Tech-driven compliance monitoring and validation of internal models

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– Anita Baid, finserv@vinodkothari.com 

Streamlining internal compliance monitoring function

The recent RBI directive on streamlining the internal compliance monitoring function by leveraging technology has raised concerns regarding actionable on the part of regulated entities covered thereunder. The notification on Streamlining of Internal Compliance monitoring function – leveraging use of technology dated January 31, 2024 is based on RBI’s review of of the prevailing system in place for internal monitoring of compliance with regulatory instructions and the extent of usage of technological solutions to support this function.

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The big buzz on small business payment delays

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Mahak Agarwal | corplaw@vinodkothari.com

The Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) has been around for close to 2 decades now, providing for  penal interest for delayed payments to MSMEs; yet, it is only of late that there has been buzz around this. Why?

This attributes to clause (h) of Section 43B of the Income Tax Act, 1961 (IT Act, 1961), inserted  by the Finance Act, 2023, effective FY 23-24. That is to say, its impact will be faced for outstanding payments as on 31st March, 2024. Now, with the year end fast approaching, there’s a sense of confusion amongst taxpayers who buy goods or services from MSMEs. 

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Finance Ministry to modernize the Indian Stamp Act

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Archana Kejriwal | corplaw@vinodkothari.com

The Ministry of Finance, Government of India, through its Department of Revenue, has issued a draft Indian Stamp Bill, 2023[1] on 17th January, 2024 inviting public comments and suggestions within 30 days, with an intent to align it with the modern stamp duty regime. Once enacted, the Bill seeks to replace the Indian Stamp Act, 1899[2].

The Indian Stamp Act, 1899 is a fiscal legislation enacted for the purpose of generating revenue to the Government. Being enacted during the British era, the Act has undergone several amendments from time to time, however, most of the provisions still stand redundant, for instance, proviso under section 8(2) of the Act provides for the treatment of stamp duty on bonds, debentures or other securities issued by the local authority prior to 26th March, 1897, the Act at several places uses denomination of money in ‘anna’ which has no role in the present. Such transitional provisions hold no stand anymore, thus may be removed. Therefore, it has been proposed to modernise the legislation to enable it to deal with the present realities and objectives.

 In this article, we have made an attempt to analyse the changes proposed.

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AIFs ail SEBI: Cannot be used for regulatory breach

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Vinod Kothari | corplaw@vinodkothari.com

The alternative investment management industry in India works in the form alternative investment funds (AIFs), a SEBI-regulated vehicle. Most of the PE, VC funds, and hedge funds in India work in this mode.

AIFs have recently been at the receiving end of regulatory flak. RBI had expressed concerns on use of AIFs by regulated lenders for evergreening, and prohibited regulated entities from making any investment in such AIFs as have investments in their borrowers.

Now, SEBI, vide a Consultation Paper dated 19th January heaped a bunch of similar concerns, and required AIFs to affirm that the AIF or investments therein are not being used for regulatory breaches. These concerns, SEBI says, are a result of an ongoing thematic check on the AIF industry, and SEBI says it has already detected at least 40 cases, involving AUM over Rs 30000 crores, where the structure was used to create dents in existing financial regulations.

Based on Data relating to activities of Alternative Investment Funds (AIFs)

The AIF industry has demonstrated steady growth in recent years. As of September 2023, the assets under management (AUM) of AIFs have surged to 3.88 lakh crores, a substantial increase from the 13,000 crores recorded in September 2015. [See Graph above].   

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Sustainability linked derivatives: An instrument with a potential

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– Vinod Kothari, vinod@vinodkothari.com

Sustainability-linked loans and bonds have been surging globally. While there has been a dip in the recent periods (Q3 and Q4 of 2023) owing to tightening of regulatory conditions, the global volumes of sustainability-linked loans stood at around $ 400 billion[1].

However, there is another instrument – a derivative, which also has a linkage with sustainability targets, and that is making a global buzz. ISDA, having named this Sustainability Linked Derivatives or SLDs, is creating proper documentation basis to take this market forward. As of now, the market for SLDs is neither large nor highly standardised, but as credit defaults rose from nowhere and from a purely OTC product into being in the very thick of the global financial crisis, SLDs also merit close attention.

What is an SLD?

Think of usual derivatives in financial business – it will be an interest rate swap, or cross currency swap/FX forward. An SLD adds a sustainability-linked overlay on a typical IRS or FX hedge transaction.

For instance, assume Borrower X has taken a floating rate loan of $ 100 million, say at SOFR + 100 bps. X now hedges interest rate risk by entering into an IRS with Bank A, whereby Bank swaps this for a fixed rate of 4.5%.

Here, if we add an SLD overlay, Bank A will agree to provide a discount of, say 5 bps if X is able to meet certain specified sustainability KPIs. On the contrary, if X fails to meet the KPIs, then X pays a penalty of equal or a different amount. Depending on the agreement, the discount or penalty, or bonus/malus, may either be exchanged between the counterparties or by spent by either counterparty by way of a donation  for a sustainability cause.

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LEAP to listing: India permits direct listing of shares overseas through IFSC

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MCA & MOF notify rules for the same

– Vinita Nair & Prapti Kanakia | corplaw@vinodkothari.com

Indian companies were permitted to raise funds from overseas either pursuant to issue of depository receipts listed overseas or having the non-residents subscribe to issuances made in India or by way of borrowing overseas. As an initiative to provide an avenue to access global capital markets, GoI had announced the decision to ease raising of foreign funds in order to boost foreign investment inflows, unlock growth opportunities and offer flexibility to Indian companies to raise funds. Consequently, an enabling provision for direct listing of prescribed class of securities on permitted stock exchanges in permissible foreign jurisdictions was inserted vide Companies (Amendment) Act, 2020 in Section 23 of Companies Act, 2013 (‘CA, 2013’), that deals with permissible modes of issue of securities, vide notification dated September 28, 2020 and made effective from October 30, 2023. Thereafter, the Ministry of Corporate Affairs (‘MCA’) notified Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (‘LEAP Rules’) effective from January 24, 2024. As listing of shares abroad will result in raising funds from persons resident outside India, Ministry of Finance (‘MoF’) notified FEMA (Non-Debt Instruments) Amendment Rules, 2024 amending FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’) with effect from January 24, 2024. SEBI is also expected to roll out the operational guidelines for listed companies to list their equity shares on permitted stock exchanges.[1]

Additionally, FAQs on direct listing scheme (FAQs) have also been rolled out on January 24, 2024. Further, two of the key recommendations of the working group report on Direct Listing of Listed Indian Companies on IFSC Exchanges submitted in December 2023 was to notify the rules under Section 23 (3) and (4) of CA, 2013 and notify necessary amendments in NDI Rules to permit cross-jurisdiction issuance and trading of equity shares of Indian companies on IFSC exchanges.

Presently, both the LEAP Rules as well as NDI Rules have notified International Financial Services Centre in India (‘Gift City’) as the permissible jurisdiction and India International Exchange and NSE International Exchange as the permissible stock exchange. International Financial Services Centres Authority (‘IFSCA’) had issued the IFSCA (Issuance and Listing of Securities) Regulations, 2021 effective July 19, 2021 (‘IFSC Regulations’) however, in the absence of enabling provision under CA, 2013 and NDI Rules, Indian companies were unable to undertake listing of securities abroad.

In this article we provide an overview of the regulatory regime and deal with the procedural aspect.

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Corporate Governance: Miles Travelled and Miles to go

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Register to our premium section to access the e-book

Book released on January 24, 2024

Access the official book launch video on our youtube channel

Inviting you to delve into a sweeping 700-pager book that unfolds the intricate tapestry of Corporate Governance as concept, providing a comprehensive and enlightening treatise on its evolution across diverse areas. Some of the salient features of this book are 

  • Runs over 700 pages of text, divided into 9 parts, consisting of 25 chapters.
  • Coverage of the complete ecosystem of corporate governance including the board and its committees, independent directors, auditors, proxy advisors, and shareholders. 
  • Extensive coverage of conflicts of interest which forms the major area of concern in corporate governance with detailed analysis of regulations on related party transactions.    
  • Covers information symmetry and corporate transparency as one of the key targets of effective corporate governance, with substantial coverage on insider trading and ensuring confidentiality and the flow of information from companies to the stock exchanges.
  • Several chapters are supported by extensive,well-classified FAQs.
  • Global coverage with an Indian focus, to allow readers to put the regulations into a wider context and understand international best practices.
  • Sustainability and business responsibility covering detailed analysis of obligations relating to ESG, climate change and directors’ liability for the same, sustainability financing, and CSR.
  • Use of technology in corporate governance like the use of AI in boardroom decisions.

In addition to the contents, the book has been designed in an e-book format to provide additional benefits to readers such as –

  • Hyperlinked text allowing access to the net resources
  • Eco-friendly, as we save paper and print
  • Cost effective -note that the subscription charges to our premium section are nominal, and not for this book but for all the materials/text that we put in the premium section
  • Reader’s ease of access – you may refer to the book using your handheld device, laptop, and at any point or place
  • Ease of searching and referencing – text search, string search capabilities of PDF versions may be deployed
  • Timely updations – we may, at intervals that we determine, update the text – therefore, you will be reading the last updated version, whereas print publications take long time to be revised. Notably, in the dynamic space of corporate governance, regulatory information itself may change frequently enough

Here’s a sneak peek into the contents of the book

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Access Detailed Table of Contents – here

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AGENDA – Felicitation meet-cum-Panel Discussion on Corporate Governance

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Register Here for the Panel Discussion on Corporate Governance

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Regulatory round up: Corporate Law updates for the year 2023

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Regulatory round-up 2023: Link to YouTube videos
Part IListing Regulationshttps://www.youtube.com/watch?v=RJbGM9AGu2Y 
Part IISEBI Regulations and other miscellaneous regulatory developmentshttps://www.youtube.com/watch?v=UTuEgXAkYW0 
Part IIIMCAhttps://www.youtube.com/watch?v=luRn7NcI_PU 
Part IVSEBI amendments relating to corporate debt https://www.youtube.com/watch?v=u2FGSfsyQOM 
Part VRegulatory round-up for NBFCshttps://www.youtube.com/watch?v=H82D3t38nio 

Felicitation Meet and Panel Discussion on Corporate Governance – from 1988 to Now

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Agenda for the Panel Discussion

About the Book

Live on Youtube

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