New remuneration regime for Independent Directors
The Ministry of Corporate Affairs (MCA) has recently notified amendments to Sections 149(9) and 197(3) of Companies Act, 2013 (Act) , inserted by the Companies (Amendment) Act, 2020 vide a notification dated 28 September 2020 which came into effect from March 18, 2021, in order to facilitate companies that are struggling with inadequacy or lack of profits, to pay certain minimum guarantee remuneration to its Independent Directors (IDs). The Ministry also issued another notification amending Schedule V of the Act which prescribes the scale of remuneration to be paid to IDs based on the company's effective capital.
Prior to these amendments, Sec 197(3) of the Act only dealt with Managing Directors, Whole-time Directors and Mangers, excluding IDs from its ambit. The section specified the amount that could be paid as remuneration to people holding these positions, both in case of profits and inadequate profit to the company. However, in both the situations, IDs were entitled only to the sitting fees for attending Board meetings and nothing more. This led to a grossly inadequate remuneration framework for IDs in loss-making companies, which was not proportionate to the crucial role that the IDs were expected to play in the company so as to ensure better corporate governance.
The new remuneration policy for IDs, according to Schedule V of the Act, states that companies are now allowed to award remuneration to IDs irrespective of their net profits. In case of inadequacy of profits, it is the approval of the Board and recommendation of the Nomination and Remuneration Committee that are a pre-requisite for payment of remuneration to IDs. This approval is also required if the company owes debts to financial institutions, banks, debenture holders and secured creditors. Further, the limits prescribed by the Schedule can be exceeded once the approval of shareholders is sought through a special resolution.
It is noteworthy to mention that Sec 149(9) of the Act had entirely restricted granting of Employee Stock Ownership Plan (ESOP) to IDs as it could compromise their credibility.
The amendment has also brought about liberalization in the remuneration structure of IDs working in companies that have undergone resolution process under the Insolvency and Bankruptcy Code, 2016. According to this structure, such companies can pay any amount of remuneration to its IDs for the duration of five years effective from the date on which the resolution plan was approved.
The proposed amendments are a welcome step. It is expected that these changes will ultimately lead to more competent professionals joining the Board as IDs and bring consistency to the remuneration framework by improving the remuneration framework of IDs who contribute their valuable time and experience towards the smooth governance of the company.
ECB Policy – Relaxation in the period of parking of unutilised ECB proceeds in Term Deposits
The RBI has stated that unutilized External Commercial Borrowing (ECB) proceeds drawn down before March 1, 2020, can be parked in Term Deposits with banks in India prospectively up to March 1, 2022, in a relief to borrowers who could not utilize the proceeds due to lockdown.
Under the extant ECB framework, borrowers are allowed to place ECB proceeds in Term Deposits with banks in India for a maximum period of 12 months. However, in view of the difficulty faced by borrowers in utilizing already drawn down ECBs due to Covid-19 pandemic induced lockdown and restrictions, RBI took this decision to relax the stipulation as a one-time measure.
Accordingly, unutilized ECB proceeds drawn down on or before March 1, 2020, can be parked in Term Deposits with AD category-I banks in India prospectively up to March 1, 2022. The central bank will be issuing guidelines in this regard separately.
Indian insurance regulator permits investment in debt securities by insurers of InvITs/REITs
The Insurance Regulatory and Development Authority of India (IRDAI) irecently amends the Investment Master Circular enacted under Finance Act, 2021 to permit insurers to make investment in debt securities of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
The Investment Master Circular permits insurers to invest in units of listed InvITs and REITs on satisfaction of certain conditions such as maintenance of at least AA rating, investment not exceeding prescribed concentration limits, restrictions on related or promoter group investment, etc. The Finance Act, 2021 was amended with the intent of increasing the depth of investment and offer monetization to partially completed real estate and infrastructure projects by permitting investment vehicles (InvITs/REITs) to issue debt securities for raising capital.
Debt securities investment by insurers of InvITs/REITs
Insurers keen to subscribe to debt securities of InvITs/REITs are obligated to follow certain conditions, such as:
- Debt instruments of InvIT/REIT are rated atleast 'AA' as approved investments and if such instruments are downgraded below 'AA', they are characterised as Other Investments with the prescribed codes
- Insurer cannot invest over 10 per cent of outstanding debt instruments including current issue in a single InvITs/REITs issue
- Cumulative investment in units and debt instruments of InvITs and REITs are always less than 3 per cent of total fund size of the Insurer
- Investment by related or promoter groups is restricted in debt instruments of InvITs/REITs Sponsor
- Investment in debt securities is valued either under Fixed
Income Money Market And Derivatives Association of India or at
applicable market yield rates published by a SEBI-registered Rating
Agency Investment in Debt Securities of:
- InvIT is regarded as Infrastructure Investments
- REIT is regarded as part of industry group Real Estate activities
- Concurrent Auditor to the Audit Committee/Board of the Insurer to ensure compliance of the said norms in its Quarterly Report
The extension of investment by insurers to access established investment vehicles being InvITs/REITs is likely to support the objective of the Indian Government to improve liquidity and promote capital raising for infrastructure projects and help mobilize funds into the capital intensive sector. The proposition will also permit fixed income returns to the insurers focusing on safe investments offering them investment alternatives.
SEBI issues a Circular on Regulatory Reporting by AIFs to review and rationalize the existing regulatory reporting requirements
By virtue of powers conferred under Section 11(1) of the Securities Exchange Board of India Act, 1992, Securities Exchange Board of India (SEBI) issued a circular dated April 07, 2021 bearing Circular no. SEBI/HO/IMD/IMD-I/DOF6/CIR/2021/549. In order to provide ease of compliance, the regulatory reporting requirements as provided under AIF Regulations and paragraph 3.2 of the Circular No. CIR/IMD/DF/10/2013 dated July 29, 2013, has been reviewed and rationalized
The circular provides for two key changes:
- Firstly, it requires all AIFs to submit report on their activity as an AIF to the SEBI on quarterly basis and within ten calendar days from the end of each quarter in a revised format which is specified in the Annexure I of the Circular. Further, Category III AIFs (those which employ diverse or complex trading strategies with a view to making short-term returns and include hedge funds) are required to submit report on leverage undertaken, on a quarterly basis in a revised format which is specified in the Annexure II of the Circular. Earlier, Category III AIFs which undertake leverage were required to submit reports on a monthly basis.
- Secondly, changes in terms of private placement memorandum and in the documents of the fund/scheme are required to be intimated to investors and SEBI on a consolidated basis, within one month of the end of each financial year.
It was further clarified that reporting requirements would be applicable for quarter ending December 31, 2021 onwards and provisions regarding changes in private placement memorandum would come into effect immediately.
SEBI directs companies to separate the roles of Chairperson and Managing Director
SEBI has asked Indian companies to work towards separating the roles of chairperson and managing director (MD).
The deadline is a year away, but the market regulator is hinting that it will no longer extend it. Listed entities were initially required to separate the roles of chairperson and MD/CEO from April 01, 2020 onwards. However, based on industry representations, an additional time period of two years was allowed for compliance. The regulation will now be applicable to the top 500 listed entities by market capitalization, with effect from April 01, 2022. As at the end of December 2020, only 53 % of the top 500 listed entities had complied with this provision. He said the rule is not to weaken the position of promoters but to improve corporate governance.
RBI extends the 'Interest Equalization Scheme for Pre and Post Shipment Rupee Export Credit' for another 3 months up to June 30, 2021
The RBI vide a notification dated April 12, 2021 bearing no. RBI/2021-22/21 DOR.CRE.REC.06/04.02.001/2021-22 has provided an extension of the Interest Equalization Scheme for Pre and Post Shipment Rupee Export Credit (Scheme). The Scheme which was ending on March 31, 2021 has been extended for a period of three months with effect from April 01, 2021 and ending on June 30, 2021. The scope and coverage of the scheme shall remain the same during this extended period and the extant operational instructions issued by the RBI under the Scheme shall continue to remain in force till June 30, 2021.
This Scheme was first introduced in 2015 to provide rebate of interest on pre and post shipment export credit like packing credit to eligible exporters. The eligible exporters under the Scheme can claim the benefit from the banks on the basis of a certification by an external auditor in this regard. The banks can then claim a reimbursement of the same from the RBI.
International Financial Services Centres Authority (Finance Company) Regulations, 2021
The International Financial Services Centres Authority (IFSCA) 1 has issued the International Financial Services Centres Authority (Finance Company) Regulations, 2021 (Regulations) dated March 25, 2021 to provide a framework for finance companies in an International Financial Services Centre (IFSC) in India. The Regulations are aimed at providing a competitive regulatory environment to non-banking financial institutions to complement the role of banking in providing finance, innovative products and services from the IFSC.
Salient features of the Regulations
A Finance Company (FC) or a Finance Unit (FU) can commence business after obtaining the certificate of registration from IFSCA. FCs and FUs are defined as financial institutions under Section 3(1)(c) of the International Financial Services Centres Authority Act, 2019. Whilst a FC can be set up as a separate incorporated entity, a FU is set up as a branch as permitted under the Regulations to deal in one or more of the permissible activities specified under regulation 5(1) of the Regulations, provided that:
- They do not accept public deposit from resident/non-resident as defined under the Regulations
- They are not registered with IFSCA as a Banking Unit2
1 IFSCA is a regulatory authority established under the International Financial Services Centres Authority Act, 2019 for regulating financial institutions, financial services and financial products in an IFSC in India.
2 'Banking Unit' means a financial institution under clause Section 3 (1) (c) of the Act that is licensed by the Authority to undertake permissible activities under International Financial Services Centres Authority (Banking) Regulations, 2020
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