SEBI propose 2-year lock-in to hedge funds wanting to invest in India

Hedge funds interested in participating in the Indian stock markets have been asked by The Securities and Exchange Board of India (SEBI) to agree to a lock-in period of two years as a cushion against sudden withdrawal under adverse circumstances. Some hedge funds, both new and existing, already have agreed to the lock-in stipulation, as per SEBI officials.

Some of these are already invested in the Indian market through participatory notes (PNs), and may want to register directly with SEBI and invest with a two-year lock-in. SEBI chairman M Damodaran is trying to persuade many other new hedge fund applicants to provide a lock-in undertaking. The regulator also wants to ensure that hedge funds registering directly with it are regulated in the country of their origin. This information is being gathered by SEBI within 24 hours from a multilateral body of global regulators. Once the hedge fund comes upfront, SEBI is able to determine whether it is regulated in the home country. Having ensured this, the other comfort being sought is whether the fund will agree to a two-year lock in period. Sources said those who agree to this will get a preference in entering the Indian stock market.

In the past, SEBI had considered allowing hedge funds as it felt that they could be an additional source of liquidity besides diversifying the pool of foreign investments in the local market. As part of policy options, it was suggested three years ago that hedge funds could be allowed in the Indian market subject to certain conditions such as ensuring that at least 20% of the corpus should be contributed by investors such as university funds, charitable trusts, endowments, insurance firms, banks and pension funds.

Read more in The Economic Times article.

CVC International allowed investing in Flemingo Duty Free Shops by FIPB

Citicorp Venture Capital International’s proposal to acquire 15% stake in Flemingo Duty Free Shops Private Limited (FDSPL) has been approved by the Foreign Investment Promotion Board (FIPB). Flemingo Duty Free runs duty-free shops at various airports and seaports. The deal is valued at more than Rs. 100 crores. The Ministry of Finance had already given the go-ahead to the investment. However, the proposal was awaiting approval pending with the FIPB.

Flemingo would initially issue 1 mn convertible preference shares to CVC International for about Rs. 1000 each, total amounting to Rs. 100 crores. These preference shares would then be converted into equity at a later date for a premium. Citicorp’s shareholding in Flemingo would be up to a maximum of 15% of the paid-up equity of the company.

The current shareholding structure of Flemingo Duty Free Shops includes 51.22% equity stake held by Flemingo International, a company based in British Virgin Islands, and a 24.87% stake held by various NRIs. After conversion of Citicorp’s preference shares; Flemingo International, NRIs and Citicorp would respectively hold 43.54%, 21.14% and 15% in FDSPL, taking the total FDI to 79.68%.

Read more in The Economic Times article.
Related Post:
Flemingo Duty Free Shops sells 15% stake to Citigroup Venture Capital International; awaits regulatory nod

SEBI, RBI conduct studies for regulating PE funds

If media reports are to be believed, then private equity funds are in for a tough time ahead in the Indian markets. PE funds may come under the regulatory scanner in India, and though the ultimate regulator has not been decided upon, both Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have formed study groups to analyze the structure and impact of such funds on the investors, the companies in which they invest in and their effect on corporate governance.

The issue has gained importance as a working group of International Organisation of Securities Commission (IOSCO) has been set up to study the impact of private equity funds on emerging markets. The Indian market regulator is the chairman of IOSCO’s emerging market committee, and will also have consultative discussions with other regulators during the 32nd annual conference of IOSCO to be hosted by SEBI in India this year.

Based on the joint findings of the study, the regulators may issue guidelines for listing and registration of such funds, for ensuring better monitoring. The purpose of the study is to ascertain if the actual investors in a private equity fund are loosing out during leveraged buyouts, de-listing and re-listing of the company.

Read more in the Business Standard article.

SEBI eases listing agreement for debenture issues

The Securities and Exchange Board of India (SEBI) today has relaxed listing agreement for debentures. It has allowed companies issuing debentures on private placement, to submit their unaudited half-yearly results to the stock exchanges, instead of quarterly basis.

The regulator seems to be easing the guidelines with an objective to encourage more companies to tap the debenture market, which has been lying low for some time now. With the amendment, the debenture issuer companies would now be submitting unaudited half yearly results instead of unaudited quarterly results.

However, the half-yearly accounts would be subject to a limited review, which has to be done by the statutory auditors of the company. The SEBI has also made changes to the format which is to be used for reporting of the limited review.

Read the article in Business Standard.

SEBI to allow hedge funds direct entry into Indian capital markets

The capital markets regulator, the Securities and Exchange Board of India (SEBI), is considering direct participation of hedge funds in the Indian stock markets. SEBI has invited hedge funds to register with the regulator and invest in the Indian stock markets without the cover of participatory notes, currently the most preferred route of hedge funds for channeling investments in the Indian markets.

Participatory notes are often seen as tools for money laundering and there have been numerous calls, including from the Reserve Bank of India, to curtail them. It is widely estimated that 48% of the $50 bn investment by foreign institutional investors in the Indian markets has come through offshore participatory notes. Allowing hedge funds direct entry will help SEBI track the source of funds coming into the capital markets more efficiently. It is difficult to track the source of funds coming in through participatory notes.

SEBI’s thinking was articulated by its chairman, M Damodaran, at a meeting organized by ICICI Securities in Singapore early this month, which foreign investors, including several hedge funds, attended.

Read more in the article in Business Standard.

RBI refuses Catholic Syrian Bank to let PE firm AIF Capital Development up stake above 5%

The Reserve Bank of India (RBI) has refused clearance to allow the preferential allotment of about 15% stake in Thrissur-based Catholic Syrian Bank to Asian private equity firm, AIF Capital Development. This has made a dent in (CSB) capital raising plans. The Foreign Investment Promotion Board (FIPB) has cleared the proposal but the RBI guidelines restrict any single private equity firm’s holding in a private sector bank to 5%.

Strangely, AIF Capital has 5.56% stake in Yes Bank, a new generation private sector bank. In addition to Yes Bank, AIF Capital’s portfolio in India includes Bharti Tele-Ventures and GVK Industries.

CSB had a capital adequacy of 11.24% at the end of March 31, 2006 and has been struggling to raise capital. It is imperative for CSB to raise capital to adhere to the RBI’s norms on minimum capital requirements for private sector banks, which require all private sector banks to increase their net worth to a minimum of Rs. 300 crores. CSB’s net worth in at the end of 2005-06 was around Rs. 215 crores.

Read more in the Business Standard article.
Related Post:
Catholic Syrian to sell 15% stake to AIF Capital Development; seeks RBI nod for sale

SEBI to amend Clause 49 rules to tighten listing requirements

The Securities and Exchange Board of India (SEBI) has proposed to initiate a series of changes in Clause 49 rules, which relate to corporate governance, so as to tighten the listing norms for companies.

As per the proposed changes, the government nominees in public sector companies would not be treated as independent directors as they have “material pecuniary relationship with the government”.

The market regulator also has made it mandatory for companies to disclose relationship between independent directors, as well as other directors. SEBI has stipulated that companies would disclose the relation between independent directors inter-se, as well as the other directors of the company not holding management position, in all documents where the details of the board of directors are incorporated. SEBI also has proposed deletion of the provision allowing nominee directors appointed by the institutions to be considered as independent directors. The proposals came after SEBI received complaints that some companies were appointing independent directors related to other directors on the board. SEBI also proposed to fix the minimum age of 21 for independent directors.

The proposed norms have been made public for feedback.

Read the Business Standard article.

SEBI bars Atlanta Infra, 15 others from capital market transactions for price rigging

The Securities and Exchange Board of India (SEBI) has barred 16 entities from selling or buying the shares of Atlanta Infrastructure, a construction and engineering company, for alleged price manipulation. These entities include the promoters of Atlanta as well as managing director Rajoo Barot and company secretary Sachin Jain.

The SEBI has also asked exchanges not to approve the listing of Atlanta’s convertible warrants and shares, till further directions. It also has asked depositories not to dematerialize convertible warrants and shares issued upon conversion and not to allow stock-split plans. The company had raised Rs. 85.72 crores by issuing convertible warrants at Rs. 317.50. At its EGM on February 16, the company approved 1:5 stock split and further raising of funds through foreign currency convertible bonds.

Shares of Atlanta, which were listed on September 25, 2006, have rose from its offer price of Rs. 150 to Rs. 1446 on January 17 a rise of 681% in 55 trading days. Sensing something fishy in the sudden spurt in its share price, the SEBI advised the NSE and the BSE to conduct a probe. The probe concluded that the Manish Marwah / Dilip Nabera Group, the Atul Shah Group and the Nirmal Khotecha Group made large scrip purchases during the period. It also said the employees, who were allotted shares, had immediately transferred the shares through off-market transactions, to persons connected with the company.

Read the article in Business Standard.

Indian Government to announce an incubation fund for entrepreneurs

The Indian government is proposing to set up an incubation fund which could be announced in the forthcoming Budget. The fund will help graduates from leading technical and management institutes with the seed money to float their ventures. The initiative will be on the lines of private venture capital funds. The fund will provide capital support and interest subsidy for a project. The proposal is being worked out on the basis of recommendations made by a committee under the Planning Commission.

While the government may provide seed money for the fund by way of token provision for the next fiscal, the industry may also be asked to take it forward. The industry may be involved in the identification and implementation of viable projects. Incubatee entrepreneurs may be allowed certain concessions. Besides, contributions to the fund by business houses could earn them deductions from income tax.

A Planning Commission committee on technology innovation and venture capital has suggested that all technical institutions should set up profit-sharing Enterprise Incubation Units to provide advisory services, help in filing patents and protecting commercially valuable intellectual property. The committee also has suggested that these incubation units should get grants of up to 50% of their expenditure and exemption from tax as long as returns are used for further innovation. The committee has also suggested that enterprises being developed at incubation centres should also be categorized a priority sector for extending concessional bank credit.

Read The Economic Times article.

SEBI-RBI tiff stymies realty venture capital

The differences between the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have stalled foreign venture capital real estate funds from setting up shop in India. The RBI is insisting that funds floated by foreign venture capital investors (FVCIs) be brought on a par with real estate funds coming through the foreign direct investment (FDI) route for regulatory purposes.

At present, the FDI in the real estate sector is permitted through the automatic route and does not require the Foreign Investment Promotion Board (FIPB) nod. But fund houses have to adhere to certain project and financial restrictions.

The rules governing venture financing are liberal and allow funds to park money and withdraw it at their will. But financial conditions governing FDI rules require these funds to stay here for a minimum three years. Repatriation of any of the initial investment by funds before the stipulated period requires FIPB approval. The project conditions governing FDI rules prohibit sale of undeveloped land – a developer may purchase undeveloped land but must develop it before selling it. Also, it states that at least 50% of the project must be completed within five years from the date of obtaining statutory clearances.

Nearly 20 FVCI applications to invest in the Indian real estate sector are pending with the RBI, but have been approved by SEBI. Investments in the pipeline are estimated to be worth around $2 bn.

Article in The Financial Express.

SEBI prohibits Gammon Infrastructure IPO for a year

The Securities and Exchange Board of India (SEBI) has blocked the Rs. 450 crore-public offer of Gammon Infrastructure, restraining the company from tapping the capital markets for a year. This follows the December 21, 2006 order barring the parent company of Gammon Infrastructure, Gammon India from accessing the capital markets.

SEBI had stopped Gammon India and four others including promoter-chairman Abhijit Rajan and two companies controlled by him, from accessing the capital markets for a year for routing Gammon funds to subscribe to its rights issue in 2001. However, back then, it had not named Gammon Infrastructure Projects in the order. Gammon India will now appeal against the SEBI order with the Securities Appellate Tribunal (SAT). The SEBI has communicated to Gammon India that since the parent company holds significant stake in Gammon Infrastructure, the one-year prohibition on Gammon India would be applicable to Gammon Infrastructure as well.

At present, Gammon India holds 82.5% in Gammon Infrastructure, which following the IPO was supposed to come down to 20%. US hedge fund Och-Ziff also owns 12.5% in Gammon Infrastructure. The company is debt-free and has around Rs. 100 crores cash and sees no funding issues to delay its ongoing projects.

Read the article in Business Standard.

Government to bring M&As under RBI, SEBI regulations

The Indian Government may pass regulations to empower the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) to inspect mergers and acquisitions involving domestic and foreign companies in order to examine whether such deals pose any security threat to the country. All details regarding the source of funding and the structure of the new entity, after merger / acquisition, will be closely scrutinized by the two regulators. In the case of inflow and outflow of funds, the RBI will set a threshold limit. The apex bank and the capital market regulator will examine any investment beyond the threshold limit in the case of listed companies. In addition, sectoral regulators would also examine impact of the M&As for the domestic market.

The investigation will seek to find out whether the formation of the new company, post-merger, will be a threat to national security—both economic and physical. A probe by sectoral regulators will deal with the impact of the merger for the domestic market in terms of monopolistic practices. In the event of a foreign company acquiring an Indian company, the regulator will investigate the antecedents of the company that is acquiring the Indian company and its promoters. Moreover, a detailed investigation of the source of funds, used for financing the acquisition, will also be undertaken.

In the case of an Indian company acquiring a foreign company, the procedures will be much simpler, with the domestic firm required to follow the existing procedures of informing the regulators about the source of funding. Not just the foreign direct investment (FDI), even projects covered under the public-private-partnership (PPP) model will come under security. As a part of this, all PPPs will have a national security exemption clause, which will prevent companies in the consortium to undertake activities, which the government thinks will be against the country’s safety. In case of violations, companies will be removed from the project.

Article in The Financial Express.

Government considering amendments to the SEBI Act in Budget 2007

It is understood that the government is planning to amend the Securities and Exchange Board of India (SEBI) Act so as to enable SEBI to introduce plea bargain, disgorgement, etc. in the forthcoming budget session. The Ministry of Finance has called a meeting of the SEBI officials to discuss and finalize these amendments before placing it for the amendment. The Act will also incorporate the clause of compounding of cases in the capital market. This power will be accorded to the court and not to the SEBI. Plea bargaining might be allowed for select category of cases and not all. The SEBI Act amendments will also address more clarity and transparency by introducing clauses specifically related to disgorgement. The amendments will also incorporate the creation of an investor protection fund and the provision that all fees and charges collected by the regulator will be transferred to the government account. Among other things, this will include fees collected from brokers, penalties imposed, etc. After the funds were transferred to the government account, the SEBI might have to take the permission of the government to withdraw funds for use.

Read the Business Standard article.

Government to review FDI policy in March

The Indian Government is considering a number of changes in the current foreign direct investment (FDI) policy governing the activities of the various foreign entities invested and wanting to invest in India. Some of the proposals include –

· Acquisition of stake in Indian commodity exchanges by foreign investors
· Annual reviews of FDI policies in all sectors instead of one sector a month as at present
· Removal of the mandatory clause for petroleum companies to disinvest 26% in Indian subsidiaries in five years
· Review of the 10% cap on voting rights in subsidiaries of foreign banks
· Hike in the 49% cap in air transport services including activities like charter flights, ground handling and helicopter services and clear definition of all aviation activities and the relevant FDI cap
· Increase in the FDI cap in retail, currently at 51% in single-brand retail and 100% in wholesale cash-and-carry

The proposal would be submitted to the Union Cabinet this March.

Read more in the Business Standard article.

SEBI to issue guidelines for real estate mutual funds

The Securities and Exchange Board of India (SEBI) is planning a number of moves for growing the real estate mutual fund (REMFs) business in India. It is moving towards enforcing a minimum closing period of three years for REMFs. SEBI also plans to allow such funds to announce their net asset values (NAV) every quarter instead of daily as is currently the practice. A tax regime for real estate mutual funds is also being worked on, based on the US model, and will be announced in the next budget. The US model allows the trusts exemption from tax provided they share 90% of their taxable income as dividends with investors. SEBI would most likely be guiding REMFs to invest 70 to 80% of their funds in real estate projects directly, and the rest in real estate companies.

Read more in the article on Indianrealtynews.com.

RBI to divest its stake in SBI to the Indian Government

The Union Cabinet has approved the transfer of Reserve Bank of India’s (RBI) shareholding in State Bank of India (SBI) to the Indian Government by June 2007 with a view to let the RBI focus exclusively on regulation, the Cabinet has also assented for the transfer of RBI’s stake in the unlisted National Bank of Agriculture and Rural Development (NABARD) and National Housing Bank (NHB) to the government at book value by June 2008.

The estimated acquisition cost of RBI’s 59.7% stake in SBI to the government is likely to be around Rs. 40,000 crores, at a price of Rs. 1300 per share in an all-cash deal. It is to be noted that a bill is likely to be approved in the forthcoming budget to amend the SBI Act to reduce the minimum holding of the government or RBI from 55% to 51%. The move is aimed at giving the bank leeway to divest more equity to public to raise capital to fund growth. The follow-on public offer of SBI is likely to come after the majority share transfer to the government.

Read the article in Business Standard.

CLB tells West Bengal to sell out of Haldia Petrochemicals to The Chatterjee Group

The Company Law Board has directed the West Bengal government to transfer 155 mn shares of Haldia Petrochemicals Limited (HPL) to The Chatterjee Group (TCG) at Rs. 10 a share agreed upon earlier by the West Bengal and TCG, and another lot of 520 mn shares at Rs. 28.80 or a price determined by an independent valuer. Following the stake transfer, TCG would hold 52% (760 mn shares) stake in HPL, which has a paid-up equity of Rs. 1460 crores (1.46 bn shares of Rs. 10). The increased stake would bring TCG closer to taking over the management control of HPL after a prolonged legal battle with the West Bengal government.

TCG holds its stake in HPL mainly through Chatterjee Petroleum (Mauritius) and India Trade (Mauritius). The 155 mn shares was earlier issued to Chatterjee Petroleum India (CPIL) but was not confirmed.

West Bengal industry minister Nirupam Sen told reporters at the sidelines of a seminar organized by Bengal National Chamber of Commerce that the order was not acceptable for the state and indicated that it would move the Supreme Court against the order.

Read the Business Standard article.

Actis hikes open offer for Phoenix Lamps to Rs. 190

Business Standard reports that PE fund Actis has decided to increase the open offer price for Phoenix Lamps by 25% to Rs. 190 a share, following a directive by the Securities and Exchange Board of India (SEBI). The revised open will open on February 5 and close on February 24.

The mandatory 20% open offer was triggered after Actis bought the entire 37% stake in Phoenix Lamps from its promoters, the Gupta family, last year. The open offer was priced at Rs. 152 a share and was supposed to open on August 31 and close on September 19. Yes Bank was the adviser to Actis for the offer. Actis had agreed to pay Rs. 190 a share to the Guptas, 25% higher than the price of the open offer on account of non-compete fees. However, market regulator SEBI did not agree to this argument. Actis will now make the open offer at Rs. 190 to buy the shares of the remaining shareholders.

Related Post:
SEBI asks Actis to pay Phoenix Lamps’ minority shareholders same price as paid to promoters

Reserve Bank of India hikes repo rate by 25 bps to 7.5%, keeps other rates unchanged

The Reserve Bank of India (RBI) has hiked the repo rate (rate at which RBI lends to the market) by 25 bps to 7.5%, while keeping reverse repo (rate at which RBI borrows from the market), bank rate and Cash Reserve Ratio (CRR) unchanged at 6%, 6% and 5.5%, respectively. The bank has also kept inflation target steady at 5-5.5%.

Read more in the Business Standard article.

UK’s Centric, Fox Mandal and the Hinduja Group to float LPO JV

UK-based contact centre Centric has entered in to an alliance with the Hinduja Group and leading Indian law firm Fox Mandal Little to set up one of India’s largest legal process outsourcing (LPO) firms. The three-way JV, to be called Centric LPO, is likely to employ over 1000 lawyers initially and aims to make India an outsourcing hub for international legal practices. It will be 40% owned by the UK-based outsourcing major and 60% by the JV between Hinduja TMT Technologies and Fox Mandal, with Hinduja TMT holding the majority stake. Hinduja TMT had recently completed the acquisition of US-based BPO Affina. The Hinduja TMT-Fox Mandal JV will have four members on the LPO board while Centric will have two. Centric will use its existing customer base in these markets to woo clients for the new business. Similarly, Fox Mandal will provide the legal expertise while the Hindujas the process skills. The JV will become operational in the next two months and that Centric had already lined up business from UK and US clients. The LPO will focus on every legal aspect-from the low-end secretarial works to law firm accounting and high-end legal work. In two years, it will ramp up to 2000 people.

The LPO segment is poised to cross $6 bn by 2010 and $15-$20 bn by 2015. LPO customers include legal departments of multinationals, international law, legal publishing and legal research enterprises. As of now, it accounts for less than 11% of the $6.3-billion ITeS-BPO pie. Other prominent players in the Indian LPO space include Pangea3, OfficeTiger and Integreon, which is also a BPO player, and law firms such as AZB & Partners.

Read the article in The Economic Times.

SEBI investigates structured deals in IPO allotments

The Securities and Exchange Board of India (SEBI) is investigating all public issues in the past three months after it found in the offering of Nissan Copper that allotments and subsequent sale of shares to some foreign institutional investors (FIIs) were actually structured deals. It has been discovered that at least three portfolio investors have sold all the shares they purchased in the IPO on the first day of their listing. SEBI was also looking at the role of merchant bankers in these issues. SEBI investigators have also asked stock exchanges for details of public offers and first few days’ trading of Shree Ashtavinayak Cine Vision, Minar International, and Cairn India. The regulator is probing whether merchant bankers or the companies themselves helped some investors to use the FII route to corner shares without directly participating in the IPO process.

Read the complete article in The Times of India.

JM Financial’s PE fund referred to CCEA; approved by FIPB

JM Financial Trustees Company’s proposal to set up a Rs. 900 crore-private equity fund has been referred to the Cabinet Committee on Economic Affairs (CCEA). The Mumbai-based trust will mobilize funds in the domestic and the overseas markets to make private equity investments in Indian companies. The Foreign Investment Promotion Board (FIPB) has already provided an in-principle approval to the fund.

The fund plans to invest in IT and IT-enabled services, manufacturing, pharmaceuticals, healthcare and media through separate schemes (and not through units of equity shares). Since such investments are not permitted through the automatic route, the application was first submitted to the Board and then referred to the CCEA. The trust has sought approval to float an offshore fund which would raise monies from high net-worth individuals, NRIs / PIOs, corporate and financial institutions from countries such as the US, the UK, UAE, Qatar, Saudi Arabia, Hong Kong and Singapore. The fund will be established in Mauritius and will be a global business license-category I company.

The proposal has attracted Schedule 5 of the Foreign Exchange Management Act (FEMA) notification of 2000. Accordingly, the fund can make the proposed investment but is restricted between equity and debt instruments in a 70:30 ratio. Also, if the FII plans to invest 100% in dated government securities, including treasury bills or non-convertible bonds and debentures, it will have to form a 100% debt fund registered with the Securities Exchange board of India (SEBI).

Article in The Economic Times.

23 foreign investment plans cleared by FIPB; plans included those of Reliance Communications, Lehman Brothers

The Foreign Investment Promotion Board (FIPB) approved foreign investments worth Rs. 5910.66 crores on Tuesday, reports The Economic Times. Of this amount, the major chunk is expected to flow into Reliance Communications by way FII investments worth Rs. 5400 crores. The company will raise this money through ADRs and GDRs worth $1.2 bn. The government also approved US investment bank Lehman Brothers’ planned investment of Rs. 225 crores in its Indian arm. Velcan Energy, a French power generation company has also got an approval to invest Rs. 200 crores in the Indian renewable energy sector. The company will now convert its operating company in India to an operating-cum-holding company. The FIPB has also given permission to Mauritius based Horse-Shoe Capital to invest Rs. 45 crores to make downstream investments in companies engaged in providing telecommunication infrastructure. The other approvals include a nod to Hong Kong-based Haier International for marketing and distribution of Haier brand mobile phones. The company plans to set up a joint venture with a foreign equity of 51% for single-brand retail. The government has also cleared the application of US-based Bloomingdale International, which will allow the company to set up a chain of five-star and three-star hotels in the country. The company will invest Rs. 8.6 crores as per the application. Singapore-based Sincere Watch has also got an approval to set up a wholly-owned subsidiary to set up duty free shops at airports, seaports and SEZs. Bank of Muscat has also got a go ahead from the board to invest Rs. 10.92 crores in an NBFC in India (See Related Post). Other approvals include Delta Plus’ plans to set up a JV with 90% foreign equity for warehousing and export activity. Deutsche Post international has been permitted to raise its stake from 49% to 51% in DHL Danzas, which is engaged in carrying on business of transportation, air freight and ocean freight.

Government to notify 5% of pension funds to be invested in stocks

The Central Government would notify an interim investment pattern for funds collected under the New Pension Scheme (NPS) that will allow 5% investment of the corpus in the capital markets. Under NPS, the Centre and the states have collected about Rs. 1500 crores till date. The interim scheme would also have a provision to invest all the NPS money in government bonds. The proposal has been backed by 19 states.

The initiative has been designed so to allow more funds to flow into the capital markets and provide an opportunity for better returns to NPS subscribers. The NPS corpus earns only 8% interest at present. The government plans to appoint fund managers to handle the investments and the first one is likely to be from the public sector. The decision is being opposed by the Left parties and Left-ruled states of West Bengal, Kerala and Tripura who have rejected the proposed investment pattern. They feel that subscribers should not be subjected to risks associated with stock market investments.

Read more details in The Economic Times.

Easier funding norms contemplated by RBI for India Inc.’s foreign acquisitions

Business Standard reports that the Reserve Bank of India (RBI) in its plans to liberalizing regulatory norms for outbound investments, is considering allowing Indian companies to directly give loans to their step-down companies for overseas business expansions. A step-down company is a subsidiary of a holding company abroad which is set up by Indian entity. At present, an Indian corporate can extend loans only to a company in which it holds direct stake.

The RBI may ask banks to do the diligence in such matters of extending loans to such ‘step-downs’. The fund (debt) will have to be within the existing limit of 200% of the net worth of the Indian company. Funding the operating company through holding company has attendant complexities and direct assistance is expected to save cost and make transaction transparent.

These issues were discussed by RBI deputy governor Shyamala Gopinath while addressing a conference on cross-border acquisitions organized by the Bombay Chamber of Commerce.

Takeover regulations for undercapitalized banks to be eased

The government is planning to amend the Banking Regulations Act so as to facilitate the route for foreign banks to acquire undercapitalized private banks. The government has on its agenda the tabling of the Banking Regulations (Amendment) Bill as well as the Pension Fund Development and Regulatory Authority Bill in the Budget session to push further financial sector reforms

The amendments to the Banking Regulations Act were expected to help foreign banks acquire undercapitalized private Indian banks. “Undercapitalized” refers to those category of banks that have not been able to raise their net worth to the minimum required Rs. 300 crores.

The Reserve Bank of India’s (RBI’s) roadmap on banking consolidation allows only “weak” banks to be acquired but the central bank has neither defined what a weak bank is nor ever identified a weak bank. The RBI’s roadmap proposes to open up the banking sector to foreign banks from 2009.

Consolidation among public sector banks is expected to gather momentum in 2007 as even some Indian banks have shown interest in buying undercapitalized banks, he added. The amendment to the Banking Regulations Act will align the voting rights of foreign and domestic shareholders with their shareholding. Apart from public sector banks, the government will also be selling some of its stakes in public sector undertakings. The proceeds of these sales will accrue to the National Investment Fund. This money will be used for social sector programmes and also for the revival of ailing public sector utilities.

Some of the banks having net worth under Rs. 300 crores as on March 31, 2006, and are thus potential takeover targets include the Catholic Syrian Bank (Rs. 216 crores), the City Union Bank (Rs. 286 crores), the Dhanalakshmi Bank (Rs. 134 crores), the Lakshmi Vilas (Rs. 291 crores), and the Ratnakar Bank (Rs. 54 crores).

Read more on this in the Business Standard article.

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Govt to raise ECB cap from $22 bn to $18 bn

The government will now allow companies to raise more foreign loans. It has asked the Reserve Bank of India to raise the external commercial borrowing (ECB) ceiling for 2006-07 to $22 bn, instead of $18 bn at present.

The move is expected to help companies like Reliance Communications, whose applications to raise $4 bn is awaiting approval. The Reliance Communications board had cleared a proposal to let the company raise long-term resources including ECBs. The board had also approved raising $1 bn through foreign currency convertible bonds. Reliance Communications had filed three applications for raising $4 bn, with two of them seeking permission for loans worth $500 mn each and the third for $3 bn. Apart from Reliance Communications, India Infrastructure Finance Company Limited, the special purpose vehicle set up by the Centre last year, is also expected to raise a sizable amount to finance core sectors developed by PSUs and through the public-private partnership model. Another infrastructure finance company, IDFC, has already started the process to raise ECBs to finance projects.

With interest rates in India on the rise, more domestic companies are expected to opt for ECBs to lower interest costs. Till December, Indian companies raised $14.3 bn through ECBs, and with proposals for another $6-7 bn awaiting clearance by a high-level committee, the government had little choice but to raise the cap on ECBs.

Read the article in The Times of India.

SEBI asks Actis to pay Phoenix Lamps’ minority shareholders same price as paid to promoters

The Securities and Exchange Board of India (SEBI) has asked private equity firm Actis to increase the open offer price for the minority shareholders of Phoenix Lamps by 25% to Rs. 190 a share.

Actis made the open offer it bought the entire 37%t stake in Phoenix Lamps from its promoters, the Gupta family. Priced at Rs. 152 a share, the mandatory 20% public offer was supposed to open on August 31 and close on September 19. SEBI has asked Actis to pay the same price it offered to the promoters. Actis had agreed to pay Rs. 190 a share to the promoters of the company, 25% higher than the price of the open offer, on account of non-compete fees. However, SEBI does not seem to be convinced of Actis’ argument.

This is the second instance of the SEBI coming down heavily on acquirers for paying the promoters more on account of non-compete fees. Last month, it had asked the German cement company Heidelberg Cement, which had acquired Mysore Cement, to raise the open offer price by 25% to Rs. 72.50 a share, the price it agreed to pay the promoters including non-compete fees. Heidelberg, however, challenged the SEBI order with the Securities Appellate Tribunal. Actis’ future course of action might be linked to the outcome of the SAT ruling on Heidelberg Cement.

Phoenix Lamps is the third management buyout by Actis in India after Nitrex and Punjab Tractors. Phoenix Lamps, owner of Halonix brand, posted a net profit of Rs. 24 crores last year on total sales of Rs. 230 crores.

Read the article in Business Standard.

Government may remove distinctions between FDI and FII

The government is contemplating the removal of the distinction between FDI and FII investments. The new policy will require changes in the Foreign Exchange Management Act (FEMA) regulations, and will look at foreign investments in a company as a whole, instead of treating foreign institutional investors (FIIs) as a separate entity.

The proposed policy change will impact several sectors, notably, the asset reconstruction companies, direct-to-home distribution of broadcast signals and real estate, where separate sub-ceilings or conditions apply at present for foreign direct investment (FDI), leaving FII investments outside their scope.

Senior finance ministry officials are set to hold a meeting later this week with the Reserve Bank of India (RBI) and the Department of Industrial Policy and Promotion (DIPP) to take a final view on this matter. The debate over removing distinctions between FII investments and FDI came up following the DIPP proposal over foreign investments in the real estate sector.

Read more in The Economic Times.