business standard updates 23-2-2013

New banks: RBI welcomes all, but sets stiff riders

BS REPORTER Mumbai, 22 February The Reserve Bank of India (RBI) today issued the final guidelines for new bank licences, allowing any type of company to apply for a permit, paving the way for new banks after nine years. RBI said it would allow applications till July 1. No specific industry was barred from applying, although draft rules issued in August 2011 had barred real estate companies and brokerages. But the central bank has put stiff conditions. For example, the guidelines said a promoter group’s “ business model should not be misaligned with the banking model” and its business should not potentially put the bank and the banking system at risk on account of “group activities which are speculative or subject to high asset price volatility”. Many experts said real estate companies and brokerages would find these conditions onerous. DLF, the country’s largest real estate company, said it would not apply as it wanted to focus on its core business. Some nonbanking financial companies could face a challenge, as RBI has not permitted the firms to carry out activities otherwise undertaken by banks. The applications, expected to come in from Monday, will be screened by a high- level committee of external experts. A decision would be taken by the central bank. RBI said successful applicants have a year to set up a bank. The new banks must make a stock market listing within three years — one year longer than proposed in the draft rules. The rules are intended to ring- fence a company’s regulated financial services operations, RBI said. It said the aspirants will have to set up non- operative financial- holding companies (NOFHC), which should hold a minimum 40 per cent of the equity capital in the bank. This has to be reduced to 20 per cent within 10 years and 15 per cent in 12 years from the date of start of business. An NOFHC will be registered as a non- banking financial company with RBI and will be governed separately. At least half the directors at such holding companies shouldn’t be connected to the founder groups, RBI said. “Entities, groups should have a record of sound credentials and integrity, be financially sound with a successful track record of 10 years.” The minimum equity capital required for setting up a bank under the new rules is ₹ 500 crore. Foreign shareholding shouldn’t exceed 49 per cent in the first five years. The new banks must open at least a fourth of its branches in rural areas – a condition, many experts said, almost impossible to achieve. RBI said applicants meeting the eligibility criteria might not get a permit. Feedback on the applicants will be sought from enforcement and investigative agencies, it said. Public sector entities will be allowed to apply for a licence. The draft norms had talked about private sector entities only. NEW LENDER GUIDELINES |Entities, groups in private sector, public sector and NBFCs eligible for bank licences; no sector excluded cap on foreign holding in new banks and minimum paid- up equity capital at ₹ 500 cr minimum stake of non- operative holding company in the bank for five years; to be cut to 15% in 12 years of total branches must be in rural and unbanked areas |Firms with sound credentials and integrity, and 10 years of successful business eligible |New banks must be listed within three years — one year longer than what the draft had proposed |Finance ministry expects permits to be issued by Mar 2014 49% 40% 25% Source: RBI Final norms remove bar on sectors; applications to be accepted till July 1 GUIDELINES FOR NEW BANK LICENCES P6> Realtors, brokerages may not pass test RIL may apply for bank licence Guidelines fair & open to all: India Inc RBI DY GUV SINHA SET TO GET ONE- YEAR EXTENSION RBI Deputy Governor Anand Sinha, due to retire this month- end, is set to get an year’s extension. He was the architect of the bank licence norms. P6 > BACK PAGE P14> Conversion challenge before NBFCs

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Conversion challenge before NBFCs

BS REPORTER Mumbai, 22 February Non- banking finance companies ( NBFCs) are seen as key contenders to receive the regulators green signal to foray in the banking space. However, some of the likely applicants face a challenge in meeting the criteria to convert themselves into a bank. In its final guidelines, the central bank has clearly said such NBFCs will not be permitted any activity a bank cannot do. If an NBFC converts, any activity a bank is not allowed to undertake should be divested, the Reserve Bank has said. The minimum net worth for an NBFC converting to a bank is ₹ 500 crore. The southbased Shriram Group, among the top contenders for abanking foray, has two NBFCs in its fold. “ The guidelines don’t seem different from the draft ones. We will have to discuss it with RBI,” said G S Sundararajan, group director. “ We need to understand the implications in greater detail and then take a call.” There are certain challenges before NBFCs convert. Most have a strong geographical presence or one in an asset class. The challenge for Shriram would be converting asizable asset base in one sector ( commercial vehicles). While NBFCs don’t have a sectoral lending cap, banks do. Analysts seconded the view. “ For some NBFCs, going for banking might not be a wise idea. It depends on the business model of individual NBFCs,” said Shinjini Kumar, director, PricewaterhouseCoopers. “There are some upsides as well as downsides in becoming abank.” RBI’s draft guidelines had said groups having 10 per cent or more in total income from broking or real estate activities would not be allowed to promote a new bank. However, it did away with these conditions in the final guidelines. Therefore, agroup such as Religare Enterprises has also shown interest in applying for a banking licence. It had 12 per cent income from broking activities as of December 2012. “We welcome the final guidelines. Banking is a logical extension of Religare’s diverse India financial services platform and we will certainly apply for a licence,” said Sunil Godhwani, chairman and managing director. Kolkatabased SREI Infrastructure Finance, an NBFC mainly into core sector lending, also said it would apply for a licence. RBI also cleared the deck for industrial houses to apply. Reliance (ADAG), Tata Group and Aditya Birla Group already have an NBFC within their groups and are likely to apply. “Reliance Capital will be interested in applying,” said Sam Ghosh, chief executive. “The Aditya Birla Group remains committed to meeting all the financial needs of its target customer and aligning with this strategy, banking will play a key role. Therefore, we intend to apply,” said Ajay Srinivasan, chief executive, financial services. RBI GUIDELINES FOR NEW BANK LICENCES If an NBFC converts, any activity, a bank is not allowed to undertake should be divested and the minimum net worth for an NBFC converting to a bank is ₹ 500 crore, the Reserve Bank said in its final guidelines

Reports of negligence in MCA21 project ‘ misguided’: Infosys

PRESS TRUST OF INDIA New Delhi, 22 February Infosys, earlier awarded the contract for developing and maintaining the website of the ministry of corporate affairs (MCA), today said it had fulfilled its obligations and any reports of negligence were "misguided". Earlier this week, MCA had asked rival firm Tata Consultancy Services ( TCS) for temporary assistance to resolve glitches related to the electronic filing system, MCA21, currently being implemented by Infosys. Concerns were raised over glitches in MCA21, including slow speed and difficulties in uploading documents. The MCA21 portal was launched in 2006 and is the main platform for companies to file documents to the registrar of companies. Infosys had taken over the MCA21 initiative from TCS on January 17, this year. "Successful transition depends upon the current state and stability of the applications and the full cooperation of both service providers. We believe that we have fulfilled all our obligations as per the contract," Infosys said in a statement. It added the company was in constant touch with the ministry, providing information relevant to the architecture and functioning of the portal and has made no significant changes to the system managed by incumbent vendor, Tata Communications. "Any reports that imply that the instability in the MCA21 applications is on account of our negligence are misguided," Infosys said. Tata Communications was the vendor used by the earlier provider ( TCS) to manage the technology infrastructure. "We have decided to continue to retain the services of Tata Communications to manage the technology infrastructure for us as well," Infosys said. Infosys had won a 6.5- year contract to develop and maintain the MCA21, an application suite offered by the ministry of corporate affairs. "Transitioning a large application suite like MCA 21 at the best of times is complex.... We are working with Ministry to ensure that the system performs to its optimal level," Infosys said.

Budget may introduce new tax regime for SEZ units

NAYANIMA BASU New Delhi, 22 February The Union Budget for 2013- 2014 is likely to introduce a new tax regime for units located in Special Economic Zones ( SEZs). This will be on the lines suggested under the proposed Direct Taxes Code (DTC) legislation. Under the new scheme, SEZ units will get investment- led tax benefits, not those based on the profits earned. Under the new norms, a company will enjoy income tax ( I- T) benefits till it recovers the investment made to set up the unit inside an SEZ. It will start paying income tax similar to those paid by units outside SEZs once it recovers the capital. This is to retain the interest of companies to set up shop inside the tax- free enclaves, a senior commerce department official told Business Standard. However, it is unclear if the new tax regime will apply to existing or new units. Some experts say the move will largely benefit those with high investments, as in multiproduct or manufacturing SEZs. The investment component for information technology ( IT) companies, for instance, are comparatively lower. “ This is not practiced anywhere in the world. This will only give rise to more litigation. Only sectors having huge investments will benefit such as in the infrastructure sector but this will be extremely discouraging for IT companies,” said Hitendra Mehta, partner, Vaish Associates, a Delhi- based corporate, tax and business advisory law company. Under Section 10AA of the I- T Act, SEZ units get full exemption on export income in the first five years, 50 per cent for the next five years and 50 per cent of the ploughed- back export profit for the next five years. Major SEZ developers are concerned about the deadline for profit- linked deductions with the proposed introduction of DTC. “While we discuss the support given to the export sector, only the tax and duty forgone is highlighted. We forget the contribution made by this sector in bridging the trade deficit. The Ministry of Finance should re- look while finalising the Budget, especially in view of the widening trade deficit year after year… Developers are probably shying away from making investments as they are apprehensive of getting units to establish their units in their SEZs if there is no tax advantage available. The major benefit a unit can get is the I- T benefits,” said P C Nambiar, director of Serum Bio Pharma Park, the country’s first biotech SEZ and chairman of the Export Promotion Council for EOUs ( export- oriented units) and SEZs ( EPCES). EPCES has also urged the finance minister to remove the Minimum Alternate Tax ( MAT) and Dividend Distribution Tax ( DDT) on SEZs. Introduction of MAT and DDT last year had adversely impacted SEZ developers and units. Of the 588 SEZs formally approved, 385 have been notified but only 161 are operational. As of September 30, total investments in SEZs was ₹ 219,000 crore and employment generated was 893,465. Export during 2011- 12 was ₹ 364,477 crore. This sector registered export growth of 36 per cent over the previous period in the first half of this financial year. New model suggested under proposed Direct Taxes Code Bill Under the new norms, a company will enjoy income tax benefits till it recovers the investment made to set up the unit inside an SEZ RUN- UP TO THE BUDGET 2013- 14