New rules change business dynamics for foreign banks
Foreign banks in India have, for the past several years, been aspiring for a larger presence in the banking sector. They have also been seeking near-domestic banking treatment from the government and the regulator. The reform was discussed, debated and the regulator had sought comments and suggestions from the industry and the constituents associated with the sector. The major issue was the waiver of the capital gains tax and the stamp duty associated with the conversion.
Now the regulations are notified. The significant deviation between the guidelines and the discussion paper is the tone of communication. The discussion paper had suggested that wholly-owned subsidiary (WOS) would be a preferred structure. The guidelines suggest that regulator is now mandating only some of the banks to take the WOS route. Possibly, as we go along, more and more foreign banks, based on several factors mentioned in the guidelines, will have to set up WOS. Complex structures, time of entry, reciprocity, deposit holder rights, etc. could be those factors.
One of the factors that these bankers are examining is the priority sector lending. The rural presence and inclusion are challenges for foreign banks. The fear that the government and regulator may shift the policy and rules cannot also be over ruled. There is also an issue of local leadership and headquarters connect. The headquarters may perhaps perceive a different market environment compared to what exists here. The true potential associated with larger branch network and the priority sector may not be available to them.
Truly, the beauty of the reform lies in the eyes of the beholder. A segment of new entrants and those banks that have very long-term commitment to Indian market are viewing the reform as a big opportunity to change the business dynamics. One thing however, is very certain, in the next 10 years we will see new leaders in the sector emerging. These foreign banks will bring new ideas, order of governance, products, service levels and technology to this market. We have been missing this from this segment of players for almost more than a decade now.
Views expressed are personal
The first critical point in 2014 will be the elections. Fortunately, it's in the early part of the year. It is important for the country to have a stable government so that firm decisions can be taken. Right now, there is a policy paralysis. This has impacted the demand growth.
In the current year, new steel capacities are going on stream. If the domestic demand does not pick up, India will have to export more to maintain demand-supply equilibrium. This will be a significant transformation from a net importer status to a net exporter status.
Normally, the demand growth for steel is in the region of 1.2-1.5 times the GDP. In the last few years, it has fallen below the GDP growth. Steel is an intermediary product and it is a derived demand. So, in order to revive the domestic steel demand, projects in the power, construction, infrastructure sectors have to get off the ground besides the recovery of demand in consumer sectors of white goods and automobile.
In order to ensure utilisation of capacities, uninterrupted supply of raw material like iron ore is critical. The steel companies should be given mining leases. The state governments have to take a position on awarding mining leases.
In the recent past, more than 90% of the supply growth has taken place through brown field expansion, going forward 50% of the growth will come from green field expansion. I am hoping that the new Land Acquisition Act will be at worst a road bump and not a show stopper. Corporates should agree to pay a fair price and relief and rehabilitation package. Unfortunately, at times, one man's need becomes another man's greed!
India's fast changing legal landscape is greatly impacting corporates in the country.
One of the most important developments is the introduction of the new companies' law. From a compliance perspective, the long entrenched distinction between a public and a private company has been virtually eliminated. The new law also requires businesses above certain thresholds to undertake corporate social responsibilty placing additional administrative and financial burden on them including requirements such as appointment of an independent director by all eligible companies, whether public or private. The new law also appears to widen the scope of insider trading to potentially cover unlisted companies.
Introduction of legislation against sexual harassment at workplace will require employers to come up with detailed policies, complaints committees and workshops for sensitising employees. On the real estate front, the new legislation on land acquisition is likely to lead to longer processes and higher acquisition costs for businesses. Another key area is corporate taxation.
The role of the in-house counsel today is not only to keep up with such developments and assess their impact, but to also coordinate with multiple regulators. The in-house team will need to maintain a high learning curve and work closely with their external advisors.
Disclaimer: Views expressed above are not to be considered as legal advice, general or otherwise.
Transparency, good corporate governance and accountability will be core to a legal head's responsibilities in the current changing environment. The new Companies Act 2013 requires members of the board of directors to confirm that systems are in place and operating effectively for ensuring compliance with all laws. Consequently, it will increase accountability and actions by regulators and shareholders in case of any breakdown. Class actions suits and penalties can directly reach board members, the company secretary and the CFO.
The Lok Pal Bill reinforces the need to build strong anti-corruption policies as well as conduct training sessions and workshops to assist the field staff, particularly in sales, in dealing with practical situations. There can be situations where the pressure to sell will lead to conflicts. The learning curve will continue to remain at its peak, as legal heads will deal with evolving concepts (such as fraud related provisions in the Companies Act), rapidly changing regulations (one of the perils of delegated legislation), replacement of archaic laws (for example consolidating of more than 80 archaic financial sector laws) and increasing reliance on judicial precedents.
The engagement of the legal head is increasing with almost all regulatory disputes and tax litigations going through tribunals and courts and is specifically critical for highly regulated sectors like telecom, media and financial services.
In conclusion, the changes of emerging legal and regulatory framework needs to be viewed as an opportunity to transform business processes for a better governance, maintain pace with changing business environment and ensure that streamlined methods are in place to be fully compliant.
2014-15 is likely to be the year for massive changes to the regulatory framework within which Corporate India operates. Not only will we be operating under a new Companies Act 2013, but are likely to have the new Direct Tax Code (DTC), and possibly a unified Goods and Service Tax (GST).
The three main changes in the Companies Act 2013 that will create a permanent shift are:
Consolidation
The need to present consolidated financial statements for all companies including private companies will lead to:
The need to change audit firms for all listed companies over the next three years will lead to:
The need to spend 2 per cent of profits or explain inability to do so will lead to:
The Companies Act, 2013, is based on the presumption that shareholders are the best caretaker of the company.
The Act has virtually eliminated the need for obtaining government approvals. It envisages a proactive role on the part of directors in balancing the ease of doing business whilst protecting interest of minority shareholders. Some provisions that merit greater attention include composition of board, board responsibilities relating to internal financial controls and compliance of applicable laws, CSR and related party transactions. These will require companies to make changes in their governance structures as well as reporting and review mechanisms. The Act may pose issues in regard to the appointment of directors as it limits the number of companies in which an individual can be appointed as a director. Further, the individual cannot be a director in more than 10 public companies. The Act makes it mandatory for all companies to at least have one director who has stayed in India for not less than 182 days in the previous calendar year. Most wholly-owned subsidiaries of foreign companies would need to reconstitute their board to be in compliance with this requirement.
Mehul M Modi
Senior Director, Deloitte Touche Tohmatsu India Choose right forum for competition issues
TThe impact of competition law is most felt on mergers and acquisitions. Acquisition of shares above a specified threshold or acquisition of control may trigger merger filing requirement forcing the industry to postpone closing until approval of the Competition Commission of India (CCI) is obtained. In the absence of a precise definition of 'control', industry has to face uncertainty on meeting its legal obligation to seek a prior approval since determination of what leads to 'control' is decided on a case-to-case basis.
Another challenge is choosing the right forum for redressal of competition related grievance. Many sectors have regulators with powers to deal with anti-competitive conduct. The Delhi court has decided in favour of a sectoral regulator, but while they may have the power to deal with competition related issues, they do not possess sufficient punitive powers. Also, the industry must think of having a competition law compliance manual and conducting competition law compliance programme for its key officials.
Kumar was first director general of CCI, from 2004 to 2009
Foreign banks in India have, for the past several years, been aspiring for a larger presence in the banking sector. They have also been seeking near-domestic banking treatment from the government and the regulator. The reform was discussed, debated and the regulator had sought comments and suggestions from the industry and the constituents associated with the sector. The major issue was the waiver of the capital gains tax and the stamp duty associated with the conversion.
Now the regulations are notified. The significant deviation between the guidelines and the discussion paper is the tone of communication. The discussion paper had suggested that wholly-owned subsidiary (WOS) would be a preferred structure. The guidelines suggest that regulator is now mandating only some of the banks to take the WOS route. Possibly, as we go along, more and more foreign banks, based on several factors mentioned in the guidelines, will have to set up WOS. Complex structures, time of entry, reciprocity, deposit holder rights, etc. could be those factors.
One of the factors that these bankers are examining is the priority sector lending. The rural presence and inclusion are challenges for foreign banks. The fear that the government and regulator may shift the policy and rules cannot also be over ruled. There is also an issue of local leadership and headquarters connect. The headquarters may perhaps perceive a different market environment compared to what exists here. The true potential associated with larger branch network and the priority sector may not be available to them.
Truly, the beauty of the reform lies in the eyes of the beholder. A segment of new entrants and those banks that have very long-term commitment to Indian market are viewing the reform as a big opportunity to change the business dynamics. One thing however, is very certain, in the next 10 years we will see new leaders in the sector emerging. These foreign banks will bring new ideas, order of governance, products, service levels and technology to this market. We have been missing this from this segment of players for almost more than a decade now.
Views expressed are personal
Ashvin Parekh
Managing Partner, Ashvin Parekh Advisory Services LLP, & Senior Expert Advisor - Financial Services, EY
Corporates must pay fair price for landManaging Partner, Ashvin Parekh Advisory Services LLP, & Senior Expert Advisor - Financial Services, EY
The first critical point in 2014 will be the elections. Fortunately, it's in the early part of the year. It is important for the country to have a stable government so that firm decisions can be taken. Right now, there is a policy paralysis. This has impacted the demand growth.
In the current year, new steel capacities are going on stream. If the domestic demand does not pick up, India will have to export more to maintain demand-supply equilibrium. This will be a significant transformation from a net importer status to a net exporter status.
Normally, the demand growth for steel is in the region of 1.2-1.5 times the GDP. In the last few years, it has fallen below the GDP growth. Steel is an intermediary product and it is a derived demand. So, in order to revive the domestic steel demand, projects in the power, construction, infrastructure sectors have to get off the ground besides the recovery of demand in consumer sectors of white goods and automobile.
In order to ensure utilisation of capacities, uninterrupted supply of raw material like iron ore is critical. The steel companies should be given mining leases. The state governments have to take a position on awarding mining leases.
In the recent past, more than 90% of the supply growth has taken place through brown field expansion, going forward 50% of the growth will come from green field expansion. I am hoping that the new Land Acquisition Act will be at worst a road bump and not a show stopper. Corporates should agree to pay a fair price and relief and rehabilitation package. Unfortunately, at times, one man's need becomes another man's greed!
Firdose Vandrevala
Executive Vice-Chairman Essar Steel
In-house counsels must liaise with multiple regulatorsExecutive Vice-Chairman Essar Steel
India's fast changing legal landscape is greatly impacting corporates in the country.
One of the most important developments is the introduction of the new companies' law. From a compliance perspective, the long entrenched distinction between a public and a private company has been virtually eliminated. The new law also requires businesses above certain thresholds to undertake corporate social responsibilty placing additional administrative and financial burden on them including requirements such as appointment of an independent director by all eligible companies, whether public or private. The new law also appears to widen the scope of insider trading to potentially cover unlisted companies.
Introduction of legislation against sexual harassment at workplace will require employers to come up with detailed policies, complaints committees and workshops for sensitising employees. On the real estate front, the new legislation on land acquisition is likely to lead to longer processes and higher acquisition costs for businesses. Another key area is corporate taxation.
The role of the in-house counsel today is not only to keep up with such developments and assess their impact, but to also coordinate with multiple regulators. The in-house team will need to maintain a high learning curve and work closely with their external advisors.
Disclaimer: Views expressed above are not to be considered as legal advice, general or otherwise.
Ajay Bahl
Co-Founder & Managing Partner, AZB & Partners
Lok Pal needs strong anti-corruption policiesCo-Founder & Managing Partner, AZB & Partners
Transparency, good corporate governance and accountability will be core to a legal head's responsibilities in the current changing environment. The new Companies Act 2013 requires members of the board of directors to confirm that systems are in place and operating effectively for ensuring compliance with all laws. Consequently, it will increase accountability and actions by regulators and shareholders in case of any breakdown. Class actions suits and penalties can directly reach board members, the company secretary and the CFO.
The Lok Pal Bill reinforces the need to build strong anti-corruption policies as well as conduct training sessions and workshops to assist the field staff, particularly in sales, in dealing with practical situations. There can be situations where the pressure to sell will lead to conflicts. The learning curve will continue to remain at its peak, as legal heads will deal with evolving concepts (such as fraud related provisions in the Companies Act), rapidly changing regulations (one of the perils of delegated legislation), replacement of archaic laws (for example consolidating of more than 80 archaic financial sector laws) and increasing reliance on judicial precedents.
The engagement of the legal head is increasing with almost all regulatory disputes and tax litigations going through tribunals and courts and is specifically critical for highly regulated sectors like telecom, media and financial services.
In conclusion, the changes of emerging legal and regulatory framework needs to be viewed as an opportunity to transform business processes for a better governance, maintain pace with changing business environment and ensure that streamlined methods are in place to be fully compliant.
Deepak Kapoor
Chairman, PwC India
Auditors must plan audits differentlyChairman, PwC India
2014-15 is likely to be the year for massive changes to the regulatory framework within which Corporate India operates. Not only will we be operating under a new Companies Act 2013, but are likely to have the new Direct Tax Code (DTC), and possibly a unified Goods and Service Tax (GST).
The three main changes in the Companies Act 2013 that will create a permanent shift are:
Consolidation
The need to present consolidated financial statements for all companies including private companies will lead to:
- Review of corporate structure and potentially collapse number of entities
- Review of capital structure and the balance of equity and debt, and the sources of the same
- Bankers finding it easier to lend to private companies (promoters finding it more difficult to hide losses and create off balance sheet financing)
- Auditors needing to plan their audits differently covering a wider group top down, as opposed to only entities individually
- Regulators needing to gear up capacity to review the filings
The need to change audit firms for all listed companies over the next three years will lead to:
- Audit committee needing to gear up to run RFP/ tenders for selecting a new firm;
- Audit firms need to seek new work to replace long-standing clients
- CFOs and other professionals to be ready to explain their business and open to a re-examination of their accounting judgements to a new audit firm
The need to spend 2 per cent of profits or explain inability to do so will lead to:
- Need to form a new committee of the board charged with such responsibility
- Review current CSR activities and spends, future plans, and align the same for compliance with the actives listed as permitted
Vishesh C Chandiok
National Managing Partner, Grant Thornton India LLP
Directors' role key in new company lawNational Managing Partner, Grant Thornton India LLP
The Companies Act, 2013, is based on the presumption that shareholders are the best caretaker of the company.
The Act has virtually eliminated the need for obtaining government approvals. It envisages a proactive role on the part of directors in balancing the ease of doing business whilst protecting interest of minority shareholders. Some provisions that merit greater attention include composition of board, board responsibilities relating to internal financial controls and compliance of applicable laws, CSR and related party transactions. These will require companies to make changes in their governance structures as well as reporting and review mechanisms. The Act may pose issues in regard to the appointment of directors as it limits the number of companies in which an individual can be appointed as a director. Further, the individual cannot be a director in more than 10 public companies. The Act makes it mandatory for all companies to at least have one director who has stayed in India for not less than 182 days in the previous calendar year. Most wholly-owned subsidiaries of foreign companies would need to reconstitute their board to be in compliance with this requirement.
Mehul M Modi
Senior Director, Deloitte Touche Tohmatsu India
TThe impact of competition law is most felt on mergers and acquisitions. Acquisition of shares above a specified threshold or acquisition of control may trigger merger filing requirement forcing the industry to postpone closing until approval of the Competition Commission of India (CCI) is obtained. In the absence of a precise definition of 'control', industry has to face uncertainty on meeting its legal obligation to seek a prior approval since determination of what leads to 'control' is decided on a case-to-case basis.
Another challenge is choosing the right forum for redressal of competition related grievance. Many sectors have regulators with powers to deal with anti-competitive conduct. The Delhi court has decided in favour of a sectoral regulator, but while they may have the power to deal with competition related issues, they do not possess sufficient punitive powers. Also, the industry must think of having a competition law compliance manual and conducting competition law compliance programme for its key officials.
Kumar was first director general of CCI, from 2004 to 2009
Amitabh Kumar
Partner, JSA
Partner, JSA