business standard updates 28-4-2012

Investors may sway state-run banks’ boardroom dynamics

ABHIJIT LELE Mumbai, 27 April The Cabinet-approved Banking Amendments Bill proposing a rise in public sector bank shareholders’ voting rights may see investors vie for larger stakes and a greater say. The cap on voting rights is proposed to be raised from one to 10 per cent in public sector banks (PSBs) and from 10 to 26 per cent in private sector banks. The Bill will now go to Parliament. In essence, it means the government is opening doors for investors who want to have voting rights and a say in the working of PSBs — a move many see as positive. Earlier, even if an investor held more than one per cent in a PSB, their voting rights were limited to one per cent. For instance, Lazard Asset Management LLC (a foreign institutional investor) held 4.6 per cent in Punjab National Bank at March-end. However, its voting rights were limited to one per cent. Now, the FII may feel encouraged to raise its stake for more voting powers. Ashwin Parekh, partner (financial services), Ernst & Young, said, “This is a constructive change, as there has been improvement in the working of state-owned banks due to competition. The increase in investors’ interest (institutional investors) will bring in further improvement in governance.” Industry officials said domestic and foreign institutional investors (FIIs), with substantial holding, would get a chance to seek a board seat. There could be one board seat that may come to FIIs or nongovernment shareholders. With PSBs accounting for over 70 per cent of banking assets, their equity capital requirement is going to be huge. But given the state of government finances, it may think of lowering the threshold for its minimum stake below 51 per cent to facilitate fund-raising from the market. The move may be a precedent to that as well because it will encourage institutional investors to participate in any equity offering by PSBs. There could be a couple of hurdles. For one, according to Reserve Bank of India guidelines, any investor can hold stake in a bank only up to five per cent. Any investor wanting to hold above this limit needs the banking regulator’s permission. Another hindrance, many say, could be the government’s tight grip on the working of PSBs. The government has been asking banks to hike exposure to retail loans, review rate policies (effectively, cut lending rates) and so on. That may sour any potential investor’s mood. An industry official said, “Decisions like waiving off farm loans would be debated more in board meetings if there are nongovernment officials present.” A senior India Banks’ Association official says at present it is the government that calls the shots through its board nominees. Plus, the CMD and executive directors are its employees. “It will be a good beginning but it is going to be long-drawn process to see a shift in corporate governance at PSB boards,” added the official. Hemindra Hazari, head of institutional equity research at Nirmal Bang Securities, said the move should give shareholders some say in management. ECONOMY, P4 >CCI ambitto shrinkafternewlaw Higher voting rights, possible board representation likely to boost investor participation, subject public sector banks to unfamiliar shareholder activism THEIR SLICE OF THE PIE FII holding in selectpublic sector banks Bank The largestFII shareholder Total FII and its stake holding (%) Andhra Bank Genesis Indian Invest 13.45 Company (6.05%) Punjab Lazard Asset 17.38 National Bank Management (4.61%) BankofIndia Lazard AssetMgmt (4.25%) 14.71 Dena Bank Acacia Partners (2.40%) 11.63 Canara Bank HSBCInvestmentFunds 14.49 (1.56%) Oriental Bank Mackenzie Cundhill 10.28 of Commerce (1.47%) BankofBaroda Copehill Mauritius (1.37 %) 13.54 Allahabad Bank Mathtews India Fund 12.54 (1.31%) Indian Bank Stitchting 9.03 Pensidenfonds (1.07%) SBI None with 1%-plus stake 8.70 Figures in % as on March 31, 2012; FII: Foreign institutional investor Compiled by BS Research Bureau Source: Bombay Stock Exchange

With ~40k-cr tax at stake, FinMin firm on I-T amendments

BS REPORTER New Delhi, 27 April Pressure from various quarters notwithstanding, the government is sticking to its guns on retrospective amendments to the Income Tax Act, as it eyes ~35,000-40,000 crore tax realisation from deals similar to the $11-billion VodafoneHutchison deal in 2007. Finance ministry officials said if the government did not opt for the amendments, those who had paid tax in such deals would ask for refunds. The merger and acquisition deals pending in courts include the $150-million Idea CellularAT&T deal, the GE’s $500-mn deal with Genpact, the $981million Mitusi-Vedanta Sesa Goa deal, the SABMiler-Fosters deal and the $770-mn Sanofi Aventis-Shanta Boitech deal. Though officials said other deals were also being investigated, they refused to divulge the details. According to the Income Tax Department’s estimates, deals similar to the VodafoneHutchison one would yield ~35,000-40,000 crore. Officials, however, said these were rough calculations. In the $6-billion Cairn India deal between Cairn Plc and Vedanta, the parties concerned have already made an arrangement to pay capital gains tax to the government. In fact, London-based Cairn Plc has already paid more than $500 million to the Indian government. In the recent Max New York Life deal, Japan’s MS&AD Insurance Group withheld tax while acquiring 26 per cent stake in the company for ~2,731 crore. New York Life Insurance Company said the capital gains should not be subject to tax in India, as it held the shares in the life insurance joint venture with Max India through a holding company in Mauritius. However, it has allowed the Japanese company to withhold the tax as a precaution, and would file for a refund with the tax department later. Meanwhile, officials claimed retrospective amendments would not impact foreign direct investment in India, as investors do not look at only taxes, but the overall economic environment. Vodafone, however, does not agree. A source in Vodafone said even as tax rates may not be minutely assessed while investing, the certainty of tax laws and the policy environment what certainly looked at. He also contested the finance ministry’s view that retrospective amendments to income tax laws were not being carried out in India alone, but in the UK as well In the Barclays deal, the UK government had amended a tax law in 2009 to clarify certain assistance given to companies in distress would not qualify as tax deductions. But when Barclays continued to avail of that exemption, UK authorities clarified the company would have to pay tax for these for the period when the tax laws were first clarified. “It was not as if the law was amended with retrospective effect, as is being done in India. In no other country is it done after a court verdict and that too, with a retrospective effect. You cannot change the rule of the game in between,” the source said. At a meeting between Finance Minister Pranab Mukherjee and his UK counterpart George Osborne, Mukherjee had mentioned the UK’s move to amend its tax law a day before Mukherjee presented the Budget in Parliament. Osborne had told Mukherjee investors were anxious, as India proposed to amend the Income Tax Act retrospectively. VODAFONE-TYPE DEALS IN COURTS: |Idea Cellular-AT&T’s $150-mn deal pending in Bombay HC |GE-Genpact $500-mn deal pending in Delhi HC |Mitsui-Vedanta $981-mn Sesa Goa deal pending in Goa HC |SABMiller-Fosters 2006 deal pending in Bombay HC |Sanofi Aventis-Shantha Biotech $770-mn deal pending in Bombay HC