Restrictions on Redemption of IDRs

On the basis of prevalent regulations, Standard Chartered Bank issued Indian Depository Receipts (IDRs) last year with the offer document stating that IDRs would be convertible into equity shares by way of redemption one year after the issue subject to the approval of the Reserve Bank of India (RBI) on a case-by-case basis. However, one year after the IDR offering, SEBI has issued a new circular on June 3, 2011providing that “redemption of the IDRs shall be permitted only if the IDRs are infrequently traded on the stock exchange(s) in India.” This imposes a significant restriction on redemption of IDRs that was previously not anticipated, and hence appears as a change to the legal regime that further restricts the viability of IDR issuances in the Indian markets.

A report in the Business Standard highlights the consequences of SEBI’s decision:

The annualised trading volume in Standard Chartered’s IDRs over the last six months was 48.5 per cent of the total IDR issue. So, there will be no redemption. Sebi’s move has hurt investors, as they lost an arbitrage opportunity of converting the IDR into underlying shares and selling it in global markets.

This announcement is not in the interest of future IDR issuances. Some even say foreign companies would find it difficult to attract investors because of the limited exit route.

The rationale for the decision to restrict redemption to illiquid IDRs is yet unclear.

Public Financial Institutions under Section 4A of the Companies Act, 1956: MCA Circular

(This post is contributed by Vaibhav Modi)

Section 4A of the Companies Act, 1956 (the “Act”) lays down what institutions shall be regarded as public financial institutions for the purposes of the Act. Section 4A(2) empowers the central government to specify other institutions as a public financial institution by a gazetted notification. This sub-section is 4A(2) has a proviso which lays down the following criteria for an ‘institution’ to be specified as a public financial institution by the central government:

(i)     the institution should have been established/constituted by or under any Central Act, or,

(ii)     not less than fifty-one percent of the paid up share capital of such institution must be held or controlled by the central government.

The Ministry of Corporate Affairs vide a circular dated 2 June 2011 has prescribed some additional conditions for an institution to be declared as a Public Financial Institution under Section 4A of the Act. These additional conditions are produced below from the said circular:

(a)  A company or corporation should be established under a special Act or the companies Act being Central Act;

(b)  Main business of the company should be industrial/infrastructural financing;

(c)  The company must be in existence for at least 3 years and their financial statement should show that their income from industrial/infrastructural financing exceeds 50% of their income;

(d)  The net-worth of the company should be Rs. one thousand crore;

(e)  Company is registered as Infrastructure Finance Company (IFC) with RBI or as an Housing Finance Company (HFC) with National Housing Bank;

(f)   In the case of CPSUs/SPSUs, no restriction shall apply with respect to financing specific sector(s) and net-worth.

Henceforth, for any financial institution to be declared as a public financial institution, it will have to fulfill these additional conditions, apart from the requirements under the proviso to Section 4A(2) of the Act. These additional conditions inter alia prescribe that a financial institution to be declared as a public financial institution must be having industrial/infrastructural financing as its main business and having a net worth of Rs. 1000 crores.

While the Act uses the word ‘institution’ in the proviso to Section 4A(2), the circular uses the word ‘company’ in the conditions (a) to (e). The wording of condition (a) above appears to be confusing and suggestive of the first criteria under the proviso to Section 4A(2) of the Act.

The use of the phrase ‘special Act’ in condition (a) may also be interpreted to be a ‘special Act’ of a state legislature, for it is not clear if the qualification in the later part ‘being central Act’ applies to the phrase ‘special Act’.  This further gains support from
condition (f) which exempts a state public sector undertaking (and also a central public sector undertaking) from conditions on financing specific sectors and net worth, thereby indicating that a state public sector undertaking can be a public financial institution.

- Vaibhav Modi

Academic Analysis of CSR in India

Although there has been a signficiant amount of discussion about corporate social responsibility (CSR) in India, there has been little academic analysis of the concept. A new paper titled Directors as Trustees of the Nation? India’s Corporate Governance and Corporate Social Responsibility Reform Efforts by Professor Afra Afsharipour fills this gap. Interestingly, it also considers the crucial interplay between corporate governance and CSR. The abstract is as follows:

Corporate law in India has been fundamentally transformed since the early 1990s. In conjunction with significant economic liberalization, the Indian government has introduced a series of corporate law reforms aimed, in part, at creating a system of transparent, ethical, and accountable corporate functioning. Early reforms sought to implement rules and practices that addressed traditional corporate governance concerns, in other words the relationship between firm managers and shareholders and the relationship among different groups of shareholders, particularly majority and minority shareholders. More recently, not only has the Indian government implemented laws to address corporate governance matters, but it has also started addressing the corporate social responsibility (CSR) area.

This Article argues that the Indian government’s corporate governance and CSR efforts, while laudable in some respects, are problematic in their approach to the governance of Indian companies and reflect a view of the ownership and governance of Indian companies that does not necessarily address the fundamental governance issues that arise in Indian firms. India’s proposed corporate law reforms suggest imposition of detailed corporate governance rules without necessarily assisting directors in addressing the majority–minority agency problems of controlled companies. Moreover, India’s proposed CSR guidelines may further hamper independent directors and exacerbate some of the problems that this Article discusses with respect to majority–minority agency costs.

CA firms with LLPs can now act as statutory auditors

(The following post is contributed by Rohan Bagai)

A limited liability partnership (LLP) of chartered accountants (CAs) can now act as a statutory auditor of a company notwithstanding Section 226 (3) (a) of the Companies Act, 1956, which stipulates that a ‘body corporate’ is disqualified from such an appointment.

In this regard, the Ministry of Corporate Affairs (MCA) has recently issued a clarification vide General Circular No. 30A/2011 that detaches LLPs of CAs from the definition of ‘body corporate' for the limited purpose of Section 226(3) (a) of the Companies Act.

The release comes pursuant to representations from the Institute of Chartered Accountants of India (ICAI) to the MCA wherein ICAI had submitted that an LLP of CAs being a ‘body corporate’ under Section 3 (1) of the Limited Liability Partnership Act, 2006 would not be qualified for appointment as auditor by a company.

This Government move is sure to trigger conversion of CA firms into LLPs by seeking to address the limit on the number of partners (which is presently restricted to a maximum of 20 partners under the Partnership Act, 1932). More so, this would enable these firms to form multidisciplinary LLPs with cost and works accountants, company secretaries, lawyers as well as chartered engineers whilst suitable amendments are being carried out in the legislations governing their regulators like the ICAI, the Institute of Company Secretaries of India (ICSI) and the Institute of Cost and Works Accountants of India (ICWAI).

- Rohan Bagai