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Business Restructuring:Stock Brokers
- Anup P. Shah13th March, 2011
2 Days Conference @ Hotel Sea Princess
Scope of Discussion
� Corporatisation of Firms
� Slump / Asset Sale
� Part IX Conversion / LLP
Conversion
� Stamp Duty issues
� Demerger
� Takeover of Cos.
� FDI
� Sectoral Caps for NBF
Sector
© PRAVIN P. SHAH & CO. 2
� Mergers
� Key issues
� Reverse Merger
� Cross-border M&A
� Stamp Duty
Corporatisation – Alternatives
� Firms can be converted into Company / LLP:
� Slump / Asset Sale by Firm to Co.
� Slump / Asset Sale by Firm to LLP
� Conversion of Firm into Co. under Part IX
© PRAVIN P. SHAH & CO. 4
� Conversion of Firm into LLP under LLP Act
Corporatisation by Sale
Shareholders / Partners
© PRAVIN P. SHAH & CO. 5
Firm Co. / LLPSlump / Asset Sale of Bus.
Corporatisation by Sale
� Slump Sales or Asset Sales
� No Court process
� Quick
� Factors to be considered
© PRAVIN P. SHAH & CO. 6
� Factors to be considered
� Capital Gains
� Stamp Duty
� VAT
Tax Consequences
� Slump Sale to Co. / LLP
� Lump sum consideration – No itemised break-up
� Excess of SC over Networth = LTCG / STCG
� Gains Taxable u/s. 45 r.w. s.50B
© PRAVIN P. SHAH & CO. 7
� Itemised Sale to Co. / LLP
� Itemised Break-up over A&L
� Gains Taxable:
�
Tax Exemption
� Exemption for Slump / Itemised Sale to Co.:
� S.47(xiii) Conditions
� All A / L of Firm / AOP become that of Co.
� All Partners become SHs in same proportion
© PRAVIN P. SHAH & CO. 8
� Partners do not receive any other consideration
� SH of all Partners is at least 50% of Voting Power
� 50% SH of Partners continues for 5 years
� Exemption N.A. if Sale to LLP
Tax Exemption
� Analysis of s. 47(xiii):
� Can it be a New Co.?
� Firm can trf 2 Businesses to 2 Cos.?
� Only Business A/L to be trd?
Can RPS be issued to partners?
© PRAVIN P. SHAH & CO. 9
� Can RPS be issued to partners?
� Shares can be issued at a Premium?
� Transfer inter se Partners permissible in 5 years?
� If conditions violated
Transfer of Actionable Claims
� Actionable Claims :
� Claim to any debt which is not secured or
� Beneficial Interest in movable property
� E.g., : Loans, Right under a Contract
© PRAVIN P. SHAH & CO. 10
� E.g., : Loans, Right under a Contract
� S.130 of TP Act : Actionable Claims can be
transferred only by written document
� Stamp Duty?
Stamp Duty
� Slump Sale / Assets Sale
� Conveyance under BSA & ISA
� Bifurcate assets into Immovable & Movable
Bifurcation for SD purposes negates IT
© PRAVIN P. SHAH & CO. 11
� Bifurcation for SD purposes negates IT
Benefit?
� Under BSA - SD on Movables
� Under BSA - SD on Immovables
Stamp Duty
� Slump Sale
� Sale of Undertaking as a Going Concern
� SD on:
Net Market Value of Undertaking; OR
© PRAVIN P. SHAH & CO. 12
� Net Market Value of Undertaking; OR
� Gross Value of Assets
Stamp Duty
� Slump Sale / Asset Sale
� Under ISA : No SD if transfer:
� between Transferor Co. owning at least 90% of
Transferee Co. or
© PRAVIN P. SHAH & CO. 13
Transferee Co. or
� between Parent Co. & min. 90% Subsidiary or
� Two 90% Subsidiaries of one Parent Co.
� Applicable in Mumbai?
Indirect Taxes – Slump Sale
� VAT – Applicable?
� Sale of Bus. Undertaking = Movable Goods?
� Lump sum consideration
� Is it a sale in course of Business?
© PRAVIN P. SHAH & CO. 14
� Service Tax / CENVAT
� Trf. of CENVAT Credit available to Buyer Co?
� No Service Tax on Sale
Issue of Shares
� Articles of Association
� 0.2% of Share Capital – Max. Rs. 50 lakhs
� At every increase in Authorised Capital
� Issue of Share Certificate:
© PRAVIN P. SHAH & CO. 15
� Issue of Share Certificate:
� 0.1% of the Value of the Share
�
Corporatisation by Conversion
Shareholders / Partners
© PRAVIN P. SHAH & CO. 16
Firm Co. / LLPConverted by Statute
Part IX Conversion
� Firm⇒⇒⇒⇒ Co. u/s. 565 of Cos. Act (“Part IX”)
� Transfer of Undertaking from Firm to Co.?
� Sale of Property?
� Statutory provision – ROC must Incorporate Co?
© PRAVIN P. SHAH & CO. 17
� Conveyance reqd.?
� Statutory vesting of property
� Capital gains?
� Is it a Transfer u/s. 45(4)?
� Stamp Duty?
Part IX Conversion
� Conditions
� Registered Firm
� 7 or more Members of Co.
� On Conversion Co. only has Partners as Members
© PRAVIN P. SHAH & CO. 18
� On Conversion Co. only has Partners as Members
� Do conditions of s.47(xiii) need to be satisfied?
LLP Act Conversion
� Firm⇒⇒⇒⇒ LLP u/s. 55 of LLP Act
� No Transfer of Undertaking from Firm to LLP
� Statutory provision – ROC must Incorporate LLP
� Conveyance reqd.?
© PRAVIN P. SHAH & CO. 19
� Statutory vesting of property
� Capital gains?
� Is it a Transfer u/s. 45(4)?
� Stamp Duty?
Mergers – Key Issues
� Appointed Date – Retrospective?
� Rationale? Tax Planning only?
� Share Exchange Ratio
� Fairness Ratio in case of Listed Cos.
© PRAVIN P. SHAH & CO. 21
� Accounting Treatment
� Auditor’s Certificate for Listed Cos.
� Reduction of Capital of Transferee Co.
� St. Ex. Permission
� 3/4th SH Majority + Court
Mergers – Key Issues
� Tax Losses & MAT Credit
� Stamp Duty
� ICDR Regs for Listed Cos.
� Listing Requirements
© PRAVIN P. SHAH & CO. 22
� FEMA in case of Cross-Border Mergers / Foreign
SH
Reverse Merger
Finvest Ltd.UNLISTED
Ace BrokingLISTEDMERGER
© PRAVIN P. SHAH & CO. 23
• Unlisted Co.
• Loss Making
• Low activity
• Listed Brokerage Co.
• Profitable
• In Business
Q. Listing of Finvest Ltd. possible?
Reverse Merger
� Listing possible?
� SEBI’s approval required
�
� Justification
© PRAVIN P. SHAH & CO. 24
� Justification
� Under a Court Scheme of Merger / Demerger
� Procedural matters
Forward v. Reverse Merger - Comparison
Available?Available?C/f Unabs. Dep
Available?Available?C/f Bus. Loss
Reverse MergerForward Merger
© PRAVIN P. SHAH & CO. 25
Advisable?Required?Capital Reduction
Unlisted can be
listed?
Continues?Listing
Remains with itAvailable?MAT Credit of
Loss making Co.
Merger & S.47A
Holding Co.
Transfer of Broking Biz
Subsidiary merged
into Holding Co.
Year 1 Year 4
S.47A(1):
© PRAVIN P. SHAH & CO. 26
Wholly-ownedSub
Broking Biz
No CGT –s.47(iv)
S.47A(1):
• Parent should own 100% of Sub for 8 years:
• Is it possible to apply this section?
• Provision is frustrated?
Preferential Issue G/L
� Ch. VII of SEBI (ICDR) Regs. deal with
Preferential Issue G/L
� Do Not apply to an issue of Shares made
pursuant to a Scheme u/s. 391-394
© PRAVIN P. SHAH & CO. 27
� However, Lock-in provisions apply:
� 20% of PC: 3 years
� Balance PC: 1 year
� All other Shares: 1 year
� Strange provision
Merger
� SD on Merger is an evergreen issue
� BSA Conveyance defn. – s.2(g) Includes
� Every Instrument,
© PRAVIN P. SHAH & CO. 28
� Every Decree / Order of Civil Court
� Every HC Order u/s. 394 of Cos Act or RBI
Order under Banking Act for the
amalgamation or reconstruction of Cos.
Specific Entry for SD
� Entries for Merger / Demerger under Sch. I
� Maharashtra M / D
� Gujarat M / D
� Karnataka M / D
© PRAVIN P. SHAH & CO. 29
� Rajasthan M
� No Entries for either under ISA
Merger – BSA Rates
� Art. 25 Conveyance
� 10% of Market Value of shs issued + consideration
� But not exceeding higher of:
� 5% of Market Value of Immovable Property of Transferor
© PRAVIN P. SHAH & CO. 30
located in Maharashtra; or
� 0.7% of Market Value of shares issued
� Upper limit if 5% of MV of IP > 10% of MV of shs
� For Market Value of Imm. Property –
� Refer to Ready Reckoner Value
Merger – BSA Rates
Details Scenarios
1 2 3
FMV of Shares 1000 1500 1700
FMV of Imm. Prop. In Mah. 3000 500 120
© PRAVIN P. SHAH & CO. 31
FMV of Imm. Prop. In Mah. 3000 500 120
10% of FMV of Shares 100 150 170
5% of Imm. Prop. 150 25 6
0.7% of FMV of Shares 7 10.5 11.9
Stamp Duty 100 25 11.9
Merger – BSA Rates
� Art. 25 Conveyance
� For Market Value of Shares :
� If Transferee listed & quoted for Trading on a St. Exch. :
© PRAVIN P. SHAH & CO. 32
FMV as on Appointed Date in Scheme or
Date of Court Order
� Transferee Not listed &/or listed Not quoted for Trading:
FMV of Transferor’s Shares or
FMV as determined by Collector
Merger – ISA
� Gemini Silk (Cal)
� ISA – West Bengal
� Merger u/s. 394 is a sale
� Sale by a Court Order
� Consideration is shares
� Order is an instrument – SD as
� Madhu Intra Ltd. (Cal)
� Under ISA – WB – 2 Member
� Overrules Gemini Silk
� HLL (SC) not cited or considered
� No SD on Order unless express
provision like under BSA
© PRAVIN P. SHAH & CO. 33
� Order is an instrument – SD as
on Conveyance
� Hindustan Lever (SC)
� Under BSA – did not deal with
ISA expressly
� SD payable even if no amdt to
BSA
provision like under BSA
� Delhi Towers (Del)� Decision under ISA ~ Delhi
� Considered all decisions
� Order u/s.394 is a conveyance
� Liable to stamp duty
� Hero Motors (All)� Order u/s.394 a conveyance
� Liable to stamp duty
Demerger – Key issues
� Vertical Split
� Tax Neutral
� Transfer at Book Values
� Trf. of Bus. Undertaking on Going Concern Basis
© PRAVIN P. SHAH & CO. 35
Trf. of Bus. Undertaking on Going Concern Basis
� At least 3/4th SH should become SH
� A/c : Whether Capital & reserves to be split?
� Stamp Duty
Demerger for Value Creation
INDIABULLS FINANCIAL SERVICES
NBFC
SHAREHOLDERS
© PRAVIN P. SHAH & CO. 36
NBFC
INDIABULLS SECURITIESStock Broking Company
INDIABULLS REAL ESTATE Real Estate Developer
Demerger for Value Creation
INDIABULLS FINANCIAL
SERVICES
INDIABULLS REAL
ESTATE
INDIABULLS
SECURITIES
SHAREHOLDERS
© PRAVIN P. SHAH & CO. 37
SERVICES
NBFC
ESTATE
Real Estate Developer
SECURITIES
Stock Broker
Demerged
Demerger- Sale of Business
PromotersIssue of Shares
© PRAVIN P. SHAH & CO. 38
Axis Securities
Left with PMS & MF Distribution
Demerger of IB, Broking
No Cash Consideration
100%
Company Takeover
� Key Considerations:
� Takeover Regulations for Listed Cos.
� FEMA Provisions if one party is a PROI
� Capital Gains on Seller
© PRAVIN P. SHAH & CO. 40
� Capital Gains on Seller
� Exempt if LTCG through St. Ex.
� MAT if Corporate Seller even if gain exempt
� Indexation or 10% in case of Listed LTCG
� Tax Clearance Certificate / TDS if Foreign Seller
Acquisition in Listed Cos.
Acquirer’s SH Acquisition possible
0-14.99% Any % any time till 14.99% ~ Excess PA
15-55% 5% in any FY ~ Excess PA
© PRAVIN P. SHAH & CO. 41
55-75% Up to 5% in tranches / via buyback
55-75% Over 1st 5% - by making a PA
Over 75% Follow Delisting Regulations, 2009
� S. 79 - Sale of Shares of Unlisted Co.
� X P. Ltd. – Stock Broking Co.
� Unabsorbed Depn. & B/f Business Loss
� Existing SHs want to sell 100% stake
Sale of Unlisted Cos.
© PRAVIN P. SHAH & CO. 42
� Existing SHs want to sell 100% stake
� Buyer wants benefit of Depn. & Loss
� PROBLEM
� S.79 - Can’t Transfer > 49% stake till b/f loss
set off
Share Sale by Resident to PROI
� Auto Route of FIPB, except:
� Sectors with caps, incl’d ARC, banks, Com. Ex,
Credit Info, insurance, etc.
� Auto Route of RBI, except:
© PRAVIN P. SHAH & CO. 43
� Sectors not eligible for FDI under Auto Route
� Cases where Takeover Regs. attracted
� More than 15% stake acquired
� Sectoral Caps breached due to acquisition
� Banks, Insurances, NBFCs, ARCs, etc.
Share Sale by Resident to PROI
� Pricing Guidelines
� Listed Cos. – as per Market value
� Unlisted Cos. – Fair Value as per CCI Guidelines
� Same Guidelines should apply even for
transfer under Approval Route
© PRAVIN P. SHAH & CO. 44
transfer under Approval Route
� Transfer of shares in tranches
� Pricing fixed on Milestones achieved by Co.
� Permitted by FIPB/RBI?
Takeovers stalled by FDI Policy
� Sometimes Acquisitions of Indian Cos. are
stalled by the FDI policy
� Ultimately deal is dropped; or
� Deal has to be substantially altered; or
© PRAVIN P. SHAH & CO. 45
� Deal has to be substantially altered; or
� Investor has to invest further funds
� E.g., RBI does not allow Foreign Banks to
invest in Commodity Broking Companies
HSBC-ILFS Investmart Deal
� IL & FS Investmart Deal:
� IL &FS is a Stock Broker & Commodity Broker
� HSBC Bank’s Associate Co. wanted to acquire 73%
from IL&FS and E-trade
Open offer for 20% from Public
© PRAVIN P. SHAH & CO. 46
� Open offer for 20% from Public
� RBI G/L: Banks not allowed to invest in
Commodity Brokers
∴∴∴∴IL&FS surrendered Commodity Membership to
MCX & NCDEX
BNP Paribas-Geojit Deal
� BNP Paribas invested in Geojit, a Stockbroker + open offer
� Geojit’s subsidiary was a Commodity broker
� RBI G/L: Banks not allowed to invest in
© PRAVIN P. SHAH & CO. 47
� RBI G/L: Banks not allowed to invest inCommodity Brokers
∴∴∴∴ SEBI held up permit Open Offer
� Sub. Surrendered Commodity Membership
� BNP Paribas paid additional Rs. 40 cr.compensation for surrender of membership
Takeover by FDI in a Listed Co.
� If FDI of 15% or more in a Listed Co.
by Preferential Issue
� Additional Factors to be Considered :
� Special Resolution - s. 81(1A) of Cos. Act
© PRAVIN P. SHAH & CO. 48
� Special Resolution - s. 81(1A) of Cos. Act
� Pricing as per SEBI Preferential Issue G/L
� 1 year lock-in from allotment
� Open Offer under Takeover Regs.
up to 20% of total post-issue shares
� Pricing of Offer as per SEBI Takeover Regs.
Share Subscription Agr
� SSA / SHA-cum-SSA
� Executed by PEs / VCFs / for FDI
� Investor agrees to invest an amount for a
certain % stake
© PRAVIN P. SHAH & CO. 49
certain % stake
� CPs / Covenants / R&Ws
� Stamp Duty in Mumbai?
Stamp Duty
� Transfer of Shares
� SD covered by ISA and not BSA
� SD under ISA @ 0.25% of consideration
No SD if shares in Demat form
© PRAVIN P. SHAH & CO. 50
� No SD if shares in Demat form
� Is Demat possible for Unlisted / Private Cos.?
Takeover of Foreign Companies
� Indian Cos. acquiring Foreign Cos.
� FEMA Regulations
� Upto 400% of Networth
� FCo. must be in bona fide business activity
© PRAVIN P. SHAH & CO. 51
� FCo. must be in bona fide business activity
� ECBs can be used for acquisition
� Cos. Act
� S.372A applies?
� Up to 100% of Free reserves;
� Up to 60% of Paid-up Capital + Reserves
Takeover of Foreign Companies
� Foreign St. Ex requirements
� Takeover Code of foreign Target Co.
� Requirements of NYSE / AIM/ Nasdaq
� In USA – Williams Act of 1968 + SEC Disclosures
© PRAVIN P. SHAH & CO. 52
� In UK- City Code on Takeovers & Mergers
� Anti-trust Laws of FCo
� USA: Hart-Scott-Rodino Antitrust Act
Filings with FTC or DOJ
Min. Waiting Period of 30 days
Acquisition in Financial Sector
� Indian Broking Co. wants to acquire a Broking
Co. in London
� Religare acquiring Hitchens Harrison of UK
� R.7(1) & 6(1) of FEMA:
© PRAVIN P. SHAH & CO. 53
� R.7(1) & 6(1) of FEMA:
� Upto 400% of Networth OF ICO
� 3 FYs track record of Net Profit from FS Activities
� Capital Adequacy Norms complied with in India
� Regd. in India with authorities, e.g., RBI, SEBI,
IRDA
Acquisition in Financial Sector
� R.7(1) & 6(1) of FEMA 120/2004:
� Approval for Acquisition from SEBI
� Manner of Approval Letter issued by SEBI
� Approval for venturing into activity from Regulator
© PRAVIN P. SHAH & CO. 54
� Approval for venturing into activity from Regulator
abroad
� Q. Is permission from FSA of London required in
advance or would post-facto approval suffice?
� Draft Guidelines issued by RBI for ODI by NBFCs
Relevant Regulations
Consolidated FDI Policy – DIPP, Ministry of Commerce
© PRAVIN P. SHAH & CO. 56
FEMA Regulations –Mode of Investments
+ Reporting
AP Dir Circulars –RBI’s changes
from time to time
Relevant Regulators
FIPB –Cases requiring Govt.
Approval
DIPP –Formulates FDI Policy
Part of FinanceMinistry
Part of Commerce Ministry
© PRAVIN P. SHAH & CO. 57
Approval
RBI –Nodal
Regulatory Authority
Key Types of Foreign Invst.
Foreign Investment
Primary - FDI Secondary
Invst by PROI in Capital of an Indian Co.
Purchase by PROI of Shs. Of Indian Co.
© PRAVIN P. SHAH & CO. 58
Direct Downstream Portfolio Off-Market
FIIs
NRIs / PIOs
Repatriable
Non-repatriable
Types of FDI
Foreign Direct Investment
© PRAVIN P. SHAH & CO. 59
Automatic Approval
No PermissionMoF/FIPB – Inflows up to Rs.1200 cr.
CCEA – Inflows above Rs. 1200 cr.
Instruments
Foreign Direct Investment
Equity
© PRAVIN P. SHAH & CO. 60
EquityHybrid
Voting Non-Voting CCDs CCPS
Warrants
Equity Shares
� Consideration must be for Cash
� All other cases – FIPB approval
� Issue Price of FDI Shares
© PRAVIN P. SHAH & CO. 61
� Issue Price of FDI Shares
� Listed Cos.
� Unlisted Cos.
� Must be issued within 180 days of funds
Equity Shares
� DCF Valuation
� No Guidelines specified
� Discretion to Valuer in selection of:
� No. of Years’ Forecast
Discount Rate / WACC
© PRAVIN P. SHAH & CO. 62
� Discount Rate / WACC
� Growth Rate
� Method of Calculation of Terminal Value / Perpetuity
� Q. Cos. where DCF is difficult?
CCDs
� Quasi-equity Instruments
� Subject to ECB restrictions?
� Cap on Rate of Interest?
� All-in-cost ceilings like ECBs?
© PRAVIN P. SHAH & CO. 63
� All-in-cost ceilings like ECBs?
� Tax Deduction benefits to Investee Co.
� Can be redeemed / bought back by Co.?
� Time limit for conversion into Equity?
�
Preference Shares
� Part of Sectoral Caps Only if CCPS
� If RPS / OCPS – treated as ECBs
� Must be converted within a reasonable
timeframe
© PRAVIN P. SHAH & CO. 64
� Plain redemption / buyback possible?
�
� Max. Dividend Rate
�
NVR Shares
� Issue of NVR Shares possible?
� When Useful?
�
� If Public Company?
© PRAVIN P. SHAH & CO. 65
� If Public Company?
� Examples
Others
� Issue of
� Warrants?
� Partly Paid-up Shares
� Flip-flop in Policy
© PRAVIN P. SHAH & CO. 66
� Flip-flop in Policy
� Recent Reports - Proposal
� Paid-up portion - a part of Capital
� 25% paid-up upfront
� Balance within 12 months
Specified Activities
� FDI Prohibited in:
� Chit Fund
� Nidhi Company
� 100% FDI permissible in 18 specified
© PRAVIN P. SHAH & CO. 68
� 100% FDI permissible in 18 specified
Activities under Automatic Route
� Minimum capitalisation norms ?
� Subsidiaries for specific NBFC activities
are permitted subject to specific norms
Specified Activities
• Merchant Banking
• Underwriting
• Portfolio Management
Services
• Venture Capital
• Custodian Services
• Factoring
• Credit Rating Agencies
18 Activities under 100% Automatic Route
© PRAVIN P. SHAH & CO. 69
Services
• Investment Advisory
Services
• Financial Consultancy
• Stock Broking
• Asset Management
• Money Changing Business
• Credit Rating Agencies
• Leasing and Finance
• Housing Finance
• Forex broking
• Credit Card Business
• Micro Credit
• Rural Credit
Specified Activities
� FDI in Commodity Broking
� Permissible?
� Is it an NBFC activity?
�
FDI by Banks in Com. Broking?
© PRAVIN P. SHAH & CO. 70
� FDI by Banks in Com. Broking?
�
Specified Activities
� FDI in Investment Companies prohibited
� RBI Act – NBFC definition
� FEMA Regulations – 18 Activities
© PRAVIN P. SHAH & CO. 71
� FEMA Regulations – 18 Activities
�
� Dual stance?
Specified Activities
� FIPB has several times disallowed FDI in Invst
Cos.
� Does not fall within 18 activities
� Several FDI Proposals rejected:
© PRAVIN P. SHAH & CO. 72
�
Specified Activities
� Nomura Financial’s Case
� FDI for proprietary trading by a NBFC
� Distinct from FDI for Investment Activities?
�
© PRAVIN P. SHAH & CO. 73
�
Specified Activities
� Barclays Investments’ Case
� FDI for direct marketing of financial products
~ IT enabled services and back office
processing
© PRAVIN P. SHAH & CO. 74
processing
� Collection and recovery, Direct marketing, IT
enabled services, Back-office processing, Advisory
and financial solutions & IT services, advisory
service
�
Other Financial Cos.
Activity FDI Cap Remarks
Infrastructure Cos. In
Securities Mkt.:
� St. Ex. (BSE)
� Depositories (CDSL)
Composite Cap 49%
• FDI 26%
• FII 23%
• FDI by Approval Route
only
• SEBI Regs. for St Ex
• Single For. Investor
© PRAVIN P. SHAH & CO. 75
� Depositories (CDSL)
� Clearing Corp.
(NSECCL)
• Single For. Investor
can hold only 5%
• FII through secondary
markets
Credit Information
Cos. (CIBIL)
Composite Cap 49%
• FDI 25%
• FII 24%
• FDI by Approval Route
only + RBI clearance
• FII through secondary
markets
Capitalisation Norms
NBFC
© PRAVIN P. SHAH & CO. 76
Fund- Based Activities
Non- fund based activities
Capitalisation Norms-Fund Based
� 3 Tiers for Fund based Activities� Up to 51% of Capital: US $0.5 M upfront
� More than 51% - 75% of Capital: US$5Mupfront
© PRAVIN P. SHAH & CO. 77
More than 51% - 75% of Capital: US$5Mupfront
� More than 75% of Capital: US $50M out ofwhich US $7.5M. upfront immediately andbalance US$42.5 M within 24 months
Capitalisation Norms:Non-Fund Based
� Activities classified as Non- fund based are
1. Investment Advisory Service
2. Financial Consultancy
3. Forex Broking
© PRAVIN P. SHAH & CO. 78
3. Forex Broking
4. Money changing business
5. Credit rating agencies
Capitalisation Norms:Non-Fund Based
� US $ 0.5 M upfront for any amount of investment
� Prohibition on:
� Setting up Subsidiary for Activity other than in which
Holding Company is engaged
© PRAVIN P. SHAH & CO. 79
� Participation in any equity of NBFC holding /
Operating Company
Capitalisation Norms
� Requests to FIPB for relaxation of Cap
Norms:� Turned down in a host of cases
� Waiver of norms tantamounts to dilution of
Press Notes
© PRAVIN P. SHAH & CO. 80
Press Notes
� Despite recession, requests for dilution of
capitalisation norms have been rejected
Capitalisation Norms
� What constitutes Capital
� Only Equity
� CCPS / CCDs?
�
© PRAVIN P. SHAH & CO. 81
�
� Share Premium?
�
Subsidiaries
� Can an NBFC with 100% FDI set up aSubsidiary?
� Yes. Holding Co. must be an NBFC with 100% FDI with
minimum capitalisation of US$ 50 M.
© PRAVIN P. SHAH & CO. 82
� Subsidiaries must be for Specific NBFC activities
� No restriction of number of operating subsidiaries
� No additional Capital is required to be brought in.
� NBFC in Non- fund based activities can not set up
subsidiary for any other activity.
Subsidiaries
� Can other NBFC set up Subsidiaries?� Yes. The NBFC must have FDI equal to 75% or less
than 75% of its capital.
� Subsidiaries should also comply with the Min. Cap.
© PRAVIN P. SHAH & CO. 83
Norms applicable to Holdco. if they are in Fund Based
Activities
� NBFC in Non- fund based activities can not set up
subsidiary for any other activity.
Downstream Invst. by NBFCs
Fund- based Joint Venture-NBFC
Type of NBFCwhich would be
Holdco
Non- fund based
© PRAVIN P. SHAH & CO. 84
84
activities NBFC
• 100% FDI• Min. Cap. US $ 50M• No Min. Cap. for
Subsidiaries
• 75% or less FDI• Min Cap. for Holdco
& Sub. both
• Sub in sameactivity as Holdco
Non- fund based
Contrary Provisions
� Circular 1/2010 & FEMA Regulations
� FEMA Regs. & Para 5 of Cir.
�
� Para 4.6.4 of Cir. (Press Note 4)
© PRAVIN P. SHAH & CO. 85
� Para 4.6.4 of Cir. (Press Note 4)
�
� Current Position?
Calculation of FDI
� Cal. of FDI in NBFCs for Min. Cap. norms:
� Both Direct and Indirect FDI to be considered?
�
Indirect FDI ~ ascertain whether Investor is a
© PRAVIN P. SHAH & CO. 86
� Indirect FDI ~ ascertain whether Investor is a
Company owned & controlled by Non-residents?
� If no, then it is domestic investment and not Indirect FDI.
� Ascertain Min. Cap. Requirement based on Total FDI
or only Direct FDI in NBFC?
Exit Options for PE Firms
� Some popular Exit Options for PEs:
� IPO
� Buyback by Co.
© PRAVIN P. SHAH & CO. 88
� Buyback by Co.
� Buyout by Promoters
IPO - SEBI DIP G/L
� SEBI ICDR Regs:
� In case of IPO/ Offer for Sale
� All Convertibles – CCD / CCP should be
converted or they lapse on DRHP
© PRAVIN P. SHAH & CO. 89
converted or they lapse on DRHP
� Pre-IPO capital locked in for 1 year
� N.A. to a VCF holding shs. for 1 yr. as on DRHP
� N.A. to pre-IPO shs. held for 1 year as on DRHP
and Offered For Sale
�
Buyback by Co.
� Limits under Cos. Act
� 25% of Eq. + Free Reserves
� 25% of Eq. Capital per FY
� Can use Free Reserves, Sh. Premium
© PRAVIN P. SHAH & CO. 90
Can use Free Reserves, Sh. Premium
� Auto. Route of RBI (for Foreign PE) if:
� Not in Financial services’ sector
� Pricing G/L – 2 Valuation reports
� Form FC-TRS
� Tax treatment for Co & SH?�
Buyout of PE by Promoters
� FIPB permission needed?
� Automatic Route of RBI?
� Pricing Guidelines
� Capital Gains Tax in hands of PE
© PRAVIN P. SHAH & CO. 91
� Capital Gains Tax in hands of PE
RBI Act & NBFC Directions
� Stock Brokers / Sub-Brokers Exempt from
� Registration as NBFC
� Net Owned Funds Requirements
� Prudential Norms
© PRAVIN P. SHAH & CO. 93
� Prudential Norms
� Must Not accept / Hold Public Deposits
� Exemption available even if only business is
Prop Trading
NBFC Prudential Norms
� Most Large Brokerages have an NBFC
� NBFCs fund Margin Requirements / IPO
Financing
� Consider Non-Deposit Accepting Cos.
© PRAVIN P. SHAH & CO. 94
� Consider Non-Deposit Accepting Cos.
Prudential Norms Directions 2007
� Is NBFC a SIND NBFC?
�No Public Deposits
� Total Assets > Rs. 100 cr. as per last Audited
B/S
Prudential Norms for SINDs
Activity % of Owned
Funds
Lending to one borrower 15%
Lending to a single group of borrowers 25%
© PRAVIN P. SHAH & CO. 95
Lending & Invst in one party 25%
Lending & Invst to one group 40%
• Above limits even apply to loans to Group Cos. of NBFC
• No such limits if NBFC is not a SIND
Exchange Approval
No. Situations where Approval reqd.
1. Change in Designated / Whole-time Directors
2. Change in Control ~ as defined by Takeover Regulations, 1997
© PRAVIN P. SHAH & CO. 96
3. Corporatisation of Firms, Sole Proprietors
4. Transfer by way of Sale, etc.
5. Mergers / Amalgamations
6. Surrender of Certificate of Registration
No Exchange Approval
No. Situations where Approval NOT REQUIRED
1. Inter se transfers amongst DPGs
2. Addition of another SH to DPG
© PRAVIN P. SHAH & CO. 97
3. Cessation of Joint Control to Sole Control
4. Change which is such that SH of DPG does not fall below 51%
5. Acquisition of stake by New Group equal to or less than stake
of present DPG
Merger of Membership - Approval
� DPG to comprise only of DPG of merging Members
� Merged Entity to consist of:
� DPG of Tor Member with at least 51% / 40% for Listed /
Unlisted Cos. /Firms in Tee Member
Scheme should provide for trf. Of Deposits to Tee
© PRAVIN P. SHAH & CO. 98
� Scheme should provide for trf. Of Deposits to Tee
� Lock-in for Deposits applicable to Tee
� Tee to honour all financial commitments of Tor
� Approach St. Ex after filing High Court Petition
� Tee Member can trade for 45 days till SEBI Order
Group Restructuring
� Multiple biz. In Financial Sector
� Q. Merge all biz. or keep separate entities?
� Umbrella Holding Co.
� Purely Investment Co. – JMF
© PRAVIN P. SHAH & CO. 100
� Purely Investment Co. – JMF
� Operating-cum-Investment – Kotak Bank
� Advantages of Umbrella Holding?
� One of the Factors to be considered is the
Risk
Risk Assessment
CompetitionRisk
Liquidity Risk
Credit Risk
© PRAVIN P. SHAH & CO. 101
ReputationRisk
Regulatory Risk
Operational Risk
Market Risk
RISKS
Invst Bank NBFC MF AMC Pvt Equity
Investment Holding Co.
ARC
© PRAVIN P. SHAH & CO. 102
Invst Bank
Inst. Broking
NBFC MF AMC Pvt Equity
Retail Broking
Commodity
ARC
Invst Advisory
Invst Bank Broking Insurance
NBFC
PE Commodity
© PRAVIN P. SHAH & CO. 103
Invst Bank Broking InsurancePE Commodity
Securities
AMC & PMS
Invst Banking
Commodity
© PRAVIN P. SHAH & CO. 104
Commodity
Private Equity
VC Fund
Insurance
NBFC Holding Co.
Structures of Listed Brokerages
No. Listed
Company
Business of
Listed Company
Business
of Subsidiaries/Associates
1. Reliance
Capital
Depository /
Investments
AMC
Life Insurance
General Insurance
© PRAVIN P. SHAH & CO. 105
General Insurance
Trustee
2. IDFC Infrastructure
Finance
Financial Services
Asset Management
Investment Advisory Services
Trusteeship Services
Broking
Advisory Services
Investment Banking
No. Listed
Company
Business of
Listed Company
Business
of Subsidiaries/Associates
3. Edelweiss
Capital
Merchant Banking
PMS
Securities Broking
Commodity Broking
Insurance Broking
Structures of Listed Brokerages
© PRAVIN P. SHAH & CO. 106
NBFC
4. Geojit Financial
Services
Securities Brokers Commodity Broking
Middle East based financial
advisory, broking
No. Listed Company Business of
Listed Company
Business
of Subsidiaries/Associates
5. IL&FS
Investmart
IB/ Broking /
NBFC
Retail Business
Project Syndication
Division
Structures of Listed Brokerages
© PRAVIN P. SHAH & CO. 107
Division
6. Cholamandalam
DBS Finance
NBFC Mutual Fund AMC
Brokerage
Distributors of Financial
Products
Trustee Company
No. Listed
Company
Business of
Listed Company
Business
of Subsidiaries/Associates
7. JRG Securities Securities Broking Commodity Broking
Insurance
8. Joindre Capital Securities Broking Commodities Broking
Structures of Listed Brokerages
© PRAVIN P. SHAH & CO. 108
8. Joindre Capital Securities Broking Commodities Broking
9. Emkay Shares Securities Broking NBFC
Commodity Broking
10. Pioneer
Investcorp
Merchant Banking Securities Broking
Restructured Brokerages
BEFORE AFTER REMARKS
Fortune Financial Services
Holding Co. � Merchant
Banking
� Merchant
BankingSlump Sale of
Broking Biz.
© PRAVIN P. SHAH & CO. 109
Banking
� Broking
Banking Broking Biz.
from Listed
Holding Co. to
WOS
Subsidiary � NBFC
� Commodity
� Broking
� NBFC
� Commodity
Restructured Brokerages
BEFORE AFTER REMARKS
India Infoline Ltd
Holding Co. � Merchant � Merchant Merger of WOS
© PRAVIN P. SHAH & CO. 110
Holding Co. � Merchant
Banking
� Eq. Research
� Merchant
Banking
� Broking
Merger of WOS
in Broking with
Listed Holding
Co.Subsidiary � Broking
� NBFC
� Commodity
� NBFC
� Commodity
� Insurance