Public Financial Institutions: Effect of latest Ministry of Corporate Affair Circular

The Ministry of Corporate Affairs, Government of India (or Central Government) issued a General Circular No. 34 dated June 2^nd, 2011 “Guidelines for declaring financial institution as Public Financial Institution under Section 4A of the Companies Act, 1956” which dealt with guidelines for recognizing institutions as Public Financial Institutions.

Public Financial Institution or PFI is nowhere defined under Companies Act, 1956. Its major reference is only available in Section 4A of the Act, wherein certain institutions are referred as PFI. However, the term Financial Institution is defined under two statues:

Section 2(h) of ‘The Recovery of Debts Due to Banks and Financial Institutions Act, 1993’ defines “Financial Institution” as:-

(i)                 a PFI within the meaning of Section 4A of the Companies Act, 1956;

(ii)      the securitization company or reconstruction company which has obtained a certificate of registration under Section 3(4) of SARFAESI Act, 2002;

(iii)             such other institution as the Central Government may, having regard to its business activity and the area of its operation in India by notification, specify;

Section 2(m) of ‘The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ puts the definition of “Financial Institution” as:-

(i)                 a PFI within the meaning of Section 4A of the Companies Act, 1956;

(ii)       any institution specified by the Central Government under Section 2(h)(ii) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993;

(iii)        the International Financial Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958;

(iv)         any other institution or NBFC as defined in Section 45-I(f) of Reserve Bank of India Act, 1934, which Central Government may, by notification , specify as financial institution for the purpose of this Act;

Sub-section (1) of Section 4A of the Companies Act, 1956 mentions six institutions to be regarded as PFI for the purpose of the Act. Sub-section (2) of the said section empowers Central Government to declare an institution as PFI by notification in Official Gazette provided they follow the following criteria:-

(i)                 it has been established or constituted by or under any Central Act; OR

(ii)           not less that 51% of the paid-up share capital of such ‘institution’ is held or controlled by Central Government.

Central Government, vide notifications under Section 4A(2), have added 54 institutions as PFI.

From the above, it is amply clear that the term ‘Public Financial Institution’ or PFI do not conform to a particular definition. However, it is also certain that such institution is usually a Financial Institution primarily into the field of industrial / infrastructure finance and only on it notification becomes a PFI.

Coming back to the circular, the Central Government has made it clear that the Companies (or Financial Institutions) applying for being declared as PFI has to fulfill the following criteria:-

(a)      Establishment under special Act or Companies Act being central Act (in conformity of Section 4A(2)(i))

(b)     Main business should be industrial / infrastructure financing

(c)      Net worth of Rupees one crore or more

(d)     Registered as Industrial Finance Company with RBI or as an Housing Finance Company with National Housing Bank

(e)      In case of CPSUs / SPSUs, no restriction shall apply with respect to financing specific sector(s) and networth. (in conformity with Section 4A(2)(ii) and also adding state government entities to the preview)

The effect of this circular is that is paves the way for Financial Institutions in private sector , specifically in the field of infrastructure / industrial financing, which usually have long gestation period, to get registered as a PFI.

Certain benefits which a PFI enjoys under Companies Act, 1956 are:-

(1)   Issue of Shelf Prospectus for raising monies (Section 60A)

(2)   Appointment of Auditor in a company where such PFI has significant stake,  by special resolution (Section 224A)

(3)   Relaxation in making inter-corporate loans and advances (Section 372A)

(4)   Reference to the Tribunal for Sick Industry (Section 424A)

(5)   Operating Agency for reviving Sick Industry (Section 2 (31AA))

This would certainly enable the private Financial Institutions to have a better position and say while extending loans and advances to industrial / infrastructure projects. It also provides better conditions for raising funds and monitoring investments made in these sectors where gestation period is high.

© Tarun Mitra

June 10, 2011

References:-

1.      Companies Act, 1956

2.      The Recovery of Debts Due to Banks and Financial Institutions Act, 1993

3.      The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

4.      MCA Circular No. 34, dt. June 2nd, 2011

Star-Zee Distribution Alliance: A Challenge to Competition Law

The Mint, New Delhi edition on Tuesday, May 24, 2011 reported that the Star TV and Zee Network are joining hands for distribution of their television channels. Both the networks, which have in their portfolios television channels with the highest viewer ship in the country, presently distribute channels through their own respective joint ventures, Zee Turner Limited and StarDen for Zee Network and Star TV respectively. This proposed joint venture between two top television companies could have serious impact on the Cable TV industry of the country; it would not only affect the Cable TV distributors and DTH operators but also the local Cable TV operators and the end consumers.

This proposed joint venture, poses a serious challenge to the Competition law, as there is clear cut absence regarding the status of the joint ventures in the Act. Although, the Act talks about the cartels, but proviso to subsection (3) of Section 3 of the Competition Act, 2002 provides that:

“Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.”

Which will clear cut provide a defense to the companies to claim that their JV is in nature of “increasing efficiency” of distribution, as Mint reports quoting an unnamed Zee TV executive “move should be seen in view of the growing piracy of broadcasters’ signals as well as the monopoly of large cable networks in some markets such as Punjab and Tamil Nadu. Some states are monopolized by a single operator and we find it hard to collect subscription fees”. It is an open secret that cable TV signals are being pirated and in many instances mafia controls the cable TV operations, however by making the consumer pay by their nose is any solution.

Such move will only lead to cartelization by the broadcasters to increase the revenues. Such cartel will not only squeeze cable TV operators but also increase the subscription rate, which will give no leeway to the consumer to seek recourse.

The report further states other broadcasters might also join this joint venture, making it near monopoly situation in the market. Further, it is also believed, as the report states, that the both companies are scrambling to declare their JV before June 1^st, when the Combination regulations comes into force, thereby bypassing the law.

However, as it is stated earlier, that the law regarding to Joint Ventures is vague and can form a grey area in the Competition Act. But if this joint venture happens, it will surely will one of the greatest challenges to the emerging field of Competition law in the country.

© Tarun Mitra

May 25, 2011

References:-

1.      The Mint, “Star, Zee to join hands for distribution”, May 24, 2011

2.      Competition Act, 2002

3.      The Competition Commission of India (Procedure in regard to transaction of business relation to combination) Regulations, 2011

  

Just My Thoughts…..

Just My Thoughts…..

January 24^th, 2011 will always remain as a memorable day in my life. Though I passed my CS Final on August 2010, got my MSOP done on January 14^th, 2011 and was finally admitted member of this esteemed institute, the Institute of Company Secretaries of India, on January 20^th, 2011. But it was on January 24^th, 2011 on which I was allotted my membership number, culminating a long and arduous battle. As I said, it has ended a battle, just a phase, not the war.

For the last few months, I have not shared anything in my blogs, whether it is this one or Target Aim Shoot, either I had refrained myself or I was too lazy to share anything. It is a feeling that has become a common fixture in my character in 2010. The world has also meanwhile turned into quite a smutty place, with each one of us from every strata of society dying to gets its pie.

Whether is corruption in the government, or in the roads, or in the media or even stupid reality shows. We have metamorphosed into an eternally corrupt society which accepts the basic tenet that if something is above for free then it must be welcome. We can see murder and pretend nothing happened, we may even enjoy it, cherish it and relish its memories later. Of course, you can argue that I’ve being cynical, but just honestly, take a minute out and look into the mirror; you will definitely find the answer. Alas! The word ‘honesty’ no longer figures in the dictionary anymore.

But still there is some sanity, or some faint resemblance of it. We all want to move and we do move, but at which direction, we do not know. We are rather unclear about the destination and unsure of the path we have taken. We go on complaining but we seldom try to find the problem in the first place itself.

Sorry for diversion but just cannot help it, you just can’t blame god and government for everything. Coming back to me, I have joined twitter few months back, and I’d found it rather too fast for my palette. It just like a quickie or a blind date where it happens and ends within few minutes and only one realizes is the sensation of something that had happened. It is too fast for my sub-conscious and sometimes elicits response you just don’t want to give. But I’ll be there slowly in my own way, although I find it too overwhelming.

Meanwhile, I will be doing more off technical writing here than just sharing of my memories, poetry and stories. But I finding it would be more fruitful to share what I have learned. It is indeed difficult to maintain two different blogs or third one would be even tougher. However, I will be writing some literature (or gibberish as you may rate).

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Is all is well in the world? No it isn’t. As I said, the war had begun now and many of my MSOP mates can concur with what I said. MSOP has been a great platform to make new friends and those 15 days were very special for me, I was just like passing out parade were each participant jelled like a family. Now, we many be in different parts of the country, but we will never ever forget that once we all got together out of compulsion of statue but have to leave with a heavy heart.

© Tarun Mitra

February 4, 2011