SEBI’s proposal for more stringent Monitoring of Utilization of Issue Proceeds, by Somesh Lund, 22nd May, 2017

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SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009[1] (ICDR Regulations) requires that while raising funds from the public, the company has to mention the object for raising the fund.

Thus to maintain the integrity of the above clause, SEBI in its board meeting conducted on April 26, 2017[2]  has proposed stringent rules and provisions to have better oversight on the utilization of funds raised through the public. This is a measure to keep a check on the misuse of these funds.

The Major changes proposed are:-

  • Appointment of Monitoring agency
Present Requirement every company issuing securities in excess of Rs. 500 crore has to appoint a Monitoring agency
Proposed Requirement every company issuing securities in excess of Rs. 100 crore has to appoint a Monitoring agency;
Rationale for Proposal To determine if the funds raised are utilized for the prescribed purpose. By decreasing the limit a larger number of companies will fall under the net of Monitoring agencies
  • Frequency of report by monitoring agency report
Present Requirement Monitoring Agency is required to submit its report to the issuer half-yearly.
Proposed Requirement Monitoring Agency is required to submit its report to the issuer quaterly
Rationale for Proposal Gives SEBI better oversight and timely information
  • Timely submission of Monitoring Agency Report
Present Requirement No such requirement exist
Proposed Requirement Report to be submitted within 45 days from end of the quarter.
Rationale for Proposal Such disclosure will help investors and other concerned persons to obtain timely information.
  • Disclosure of the Monitoring Agency Report on Company’s website
Present Requirement Disclosure of the Monitoring Agency Report on companies website not mandatory
Proposed Requirement Disclosure of the Monitoring Agency Report on companies website is mandatory
Rationale for Proposal Companies Act, 2013 prescribes that prior approval from shareholders is required for any change of object. Thus it is very important that the shareholders get regular update on utilization of issue proceeds.
  • The Board of Directors comments on the findings of the monitoring agency.
Present Requirement No such requirement exist
Proposed Requirement It is mandatory for the Board of director’s comments on the findings of the monitoring agency.
Rationale for Proposal Creates onus on the Board of Directors to insure that the funds are utilized for the prescribed purpose.

Conclusion

These measures will help SEBI to monitory the utilization of funds as all deviations, other than the purpose for which the fund was raised, are to be reported by the monitoring agency. If the funds are utilized for any other purpose the report will also mention if the prerequisite approvals from board/shareholders have been obtained.

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[1] http://www.sebi.gov.in/legal/regulations/apr-2017/sebi-issue-of-capital-and-disclosure-requirements-regulations-2009-last-amended-on-march-6-2017-_34697.html

[2] http://www.sebi.gov.in/media/press-releases/apr-2017/sebi-board-meeting_34761.html

The author can be contacted at: corplaw@vinodkothari.com

Framework for consolidation and re-issuance of debt securities issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, by Somesh Lund, 22nd May, 2017

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The Companies Act,1956 had provisions regarding the consolidation and reissuance of debt securities under section 121.This section gave the company power to keep the same security alive for the purpose of re-issue after it’s been redeemed. This helped the company to increase liquidity in the secondary debt market. However Companies Act, 2013 was silent on this matter.

Thus to clarify on this subject SEBI issued a concept paper on 04 December, 2014[1] proposing amendment in SEBI (Issue and Listing of Debt Securities) Regulations, 2008 to this effect.

The concept paper was followed by a consultation paper issued on 2nd February, 2017[2] to seek comments regarding the consolidation and re-issuance of debt securities. The consultation paper provided an in detail analysis of the corporate bond market and also spoke about the remarkable growth of the primary debt market and the relatively slower growth of the secondary debt market.

Therefore, with an objective to further facilitate the debt market it considered and approved proposals regarding the consolidation and re-issuance of debt securities during its board meeting on 26th April, 2017[3]

The SEBI’s board in its meeting approved the following:-

  • The board approved a cap of 12 ISINs (International Securities Identification Number) maturing per financial year. Furthermore, the issuer can also issue additional 5 ISINs per financial year as structured debt instruments of a particular category. However, this restriction is not applicable on debt instruments which are used for generating regulatory capital like Tier I, Tier II bonds, etc;
  • The issuer can as a one-time exercise during the tenure of the security make a choice between making a  bullet maturity payment or the issuer can make staggered payment of the maturity proceeds within a particular financial year to resolve this issue of concentration of liabilities which may give rise to asset-liability mismatch for the issuer;
  • Active consolidation of existing corporate debt securities through switches and conversions has not been made mandatory.
  • There should not be any clause prohibiting consolidation and re-issuance in the Articles of Association of the issuer/company.

Conclusion

This is a step in the right direction and has been welcomed with open arms as these measures will help boost liquidity in the debt/bond market.

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[1] http://www.sebi.gov.in/reports/reports/dec-2014/concept-paper-on-consolidation-and-reissuance-in-corporate-bond-market_28526.html

[2] http://www.sebi.gov.in/reports/reports/feb-2017/consolidation-and-re-issuance-of-debt-securities-issued-under-the-sebi-issue-and-listing-of-debt-securities-regulations-2008_34120.html

[3] http://www.sebi.gov.in/media/press-releases/apr-2017/sebi-board-meeting_34761.html

The author can be contacted at: corplaw@vinodkothari.com

FAQs on impact of GST on financial services, by Financial Services Division, 24th May, 2017

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  1. What is the meaning of financial services?

Financial services have no meaning ascribed to it under the GST regime. However, for the purpose of this write up, by financial services, we mean any supply of goods or services by a person to another person, meant for the purpose of extending credit support. This includes, but is not limited to the following: Read more →

Section 94B: Thin capitalization rules may impede operations of NBFCs, by Nidhi Bothra & Kanishka Jain, 24th May, 2017

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Genesis of the thin capitalization rules

The genesis of the thin capitalization rules lies in the distinction between tax treatment of debt and equity.  A company typically finances its projects either through equity and debt or mixture of both, equity being costly in terms of cost and ownership is less attractive than the debt financing where interest is a deductible expense. Debt is not only less expensive to service, it also reduces tax liabilities and enhances return on equity.

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Legal Implication of Business Transfer Agreement, by Legal Team, on 22nd May, 2017

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Business restructuring is a comprehensive process be it financial or technological or market or organisational. There are various modes by way of which it can take place such as re-organisation of capita, compromise/arrangement, merger/amalgamation, demerger, acquisition/takeover, slump sale, strategic alliance and such other similar modes. The primary motive behind undertaking any such rearrangement would be to prosper both in size and profits. The corporate restructuring process can be either be by any of the much traversed gradual way or a much faster way of selling off the business undertaking. Read more →

Date extended again for transfer of shares to IEPF

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The MCA has once again extended the time for transferring the shares to the IEPF demat account in view of the modality gap present. The circular clearly states that since the operational issues are yet to be finalized with the other participants, the date for transferring shares is being extended.

After number of circulars on trying to simplify the whole process of transfer of shares, it does not seem to actually simplify the task, moreover such extensions raise high doubts in the minds of the stakeholders on how realistic the transfer of shares would actually be.

The circular also states that all the corporates are advised to complete all the formalities in relation to transfer without waiting for any fresh dates. This implies that companies which have almost completed all the formalities on their part can without any doubt finish off the residual formalities like issuing duplicate share certificates and making entries in the register. Such extension surely does not provides the scope to the shareholders whose shares are to be transferred to have an extended time to come and claim dividend from the company beyond the time provided in the notices.

Further, for many companies time has come to give notice to the shareholders whose dividend is lying unclaimed from the financial year 2009-10. At such a stage when the first tranche of transfer has not been done, corporates wonder on how the upcoming events will turn out to be in connection with such transfer.

Link to the circular- http://www.mca.gov.in/Ministry/pdf/GeneralCircular6_29052017.pdf

 

Author:  Pammy Jaiswal

Associate

Vinod Kothari and Company

SARFAESI Rulings

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