Securities
An Airports Economic Regulatory Authority (AERA) could be created in the near future after the Union Cabinet approved in May the passing of the AERA Bill, 2007. Under the bill, the authority would review and approve the tariff structure for aeronautical services and monitor performance standards at Indian airports. However, with the civil aviation ministry against conferring AERA with the power to adjudicate on disputes arising out of monopolistic, restrictive and unfair trade practices by airport operators, pursuant to a June cabinet note, it remains to be seen what powers AERA will actually have.
Securities
The Securities and Exchange Board of India (SEBI) said on May 29 that stock exchanges are “public authorities” and, therefore, have to disclose information, if asked to, under the Right to Information (RTI) Act. Following this, the Central Information Commission, on June 10, directed all exchanges to comply with all RTI rules in three months. While few concerns have been raised on bringing stock exchanges under the RTI ambit, it is expected the move will bring greater transparency to Indian exchanges.
Parliament approved the Securities Contracts (Regulation) Amendment Bill that allows banks and financial institutions to securitize loans, reduce risks and enhance business portfolios by trading debt instruments on stock exchanges. The Bill, introduced in 2005, will amend the definition of “securities” in the Securities Contracts (Regulation) Act, 1956 to provide a legal framework for trading secured debt.
Real estate
May 21 saw the Reserve Bank of India (RBI) banning real estate companies from raising funds through external commercial borrowings (ECBs) for developing integrated townships. While ECBs have been restricted in the real estate sector, an exception was made for the development of integrated townships. The withdrawal of this exemption follows increased government concerns about excessive external funds flowing into India’s booming real estate sector.
Foreign investment
The RBI said on June 7 that only financial instruments which are fully and compulsorily convertible into equity will be counted towards the sectoral caps under India’s foreign direct investment policy. Instruments such as optionally or partially convertible preference shares, classified as “investments” under Indian company law, would now be considered debt for the purposes of foreign exchange laws. The purported rationale of the new policy is to prevent corporations from circumventing provisions of the FDI policy by issuing hybrid instruments, which are intrinsically debt-instruments.
Insurance
Indian promoters in insurance joint ventures may no longer be required to reduce their stake to 26% and to list within 10 years of their operations, as has been prescribed by India’s insurance law. The relaxation of this listing requirement would require a repeal of provisions of the Insurance Act, and is seen as a much needed development in India’s insurance law.
Mutual funds
Mutual funds will now be able to invest in existing international funds. A June circular from the RBI paved the way for launching feeder funds, which will raise money in India and invest in existing mutual funds abroad. The move assumes significance in light of the growing belief amongst fund managers that international investing is necessary for diversification.
Competition
The group of ministers has given its go-ahead to the Competition (Amendment) Bill, which may make it mandatory for companies involved in overseas mergers or acquisitions to notify the Competition Commission India (CCI), if the combined entity meets the criteria of “territorial nexus”. In addition, the principle of criminal liability will apply to those who defy the orders of the CCI.
Credit
To put in place a regulatory framework, the RBI issued draft guidelines in May for trading credit default swaps (CDS), which are essentially insurancelike contracts that protect against default and restructuring. In view of the complexities involved, the RBI has published these guidelines as a first draft, and will finalize them only after receiving comments and feedback from various stakeholders. The release of these guidelines is seen as a first step in introducing credit derivatives – the fastest growing financial tools in the world.
The wrap of significant legal and regulatory developments was compiled by Dr Shweta Hingorani and Rohan Kaul of law firm Luthra & Luthra. Dr Hingorani can be reached at shingorani@luthra.com.
