Ernst & Young Issued "Guide on Doing Business in India"

E&Y, India has issued new guide on "Doing Business in India" and accepted India as the second most attractive destination for foreign investors.

Guide states that the Indian economy successfully weathered the global financial crisis, thereby proving its resilience and depth. This, along with the India's liberalized foreign exchange regime, has attracted large MNCs to invest in the country.

The study highlights that India is one of the most attractive destinations for FDI, only being second to China, which leads the chart. Some highlights of the report are as follows:

• FDI inflows in India from FY05 to FY11 has risen to 31.5%, reaching a figure of INR885 billion.
• The study suggests that the aerospace and defence industry is an emerging market in India, with the Indian military expected to spend roughly US$80 billion over the next four to five years. About 65–70% of India's defence requirement is imported from global aerospace and defence companies.
• Automotive is another profitable sector in India for foreign investors, as the barriers to entry into this segment are relatively low and setting up operations is fairly easy without the need for industrial licenses.
• Banking is another key sector where the aggregate limit for all foreign institutional investors (FIIs) is restricted to 24%, which can be raised to 49% with the approval of the board/general body.

SEBI Proposed Changes on Convertible Debt Securities in Rights/Bonus Issues, Preferential Allotment to Insurance Companies and Mutual Funds, SEBI (Mutual Fund) Regulations, 1996 and SEBI (Portfolio Managers) Regulations, 1993

 The SEBI Board met in New Delhi today and took the following decisions under PR No. 15/2012:

1.  Reservation to Holders of Convertible Debt Securities in Rights/Bonus Issues

On the issue of reservation to convertible debt holders in rights/bonus issues, it has been decided to clarify that reservation shall be available only to compulsorily convertible debt holders, since conversion in such cases is not at the option of the holders of these instruments.

2. Waiver of Certain Requirements Relating to  Preferential Allotment to Insurance Companies and Mutual Funds

It has been decided to exempt Insurance Companies and Mutual Funds which are broad based investment vehicles representing the interests of the public at large from the provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations relating to sale and lock-in of their pre-preferential shareholding in the issuer company. Presently, SEBI (ICDR) Regulations preclude companies from issuing preferential allotment to entities who have sold any of their holdings during the six month period prior to relevant date. Further, allottees in preferential allotment are required to lock-in their entire pre-preferential holdings for a period of six months from date of preferential allotment. The lock-in on shares allotted in preferential issue per se, however, would remain unchanged.

3.  Amendment to SEBI (Mutual Fund) Regulations, 1996

a. Amendment relating to Advertisement Code

• In order to provide flexibility to Asset Management Companies (AMCs) in issuing true and fair advertisements with meaningful disclosure to investors, the Sixth Schedule of SEBI (Mutual Fund) Regulations, 1996 and various circulars issued from time to time on Advertisement Code shall be amended and made principle based as far as possible.   
• AMCs shall be responsible for the accuracy, truthfulness, fairness of the advertisement.

• The definition of advertisement shall be broadened to include all forms of communication that may influence investment decisions of any investor.

b. Amendment relating to Investment Valuation Norms

In order to provide for fair valuation of securities/assets of Mutual Fund schemes, the following proposed changes in the SEBI (Mutual Fund) Regulations, 1996 are approved by the Board:

• AMC shall ensure fair treatment to all investors i.e. to existing investors as well as to investors seeking to purchase or redeem units of Mutual Funds at all point of time in all schemes.

• In case debt and money market securities are not traded on a particular valuation day then valuation through amortization basis shall be restricted to securities having residual maturity of upto 60 days (currently 91 days), provided such valuation shall be reflective of the realizable value/ fair value of the securities.

4.  Amendment to SEBI (Portfolio Managers) Regulations, 1993

The Board decided to amend the SEBI (Portfolio Managers) Regulations, 1993 to give effect, inter alia,  to the following:

• To enhance the minimum investment amount per client from Rs.5 lakh to Rs.25 lakh

• To ensure segregation of holdings in individual demat accounts in respect of unlisted securities also

The proposed amendment would be applicable on prospective basis for new clients and for fresh investments by existing clients.

DFSA Enters Into Statement of Protocol With US Audit Regulator

The Dubai Financial Services Authority (DFSA), recently, entered into a Statement of Protocol with the Public Company Accounting Oversight Board (PCAOB).

The agreement was signed on behalf of the DFSA by the Chief Executive, Mr Paul M Koster, and the Chairman of the PCAOB, Mr James R Doty, during a visit by Mr Koster to Washington DC. DFSA Board Member, Dr J Andrew Spindler, was also present at the signing.

Mr Paul M Koster, Chief Executive of the DFSA, said: “The DFSA is very pleased to have concluded this statement of protocol with the PCAOB, the United States (US) agency responsible for federal oversight of the audits of public companies. The ability of audit regulators to co-operate and share information is critical in the current environment when the need to protect investors and the public interest has never been more important. There are eight US regulated Firms in the DIFC and the PCAOB already conducts audits jointly with the DFSA, this agreement facilitates the sharing of information.”

“This is, in fact, the first bi-lateral agreement the DFSA has established with an audit regulator following the change to the Dubai International Financial Centre’s Regulatory law, which allows such co-operation.  As fellow members of the International Federation of Independent Audit Regulators, the DFSA and the PCAOB are committed to developing and implementing international standards, among them supporting co-operation between regulators and promoting greater consistency of audit oversight.”

Mr Koster added: “This initiative also extends the DFSA’s collegiate links with regulators in the US. The DFSA already has a Memorandum of Understanding with the Commodity Futures Trading Commission and with the four federal banking supervisors, as well as other US regulators in the context of our multi-lateral arrangements.”

When the PCAOB announced its approval of this agreement in December, Mr Doty said: “For many years the DFSA has been a valued partner as the PCAOB has sought to ensure effective cross-border audit oversight. We are pleased that this agreement will allow us to exchange confidential information, which will enhance the strong co-operative relationship that already exists." 

Please see official letter.

FSA has issued Discussion Paper on "Implementation of the Alternative Investment Fund Managers Directive"

Financial Services Authority (FSA), capital market regulator in United Kingdom published first discussion paper on "Implementation of the Alternative Investment Fund Managers Directive" in process to initiate coherent between EU directives and regulation of Alternative Investment Fund (AIF) industry in the country.

This Discussion paper (DP) to set out some provisional thinking in approach to implementing the European Union Alternative Investment Fund Managers Directive (the Directive or AIFMD) in the UK.

Objectives of the DP

This DP has two folds objective:

i) Development of well-informed, proportionate and effective regulatory policy on alternative investment fund managers (AIFMs); and

ii) Assisting stakeholders towards ‘AIFMD-readiness’,and establish regulatory changes in UK in line of the EU directive.

EU Directive on AIFM's

The European Union Directive on Alternative Investment Manager was published in the Official Journal of the European Union on 1 July 2011. EU Member States, such as the UK, are required to transpose the Directive by 22 July 2013.
The Directive is one of several pieces of EU and domestic regulation that firms, especially fund managers, will need to consider over the next 18 months. The EU Directive forms part of a legislative programme put forward by the Commission to ‘extend appropriate regulation and oversight to all actors and activities that embed significant risks’.

The goals for the Directive were to:
• establish a secure, harmonised EU framework for monitoring and supervising the risks that AIFMs pose to their investors, counterparties and other financial market participants and to financial stability; and
• permit, subject to compliance with strict requirements, AIFMs to provide services and market their funds across the internal market.

Meaning of Alternative Investment Fund (AIF)

There is no simple definition of an Alternative Investment Fund. In summary, Alternative Investment Funds are defined by their characteristics, including: a nontraditional strategy, a focus on risk rather than reward: reduced correlation to traditional markets and some form of performance based fee structure.

The EU Directive contains a fairly broad legal definition of an AIF which seeks to capture any investment fund which does not require authorisation under the UCITS Directive. The Directive also specifies a number of additional elements in the definition, including (i) the raising of capital from (ii) a number of investors (iii) with a view to investing that capital in accordance with a defined investment policy (iv) for the benefit of those investors.

Potential AIFs in UK

Present DP expects the AIF population to be diverse, which in turn would mean that there will be a diverse population of AIFMs. As an illustrative starting point, we expect that some, or all, of the following, may be considered UK AIFs:

• hedge funds, hedge funds of funds;
• private equity and venture capital funds;
• property funds;
• investment trusts;
• Real Estate Investment Trusts (REITs);
• FSA-authorised non-UCITS funds including Non-UCITS Retail Schemes (NURS), Funds of Alternative Investment Funds (FAIFs) and Qualified Investor Schemes (QIS);
• charity funds (these are distinct from social funds which are currently the subject of a Commission proposal for regulation);
• commodity funds; and
• infrastructure funds.

The Financial Services Authority invites comments on this Discussion Paper. Comments should reach us by 23 March 2012.
Comments may be sent by electronic submission using the form on the FSA’s website at: www.fsa.gov.uk/Pages/Library/Policy/DP/2012/dp12_01_response.shtml.

FSC, Mauritius New "Guide to Global Business"

Financial Services Commission (FSC), capital market regulator in Mauritius has come up with updated "Guide to Global Business" dated on January 25, 2012.

The main objectives of this guide are to:

• provide guidance to investors and service providers;
• remove bottlenecks to the application process;
• strengthen the continuous and efficient collaboration between the FSC and Management Companies; and
• contribute to enhancing the competitiveness of Mauritius as an international financial centre of substance and as a preferred destination for starting a business.

SEBI circular on Eligibility criteria for Qualified Depository Participant

Securities Exchange Board of India (SEBI) in process to streamline QFI regime, present circular CIR/ IMD/ FII&C/ 4/ 2012 dated January 25, 2012 has laid down additional eligibility criteria for Qualified Depository Participant (QDP).

Vide SEBI circulars Cir/IMD/DF/14/2011 and Cir/IMD/FII&C/3/2012 dated August 09, 2011 and January 13, 2012 respectively, Qualified Foreign Investors (QFI) were allowed to invest in schemes of Indian mutual funds and Indian equity shares subject to terms and conditions mentioned therein, including opening a demat account with qualified Depository Participant. The eligibility criteria for a SEBI registered Depository Participant (DP) to act as qualified Depository Participant were provided in the aforementioned circulars.

SEBI states following eligibility criteria for become QDP:

• QDP shall have net worth of Rs. 50 crore or more;
• QDP shall be either a clearing bank or clearing member of any of the clearing corporations;
• QDP shall have appropriate arrangements for receipt and remittance of money with a designated Authorised Dealer (AD) Category - I bank;
• QDP shall demonstrate that it has systems and procedures to comply with the FATF Standards, Prevention of Money Laundering (PML) Act, Rules and SEBI circulars issued from time to time; and
• QDP shall obtain prior approval of SEBI before commencing the activities relating to opening of accounts of QFI.

Present circular in order to maintain consistency in the maximum retention period of QFI’s fund in the single rupee pool bank account for investments/ re-investment out of redemption or dividend in schemes of Indian mutual funds vis-à-vis equity shares, laid down following time line for QDP:

• the maximum retention period of QFI’s funds in the single rupee pooled account with the QDP stands revised to five working days (including the date of receipt of foreign inward remittance through normal banking channels from the designated overseas bank account of the QFI into the single rupee pool bank account) for both investment as well as re-investment out of redemption proceeds in schemes of Indian mutual funds; and
• to allow credit of dividend payments to QFIs on account of investment in schemes of Indian mutual funds held by them to the single rupee pool bank account subject to the condition that in case dividend payments are credited to the single rupee pool bank account, they shall be remitted to the designated overseas bank accounts of the QFIs within five working days (including the day of credit of such funds to the single rupee pool bank account). Within these five working days, the dividend payments can be also utilized for fresh purchases in schemes of Indian mutual funds, if so instructed by the QFI.

Reserve Bank of India: New Master Circular on External Commercial Borrowings and Trade Credits

Reserve bank of India (RBI) issued Master circular no. RBI/2011-12/ 356, consolidates the existing instructions on the subject of "External Commercial Borrowings (ECB) and Trade Credits" at one place revised upto January 05, 2012.

Typically,  ECB is one of the method allowed by RBI to access funds from abroad. ECB refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years.

RBI has allowed ECB under two routes, viz., (i) Automatic Route and (ii) Approval Route. Automatic Route allows Indian company to have external borrowing without any prior permission of RBI, however certain reporting obligations will always be on Indian borrower and RBI has categorized automatic route based on Industries and cap of external borrowing. Approval route is for more bigger and sensitive sectors in the light of economy sustainability, where borrower requires prior approval of RBI before initiating any ECB process.

In present Master circular, RBI has widely covered issues related to ECB and Trade credits and provided comprehensive document with inclusion of all circulars related to the subject issued by RBI.

SEBI Circular On Call Auction in Pre-open session for Initial Public Offering (IPO)

SEBI, vide circular no. CIR/MRD/DP/21/2010 dated July 15, 2010 introduced Call Auction in Pre-open session (hereinafter referred to as “pre-open session”) for the scrips forming part of Sensex and Nifty. Further, SEBI, vide circular no. CIR/MRD/DP/32/2010 dated September 17, 2010 and vide letter dated September 17, 2010 provided clarification with regard to order matching and order level risk management.

In continuation to the above, it has been decided to extend Call Auction mechanism to IPOs and scrips as defined under para 1(c) of SEBI circular no. SEBI/Cir/ISD/1/2010 dated September 2, 2010 (hereinafter referred to as Re-listed Scrips).

In present circular CIR/MRD/DP/ 01/2012 dated January 20, 2012 SEBI has laid down additional operation conditions of Call Auction mechanism to IPOs on the first day of trading/ re-commencement of trading, which shall be applied with earlier circular of SEBI on the same issue.

Vodafone Judgment: Supreme Court of India Allows company Appeal

"PRAISE be to the Indian legal system! Businessmen do not say that very often but Vittorio Colao, the boss of Vodafone, mayhave uttered something along those lines on January 20^th after the firm’s four and a half year odyssey through the Indian courts came to end".1

Supreme Court of India (SC), an apex court of the territory has allowed Vodafone appeal in CIVIL APPEAL NO.733 OF 2012 (arising out of S.L.P. (C) No. 26529 of 2010) Vodafone International Holdings B.V.  versus Union of India & Anr. , and the Supreme Court inter alia rejecting the Revenue’s “extinguishment” argument of liability of tax evasion on the company under process of buying shares of CGP Investments (Holdings) Ltd. by Vodafone International Holdings BV.

SC has laid down a comprehensive precedent on process of Offshore transaction which are directly or indirectly related to India. We shall come up with detailed micro analysis of this judgment in couple of days.

Footnote 

1.  http://www.economist.com/blogs/schumpeter/2012/01/vodafone-india

New Circular of FSC, Mauritius on Limited Partnership Structure

Financial Services Commission (FSC), capital market regulator has come up with CIRCULAR LETTER - CL200112 on the requirements for Limited Partnerships applying for a Category 1 Global Business Licence (“GBC1 licence”) pursuant to section 71 of the Financial Services Act 2007 (the “FSA”).

The Financial Services Commission (the “Commission”) is issuing this Circular Letter following the enactment of the Limited Partnerships Act 2011 (the “LPA”).

FSC Circular has cleared following issues of structuring LP as a GBC 1 in Mauritius:

Registered Agent 

According to Section 2 of the LPA, registered agent includes a Management Company, where the Limited Partnership holds a GBC1 licence.
In this respect, the Commission shall require that a Limited Partnership holding a GBC1 licence, maintains at all times, a Management Company as its registered agent.

Conduct of Global Business

In considering the application, FSC shall ensure the principal of "Conduct of business being managed or controlled from Mauritius or not".

Ensuring above principle, FSC shall look into following conditions in relation to a Limited Partnership applying for a GBC1 licence, the FSC shall have regard to whether -
(a) at least one Partner of the Limited Partnership is:
(i) resident in Mauritius, where the partner is a natural person; or
(ii) incorporated, formed or registered under the laws of Mauritius, where the partner is not a natural person;
(b) the Registered Agent of the Limited Partnership is resident in Mauritius;
(c) the Limited Partnership will maintain or maintains at all times its principal bank account in Mauritius;
(d) the Limited Partnership will keep and maintain or keeps and maintains, at all times, its accounting records at its registered office in Mauritius; and
(e) the Limited Partnership prepares or proposes to prepare its statutory financial statements and causes or proposes to have such financial statements to be audited in Mauritius.

CDD Requirements for Limited Partnerships

Management Companies have the obligation to undertake effective customer due diligence (CDD) measures, and risk profiling procedures when establishing business relationships and throughout such relationships (the obligation being a continuing one).

Submission of Documents

When a Limited Partnership is applying for a GBC1 licence, the Management Company must submit the following documents to the Commission:
(a) the Partnership Agreement;
(b) CDD Documents on the General Partners, and CDD documents on the significant1 Limited Partners of the Limited Partnership;
(c) documents as provided under Rule 12 of the Financial Services (Consolidated Licensing and Fees) Rules 2008; and
(d) any other documents as may be required by the Commission.

In addition, where the Limited Partnership holds another Licence2 under any of the relevant Acts, it shall comply with the requirements set out in the respective relevant Acts.

Liberalization of Foriegn Direct Investment Policy in Single Brand Trading in India

In process to accelerate liberalization policy in retail market, govt. of India has reviewed FDI policy in single brand trading in Press Note no. 1/2012.

As per existing FDI policy, foreign players were allow to have investment in India under 51% cap, which has been revised under first press note of DIPP and now 100% FDI allowed in single brand trading market in India.

However, present press note has laid down following conditions for proposed door of FDI in single brand trading:

(a) Products to be sold should be of a 'Single Brand' only.
(b) Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.
(c) 'Single Brand' product-retail trading would cover only products which are branded during manufacturing.
(d) The foreign investor should be the owner of the brand.
(e) In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian 'small industries/ village and cottage industries, artisans and craftsmen'. 'Small industries' would be defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. The compliance of this condition will be ensured through self-certification by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts, which the company will be required to maintain.

This new step has definitely being a commendable step of govt. of India and participation of small industry in brand marketing can lead for more sustainable structure in long run.

Tough Indian Court Stands towards Facebook and Google: Issue Objectionable Content

Delhi High Court, last week started hearing of posting "objectionable contents" on social websites like Facebook and Google. Indian Court has taken a toughen stand on present issue and warned Facebook and Google and extended their views "like china, we will block all such sites".

However, this case has gone beyond Information Technology Act, and added public values of social website. This case is still pending with Delhi High Court and final judgment shall definitely lay down an emphatic precedent for social websites in India.

Business Standard Article.

New Disclosure Regime of SEBI for Merchant Bankers

In process to protect interests of investors and encourage comprehensive disclosure regime of Initial Public Offering, Indian Capital Market Regulator 'SEBI' has issued new circular "Disclosure of Track Record of the public issues managed by Merchant Bankers".

This additional step has come from SEBI, at the time when Indian equity market is affected by global recession and performance of IPO's gone down significantly.

SEBI has added additional disclosure requirements for Merchant Bankers, who play a very crucial role in Initial Public Offering. Circular has laid down two broader disclosure regime for merchant bankers:
- disclose the track record of the performance of the public issues managed by merchant banker; and
- to channelize due diligence process of merchant bankers in light of post issue performance.

SEBI Circular: http://www.sebi.gov.in/sebiweb/home/list/1/7/0/0/Circulars

Circular Related to Investment by QFI's In India Equity Shares Market

Furtherance to the Central Government, vide press release dated January 1, 2012 has announced its decision to allow QFIs to directly invest in Indian equity, in order to widen the class of investors, attract more foreign funds, reduce market volatility and to deepen the Indian capital market, SEBI and RBI has issued circulars to streamline operation of the investment in equity markets by QFI's.

With checks on KYC and ultimate beneficial ownership issues, like for Mutual funds, regulators has opened an additional doors along with FII route. However, present step of Govt. of India and India regulator needs to be more refined and required comprehensive changes in other laws, to avid conflict between existing laws and QFI route regulations.

SEBI Circular: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1326453304731.pdf
RBI Circular: http://rbidocs.rbi.org.in/rdocs/Notification/PDFs/APD130112FS.pdf

New Opening Doors to Invest in Indian Stock Market for Foreign Investors

New year 2012 has come with some good news for Indian stock markets and off course for foreign investors. The process of liberalization which was initiated through last year QFI Regulations has stepped into next phase, where govt. of India shall allow QFI to invest directly in Indian stock markets.
As per Aug 2011 SEBI regulation on "QFI Investment in Indian Mutual Funds", Qualified Foreign Investors (QFI) can invest in Indian Mutual Funds Scheme directly through process laid down by the SEBI and RBI.
However, technically above regulation is not for all foreign investors and it is restricted to QFI's only, which has certain conditions stated by SEBI.
Now, Govt. in extension of logical process of liberalization in Indian capital market, has officially announced to opening up stock market to QFI also. Formal regulation of SEBI is still awaited.

Please read Article:
http://timesofindia.indiatimes.com/business/india-business/Foreigners-can-now-invest-directly-in-Indian-stocks/articleshow/11331706.cms