PE-VC funds may be deemed FDI

According to a latest draft put up on RBI site for public comment, various classes of investors have been broadened with specific mention of PE & VC funds.

"Secondly, the details of investment received in units of venture capital funds from FVCIs are proposed to be separately captured."

Details of investment received from foreign venture capital investors are also proposed to be captured separately. Part B of Form FC-GPR has been modified to capture details of such foreign investors. The date of filing Part B of the form has been extended from June 30 of every year to July 31.

FDI is permitted under automatic & approval route. An Indian company issuing shares and convertible debentures to non-residents under either route is required to submit details of the investment in a two-stage reporting procedure.

In the first stage, receipt of funds is to be reported to RBI within 30 days. In the second stage, the company has to file Form FC-GPR with RBI within 30 days from the date of issuing shares/convertible debentures.
Form FC-GPR was revised in April 2007 by which remittance receiving Indian banks were required to obtain a KYC report on the foreign investor from the overseas bank remitting the amount.

Go to Financial Express for the complete article

RBI Responds : FOREX Derivative Cap May Arrive

The RBI has called for data from banks to assess their expsoure to FOREX derivatives in domestic & overseas markets.
Local exposure mainly relates to interest rate and currency options and swaps while international investment includes credit derivative structures like credit-linked notes based on foreign currency loans and bonds raised by Indian companies abroad. RBI has asked banks to limit their capital market exposure to 40 per cent of their net worth, with direct exposure limited to 20 per cent.
As part of the proposed valuation norms, RBI could also ask banks to mark to market the derivative portfolio maintained in the held-to-maturity (HTM) category.

RBI lifts PwC Ban

RBI lifted ban on PwC auditing banks & NBFCs.

PwC was banned from auditing banks and NBFCs following its association with the now failed Global Trust Bank as its auditor for financial years 2002 and 2003. RBI had found that PwC underprovided for NPAs.

GTB eroded networth due to over exposure to Capital Markets. It tried to make up for the capital by roping in Newbridge Capital, but RBI disapproved on grounds of questionable source of money. Since bank was not able to make up for capital, it was put under moratorium and then a quick takeover by OCB.

Restrictions on Realty VCs

The real estate sector has been on the radar of regulators for a while now. The fear of an asset bubble being formed due to increased interest in the sector, especially by the ever growing realty funds, has been sensed by one and all.

As per an article in the Business Standard, the government is reviewing norms for investments by foreign venture capital funds in real estate, after the Reserve Bank of India coming round to the view that such funding is helping create an asset bubble in the sector.

The government had recently clamped down on the use of external commercial borrowing by real estate companies in order to check capital inflow, which, it feels, is fuelling inflation in the country.

With stock market sentiments too turning against the sector, real estate developers were looking at private equity funds as their last hope. But that source too could suffer if the proposed clampdown on venture capital funds takes place.

Under current norms, foreign venture capitalists invest in real estate through private equity firms in the form of foreign direct investment.

While market regulator Securities & Exchange Board of India has cleared the decks for registration of such VCs, the Reserve Bank of India has opposed their operation and not allowed them to open foreign exchange accounts. If the Reserve Bank gives the green signal, such investments will be clubbed under institutional investments.

Read more

Foreign Private Equity firms to take India’s infrastructure story ahead

The monetary requirements for building infrastructure set by the government seems to find foreign support .The centre has earmarked $320 bn in infrastructure investments by 2012 which it proposes to accrue from its Foreign exchange reserves in partnership with foreign funds.

Various Private Equity firms has approved of investments pertaining to infrastructure in India .Citigroup and Blackstone will float a $5 billion fund with India’s Infrastructure Development Finance Company (IDFC) and India Infrastructure Finance Company (IIFC) .3i, another UK based PE firm, has put in $500 mn in projects with IIFC as its partner, in India .The SBI along with Société Générale of France plans to Rs 18 bn to invest in infrastructure companies .It also plans to venture into private equity with a target to invest Rs 42 bn in infrastructure .About 65% of these funds will be invested in equity .US based TransAsia infrastructure holdings will be another infrastructure dedicated fund to be launched by the end of 2007.

However all this is subject to approval by RBI who dictates an upper limit for External Commercial Borrowings(ECB’s) in India and also the decision to use the forex reserves is reserved with the RBI.

Source: www.economist.com

Debt markets to have credit default swaps

The next level for the debt markets in India is not far from realization.The RBI is expected to issue guidelines for the introduction of credit derivatives and set the regulatory framwork for its issuance today.This is after the the credit market has soared more than 27% in the last tweleve months.

RBI claims that it has reached the "adequate comfort level for the introduction of such products".However it may take several months for the banking industry to standardize the terms for trading these instruments.

There is a possibility that the government initially sets aside these instrument to be secured against an asset before allowing the markets to do away with them at a later stage.Also there is much speculation about whether or not offshore FI's will be allowed to trade in them.

Interest rate derivatives were the only derivative products allowed by the regulators to hedge against foreign currency risk before 1999.Allowing credit derivatives to be traded after the recent inclusion of derivatives on equity products(as recently as 2001)will cerainly lead the markets towards more stability.

Source: Mint

Hedge funds to debut in India soon

The RBI monetary policy for 2007-2008 has given a fillip to the alternative investment industry in India.

In a move to usher the capital and current account convertibility of the rupee the RBI has increased the present limit for individuals for any permitted current or capital account transaction from $50,000 to $100,000 per financial year.The current account convertibility was established with the acceptance of the obligations under Article VIII of the IMF’s Articles of Agreement in August 1994.

Driven by the need to increase their assets under management Hedge funds have reduced their minimum investment limits from $1mn to 200,000$ and even 100,000$ overseas and to tap the retail markets launched mutual funds that invest in them.This move by the Hedge fund community over the years coupled with the government's incentive gives a strong case for Hedge fund investments in India.

The SEBI has laid down the guidelines for the direct registration of hedge funds.What is to be seen is that how these funds interpret this move by the RBI.

Read the Hindu article
$100,000 limit puts hedge funds within reach of Indian investors

Central Bank to come out with IPO; issues 5 merchant bankers for the issue

Mumbai-based public sector bank Central Bank of India is coming out with an initial public offering of Rs. 1000 crores, expected by end-May 2007. The bank has finalized five merchant bankers for the issue. The bank has appointed IDBI Capital Markets, Kotak Securities, ICICI Securities, Citigroup Global Markets and Enam Financial as the lead managers to the issue.

The bank has received all regulatory clearances for converting about 71% of its large equity base into preference shares. The proposal for conversion of shares, which was stuck at the Reserve Bank of India (RBI), was recently cleared by the government. The bank is negotiating with the government for the coupon rate on the preference shares. The government wants a floating coupon rate of 100 basis points above the RBI’s repo rate, which is currently at 7.75%.

Of the Rs. 1124.14 crores equity capital, Rs. 800 crores would be converted into preference shares. The conversion will lower the bank’s paid-up equity capital to Rs. 324.14 crores. Central Bank, which had planned to get listed in the fourth quarter of 2006-07, as on December 31, 2006, had a total business of Rs. 121,301 crores, comprising deposits of Rs. 74,974 crores and advances of Rs. 46,327 crores.

Read the article in Business Standard.

ICICI Bank to transfer stake in insurance and AMC businesses to new company ICICI Holdings

ICICI Bank will transfer its holdings in its insurance and asset management businesses to a new holding company called ICICI Holdings. The bank would transfer to ICICI Holdings its 74% equity holdings in ICICI Prudential Life Insurance Company and ICICI Lombard General Insurance Company and 51% in Prudential ICICI Asset Management Company and Prudential ICICI Trust to the new entity.

The book value of ICICI Bank's investment in ICICI Prudential Life is Rs. 1300 crores, ICICI Lombard General Insurance Rs. 600 crores and in ICICI Prudential Asset Management Company and the trustee company is about Rs 50 crores.

The decision to move these assets to the new company was prompted by the Reserve Bank of India (RBI) regulation that banks can invest a maximum of 20% of their net worth in subsidiary companies.

The bank has applied for approvals from the RBI and the Insurance Regulatory and Development Authority (IRDA) for transferring its stake in the insurance and mutual fund ventures.

ICICI Holdings may consider a public listing of its equity shares at an appropriate time to meet a part of the further capital requirements of ICICI Life and ICICI General. ICICI Bank intends to retain majority ownership in ICICI Holdings.

Read the Business Standard and The Economic Times articles.