Business standard news updates 2-4-2013

RBI redefines core investment firms’ rules on entry into insurance

BS REPORTER Mumbai, 1 April The Reserve Bank of India ( RBI) has barred core investment companies from the insurance broking business and has laid tighter conditions for entering the insurance business. The guidelines say a systemically important core investment company ( CIC- ND- SI) is a non- banking financial company (NBFC) with an asset size of ₹ 100 crore and above, with not less than 90 per cent of net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies. RBI has said a CIC should have registered net profit continuously for three years if it wanted to enter the insurance sector. The risks involved in an insurance business should not get transferred to the CIC. “CICs cannot enter into the insurance business as agents. CICs that wish to participate in the insurance business as investors or on risk participation basis will be required to obtain prior approval of the Reserve Bank ( which) will give permission on a case- to- case basis, keeping in view all relevant factors,” said RBI. At present, NBFCs venturing into insurance are governed by guidelines in this regard. RBI said in view of the unique business model of CICs, it has been decided to issue a separate set of guidelines for their entry into insurance. “ While the eligibility criteria, in general, are similar to that for other NBFCs, no ceiling is being stipulated for CICs in their investment in an insurance joint venture. Further, it is clarified that CICs cannot undertake an insurance agency business,” it added. This move comes at a time, when some NBFCs have entered into agreements to purchase stake in insurance companies. In March, Pantaloon Retail decided to sell 22.5 per cent of its stake in Future Generali India Life Insurance to Industrial Investment Trust Limited ( IITL). IITL is an investment company registered as an NBFC ( non- deposit taking) with RBI and is listed on the Bombay Stock Exchange and National Stock Exchange. The IITL Group has subsidiary companies in real estate, infrastructure, stock broking and insurance broking. RBI said CICs exempted from registration with RBI do not require prior approval, if they fulfill all the necessary conditions of exemption and their investment in an insurance joint venture would be guided by Insurance Regulatory and Development Authority ( Irda) norms. To be eligible to set up a joint venture company for undertaking an insurance business with risk participation, RBI said the CIC should have minimum owned funds of ₹ 500 crore. Further, the level of net nonperforming assets shall be not more than one per cent of the total advances and the record of the performance of the subsidiaries, if any, of the CIC concerned should be satisfactory. RBI has also advised the CIC to comply with all applicable regulations including CIC Directions, 2011. “ Thus, CICsND- SI are required to maintain an adjusted net worth which shall be not less than 30 per cent of aggregate risk- weighted assets on the balance sheet and the risk- adjusted value of off- balance sheet items,” it said. Further, it said an NBFC ( in its group/ outside the group) would normally not be allowed to join an insurance company on a risk participation basis and, hence, should not provide direct or indirect financial support to the insurance venture. Within the group, it said CICs may be permitted to invest up to 100 per cent of the equity of the insurance company on either a solo basis or in ajoint venture with other nonfinancial entities in the group. This would ensure that only the CIC, either on a solo basis or in a joint venture with the group company, is exposed to insurance risk and the NBFC within the group is ring- fenced from such risk. In a case where a foreign partner contributes 26 per cent of the equity, with the approval of Irda/ Foreign Investment Promotion Board, more than one CIC may be allowed to participate in the equity of the insurance joint venture. NEW NORMS |Core investment companies (CIC) have been barred from insurance broking business |RBI says a core investment company ( CIC) should have registered net profit continuously for three years if it wants to enter the insurance sector To set up a JV company for undertaking an insurance business with risk participation, CIC should have minimum owned funds of ₹ 500 crore

‘ECB norms for HFCs likely to be reviewed’

Government and Reserve Bank may relax norms for paid- up capital and net- owned funds BS REPORTER Mumbai, 1 April National Housing Bank ( NHB) today said the ministry of finance and the central bank were considering reviewing the eligibility criteria for housing finance companies ( HFCs) to raise money through external commercial borrowing ( ECB). “We are expecting modification in some features found to be a little restrictive to allow more players ( to tap ECB). This is being considered by the Reserve Bank of India ( RBI) and the government,” NHB Chairman R V Verma said. “ RBI has already sent its comments to the government.” Verma said RBI and the government were considering relaxing HFC norms for paid- up (share capital) and net- owned funds. In his Budget 2012- 13 speech, then finance minister Pranab Mukherjee had allowed ECB for affordable housing projects in urban areas. Following this, RBI had fixed the ECB limit for 2012- 13 at $ 1 billion. The guidelines stated only HFCs with minimum paidup capital of ₹ 50 crore and net owned funds of ₹ 300 crore for at least the last three financial years were eligible to raise funds through ECB. A few developers, as well as the top three HFCs, Housing Development Finance Corporation, LIC Housing Finance and Dewan Housing Finance, had approached NHB, the regulator for HFCs as well as nodal agency for the scheme, for ECB. Verma said after the review, these HFCs would be informed of the final approval by RBI. For 2012- 13, the $ 1 billion limit had been fully applied for, he said. Since the financial year had ended yesterday, he was “ sure RBI will consider an extension for raising ECB”, he added. Based on utilisation, afresh limit for ECBs would be announced for 2013- 14, he said. On the urban housing fund announced in Budget 2013- 14, Verma said NHB had already formulated the scheme and sent it to the ministries concerned — of finance and housing & urban poverty alleviation. The scheme, he said, would be operational in 15 days to a month. “We are expecting modification in some features found to be a little restrictive to allow more

RBI eases interest rate norm for power debt restructuring

SUDHEER PAL SINGH New Delhi, 1 April The Reserve Bank of India ( RBI) has agreed to a coupon rate of 8.9 per cent for the bonds to be issued by state power distribution companies ( discoms) under the central governmentsponsored debt recast scheme, which has so far not cut much ice with states. This eliminates a major irritant for the financial restructuring plan ( FRP), as talks between the Centre and states have been stuck with the latter demanding favourable interest rate. States had demanded lower interest rates on the bonds in order to have less financial burden on them. With RBI agreeing in principle to a formula that works to 8.9 per cent currently, more states are likely to subscribe to the FRP scheme. The formula has four components –the government of india ( GoI)’ s securities of a particular nature, average spread of state government loans, spread for compensation for non- SLR ( statutory liquidity ratio) status and incremental cost of capital. “RBI has given its approval for the modalities worked out for the formula for calculating coupon rate for bonds. Based on the formula, the rate works out to 8.90 per cent, though it may slightly vary from one state to another,” power secretary PUma Shankar told Business Standard. An increased debt burden, coupled with a higher outgo on interest payment, would have left the state governments with lower elbow room to meet the fiscal responsibility targets under the Fiscal Responsibility and Budget Management Act. The formula for coupon rate has been decided after due consultations with