Corporate Cue

Make the cut

March 2010
Corporate Cue 1
Contents

Snapshot 3

Foreign Investment & Exchange Management 5

Corporate Law 8

Securities Law 10

Non-Banking Financial Companies 15

Insurance 18

2
Snapshot

Foreign Investment & Exchange Management
• Infrastructure Finance Companies [IFCs] will now be
able to avail External Commercial Borrowings [ECBs]
for on-lending to infrastructure sector under approval
route subject to satisfaction of prescribed conditions.
• On-line reporting system of Overseas Direct
Investment [ODI] is operationalised effective
2 March 2010.
Corporate Law
• Criteria for identification of a vanishing company
provided by Ministry of Corporate Affairs [MCA].
• It is mandatory for the transferees of shares held in
a physical form in a listed company to furnish a copy
of Permanent Account Number [PAN] in the specified
cases.
Non-Banking Financial Companies [NBFCs]
• “Infrastructure Finance Company” included as 4th
category of NBFCs.
• NBFCs having FDI are required to submit a certificate
from their Statutory Auditors on half yearly basis for
compliance with the existing terms and conditions of
FDI.

• Provisions relating to winding-up of a company under

the Companies Act, 1956 [Companies Act] made
applicable to a Limited Liability Partnership [LLP]
formed under the Limited Liability Partnership Act,
2008.

Securities Law
• Application Supported by Blocked Amount [ASBA]
facility extended to various categories of investors.

• Stock exchanges are mandated to disclose prescribed

details of allottees in Qualified Institutional Placement
[QIP] who have been allotted more than 5% of the
securities offered in the QIP, on the website of stock
exchanges along with the final placement document.

Corporate Cue 3
4
Foreign Investment &
Exchange Management
Foreign Direct Investment [FDI] regime eased –
Policy of cases under Government of India [GOI]
route for making foreign investments reviewed
Cabinet Committee on Economic Affairs [CCEA] has,
on 11 February 2010, approved the proposal of the
Department of Industrial Policy & Promotion, Ministry of
Commerce & Industry, to liberalize the approval process
for foreign investment. Consequently, GOI has, on
25 March 2010, issued Press Note No. 1 (2010 Series)
to give effect to the above proposal. Following are the
liberalization measures taken up by GOI:
• Currently, the recommendations of Foreign Investment
Promotion Board [FIPB] on proposals with total
investment upto Rs. 6 billion are considered by the
Minister of Finance whereas proposals involving total
investment of more than Rs. 6 billion are put-up
to CCEA. It has now been decided to allow FIPB to
recommend the proposals involving foreign equity
inflow of upto Rs. 12 billion to the Minister of Finance
for approval, without any need to go to CCEA.
• CCEA would also consider the proposals which may
be referred to it by the FIPB / Minister of Finance.
• There will be no requirement to approach FIPB for
a fresh approval for bringing in additional foreign
investments into the same entity, in cases where:
– FIPB approval had been taken for initial foreign
investment because the activities required prior
approval and subsequently the sectors / activities
have been placed under automatic route;
– FIPB approval had been taken for initial foreign
investment because there were sectoral caps and
subsequently the sectoral caps have been removed
/ increased and the activities were placed under
the automatic route provided that such additional
foreign investment along with the initial / original
investment does not exceed the sectoral caps.
• Similarly, there will be no requirement to approach
FIPB / GOI for fresh approval where the approval was
already obtained in terms of Press Note 18/1998 and
Press Note 1/2005 provided prior approval of the
GOI under the FDI policy is not required for any other
reason / purpose. As per Press Note 1 / 2005 a foreign
company is required to obtain prior approval from the
GOI in cases where the foreign investor had an existing
joint venture or technology transfer / trademark
agreement in the same field.
External Commercial Borrowings [ECBs] policy
revised
Reserve Bank of India [RBI] has, on 2 March 2010, made
the following amendments in the ECB policy:
Infrastructure Sector
• As per the extant ECB policy, ECB is permissible for
infrastructure sector as defined in the policy.
• Infrastructure sector is defined as (i) power, (ii)
telecommunication, (iii) railways, (iv) road including
bridges, (v) sea port and airport, (vi) industrial parks,
(vii) urban infrastructure (water supply, sanitation
and sewage projects) and (viii) mining, refining and
exploration.
• As stated in the para 54 of the Union Budget for the
year 2010-11, it has now been decided to expand
the definition and to include “cold storage or cold
room facility, including for farm level pre-cooling,
for preservation or storage of agricultural and allied
produce, marine products and meat” within the
meaning of the term infrastructure sector for the
purpose of availing ECB.
ECB for Non-Banking Finance Companies [NBFCs]
engaged in financing infrastructure sector
• As per the extant ECB policy, NBFCs, which were
exclusively engaged in financing of infrastructure
sector, were permitted to avail ECB from the
recognized lender category including international
banks, under the approval route, for on-lending to the
infrastructure sector.
• In view of a separate category of NBFC viz.
Infrastructure Finance Companies [IFCs] introduced in
terms of the RBI guidelines, IFCs will be able to avail
ECBs for on-lending to infrastructure sector under
approval route subject to satisfaction of prescribed
conditions.
Structured Obligations
• As per the extant policy, domestic Rupee denominated
structured obligations have been permitted to be
credit enhanced by non-resident entities under the
approval route.
• In view of the growing needs of funds in the
infrastructure sector, a comprehensive policy
Corporate Cue 5
 framework on credit enhancement to domestic debt
has been now put in place.
• The facility of credit enhancement by eligible
non-resident entities now has been extended to
domestic debt raised through issue of capital market
instruments, such as debentures and bonds, by Indian
companies engaged exclusively in the development
of infrastructure and by IFCs subject to satisfaction of
certain prescribed conditions.
• The reporting arrangements as applicable to ECBs
would be applicable to the novated loans.
The modifications to the ECB policy have come into
force with immediate effect.
Other conditions of ECB policy
All other conditions under the ECB policy, such as USD
500 million limit per company per financial year under
the Automatic route, eligible borrower, recognised
lender, end-use, all-in-cost ceiling, average maturity
period, prepayment, refinancing of existing ECB and
reporting arrangements remain unchanged.
Liberalization of ECB Policy
RBI has, on 9 February 2010, liberalized the ECB Policy
wherein Designated Authorised Dealer [AD] Category–I
banks, inter alia, have been allowed to approve the
following requests of the ECB borrowers for change in
terms and conditions of the ECB:
Changes / modifications in the drawdown /
repayment schedule
Designated AD Category–I banks are allowed to approve
changes in or modify the drawdown / repayment
schedule of ECBs already availed, both under the
approval and the automatic routes, provided the
average maturity period as declared while obtaining the
Loan Registration No. [LRN] is maintained. However,
any rollover in the repayment on expiry of the original
maturity of the ECB would require prior approval of RBI.
Changes in the currency of borrowing
Designated AD Category–I banks are authorized to
allow changes in the currency of borrowing, if so
desired, by the borrower company, in respect of ECBs
availed of both under the automatic and the approval
routes, subject to all other terms and conditions of
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the ECB remaining unchanged. Designated AD banks
should, however, ensure that the proposed currency of
borrowing is freely convertible.
Change of the Designated AD bank
Designated AD Category–I banks are authorized to
allow change of the existing Designated AD bank by
the borrower company for effecting its transactions
pertaining to the ECBs subject to No-Objection
Certificate from the existing Designated AD bank and
after due diligence.
Changes in the name of the Borrower Company
Designated AD Category–I banks are authorized to allow
changes in the name of the borrower company subject
to production of supporting documents evidencing the
change in the name from the Registrar of Companies
[ROC].
Revision of Conversion Price of Foreign Currency
Convertible Bonds [FCCBs] as per new pricing
norms
GOI has amended the scheme for Issue of Foreign
Currency Convertible Bonds and Ordinary shares
(Through Depository Receipt Mechanism) Scheme,
1993, to enable interested companies which had
issued FCCBs prior to 27 November 2008 to revise their
conversion price as per new pricing norms. The pricing
norms upto 27 November 2008 and new pricing norms
are as under:
Old norms New norms
The pricing should not be less than the The pricing should not be less than:
higher of the following two averages: • the average of the weekly high and
• average of the weekly high and low of low of the closing prices of the related
the closing prices quoted on the stock shares quoted on the stock exchange
exchange during 6 months preceding during 2 weeks preceding the relevant
the relevant date; date;
• average of the weekly high and low of • the “relevant date” means the date
the closing prices quoted on a stock of meeting in which the Board of
exchange during 2 weeks preceding the Company or the Committee of
the relevant date. Directors duly authorized by the Board
• the “relevant date” means 30 days of the Company decides to open the
prior to the date on which the meeting proposed issue.
of the general body of shareholders
is held, in terms of section 81(1A) of
the Companies Act, to consider the
proposed issue.
The window to revise conversion price is available only
for 6 months from the date of issue of press note and is
subject to the fulfillment of the following conditions:
• The revision of price and consequent issue of shares is
within FDI limit.
• Approval from the Board as well as the shareholders is
obtained.
• Fresh agreement is entered with the FCCB holders in
terms of renegotiation of the conversion price.
• Approval of RBI for the revision is obtained.
Further, GOI has, on 15 March 2010, clarified that the
“relevant date” for the limited purpose of revision of
conversion price as mentioned above, would mean the
date of the meeting in which the Board of the Company
or the committee of Directors authorized by the Board
of the Company decides to revise the conversion price
of the existing FCCBs.
Online reporting of Overseas Direct Investment
[ODI]
RBI has, on 24 February 2010, notified
operationalization of the on-line reporting system of ODI
in a phased manner effective from 2 March 2010, to
simplify the existing reporting framework.
The salient features of the on-line reporting system,
inter alia, are hereunder:
• The new system would enable on-line generation of
Unique Identification Number [UIN], acknowledgment
of remittance/s, filing of the Annual Performance
Reports and easy accessibility to data at the AD banks
level for reference purposes;
• AD banks would continue to receive ODI forms in
physical form in the specified manner which should be
preserved, UIN wise, for onwards submission to RBI, if
specifically required;
• Transactions in respect of Mutual Funds, Portfolio
Investment Scheme [PIS] and Employees Stock Options
Scheme are also required to be reported on-line in the
Overseas Investment Application;
• The application for overseas investment under the
approval route would continue to be submitted to RBI
in physical form, in addition to the on-line reporting as
mentioned above, for approval purposes;
• Transactions relating to closure / disinvestment /
winding up / voluntary liquidation of the overseas
Joint Ventures / Wholly Owned Subsidiaries under the
automatic and approval routes would continue to be
submitted to RBI in physical form.
Introduction of e-filing portal for seeking FIPB
approval
GOI has, on 15 March 2010, launched the e-filing portal
of FIPB. It enables applicants to file proposals seeking
FIPB approval online. The website can be accessed
though http://finmin.nic.in or directly at www.fipbindia.
com.
Trading of Currency Futures in Recognized Stock
Exchanges [RSEs]
In order to facilitate direct hedging of currency risk in
currency pairs other than US Dollar [USD] - Indian Rupee
[INR] currency, RBI has, on 19 January 2010, amended
the Currency Futures (Reserve Bank) Directions, 2008
and has allowed the recognized stock exchanges to
offer currency futures contracts in the currency pairs of
Euro-INR, Japanese Yen [JPY]-INR and Pound Sterling
[GBP]-INR, in addition to the USD-INR contracts. Further,
the settlement price for USD-INR and Euro-INR contracts
shall be RBI’s Reference Rates and the settlement price
for GBP-INR and JPY-INR contracts shall be the exchange
rates published by RBI in its press release on the last
working day.
Securities and Exchange Board of India [SEBI] has, on
19 January 2010, permitted eligible stock exchange in
India to introduce currency futures on Euro-INR,
GBP-INR and JPY-INR.
Corporate Cue 7
Corporate Law
Criteria for identification of a vanishing company
As per the information available on the website of the
Ministry of Corporate Affairs [MCA], GOI, a company
would be deemed to be a vanishing company, if it is
found to have:
1. Failed to file returns with Registrar of Companies
[ROC] for a period of 2 years;
2. Failed to file returns with Stock Exchange [SE] for a
period of 2 years (if it continues to be a listed company);
3. It is not maintaining its registered office at the address
notified with the ROC / SE; and
4. None of its Directors are traceable.
MCA has clarified that all the conditions mentioned
above would have to be satisfied before a listed
company is declared as a vanishing company. Further,
the conditions mentioned at (1), (3) & (4) would suffice
to declare a company as vanishing if such company has
been de-listed from the SE.
E-filing of Corporate Social Responsibility [CSR]
report on the portal of MCA
GOI has, on 11 March 2010, announced that MCA is
in the process of designing an e-form under MCA-21
which will enable the corporates to file their CSR report
on the portal of the Ministry. The availability of these
reports at a single place will enable the GOI to take
policy decisions.
Amendment to Limited Liability Partnership Act,
2008 [LLP Act] and rules issued there under
GOI has, on 6 January 2010, notified that certain
provisions relating to winding-up of a company under
the Companies Act shall be applicable to a Limited
Liability Partnership [LLP] formed under the LLP Act. The
notification also provides details of modification in the
provisions of the Companies Act relating to winding up
for its applicability to winding up of LLP under the LLP
Act.
MCA has further, on 11 January 2010, notified the
Limited Liability Partnership (Amendment) Rules, 2010
[LLP Amendment Rules]. The salient features of the
amendment, inter alia, are as under:
• Application for allotment of Designated Partner
Identification Number is now required to be submitted
online on the LLP website along with the necessary
proof duly attested and certified as prescribed in the
LLP Amendment Rules.
8
• Certification requirements as applicable to foreign
LLP have been extended in cases where the intending
partner is a foreign national residing outside India / a
foreign body corporate registered outside India.
• LLP shall file with ROC, the LLP agreement ratified
by all the partners within 30 days of incorporation
of LLP as against the earlier requirement of filing the
LLP agreement within 30 days of ratification by all
partners.
Key judicial decisions
Right to file appeal for refusal to transfer shares of
a public company available to transferee and not to
transferor
The Andhra Pradesh High Court has held that in case
of refusal to register transfer of shares in a public
company, the right of appeal under Section 111A of the
Companies Act is available only to the transferee and
not to the transferor.
Fenoplast Ltd. v. A. Mallikarjuna Rao [2010] 154 Comp
Cas 386 (AP)
Member of a Section 25 company not having
share capital cannot prefer complaint against the
Company under section 621 of the Companies Act
The Madras High Court has held that in case of a
Section 25 company not having share capital, a member
thereof cannot prefer complaint against such a company
under Section 621 of the Companies Act since he is not
a shareholder.
Section 621 of the Companies Act provides that no
court can take cognizance of any offences against
the Companies Act which is alleged to have been
committed by any company or any officer unless a
complaint in writing is made by ROC or by a shareholder
or by a person authorized by the Central Government.
Court distinguished the term - member of a section 25
company (not having share capital) and shareholder
and stated that a member of a section 25 company
(not having share capital) is neither a subscriber to the
memorandum of association who has agreed to become
member of a company, nor a person who has agreed in
writing to become member of a company.
Madras Cricket Club & Others v. M. Subbiah [2010] 154
Comp Cas 353 (Mad)
Transfer of shares of a public company
In a recent judgment of Western Maharashtra
Development Corporation Limited vs. Bajaj Auto Limited,
the Bombay High Court has held (among other things)
that in case of a “public company”, its shares are freely
transferrable under the Companies Act, 1956 (the Act)
even if the Articles of Association (the Articles) contain
restrictive provisions relating to transfer of shares.
Background:
One of the distinctions between private companies and
public companies is with regard to freedom to transfer
shares in terms of their definitions in the Act.
In case of unlisted public companies, the Articles
could contain restrictions inter se the shareholders
with respect to transfer of shares in such companies.
The conditions relating to transfer of shares as agreed
between the shareholders under a joint venture
agreement / shareholders agreement or similar
arrangements are generally incorporated in the Articles
of such companies so as to make them binding on the
companies.
The Bombay High Court interpreted provision of section
111A of the Act and held that the shares of public
companies are freely transferable irrespective of any
restriction contained in its Articles.
Section 111A of the Act is applicable to public
companies. Section 111A was enacted in the Act as
a consequence of enactment of the Depositories Act
1996 to allow free transferability of shares. The relevant
extract of the provisions of Section 111A (2) of the Act
is as under:
“(2) Subject to the provisions of this section, the shares
or debentures and any interest therein of a company
shall be freely transferable:.…… “
Rationale of decision:
The summary of the rationale given by the Bombay High
Court with regard to the interpretation of provisions of
Section 111A of the Act is as under:
1. In case of a public company, the Act provides that
the shares or debentures or any interest therein of a
company shall be freely transferable. The provision
of the Act for free transferability of shares in a
public company is founded on the principle that the
members of public must have freedom to purchase
and, every shareholder, freedom to transfer.
2. The incorporation of a Company as public company,
as distinguished from the private company, leads
to specific consequences and the imposition of
obligations envisaged in law. Corresponding to those
obligations are rights, which the law recognizes as
inhering in the members of the public who subscribe
to shares.
3. The principle of free transferability must be given
a broad dimension in order to fulfil the object of
the law. An agreement between the shareholders
of a public company which has been incorporated
in the Articles, to preclude sale to or purchase by
the members of the public of the shares, impose a
restriction on the free transferability of shares. This
would be contrary to the provisions of section 111A
of the Act read with Section 9 of the Act. Section 9
of the Act gives over riding force and effect to the
provisions of the Act, notwithstanding anything to the
contrary contained in the Memorandum or Articles
of a company or in any agreement executed by it or
any resolution of the company in general meeting
or its board of directors. A provision contained in
Memorandum or Articles, agreement or resolution is
to the extent to which it is repugnant to the provisions
of the Act is regarded as void. The Court analysed
and considered the decisions of V. B. Rangraj vs.
V. B. Goplakrishnan [(1992) 1 SCC 160] and M. S.
Madhusoodhanan vs. Kerala Kaumudi Private Limited
[(2003) 117 Com Cases 19].
4. The provisions of Section 111A cannot be read as
being subject to a contract between shareholders.
Firstly, because such a restriction is not mentioned
in section 111A of the Act, secondly, the word
“transferable” is of the widest import and the context
in which the provision has been introduced requires to
be given a wide meaning.
Judgment of the Bombay High Court dated 15th
February 2010 in case of Western Maharashtra
Development Corpn. Ltd. vs. Bajaj Auto Limited
Corporate Cue 9
Securities Law
SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 [ICDR
Regulations]
SEBI had, on 10 December 2009, decided to extend the
facility of Application Supported by Blocked Amount
[ASBA] to all investor categories except Qualified
Institutional Buyers [QIBs] to apply for public / rights
issues using this facility. To give effect to this decision
SEBI has, on 30 December 2009, amended the ICDR
Regulations to provide that all public issues and rights
issues, where not more than one payment option is
given, the issuer shall provide the facility of ASBA in
accordance with the procedure and eligibility criteria
specified by SEBI.
Amendment to SEBI (Credit Rating Agencies)
Regulations, 1999 [CRA Regulations]
SEBI has, on 19 March 2010, made following
amendments to the CRA Regulations:
• The term “change of status or constitution” has been
defined, in relation to a credit rating agency -
– to mean any change in its status or constitution of
whatsoever nature; and
– to include
– amalgamation, demerger, consolidation or any
other kind of corporate restructuring falling within
the scope of section 391 of the Companies Act or
the corresponding provision of any other law for
the time being in force;
– change in its managing director or whole-time
director;
– any change in control over the body corporate.
• The term “change in control” in relation to a credit
rating agency being a body corporate, has been
defined to mean -
– if its shares are listed on any RSE, change in control
as defined under the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997 [Takeover
Regulations];
– in any other case, change in the controlling interest
in the body corporate. For this purpose “controlling
interest” means an interest, whether direct or
indirect, to the extent of at least 51% of voting
rights in the body corporate.
• The certificate granted to the credit rating agency
shall be subject to the additional condition that in
case the credit rating agency proposes to change its
10
status or constitution it shall obtain prior approval of
SEBI for continuing to act as such after the change.
SEBI Board Meeting Decisions
SEBI at its Board Meeting held on 6 March 2010 took
the following decisions:
• Margin Requirement in Public Issues -
– Currently, QIBs and Anchor Investors are required
to bring an amount of not less than 10% and 25%
of the application money respectively as margin
money. While 100% of application money is
being collected from all other investor categories.
Henceforth, all types of investors would be required
to bring in 100% of the application money as
margin along with the application for securities in
public issues. This would avoid inflated demand in
public issues and provide level playing field to all
investors subscribing for securities.
• Reservation for Employees in Public / Rights Issues
– Benefit of reservation for employees in public /
rights issues would also be extended to employees
of subsidiaries and material associates of the issuer
whose financial statements are consolidated with
the issuer’s financial statements.
• Reforms in Derivatives Market
– SEs are allowed to introduce -
– equity derivatives contracts with tenures upto
5 years;
– derivative contracts on volatility indexes which
have suitable track record; and
– physical settlement of equity derivatives.
Instructions to mutual funds
SEBI has, on 15 March 2010, issued, inter alia, the
following instructions to mutual funds:
Role of Mutual Funds in Corporate Governance of
Public Listed Companies
• Asset Management Company [AMC] shall disclose
following on their website and also in annual report
distributed to the unit holders from the financial year
2010 - 11.
– General policies and procedures for exercising the
voting rights in respect of shares held by AMC
– Actual exercise of their proxy votes in the Annual
General Meetings / Extra-Ordinary General Meetings
 of the investee companies in respect of the
following matters -
– Corporate governance matters, including
changes in the state of incorporation, merger and
other corporate restructuring and anti takeover
provisions.
– Changes to capital structure, including increases
and decreases of capital and preferred stock
issuances.
– Stock option plans and other management
compensation issues.
– Social and corporate responsibility issues.
– Appointment and Removal of Directors.
– Any other issue that may affect the interest of the
shareholders in general and interest of the unit-
holders in particular.
Additional management fees by AMC in case of
schemes launched on no load basis
• AMC shall not collect any additional management
fees. Currently, in case of scheme launched on a no
load basis, AMC can collect additional management
fees not exceeding 1% of the weekly average net
assets outstanding in each financial year.
Fund of Funds Scheme
• AMC shall not enter into any revenue sharing
arrangement with the underlying funds in any manner
and shall not receive any revenue by whatever means
/ head from the underlying fund.
• Any commission or brokerage received from the
underlying fund shall be credited into concerned
scheme’s account.
Provisions of SEBI (Mutual Fund) Regulations, 1996
would be suitably amended in due course.
Valuation of Debt and Money Market Instruments
SEBI has, on 2 February 2010, modified the valuation
method of debt and money market instruments in
case of mutual fund to ensure that the value of money
market and debt securities in the portfolio of mutual
fund schemes reflect the current market scenario.
Salient features of the revised valuation norms which are
applicable from 1 July 2010 are as under:
• Valuation of money market and debt securities
(including floating rate securities) with residual
maturity of upto 91 days -
– To be valued at the weighted average price at which
they are traded on the particular valuation day. If
securities are not traded on a particular valuation
day, they shall be valued on amortization basis.
• Valuation of money market and debt securities
(including floating rate securities) with residual
maturity of over 91 days -
– To be valued at weighted average price at which
they are traded on the particular valuation day. If
securities are not traded on a particular valuation
day, they shall be valued at benchmark yield / matrix
of spread over risk free benchmark yield obtained
from agency(ies) entrusted for the said purpose by
Association of Mutual Funds in India [AMFI].
• Valuation of securities not covered under the current
valuation policy -
– In case of securities purchased by mutual funds
do not fall within the current framework of the
valuation of securities then such mutual fund shall
report immediately to AMFI regarding the same.
– AMC shall ensure that the total exposure in such
securities does not exceed 5% of the total asset
under management of the scheme.
– AMFI has been advised that valuation agencies
should ensure that the valuation of such securities
gets covered in the valuation framework within
6 weeks from the date of receipt of intimation
from mutual fund. Till such provisions are made,
mutual funds shall value such securities using their
proprietary model which has been approved by their
independent trustees and the statutory auditors.
Revision in Securities Lending and Borrowing
[SLB] Framework
SEBI has, on 6 January 2010, revised framework for SLB.
The broad revisions are as under:
• Tenure of contracts in SLB can be upto a maximum
period of 12 months (earlier 30 days).
• Lender / borrower will have a facility for early recall /
repayment of shares.
– In case lender recalls the securities anytime before
completion of the contract -
– Approved Intermediary [AI] shall, on a best effort
basis, try to borrow the security for the balance
period and pass it onward to the lender.
Corporate Cue 11
 – AI will collect the lending fee from the lender who
has sought early recall.
– Original contract between lender and AI will
exist till the contract with the new lender for the
balance period is executed and the securities
returned to the original lender.
– In case of early repayment of securities by the
borrower -
– Margins shall be released immediately on the
securities being returned by the borrower to the
AI.
– AI shall, on a best effort basis, try to onward lend
the securities and the income arising out of it shall
be passed on to the borrower making the early
repayment of securities.
– In case AI is unable to find a new borrower for the
balance period, the original borrower will have to
forego lending fee for the balance period.
• In case the borrower fails to meet the margin
obligations, AI shall obtain securities and square off
the position of such defaulting borrower, failing which
there shall be a financial close-out.
• In case of early recall / repayment of securities, the
lending fee for the balance period shall be at a market
determined rate.
Disclosure of details of the allottees in QIP
SEBI has, on 5 March 2010, mandated stock exchange
to disclose the following details of allottes in QIP who
have been allotted more than 5% of the securities
offered in the QIP, on the website of stock exchanges
along with the final placement document -
• Names of the allottees;
• Number of securities allotted to each of them; and
• Pre and post issue shareholding pattern of the issuer
in the format specified in clause 35 of the Equity
Listing Agreement.
12
Requirements of furnishing copy of PAN for
transmission of shares in physical form
SEBI has, on 7 January 2010, inter alia clarified that it
shall be mandatory for the transferees of shares held in
physical form of a listed company to furnish a copy of
PAN in the following cases -
• Deletion of name of the deceased shareholder(s),
where the shares are held in the name of two or more
shareholders.
• Transmission of shares to the legal heir(s), where
deceased shareholder was the sole holder of shares.
• Transposition of shares – when there is a change in
the order of names in which physical shares are held
jointly in the names of two or more shareholders.
Revised format for half yearly reporting by
portfolio managers
SEBI has, on 15 March 2010, revised the format of
reporting on portfolio management activity required
to be submitted by portfolio manager. All portfolio
managers are required to submit the half yearly report
to SEBI in the revised format within 30 days after the
end of respective period ended 30th September and
31st March each year.
Revision in timeline and quarterly reporting
format by Venture Capital Funds [VCF] & Foreign
Venture Capital Investors [FVCI]
SEBI has, on 11 January 2010, revised the format
of quarterly report on venture capital activity to be
submitted by VCF & FVCI effective from the quarter
ended 31 March 2010. The timeline for uploading the
report online on SEBI portal has been made uniform i.e.
within 7 days from the end of each calendar quarter.
It is clarified that physical copies of the report are not
required to be submitted.
SEBI Informal Guidance scheme
Consecutive two offer for buyback of shares
SEBI has, in response to the request for an interpretative
letter, on applicability of the provisions of SEBI (Buyback
of Securities) Regulations, 1998 [Buyback Regulations]
and Section 77A of Companies Act, for second buyback
of shares, inter alia, clarified as under:
Background:
As per the provision of Section 77A(2) - first proviso
and Section 77A(2)(b) of the Companies Act, once the
buyback has been made with the authorization of the
board and not that of shareholders, no further offer of
buyback of any securities can be made within 365 days
reckoned from the date of preceding offer.
A listed company (say, X Ltd.) completed its first offer of
buyback through open market under the authorization
of its Board of Directors. The Board of Directors
authorized buyback commenced on 31 December
2008 after corrigendum to public announcement was
published. Buyback offer opened on 27 December 2008
and closed on 4 December 2009.
Issues:
1. Whether the period of 365 days is to be reckoned
from the date of the public announcement or from
the date of opening of the offer or from any other
date?
2. Whether the company can immediately proceed with
the second buy-back offer pursuant to the special
resolution passed by the members or whether the
cooling period of 365 days will be applicable to the
second offer through the members’ resolution also?
SEBI Response:
• SEBI Response 1 - The period of 365 days has to
be reckoned from the date of completion of the
preceding offer of buy back made pursuant to the
Board resolution.
• SEBI Response 2 - A second buyback authorized by
special resolution passed by the shareholders can
be made after completion of the first buy-back offer
made pursuant to Board resolution. However, other
conditions provided in Buyback Regulations and
section 77A of Companies Act e.g. the buy-back
should not exceed 25% of the total paid up equity
capital in the financial year, must be complied with.
Applicability of SEBI (Stock Brokers & Sub-Brokers)
Regulations, 1992 [the Brokers Regulations] to the
subsidiaries of stock exchanges
SEBI has, in response to the request for an interpretative
letter clarified that provisions of Regulation 15A of the
Brokers Regulations are not applicable to the subsidiaries
of RSEs, which are registered as stock brokers under
the Regulations. The provisions of Regulation 15A, inter
alia, provides that no director of the stock broker can
act as a sub broker to the same stock broker.
Key judicial decision
Protective rights under shareholders agreement
would not necessarily results into acquisition
of control under Regulation 12 of the Takeover
Regulations
Acquirer alongwith persons acting in concert had
acquired, on preferential basis, 17.90% of the post issue
equity share capital of the Target Company and had
made open offer of 20% to public under Regulation 10
(open offer is required when acquirer alongwith persons
acting in concert acquires shares or voting rights of
15% or more of the target company) of the Takeover
Regulations. The acquirer had entered into Share
Subscription and Shareholders Agreement [Agreements]
with the existing promoters which, inter alia, provided
for following:
• right to appoint 1 nominee of the acquirer on the
board of directors / committee of the Target Company
• quorum for a board meeting shall be 3 directors of
which 1 director shall be nominee of the Acquirer
• affirmative vote of the Acquirer director on reserved
matters like approval of annual business, acquisition of
securities of any other body corporate, amalgamation/
splitting/ re-organization / consolidation of target
company, appointment of key officials of the target
company like CEO, CFO, COO etc. and determination
of their remuneration and powers etc.
• Acquirer is only a financial investor in the target
company and shall not be considered to be a promoter
of the target company and this acquisition will not
result in a change in the control and management of
the target company and the control and management
of the target company shall continue to vest with the
promoters of the Target Company etc.
Corporate Cue 13
The question for consideration was whether rights
available to the Acquirer pursuant to the Agreements
would results into acquisition of control over the Target
Company under Regulation 12 (open offer is required
when acquirer acquires control over the target company,
irrespective of acquisition of shares or voting rights) of
the Takeover Regulations?
On facts, Securities Appellate Tribunal [SAT] held that
• Control under Regulation 2(1)(c) of Takeover
Regulations, is a proactive and not a reactive power.
It is a power by which an acquirer can command the
target company to do what he wants it to do. Control
means creating or controlling a situation by taking the
initiative. Power by which an acquirer can only prevent
a company from doing what the latter wants to do is
by itself not control. In that event, the acquirer is only
reacting rather than taking the initiative. It is a positive
power and not a negative power. In a board managed
company, it is the board of directors that is in control.
In other words, the question to be asked in each
case would be whether the acquirer is the driving
force behind the Company and whether he is the one
providing motion to the organization? If the answer is
yes, he is in control but not otherwise. In short control
means effective control.
and approval. These are meant to ensure standards
of good corporate governance and to protect
the interests of the shareholders including that of
Acquirer from the whims and fancies of the promoters
who manage the Target Company. The protective
provisions are not in the nature of the day to day
operational control over the business / management /
policy decisions of the Target Company.
• Even if the entire open offer of 20% to the public
is tendered, the Acquirer would still be far short of
a simple majority that is necessary for getting an
ordinary resolution passed.
Thus, based on the facts, SAT held that aforesaid
acquisition of shares or voting rights by the acquirer
would not result into acquisition of control over the
Target Company and Regulation 12 does not get
triggered.
M/s. Subhkam Ventures (I) Private Limited vs. SEBI (SAT
order dated 15 January 2010)

• Right to nominate only 1 director can by no stretch

of reasoning exercise control over the affairs of the
Target Company or control its board of directors. The
single nominee would be in a microscopic minority
and has no veto powers. It may be noted that where
the quorum is 3 or more directors, the presence of
1 nominee of the Acquirer would always be in a
minority and have no veto power.

• Protective provisions in the Agreement are meant

only to protect the interest of the Acquirer for the
investment made by it. It is clear that through such
protective provisions, Acquirer does not want the
Target Company to undergo any paradigm shift from
its present position without Acquirer’s knowledge

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Non-Banking Financial
Companies [NBFCs]
Introduction of 4th category of NBFC –
Infrastructure Finance Company [IFC]
RBI has, on 11 February 2010, amended the Non-
Banking Financial (Non-Deposit Accepting or Holding)
Companies Prudential Norms (Reserve Bank) Directions,
2007 [NBFC Directions] to introduce a 4th category of
NBFC viz. “Infrastructure Finance Company”. This is
in addition to the existing 3 categories of NBFCs viz.
Asset Finance Company [AFC], Loan Company [LC] and
Investment Company [IC].
Salient features of the amendments to the NBFC
Directions are as under:
Meaning of IFC:
IFC has been defined to mean a NBFC which deploys at
least 75% of its total assets in “infrastructure loans”.
The definition of “infrastructure loan” has been
amended to include credit facility extended to a project
of laying down and / or maintenance of gas, crude
oil and petroleum pipelines. However, credit facility
extended by NBFC to a project of construction of
educational institutions and hospitals has been excluded
from the definition of the term an “infrastructure loan”.
The amended definition of “infrastructure loan” under
the NBFC Direction is as under:
“Infrastructure loan means a credit facility extended
by NBFC to a borrower, by way of term loan, project
loan subscription to bonds / debentures / preference
shares / equity shares in a project company acquired
as a part of the project finance package such that such
subscription amount to be “in the nature of advance”
or any other form of long term funded facility provided
to a borrower company engaged in:
• Developing or
• Operating and maintaining, or
• Developing, operating and maintaining
any infrastructure facility that is a project in any of the
following sectors:
(a) a road, including toll road, a bridge or a rail system;
(b) a highway project including other activities being an
integral part of the highway project;
(c) a port, airport, inland waterway or inland port;
(d) a water supply project, irrigation project, water
treatment system, sanitation and sewerage system or
solid waste management system;
(e) telecommunication services whether basic or cellular,
including radio paging, domestic satellite service
(i.e., a satellite owned and operated by an Indian
company for providing telecommunication service),
network of trunking, broadband network and
internet services;
(f) an industrial park or special economic zone;
(g) generation or generation and distribution of power;
(h) transmission or distribution of power by laying a
network of new transmission or distribution lines;
(ha) laying down and/or maintenance of gas, crude oil
and petroleum pipelines*
(i) construction relating to projects involving agro-
processing and supply of inputs to agriculture;
(j) construction for preservation and storage of
processed agro-products, perishable goods such
as fruits, vegetables and flowers including testing
facilities for quality; and
(k) [ ** ]
(l) any other infrastructure facility of similar nature.”
* Inserted w.e.f. 11 February 2010.
** Construction of educational institutions and hospitals
– deleted w.e.f. 11 February 2010.
Requirements for IFC:
• IFC shall have “net owned fund” of Rs. 3 billion or
more.
Under NBFC Directions, “Non-Banking Finance
Companies-Non-Deposit Taking-Systemically Important”
[NBFCs-ND-SI] has been defined to mean a NBFCs
– not accepting / holding public deposits and
– having total assets of Rs 1 billion or more as per
latest audited balance sheet.
Having regard to the condition that the net owned
fund of IFC to be not less than Rs. 3 billion, it
follows that an IFC would be a NBFCs-ND-SI.
• IFC shall have minimum credit rating of ‘A’ or
equivalent of CRISIL, FITCH, CARE, ICRA or equivalent
rating by any other accrediting rating agencies; and
• IFC shall have Capital to Risk Assets Ratio of 15% (with
a minimum Tier I capital of 10%);
• IFC shall not accept deposits from the public.
Corporate Cue 15
NBFC satisfying the above conditions may approach Comparative chart of concentration of credit and
the Regional Office of RBI for classification as IFC. The investment:
application is to be supported by the certificate from A comparative chart showing limits on concentration of
Statutory Auditors of such NBFC confirming the asset / credit and investments in respect of various NBFCs-ND-
income pattern of the company as on March 31 of the SI after the amendment of NBFC Directions is as under:
latest financial year.
Credit / Investment AFC / LC/ IC AFC / LC/ IC giving IFCs
Concentration of credit limits for IFCs relaxed: (limits as loans / making (limits as
Limits on lending to a single borrower or single group of a % to its investments in a % to its
borrowers by IFC have been relaxed. owned fund) infrastructure owned
IFC may lend to - sector (note 1) fund)
• any single borrower upto 25% of its owned fund; (limits as a % to its
owned fund)
• any single group of borrowers upto 40% of its owned Lending to
fund. any single borrower 15% 20% 25%
any single group of borrowers 25% 35% 40%
Further, IFC may lend to and invest in (loans /
Investments in (note 2)
investments taken together) -
shares of another company 15% 20% 15%
• any single borrower upto 30% of its owned fund;
shares of single group of 25% 35% 25%
companies
• any single group of borrowers upto 50% of its owned
fund. Lending to and investments in
single party 25% 30% 30%
Present norms relating to concentration of credit limits single group of parties 40% 50% 50%
in respect of infrastructure loan as laid out in NBFC
Directions will continue to be applicable to NBFCs-ND-SI Notes:
1) The higher limits would be available only for exposure to infrastructure related loan and / or
that do not meet the criteria to be classified as IFC.
investments.
2) Investment limits will not be applicable for investment in the equity capital of an insurance company
Existing provisions of NBFC Directions which are based upto the extent permitted by RBI.
on asset specification viz. income recognition, asset 3) In case of AFC, above limits to a single party / single group of parties may be increased by 5% of its
owned funds in exceptional circumstances with the approval of such AFC’s Board of Directors.
classification and provisioning norms shall be applicable
4) NBFCs-ND-SI not accessing public funds (commercial papers, public deposits, debentures, inter-
to IFC. corporate deposits and bank finance), either directly or indirectly, may make an application to RBI for
modifications in the above limits.

16
Risk weights and exposure norms for bank exposure
to IFCs:
RBI has, on 12 February 2010, also made separate
amendments to the master circulars to banks with
regard to assigning risk weightage and exposure norms
for banks’ exposure to IFCs and bank finance to NBFCs.
Accordingly –
• the banks’ exposure to IFCs will be risk weighted as
per the rating assigned to IFCs by rating agencies
registered with SEBI and accredited by RBI. Banks are
required to assign risk weight similar to corporate /
corporate bonds while computing capital for credit
risk and specific risk under market risk.
• bank’s exposure to IFCs should not exceed
– 15% of its capital funds as per its last audited
balance sheet,
– 20% of its capital funds, if such exposure is
on account of funds on-lent by IFCs to the
infrastructure sector.
Withdrawal of Short-term Forex Loans facility for
NBFCs and Housing Finance Companies [HFCs]
RBI had, as a temporary measure, allowed NBFC-ND-
SI on 31 October 2008 and HFCs on 17 November
2008, to raise short-term foreign currency borrowings
not exceeding 50% of the Net Owned Funds or USD
10 million, whichever was higher, for refinancing their
short-term liabilities. The facility was extended to these
companies under the approval route, subject to certain
terms and conditions. However, effective from
3 February 2010, RBI has withdrawn the facility of short-
term foreign currency borrowings provided to NBFC-ND-
SI and HFCs.
Compliance requirement of NBFCs
RBI has, on 4 February 2010, clarified that NBFCs having
FDI, whether under automatic route or under approval
route, are required to submit a certificate from their
Statutory Auditors on half yearly basis (half year ending
September and March) certifying compliance with the
existing terms and conditions of FDI. Such certificate is
required to be submitted within one month from the
close of the half year to which the certificate pertains,
to the Regional Offices in whose jurisdiction the head
office of the company is registered.
Corporate Cue 17
Insurance
Amendment to Corporate Governance Guidelines
for Insurance Companies
Insurance Regulatory and Development Authority [IRDA]
has, on 29 January 2010, amended the Corporate
Governance Guidelines for Insurance Companies [CG
Guidelines] which were issued on 5 August 2009. The
amendments, inter alia, include:
• As a matter of prudence, not more than one member
of a family, or a close relative as defined in the
Companies Act or an associate (partner, director, etc.,)
should be on the Board of an Insurer as “Independent
Director”.
• The reports of the Policyholders’ Protection
Committee should be on the agenda of every Board
meeting of the company.
• The company must disclose, inter alia, the following
in their annual report:
– Number of the meetings held of the Board of
Directors and Committees mandated under the CG
Guidelines in the financial year.
– Details of the composition of the Board of Directors
and Committees mandated, setting out name,
qualification, field of specialization, status of
directorship held etc.
– Number of the meetings attended by the Directors
and the members of the committee.
– Detail of the remuneration paid, if any to the
independent director.
• All the mandatory committees should meet at least
4 times in a year and not more than 4 months shall
elapse between two successive meetings. The quorum
shall be either 2 members or 1/3rd of the members
of the committee whichever is greater, but in case an
independent director is mandated to be in any of the
Committees, he/she should be necessarily present to
form the quorum.
• Each insurer should designate their Company
Secretary as the Compliance Officer whose duty will
be to monitor continuing compliance with the CG
Guidelines.
CG Guidelines applicable to insurance companies and
reinsurance companies except that reinsurance company
will not require to have the Policyholders’ Protection
Committee.
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Guidelines on Licensing of Corporate Agents by
the Insurance companies
IRDA has, on 2 March 2010, issued the instructions for
compliance by the Insurance companies while issuing
license to the Corporate Agents. The applications for
corporate agency license from such a person or group
of persons who is / are already engaged in any insurance
business shall be dealt with, inter alia, in the following
manner:
• All such applications shall be referred to IRDA by the
designated person concerned and licenses shall be
issued by the designated person only after approval by
IRDA.
• Persons from any group which is having a broking
license shall not be eligible for corporate agency.
• Any of the persons which are regulated by RBI within
the group may apply and obtain a corporate agency
license provided they have “substantial client base
of their own or access to data which would facilitate
identification of prospects”.
• Persons who are not regulated by RBI, shall not be
eligible for corporate agency license, unless they have
“a substantial client base of their own or access to
data to identify the prospective policyholders” and
have a turnover, assets or income of at least Rs. 15
crores.
• Only those persons which are part of a group having
Indian Insurance Company or a scheduled commercial
Bank within the group shall be eligible for issue of
corporate agency license to do insurance distribution
as the principle business, provided this shall be the
only corporate agency amongst all the entities in the
group, subject to fulfillment of conditions of licensing
of Corporate Agency guidelines.
In addition to above, all other conditions issued under
IRDA (Licensing of Corporate Agency) Regulations, 2002
and the Guidelines issued shall be applicable.
Corporate Cue 19
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