Global Regulatory Update, January 2014

Confederation of
Indian Industry

GLOBAL
Regulatory
E
PDAT
U

January 2014, Volume 4, Issue 1

Inside
ARTICLES AND UPDATES
Indian Companies - Moving closer to a US Listing
l
Infrastructure Projects - Capitalization challenges
l infra, banking needing trillions, regulatory innovation critical
With
l
Corporate bond markets in India – Challenges and Opportunities
l
Corporate debt market – future prospects
l
Domestic and International Updates
l Appointments
New
l

CII'S RECENT INITIATIVES
CII's 9th International Corporate Governance Summit

l

Interaction with SEBI Chairman

l

CII Recommendations on Draft Rules under Companies Act, 2013

l

CII Representation on Prohibitions and Restrictions Regarding Political Contributions

l

Comments on the Justice Sodhi Committee Report on Insider Trading Regulations

l

CII Representation on Need for Exemptions for Private Companies

l

In The Coming Months…
A host of developments are scheduled to take place in 2014.Here is a list of some of
the most important ones.
l
General Elections

India will have general elections for the 16th Lok Sabha. The current Lok Sabha will
complete its constitutional term on 31 May 2014.
l
Assembly Elections

The tenure of the assemblies of Andhra Pradesh, Arunachal Pradesh, Haryana,
Maharashtra, Odisha and Sikkim is due to expire during the year. These states
would have elections between May and December 2014.
l
Elections would also take place in the following countries:

February- Thailand
March- Colombia
April-Afghanistan, Indonesia, Iraq, South Africa
August -Turkey
October-Brazil
December-New Zealand

Appointments
Ms Janet Louise Yellen would be the Chairman of the Board of Governors of the
Federal Reserve System. The first woman to run the central bank of the United
States, she will assume office on 1 February 2014.

G-20 Summit
9th meeting of the G-20 heads of governments will be held in Brisbane, the capital
city of Queensland, Australia, on 15 and 16 November 2014. The hosting venue will be
the Brisbane Convention & Exhibition Centre.

Contents

NATIONAL UPDATES . . . . . 2

APPOINTMENTS . . . . . . . . . 9

GLOBAL UPDATES . . . . . . 10

Expert Speak
Ms. Roopa Kudva, Managing Director & CEO, . . . . . . . . . . . 19
CRISIL Ltd on “With Infra, Banking Needing
Trillions, Regulatory Innovation Critical"
Mr Nirmal Jain, Chairman, India Infoline Limited on. . . . . . . 22
“Corporate Bond Markets in India – Challenges
and Opportunities”
Mr Mohan Shenoi, President, Group Treasury and . . . . . . . . 25
Global Markets Kotak Mahindra Bank on
“Corporate Debt Market – Future Prospects”

CII's Recent Initiatives
l Companies Indian

. . . . 14

Moving Closer to a
US Listing
l
Infrastructure . . . . . . . . 16

Projects Capitalization
Challenges

Events:
CII's 9th International Corporate Governance Summit

. . . . 27

Interaction with SEBI Chairman . . . . . . . . . . . . . . . . . . . . 29

Representations:
CII Recommendations on Draft Rules under . . . . . . . . . . . . 30
Companies Act, 2013
Prohibitions and Restrictions Regarding . . . . . . . . . . . . . . . 32
Political Contributions
Justice Sodhi Committee Report on . . . . . . . . . . . . . . . . . . 34
Insider Trading Regulations
Need for Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
for Private Companies

DISCLAIMER
This Regulatory Update has been compiled with a view to update readers and CII membership of international as well as the domestic changes relevant to the domain
of Corporate Governance & Regulatory Affairs. The compilation must not be taken as an exhaustive coverage of announcements and news nor should it be used as
professional advice. Although, every endeavour has been made to provide exhaustive information, no claim would be entertained in the event any
information/data/details/text is found to be inaccurate, incomplete, at variance with official data/information/details released through other sources prior or
subsequent to release of the issue. CII does not necessarily subscribe to the views expressed in the items. These reflect the author's personal views and in the event of
any violation of IPR by the subscribers, CII would not be held responsible in any manner. Further, no part of this Update may be reproduced, copied or used without the
prior permission of CII.

1

GLOBAL REGULATORY UPDATE

NATIONAL
By :

1. Extension of ESOP
compliance deadline again
SEBI has decided to extend the time
line for alignment of existing
employee benefit schemes with the
SEBI (ESOS and ESPS) Guidelines,
1999, to June 30, 2014. SEBI had earlier
extended the deadline to 31
December 2013 from the 30 June 2013
mandate.
Accordingly, in Clause 35C (ii) of the
Equity Listing Agreement, the words
"December 31, 2013" shall be replaced
with "June 30, 2014".

2. NOVATION OF OTC
DERIVATIVE CONTRACTS
The RBI has by its circular dated
December 9, 2013 permitted novation
of OTC derivative contracts
("Contract").

Highlights of the circular include:
i. N o v a t i o n : N o v a t i o n i . e .
replacement of one of the existing
parties ("Transferor") to the
Contract is possible subject to the
prior consent of the other party to
the Contract ("Remaining Party").
The novation permits the
Transferor to transfer all his rights,
liabilities, duties and obligations to
a third party ("Transferee").
ii. Purpose of Novation: Novation
may be used for management of
counter-party exposure and
counter-party credit risk; and to
deal with events such as windingup of business by banks and in
cases of mergers/acquisitions.
iii. Mechanism for Novation: For
executing the novation the 3

2

parties namely the Transferor, the
Transferee and the Remaining
Party are to enter into a Tri Partite
Agreement by which the Contract
will stand extinguished and a new
contract having identical terms
and conditions as the Contract
including the terms pertaining to
notional amount and maturity
date shall hold good as between
the Transferee and the Remaining
Party.
The execution of the new contract
will release the Transferor from its
obligations and liabilities under the
Contract which would now be
reinstated in the new contract
executed between the Transferee
and the Remaining Party and
assumed by the Transferee under
the said contract.

Further the amount
corresponding to the Mark to
Market value of the Contract as on
the transfer date should be
exchanged between the
Transferor and the Transferee,
with no cash flow being given to
the Remaining Party.
iv. Other Conditions:
The Transferor will be able to
novate the Contract subject to the
said contract being held by it for a
period of 6 months in case of the
original maturity date being for 1
year and for at least 9 months in
case the original maturity date is
beyond 1 year. The said condition
not being applicable in case the
Transferor is winding up its
business or is under liquidation.

3. SFIO ACCORDED
STATUTORY STATUS
The MCA has accorded statutory
status to the Serious Fraud
Investigative Office ("SFIO") vide its
Press Release dated December 06,
2013.
As per the release the ministry would
also be taking steps to improve the
functioning of the SFIO by inducting
new technology and skilled
manpower. The government had
approved the establishment of the
SFIO in 2003 based on the Naresh
C h a n d r a
c o m m i t t e e
recommendations. The SFIO is a multidisciplinary organization consisting of
experts from various fields including
the capital markets, financial sector,
tax, forensic audit, law, customs and
investigation.
By according the statutory status the
ministry hopes that the SFIO would be
empowered in taking the necessary
and effective action in ensuring
greater regulatory compliance and
protecting investor rights.

4. CLARIFICATION WITH
REGARD TO DISCLOSURES
TO BE MADE FOR POLITICAL
CONTRIBUTIONS MADE BY
COMPANIES

company as well as transferor and
transferee entities, which
requirement has now been dispensed
with i.e. to say that NOC's need not be
filed while submitting the form FC-TRS
to the AD bank.

The Ministry of Corporate Affairs by its
circular dated 10 December 2013 has
issued a clarification with respect to
the companies that need to make
disclosures of the political
contributions made by them under
Section 182 (3) of the Companies Act
2013 ("Disclosure Section").

However, any 'fit and proper/ due
diligence' requirement as regards the
non-resident investor as stipulated by
the respective financial sector
regulator shall have to be complied
with.

As per the circular, the companies
contributing amounts to the 'Electoral
Trust Company' who in turn make
contributions to political parties need
not make disclosures under the
Diclosure Section which they would
have to in the event of them making
the contributions directly to the
political parties. Further, alongside
companies making disclosures, the
clarification states that the Electoral
Trust Company would also be required
to make disclosures in their books of
accounts as regards the amounts
received from the companies for
political contribution along with
details of the amounts contributed by
them to the political parties.

5. TRANSFER OF SHARES IN
FINANCIAL SECTORRELAXATION OF
REGULATION
The Reserve Bank of India ("RBI") by
its notification dated November 11,
2013 has modified the filing
requirements in respect of the
transfer of shares from Residents to
Non - Residents where the investee
company is in the Financial Sector.
Earlier, for any such transfer to occur
between the parties there has to be a
No Objection Certificate (NOC) to be
obtained from the respective financial
sector regulator of the investee

3

6. APPLICABILITY OF SECTION
372A PERTAINING LOANS
AND INVESTMENTS MADE
BY COMPANIES
In light of the Ministry of Corporate
Affairs notifying 98 sections of the
new Companies Act, 2013 vide its
circular dated November 19, 2013 it has
brought about a clarification with
regard to the applicability of provision
of Section 372A of the Companies Act,
1956 which deals with inter-corporate
loans and investments, which inter
alia exempts grant of
loan/investments by holding
companies to their wholly owned
subsidiaries.
This circular now clearly clarifies that
the old section of the Companies Act,


1956 will rather apply then Section 186
of the New Companies Act, 2013
("New Act") until the section of the
New Act is notified. This query had
arisen in light of the fact that of the 98
notified sections Section 185 was one
of them but Section 186 was not and
whether it was the old act or the
corresponding provision in the new
one which had to be complied with.

CLARIFICATION WITH REGARD
TO HOLDING OF SHARES OR
E X E RC IS ING POWE R IN A
FIDUCIARY CAPACITY
MCA has clarified that the shares held
by a company or power exercisable by
it in another company in a 'fiduciary
capacity' shall not be counted for the
purpose of determining the holdingsubsidiary relationship in terms of the
provision of section 2(87) of the
Companies Act, 2013.

7. SIMPLIFICATION OF DEMAT
ACCOUNT OPENING
PROCESS
For the purpose of simplifying the
process of opening an account for
trading as well as a demat account, the
RBI by its circular dated December
2013 replaced the existing Beneficial
Owner-Depository Participant
Agreements with a common
document namely the "Rights and
Obligations of the Beneficial Owner
and Depository Participant"
("Document"). This will not only
harmonize the account opening
process but also rationalize the
number of signatures that the
investor is required to affix.
The DP has to provide a copy of the
Document to the beneficial owner and
has to ensure that any other voluntary
document executed is not conflicting
with the regulations and guidelines
prescribed by SEBI or such other
regulator.

8. SELF-REGULATORY
ORGANIZATION
REGULATIONS, 2013
INTRODUCED AND
ENACTED
SEBI by its circulars dated 7 January
2013 and 8 January 2013 have
introduced and enacted the Securities
and Exchange Board Of India (Self
Regulatory Organizations)
(Amendment) Regulations, 2013
("Regulations") which shall be
applicable to distributors engaged by
asset management companies of
mutual funds and distributors
engaged by portfolio managers from
8 January 2013.
The highlights of the Regulations
include the following:
i. New Definitions: New definitions
of "distributor" and "issuer" have
been introduced.
ii. I n t e r m e d i a r y : T h e e x i s t i n g
definition of "Intermediary" has
been substituted with a new
definition wherein an intermediary
will be as defined under the SEBI
(Intermediaries) Regulations,
2008 to now include asset
management companies within
the scope of the definition and will
exclude foreign institutional
investors, foreign venture capital
investors and mutual funds.
iii. D i s t r i b u t o r d e e m e d t o b e
Intermediary: For the purposes of
registration as a self regulatory
organization, a distributor is also
deemed to be an intermediary.

9. FINANCING OF
"INFRASTRUCTURE
LENDING" SCOPE EXTENDED
The RBI by its notification dated
November 29, 2013 has widened
the ambit of the Infrastructure
sub- sectors to include the
following:

4

i. Hotels with project cost of more
than Rs.200 crores each in any
place in India and of any star
rating; and
ii. Convention Centres with project
cost of more than Rs.300 crores
each.
1. Mutual Funds permitted to hold
Gold Certificates in physical form
The SEBI by its circular dated
October 18, 2013 has now allowed
mutual funds to hold Gold
certificates issued by banks in
respect of investments made by
Gold ETFs in Gold Deposit Scheme
in physical form as well. Earlier,
they were allowed to be held in
only dematerialised form.
2. SEBI allows direct listing of SME
on ITP
The SEBI has by its circular dated
October 24, 2013 allowed small
and medium enterprises to list
their securities without an Initial
Public Offering (IPO). It has
notified the SEBI (Listing of
Specified Securities on
Institutional Trading Platform)
Regulations, 2013 (ITP
Regulations) as a new Chapter to
the SEBI (Issue of Capital and
Disclosure Requirements)
Regulations, 2009 (ICDR
Regulations).

Key features of the ITP Regulations:
I. Eligibility criteria:
l
No past action by Authority:

The promoters, directors or
group company of the SME and
the SME itself should not be in
the list of wilful defaulters of
RBI. No winding up petition
against the SME should have
been admitted by a competent
court. The group companies or
subsidiaries of the SME and the
SME itself should not have been
referred to the Board for
Industrial and Financial
Reconstruction within a period
of five years prior to the date of
application. Also, no regulatory
action should have been taken
against the SME, its promoter
or director, by the prescribed
regulatory authority within a
period of five years prior to the
date of application;
l Statements: The SME
Audited

should have at least one full
year's audited financial
statements for the immediately
preceding financial year and
should not have completed a
period of more than ten years
since incorporation;
l
Revenue of SME: The revenue

of the SME should not exceed
Rs. 1,000,000,000 (Rupees One
Billion Only) in any of the
previous financial years and the
paid-up capital of the SME
should not exceed INR
250,000,000 (Rupees Two
Hundred Fifty Million Only) in
any of the previous financial
years; and

investors/lenders approved by
SEBI should have invested a
minimum amount of INR
5,000,000 (Rupees Five Million
Only) in its equity shares; (ii) at
least one angel investor who is a
member of an association or
group of angel investors should
have invested a minimum
amount of INR 5,000,000
(Rupee s Five Million Only) in its
equity shares; (iii) the SME
should have received finance
from a scheduled bank for its
project financing or working
capital requirements and a
period of three years should
have passed from the date of
such financing and the funds so
received have been fully
utilized; (iv) a registered
merchant banker should have
exercised due diligence and has
invested not less than Rs.
Only) in its equity shares which
shall be locked in for a period of
three years from the date of
listing; (v) a qualified
institutional buyer should have
invested not less than INR
Only) in its equity shares which
shall be locked in for a period of
three years from the date of
listing; or (vi) a specialized
international multilateral
agency or domestic agency or a

l
Minimum Investments: SME is

required to meet any one of the
following criteria - (i) at least
one alternative investment
fund, venture capital fund or
other category of

5

public financial institution as
defined under section 4A of the
Companies Act, 1956 must have
invested in its equity capital.
II. Process of Listing:
l
Information document: An

application to a recognised
stock exchange along with an
information document
containing certain specific
disclosures relating to, inter
alia, description of business,
specified financial information,
risk factors, assets and
properties, ownership of
beneficial owners, details of
directors, executive officers,
promoters and legal
proceedings.
l
Restriction on further issue of

securities: Listing of specified
securities on the ITP cannot be
accompanied by any issue of
securities to the public in any
manner. Further, the SME
cannot undertake an IPO while
its specified securities are listed
on the ITP.
III. Capital raising
The SME listed on ITP may raise
capital through private placement
or rights issue without an option
for renunciation of rights. Before
raising money through private
placement, SME should procure an
in-principle approval from the


recognised stock exchange and
also a shareholders approval by
special resolution and
subsequently the allotment of
securities has to be completed
within two months of obtaining
such approval. Such an in-principle
approval from the recognised
stock exchange is also required
prior to a rights issue.
IV. Lock-in of promoter shareholding
At least 20% of the post listing
capital is required to be held by the
promoters of the SME which shall
be locked-in for a period of three
years from the date of listing on the
ITP.
Ticket size: The minimum trading lot
on the ITP has been set at INR
1,000,000 (Rupees One Million
Only).

time to the SME to delist from the
platform on occurrence of the
events specified in this
paragraph.

from Rs. 1,00,000 (Rupees
One lakh only) to Rs.
5,00,000 (Rupees Five lakh
only).

VI. Non-applicability of the Takeover
Code and the Delisting
Regulations: The SEBI
(Substantial Acquisition of Shares
and Takeovers) Regulations, 2011
(Takeover Code) shall not apply
to direct and indirect acquisition
of shares or voting rights in, or
control over, a company listed on
the ITP of a recognised stock
exchange. Similarly, the SEBI
(Delisting of Equity Shares)
Regulations, 2009 (Delisting
Regulations) shall not apply to
securities listed on the ITP of a
recognised stock exchange.

v held in physical
Securities

The ITP Regulations will enable
angel investors and venture
capitalists to explore this
opportunity and thereby seek an
easy and efficient exit and will
encourage a number of start-ups
and SMEs to explore the option of
getting their specified securities
listed on the ITP.

V. Exit from the ITP
l
SME listed on the ITP may exit

from it if: (i) its shareholders
approve such exit through a
special resolution with 90% of
total votes and the majority of
non-promoter votes in favour of
such proposal; (ii) the recognised
stock exchange where its shares
are listed approves such exit.
l an SME listed on the ITP
Further,

shall exit from it if: (i) the
specified securities have been
listed on ITP for a period of ten
years; (ii) the SME has paid-up
capital of more than INR
2 5 0 , 0 0 0 , 0 0 0 ( R u p e e s Tw o
Hundred Fifty Million Only); (iii)
the SME has revenue of more
than INR 3,000,000,000 (Rupees
Three Billion Only) as per the last
audited financial statement; or
(iv) the SME has market
capitalization of more than INR
5,000,000,000 (Rupees Five
Billion Only). However, the stock
exchange may grant 18 months'

3.

P R O C E D U R E
F O R
TRANSMISSION OF SECURITIES
SIMPLIFIED
SEBI has by its circular dated
October 28, 2013 issued
guidelines for Share Transfer
Agents (STAs)/issuer companies
and depositories to make the
process for transmission of
securities efficient and investor
friendly.
l
Highlights of the Guidelines:
v
Securities held in demat

form: In case of transmission
of securities held in demat
form and not having a
nominee the existing
threshold limit for such
account has been revised

6

form: In case of transmission
of securities held in a single
name with a nominee or
without a nominee for a
threshold limit of Rs.
2,00,000 (Rupees Two lakh
only) per issuer company,
the company is transmit the
securities in accordance with
the rules as prescribed with
the guidelines. The issuer
company may in its
discretion enhance the value
of the securities.
l Nomination: STAs and
Right of

Registrars to publicize
nomination as an additional
right available to investors.
4.

ISSUES PERTAINING TO
PRIMARY ISSUANCE OF DEBT
SECURITIES RESOLVED
The SEBI by its circular dated
October 29, 2013 has addressed
several issues relating to issuance
of debt securities which are as
follows:
I.

D i s c l o s u r e a n d
standardization of Cash
Flows effective from
December 1, 2013: The cash
flows emanating from the
debt securities shall be
mentioned in the
Prospectus/Disclosure
Document, by way of an
illustration. Further, it has
also been decided that if the
coupon payment date and
redemption date of the debt
securities, is falling on a
Sunday or a holiday, it shall
be made on the next working
day or on the previous
working day respectively.

II.

Withdrawal of requirement
to upload bids on date-time
priority effective from
November 1, 2013 : In light of
the operational difficulties
being faced for making
allotment on date-time
priority basis, it has been
decided that the allotment in
the public issue of debt
securities should be made on
the basis of date of upload of
each application into the
electronic book of the stock
exchange. However, on the
date of oversubscription, the
allotments should be made
to the applicants on
proportionate basis.

RBI UPDATES
1. RBI releases framework for setting
up of Wholly Owned Subsidiaries
by Foreign Banks in India
On the principles of reciprocity and
single mode of presence, the RBI on
November 6, 2013 released a policy
framework for setting up of Wholly
Owned Subsidiaries (WOS) by
foreign banks in India.
Overview of the Policy: The policy
gives the WOS's a treatment almost
at par with the national banks along
with providing incentives to those
which contribute to the Indian
economy. Measures have been
incorporated to contain the
expansion of the foreign banks
along with ensuring corporate
governance compliance.
Main Features of the Framework:
lminimum paid-up capital or
Initial

minimum net worth for a WOS:
Initial minimum paid up voting
equity capital to be Rs. 5 billion for
new entrants. a minimum net worth
of Rs.5 billion in case of existing

III. Disclosure of unaudited
financials with limited
review report effective from
November 1, 2013: To avoid
hardships to frequent debt
issuers, listed issuers who are
in compliance with the listing
agreement, may disclose
unaudited financials with
limited review report in the
offer document, as filed with
the stock exchanges in
accordance with the listing
agreement, instead of
audited financials, for the
stub period, subject to
making necessary
disclosures in this regard in
offer document including
risk factors.
foreign banks desiring to convert
into WOS.
Banks
l allowed entry only in WOS
mode: Banks with complex
structures, which do not provide
adequate disclosure in their home
jurisdiction, which are not widely
held, banks giving a preferential
claim to depositors of home country
in a winding up proceedings would
be permitted entry in India only
through the WOS mode.
l
Continue as branches: Foreign

banks having commenced banking
business in India before August 2010
shall have the option to continue
their banking business through the
branch mode. However the nearly
national bank treatment incentive
would be given in case of the branch
converting into a WOS.
lr i c t i o n s
Rest

on further
entry/capital infusion: Setting up of
additional WOSs will be restricted
when the capital and reserves of the
WOSs and foreign bank branches in
India exceed 20% of the capital and
reserves of the banking system.

7

IV. Disclosure of contact details
of Debenture Trustees in
Annual Report effective
from December 1, 2013: To
enable investors to forward
their grievances to the
debenture trustee, the
Listing Agreement for Debt
Securities has been amended
by inserting a clause which
requires that the companies,
which have listed their debt
securities, have to disclose
the name of the debenture
trustees with contact details
in their annual report and on
an ongoing basis, on their
website.

Parent
l to meet liability of WOS: A
letter of comfort to be issued by the
parent to the RBI stating that it
would meet the liabilities of its
WOS.
l Composition - (i) not less
Board

than 2/3rd of the directors should be
non-executive directors; (ii) a
minimum of 1/3rd of the directors
should be independent of the
management of the subsidiary in
India, its parent or associates; (iii)
not less than 50% of the directors
should be Indian nationals
/NRIs/PIOs.
l guarantee/ credit rating:
Parental

On arm's length basis the WOS
would be permitted to use parental
guarantee/ credit rating, for the
purpose of providing custodial
services and for their international
operations. However, the WOS
should not provide counter
guarantee to its parent for such
support.
l stake to 74% or less: WOSs
Diluting

may, at their option, dilute their
stake to 74 per cent or less in


accordance with the existing FDI
policy. In the event of dilution, they
would have to list themselves.
M&A
l by WOS: The issue of
permitting WOSs to enter into M&A
transactions with any private sector
bank in India would be considered
after a review of the extent of
foreign investment in Indian banks
and functioning of foreign banks in
India.
2. Amendment to the existing policy
for issue of shares by unlisted
Indian companies
The RBI by its Circular dated
November 8, 2013 has allowed
unlisted Indian companies to raise
capital abroad by accessing the
Global Depository Receipts/ Foreign
Currency Convertible Bonds route
for a period of 2 years subject to the
conditions stated in the said
circular.
Conditions for Investment:
l
Unlisted Indian companies are

required to list abroad only on
exchanges in IOSCO/FATF
compliant jurisdictions or those
jurisdictions with which SEBI has
signed bilateral agreements;
l
The issuing of ADRs/ GDRs shall be

subject to the sectoral cap, entry
route, minimum capitalisation
norms, pricing norms, etc. as per
the notified FDI regulations;
l
The number of underlying equity

shares offered for issuance of
ADRs/GDRs to be kept with the local
custodian shall be determined
upfront and ratio of ADRs/GDRs to
equity shares shall be decided
upfront based on applicable FDI
pricing norms of equity shares of
unlisted company;
l
The unlisted Indian company is

required to comply with the
instructions on downstream
investment;

ADRs/GDRs shall be as prescribed
by Government of India;
l
The capital raised abroad could be

utilised for retiring outstanding
overseas debt or for bona fide
operations abroad including for
acquisitions;
l the funds raised are not
In case

utilised as stipulated, the company
shall repatriate the funds to India
within 15 days and such money shall
be deposited only with AD
Category-I banks and will be used
for eligible purposes;
3. Waiver of NOC requirement under
Foreign Direct Investment in
Financial Sector - Transfer of
Shares
The RBI by its Circular dated
November 11, 2013 has decided to
waive the requirement of NoC(s) to
be filed along with form FC-TRS in
case of transfer of shares from
Residents to Non-Residents where
the investee company is in the
financial services sector. However,
any 'fit and proper/ due diligence'
requirement as regards the nonresident investor as stipulated by
the respective financial sector
regulator shall have to be complied
with.
4. Foreign investment in India participation by SEBI registered
FIIs, QFIs and SEBI registered long
term investors in credit enhanced
bonds
The RBI by its circular dated
November 11, 2013 has now
permitted Foreign Institutional
Investors (FIIs), Qualified Foreign
Investors (QFIs) and long term
investors registered with SEBI,
Multilateral Agencies, Pension/
Insurance/ Endowment Funds,
foreign Central Banks to invest in
the credit enhanced bonds up to a
limit of USD 5 billion within the
overall limit of USD 51 billion
earmarked for corporate debt.

l
The criteria of eligibility of unlisted

company raising funds through

8

Justice Sodhi Committee on
Insider Trading Regulations
submits report to SEBI
The High Level Committee to Review
the SEBI (Prohibition of Insider
Trad i ng) Re gul at ions , 19 9 2
constituted under the Chairmanship
of Justice (Shri.) N.K. Sodhi, former
chief justice of Karnataka and Kerala
High Courts and former presiding
officer of the Securities Appellate
Tribunal, submitted its report to SEBI
Chairman, Shri U.K. Sinha, on
December 7, 2013 at Chandigarh.
The Committee has made a range of
recommendations to the legal
framework for prohibition of insider
trading in India and has focused on
making this area of regulation more
predictable, precise and clear by
suggesting a combination of
principles-based regulations and rules
that are backed by principles. The
Committee has also suggested that
each regulatory provision may be
backed by a note on legislative intent.
Some of the salient features of the
proposed regulations are set out
below:1 While enlarging the definition of
"insider", the term "connected
person" has been defined more
clearly and immediate relatives are
presumed to be connected persons,
with a right to rebut the
presumption. The term "immediate
relative" would cover close relatives
who are either financially
dependent or consult an insider in
connection with trading in
securities.
2 Insiders would be prohibited from
communicating, providing or
allowing access to UPSI unless
required for discharge of duties or
for compliance with law.
3 The regulations would bring greater
clarity on what constitutes
"unpublished price sensitive
information" ("UPSI") by defining
what constitutes "generally

available information" (essentially,
information to which nondiscriminatory public access would
be available). A list of types of
information that may ordinarily be
regarded as price sensitive
information has also been provided.
4 Trading in listed securities when in
possession of UPSI would be
prohibited except in certain
situations provided in the
regulations.
5 Insiders who are liable to possess
UPSI all round the year would have
the option to formulate prescheduled trading plans. In such
cases, the new UPSI that may come
into their possession without
having been with them when
formulating the plan would not
impede their ability to trade.
Trading plans would, however, be
required to be disclosed to the stock
exchanges and have to be strictly
adhered to.
6 Conducting due diligence on listed
companies would be permissible for

purposes of transactions entailing
an obligation to make an open offer
under the Takeover Regulations. In
all other cases, due diligence would
be permissible subject to making
the diligence findings that
constitute UPSI generally available
prior to the proposed trading. In all
cases, the board of directors would
need to opine that permitting the
conduct of due diligence is in the
best interests of the company, and
would also have to ensure
execution of non-disclosure and
non-dealing agreements.
7 Trades by promoters, employees,
directors and their immediate
relatives would need to be disclosed
internally to the company. Trades
within a calendar quarter of a value
beyond Rs. 10 lakhs or such other
amount as SEBI may specify, would
be required to be disclosed to the
stock exchanges.
8 Every entity that has issued
securities which are listed on a stock
exchange or which are intended to

be so listed would be required to
formulate and publish a Code of Fair
Disclosure governing disclosure of
events and circumstances that
would impact price discovery of its
securities.
9 Every listed company and market
intermediary is required to
formulate a Code of Conduct to
regulate, monitor and report
trading in securities by its
employees and other connected
persons. All other persons such as
auditors, law firms, accountancy
firms, analysts, consultants etc.
who handle UPSI in the course of
business operations may formulate
a code of conduct and the existence
of such a code would evidence the
seriousness with which the
organization treats compliance
requirements.
10Companies would be entitled to
require third-party connected
persons who are not employees to
disclose their trading and holdings
in securities of the company.

APPOINTMENTS
Ms Usha
l Ananthasubramanian has
been appointed as CMD of
Bharatiya Mahila Bank
Mr Deepak Kapoor has been
l
appointed as India Chairman, PwC
Mr Ajit
l Prakash Shah has been
appointed as Chairman of Law
Commission of India
Mr Nitish Kapoor has been
l
appointed as Managing Director,
Reckitt Benckiser India
Mr N
l eeraj Sahai has been
appointed as President, Standard &
Poor's Ratings Services
Ms Arundhati Bhattacharya has
l
been appointed as Managing
Director, SBI
Mr M
l i k e Ye a g e r h a s b e e n
appointed as Chairman, Cairn India

Mr P
l Madhusudan appointed as
CMD, Rashtriya Ispat Nigam
Ms Sushma Singh has been
l
appointed as Chief Information
Commissioner (CIC), India
Mr Sumit Bose has been appointed
l
as Finance Secretary, Finance
Ministry, GOI
Mr D
l Shivakumar has been
appointed as CEO, PepsiCo India
Mr Shaktikanta Das has been
l
appointed as Special Secretary,
Department of Economic Affairs,
GOI
Mr C
l V R Rajendran has been
appointed as Chairman and
Managing Director, Andhra Bank

9

Ms Usha Sangwan has been
l
appointed as Managing Director,
LIC
Mr P.
has been
l K. Malhotra
appointed as Secretary (Additional
Charge), Department of Legal
Affairs, Ministry of Law and Justice,
GOI
Mr Pradeep Kumar has been
l
appointed as Managing Director
(Corporate Banking), SBI
Mr P
l Madhusudan has been
appointed as Chairman and
Managing Director, Rashtriya Ispat
Nigam Limited (RINL)
Ms Sunita Sharma has been
l
appointed as MD & CEO of LIC
Housing Finance Ltd


GLOBAL
By :

China amends company law
On 28 December 2013, the Standing
Committee of the People's Congress
adopted a resolution to approve the
Amendment to the PRC Company Law
("Amendment"). The Amendment will
become effective on 1 March 2014. It
refers to changes of the capital
contribution of companies in China
with the aim to ease the financial
burdens on investors for establishing
companies in China. According to the
current PRC Company Law, the
minimum registered capital of a
limited liability company shall be RMB
30,000 or RMB 100,000 (in case the
company is wholly owned by one
shareholder). For a company limited
by shares, the minimum registered
capital shall be RMB 5 million.

According to the Amendment, these
requirements on minimum registered
capital will be abolished, unless the
law, administrative regulations or
decisions of the State Council provide
otherwise for companies in certain
industrial sectors. Thus, theoretically
speaking, investors can now establish
a company with a registered capital of
one RMB.
On capital contributions, prior to the
Amendment, the investor of a
company had to contribute at least
20% (15% for FIEs) of the registered
capital within 3 months upon the
issuance of the first Business License
of the company and the remaining
amount had to be paid in within 2
years. According to the Amendment,
such deadlines for capital contribution

10

no longer exist, unless the law,
administrative regulations or
decisions of the State Council provide
otherwise for certain companies.
Now, the amount of the paid-in
registered capital is no longer subject
to registration with the competent
AIC and it also will not be a must to
engage a certified public accountant
to issue a capital verification report for
the capital contribution. Furthermore,
in the past, the amount of cash
contribution shall not be less than 30%
of the total amount of registered
capital of a company. Such
requirement on minimum cash
contribution has also been abolished
by the Amendment.

Merger Review process
simplified- European
Commission
The European Commission (EC) has
announced rules to restructure
procedure for mergers which shall be
effective from 1 January, 2014. The
significant changes include bringing
more mergers under review and
significantly reducing the information
required for merger review by asking a
number of questions upfront.
The amendments introduced by the
new framework include changes at
two levels mainly being :
(i) R e g u l a t o r y F r a m e w o r k
Amendments: The regulatory
framework which governed the
mergers are eligible for review
under the simplified review
procedure wherein the now the
scope of mergers eligible for
review has been widened in cases
where the activities of the parties
overlap horizontally, and their
combined market share of
activities of parties constitute 20%
instead of the earlier 15% of the
market share; and in case their
activities overlapping vertically
and their market share is
constitutive of 30% instead of
earlier 25% of the aggregate
market share shall be subject to
review.

has to ask the parties later on in
the review.
The amendments have also
permitted the parties to seek
waiver from the Commission in
respect of furnishing information
pertaining to (i) acquisitions
made during the last 3 years by
group undertakings active in
affected markets; (ii) estimates of
the total size of the market in
terms of sales value and volume;
and (iii) details of the most
important co-operative
agreements engaged in by the
parties to the concentration in
affected markets.
The package comprises amended
versions of the (i) Notice on
Simplified Procedure and (ii)
Commission Implementing
Regulation and its accompanying
Annex 1 (Form CO), Annex 2
(Short Form CO), and Annex 3
(Form RS).

France and USA sign the FATCA
tax information
The representatives of France and the
United States of America have on 14
November, 2013 signed a bilateral
Inter-Governmental Agreement (IGA)
intended to implement the Foreign
Account Tax Compliance Act (FATCA)
which was a flagship legislation
introduced by the US in 2010 to

(ii) Procedural Amendments: the
regulations pertaining the
formalities (i.e. the filing and
information submitting
requirements to be complied
with) for each of the mergers
under review. The amendments
have been designed primarily to
reduce the volume of information
required to be provided by the
parties. Additionally, the
Commission now asks for certain
information upfront, so as to
reduce the number of questions it

11

combat offshore tax evasion by US
persons. The key points of the IGA
are:
(i) "Most favoured nation' clause to
be adopted to favour the french
financial institutions;
(ii) Exemption related to employee
savings plans and a special status
to the asset management
industry that can ensure absence
of US investors and nonparticipating institutional
customers;
(iii) Exemption for certain local banks
with an almost exclusively local
client base which could be
beneficial to the French
institutions especially in light of
the mutual banking model;
(iv) Insurance products and pension
funds dedicated to retirement
planning to receive special
exemptions under FATCA.
These exemptions are likely to affect
the sectors including the banking, life
insurance and asset management
industries along with certain holding
companies as well as hedging, finance
and treasury centers of non-financial
groups which could also be impacted
depending on the nature of their
activities.
Thus, the IGA is intended to simplify
the requirements but will require


significant efforts to maintain
compliance necessary for foreign
financial institutions.

Largest ever US Insider Trading
Case settlement
On November 8, 2013, the US
Department of Justice (USDOJ)
announced that SAC Capital Advisors
LP, SAC Capital Advisors LLC, CR
Intrinsic Investors, Sigma Capital
Management (collectively 'SAC
Companies') that are responsible for
the management of a group of
affiliated hedge funds has agreed to
plead guilty to charges of insider
trading. SAC has agreed to an
additional penalty of US$1.184 billion
and to terminate its investment
advisory business. The earlier penalty
of US$616 million have already been
agreed to be paid.
As alleged, from 1999 to 2010,
numerous employees of SAC
Companies obtained and traded nonpublic information or recommended
trades based on information of more
than 20 publically traded companies
across multiple sectors to SAC
Portfolio Managers.

ii. Order Interim Measures: CMA has
wider powers to pass interim
orders including requiring a
company under suspicion to
suspend or terminate relevant
businesses under investigation.
iii. Merger Control: CMA will have a
right to order the reversal of
integration of businesses that
have already occurred.

Canada- EU trade agreement
liberalizes existing trade
practices
The conclusion of the Comprehensive
Economic Trade Agreement ("CETA")
between Canada and the European
Union has finally made the four year
old negotiations between the two
parties see the light of the day.
Though the CETA structure is already
in place, formalities including
conversion of the agreement into the
treaty languages and complying with
the legal formalities could take
another 24 months.
Scope of CETA:
i.

United Kingdom gets a new
competition authority
The Competition and Markets
Authority (CMA) has replaced the
existing competition
agencies namely the Office of Fair
Tr a d i n g a n d t h e C o m p e t i t i o n
Commission for becoming United
Kingdom's exclusive authority to
regulate competition. The CMA will
not only replicate the powers of its
predeceasing authorities but assume
new ones as well including:
i. I n v e s t i g a t i v e P o w e r s : To
investigate into suspected
infringements including
interrogating individuals
associated with businesses over
which the suspicion cloud looms.

ii.

Agronomy: Seeming to be the
most critical of the issues and a
possible "deal-breaker", the
agrarian front saw Canada
pressing for diverting from the
ground rule of fair trade and
seeking a significant increase in
the quota of beef and pork, in
return EU increasing the cheese
imports from Canada.
Investments: After the EU
negotiators pressed for key
issues including gaining
investment access to Canadian
banking and removal of EU
investment reviews under the
Investment Canada Act has now
reaped to the EU banks doing
business in relation to deposits
excluding that the Canadian
banks still be in ownership of the
Class A banks.

12

iii. Government Approval: The
Government concessions that
can be procured now have
exceeded those already existing
under the NAFTA. EU Companies
can now bid on the federal
government contracts and
reciprocal rights have been
convened on the Canadian
companies to bid on contracts
tendered by all EU institutions, as
well as with all 28 member
countries and their regional and
local governments.
iv. Trade-in Services: Reciprocal
preferential access to sectors
including information technology
workers, professionals (e.g.
accountants, engineers),
investors, environmental
services, scientific/technical
personnel, and workers in the
energy distribution sector have
been introduced under the CETA.
Therefore the outcome may not have
satisfied all the stakeholders on each
of the issues, but the parties have
understood that the agreement
necessarily has positive impact on
each of their economic sectors.

Canadian corporate governance
under review
The Minister of Industry has
announced a public consultation on
the Canada Business Corporations Act
with a view to improving the
governance of corporations subject to
the statute.The key areas identified
for consultation include executive
compensation, shareholder rights,
shareholder and board
communication, securities transfers,
corporate transparency, combating
bribery and corruption, diversity of
boards and management, the use of
t he l e gi s l at i on' s arrange m e nt
provisions, and corporate social
responsibility. The comment period is
open until March 11, 2014.

Belgium: Competition
Authority Issues Guidelines For
Dawn Raids
The Belgian Competition Authority
("BCA") has announced that when
investigating violations of
competition law, they can carry out
unannounced on-site inspections at
the premises of undertakings,
associations of undertakings and
natural persons. Such inspections are
known as dawn raids. The following
points should be noted:
l
BCA

can start the inspection as
soon as the undertaking
concerned receives the orders
issued by the competition
prosecutor and the investigating
magistrate. It is not obliged to
await the arrival of external
counsel. In practice, however, the
BCA will usually wait 30 minutes in
order to allow external counsel to
reach the premises.

Electronic data and documents are
l
increasingly crucial when it comes
to proving potential violations of
competition law. The guidelines
explain in detail the methods the
BCA applies to search for such
documents and data.
The guidelines provide much-needed
insight into the various methods used
to search for electronic documents
and data during a dawn raid and
appear to apply the best practices for
seizing digital data established by the
Brussels Court of Appeal in its
judgment of 18 April 2013. Pursuant to
this judgment, the documents must
be selected in the company's
presence. Secondly, the selection
should be made using keywords,
which should be closely connected to
the practices under investigation.
Hence, general keywords covering a
wide array of subjects are not allowed.
In addition, the selection of
documents on the basis of keywords

should be double checked using
another set of keywords and spot
checks. Finally, the company should
be given sufficient time to review the
selection, taking into account the
complexity of the case. The
prosecutors should permanently
delete documents deemed to fall
outside the scope of the investigation.

China: approval requirements
for outbound investment
projects relaxed
On 2 December 2013, the State Council
issued a 2013 version of Catalogue of
Investment Projects that Require
Government Verification. Now, only
investments of US$1 billion or more, or
that involve sensitive countries or
industries, still require verification by
Chinese governmental authorities.
Other outbound investments are
subject only to record filing
requirements. The Catalogue is
currently effective; however, the
authorities may wait until
implementing rules have been issued
before applying the Catalogue in
practice.

CONTACT
Krishnayan Sen / Dipankar Bandyopadhyay
partners@verus.net.in
Mumbai
24 M. C. C. Lane
Fort
Mumbai 400023
E: mumbai@verus.net.in
T: +91 22 22834130 / 01
F: +91 22 22834102
India member firm of:

New Delhi
E-177 Lower Ground Floor
East of Kailash
New Delhi 110065
E: delhi@verus.net.in
T: +91 11 26215601 / 02
F: +91 11 26215603

Kolkata
10 Old Post Office Street
Ground Floor
Kolkata 700001
E: kolkata@verus.net.in
T: +91 33 22308909
F: +91 33 22487823
Winner:
Best Newcomers: India
Business Law Journal Awards
2012

www.verus.net.in
13

Hyderabad
Chamber#103 Ground Floor
6-3-252/A/10 Sana Apartments,
Erramanzil
Hyderabad 500082
E: hyderabad@verus.net.in
T: +91 40 39935766


Indian CompaniesMoving Closer to a US Listing

T

he U.S. capital markets have long
been a favoured destination for
companies wishing to raise capital or
to establish a trading presence for
their securities. A U.S. listing can help
foreign private issuers (FPIs) to
significantly improve their chances to
attract capital. Several companies in
India, especially in new age sectors
such as information technology and
financial services, made good use of
this opportunity and listed their
securities in the U.S. market.
However, in the recent past the pace
of overseas listings reduced primarily

due changes in the financial and
regulatory environment in the U.S.
which lead to increased cost of
compliance. In particular, some of the
key challenges include being subject
to the U.S. regulatory environment,
increased cost of compliance on
account of provisions of the Sarbanes
Oxley Act and the rigorous
accounting, disclosure and review by
the Securities Exchange Commission
(SEC).
Another reason for lack lustre
overseas listings was an impediment
in the Indian regulations which

14

required companies to list first in India
before they could list overseas. To this
end, the Ministry of Finance in India
has issued a press release on 27
September 2013 on allowing unlisted
companies to raise capital abroad
without the requirement of prior or
simultaneous listing in India, allowing
Indian companies to capitalise on this
demand for diversification from
investors. The approval for listing is
however subject to the condition that
the Stock Exchanges would have to be
International Organisation of
Securities Commissions (IOSCO) or

financial data. The rules related to
Executive Compensation Disclosure
have also been relaxed for EGCs.
The reporting requirements with
respect to financial statements,
selected financial information and
audit firm rotation apply equally even
in case of Post IPO Reporting
Requirements

Financial Action Task Force (FATF)
compliant, or those with whom
Securities and Exchange Board of
India (SEBI) has a bilateral agreement.
That gives Indian unlisted companies a
choice of over 100 jurisdictions
including those of the U.S., U.K.,
Singapore and Hong Kong.
The money raised via an overseas
listing can only be utilised to repay
overseas debt or fund acquisitions
abroad. In case the funds are not
utilised for these two purposes, they
would have to be remitted back to
India within 15 days and deposited
with an RBI recognised authorised
dealer.

corporate governance and other
regulatory requirements for
'emerging growth companies' (EGCs),
a new class of issuer. An EGC is a
company that had gross revenues of
less than USD1 billion during most
recently completed fiscal year.
The JOBS Act has brought about
several changes to make a new IPO
playing field for several companies.
These provisions have reduced the
costs and risks associated with IPO in
emerging growth companies in three
distinct areas; namely in the IPO
process, in the IPO Registration
Statement Disclosure requirement
and in the Post IPO Reporting
requirements.

further in order to keep pace with and
to restore U.S.'s leading position in
overseas listings, in April 2012, the U.S.
Enacted the Jumpstart Our Business
Startups ('JOBS') Act. This Act which
received the assent of President
Obama was a significant step that
provided a thrust to simplifying
listings in the US.

The fact that JOBS Act now permits
companies to make a confidential
submission of the IPO Registration
Statement with the SEC has indeed
helped companies that are reluctant
to publicly disclose proprietary
information, market data and financial
data

One of the aims of the JOBS Act was to
increase the number of companies
electing to complete an IPO and to
provide those companies with a
transition period to the public
markets, allowing them to focus
resources on growth of their
businesses and reduce financial,

In terms of the IPO Registration
Statement Disclosure Requirements,
only two years of audited financial
statements and two years of selected
financial data is now required as
compared to the earlier requirement
to file three years of audited financial
statements and five years of selected

15

The process of planning and executing
an IPO is time-intensive and, typically
takes several months from
organisational meeting to closing,
though the exact time taken can vary
widely and depends on the complexity
of the transaction, the company's
readiness prior to embarking on the
IPO process, market conditions and
many other factors. Some of the
frequently encountered hurdles in the
IPO process relate to legal and tax
structuring, governance, having
adequate reporting tools and
management team's availability.
In summary, though the JOBS Act is
only a year old, early results show it is
having an impact by providing an "onramp" to public markets for smaller
companies. Given the initiative by the
Ministry of Finance for overseas
listing, and the favourable response to
the JOBS Act, there is an opportunity
for increased number of companies to
make use of the initial two year
window for accessing the U.S. Capital
Market.
Authored by:

Mr. Gaurav Vohra
Director
Accounting Advisory Services
KPMG, India


Infrastructure Projects Capitalization Challenges

T

he infrastructure sector in India is
developing at a rapid pace and is
attracting attention and capital from
both domestic and foreign players
alike. This includes not only public
utilities such as roads, bridges,
tunnels, hospitals, airports, railways,
telecom and power but also real
estate, both residential and
commercial. Apart from the
regulatory, technical and commercial
issues that infrastructure projects
face, there are also a number of
significant accounting challenges.
These accounting issues come up
since the transactions and events that
take place as part of these projects are
complex in nature and the Indian
accounting framework sometimes

does not cover the unique aspects of
such transactions. As a result,
accountants are left to assumptive
interpretation and judgment to
conclude on such financial reporting
issues.
In any infrastructure project,
capitalization of costs is one of the
most crucial areas of accounting.
Simply put, capitalization means
inclusion of a cost incurred in the value
of a fixed asset. As the concept of
'Earnings Before Interest, Tax,
Depreciation and Amortisation' gains
popularity, companies increasingly
desire to capitalize as many costs as
possible. This has a favourable impact,
effectively reclassifying expenditure

16

from operating expenses (within
'Earnings Before Interest, Tax,
Depreciation and Amortisation') to
depreciation (outside 'Earnings
Before Interest, Tax, Depreciation and
Amortisation'). Accountants shoulder
the responsibility to balance
management's inclination towards
capitalization and adherence to
accounting principles.
The key accounting issues
infrastructure projects face during the
construction and development
phases are:
l costs are to be capitalized?
Which
l
Till when

are these costs to be
capitalized?

Which costs to be capitalised?

Labour costs

'Accounting Standard 10: Accounting
for Fixed Assets' provides guidance on
recognition of costs for capitalization.
The Accounting Standard defines
'fixed asset' as an asset held with the
intention of being used for the
purpose of producing or providing
goods or services and is not held for
sale in the normal course of business.
The Standard further states that the
cost of an item of fixed asset should
comprise all directly attributable costs
incurred to bring the asset to its
working condition for its intended
use.

Labour costs typically are a large
component of many infrastructure
projects, and it is appropriate that the
internal effort expended by technical
engineers and other in-house
specialists be included in the cost of
assets built.

The Standard gives limited guidance
on what constitutes "directly
attributable costs" but gives a few
examples of such costs:
a) site preparation;
b) initial delivery and handling costs;
c) installation cost, (like special
foundations for plant); and
d) professional fees, (like fees of
architects and engineers).
Following are some costs that are
common to most infrastructure
projects and an analysis on their
eligibility for capitalization:

Feasibility studies
Generally, companies incur
expenditure in carrying out a
feasibility study before deciding
whether to invest in a project or in
deciding which project to pursue.
Generally, expenses incurred for
feasibility assessment should be
expensed as incurred because they
are not linked to a specific item of
capital project. However, the cost of
capital project does include
expenditure that is incurred only if an
asset is acquired, such as a fee paid to
a broker or agent only if a suitable
property is identified and purchased.

Often there are practical
complications in determining how
much internal labour to capitalise.
Common difficulties exist when, for
example, a resource pool is used for
more than one project or when there
are overlaps between construction
and maintenance activities. Strong
project management and time
recording systems therefore are
important in tracking such costs and in
ensuring that the proportion relating
to construction and extension of
infrastructure can be measured
reliably.

Operating lease costs
If a project is constructed on land that
is leased under an operating lease,
then the operating lease costs
incurred during the construction
period can be capitalised as part of the
cost of the project if these costs are
directly attributable to bringing the
asset to its working condition for its
intended use.
Training
The cost of training staff is not
capitalised. Even if staff training is
included as part of a larger contract
with a third party in connection with
the acquisition or construction of
capital asset, it is appropriate that the
training cost component of the
contract to be expensed as the
training occurs.

Start-up and commissioning
costs
The expenditure incurred on start-up
and commissioning of the project,

17

including the expenditure incurred on
trial runs, and experimental
production, is usually capitalised as an
indirect element of the construction
cost. However, it is of foremost
importance to first establish that
those activities are necessary to bring
the asset to its working condition.

Borrowing costs
Borrowing costs are interest and
other costs incurred by an entity in
connection with the borrowing of
funds. They include interest and
commitment charges on bank
borrowings and other short-term and
long-term borrowings, exchange
differences on foreign currency
borrowings and other related costs.
Borrowing costs are eligible for
capitalization only when they are
incurred on funds borrowed
specifically for the purpose of the
concerned project. If the funds are
borrowed generally and used for the
purpose of the capital project, the
amount of borrowing costs eligible for
capitalization should be determined
by applying a capitalization rate to the
expenditure on that asset.
Capitalization of borrowing costs
should start only when the project
work is in progress, even if the
borrowing costs are being incurred
before the commencement of project
work.


Foreign exchange differences
Companies have an option to
capitalize foreign exchange
differences arising on all long term
borrowings either as an adjustment to
the cost of a related depreciable asset
or by accumulating these differences
in a Foreign Currency Monetary Item
Translation Difference Account, if the
borrowing does not relate to a
depreciable asset.
The balance in Foreign Currency
Monetary Item Translation Difference
Account is subsequently amortised
through the profit and loss account
over the life of the borrowing.
Companies are allowed to continue
such capitalization even subsequent
to the completion of construction of a
qualifying asset, unlike borrowing
costs which are required to be
charged to the profit or loss account
subsequent to construction.

Abnormal wastages
Abnormal amounts of wasted
material, labour and other resources
to be expensed as incurred instead of
being capitalized. A determination of
what should be considered abnormal
is subjective, but some of the factors
to consider include the level of
technical difficulty involved with the
construction, the scale of the project,
the estimates and timelines included
in the project planning, and the usual
construction process for that type of
project.

Administration and other
general overhead costs
Administration and other general
overhead expenses are usually
excluded from the cost of fixed assets
because they do not relate to a
specific fixed asset. However, in some
circumstances, such expenses may be
specifically attributable to
construction of a project or to the

acquisition of a fixed asset or bringing
it to its working condition, may be
included as part of the cost of the
construction project or as a part of the
cost of the fixed asset
Some other common issues which
need careful analysis before deciding
on capitalization are as follows:
l
Project

support costs - Companies
incur costs to build houses, roads,
water and electricity facilities and
other utilities to support the living
conditions of employees, labour
and general public in the locality
near the project.

l
Redevelopment

cost - Cost
incurred in activities like
negotiation with the tenant to exit
the property (including lease
cancellation cost), obtaining
necessary regulatory approvals
for change in use, redeployment
cost of used assets, site
restoration cost, etc.

l
Government

incentive - Capital
projects receive grants in the form
of land lease at nominal rentals or
in the form of tax exemption.

l
Liquidated

damages - Penalties
received from project contractors
for delay in achieving agreed
milestones.

and generally an engineer's certificate
to the effect of its completion is
obtained. In many cases the interval
between the date a project is ready to
commence commercial
use/production and the date at which
commercial use/production actually
begins is prolonged, all expenses
incurred during this period are
charged to the profit and loss
statement.
The date of capitalization should be
carefully determined since it is critical
from the accounting perspective as all
expenditures cease to be capitalized
and depreciation of the asset
commences.

To summarise…
The size and duration of infrastructure
projects makes it crucial for a
company to understand the
accounting issues these projects face
and their impact on the financial
statements. Therefore systems and
processes need to be prepared to deal
with these accounting challenges in
order to manage the complexities
effectively.
Authored by:

Till when are these costs to be
capitalized?
Capitalization of costs should end
when the asset is ready for its
intended use. In case of infrastructure
projects, this happens when the
project is ready for commercial use

18

Mr. Akil Master
Director
Accounting Advisory Services
KPMG, India

EXPERT SPEAK

With Infra, Banking Needing
Trillions, Regulatory Innovation
Critical
India's development over the next five years hinges on how the policy and rules framework facilitates the corporate bond market

I

ndia's infrastructure and banking
sectors will require a total Rs 10.4
trillion from the bond market over the
next 5 years.
That's about Rs 2.1 trillion a year or 50%
more than what was mopped up by
these sectors in the last fiscal.
Which begs the question, how will
such humongous amounts be raised?
I believe this can be done only through
regulatory support in three areas:
deepening of India's corporate bond
market including through
innovations, developing creditenhancement mechanisms for
infrastructure projects and building
investor appetite for banks' nonequity capital.

We will need to complement this by
facilitating greater foreign investor
participation and more liberal norms
for long-term investors, apart from
addressing issues of low trading
volumes, issuer concentration and a
weak securitisation market.
On the innovation side, there have
been several encouraging initiatives
this year, such as the first 50-year
rupee bond and the first inflationindexed debentures by Indian
companies, five Basel III compliant
issues by banks, and the launch of two
infrastructure debt funds (See box on
page 21).

The requirement & the
challenges

19

Let us first look at the investment
needs. CRISIL Research presages a
total investment of Rs 26.4 trillion in
the infrastructure sector over the next
five years. Four sectors need the bulk
of this money: the power sector Rs 8.4
trillion, roads Rs 6.3 trillion, railways
Rs 4.3 trillion and urban infra Rs 4
trillion.
About Rs 8.1 trillion of the funding will
be through equity, while debt funding
would be around Rs 18.3 trillion.
While banks will continue to be the
largest financiers of the infrastructure
sector contributing Rs 8.7 trillion,
another Rs 2.6 trillion need to be
raised through external commercial
borrowings. The remaining Rs 7 trillion


will have to come from the corporate
bond market.
Currently, bond market funding for
infrastructure is primarily indirect, in
the sense that 5 specialised financial
institutions issued nearly 60 per cent
of Rs 1.3 trillion bonds raised in the last
fiscal to fund infrastructure. Another
25 per cent bonds were raised by
central and state government public
sector enterprises.
Only 15 per cent of the funding was
available directly to the private sector
issuers. It is for this segment of the
market that regulatory attention is
needed, with the objective to
encourage direct access of private
infrastructure projects to the bond
market.
This will be possible by focusing on
credit-enhanced structures such as
partial guarantees, securitisation of
annuity and toll collections for
operational roads, and of property tax
receivables of municipal corporations.
Another to-do is to ensure successful
scale-up of the recently launched
infrastructure debt funds (IDFs) in the
form of NBFCs. Two such IDF-NBFCs
have already been launched, both of
which have been rated by CRISIL.
Banks, on the other hand, will seek to
raise Rs 3.4 trillion in non-equity
capital till March 31, 2018. We have
already seen a decent beginning on
this front, with five banks raising Rs 60
billion by issuing Tier II bonds -- all of
which were rated by CRISIL.

The regulatory facilitation so far
l
IRDA

has created headroom for
insurer investments in AA-rated
corporate bonds by clubbing
investment limits in government
securities with AAA-rated
corporate bonds.

l has also taken many enabling
IRDA

steps, such as approving the issue
of NCDs of India Infradebt Ltd to be
re ck one d as inve stme nt in
infrastructure sector by insurers.
l
The

Employees' Provident Fund
Organisation, India's largest
investor with a corpus of Rs
5,46,000 crore, has made its
investment policy a little more
inclusive by adding more names for
investment in bonds.

l
Recently,

the Reserve Bank of
India (RBI) proposed allowing
banks to offer partial credit
enhancements to corporate bonds
by way of providing credit and
liquidity facilities to the
corporates, and not by way of
guarantee. Guidelines in this
regard are expected shortly.

lRBI
The

has also allowed foreign
institutional investors (FIIs),
qualified foreign investors and
long-term investors registered
with the Securities and Exchange
Board of India - such as sovereign
wealth funds, multilateral
agencies, pension/ insurance/
endowment funds and foreign
central banks to invest up to $5
billion in credit-enhanced bonds
issued locally by Indian companies.

But the key challenge will be in raising
money through Tier I non-equity
instruments due to their riskier
features of coupon discretion and
principal loss absorption at specified
capital thresholds.
So to build investor appetite for such
instruments, guidelines for long-term
investors will need to include eligibility
for Tier I instruments.

20

In the circular, the RBI said the $5
billion limit would be part of the
overall $51 billion quota for
corporate debt investment by FIIs.
Meanwhile, the bond market stirs
Recent issuance trends have been
encouraging and follow policymakers'
efforts to remove impediments.
Fiscal 2012 saw a 31% increase in
issuances to Rs 2,51,000 crore over
fiscal 2011, while in the last fiscal, they
rose 39% to Rs 3,50,000 crore. The
number of issuers, too, increased
from 182 to 267 in the period.
However, adverse domestic business
environment, currency volatility and
high interest rates have led to a
decline in issuance volume in the first
half of the current fiscal by 13% to Rs
1.22 trillion as regular issuers stepped
back.
Yet, even though the total issuance
volume fell, there is visible growth in
both the number of issuers and
issuances. This is because private
sector issuers have been accessing the
bond market despite adverse
conditions.
To be sure, there are other enabling
factors, too, today. With 24,000 firms
rated by local rating agencies - the
largest number in the worldavailability of credible information and
analysis in the public domain has never
been so high.
All of the above, I believe, are signs of
a structural strengthening of India's
bond market. Truly, an inflection
point could be at hand -- conditions
enabling.

Additionally, with the introduction
of a capital conservation buffer,
banks will be in a better position to
absorb potential losses during
financial crises.

Recent innovations
India's first 50-year bond
In early July this year, CRISIL
assigned its 'CRISIL AA+/Stable'
rating to Mahindra & Mahindra Ltd's
(M&M's) Rs 500 crore, 50-year nonconvertible debenture issue -- the
first 50-year, plainvanilla rupeedenominated instrument by an
Indian corporate. The issue
underscored the increasing
confidence of investors in corporate
India's long-term prospects. CRISIL
believes investors such as pension
funds and insurance companies can
use such long-tenure instruments to
better align the duration of their
portfolios. The salient features of
the instrument are a tenure of 50
years with bullet redemption,
interest rate of 9.55% per annum,
annual payment of interest, and no
call or put option

India's first NBFC
Infrastructure Debt Fund
In another landmark development in
July this year -- which will enhance
the availability of funds for
infrastructure projects through the
Indian debt markets -- CRISIL
assigned its CRISIL AAA/Stable
rating to the Rs 500 crore debenture
issue of India Infradebt Ltd. The
company, which received its licence
in February 2013, is India's first
infrastructure debt fund set up as a
non-banking financial company
under the guidelines issued by the
Reserve Bank of India. An IDF-NBFC
is a new vehicle designed to

India's first inflation-indexed
debentures

facilitate the flow of low-cost, longterm funds from domestic and
global debt investors to capitalintensive infrastructure projects.

India's first Basel-III compliant
Tier-II bonds
Late in June, CRISIL assigned its
CRISIL AA+/Stable rating to the Rs
500 crore Tier-II bonds of United
Bank of India. This was the first TierII capital instrument issued in India
under the Basel-III capital
regulations. Five more public sector
undertakings followed suit. The
Reserve Bank of India had advised
the implementation of Basel-III
capital regulations for Indian banks
from April 1, 2013, based on the final
guidelines issued in May 2012. CRISIL
believes the guidelines will
structurally strengthen India's
banking sector by enhancing the
quantity and quality of capital.

In May this year, CRISIL assigned its
CRISIL AAA/Stable rating to Larsen &
Toubro Ltd's (L&T's) Rs 100 crore
inflation-linked capital-indexed nonconvertible debenture issue, the
first of its kind in the country. These
debentures, which were issued in
the same month, were unique in that
they offered inflation-adjusted
returns to investors based on the
movement in the wholesale price
index (WPI) over the tenure of the
instrument. While the real interest
rate is fixed, the instruments
provide for annual indexation of the
principal, leading to a variable
interest payout. At the end of the
tenure, the redemption value will be
the principal adjusted for the
prevailing WPI, subject to a
prescribed floor and cap. The salient
features of the debentures are a
tenure of 10 years with bullet
redemption and a real yield of 1.65
per cent per annum.
Authored by:

Ms. Roopa Kudva
Managing Director & CEO
CRISIL Ltd

21


Corporate Bond Market in
India – Challenges and
Opportunities

C

orporate Bond markets play a
crucial role in the development of
an economy, by efficiently allocating
capital across the economy, providing
diversification of risk to the investor
community and also strengthening
the stability of the investment
ecosystem.

Size a reflection of maturity?
It is a well-known fact that the
Government and Corporate Bond
market in India lag not only the
developed world but also China and
other Asian countries. According to
the Asian arm of the Securities
Industry and Financial Markets
Association, the total size of the bond
market in India at about USD 100bn in

2012 is approx. 25% of the Chinese
bond market and 69% of the Korean
bond market.
Another interesting statistic is the
bond outstanding to GDP ratio. India,
which is Asia's third largest economy,
has a ratio of merely 5.5%. This puts us
behind every country in Asia (apart
from Indonesia). To put this in
perspective, China that has a bond-toGDP ratio of about 24%. A CII survey
suggests our ratio may rise from
approx. 5.5% to 15% by the end of the
12th Plan, but that is tough to imagine.
a. Indian corporate bonds fare poorly
Indian Corporate Bond market
fare even worse when compared
to Government bonds. India's

22

corporate bond issuance is less
than one-fifth of China's and less
than one-quarter of Korea's
corporate bond market. Corporate
securities comprise only 20% of the
total amount of outstanding
bonds in India, with a mere 5% of
that raised through Public Issues.
b. Dismal secondary market volumes
An analysis of secondary market
trading also paints a sad picture for
Indian corporate bonds. In FY13,
the ratio of total volumes traded to
outstanding debt was 0.57 times
for corporate debt and 1.58 times
for Government Securities. The
volume to debt ratio is regarded as
a measure of the potential for

secondary market expansion and
going by these numbers, the
current situation needs to improve
drastically.

Many challenges plaguing the
sector
Why do Indian companies not access
the debt markets regularly? One of the
reasons has to do with a mindset issue
amongst Indian promoters. A
combination of a strong equity culture
and persistently high and rising
interest rates has biased the promoter
community against large scale
issuance of fixed-rate securities. Some
of the other factors are:
a. Tax Arbitrage claims its pound of
flesh
Along with the development of a
sound and efficient bond market,
the taxation system should keep
pace and ensure it can
accommodate structural changes.
Unfortunately, the current tax
system has also contributed to the
limited participation in corporate
bond markets by creating an
artificial incentive to invest in
equity or debt Mutual Funds as
opposed to direct bonds.
Interest earned on investment in
bonds is taxed at Maximum
Marginal Rate (MMR), while
dividends on equity are tax free.
Further, the benefits of indexation
and lower capital gains tax on Debt
mutual funds creates a tax
disadvantage for corporate and
individuals while investing directly
in bonds.
b. Bank monopoly crowds out
smaller players
The lack of depth in debt market
leaves large companies dependent
upon the banking system, giving
them a quasi-monopoly position.
Banks, then, have less and more

costly capital to lend to the small
and medium-size enterprises.
Ultimately, this raises the overall
cost of financing as other debt
instruments take cues from bank
rates and deters corporate
borrowers from tapping debt
markets.
c. Absence of a sound credit rating
ecosystem
One of the most important
elements missing in India is a
robust, transparent, easy-toaccess credit rating industry, which
makes bond markets attractive
and accessible. A well-supervised
and established credit rating
industry can provide investors with
information, comfort and relative
surety regarding the type of
securities they are trading in. This
will undoubtedly lead to more
issuances as well as secondary
market transactions. Further, the
benefits would accrue to non-AAA
rated bonds as well, thereby
deepening the market.
d. Other systemic weaknesses
Factors such as lack of benchmark
securities, shallow secondary
market, lack of market participants
other than banks and insurance
companies, etc conspire to make
the bond market unattractive for
private issuers as well as investors.

The woods are lovely, dark and
deep, but I have miles to go
before I sleep...
The regulator is cognizant of these
challenges and seems to be taking
steps to alleviate the situation. A few
positive developments include
removal of the Rs.70,000Cr cap on
outstanding government issuances,
reduction in withholding tax to 5%for
FIIs/QIBs, deregulation of interest
rates on savings account and
increasing FII limits, to mention a few.

23

There has also been talk of including
India in the JPMorgan Government
Bond Emerging Markets Index. This
could be a game-changer for flows
into Indian bonds as this index is
tracked by an AUM of almost USD
240bn, potentially attracting between
USD 20-40bn a year to India.
However, a lot still needs to be done
to bring Indian debt markets at a level
comparable to global markets. Some
of these steps may be as follows:
a. Unified Trading Platform
SEBI recently underscored the
need for unified trading platform
for deepening the corporate debt
market, and said it is working with
all stakeholders, including the
Reserve Bank of India (RBI), to
usher in such a facility. Just as
government securities have the
Clearing Corporation of India Ltd.
(CCI) platform to report and settle
a transaction, the corporate bond
market also requires a unified
platform, SEBI Chairman Mr U.K.
Sinha said recently. Underlining
the need for integration, he cited
the case of commercial papers and
certificate of deposits, saying the
settlements happen in one
particular stock exchange, while
the reporting happens


event of a counterparty default,
the terminated transactions are
valued and netted under close-out
netting. India could learn from this
and incorporate a localised version
of the same.

Summary
a. There has been some growth in the
corporate debt market in terms of
both primary issuances and
secondary market activity.
b. However, primary issuances are
still dominated by the private
placement segment and further,
the financial sector is more active
here.
somewhere else. Removal of these
anomalies will go a long way in
increasing the depth in the debt
markets.
b. Benchmark yield curve aids fair
pricing, increases confidence
Benchmark yield curve and rates
define the structure of interest
rates, influence investors' future
expectations about rate
fluctuations, and are used as
hedging tools. A liquid benchmark
at every level of the yield curve
reflects the risk-free rate and
enables more transparent and
efficient pricing of risk in primary
as well as secondary markets. Low
liquidity in secondary markets
result in volatility and even small
trades can move the market price
significantly. Needless to say, this
acts as a deterrent for serious
investors. Fair pricing in secondary
market will lead to realistic,
transparent price discovery and
trading, leading to more market
participation.
c. Introduce Futures, Interest rate
and currency swaps, derivatives
In addition to the secondary
market, we also need to develop a

bond futures market as it helps
primary dealers and market
participants to hedge risks. Bond
futures will promote large volume
active calls on the market, facilitate
the growth of OTC derivatives
market and contribute to its
stability and security.
Low liquidity has also led to high
and dysfunctional Bid-Ask spreads,
which amount to 10 bps on
average, compared to less than
3bps in China. A well-oiled
secondary market with access to
derivatives should wipe out these
anomalies. Investors need
derivatives in order to hedge,
speculate and offset risk, which in
turn enhances liquidity. Interestrate swaps, currency swaps and
credit derivatives are important
parts of international debt markets
and India should take the
experience of the developed world
and introduce them as well.

c. The GSec market still dominates
the overall debt market and the
volumes traded are still a little less
than 10 times that in the corporate
debt market.
d. The focus must be on improving
liquidity in the corporate debt
market as this is a prerequisite for
more interest in the primary
segment.
e. While the regulator has taken
some steps, it can reduce the tax
arbitrage by bringing the taxation
on corporate bonds at par with
equity or listed debt, thereby
encouraging far more companies
to come to the market, and far
more investors from considering
direct bond investments.

Authored by:

d. Close-out netting
An important factor in global debt
markets is the recognition of closeout netting, which is a wellestablished practice in the most
advanced financial markets. In the

24

Mr Nirmal Jain
Chairman
India Infoline Limited

Corporate Debt Market –
Future Prospects

Development of the corporate debt
market has always been a focus area
for the regulators as this is seen as an
important segment to address
corporate funding needs. With the
increasing focus on the infrastructure
sector and its requirement for long
term funds, it is felt that corporate
debt market can play an important
role here.
Given this background, the
Government set up the R H Patil
committee to come up with
recommendations for development
of the corporate debt market. The
Committee in the year 2006 came out
with a series of recommendations to
address many of the issues pertaining
to the market structure, regulations,
trading infrastructure etc. Many of

these recommendations were
implemented by the regulators over
the last few years. Some of these
steps have started yielding dividends
as the corporate debt market has seen
robust growth in the last few years. In
the years 2011-12 and 2012-13, based on
data from CRISIL, corporate debt
issuances surged 31% and 39%
respectively over the previous years.
The reasons for the surge have been
attributed to steps like simplification
of the issuance process, changes in
investment norms for insurance
companies and provident funds,
growth in mutual fund assets etc.
However despite this growth, the
market still has a long way to go.
Firstly, in terms of size the corporate
bond market as estimated by CRISIL is
Table i
Amount (Rsbn) as on 31 March 2013

Banks

5,966

still only 14% of GDP compared with 4070% for developed market. Secondly,
issuances are largely in short and
medium term buckets with long term
issuances far and few between.
Thirdly, the market is dominated by
higher credit quality issuers and
issuers from the BFSI segment. The
share of issuers of rating AA - and
above has increased over the last few
years. Corporate debt market
continues to be out of reach for the
infrastructure sector.
The issues that are hindering the
growth of the corporate debt market
are both macro and micro.
Macro-level issues
To understand the macro issues there
is a need to analyze the sources of
household savings in India.
Percent
54.4

Non- banking deposits

204

1.9

Insurance Companies

1,795

16.4

Provident Funds

1,596

14.6

Shares & debentures

344

3.1

Claims on Government

-90

-0.8

Trade Debt(Net)

32

0.3

Currency
TOTAL

1,121
10,969

Source: RBI

25

10.2
100.0


The following observations can be
made from the data in table i:
l
India

remains a primarily a bank
driven market despite the growth
of the mutual fund and insurance
sectors in the last few years. With
the increasing focus on financial
inclusion, the share of banks as a
source of savings is bound to stay
high.

l
The growth in mutual funds has also

been largely led by equity, liquid and
short term funds. The share of
mutual fund money devoted to
medium and long term bond funds
is still not significant.
l
The insurance

and PF segments are
restricted to the organized
segments of the market and thus
have their own limitations.

lc t
Dire

retail investment in
corporate debt has been and will
continue to be miniscule and cannot
be the driver for corporate debt
growth.

l
While

foreign investment in Indian
debt remains an option, there are
certain concerns in increasing
dependency on this segment. This
will be discussed in detail in the
following sections.

Thus any strategy for growth of the
corporate debt market has to consider
the role of banks in this segment and
the issues faced by them in this regard.
Some of these issues are structural in
nature and have their roots in long
standing problems faced at the
macroeconomic level.
Fiscal deficit:
The Indian government has a track
record of running high fiscal deficits
over the years. While fiscal deficit had
marginally reduced in the early and
mid-2000s, following the crisis of 2008
the government had to resort to fiscal
stimulation to keep the economy
afloat. The net impact of the high fiscal
deficit is a classic "crowding out"
effect.Thus with the biggest pool of
domestic savings having only limited
participation in the corporate debt
market, the growth of the market is
muted to that extent.

High reserve requirements:
Banks have to invest 23% of their
liabilities in government securities as
part of their Statutory Liquidity
Reserve (SLR) requirements. This not
only pre-empts the bank's funds but
also increases the bank's overall cost
of funds, given the lower yields on
government securities as compared
to the cost of bank deposits. This
severely restricts the ability of banks
to participate in corporate debt,
especially the high quality credit. The
same holds true for investments by
insurance companies and provident
funds also who are mandated to
invest in government securities as per
their regulatory requirements.
Current account deficit:
The current account deficit also
restricts the ability of the country to
rely on investments by foreign
investors in Indian debt. As long as the
country is running a current account
deficit, the currency remains
vulnerable to any external shock and
consequent withdrawal of foreign
investors from the domestic debt
market. The sharp depreciation of the
rupee in mid-2013 following the Fed
taper fears and the selloff by FIIs will
make the regulators cautious about
completely opening up the Indian
debt market to foreigners.
Micro-level issues
At a micro level, there are certain
preferences of both borrowers and
lenders that also act as deterrents for
the development of a corporate debt
market. Borrowers, especially the
weaker credits, prefer to borrow
directly from banks by way of loans
even if it involves paying a slightly
higher cost. This is because loans give
corporates the flexibility to negotiate
terms with a single lender not only at
the time of taking the loan but also at a
later date if there is a need to
restructure the loan.
From the bank's perspective the
single biggest benefit that loans
provide is that they need not be
marked to market unlike corporate
debt. This helps protect the bank's

Profit & Loss when interest rates are
volatile. In addition, provisioning
norms in case of loans provide
flexibility to the banks while in case of
corporate debt any kind of default
gets reflected in the mark to market
immediately. This issue will partly get
addressed once banks start marking
to market the loan portfolios also.
However till that time banks
participation in corporate debt may be
restricted to top credits only.
Banks also have constraints in terms
of the tenor of the structure of their
liabilities which are largely short and
medium term in nature. Thus banks do
not have the ability to invest in long
term debt to fund the infrastructure
sector.

Conclusions
Any steps taken for the development
of the corporate debt market cannot
be to the exclusion of the banking
system as banks are the biggest
channels of disintermediation.
However banks themselves are
constrained because of both macro
level and micro level issues/ At the
macro level, till the government
addresses the twin deficit problem,
this will be one of the biggest drags on
the banking system in their
participation in the debt market. In
addition, because of preferences of
both banks and corporates, the
corporate debt market will initially
show growth only for top rated
credits and for short to medium
maturities. Only when these segments
fully develop, we are likely to see
growth in the infrastructure debt
segment.
Authored by:

Mr Mohan Shenoi, President
Group Treasury and Global Markets
Kotak Mahindra Bank
Disclaimer: The views expressed in the article are personal and do not reflect the views of Kotak Mahindra Bank Ltd.

26

CII's Recent Initiatives
CII's 9th International Corporate Governance Summit focuses
on the need to adapt to changing social & political structures

L to R
Mr P R Ramesh, Chairman, Deloitte India; Mr Chandrajit Banerjee, Director General, CII; Mr U K Sinha, Chairman, Securities & Exchange Board of India;
Mr K V Kamath, Past President and Chairman, Council on Corporate Governance & Regulatory Affairs, CII; at the 9th International Corporate
Governance Summit held on 20th December 2013 at Mumbai.

The 9th International Corporate
Governance Summit, organized on
20th December at Mumbai, was
inaugurated by Mr. U K Sinha,
Chairman, Securities & Exchange
Board of India (SEBI). During the
Inaugural Address, Mr Sinha drew
attention to the strong upsurge
towards democracy, accountability
and transparency across the world in
the last five years. He advised the
corporates not to ignore these social

and political happenings in the larger
society as corporates are also
governed by the same considerations
and guiding principles that govern the
rest of society. Explaining this further,
Mr Sinha said, "Adding to this is the US
financial crisis where it was found that
many corporations acted recklessly,
took too much risk, went for short
term gains, had lax monitoring and
had policies not in the best interest of
shareholders. These have led to

27

shareholder impatience and the
strengthening of regulatory actions
against corporates".
Chairman, SEBI also announced that
the new set of corporate governance
guidelines for listed companies were
being finalized and were expected to
be announced shortly. Mr. Sinha also
referred to international corporate
governance practices with the
intention of driving the need to be in


sync with the rest of the world and for
corporates to go beyond how
business is done in India and adopt
international best practices in a
globalised world.
Responding to the submission by Mr
Chandrajit Banerjee, Director General,
CII that the regulations should not be
framed keeping the outliers in mind,
Mr Sinha responded that noncompliance was becoming quite
rampant. Chairman, SEBI also pointed
out that many companies are not
complying with the Listing Agreement
- Clause 40A on minimum public
shareholding and Clause 49 on
Corporate Governance and that SEBI
would we well within its right to take
action against them.
The Summit was chaired by Mr K V
Kamath, Past President and Chairman,
National Council on Corporate
Governance & Regulatory Affairs, CII.
While delivering the Theme Address,
Mr Kamath advised that corporate
governance is a naturally evolving
process and should be internalized. He
further added that the regulatory
nudge in the offing may turn out to be
a hard shout to turn such practices
from mere form to due processes.

global trends in corporate
governance.

Current Environment' focused on how
companies can take a strategic
approach to the challenge of
complying with the new corporate
governance requirements and use
compliance efforts to build greater
business value. Panel members - Mr
Keki Mistry, Vice Chairman & CEO,
HDFC; Mr Arun Nanda, Non Executive
Director, Mahindra & Mahindra; Ms
Dipti Neelakantan, Managing Director
& Group COO, J M Financial and Mr
Bharat Vasani, Chief, Legal & Group
General Counsel, Tata Sons Ltd explained the combined impact of the
provisions of the new Companies Act
and SEBI Regulations on listed
companies and how these divergent
provisions could be reconciled. Mr P R
Ramesh, Chairman, Deloitte India
moderated this insightful interaction.

Post the Inaugural Session,
discussions were held on effective
boardroom behavior and how to
manage diverse stakeholders'
expectations. The panel comprising
Mr Y M Deosthalee, Chairman &
Managing Director, L&T Finance
Holdings; Mr Y H Malegam, Chairman Emeritus, S B Billimoria & Co; Mr Leo
Puri, Managing Director, UTI Asset
Management Co. Ltd and Mr Shailesh
Haribhakti, Professional Independent
Director shared their experiences in
an insightful discussion moderated by
Dr Janmejaya Sinha, Chairman - Asia
Pacific, Boston Consulting Group.

The Panel led by Mr Suresh Senapaty,
Executive Director & CFO, WIPRO and
comprising Mr Dipankar Chatterji;
Senior Partner, L B Jha & Co; Mr Amit
Ta n d o n , M a n a g i n g D i r e c t o r ,
Institutional Investment Advisory
Services and Mr Abhay Gupte, Senior
Director, Deloitte India, deliberated if
the disclosure requirements were
excessive and obscuring meaningful
information and also on the possibility
of reforms in these requirements.

With the renewed focus of the
Companies Act, 2013 on disclosures
and governance practices, discussions
during the Panel titled 'Board
Governance and Challenges in the

The Summit saw a high level of
participation from senior industry
representatives, compliance and audit
practitioners, institutional investors
and other stakeholders.

A joint CII- Deloitte publication titled
' G l o b a l Tr e n d s i n C o r p o r a t e
Governance - since the financial crisis'
was released by Mr. U K Sinha at the
Summit. The paper gives an overview
not only of the national trends but also

28

Transparency, Accountability, Minority Protection are the
three Growth Mantras of SEBI: U K Sinha, Chairman, SEBI
CII National Council was addressed by
Mr U K Sinha, Chairman, SEBI on 15th
November 2013 at Mumbai. The
address was followed by an insightful
interaction with the captains of the
industry present at the meeting.
During his address, Mr U K Sinha
underscored that the three growth
mantras - Transparency,
Accountability and Minority - are the
pivot of SEBI Regulations. He said that
capital market can contribute to
growth of the economy only if these
principles are not compromised with.
He urged the industry to implement
regulations in letter and spirit pointing
out that 11000 companies are in
violation of the clause pertaining to
shareholder pattern and around 900
companies in violation of the
corporate governance clause of the
Listing Agreement, asserting the need
to implement regulations both in
letter and spirit.
Speaking about the state of the
primary market, Chairman, SEBI
attributed the significant
improvement in the corporate bond
market in the past couple of years to
the investment by Employees'
Provident Fund Organisation in the
bond markets due to liberalization of
investor class. He emphasized the
importance of inflow of pension
money into the equity market for it to
take the next big leap. Mr Sinha
further advised that over-dependence
on Foreign Institutional Investors can
be rectified only by mobilizing
domestic investors into equity
market. He called upon the industry to
channelize retirement savings into the
market, which would help stabilize the
volatility in the market.
Mr Sinha also praised the report on
the Financial Sector Legislative
Reforms Commission (FSLRC) for its
focus on formulation of
comprehensive consumer protection

laws. He also appreciated the
proposed interaction between
industry and regulators for
formulation of regulations envisaged
in the report.
Mr Sinha also spoke on the state of
regulatory architecture being
influenced by the state of affairs in
other economies, the role and
functioning of the other regulators in
the country and the interface
between the two. He stated, "Globally
the investors are in a state of unrest
and this is intensifying. The usage of
technology is adding to this
intensification. While this is helping
strengthening of shareholders'
democracy, even small violations
don't go unnoticed". He also added
that the Regulators around the world
have started to lay emphasis on
transparency and more accountability
with regulations being framed
extending to other jurisdictions as
well. On the impact of such extraterritorial regulations on Indian
companies, Mr Sinha, urged the
industry to make a representation to
the Government on the issues arising
because of these regulations.

Earlier welcoming Mr U K Sinha, Mr S
Gopalakrishnan, President, re-iterated
that CII continues to unflinchingly
focus on adoption of good corporate
governance by Indian industry. He
also mentioned while CII has
constituted a Council on Financial
Sector Development to study the
subject of regulatory oversight particularly in cases, where there are
potential overlaps and also the
recommendations of the FSLRC, he
also sought SEBI chairman's guidance
on the stated subject.
Mr Adi Godrej, Immediate Past
President, CII highlighted the need to
create an environment that promotes
"ease of raising capital" along with
"ease of doing business" in India. The
stringency of delisting regulations
was also brought to the Regulator's
notice. Mr Uday Kotak, Chairman, CII
Financial Sector Development Council
pointed to the need to correct the
tendency of Indian investors to divert
savings in not-so transparent markets
(gold and real estate) that block a
significant amount of funds which
could have otherwise flowed into a
more transparent equity market.

Mr U K Sinha, Chairman, SEBI addressing the Fourth meeting of the CII National Council for 201314 held on 15 November 2013 at Mumbai

29

Global Regulatory Update, January 2014

Global Regulatory Update, January 2014

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