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.

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

The Reserve Bank of India hikes CRR rate by 50 bps to 6%

The Reserve Bank of India (RBI) has upped the Cash Reserve Ratio (CRR) by 50 basis points. The CRR now stands at 6%. This move by the RBI is said to drain liquidity to the tune of Rs. 14,000 crores from the system. The CRR rate hike will have it effect on banks in that many would be forced to hike interest rates. The CRR rate hike has been effected in two stages. The first hike of 25 basis points will be effective from February 17 and the second from March 3. The RBI’s move of hiking the CRR rate is aimed at checking liquidity from further compounding the inflation rate and follows a fortnight after the central bank raised its overnight lending (repo) rate to 7.5% on January 31.

Read more in the article in Business Standard.

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.

SBI to raise $700 mn from markets overseas by March 2007

The State Bank of India will raise $700 mn by March through placing long- and medium-term bonds overseas. The bank may also go for a follow-on public offer in 2007-08. The borrowing is part of the $2 bn medium term note programme of SBI. It has hired Barclays and Citigroup to sell dollar-denominated bonds. Deutsche Bank and HSBC will also manage the sale. The four banks will also arrange a sale of five-year notes. The bank is raising funds to meet new Central bank rules on capital levels and meet demand for loans. The Reserve Bank of India (RBI) on 21 July permitted banks to increase capital by selling debt overseas. SBI last month increased $300 mn of bonds it sold in December to $500 mn.

Read the Business Standard article.

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.

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.

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.

Catholic Syrian to sell 15% stake to AIF Capital Development; seeks RBI nod for sale

Kerala-based Catholic Syrian Bank is in the process of selling a 15% stake to AIF Capital Development, a Mauritius-registered private equity firm. It is seeking the Reserve Bank of India’s (RBI) permission for the same. The RBI’s policy on shareholding in private sector banks allows any single entity to own a maximum of 10% stake in a bank. Catholic Syrian Bank hopes to get clearance from the RBI to have a single shareholder owning more than 10% stake as has been allowed in Yes Bank (Rabobank – 19.29%) and Centurion Bank of Punjab (BankMuscat – 17.76%). AIF Capital Development has already obtained clearance from the Foreign Investment Promotion Board (FIPB). The government’s guidelines allow up to 74% foreign ownership in banks.

The bank plans to make a preferential allotment to AIF Capital to fulfill the central bank’s requirement that every private sector bank must have a minimum net worth of Rs. 300 crores. The bank had a net worth of Rs. 215.58 crores as on March 31, 2006. The Kerala-based bank has a network of 334 branches and extension counters, which include 5 NRI branches, 5 SSI branches, 5 industrial finance branches and 4 service branches.

Read the Business Standard article.

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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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.