Investment by Foreign Portfolio Investors (FPI) in Debt

Reserve Bank of India (RBI) vide RBI/2018-19/123 A.P. (DIR Series) Circular No. 19 dated 15th February 2019 have made an amendment relating to the investment by Foreign Portfolio Investors (FPI) in Debt.

As per RBI/2017-18/199 A.P. (DIR Series) Circular No. 31 dated June 15, 2018, FPI investment in corporate bonds (under Schedule 5 of FEMA 20(R)/ 2017-RB) shall be subject to the following requirements:

1.  Investment by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of a corporate bond. In case an FPI, including related FPIs, has invested in more than 50% of any single issue, it shall not make further investments in that issue until this stipulation is met.
2. No FPI shall have an exposure of more than 20% of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate).

RBI has decided to withdraw the point (ii) stated above i.e., limit of FPI investment of 20% of its corporate bond portfolio to a single corporate with effect from 15th February 2019 to encourage a wider spectrum of investors to access the Indian corporate debt market.

Amendment in Companies (Significant Beneficial Owners) Rules, 2018 Rules

The Ministry of Corporate Affairs (MCA) has amended the Companies (Significant Beneficial Owners) Rules, 2018 vide notification dated 8 Feb, 2019. The highlights of the same are as follows:

1. Significant Beneficial Owner:  The definition of Significant Beneficial Owner (SBO) has been made clear so as to avoid confusions of earlier definition. Pursuant to the revised definition, SBO in relation to a reporting company [1] means an individual referred to in section 90(1) of the Companies Act, 2013,  who acting alone or together or through one or more persons or trust possess the following rights/entitlements in reporting company

• Holds indirectly or together with direct holding 10 % or more shares/voting rights
• Right to receive or participate in distributable dividend  or other distributable – 10% or more in a financial year  indirectly or together with direct holding
• Exercises or has Right to exercise significant influence [2] or control in any manner other than direct holdings alone

2. Holding a right or entitlement indirectly:  An individual shall be considered to hold a right or entitlement indirectly in the reporting company, if the individual satisfies any of the following criteria if the member in the reporting is :

Sr. No	Type of Member of the Reporting entity	Which individual shall be said to be holding a right or entitlement indirectly (i.e., who will be considered as SBO)?
1.	Member is an Indian or foreign body corporate (other than LLP)	Such individual (acting together[3]  with any other individuals) who (a) holds majority stake [4]  in that member; or (b) holds majority stake (as explained in footnote) in the ultimate holding company (whether incorporated or registered in India or abroad) of that member; shall be said to have indirect holding in reporting Company.
2.	Member is an Hindu Undivided Family	Karta of such HUF
3.	Member is an partnership firm or Limited Liability Partnership (LLP)	·   Each Individual Partner (irrespective of his % of contribution or % of voting rights or profit sharing ratio) ·     In case of bodies corporate partner - such individual (acting together  with any other individuals) who (a) holds majority stake  (as explained in footnote above in that partner body corporate; or (b) holds majority stake (as explained in footnote above) in the ultimate holding company of that partner body corporate
4.	Member is a Trust	·   In case of Discretionary Trust or charitable Trust – all the Trustees · In case of Specific Trust – all the Beneficiaries ·    In case of revocable Trust – the author or the settlor
5.	Member is a pooled investment vehicle OR an entity controlled by the pooled investment vehicle and those which are based in member State of the Financial Action Task Force on Money Laundering and the regulator of the securities market in such member State is a member of the International Organization of Securities Commissions, and the individual in relation to the pooled investment vehicle.	·     a general partner; or ·     an investment manager; or · a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity
6.	Member is a pooled investment vehicle OR an entity controlled by the pooled investment vehicle based in a jurisdiction which doesn’t fulfill the requirements referred to point 5(supra)	The requirements of points 1/2/3/4 as the case may be shall apply

3. Individual not considered as SBO: If the individual is not having right/entitlement as mentioned in point(1), he will not be considered SBO

4. Holding a right or entitlement Directly: In case if the individual holds direct right/entitlement or if the individual beneficial interest in the share u/s 89(2) and the declaration has been made, than the individual is out of the purview of SBO

5. Instruments to be considered - For the purposes of SBO, the instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as 'shares'.

Exemptions from the compliance requirements under SBO Rules

The disclosure requirements under SBO Rules shall not be applicable with respect to the shares of the reporting company held by,

1. IEPF Authority constituted under section 125(5) of the Companies Act, 2013;
2. Holding reporting company - The details of such holding reporting company shall be reported in Form No. BEN-2.
3. the Central Government, State Government or any local Authority;
4.   (i) a reporting company, or (ii) a body corporate, or (iii) an entity,controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments;
5.  SEBI registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by SEBI,
6. Investment Vehicles regulated by RBI, or IRDA, or Pension Fund Regulatory and Development Authority

Reporting Requirements: 

1. Disclosure to be made by SBO in form BEN-1 to the reporting company within 90 days from 8 Feb, 2019 i.e., by 9 May, 2019 
2. The Reporting Company is required to file a return with registrar in e- Form BEN- 2 i.e., by 8 June 2019
3. In case of change disclosure is to be made within 30 days and return is to be filed in with registrar for change therein within 30 days. 
4. Reporting Company to maintain a register of the interest declared and any changes therein in Form BEN - 3                   

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[1] Reporting Company is defined in Rule 2(f) of the SBO Rules to mean a company as defined in clause (20) of section 2 of the Act, required to comply with the requirements of section 90 of the Act

[2] Significant influence is defined in rule 2(i) to mean the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies

[3] As per Explanation V to Rule 2(h) of SBO Rules, individuals shall be deemed to be “acting together” if such individual or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal.

[4] "Majority Stake" is defined in Rule 2(d) of SBO Rules to mean

(i) holding more than one-half of the equity share capital in the body corporate; or

(ii) holding more than one-half of the voting rights in the body corporate; or

(iii) having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate

Informal Guidance issued in case of Jindal Steel & Power Limited

SEBI has issued Informal Guidance to Jindal Steel and Power Limited (hereinafter referred to JSPL) and released on SEBI website on January 28, 2019 clarifying the lock-in related provisions in case of preferential issue of convertible warrants under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 [“SEBI (ICDR) Regulations 2009”], which have been replaced with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 [“SEBI (ICDR) Regulations 2018”] now.

Facts of the case:

• Whenever any Company whose equity shares are listed on a recognised stock exchange, issues any new equity shares or any securities which are convertible into equity shares in future, it needs to comply with the Chapter on “Preferential Issue” under SEBI (ICDR) Regulations.
  
  

• Many Companies whose equity shares are listed on recognised stock exchange issue share warrants, which are generally unlisted securities. Under SEBI (ICDR) Regulations, these unlisted share warrants must be mandatorily converted into equity shares within a period of 18 months from the date of allotment of warrants, and thereafter the resultant equity shares will be listed on the same recognised stock exchange where existing equity shares are listed, and such stock exchange given Trading Approval for the new shares, post which those can be traded on such stock exchange. 

• One of the provisions under this Chapter on “Preferential Issue of shares” under SEBI (ICDR) Regulations is regarding Lock-in of existing equity shares as well as new securities being issued to the allottees. As per the provisions of Regulation 78(6) of the SEBI (ICDR) Regulations, 2009 [erstwhile Regulations], the entire pre-preferential allotment shareholding of the allottees, if any, was to be locked-in from the relevant date upto a period of 6 months from the date of trading approval.  

•        In these earlier SEBI ICDR Regulations, 2009, in cases of preferential allotment of convertible warrants (where such warrants are not proposed to be listed), it was not clear about what should be the end date of lock-in of existing pre-preferential allotment shareholding of the allottees, if any, i.e., whether it should be locked in till 6 months from the date on which these warrants are converted into equity shares, and then they get listed and get trading approval of shares? [In such cases, if the warrants are converted in the 18^th month from the date of their allotment, then the existing pre-preferential allotment shareholding of the allottee gets locked-in for about a period of 2 years or so] 
  
  

• Hence, certain companies like Kesoram Industries Limited, PC Jewellers Limited, Balasore Alloys Limited had approached SEBI for seeking its Informal Guidance with regard to the periodicity of lock-in in such cases. SEBI had clarified them, by way of Informal Guidance, that in case of allotment of convertible share warrants, which are not proposed to be listed till the get converted into equity shares, the existing pre-preferential allotment shareholding of the allottees, if any, need to be locked-in only till the completion of 6 months from the date of allotment of these warrants.

•  Now, under SEBI (ICDR) Regulations, 2018, the earlier Regulation 78(6) is numbered as Regulation 167(6). In this Regulation, they have corrected this ambiguity by inserting an additional provision stating that, in case of preferential allotment of convertible warrants (where such warrants are not proposed to be listed), the pre-preferential allotment shareholding of the allottees, if any, shall be locked in from relevant date upto a period of 6 months from the date of allotment of such securities.

• Jindal steel and Power Limited (hereinafter referred as “Jindal”) is a Company listed on National Stock Exchange and Bombay Stock Exchange Limited which had approached SEBI for an Informal Guidance in this regard.

• Jindal had issued 4,80,00,000 warrants to one Opelina Finance and Investment Limited (“Opelina”), which is one of the promoter/promoter group entity of Jindal, on Preferential basis under the provisions of Chapter VII, i.e., “Preferential Issue” under the SEBI (ICDR) Regulations, 2009 on November 10, 2017.

• Warrants allotted to Opelina are unlisted and are convertible into equity shares of the Company at any time before the expiry of 18 months from the date of issue of the Warrants i.e., by May 09, 2019.  

• In view of the ambiguity in end-date of lock-in in case of preferential issue of share warrants (as explained above), Jindal had ensured that the entire pre-preferential allotment shareholding of Opeline is locked-in upto November 30, 2019 (i.e. assuming that the warrants are converted into equity shares on May 9, 2019, and trading approval for the equity shares will be received by May 31, 2019, the 6 months period from the date of trading approval will end on November 30, 2019)

Case / Query:

(1) What shall be the periodicity of Lock–in of pre –preferential allotment shareholding of the allottee in this case, i.e., since the preferential allotment was done under the erstwhile SEBI (ICDR) Regulations, 2009, whether the clarifying provision inserted in the new SEBI (ICDR) Regulations, 2018 be applicable to the preferential issues done prior to the date of enactment of SEBI (ICDR) Regulations, 2018?

(2) Whether the pre-preferential holding of the promoters locked-in for a longer period (as mentioned above) be released after completion of period of 6 months from the date of allotment of warrants, in accordance the above mentioned proviso inserted in Regulation 167(6) and as per the Informal Guidance issued by SEBI to other Companies?

Reply by SEBI: 

1. For the First case / query, i.e., applicability of the new Provision inserted in SEBI (ICDR) Regulations, 2018 for the preferential issue already done under the erstwhile SEBI (ICDR) Regulations, 2018, SEBI has clarified as follows:-

Regulation 78(6) of the ICDR Regulations, 2009 states:

The entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date upto a period of six months from the date of trading approval.

However, taking the same view as was taken while giving Informal Guidances to the other Companies (mentioned above), SEBI has informed that in case of preferential issue of unlisted convertible share warrants (which are not proposed to be listed), the lock-in period shall commence from the relevant date and end on the expiry of six months from the date of allotment of warrants.

2. For the second case / query, i.e., whether the pre-preferential allotment shareholding of the allottees locked-in for a longer period be released after the completion of 6 months from the date of allotment of warrants, SEBI has only re-iterated that since the warrants were issued on November 10, 2017, pre-preferential allotment shareholding of the allottees shall be locked-in from the relevant date upto a period of six months from the date of allotment of warrants.

ECB facility for Resolution Applicants under Corporate Insolvency Resolution Process (CIRP)

Reserve Bank of India (RBI) vide RBI/2018-19/121 A.P. (DIR Series) Circular No. 18 dated 7th February 2019 have relaxed the end-use restrictions for resolution applicants under the Corporate Insolvency Resolution Process (CIRP).

As per ECB policy framework dated 16th January 2019, end use (negative list) of the ECB proceeds has been defined as follows:

• Real estate activities.
• Investment in capital market
• Equity investment
• Working capital purposes except from foreign equity holder
• General corporate purposes except from foreign equity holder
• Repayment of Rupee loans except from foreign equity holder
• On-lending to entities for the above activities

Highlights of the amendment include:

• For the above highlighted point, it has been clarified that resolution applicants under the Corporate Insolvency Resolution Process (CIRP) can raise ECBs from the recognised lenders (as defined under New ECB policy) for repayment of Rupee term loans of the target company under the approval route. But they cannot raise such ECBs from branches/ overseas subsidiaries of Indian banks. 

• Accordingly the resolution applicants, who are otherwise eligible borrowers, can forward such proposals to raise ECBs, through their AD bank, to Foreign Exchange Department, Central Office, Mumbai of the Reserve Bank for approval. 

• All other provisions of the ECB policy remain unchanged. 

Additional Disclosure Requirement to ROC- Outstanding money or loan received but not considered as deposit

The Ministry of Corporate Affairs issued a Notification prescribing certain amendments in the Companies (Acceptance of Deposits) Rules, 2014 which have been made effective from 22^nd January, 2019.  Pursuant to this amendment - one time return and yearly return in e-form DPT-3 is required to be filed with ROC giving details of outstanding receipt of money or loan received by a company but not considered as deposits.

The form DPT-3 (i.e. return of deposit) is also required to file for following purpose:

Purpose	For the Period	Applicability	Due Date
One time return for disclosure of details of outstanding money or loan received by a company but not considered as deposit in terms of rule 2(1)(c) of Chapter V	From 1st April, 2014 to 22nd January, 2019	Every company to which these rules apply, except Government Company	21st April, 2019
Annually - Return for disclosures of money or loan received by a company but not considered as deposits in terms of rule 2(l)(c) of Chapter V	Information as on the 31st day of March of that year	Every company to which these rules apply, except Government Company	On or before the 30th day of June, of every year

MCA Update

Ministry of Corporate Affairs (MCA) has issued notification u/s Section 405 of the Companies Act, 2013 and has amended various rules under Companies Act, 2013.  The Key highlights of the amendments are as follows:

1. Companies (Acceptance of Deposits) Amendment Rule, 2019

• Amount received by a Company from Real Estate Investment Trusts registered with the SEBI are also now excluded from the purview of definition of Deposit 
• Form DPT-3 is required to file for following purpose:

Purpose	For the Period	Applicability	Due Date
One time return for disclosure of details of outstanding money or loan received by a company but not considered as deposit in terms of rule 2(1)(c) of Chapter V	From 1st April, 2014 till the date of publication of notification in official gazette	Every company to which these rules apply, except Government Company	Within 90 days from the date of publication of notification in official gazette
Annually - Return for disclosures of money or loan received by a company but not considered as deposits in terms of rule 2(l)(c) of Chapter V	Information as on the 31st day of March of that year duly audited by auditor	Every company to which these rules apply, except Government Company	On or before the 30th day of June, of every year

      2. Companies (Prospectus and Allotment of Securities) Amendment Rules, 2019

• Rule 9A of chapter III which deals with Issue of Securities in demat form by unlisted public companies will not apply to 


• a Nidhi;
• a Government company or
• a wholly owned subsidiary

3. Specified Companies (Furnishing of information about payment to micro and  small enterprise suppliers) Order, 2019

• Every Specified company is required to file e-form MSME Form I providing details of  dues to MSME suppliers which are outstanding for more than 45 days in the following manner:
• Initial Return – Within thirty days from date of notification viz., 22 January, 2019 for all the dues existing as on 22 January 2019 
• Regular half yearly return-
• For the period April to September – by 31 October
• For the period October to March – by 30 April

• Specified Companies means all companies, who get supplies of goods or services from micro and small enterprises (MSME) and whose payments to MSME suppliers exceed 45 days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of section 9 of the MSME Development Act, 2006

4. NCLT Rules, 2019

• Rule 71 of NCLT Rule is amended which pertains to Application under proviso to Section 61(1) (b) i.e. the application for obtaining the approval of the tribunal for the consolidation and division of all or any of the share capital into shares of a larger amount than its existing shares which results in changes in the voting percentage of shareholders.

• Copy of documents prescribed in Rule 71 should be served to Regional Director instead of Central Government alongwith Registrar of Companies, SEBI in case of Listed companies and other regulators in case of the company is regulated under other Act

Notification can be downloaded from following links:

1. http://www.mca.gov.in/Ministry/pdf/AcceptanceDepositsAmendmentRule_22012019.pdf
2. http://egazette.nic.in/WriteReadData/2019/195752.pdf
3. http://www.mca.gov.in/Ministry/pdf/MSMESpecifiedCompanies_22012019.pdf
4.http://www.mca.gov.in/Ministry/pdf/NCLTAmendmentRules_18012019.pdf

Proposal for Buy Back of shares of  L&T not  approved by SEBI.

Maintaining of Debt Equity Ratio is one of the requirements under the Buy Back of securities. (Both as per Companies Act and as per the Buy Back  of  Securities . (Both as per Companies Act and as per Buy Back Regulations ).

The provisions as per SEBI and Companies Act are expressed below:

Chapter II Regulation 4 of SEBI (Buy – Back of Securities ) Regulations ,1988

Conditions and requirements for buy-back of shares and specified securities

The  ratio  of  the  aggregate  of  secured  and  unsecured  debts  owed  by  the company  after  buy-back  shall  not  be  more  than  twice  the  paid-up capital and free reserves.

Provided that  if  a  higher  ratio  of  the  debt  to  capital  and  free reserves for the  Company has been notified under the Companies Act, 2013, the same shall prevail.

One of the condition for buy-back u/s 68 (2) (d) of Companies Act, 2013 is that the :

The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves:

Provided that the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies;

Since each company has to maintain this threshold, probably it has to be ascertained based on companies debt equity (means standalone) and not on consolidated financials.

However ,recently SEBI has denied permission to Larsen & Toubro for its Rs.9000 Core share buy back offer.

Source : 

https://www.financialexpress.com/industry/sebi-nixes-lt-plan-for-rs-9000-crore-share-buyback/1449152/

While turning down the proposal, SEBI has reportedly applied the financial ratio based on the Consolidated Financial Statement of the Company which is not specified anywhere in buyback of securities regulations.

Hence , if the ratio of the aggregate of secured and unsecured debts owned by the company after buy-back (assuming full acceptance ) would be more than twice the paid up capital and free reserves of the company based on consolidated financial statements the buyback offer will be assumed not in compliance with the Companies Act  and SEBI norms.

We will track this further when and if we get official documents in this regards.