023
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Purpose and Effect Test for Related Party Transactions.
Pledge of shares by promoter entities
– concerns involved, regulatory framework and need for additional disclosures
– Anushka Vohra, Manager | corplaw@vinodkothari.com
Background
It is common for promoter / promoter companies (HoldCo) to raise funds by way of pledging their shares held in operating companies (OpCo). This is known as loan against securities (LAS). LAS enables borrowers to raise funds from banks / NBFCs by keeping shares, mutual funds or life insurance policies as collateral. There are specific regulations issued by RBI with respect to LAS.
As on March 6, 2023[1], there are 239 companies that have reported promoter pledge on BSE. Pledging of shares by promoter companies held in operating companies does not raise a red flag per-se, however one has to know, (i) the percentage of shareholding pledged by promoters / promoter companies viz-a-viz the paid up share capital held, that is to say the unencumbered shares, (ii) leverage at the group level; (iii) impact of default.
In this article, the author tries to highlight the concerns arising from pledging of shares held in OpCo by HoldCo, the disclosure provisions currently prevailing w.r.t. the pledged shares, and the need for additional disclosures.
Read more →PML Act and Rules: Recent changes may have new compliance requirements
-Team Finserv | finserv@vinodkothari.com
Background
Financial sector entities have to follow PMLA and related rules, including by way of KYC Directions. The Finance Ministry came up with various amendments pertaining to the Prevention of Money-Laundering Act, 2002 (“PML Act”) and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’). The amendments pertain to revised thresholds for ascertainment of beneficial ownership (25% to 10%), implementation of group wide policies for compliance with provisions of Chapter IV, expanding the obligations under PMLA to service providers of virtual digital assets, etc.
Effective date and applicability:
The amendment shall be effective from the same date, i.e. March 07, 2023. It may be noted that the Master Direction – Know Your Customer (KYC) Direction, 2016 (‘KYC Directions’) are issued and updated by the regulator based on the amendment in PML Act and PML Rules. However, the Regulated Entities (RE) are required to ensure compliance with the provisions of PML Act and PML Rules, as amended from time to time. Hence, necessary steps must be taken based on the amendments.
Whether applicable to existing or new customers?
Customer Due Diligence (as required under the PML Act and Rules) is required to be undertaken at the time of commencement of a financial transaction or account-based relationship with the customer. Accordingly, necessary steps must be taken by the RE to ensure compliance with the Amendment Rules for all new customers or new financial transactions undertaken with existing customers after March 07, 2023. However, it is also pertinent to note rule 9(12) of the PML Rules which requires reporting entities to exercise continuous due diligence with respect to the business relationship with every clients.
Read more →Base Layer NBFCs amenable to NSI or SI regulations?
Rhea Shah, Executive | finserv@vinodkothari.com
Background
Prior to the implementation of the SBR Framework, NBFCs were classified into Systemically Important (SI) and Non-Systemically Important (NSI) on the basis of the overall risk involved in their operations and the economic importance of the operations that they undertake. NBFCs with asset size upto 500 crores were classified as NSI, and those with Rs. 500 crores and above, were classified as SI and are respectively governed by Master Direction – Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016[1] (‘NSI Directions’) and Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016[2] (‘SI Directions’). Besides, there are certain other directions [e.g. Master Direction – Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016[3]], which are applicable to NBFC-SIs and not NBFC-NSI. Even the return filing requirements differ for NBFC-SIs and NBFC-NSIs.
Read more →Comparative analysis between Social Sector Entities- Section 8 companies and Trusts
– Team Corplaw | corplaw@vinodkothari.com
Social sector entities can be of various types like a section 8 company, trust, societies, etc. The common idea behind these entities is the promotion of social welfare activities. Even with the common objective in place, there are various differentiating features between them. This write up is a comparative analysis between two types of social sector entities – Section 8 company and a trust.
A. Companies with Charitable objects (Sec 8 under the Companies Act, 2013)
The concept of non-profit making organizations or companies with charitable objects in India is quite old as it traces its history to the early 20th century. This concept was first introduced under the Companies Act 1913, then under the Companies Act, 1956. Now, under the Companies Act, 2013 (hereinafter “the Act”), the provision for setting up of non-profit making organizations are enumerated under section 8 of the Act read with Rule 19 and 20 of Companies (Incorporation) Rules, 2014.
Read more →Workshop on Purpose and Effect Test for RPTs
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RBI Regulation of Investment Companies: Futile, counter-productive and counter-intuitive
–Vinod Kothari | finserv@vinodkothari.com
The RBI has launched a major base-layer study of “base-layer NBFCs”, whereby audit firms will be surveying these NBFCs. Apparently, the audit firms will visit their offices to see if there is a physical office (which means a name plate outside the office), whether that physical office houses other offices too (an anachronistic objective in the age of co-working spaces), track the directors and the beneficial owners of such companies. The RBI’s definition of “beneficial owners” is remarkably different from the very same concept under section 90 of the Companies Act, which, after huge rounds of discussion, settled on certain rules for determination of such beneficial owners, and given the fact that the Companies Act is already tracking beneficial owners, it is interesting to note that the RBI would do its own enquiry into such beneficial owners.
Understandably, this massive exercise, with a budget of Rs. 2.36 crores, has been launched to do a reality check on the 9471 entities forming part of the so-called “Base layer”, which, by the regulators’ own determination, are entities which do not matter much for the financial system. Once again, out of these base layer entities, approximately 97% of the entities qualify as “investment and credit companies”.
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