400 PE, M&A deals under CBDT scanner

The spill-over effect of Vodafone’s battle with Indian tax authorities may prove costly for several other deal makers. The Central Board of Direct Taxes (CBDT) has reopened about 400 cases of big and mid-sized transactions that took place during the past six to seven years.

According to sources close to the development, the cases include foreign corporates and PE firms selling stakes of companies based in India, and not paying any capital gains tax. One of the first such cases that the tax department is currently probing is Montreal-based Alcan Inc’s selling of the controlling stake in Indian Aluminium Company (Indal) to Hindalco Industries seven years ago, sources in the finance ministry told SundayET.

Significantly, there were around 300 PE deals clocked in India in 2006 alone. The tax department had earlier slapped a notice on Vodafone Essar, demanding $2 billion as capital gains tax over its $1-billion acquisition of a majority stake in Hutchison Essar, India’s fourth largest mobile telephone company. The case is now locked in the Bombay High Court.

Source: Economic Times

Praful Patel brings in industry friendly norms for aviation sector

The aviation industry has seen a lot of action in the recent past on the M&A front. In line with the trends, Praful Patel the civil aviation minister has decided to support mergers & acquisitions (M&As) in the sector with industry-friendly norms, reported Times Now.

Simple rules for the transfer of traffic rights and the right to use airport infrastructure to facilitate M&As in the sector are among the initiatives proposed in the comprehensive civil aviation policy, which will be considered by a group of ministers (GoM) soon.

The civil aviation ministry’s stand should help M&A deals by making it clear that an airline which takes over another can use the traffic rights of the latter. Parking bays, landing slots, hangars, check-in stands, lounge areas, ticketing areas and office space would also get transferred.

In the aviation sector, management change makes it mandatory for airlines to get several clearances all over again from various authorities including the civil aviation ministry, the Director General of Civil Aviation, Airports Authority of India, the home ministry and the corporate affairs ministry, which could change if the new policy is approved by the GoM.

RBI to allow Temasek, Singapore Invt. arm to buy ICICI stake

The Reserve Bank of India (RBI) will allow Temasek and Government of Singapore Investment Corporation (GIC) to acquire 10% equity each in the country’s largest private sector lender ICICI Bank as a “one-off case”, as reported by Economic Times.

The regulator has taken a stand that this cannot be “quoted as a precedence” for the Singapore government’s investment arms and any other foreign investor to pick up stakes in other private sector banks, sources told ET. Even though the government has been in favour of allowing the Singapore entities to hold higher stakes in ICICI Bank, RBI had earlier said that Temasek and other investors associated with the Singapore government, like GIC and Monetary Authority of Singapore, were all ‘related entities’ and could together hold a maximum 10% stake.

The tussle between RBI and the Singapore government owes its origin to the Comprehensive Economic Co-operation Agreement between India and Singapore. The agreement says “...for investments into India’s capital markets, India shall regard GIC, Temasek and their investment vehicles as independent and unrelated legal entities, for the purpose of application of the Sebi legislation, including rules, regulations and guidelines governing investment limits on Foreign Institutional Investors...” Further, Annex 7 of the treaty says, “Each legal entity shall be allowed to purchase up to 10% or the prevailing threshold under these regulations, whichever is higher, of the issued capital of any company.” The Singapore investment arms were keen to participate in ICICI Bank’s issue in December ‘05. RBI had refused to make any exception for Temasek in the ownership guidelines for private banks, and had barred from further raising stake in the private bank.

FIIs' pre-IPO investments in real estate to get FDI status

The government proposes to treat the investments by foreign institutional investors in pre initial public offers (IPOs) of real estate companies as foreign direct investment (FDI), as reported by Business Standard.

The government has also said FII investments in the pre-IPO allotment of real estate companies will have a lock-in period of three years, in line with the FDI norms. The lock-in period of three years is currently applicable to FDI in real estate.

The government recently also clamped down on the use of external commercial borrowings for the real estate sector for integrated townships. All these measures are in response to widely held opinion that overseas funds are contributing to an asset bubble in the real estate space.

The government had said that it intended to slow down the flow of foreign debt into the real estate sector through its recent curbs on external commercial borrowings (ECBs).

SEBI propose 2-year lock-in to hedge funds wanting to invest in India

Hedge funds interested in participating in the Indian stock markets have been asked by The Securities and Exchange Board of India (SEBI) to agree to a lock-in period of two years as a cushion against sudden withdrawal under adverse circumstances. Some hedge funds, both new and existing, already have agreed to the lock-in stipulation, as per SEBI officials.

Some of these are already invested in the Indian market through participatory notes (PNs), and may want to register directly with SEBI and invest with a two-year lock-in. SEBI chairman M Damodaran is trying to persuade many other new hedge fund applicants to provide a lock-in undertaking. The regulator also wants to ensure that hedge funds registering directly with it are regulated in the country of their origin. This information is being gathered by SEBI within 24 hours from a multilateral body of global regulators. Once the hedge fund comes upfront, SEBI is able to determine whether it is regulated in the home country. Having ensured this, the other comfort being sought is whether the fund will agree to a two-year lock in period. Sources said those who agree to this will get a preference in entering the Indian stock market.

In the past, SEBI had considered allowing hedge funds as it felt that they could be an additional source of liquidity besides diversifying the pool of foreign investments in the local market. As part of policy options, it was suggested three years ago that hedge funds could be allowed in the Indian market subject to certain conditions such as ensuring that at least 20% of the corpus should be contributed by investors such as university funds, charitable trusts, endowments, insurance firms, banks and pension funds.

Read more in The Economic Times article.

CVC International allowed investing in Flemingo Duty Free Shops by FIPB

Citicorp Venture Capital International’s proposal to acquire 15% stake in Flemingo Duty Free Shops Private Limited (FDSPL) has been approved by the Foreign Investment Promotion Board (FIPB). Flemingo Duty Free runs duty-free shops at various airports and seaports. The deal is valued at more than Rs. 100 crores. The Ministry of Finance had already given the go-ahead to the investment. However, the proposal was awaiting approval pending with the FIPB.

Flemingo would initially issue 1 mn convertible preference shares to CVC International for about Rs. 1000 each, total amounting to Rs. 100 crores. These preference shares would then be converted into equity at a later date for a premium. Citicorp’s shareholding in Flemingo would be up to a maximum of 15% of the paid-up equity of the company.

The current shareholding structure of Flemingo Duty Free Shops includes 51.22% equity stake held by Flemingo International, a company based in British Virgin Islands, and a 24.87% stake held by various NRIs. After conversion of Citicorp’s preference shares; Flemingo International, NRIs and Citicorp would respectively hold 43.54%, 21.14% and 15% in FDSPL, taking the total FDI to 79.68%.

Read more in The Economic Times article.
Related Post:
Flemingo Duty Free Shops sells 15% stake to Citigroup Venture Capital International; awaits regulatory nod

SEBI, RBI conduct studies for regulating PE funds

If media reports are to be believed, then private equity funds are in for a tough time ahead in the Indian markets. PE funds may come under the regulatory scanner in India, and though the ultimate regulator has not been decided upon, both Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have formed study groups to analyze the structure and impact of such funds on the investors, the companies in which they invest in and their effect on corporate governance.

The issue has gained importance as a working group of International Organisation of Securities Commission (IOSCO) has been set up to study the impact of private equity funds on emerging markets. The Indian market regulator is the chairman of IOSCO’s emerging market committee, and will also have consultative discussions with other regulators during the 32nd annual conference of IOSCO to be hosted by SEBI in India this year.

Based on the joint findings of the study, the regulators may issue guidelines for listing and registration of such funds, for ensuring better monitoring. The purpose of the study is to ascertain if the actual investors in a private equity fund are loosing out during leveraged buyouts, de-listing and re-listing of the company.

Read more in the Business Standard article.

SEBI eases listing agreement for debenture issues

The Securities and Exchange Board of India (SEBI) today has relaxed listing agreement for debentures. It has allowed companies issuing debentures on private placement, to submit their unaudited half-yearly results to the stock exchanges, instead of quarterly basis.

The regulator seems to be easing the guidelines with an objective to encourage more companies to tap the debenture market, which has been lying low for some time now. With the amendment, the debenture issuer companies would now be submitting unaudited half yearly results instead of unaudited quarterly results.

However, the half-yearly accounts would be subject to a limited review, which has to be done by the statutory auditors of the company. The SEBI has also made changes to the format which is to be used for reporting of the limited review.

Read the article in Business Standard.

SEBI to allow hedge funds direct entry into Indian capital markets

The capital markets regulator, the Securities and Exchange Board of India (SEBI), is considering direct participation of hedge funds in the Indian stock markets. SEBI has invited hedge funds to register with the regulator and invest in the Indian stock markets without the cover of participatory notes, currently the most preferred route of hedge funds for channeling investments in the Indian markets.

Participatory notes are often seen as tools for money laundering and there have been numerous calls, including from the Reserve Bank of India, to curtail them. It is widely estimated that 48% of the $50 bn investment by foreign institutional investors in the Indian markets has come through offshore participatory notes. Allowing hedge funds direct entry will help SEBI track the source of funds coming into the capital markets more efficiently. It is difficult to track the source of funds coming in through participatory notes.

SEBI’s thinking was articulated by its chairman, M Damodaran, at a meeting organized by ICICI Securities in Singapore early this month, which foreign investors, including several hedge funds, attended.

Read more in the article in Business Standard.

RBI refuses Catholic Syrian Bank to let PE firm AIF Capital Development up stake above 5%

The Reserve Bank of India (RBI) has refused clearance to allow the preferential allotment of about 15% stake in Thrissur-based Catholic Syrian Bank to Asian private equity firm, AIF Capital Development. This has made a dent in (CSB) capital raising plans. The Foreign Investment Promotion Board (FIPB) has cleared the proposal but the RBI guidelines restrict any single private equity firm’s holding in a private sector bank to 5%.

Strangely, AIF Capital has 5.56% stake in Yes Bank, a new generation private sector bank. In addition to Yes Bank, AIF Capital’s portfolio in India includes Bharti Tele-Ventures and GVK Industries.

CSB had a capital adequacy of 11.24% at the end of March 31, 2006 and has been struggling to raise capital. It is imperative for CSB to raise capital to adhere to the RBI’s norms on minimum capital requirements for private sector banks, which require all private sector banks to increase their net worth to a minimum of Rs. 300 crores. CSB’s net worth in at the end of 2005-06 was around Rs. 215 crores.

Read more in the Business Standard article.
Related Post:
Catholic Syrian to sell 15% stake to AIF Capital Development; seeks RBI nod for sale

SEBI to amend Clause 49 rules to tighten listing requirements

The Securities and Exchange Board of India (SEBI) has proposed to initiate a series of changes in Clause 49 rules, which relate to corporate governance, so as to tighten the listing norms for companies.

As per the proposed changes, the government nominees in public sector companies would not be treated as independent directors as they have “material pecuniary relationship with the government”.

The market regulator also has made it mandatory for companies to disclose relationship between independent directors, as well as other directors. SEBI has stipulated that companies would disclose the relation between independent directors inter-se, as well as the other directors of the company not holding management position, in all documents where the details of the board of directors are incorporated. SEBI also has proposed deletion of the provision allowing nominee directors appointed by the institutions to be considered as independent directors. The proposals came after SEBI received complaints that some companies were appointing independent directors related to other directors on the board. SEBI also proposed to fix the minimum age of 21 for independent directors.

The proposed norms have been made public for feedback.

Read the Business Standard article.

SEBI bars Atlanta Infra, 15 others from capital market transactions for price rigging

The Securities and Exchange Board of India (SEBI) has barred 16 entities from selling or buying the shares of Atlanta Infrastructure, a construction and engineering company, for alleged price manipulation. These entities include the promoters of Atlanta as well as managing director Rajoo Barot and company secretary Sachin Jain.

The SEBI has also asked exchanges not to approve the listing of Atlanta’s convertible warrants and shares, till further directions. It also has asked depositories not to dematerialize convertible warrants and shares issued upon conversion and not to allow stock-split plans. The company had raised Rs. 85.72 crores by issuing convertible warrants at Rs. 317.50. At its EGM on February 16, the company approved 1:5 stock split and further raising of funds through foreign currency convertible bonds.

Shares of Atlanta, which were listed on September 25, 2006, have rose from its offer price of Rs. 150 to Rs. 1446 on January 17 a rise of 681% in 55 trading days. Sensing something fishy in the sudden spurt in its share price, the SEBI advised the NSE and the BSE to conduct a probe. The probe concluded that the Manish Marwah / Dilip Nabera Group, the Atul Shah Group and the Nirmal Khotecha Group made large scrip purchases during the period. It also said the employees, who were allotted shares, had immediately transferred the shares through off-market transactions, to persons connected with the company.

Read the article in Business Standard.

Indian Government to announce an incubation fund for entrepreneurs

The Indian government is proposing to set up an incubation fund which could be announced in the forthcoming Budget. The fund will help graduates from leading technical and management institutes with the seed money to float their ventures. The initiative will be on the lines of private venture capital funds. The fund will provide capital support and interest subsidy for a project. The proposal is being worked out on the basis of recommendations made by a committee under the Planning Commission.

While the government may provide seed money for the fund by way of token provision for the next fiscal, the industry may also be asked to take it forward. The industry may be involved in the identification and implementation of viable projects. Incubatee entrepreneurs may be allowed certain concessions. Besides, contributions to the fund by business houses could earn them deductions from income tax.

A Planning Commission committee on technology innovation and venture capital has suggested that all technical institutions should set up profit-sharing Enterprise Incubation Units to provide advisory services, help in filing patents and protecting commercially valuable intellectual property. The committee also has suggested that these incubation units should get grants of up to 50% of their expenditure and exemption from tax as long as returns are used for further innovation. The committee has also suggested that enterprises being developed at incubation centres should also be categorized a priority sector for extending concessional bank credit.

Read The Economic Times article.

SEBI-RBI tiff stymies realty venture capital

The differences between the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have stalled foreign venture capital real estate funds from setting up shop in India. The RBI is insisting that funds floated by foreign venture capital investors (FVCIs) be brought on a par with real estate funds coming through the foreign direct investment (FDI) route for regulatory purposes.

At present, the FDI in the real estate sector is permitted through the automatic route and does not require the Foreign Investment Promotion Board (FIPB) nod. But fund houses have to adhere to certain project and financial restrictions.

The rules governing venture financing are liberal and allow funds to park money and withdraw it at their will. But financial conditions governing FDI rules require these funds to stay here for a minimum three years. Repatriation of any of the initial investment by funds before the stipulated period requires FIPB approval. The project conditions governing FDI rules prohibit sale of undeveloped land – a developer may purchase undeveloped land but must develop it before selling it. Also, it states that at least 50% of the project must be completed within five years from the date of obtaining statutory clearances.

Nearly 20 FVCI applications to invest in the Indian real estate sector are pending with the RBI, but have been approved by SEBI. Investments in the pipeline are estimated to be worth around $2 bn.

Article in The Financial Express.

SEBI prohibits Gammon Infrastructure IPO for a year

The Securities and Exchange Board of India (SEBI) has blocked the Rs. 450 crore-public offer of Gammon Infrastructure, restraining the company from tapping the capital markets for a year. This follows the December 21, 2006 order barring the parent company of Gammon Infrastructure, Gammon India from accessing the capital markets.

SEBI had stopped Gammon India and four others including promoter-chairman Abhijit Rajan and two companies controlled by him, from accessing the capital markets for a year for routing Gammon funds to subscribe to its rights issue in 2001. However, back then, it had not named Gammon Infrastructure Projects in the order. Gammon India will now appeal against the SEBI order with the Securities Appellate Tribunal (SAT). The SEBI has communicated to Gammon India that since the parent company holds significant stake in Gammon Infrastructure, the one-year prohibition on Gammon India would be applicable to Gammon Infrastructure as well.

At present, Gammon India holds 82.5% in Gammon Infrastructure, which following the IPO was supposed to come down to 20%. US hedge fund Och-Ziff also owns 12.5% in Gammon Infrastructure. The company is debt-free and has around Rs. 100 crores cash and sees no funding issues to delay its ongoing projects.

Read the article in Business Standard.

Government to bring M&As under RBI, SEBI regulations

The Indian Government may pass regulations to empower the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) to inspect mergers and acquisitions involving domestic and foreign companies in order to examine whether such deals pose any security threat to the country. All details regarding the source of funding and the structure of the new entity, after merger / acquisition, will be closely scrutinized by the two regulators. In the case of inflow and outflow of funds, the RBI will set a threshold limit. The apex bank and the capital market regulator will examine any investment beyond the threshold limit in the case of listed companies. In addition, sectoral regulators would also examine impact of the M&As for the domestic market.

The investigation will seek to find out whether the formation of the new company, post-merger, will be a threat to national security—both economic and physical. A probe by sectoral regulators will deal with the impact of the merger for the domestic market in terms of monopolistic practices. In the event of a foreign company acquiring an Indian company, the regulator will investigate the antecedents of the company that is acquiring the Indian company and its promoters. Moreover, a detailed investigation of the source of funds, used for financing the acquisition, will also be undertaken.

In the case of an Indian company acquiring a foreign company, the procedures will be much simpler, with the domestic firm required to follow the existing procedures of informing the regulators about the source of funding. Not just the foreign direct investment (FDI), even projects covered under the public-private-partnership (PPP) model will come under security. As a part of this, all PPPs will have a national security exemption clause, which will prevent companies in the consortium to undertake activities, which the government thinks will be against the country’s safety. In case of violations, companies will be removed from the project.

Article in The Financial Express.

Government considering amendments to the SEBI Act in Budget 2007

It is understood that the government is planning to amend the Securities and Exchange Board of India (SEBI) Act so as to enable SEBI to introduce plea bargain, disgorgement, etc. in the forthcoming budget session. The Ministry of Finance has called a meeting of the SEBI officials to discuss and finalize these amendments before placing it for the amendment. The Act will also incorporate the clause of compounding of cases in the capital market. This power will be accorded to the court and not to the SEBI. Plea bargaining might be allowed for select category of cases and not all. The SEBI Act amendments will also address more clarity and transparency by introducing clauses specifically related to disgorgement. The amendments will also incorporate the creation of an investor protection fund and the provision that all fees and charges collected by the regulator will be transferred to the government account. Among other things, this will include fees collected from brokers, penalties imposed, etc. After the funds were transferred to the government account, the SEBI might have to take the permission of the government to withdraw funds for use.

Read the Business Standard article.

Government to review FDI policy in March

The Indian Government is considering a number of changes in the current foreign direct investment (FDI) policy governing the activities of the various foreign entities invested and wanting to invest in India. Some of the proposals include –

· Acquisition of stake in Indian commodity exchanges by foreign investors
· Annual reviews of FDI policies in all sectors instead of one sector a month as at present
· Removal of the mandatory clause for petroleum companies to disinvest 26% in Indian subsidiaries in five years
· Review of the 10% cap on voting rights in subsidiaries of foreign banks
· Hike in the 49% cap in air transport services including activities like charter flights, ground handling and helicopter services and clear definition of all aviation activities and the relevant FDI cap
· Increase in the FDI cap in retail, currently at 51% in single-brand retail and 100% in wholesale cash-and-carry

The proposal would be submitted to the Union Cabinet this March.

Read more in the Business Standard article.

SEBI to issue guidelines for real estate mutual funds

The Securities and Exchange Board of India (SEBI) is planning a number of moves for growing the real estate mutual fund (REMFs) business in India. It is moving towards enforcing a minimum closing period of three years for REMFs. SEBI also plans to allow such funds to announce their net asset values (NAV) every quarter instead of daily as is currently the practice. A tax regime for real estate mutual funds is also being worked on, based on the US model, and will be announced in the next budget. The US model allows the trusts exemption from tax provided they share 90% of their taxable income as dividends with investors. SEBI would most likely be guiding REMFs to invest 70 to 80% of their funds in real estate projects directly, and the rest in real estate companies.

Read more in the article on Indianrealtynews.com.

RBI to divest its stake in SBI to the Indian Government

The Union Cabinet has approved the transfer of Reserve Bank of India’s (RBI) shareholding in State Bank of India (SBI) to the Indian Government by June 2007 with a view to let the RBI focus exclusively on regulation, the Cabinet has also assented for the transfer of RBI’s stake in the unlisted National Bank of Agriculture and Rural Development (NABARD) and National Housing Bank (NHB) to the government at book value by June 2008.

The estimated acquisition cost of RBI's 59.7% stake in SBI to the government is likely to be around Rs. 40,000 crores, at a price of Rs. 1300 per share in an all-cash deal. It is to be noted that a bill is likely to be approved in the forthcoming budget to amend the SBI Act to reduce the minimum holding of the government or RBI from 55% to 51%. The move is aimed at giving the bank leeway to divest more equity to public to raise capital to fund growth. The follow-on public offer of SBI is likely to come after the majority share transfer to the government.

Read the article in Business Standard.