All of you may be aware of that the RBI vide its circular no. DBOD.No.BP.BC.57/21.01.002/2005-06 dated January 25, 2006 enhanced banks' capital raising options for capital adequacy purposes. With a view to providing a wider choice of instruments to Indian banks for raising Tier I and Upper Tier II capital.
Further vide DBOD.No. BP. BC. 42 /21.01.002/2007-2008 dated 29th October 2007, it has been decided to allow the banks to issue the following types of preference shares in Indian Rupees, subject to extant legal provisions as per guidelines herewith enclosed.
i) Tier I capital
Perpetual Non-Cumulative Preference Shares (PNCPS)
ii) Upper Tier II capital
a) Perpetual Cumulative Preference Shares (PCPS)
b) Redeemable Non-Cumulative Preference Shares (RNCPS)
c) Redeemable Cumulative Preference Shares (RCPS)
2. The Perpetual Non-Cumulative Preference Shares will be treated on par with equity, and hence, the coupon payable on these instruments will be treated as dividend (an appropriation of Profit & Loss Account). All other types of preference shares mentioned above will be treated as liabilities and the coupon payable thereon will be treated as interest (charged to Profit and Loss Account).
3. The addition of above instruments is expected to significantly enhance the range of eligible instruments available to the banks for capital adequacy purposes. Hence, it is not considered necessary to allow the banks to issue preference shares in foreign currency in overseas markets at this stage.
2. Investment in Indian Companies by FIIs/NRIs/PIOs
Regulations
As per Foreign Exchange Management (Transfer Or Issue Of Security By A Person Resident Outside India) Regulations, 2000 amended till date,foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India.
The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per centfor NRIs/PIOs. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India.
The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body of the company passing a resolution to that effect.
The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs.
The equity shares and convertible debentures of the companies within the prescribed ceilings are available for purchase under PIS subject to:
- the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, being within an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and (b) 24 per cent of the total paid up value of each series of convertible debenture; and
- the investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of the total paid up value of each series of convertible debentures issued by the company.
Monitoring Foreign Investments
The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18 per cent.
Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated bank branches so as not to purchase any more equity shares of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till such investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the `caution' and the `stop purchase' in these companies through a press release.
The current list of companies allowed to attract investments from FIIs/NRIs/PIOs with their respective ceilings you can find in below link:
http://www.rbi.org.in/scripts/BS_FiiUSer.aspx#provogue_49
FEATURES | PROPRIETARY AUDIT | SPECIAL AUDIT | COST AUDIT |
1. NATURE | Covers all aspects of safeguarding of assets, use of business funds and recording of transactions; | Conducted by CA appointed by Central Government to protect the interest of stakeholders; | Review of examination & appraisal of cost accounting records; |
2. PURPOSE | Ensure business funds are protected in the public interest; | Ensure effective & timely steps of control & mgmt; | Critical review of cost statements & recommends; |
3. SCOPE | Proper use of fixed assets & its safeguard, prevents misuse of funds & checks transaction recording; | Statutory audit PLUS prescriptions of Central Government; | Reviews cost accounting system; variation analysis ensuring efficacy; |
4. FEATURES | Covers area of financial accounting but it tests economy, efficiency & faithfulness; | Compliance of sound business principles or prudent commercial practices & prevents from serious injury or insolvency; | Correctness of cost of production and audit of cost accounting records; |
5. AREAS | Cash & other subsidiary books; Records & registers as mandated by Sec. 227 & CARO; | Cash & other subsidiary books and such other areas prescribed by Central Government (CG); | Raw material, WIP, Allocation & Distribution of direct & indirect cost & overheads; |
6. CAPACITY | Chartered Accountant or member/director under CAG; | Chartered Accountant as appointed or authorised by CG; | Member of ICWAI holding Certificate of Practice appointed by Board with previous approval of CG; |
7. PERIOD | Alongwith Statutory Audit though not mandated under Companies Act; | Only when CG directs & such direction will give the periodicity of audit; | Compulsory for every Financial Year as specified by Government; |
8. REPORTS | To Management & members in certain cases; | To the Central Government; | TO CG with a copy to company and may cause to be published; |
PR No.286/2007
SEBI Board Meeting
The SEBI Board today discussed the various issues relating to registration of FIIs viz issuance of P-Note/ODIs by some FIIs/Sub-accounts, the linkages (or absence thereof) between quantum of P-Notes/ODIs issued v/s the capital flows into the Indian markets.
The Board also discussed the nature of measures that need to be implemented immediately vis-Ã -vis the long term direction of the policy aspects relating to participation of foreign entities in the Indian Securities Market. It was felt that in the long term, SEBI may consider introduction of a regime of KYC/AML/CFT certification on foreign entities seeking to invest in the Indian markets, as is currently applicable on domestic entities, compliance with which will enable such entity to invest directly.
Having regard to the need to contain the export of the Indian capital markets, the Board felt that in the long term the approach should be to enable access to Indian markets by quality investors, by introducing a range of innovative products, including OTC derivatives, as are available in other markets, at competitive costs.
The Board discussed the policy measures on Offshore Derivative Instruments (Participatory Notes) hosted by SEBI on its website on October 16, 2007. Having considered the comments and suggestions in response to the proposals, the Board has taken the following decisions:
1. It was proposed that "FIIs and their sub-accounts shall not issue/renew ODIs with underlying as derivatives with immediate effect. They are required to wind up the current position over 18 months, during which period SEBI will review the position from time to time."
It is has already been clarified by SEBI that there is no proposed bar on ODI contracts, expiring this month or in the following months, being renewed, provided the renewal does not go beyond 18 months. It was further made clear that this proposal did not in any manner seek to restrict renewal or rollover of Indian Exchange Traded Derivative Contracts by the FIIs.
FIIs/sub-accounts are free to invest in derivatives traded on recognized stock exchanges.
The Board decided that starting from the date of implementation of this proposal, they can not issue P-Notes that are based on such derivatives.
2. It was proposed that "further issuance of ODIs by the sub-accounts of FIIs will be discontinued with immediate effect. They will be required to wind up the current position over 18 months, during which period SEBI will review the position from time to time."
The Board decided that from the date of implementation of the proposal, no sub-account can issue fresh ODIs. Existing ODI issuing sub-accounts have to ensure that they wind up all their ODIs within 18 months of implementation of the proposal.
SEBI had received several requests from existing P-Note issuing sub-accounts on the above proposal. Taking note of the transition being made by the sub-accounts currently issuing participatory notes, into FIIs, and in order to ensure implementation of the proposals in a non-disruptive manner, the Board has decided that that these applicants be treated as if they were FIIs as on the date decided for calculation of the AUC for the above proposals.
3. It was proposed that "The FIIs who are currently issuing ODIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of less than 40% shall be allowed to issue further ODIs only at the incremental rate of 5% of their AUC in India. "
The Board confirmed the proposal with the understanding that 5% incremental issuance allowed to such FIIs would be applicable on an annual basis, till such time that the percentage reaches 40%, after which the entity will abide by the proposal applicable to entities above the 40% limit.
4. It was proposed that "Those FIIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of more than 40% shall issue PNs only against cancellation / redemption / closing out of the existing PNs of at least equivalent amount." The Board confirmed the proposal.
5. The Board discussed several possible dates for implementation of the above proposals. Taking into account the fact that reporting of P-Notes/ODIs by FIIs is on a monthly basis and the last available data with SEBI was in respect of September 2007, the Board decided that the effective date for calculation of the AUC for the purpose of determining the notional value of PNs issued as a percentage of AUC, for the above proposals shall be September 30, 2007. The proposal will however take effect after close of trading hours on October 25, 2007.
In view of the submissions of some PN-holders that they would like to register with SEBI directly, instead of participating through the P-Note route but are are unable to adhere to the eligibility criteria prescribed under the FII Regulations, the SEBI board has agreed to the following changes to the registration criteria
1. Broad-based criteria
The "broad-based" criteria shall now be modified to include entities having at least 20 investors, no single investor holding more than 49% (instead of 10% at present).
2. Track record of the applicant
Track record of individual fund managers will be considered for the purpose of ascertaining the track record of a newly set up fund, subject to such fund manager providing its disciplinary track record details.
3. Issuance of ODIs/PNs would be limited to only "regulated" entities and not "registered" entities.
4. FII and sub-account registrations will be perpetual, subject to payment of fees.
5. The Board further discussed the issue of registration of Pension Funds, Foundations, Endowments, University Funds and Charitable trusts or societies, which are not regulated with any regulatory authority and having regard to the nature of these entities, advised that these entities may be registered as FIIs without imposing the requirement of their being "regulated".
Mumbai
October 25, 2007
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