topaz financial sector reform

B : Topaz

Team Members

• Anand Desai

• Vidur Mehta

• Mehul Dholaria

FSR- Indian Financial Code

BFSICM Study Group Meeting: Competition cum Think Tank on the Financial Sector Reforms 18th January 2014- ICAI Towers, Mumbai Presented by CA Anand Desai

Introduction

• The Indian Financial Code

• “Formulated” by the Financial Sector Legislative Reforms Commission

• Presented to the Ministry of Finance in March 2013

• Comprises of 450 Sections

Need for the Code

• The current financial structure of Indian Financial Sector is fragmented & Incomplete

• The financial crisis of 2008 have necessitated to have :

1. Close and effective regulation of Market ,

2. emphasis on Systematic risk,

3. An effective resolution framework.

• Several Overlaps between laws & agencies and Reguatory gaps leading to a “Regulatory Arbitrage”

• Eg: Extended litigation on Sahara group by SEBI,

Significance

• Brings about necessary transformation in the Legal and Institutional structures of the Financial Sector.

• Endeavors to reduce the gap between the requirement of the country and the present legal and regulatory arrangement.

• Unification of plethora of many laws into a Single Draft Code for better Regulation and equip the Indian Financial Sector for the Future.

Purpose of the Framework- Components 1. Consumer Protection

2. Micro-prudential Regulation

3. Resolution

4. Capital Controls

5. Systematic Risk

6. Development and Redistribution

7. Monetary Policy

8. Public Debt Management and,

9. Contract, trading and Market Abuse

Non-Sectoral Principle based laws

TRANSITION

Transition- Steps

• Project Team to be formed within Ministry of Finance

• Recommended by “The Commission”

• Facilitate the transition process

• To have adequate staff & Resources

Project Team

Blueprint for the Transition To Steer the draft & Facilitate the

information flow & co-od. With the agencies

Determine manner of:

1. Phasing out of Existing regulation, &

2. Timing of the Draft coming into effect

Identify the steps for the ease of Transition –Regulated agencies such as :

a. One time CG tax exemption;

b. Exemption from Stamp duty registration.

Functions

Suggestions by the Commission

Withdrawal of Bills that are Not Aligned with the Code & having Material Deviation

Introduction of some Elements into existing practice

Creation of New Agencies

Alternative Investments Funds- Regulatory Perspective Presented by CA Vidur Mehta

Alternative Investments

• The term “Alternative Investments” is a relatively loose term and includes tangible assets such as precious metals, art, wine, coins or stamps and complex financial assets such as commodities, private equity, venture capital, distressed securities, hedge funds, infrastructure and carbon credits.

• Investments in Real Estate are also generally included here despite ancient use of such real assets being used to enhance and preserve wealth.

• The traditional asset classes of stocks and bonds are specifically excluded.

Characteristics of the Alternative Investments

• Tool to reduce overall Investment risk through diversification.

• Low correlation with traditional financial Investments such as stocks and bonds.

• Relatively Illiquid and difficult to determine the current market value of the asset.

• Limited Historical Risk and Return Data.

• High Degree of Investment Analysis is required before buying.

• Ideal for HNIs and Institutional Investors.

Why the need for Alternative Investments?

• Traditionally the entrepreneurs were dependent on private placements, IPOs and lending from Financial Institutions

• 6,000 listed companies – about 73% of BSE listed stocks – with less than ₹ 100 crores of market capitalisation and which contribute less than 2% of daily trading volumes.

Need for AIF Regulations

• Incentivize PE Funds and VC funds to promote SMEs through Investments in prioritized sectors in a regulated manner.

• Providing a level playing between registered and unregistered VCFs.

• Need to classify AIF as a distinct asset class.

• Tie Concessions and Incentives to Investment restrictions.

• Reduce Systemic Risks that AIF may pose to stability of financial markets.

Introduction to SEBI (Alternative Investment Funds Regulations, 2012

• The Regulations came into force w.e.f. 21st May, 2012.

• The Regulations seeks to regulate fundraising activity and fund management activity in India.

• The Regulation consists of 39 regulations spread over 7 Chapters.

• An AIF is a privately pooled investment vehicle which collects funds from foreign or Indian investors for investing as per defined investment policy.

• Can be incorporated as trust, Company, LLP or body corporate.

Forms of AIF

Debt Fund

Venture Capital Fund

Hedge Fund

Private Equity Fund

SME Fund

Infrastructure Fund

Social Venture Fund

Registration of an AIF

Category I Category III

• Invests in start-ups or social ventures or SMEs or Infrastructure

• Includes VC Funds, Social Venture Funds, SME and Infrastructure Funds

• Closed Ended Fund with Minimum Tenure of 3 Years

Category II

• Prohibited to take any leverage except for day-to-day operations

• Includes mostly PE Funds and Debt Funds

• Closed Ended Fund With Minimum Tenure of 3 Years

• Employs Diverse/ Complex Strategies and may employ leverage (incl. Invt. In Listed & Unlisted Derivatives)

• Includes generally Hedge Funds

• Open Ended or Closed Ended Fund

General Requirements to be complied by an AIF

• Minimum corpus of the Fund should be ₹ 20 Crores.

• Minimum coupon size for the investor is ₹ 1 Crore.

• Manager continuing’s interest should be 2.5% (5% for Cat. III) of the fund or ₹ 5 Crores whichever is higher.

• Max. no of Investors to be 1000.

• Investments in securities of companies incorporated outside India is permitted.

• Cap on investment in single company is 25% (10%) of investible funds for Cat. I & II (III).

Recommendations

• Deregulation of Design in which Products are structured.

• Sec. 10(23FB) of the Income Tax to be amended to provide complete pass-through.

• Need to remove restrictions on IRDA and PFRDA to invest in PE and VC Funds.

• A separate category of Debt Funds to be removed so PE Funds can use debt as a medium for investment.