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Proposed New Private Bank Licensing Rules
Following promises made last year by the Indian Finance Minister, the Reserve Bank of India (RBI) is actively considering granting new private banking licenses. To that end, the RBI has invited comments on a set of proposed guidelines for licensing additional private banks.
As has been widely anticipated by industry watchers, the draft licensing guidelines published by the RBI propose to remove the previous prohibition that precluded 'industrial houses' from promoting or controlling Indian banks. The guidelines also propose to allow non-banking financial companies the option of converting themselves into banks.
However, various checks and balances have been built in to limit financial risk spreading from the other business activities of new bank promoters. For instance, promoter groups and entities will need a succesful ten-year track record of operating their businesses before they can apply for a bank license, and even then, they would be ineligible to receive a license if in the last three years, 10% or more of their income or assets are connected with real estate or capital market activities. Again, in order to ring-fence regulated financial activities from other businesses, the promoters will have to incorporate a "non-operative holding company" (NOHC) that will own the bank and all other promoter-group owned financial services companies that are regulated by the RBI or other financial regulators. For similar reasons, at least 50% of the directors of the NOHC will have to be completely independent of the promoters and there will also be caps on the bank's exposure to promoter group entities.
Under the new rules, private banks will require a minimum paid-up capital of Rs. 5,000 million. The NOHC will have to hold at least 40% of the initial paid up capital. If the NOHC holds more than 40% of the paid up capital, it will need to bring its holding down to 40% within two years—by which time the bank will also have to be publicly listed. Conversely, if the bank raises any further capital (through public issues or private placements) during its first five years, the NOHC will have to maintain its shareholding at 40%. In addition, these banks will require RBI approval to raise capital beyond Rs. 10,000 million (i.e., for every additional block of Rs. 5,000 million).
Foreign investment will be permitted in the newly licensed private banks. However, the foreign shareholding will be capped at 49% during the first five years. Not just that, the promoter groups will also have to be both owned and controlled by Indian residents. Foreign shareholding in the banks can be raised after five years based on the then applicable foreign investment rules. (The current foreign investment rules allow up to 74% foreign investment in private banks with prior government approval.)
In any event, no single non-resident shareholder or group will be allowed to hold more than 5% of the paid-up capital of any bank. Even resident individuals, entities and groups, i.e., other than the NOHC, will require prior RBI approval to hold more than 5% of the bank's paid-up capital.
Various provisions from the current bank licensing rules will continue to apply under the new rules. For example, the promoter holding will be locked in for five years from the date of the bank license, the new banks will be subject to the same priority sector lending targets as other domestic banks, and at least 25% of the new bank's branches will have to be located in unbanked rural centres.
Comments on these new draft licensing guidelines have to be sent in to the RBI by October 31, 2011.
Competition Commission Allows Disney to Buy Out UTV
In its second merger-control ruling ever, the Competition Commission of India (CCI) approved Disney's proposal to buy out UTV.
Disney's Singapore-based subsidiary filed the application to acquire all of the publicly-listed UTV Software Communications Limited. The acquisition can now proceed with Disney first acquiring the publicly held shares in UTV through a delisting offer. Following succesful delisting, Disney proposes to acquire the UTV promoter group's shares.
The CCI's ruling appears to have been primarily based on a finding that there is already intense competition in the areas where the combined business operates, i.e., motion pictures, entertainment television, interactive media and character merchandising. Given the ability to access content across multiple platforms, the business is demand driven, each area allows relatively easy entry and exit and as a result, the CCI concluded, there is a low likelihood of coordinated exclusionary behaviour. (The CCI's decision was also influenced by Disney's existing majority stake in UTV and the extensive regulatory oversight of television broadcasting in India.)
Like its first merger-control ruling, this CCI ruling was delivered within a month of the application being made—further allaying fears that the CCI's procedures might unduly delay transactions.
Inching towards allowing FDI in multi-brand retail
The Hindu newspaper has reported that the Indian Government could allow up to 51 percent foreign direct investment (FDI) in multi-brand retail, after the monsoon session of Parliament concludes. The news article suggests that a Committee of Secretaries supports the FDI reform measure and that the Ministry of Commerce and Industry's Department of Industrial Policy and Promotion is in the final stages of putting together a note on this issue for consideration by the Cabinet of Ministers.
This said, permission for FDI in multi-brand retail will probably come with a handful of conditions that will have to be met by investors. Some of the conditions reported to be favoured by the Committee of Secretaries include requiring a minimum investment of USD 100 million and a provision that at least 50 percent of the investment is made in 'back-end' infrastructure.
Foreign Investors Can Buy Units in Indian Mutual Funds
Foreign investors will now be able to access India's equity and infrastructure debt markets by buying units of rupee denominated Indian mutual funds.
In a joint move by India's Ministry of Finance, the Reserve Bank of India (RBI), and the Securities and Exchange Board of India (SEBI) the rules affecting foreign investment in domestic mutual funds have been significantly liberalized.
Under the new rules, a foreign resident individual, group or association will be able to invest in the equity and infrastructure debt schemes of SEBI registered Indian mutual funds. To do so, the foreign investor will need to meet two conditions. First, the investor should be resident in a country that is compliant with the Financial Action Task Force's (FATF) standards and is a signatory to the International Organization of Securities Commission's (IOSCO's) Multilateral Memorandum of Understanding. Second, the investor should meet SEBI's know-your-customer requirements.
Foreign investors meeting these conditions will be called qualified foreign investors (QFIs) and will be able to invest in the Indian equity and infrastructure debt mutual funds in one of two ways.
A QFI will be allowed to hold the Indian mutual fund's units directly in a dematerialized account opened with a SEBI registered depository participant. Alternatively, a QFI may elect to hold the Indian mutual fund's units indirectly, though a type of depository receipt—called a unit confirmation receipt (UCR). These UCRs will be issued by overseas issuers that will be appointed by the concerned Indian mutual funds.
The new rules have caps on the total QFI investment that will be permitted in each Indian mutual fund—USD 10 billion for equity schemes, and USD 3 billion for infrastructure debt schemes. In addition, the units or UCRs held by QFIs will not be tradeable or transferable, but they can be redeemed and the proceeds repatriated.
The QFI rules will not affect investment by SEBI registered foreign institutional investors (FIIs). In fact, the QFI rules explicitly exclude such FIIs and their sub-accounts.
The government expects the new QFI rules will provide foreign investors with a further opportunity to access India's equity and infrastructure debt markets. Hopefully, this scheme will also provide an additional source of much needed liquidity for India's capital markets.
SEBI Plans Overhaul of Private Investment Fund Regulation
The Securities and Exchange Board of India (SEBI) plans to overhaul its regulation of investment funds that pool private capital from institutions and high net worth investors. To that end, SEBI has invited comments on a set of draft 'Alternative Investment Fund Regulations' that it intends to introduce in the coming months.
At present, SEBI has adequate rules in place to regulate mutual funds and collective investment schemes. However, its rules for other types of investment funds are quite inadequate. In fact, SEBI's venture capital fund regulations, which were drafted in 1996 to encourage early stage investment, are now being used for private equity, private investment in public equity, and real estate funds.
Consequently, SEBI's current venture capital regulations treat all of these different types of private funds in the same way—even though these funds might have different economic objectives, require different regulatory incentives and present different regulatory concerns.
In addition, under the current rules these other private funds are not subject to mandatory securities regulation (the SEBI venture capital fund regulations only apply to private funds that voluntarily register themselves as 'venture capital funds' with SEBI).
Therefore, based on the recommendations of global bodies like the International Organization of Securities Commissions (IOSCO) and the Group of Thirty (G-30), SEBI now plans to introduce regulations that will cover all types of private pools of capital and that will also allow SEBI to tailor its regulation of different types of private funds.
SEBI proposes that its new regulations would apply to any pooling of capital from institutional or high net worth investors (i.e. any person or entity investing more than Rs. 10 million in a pooled investment vehicle), if such pooling of capital is not covered by SEBI's mutual fund or collective investment scheme regulations. In addition, these new regulations would apply to such pooling of capital if the funds source capital in India or if the fund's manager manages the fund for investments in India.
In effect, the proposed regulations would cover and make it mandatory for the following types of funds to register with SEBI if they either pool capital from or invest in India—venture capital funds, private equity funds, hedge funds, real estate funds, private funds that invest in the secondary market or in unlisted debt instruments, and any other class of funds that is either notified by SEBI or that is not covered by SEBI's mutual fund or collective investment scheme regulations. Even individual portfolio managers who pool assets from high net worth investors would have to register as an alternative investment fund under and comply with the proposed rules.
Under the proposed regulations, all alternative investment funds would be subject to certain common rules. These common rules would regulate their minimum fund size, individual investment size, number of investors, sponsor (or manager or designated partner) contribution and lock in, disclosure requirements, and minimum fund duration.
In addition, there would also be separate regulations specified for each of the different categories of funds. For instance, venture capital funds would be prohibited from investing in a company if the company has been promoted by any of the top 500 listed companies (by market capitalization) or by their promoters, but the same restriction would not apply to a private equity fund.
Once the new rules come into effect, SEBI intends that the existing venture capital fund regulations would be subsumed within the new rules. Funds registered under the existing venture capital fund regulations would continue to be regulated under the existing regulations until the funds or the schemes managed by those funds are wound up.