India – Corporate And Commercial Updates – December 2019.

Databank of Independent Directors

 

The Ministry of Corporate Affairs, on December 2, 2019, issued a press release “Launch of Independent Director's Databank”. This Databank is a pioneering initiative of the Ministry to provide an easy to access platform for the registration of existing Independent Directors as well as individuals aspiring to become independent directors. Companies may also register themselves with the databank in order to search, select and connect with individuals who possess the right skills for being appointed as an Independent Director. The Databank portal shall be maintained by the Indian Institute for Corporate Affairs (IICA). As per the notified rules, all existing Independent Directors are required to register themselves in the databank within 3 months from 01 December 2019.

 

Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019

 

The Ministry of Corporate Affairs issued Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 vide its notification dated November 18, 2019. The limits prescribed under Rule 15 sub rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 for the purpose of prior shareholders' approval in related party transactions have been revised. SEBI issues guidelines on InvIT and REIT.

 

On November 27, 2019, SEBI released two simultaneous circulars whereby it has issued guidelines on the following subjects respectively:

 

1. (a)  Guidelines for preferential issue of units and institutional placement of units by a listed Infrastructure Investment Trust (“InvIT”); and

2. (b)  Guidelines for preferential issue of units and institutional placement of units by a listed Real Estate Investment Trust (“REIT”).

 

In terms of the afore mentioned guidelines, SEBI has detailed the manner of issuance of units under preferential issue as well as institutional placement by listed REIT's and InvIT's and prescribed a lock-in period for making subsequent allotments as well.

 

Further, in the event REIT and InvIT fail to list the units within the specified time, the money that has been received will need to be refunded within 20 days from the date of the allotment. If such money is not repaid within the stipulated time, the REIT and InvIT and its manager or director or partner who is an officer in default shall be jointly liable to repay that money along with an annual interest rate of 15 per cent (15%).

 

Disclosuresbylistedentitiesofdefaultson payment of interest/repaymentofprincipalamountonloans from banks / financial institutions and unlisted debt securitiesIdentification and flagging of Disqualified Directors u/s 164(2)(a) of the Companies Act, 2013

 

On November 21, 2019, SEBI issued a circular in relation to disclosures by listed entities of defaults on payment of interest/ repayment of principal amount on loans from banks / financial institutions and unlisted debt securities. Many banks and financial institutions are presently under considerable stress on account of large loans to the corporate sector turning into stressed assets / Non- performing Assets (NPAs). Some companies have also been taken up for initiation of insolvency and bankruptcy proceedings.

 

In order to address this critical gap intheavailability of informationtoinvestors,SEBIhas directed listed entities to comply with the requirements of this circular, such as:

 

(a) The circular shall be applicable to all listed entities which have listed any of the following: specified securities (equity and convertible securities), Non- Convertible Debt (NCDs), Non-Convertible Redeemable Preference Shares(NCRPS).

 

(b)The disclosures shall be made to the stock exchanges whenthe entity hasdefaultedinpaymentof interest / instalment obligations on loans, including revolving facilities like cash credit, from banks /financial institutions and unlisted debt securities

 

(c) To begin with, listed entities shall make disclosure of any defaulton loans,includingrevolvingfacilitieslike cash credit, from banks /financial institutions which continues beyond 30 days. Such disclosure shall be made promptly, but not later than 24 hours from the 30th day of such default.

 

(d) In case of unlisted debt securities i.e. NCDs and NCRPS, the disclosure shall be made promptly but not later than24 hours from the occurrence of the default. This is in line with the existing disclosure requirements specified for listed debt instruments. Disclosures shall be made in the format(s) specified.

 

Regulatory authority for dealing with insolvency proceedings for Non-banking Finance Companies

 

On November 18, 2019, the MCA has issued a Notification on “Non-banking Finance Companies”. The Notification states that RBI shall be the appropriate regulatory authority for dealing with insolvency resolution and liquidation proceedings in relation to “Non-banking Finance Companies” (which include housing finance companies) with asset size of INR 500 crore or more, as per last audited balance sheet. The insolvency resolution and liquidation proceedings shall be undertaken in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 read with the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 and the applicable Regulations. 

Qualifying Assets Criteria for Non-Banking Financial Companies-Micro Finance Institutions (NBFC-MFIs) – Review of Limits

On November 8, 2019, RBI, taking into consideration the important role played by MFIs in delivering credit to those in the bottom of the economic pyramid and to enable them play their assigned role in a growing economy, decided to increase the household income limits for borrowers of NBFC-MFIs from the current level of INR 1,00,000 for rural areas and INR 1,60,000 for urban/semi urban areas to INR 1,25,000 and INR 2,00,000 respectively. Further, the limit on total indebtedness of the borrower has been increased from INR 1,00,000 to INR 1,25,000. In light of the revision to the limit on total indebtedness, the limits on disbursal of loans have been raised from INR 60,000 for the first cycle and INR 1,00,000 for the subsequent cycles to INR 75,000 and INR 1,25,000 respectively. These instructions shall come into effect from the date of this circular.

 

Operational Guidelines for FPIs & DDPs under SEBI (Foreign Portfolio Investors), Regulations 2019 and for Eligible Foreign Investors

 

On November 5, 2019, the Securities Exchange Board of India (“SEBI”) issued the consolidated operational guidelines (“Operational Guidelines”) for foreign portfolio investors (FPIs) and Designated Depository Participants (DDPs) are issued to facilitate implementation of SEBI (Foreign Portfolio Investors) Regulations, 2019 (“the Regulations”). The existing Circulars, FAQs, operating guidelines, other guidance issued by SEBI, shall hereafter stand withdrawn with the issue of these Operational Guidelines. With respect to the directions or other guidance issued by SEBI, as specifically applicable to FPIs, shall continue to remain in force. The intent behind this is that the Regulations were notified and came into force with effect from September 23, 2019 and in order to operationalise the Regulations, SEBI decided to issue necessary guidance to ensure efficient transition from SEBI (Foreign Portfolio Investors) Regulations, 2014.

 

Liquidity Risk Management Framework for Non- Banking Financial Companies and Core Investment Companies

 

On November 4, 2019, RBI issued the revised Liquidity Risk Management Framework for Non-Banking Financial Companies (“NBFCs”). In order to strengthen and raise the standard of the Asset Liability Management (ALM) framework applicable to NBFCs, RBI decided to revise the extant guidelines on liquidity risk management for NBFCs. All non- deposit taking NBFCs with asset size of INR 100 crore and above, systemically important Core Investment Companies and all deposit taking NBFCs irrespective of their asset size, shall adhere to the set of liquidity risk management guidelines. However, these guidelines will not apply to Type 1 NBFC-NDs, Non-Operating Financial Holding Companies and Standalone Primary Dealers. It will be the responsibility of the Board of each NBFC to ensure that the guidelines are adhered to. The internal controls required to be put in place by NBFCs as per these guidelines shall be subject to supervisory review. Further, as a matter of prudence, all other NBFCs are also encouraged to adopt these guidelines on liquidity risk management on voluntary basis. While some of the current regulatory prescriptions applicable to NBFCs on ALM framework have been recast in the circular, a few additional features including disclosure standards have also been introduced.

 

Guidelines on Compensation of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers and Control Function staff

 

On November 4, 2019, the Reserve Bank of India (“RBI”) issued revised “Guidelines on Compensation of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers and Control Function staff”. The compensation practices, especially of large financial institutions, were one of the important factors which contributed to the global financial crisis in 2008. Employees were often rewarded for increasing short-term profit without adequate recognition of the risks and long-term consequences that their activities posed to the organisations. In the wake of financial crisis, in order to address the issues in a coordinated manner across jurisdictions, the Financial Stability Forum (later the Financial Stability Board i.e. FSB) brought out a set of Principles (FSF Principles for Sound Compensation Practices, dated April 2, 2009) and Implementation Standards (FSB Principles for Sound Compensation Practices – Implementation Standards, dated September 25, 2009) on sound compensation practices. These principles are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes.

 

Taking into account these documents, the RBI issued the Guidelines on compensation on January 13, 2012, applicable to Whole Time Directors / Chief Executive Officers / Risk Takers and Control Function Staff, etc. for implementation by private sector and foreign banks from the financial year 2012-13. These Guidelines have since then been reviewed based on experience gained and evolving international best practices. The objective has also been to better align these Guidelines with FSB Principles and Implementation Standards for Sound Compensation Practices and the Supplementary Guidance issued by FSB in March 2018 on the use of compensation tools to address misconduct risk. Consequently, the final updated Guidelines, taking into consideration the responses received, have now been issued and are annexed to the circular. The final Guidelines (as annexed with the notification) will be applicable for pay cycles beginning from/after April 1, 2020.