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Changing Regulatory Landscape
Newsletter July 2012
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In this Issue
Sectoral Regulations 03
Financial Services Telecommunications Special Economic Zones Education
Corporate Regulations 08
Exchange Control
Perspective 12
Glossary 14
Sectoral
Regulations
Financial services
Investment by QFIs in Indian corporate debt securities
RBI has recently permitted QFIs to invest in debt securities in India on repatriation basis, subject to an overall limit of 1 billion USD.
Under this scheme, QFIs can invest through SEBI-registered QDPs in listed NCDs, listed bonds of Indian companies, listed units of mutual fund debt schemes and ‘to be listed’
corporate bonds. For this purpose, a QFI may open a single non-interest bearing rupee
account for settlement of transactions relating to purchase and sale of eligible securities and may also open a demat account with a QDP.
Registration of Pension Funds for Private Sector Guidelines, 2012
The PFRDA has recently issued guidelines for registration of pension funds in the private sector. The key eligibility criteria for an applicant are as follows:
Sponsor must be a company in the financial services sector regulated by any of the financial services sector regulators in India (i.e. RBI, SEBI, IRDA, and PFRDA).In case the applicant is a JV company, at least one of the shareholders/sponsors should falls under the financial sector regulators.
Monthly AAUM should not be less than INR 8,000 crores in the preceding 12 months ending with the month of application and such AAUM should not be less than INR 2,000 crores. This criteria should be met by any one of the sponsors in case the
application is made by a JV company.
Sponsor’s assets under management shall not include investments in its own assets, investment advisory services or any other similar activity.
Sponsors must have a positive net worth during the immediately preceding five years with a net profit record of three years immediately preceding the application.
Applicant should be a ‘fit and proper’
person.
An applicant can make an application and obtain in-principle approval from PFRDA, provided the applicant satisfies the criteria laid down under the guidelines. The applicant can then approach PFRDA for formal registration within three months from the date of such in- principle clearance. The registration certificate, once granted, may be reviewed annually or within such period as may be specified.
The Non-Banking Financial Company –Factors (Reserve Bank) Directions, 2012:
A new category of NBFCs, factoring business, has been introduced along with specific directions to govern this activity.
Some of the key features of these directions are:
Registration with RBI as an NBFC-Factor has been mandated.
Minimum NOF required for an NBFC- Factor is 5 crores INR.
NBFC-Factors should satisfy the ‘75:75 asset income pattern’, i.e. financial assets in the factoring business should constitute at least 75 percent of its total assets and its income derived from the factoring business should not be less than 75 percent of its gross income.
NBFC Prudential Norms would be equally applicable.
Existing NBFCs satisfying the prescribed asset income pattern may approach the RBI along with their certificate of registration and auditor’s certificate for change in classification within six months from the date of RBI notification.
NBFC-Factors intending to deal in forex through export or import factoring are required to make an application to the Foreign Exchange Department of RBI for permission to deal in forex and adhere to the terms and conditions prescribed.
Telecommunications Revised license fee
DoT has revised the annual license fee rate of annual gross revenue for ISPs,
UASL/CMTS/Basic service licence category A, B, C, ILD and NLD services.
Following is a tabular representation of license fee rate applicable till 31 March 2013 and post 31 March 2013:
S. no. Type of license Annual license fee rate as a percentage of AGR
For the period from 1
July 2012 to 31 March 2013
For the year 2013-14 and onwards
1 ISP
ISP – Internet telephony
4 7
8
2 UASL/ CMTS/ Basic service licence
Category A Category B Category C
9 8 7
8
3 ILD service licence 7 8
4 NLD service licence 7 8
Special Economic Zones
Important decisions taken by the BoA during the 53rd meeting dated 6th July 2012
Despite imposition of MAT and DDT on SEZ developers and units, and other bottlenecks, SEZs are witnessing a renewed interest from investors. As per media reports, a number of foreign investors are evaluating investment opportunities in these zones. During FY 2011- 12, total exports from SEZs grew by 15.4%
compared to exports in the previous financial year.
With this as a background, recently several noteworthy transactions have been approved by the BoA, for example, in its last meeting, BOA approved a developer/co-developer proposal for setting up a power SEZ. BOA has also approved SEZs in various sectors such as IT/ITES, biotech, pharma, minerals and mineral-based products.
Below is the summary of some important decisions taken by the BoA during the 53rd meeting:
Co-developer proposals
Sale of land in a SEZ is prohibited. Cases where the lease agreement between the developer and co-developer are
disproportionately high and where the lease on expiry is renewable at the sole option of the lessee, the BoA has observed that such conditions in effect amount to sale of land by the developer.
Similarly, the BoA is not approving co- developer proposals wherein the lease amount and the deposits are extremely low and where such amounts cannot be
increased.
Extension of formal approval granted to the developers
The letter of approval granted to a developer is valid for a period of three years within which one unit has to commence production and the SEZ has to become operational. The BoA has deferred extensions of in-principle approvals in all such cases where it noted that the developer has failed to acquire the minimum land. It has sought information from the development commissioner on the following matters:
a. Reasons for not acquiring minimum land even after four years
b. The status of progress made by the developers on the ground towards setting up the SEZ
c. The proposed schedule of completion of the SEZ project
Addition of non-contiguous land parcel with existing structure
The BoA has approved the addition of a non-contiguous land parcel, which already has an existing structure attached to the SEZ, subject to the following conditions:
a. The developer would not claim any indirect tax exemption on the building
already constructed prior to inclusion in the SEZ area.
b. No duty exemption would be availed for establishing contiguity.
c. The developer would be entitled to claim income-tax deduction.
Change of name
The BoA had, vide instruction no. 21, approved guidelines for a mere change in name wherein there is no change in the shareholding pattern of the original developer. In the past, such cases were being approved by the Department of Commerce on file. However, of late, such cases are being routed to the BoA for its approval.
Change in shareholding
In case of change in the shareholding or the dilution of equity, the BoA has added a new condition which requires the developer to immediately furnish to the CBDT the full financial details relating to transfer of equity.
Free trade and warehousing zone
A unit in a FTWZ is allowed to carry out trading and warehousing activities and certain value-added activities related thereto as ‘authorised operations’. However, activities that constitute manufacturing are not permitted.
Education
AICTE (Establishment of Mechanism for Grievance Redressal) Regulations, 2012
AICTE has recently released the regulations that list various complaints of students that will be considered as ‘grievance’. The regulations will be applicable to all technical institutions approved or recognised by AICTE under the AICTE Act, 1987.
For the redressal of students’ grievances, each technical institution will appoint an
ombudsman. The regulations also mention the procedure for redressal of grievances and the consequences of noncompliance, which include the withdrawal of recognition provided by AICTE or any other penalty applicable as per the AICTE (Grant of Approvals for Technical Institutes) Regulations 2010 and amendments thereto.
Corporate Regulations
Monetary policy
In line with expectations, the RBI has left interest rates unchanged for the second time since June. The monetary policy statement clearly indicates that the RBI favours an easy money environment despite inflation concerns.
The policy is expected to anchor inflation expectations and maintain liquidity in order to facilitate smooth flow of credit to productive sectors and thereby support growth.
Key highlights Inflation rate
Keeping in view the recent trend in food inflation, trends in global commodity prices and the likely demand scenario, the baseline projection for the wholesale price index (WPI) inflation for March 2012 has been raised to 7% from 6.5%.
Growth rate
Given the deficient monsoon, weak industrial activity and risk from global situation, the growth projection for the current year has been revised downwards from 7.3% to 6.5%.
Bank rates
The repo rate, reverse repo rate and cash reserve ratio (CRR) has remained
unchanged at 8%, 7% and 4.5% respectively.
The reasons for keeping the repo rate and CRR unchanged are headline WPI inflation remaining sticky at 7% and estimated current growth rate being lower than the trend rate of 7.5%.
Statutory liquidity ratio (SLR) has been reduced to 23% from 24% in order to ensure that liquidity pressures do not constrain the flow of credit to productive sectors of the economy.
Exchange Controls
Scheme for prepayment or buyback of FCCBs – Approval route
RBI has permitted Indian companies to buyback FCCBs, under the approval route, subject to following key conditions:
The buyback value of the FCCBs shall be at a minimum discount of 5% on the accreted value.
In case the Indian company is planning to borrow foreign currency for buying back the FCCBs, all FEMA rules or regulations relating to foreign currency borrowing must be complied with.
The Indian company would need to submit an ECB 2 return and a report providing details of the buyback after the completion of buyback.
The Indian company has the right to initiate prepayment, subject to bondholders’
consent.
Bonds purchased from the holders must be cancelled and cannot be reissued or resold;
The Indian company must open an escrow account for buying back the FCCBs.
Entire process of buyback should be completed by 31 March 2013.
Relaxation of ECB Norms for refinancing of outstanding rupee loans availed by borrowers in the manufacturing and infrastructure sectors
Specified eligible borrowers in the
manufacturing and infrastructure sectors1 who have earned foreign exchange during past three financial years and are not on the
default/caution list of the RBI have been
permitted to avail ECB under the approval route for refinancing outstanding rupee loans availed from domestic banking system and utilised for incurring capital expenditure and fresh rupee capital expenditure, or both. The borrower would need to comply with following key conditions:
The entire amount should be drawn within one month of obtaining the loan registration number.
ECB liability (prinicipal + interest) should be repaid only out of the foreign exchange earnings.
The overall ceiling for all specified eligible borrowers is 10 billion USD and the individual corporate ceiling is 50% of the average annual export earnings during past three financial years.
The existing facility for repayment of rupee loans availed for capital expenditure (as tabulated below) by raising fresh ECBs will continue to be available to companies in the infrastructure sector1.
1 Infrastructure sector is defined to include power, telecommunication, railways, road including bridges, sea port and airport, industrial parks, urban infrastructure (water supply, sanitation and sewage projects), mining, refining and exploration and 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.
Sector
Utilisation of Fresh ECB proceeds Refinancing of rupee loan (for capital expenditure) availed from domestic banking system
Fresh capital expenditure
Power-sector companies
Up to 40% At least 60%
Infrastructure- sector
companies (other than power sector)
Up to 25% At least 75%
Resident foreign currency accounts
RBI has liberalized following aspects applicable to RFC account-holders:
RFC account-holders were required to surrender 50% of their forex earnings for conversion to rupee balances. Going forward, they would be able to credit 100% of their forex earnings in their RFC accounts.
RFC accountholders were required to purchase foreign exchange only after fully utilising the available balances in the RFC accounts. This condition has been withdrawn
Perspective
India gets its first QFI investment With a view to creating further depth in the Indian capital markets as well as attracting greater foreign investment, the Indian government this year liberalised foreign investment in the stock markets. It also opened the Indian capital market for qualified foreign investors (QFIs) to invest in. QFIs include only individuals, groups or associations resident in a foreign country that complies with the
requirements of the Financial Action Task Force (FATF) and is a signatory to the International Organisation of Securities Commissions’
(IOSCO) multilateral MoU. Foreign institutional investors (FIIs) and foreign venture capital investments do not come under the QFI category.
The policy was not devoid of its share of checks and balances though. Some of the key highlights of the policy are mentioned below: QFIs
QFIs are not required to be registered with the Securities and Exchange Board of India (SEBI). However, they can invest only in listed Indian equities through depository participants (agents of depositories that provide accounts for holding securities in electronic format) duly registered with the SEBI.
Depository participants (DPs), through which investments will be made, have been entrusted with the onus of ensuring tax and regulatory compliances by QFIs. In
addition, DPs will also ensure compliance with the 'know your customer' norms for QFIs.
An individual QFI can invest up to 5% of the paid-up capital of a listed company. Further, total investment by QFIs in a listed
company cannot exceed 10% of its paid-up capital. These investment limits will be over and above the ceilings set for FIIs and non- resident Indians under the portfolio investment scheme for foreign investment in India.
QFIs will also be allowed to acquire equity shares by way of rights issues, bonus shares or equity shares on account of stock splits, amalgamations, demergers or other such corporate activities. However, QFI
transactions, for all purposes, will be treated on par with those of Indian non-
institutional investors with regard to margins, voting rights, public issues, etc.
DPs will purchase equity at the instruction of QFIs within five working days. If a DP fails to execute the order within five working days, the funds will be repatriated back to the QFI's designated overseas bank. When QFIs sell their stock holdings, the sale proceeds (along with dividends, if any) will be repatriated to their designated banks or will be re-invested, within five working days.
Recently, India received its first investment via the QFI route when Kotak Mahindra Bank concluded a deal worth 5 million USD for a US- based client. This puts an end to doubts that the country's attempt to get investors to buy shares directly will be a non-starter.
The government expects the QFI scheme to attract investment worth about 30 billion USD over the next 15 to 18 months. The scheme will certainly help increase the depth of the Indian market while combating volatility and
increasing foreign inflows into the country. Also, it remains to be seen whether there will be a gradual migration of FII investment into this new route if the latter confers possibilities for regulatory arbitrage.
- Pankaj Kwatra (Manager, Regulatory Services)
Glossary
AAUM Average assets under Management AGR Annual Gross Revenue
AICTE All India Council for Technical Education BoA Board of Approval
CBDT Central Board of Direct Taxes CMTS Cellular Mobile Telephone Service Crore 10 million
DC Development Commissioner DDT Dividend Distribution Tax DoT Department of Telecomm ECB External Commercial Borrowing FCCBs Foreign Currency Convertible Bonds FEMA Foreign Exchange Management Act FTWZ Free Trading Warehousing Zone
FY Financial Year
ILD International Long Distance
INR Indian Rupee
IRDA Insurance Regulatory and Development Authority ISP Internet Service Provider
IT Information Technology
ITES Information Technology Enabled Services
JV Joint Venture
LoA Letter of Approval MAT Minimum Alternate Tax NCDs Non-Convertible Debentures NBFCs Non Banking Financial Company NLD National Long Distance
NOF Net Owned Fund
PFRDA Pension Fund Regulatory and Development Authority QDPs Qualified Depository Participants
QFI Qualified Foreign Investor RBI Reserve Bank of India RFC Resident Foreign Currency SEZ Special Economic Zone
SEBI Securities Exchange Board of India UASL Unified Access Service Licensee USD United States Dollar
Contacts
Ahmedabad
President Plaza, 1st Floor Plot No 36 Opp Muktidham Derasar
Thaltej Cross Road, SG Highway Ahmedabad, Gujarat 380054 Phone +91-79 3091 7000 Bangalore
6th Floor, Millenia Tower 'D' 1 & 2, Murphy Road, Ulsoor, Bangalore 560 008 Phone +91-80 4079 7000 Bhubaneswar
IDCOL House, Sardar Patel Bhawan Block III, Ground Floor, Unit 2 Bhubaneswar 751009
Phone +91-674 253 2279 / 2296 Chennai
PwC Center, 2nd Floor 32, Khader Nawaz Khan Road Nungambakkam
Chennai 600 006 Phone +91-44 4228 5000 Hyderabad
#8-2-293/82/A/113A Road no. 36, Jubilee Hills, Hyderabad 500 034, Andhra Pradesh
Phone +91-40 6624 6600 Kolkata
South City Pinnacle, 4th Floor, Plot – XI/1, Block EP, Sector V Salt Lake Electronic Complex Bidhan Nagar
Kolkata 700 091
Phone +91-33 4404 6000 / 44048225 Mumbai
PwC House, Plot No. 18A, Guru Nanak Road - (Station Road), Bandra (West), Mumbai - 400 050 Phone +91-22 6689 1000 Gurgaon
Building No. 10, Tower - C 17th & 18th Floor, DLF Cyber City, Gurgaon Haryana -122002
Phone : +91-124 3306 6000 Pune
GF-02, Tower C, Panchshil Tech Park, Don Bosco School Road, Yerwada, Pune - 411 006 Phone +91-20 4100 4444
This report does not constitute professional advice. The information in this report has been obtained or derived from sources believed by
PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this report are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this report.
PwCPL neither accepts or assumes any responsibility or liability to any reader of this report in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take.
