CII Global Regulatory Update, October 2013

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Global Regulatory Update”, a compilation of global and domestic news, opinions on regulatory issues, CII initiatives and representations on regulatory issues. The Update is aimed at keeping CII membership apprised of developments in the international and domestic corporate governance and regulatory landscape.
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  • 1. Confederation of Indian Industry GLOBAL Regulatory DATE UP October 2013, Volume 3, Issue 11 I de si n 4 10 5 1 E AT E D AT UP D AL UP B L LO NA G IO AT S N LE IC RT A
  • 2. DISCLAIMER CLAUSE This Regulatory Update has been compiled with a view to update readers and CII membership of changes on the covered topics in the Corporate Governance & Regulatory Affairs domain in the international as well as the domestic front. The compilation must not be taken as an exhaustive coverage of announcements and news nor should it be used as professional advice. Although, every endeavour has been made to provide exhaustive information, no claim would be entertained in the event any information/data/details/text is found to be inaccurate, incomplete, at variance with official data/information/details released through other sources prior or subsequent to release of the issue. This is only a compilation and not a reproduction of announcements / articles / items. CII does not subscribe to the views expressed in the items. These reflect the author’s personal views and in the event of any violation of IPR by the subscribers, CII would not be held responsible in any manner. Further, no part of this Update may be reproduced, copied or used without the prior permission of CII.
  • 3. Contents DOMESTIC UPDATES National Updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Appointments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 GLOBAL UPDATES International Updates . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLES REPORTING AND COMPLIANCE Emerging Issues in Recognition . . . . . . . . . . . . . . . . . . . . . . 13 of Revenue by Real Estate Developers New Companies Act – . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Facilitating Business Or…? CII Submits detailed industry views on the . . . . . . . . . . . . . . 21 1st and 2nd Tranches of Draft Rules under Companies Act, 2013 1
  • 4. GLOBAL REGULATORY UPDATE NATIONAL By : DOMESTIC UPDATES Release of 3rd and 4th tranche of draft Rules under Companies Act 2013 The Ministry of Corporate Affairs has hosted the 3rd and 4th tranche of draft Rules for views from stakeholders. The draft Rules cover Deposits, SFIO, National Financial Regulatory Authority (NFRA) and IEPF. The rules are attached and also available on the Ministry's website for comments from stakeholders. The URL of the weblink is http://ncbfeedback.mca.gov.in/ I. SEBI UPDATES Standard Operating Procedure for Stock Exchanges in case of companies not complying with listing conditions SEBI by its circular dated September 30, 2013 has decided to do away with the practice of suspending the trading of shares of listed companies which have defaulted, as the suspension has turned out to affect the interests of non-promoters much more than those of the promoters. In case of noncompliant companies, other penalties such as imposition of fines, freezing of shares of the promoter and promoter group, transferring the trading in the shares of the company to separate category, would be taken before suspending the shares of the company. The Standard Operating Procedure ('SOP') to be followed by the Stock Exchanges will be as follows: Imposition v of fines (on per day basis) on the company for non- 2 compliance and delay in compliance with continuous listing conditions. v In case of non-compliance for 2 consecutive quarters, moving the shares of the non-compliant company to "Z" Category, where the trades would be settled on "Trade for Trade" basis. v In case non-compliance continues, freezing the shares of the promoter and promoter group. v In order to provide an exit window to the non-promoters, after 15 days of suspension of the trade, the nonpromoters on the first day of every trading week for a period of 6 months would be able to trade their shares on the "Trade for Trade" basis.
  • 5. SEBI permits contracts for preemption and options in shareholders agreements SEBI by its notification dated October 3, 2013 has permitted contracts for incorporating clauses including right of first refusal, tag-along or dragalong rights contained in the shareholders agreements or articles of association of the companies. The contracts entered into by listed companies can now contain an option for purchase or sale of securities subject to the following: (a) the title and ownership of the underlying securities are held continuously by the selling party for a minimum period of 1 year from the date of entering into the contract; (b) the price or consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained therein, is in compliance with all applicable laws; and (c) the contract has to be settled by way of actual delivery of the underlying securities. The contracts permitted under this notification shall be in accordance with the provisions of Foreign Exchange Management Act, 1999. Further, this notification shall not affect or validate any contract which has been entered into prior to the date of this notification. This notification supersedes the earlier SEBI notification, i.e., S.O.184 (E) dated March 1, 2000. SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013 SEBI has released the SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013. This is to allow listing and issue of capital by small and med ium enterprises on institutional trading platform without initial public offering. Under these regulations, the minimum amount for trading or investment on the Institutional Trading Platform ('ITP') is to be Rs. 10 Lakh with an easier exit option for entities such as Angel Investors, Venture Capital Funds and Private Equities. The regulations provide that the company would not make an IPO while its specified securities are listed on ITP but can raise capital through private placement or rights issue without an option for renunciation of rights. Eligibility Criteria: To be eligible for listing on an ITP, the SME company has to satisfy certain conditions including not appearing on the defaulters list of the RBI; no pending winding up petition; no regulatory action has been taken against the company within five years prior to the date of application for listing; and the company has at least one full year's audited financial statements, for the immediately preceding financial year at the time of making listing application. The regulations also provided that an SME seeking to list on ITP needs to fulfill any of the investment criteria which is either a minimum investment of Rs 50 lakh in its equity shares by a category of fund approved by the regulator; or by a Qualified institutional buyer or a merchant banker with a lock-in period of three years from the date of listing; or an investment in the equity capital has been made in the SME by a specialised international multilateral agency or domestic agency or a public financial institution; or it has received money from a scheduled bank for its 3 project financing or working capital requirements and a period of three years has elapsed from the date of such financing and the funds so received have been fully utilized. Promoter Holding Lock-in: The regulations require 20% of the post listing capital to be held by the promoters for a period of three years from date of listing. Exit Norms: Regarding exit norms, a company can exit from ITP subject to the shareholders approving the exit proposal by a special resolution passed through postal ballot where 90% of total votes and the majority of non-promoter votes have been cast in favour of the proposal, and the stock exchange approves such exit. A company whose securities are listed on ITP will have to exit the ITP if its securities have been listed for 10 years, the company has paid up capital of over Rs 25 crore, revenue of more than Rs 300 crore and market capitalisation of more than Rs 500 crore. Delisting: The company can be delisted if it does not comply with the corporate governance norm(s) for more than one year or with the listing regulations specified by the recognized stock exchange.
  • 6. GLOBAL REGULATORY UPDATE SEBI- Streamlining Investor Grievance Redressal Mechanism SEBI to streamline the investor grievance redressal mechanism and make it more investor friendly, has by its circular dated September 26, 2013 decided to give monetary relief to investors having claims up to Rs.10 Lac from the Investor Protection Fund of Stock Exchange ('IPF'). Some of the salient features of the initiatives include: a) The Investor Grievance Redressal Committee ('IGRC') in addition to the conciliation process can decide upon the admissibility of claims, wherein if the complaint is not resolved upon the conclusion of the conciliation proceedings, the IGRC would ascertain the claim amount admissible to the investor, which the Stock Exchange ('SE') would block from the deposit of the concerned member. Subsequently the SE would give 7 days from the date the member signs IGRC's directions to inform the SE, if he intends to move to the next level of resolution i.e. arbitration. b) In case, the member does not opt for arbitration, the SE would, release the blocked amount to the investor after the aforementioned 7 days. c) In case, the member opts for arbitration and the claim value admissible is not more than Rs. 10 lac, monetary relief would be given as mentioned below: i. 50% of the admissible claim value or Rs. 0.75 lac, whichever is less, would be released to the investor. ii. In case the arbitration award is in favour of the investor and the member opts for appellate arbitration then a positive difference of 50% of the amount mentioned in the arbitration award or Rs. 1.5 lac, whichever is less and the amount already released to the investor at clause (i) above, shall be released to the investor. iii. I n c a s e t h e a p p e l l a t e arbitration award is in favour of the investor and the member opts for making an application under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the appellate arbitration award, then a positive difference of 75% of the amount determined in the appellate arbitration award or Rs. 2 lac, whichever is less and the amount already released to the investor at clause (i) and (ii) above, shall be released to the investor. iv. The amount payable by the investor for appellate arbitration has been reduced from `.30,000/- to `10,000/-. To address the complaints received as regards 'unauthorised trades', the SEs' have to ensure that the contract note issued by the member for transactions owing to noncompliance of margin calls bears a remark specifying the same and that the member maintains a verifiable record of having made such margin calls and the clients not having complied with the same. SEBI releases draft of Real Estate Investment Trusts Regulations, 2013 for public comments SEBI has sought public comments on the draft REIT Regulations by October 31, 2013 under which it has proposed 4 the listing of Real Estate Investment Trusts ('REITs'). The REITs would under the regulations be allowed to list on stock exchanges through Initial Public Offer ('IPO') and would be allowed to raise funds further through Follow-On Offers. Qualified REIT: In order to be listed the REIT would need to be first registered with SEBI in the prescribed manner. Compliances: Amongst the compliances which the REIT would have to undertake, it would be mandatory for all REITs to declare its net asset value at least twice a year post listing. In case of an IPO, the size of the assets would need to be at least Rs 1,000, the same proposed to ensure that initially only large assets and established players enter the market. The minimum initial offer size of Rs 250 crore and minimum public float of 25 per cent is specified to ensure adequate public participation and float in the units. Raising Funds: The REIT would be able to raise funds from any investors, resident or foreign. However, initially, till the market develops, it is proposed that the units of REITs may be offered only to High Net Worth individuals /institution and therefore the minimum subscription size is proposed be Rs 2 lakh and unit size to be Rs 1 lakh. Sponsors are also expected to compulsorily maintain a certain percentage of holding in the REIT "to ensure a 'skin-in-the-game' at all times.
  • 7. Investments: REITs will be able to invest in properties directly or through SPVs. The REIT would not be allowed to invest in vacant land or agricultural land or mortgages other than in mortgage backed securities. The investment would be restricted to assets based in India. Investor's Approval: To safeguard the investors' interests, their approval has been made mandatory for cases such as certain related party transactions, transactions who's value exceeds 15% of the REIT's assets, change in sponsor, change in investment strategy or delisting of units. SEBI approves draft SEBI (Foreign Portfolio Investors) Regulations, 2013 SEBI in its Board meeting held on October 5, 2013 has approved the draft SEBI (Foreign Portfolio Investors) Regulations, 2013 ("Regulations"). The SEBI (Foreign Portfolio Investors) Regulations, 2013 have been framed in light of the provisions of SEBI (Foreign Institutional Investors) Regulations, 1995, Qualified Foreign Investors (QFIs) framework and the recommendations of the "Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments". (a) "Category I Foreign Portfolio Investor" which shall include Government and Government related foreign investors; (b) "Category II Foreign Portfolio Investor" which shall include appropriately regulated broad based funds, appropriately regulated entities, broad based funds whose investment manager is appropriately regulated, university funds, university related endowments, pension funds; or (c) "Category III Foreign Portfolio Investor" which shall include all others not eligible under Category I and II foreign portfolio investors. 4. All existing FIIs and sub accounts may continue to buy, sell or otherwise deal in securities under the FPI regime. 5. All existing Qualified Foreign Investors (QFIs) may continue to buy, sell or otherwise deal in securities till the period of one year from the date of notification of this regulation. In the meantime, they may obtain FPI registration through DDPs. The salient features of the Regulations include: 6. The registration granted to FPIs by the DDPs on behalf of SEBI shall be permanent unless suspended or cancelled by SEBI. 1. Existing FIIs, Sub Accounts and Qualified Foreign Investors (QFIs) shall be merged into a new investor class termed as "FPIs". 7. FPIs shall be allowed to invest in all those securities, wherein Foreign Institutional Investors (FIIs) are allowed to invest. 2. S E B I a p p r o v e d D e s i g n a t e d Depository Participants (DDPs) shall register FPIs on behalf of SEBI subject to compliance with KYC requirements. 8. Category I and Category II FPIs shall be allowed to issue, or otherwise deal in offshore derivative instruments (ODIs), directly or indirectly. 3. The FPI shall be registered as one of the following: 5 SEBI - Issues pertaining to primary issuance of debt securities SEBI has been holding discussions with issuers and various other market participants regarding the issues concerning development of Corporate Bond Market. Based on the suggestions received in the aforesaid meetings, it has been decided to implement the following measures: I. Disclosure of Cash Flows: cash flows emanating from the debt securities shall be mentioned in the Prospectus/Disclosure Document, by way of an illustration. II. Withdrawal of requirement to upload bids on date-time priority: allotment in the public issue of debt securities should be made on the basis of date of upload of each application into the electronic book of the stock exchange. However, on the date of oversubscription, the allotments should be made to the applicants on proportionate basis. III. Disclosure of unaudited financials with limited review report: listed issuers (who have already listed their equity shares or debentures)
  • 8. GLOBAL REGULATORY UPDATE who are in compliance with the listing agreement, may disclose unaudited financials with limited review report in the offer document, as filed with the stock exchanges in accordance with the listing agreement, instead of audited financials, for the stub period, subject to making necessary disclosures in this regard in offer document including risk factors. IV. Disclosure of contact details of Debenture Trustees in Annual Report: It has been decided to amend the Listing Agreement for Debt Securities as specified by inserting a clause stating that the companies, which have listed their debt securities, shall disclose the name of the debenture trustees with contact details in their annual report and as ongoing basis, on their website, to enable the investors to forward their grievances to the debenture trustees. The provisions in Para I of this circular shall be applicable for the debt securities issued, in accordance with SEBI (Issue and Listing of Debt Securities) Regulations, 2008, on or after December 01, 2013. The provisions in Para II and III of this circular shall be applicable for the draft offer document for issuance of debt securities filed with the designated stock exchange on or after November 01, 2013. The provisions in Para IV shall be applicable from December 01, 2013 and all stock exchanges are advised to carry out the amendments in their Listing Agreement. (STAs) and the Depositories / Issuer companies (in-house STAs) for effecting transmission of securities held in physical as well as dematerialized mode. With a view to make the transmission process more efficient and investor friendly, it has been decided that: In case of transmission of securities in dematerialized mode, where the securities are held in a single name without a nominee, the existing threshold limit of ` 1,00,000 (Rupees One lakh only) per beneficiary owner account has now been revised to ` 5,00,000 (Rupees Five lakh only), for the purpose of following simplified documentation, as already prescribed by the depositories vide bye-laws / operating instructions. In case of transmission of securities held in physical mode: a. where the securities are held in single name with a nominee, STAs/issuer companies shall follow the standardized documentary requirement b. where the securities are held in single name without a nominee, the STAs/issuer companies shall follow, in the normal course, the simplified documentation, for a threshold limit of ` 2,00,000 (Rupees Two lakh only) per issuer company. However, the Issuer companies, at their discretion, may enhance the value of such securities. The timeline for processing the transmission requests for securities held in dematerialized mode and physical mode shall be 7 days and 21 days respectively, after receipt of the prescribed documents. Standardisation and Simplification of Procedures for Transmission of Securities SEBI amends formats under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011(Regulations). SEBI has reviewed the process being followed by the Share Transfer Agents In order to ensure that adequate disclosures are made to help investors 6 in taking an informed decision, it has been decided to modify the formats for disclosures under regulation 29 (1), 29 (2) and 31 of the Regulations. II. RBI UPDATES Branch Opening Regulations extended The RBI by its circular dated September 19, 2013 has decided to extend its permit in allowing
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