News Flashes

Lender can now decide on change of company management

Lending banks or institutions representing over 70 percent of funded exposure to a unit will decide on the change of management of a company defaulting in its dues to lenders, according to a note prepared by the Reserve Bank of India (RBI). RBI has sought to prepare the ground rules for coordination between banks and financial institutions in consortium funding in the form of note. This note has been prepared based on the consensus arrived at following meetings of representative of financial institutions and banks. Banks and financial institutions have decided that in extreme cases, it may be worthwhile to effect change in management expeditiously, to create deterrents for the borrowing community. The note suggests chronic wilful default, loss of confidence in the management of a borrowing unit, non compliance with the time frame and quantum of committed contribution from the promoters and non-commencement of commercial production within one year from the date originally planned without assigning unavoidable reasons, as factors that could prompt a move to change management. Fraudulent actions and convictions under any law or any major penal action by a regulatory authority against the company management are also grounds to change management. RBI has identified the seven issues of common interest in projects jointly funded by banks and financial institutions. These include time-frame for the sanction of facilities; assets classification across consortium members, disciplining borrowers- change in management, levy of charges in problem accounts, group approach for borrowers, sharing of securities and cash flows and treatment of restructured accounts for assets classification purposes. Banks and FIs in the various meetings have arrived at consensus on the solution for all issues, except the treatment of restructured accounts for the purpose of asset classification. The proposed solutions have been circulated to banks and institutions in the form of a draft note. The note suggests time frames ranging from two months to 90 days, depending on the nature of the proposal, where lenders should convey their agreement or disagreement to sanction loans. SOURCE:ECONOMIC TIMES DATED 9TH MARCH,2001.

Panel to look into surveyors and loss assessors

The Insurance Development and Regulatory Authority (IRDA) has constituted the surveyors and Loss Assessors Committee. This is in keeping with the regulations relating to licencing and professionalising the body of surveyors, which was notified earlier. The IRDA, in an order issued last week named, prabodh Chander, officer onspecial duty at the IRDA; M.J Dhruv, surveyor and president of the Institute of Insurance Surveyors and Adjusters; N Velayutham, surveyors, Padmini, manager, National Insurance and Saikta Guha, Shanti Niketan, West Bengal as members of the Committee. In terms of the regulations notified by the IRDA, the committee would recommend the syllabus for examination and practical training requirement for persons to qualify as surveyors and loss assessors. For this purpose, the committee has been asked to co-ordinate with educational or other institutions, which have objectives similar to those of the profession of surveyors and loss assessors. The committee would also have the responsibility of improving and developing the status and standards of the profession of surveyors and loss assessors. This would mean that it would also have to look into the matters of professional misconduct, indscipline, and non-adherence to code of conduict by surveyors and loss assessors. According to the regulations issued by the IRDA surveyors will henceforth be licensed under three categories – A, B and C. The categorisation will be based on professional qualifications, training and experience. The regulations also provide for corporate licencing of surveyor firms. Earlier the IRDA had indicated that an independent Institute of Surveyors and Loss Adjusters would be developed in India, which would be in line with other professional institutes. The IRDA would also list them according to their specialistion so that consumers could choose make a choice. SOURCE : ECONOMIC TIMES DATED 9TH MARCH,2001

DCA willing, paychecks may swell

INDIA Inc may be given a freer hand to pay higher remuneration packages to its key personnel with the department of company affairs considering relaxation of certain provisions of the Companies Act, 1956 that places restrictions on the amount to be paid as salaries, perks and fees. The matter was before the government and a decision would be taken in the next few weeks, DCA sources said. Representatives of the industry as well as consultants may be invited to this meeting. Indian and multinational entities have been lobbying with the government for a removal of all restrictions on remuneration paid by profitable companies. Recently, a delegation of American businessmen had met law, justice and company affairs minister Arun Jaitley where the issue was taken up. Sources said the minister had assured the delegation that the government would look into the matter. Companies and business chambers have represented the government that the restrictions on remuneration were proving to be hurdle in attracting the best talent, local as well as expatriate. Under the Companies Act, profitable companies — public and subsidiaries of public companies — are allowed to pay a maximum of 11 per cent of their net profit in a financial year as managerial remuneration to directors and board level managerial personnel. The remuneration includes expenditure incurred by the company on perks such as rent-free accommodation, life insurance, pension, annuity, gratuity on the person concerned, spouse and children. However, this percentage does not include remuneration paid as fees to directors for attending board or committee meetings. The Companies Act further stipulates that remuneration paid to directors in whole-time employment of a company or a managing director may not be more than 5 per cent of the net profits without the prior permission of the DCA. If a company has more than one whole-time director, the total payout in the form of remuneration cannot exceed 10 per cent with prior clearance. Remuneration for part-time directors cannot exceed three per cent of the net profit. The Act states that a company can pay one per cent of net profit as remuneration to part time directors if the entity has a managing or a whole-time director. In other cases, it can go up to three per cent. The government had revised ceilings on remuneration paid by companies without adequate profit effective from March 2, 2000. Such companies were allowed to pay Rs 75,000 crore per month if it had an effective capital of Rs 1 crore. The limit for companies with an effective capital of more than Rs 1 crore but less than Rs 5 crore was raised to Rs 1 lakh, to Rs 1.25 lakh per month. Source : The Economic Times Dated : March 12, 2001

Two way fungibility only for those staying outside India

THE LEVEL-playing field created between Indian mutual funds and foreign institutional investors, in so far as investments in ADRs and GDRs of Indian companies listed overseas is concerned, has again been rendered uneven. Even as the Union Budget allows for conversion of ADRs and GDRs of Indian companies listed overseas into shares listed on the local stock exchanges and vice versa (two-way fungibility) subject to the overall size of the ADR/GDR issue not being exceeded, a recent RBI circular which lays down the modalities for such an exercise, allows two-way fungibility only for NRIs. This means that even those Indian MFs which have got permission from Sebi and RBI to invest in ADRs and GDRs, would not be allowed the benefits of two-way fungibility even though FIIs are allowed to do so. This is because MFs registered with Sebi are incorporated as trusts which are legal residents of India. Speaking to the Economic Times, senior Sebi officials said: "We will be taking up the matter of removal of this discrimination against MFs with the Reserve Bank of India." While conversion of ADRs/GDRs into underlying shares was allowed freely, the reverse process was not allowed. This had led to the queer situation of the ADRs/GDRs of some companies trading at a premium/discount to their domestic prices. By allowing for a two-way conversion, FIIs can now arbitrage between the two stockmarkets in cases where the premium or discount is substantial. Analysts feel that by disallowing MFs to do this, their investors are being denied the right to profit from such arbitration activity. So far the UTI, Prudential ICICI MF, Morgan Stanley MF, Reliance MF and Kothari Pioneer MF have been given permission to invest in overseas assets while a sixth Sun F&C MF has applied for the permission. Of the five fund houses, UTI has been granted permission for the highest possible amount of $50 million of investments, while others like Pru-ICICI have received approval for smaller amounts like $19.4 million. The ceiling for aggregate investments by all MFs abroad stands at $500 million. (Source: Economic Times dated 12th March,2001.)

NRIs may be allowed dividend repatriation

In a significant move which will make investment in India more attractive for non-resident Indians, the government has taken a positive view on conversion of non-repatriable shares held by NRIs into repatriable shares. Till now, the government has been taking a strict view on non-repatriable shares, not encouraging their conversion into repatriable shares since this would lead to outgo of foreign exchange. The Reserve Bank of India and Foreign Investment Promotion Board were following this norm strictly. A liberal view on this policy has been taken now following recent discussions over a proposal made by Cochin International Airport which runs India’s first greenfield airport project with private sector investments and public participation. The company has obtained permission, in a rare decision, from the FIPB to issue repatriable shares to NRIs who already hold non-repatriable shares and also to covert the non-repatriable shares into repatriable ones. The decision to relax the existing norms was made after detailed discussions and a similar policy would be followed in the case of similar proposals, officials said. Those holding repatriable shares are allowed to remit their dividends out of the country after payment of tax. Non-repatriable shares do not offer this facility. With the repatriation facilities, NRIs can also sell their shares if the norms under which they are issued do not prevent the sale. Liberalisation of the policy on conversion of non-repatriable NRI shares into repatriable shares will make the policy in this regard more attractive, officials feel. This will give more investors the confidence to pump in their money without worrying about repatriation. However, such proposals will be decided on case-to-case basis, depending on merits. This move, officials feel, will act as a safeguard to check flood of requests. Since the government has been according preference to non-repatriable shares, most NRI investments have been coming under this route. For example, in the Cochin International Airport case, the permission was was given after the civil aviation ministry argued that this was a infrastructure project which deserved this facility. Initially, the RBI had objected to the concession. Senior officials said the airport case came up for discussion since the company wanted to come up with a rights issue. The joint sector company’s initial equity capital of Rs 79 crore is being expanded through a rights issue which is expected to raise Rs 110 crore. The company said expansion of equity base was necessary since the company had borrowed Rs 210 crore to meet its project cost of Rs 320 crore and debt servicing was becoming difficult in view of insufficient revenue generation. Source : The Economic Times Dated : 5 March, 2001

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