ROLE OF STOCK EXCHANGE IN CORPORATE GOVERNANCE

ROLE OF STOCK EXCHANGE IN CORPORATE GOVERNANCE

“Corporate governance is not a matter of right or wrong -'it is more nuanced than that.” 

- Advocate Johan Myburgh

India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company." It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution.

In the corporate governance area, there are few issues quite as important as the role of stock exchanges in the governance process. Stock exchanges can play a substantial or limited role in the process. In the India, they are major players, requiring boards with a majority of independent directors and various committees, likewise staffed with independent directors. In that sense, the NSE & BSE have a substantial regulatory role.

SEBI committee defined the objective of corporate governance as the maximization of shareholders’ wealth keeping in mind the interests of the other stakeholders. However, we must also ensure that the interests of other shareholders are not getting affected in the process.

GLOBAL PHENOMENA

The OECD Steering Group on Corporate Governance has embarked on a project on The Role of the Stock Exchanges in Corporate Governance suggesting a number of issues arising from recent changes in the role of the exchanges. The role of exchanges in corporate governance has also been examined in work with non-member countries and further work on this topic is foreseen in the context of the Asian and Latin American Corporate Governance Roundtables.

Other international organisations and industry groups have also in recent years considered stock exchanges’ regulatory functions, and the closely related topic of competition between exchanges. This includes work by the International Organisation of Securities Commissions (IOSCO) in 2006 as well as the World Federation of Stock Exchanges (WFE) has so far been addressed only tangentially. Independent academic literature, on the other hand, has addressed some of the issues of this article. Ever since the first demutualisation of an exchange (Stockholm in 1993) studies of listing, competition, consolidation and internationalisation of exchanges has become a rapidly growing industry.

RELEVANCE OF ROLE OF STOCK EXCHANGES’ IN CORPORATE GOVERNANCE

Stock exchanges have established themselves as promoters of corporate governance recommendations for listed companies. Demutualisation and the subsequent self-listing of exchanges have spurred debate on the role of exchanges. The conversion of exchanges to listed companies is thought to have intensified competition. And, the sharper competition has forced the question of whether there is a risk of a regulatory ''race to the bottom".

Also exchanges are uneasy about the prospect of having to continue performing their traditional regulatory and other corporate governance enhancing functions amid a shrinking revenue base. Therefore extension of role and wider responsibility are always welcome.

Following points show relevance of role of Stock Exchanges’ in the Corporate Governance:

1.Stock exchanges in the region developing rapidly; new exchanges being established
2. Stock exchanges remain government owned entities
3. CG codes proliferating, some no longer voluntary
4. Regulatory or enforcement powers of exchanges limited
5. Room for strengthening of listing rules
6. Disclosure of listed companies requires further attention
7. No evidence of race to the bottom, need to align with industry peers

THE TRADITIONAL ROLE OF EXCHANGES IN CORPORATE GOVERNANCE

Historically, the main direct contribution of exchanges to corporate governance has been listing and disclosure standards and monitoring compliance. The regulatory function of stock exchanges was in the past mostly limited to issuing rules and clarifying aspects of existing frameworks. The standard-setting role of stock exchanges was essentially exercised through the issuance of listing, ongoing disclosure, maintenance and de-listing requirements. On the enforcement side, stock exchanges have shared their regulatory function with capital market supervisory agencies. In addition to overseeing their own rules, stock exchanges were assigned the role of monitoring the compliance with legislation and subsidiary securities regulation. Since the promulgation of the SEBI, stock exchanges have often enlarged their regulatory role to embrace a wider palette of corporate governance concerns. They have contributed to the development of corporate governance recommendations and encouraged their application to listed companies. The objective of the following part of the article is to summarize these key channels for exchanges’ contributions to good corporate governance in listed companies. 

THE EVOLVING ROLE OF EXCHANGES IN RESPECT OF CORPORATE GOVERNANCE


1. Exchanges act as a source of corporate governance related regulation

Exchanges provide complementary rationales for establishing themselves as a source of corporate governance-related regulations. In essence, by raising transparency and discouraging illegal or irregular practices, exchanges are act as regulatory authorities. The regulatory function of exchanges is exercised in the context of an existing legal framework. Exchanges' ability to introduce and enforce regulations is obviously circumscribed by the authority of the relevant market regulators. To the extent that the relevant laws or securities regulation already address corporate governance of listed companies, the role of exchange regulation can therefore only be complementary. For instance, rules on prospectus issuance follow largely from SEBI Prospectus Directive which may have further limited the scope of standards setting by exchanges. Even in jurisdictions where exchanges are empowered to issue regulations, they may be subject to an approval by another regulatory authority, e.g., in the India, proposed changes to exchange rules must be filed with the SEBI.

2. Exchanges played a central role in the effective implementation of national corporate governance codes

“Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.” One of the first among such endeavors was the CII Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The committee was formed in 1996 and submitted its code in April 1998. Later SEBI constituted two committees to look into the issue of corporate governance – the first chaired by Kumar Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy three years later. The SEBI committee recommendations have had the maximum impact on changing the corporate governance situation in India. The Narayana Murthy committee worked on further refining the rules. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures.

3. Compliance requirements

Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i.e. supervision) of stock exchange authorities. Clause 49 of the listing agreement with stock exchanges provides the code of corporate governance prescribed by SEBI for listed Indian companies. With the introduction of clause 49, compliance with its requirements is mandatory for such companies. Exchanges have played a pioneering role in the development of the Indian securities market.

4. Awareness raising efforts have also played a role

Some exchanges have been actively involved in increasing the awareness around the value of good corporate governance. For instance, The National Stock Exchange (NSE) a leading stock exchange covering various cities and towns across the country has established & organized training sessions and other educational projects in order to increase the awareness of securities market & good governance practices and the Code of Best Practice for Listed Companies. Such programmes not only serve the general public but also require corporates to maintain good governance in light of investor awareness. In the same way an equally important accomplishment of BSE Limited is its nationwide investor awareness campaign - "Safe Investing in the Stock Market" under which awareness campaigns and dissemination of information through print and electronic medium is undertaken across the country. BSE Limited also actively promotes the securities market awareness campaign of the Securities and Exchange Board of India.

INCREASING COMPETITION AMONG STOCK EXCHANGES

While competition among stock exchanges is not new, it has intensified in recent years in various areas of exchange activities, including trading, listing and settlement. In addition to the obvious effects of demutualisation and listing of exchanges, a rapid improvement in information technology and the creation of innovative financial instruments have also been among the key factors. In consequence, the traditional view of exchanges as the controllers of – at least some has been severely shaken. Exchanges are increasingly seen as providers of specific services in competitive markets, which include trading, but may or may not include settlement and other activities 

Moreover, the scope of competition has broadened from the national to the international level. While yesterday's competitors were, for example, domestic exchanges such as NSE and BSE, today's competition is between large consolidated groups operating in an internationalised financial market place. The emergence of international exchange groups in fact mirrors the evolution of the listed companies sector itself. Historically, the focus of exchanges was on attracting domestic issuers, which encouraged competition for listings among different national exchanges. As this focus has shifted on attracting large international companies, including foreign ones, exchanges' basis of operations has shifted accordingly. Competition between exchanges, both for domestic and foreign listings, has therefore intensified.

ISSUES IN CORPORATE GOVERNANCE: PAST & PRESENT

Effective corporate governance provides for more efficient allocation of resources, as the return on assets in countries with the highest levels of corporate governance is double that of the return on assets in countries with the lowest levels of corporate governance. India has been proactive throughout its past 20 years of economic liberalization in bringing regulations to help foster effective corporate governance that contributed to its economic growth.

Conclusion

Development of norms and guidelines are an important first step in a serious effort to improve corporate governance. The Ministry of Corporate Affairs has proposed the New Companies Bill 2008 which aims to improve corporate governance by vesting greater powers in shareholders. These have been balanced by greater emphasis on self-regulation, minimization of regulatory approvals and increased and more transparent disclosures. The existing (Clause 49) and ensuing (The Companies Bill, 2008) legislations do cover the fundamentals of effective corporate governance and India compares favorably with most other developing and Asian economies as far as the adequacy of corporate governance regulations are concerned. Improved corporate governance, however, does not solely rest on control through increased regulations. The bigger challenge in India, however, lies in the proper implementation of those rules at the ground level. In India at present there are 23 recognised stock exchanges along with NSE & BSE playing a prominent role in carrying out objectives of SEBI rules, regulations & guidelines in true letter and spirit.

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BIBLIOGRAPHY

1. OECD Document on Role of Stock Exchanges’ in Corporate Governance by Hans Christiansen & Alisa Kolderstova


2. Corporate Governance in India – Evolution and Challenges by Rajesh Chakrabarti, College of Management, Georgia Tech
3. The state of corporate governance in India - A Poll by KPMG (http://www.in.kpmg.com/tl_files/pictures/cg%20survey%20report.pdf)

4. Official website of National Stock Exchange (http://www.nseindia.com/)

5. Official website of Bombay Stock Exchange (http://www.bseindia.com)

SEBI's New Takeover Code

SEBI'S New Takeover Code 

Vide Notification dated September 23, 2011, Market watchdog SEBI has notified the much awaited New Takeover Regulations namely SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as “SEBI (SAST) Regulations, 2011”) which will replace the existing Takeover (SAST) Regulations, 1997. The new Regulations shall come into force on the 30th day from the date of their publication in the Official Gazette i.e. w.e.f. October 22, 2011, any acquisition or sale of shares of Listed Company shall be governed by provisions of SEBI (SAST) Regulations, 2011.

Highlights of New Takeover Regulations are as under:

1. Increase in Initial Threshold Limit from 15% to 25%.

The Initial Threshold limit provided for Open Offer obligations is increased from 15% to 25% of the voting rights of the Target Company. Since SEBI (SAST) Regulations, 2011 will be applicable from October 22, 2011, thus it’s a last opportunity for all the Promoters holding less than 25% but more than 20% to come within bracket of Creeping Acquisition. Otherwise even the existing Promoters of these Companies have to give offer to consolidate their holding.

2. Creeping Acquisition Limit raised from 15%-55% to 25%-75%:

Now there will a single and clear creeping acquisition bracket. This will be available to all persons holding 25% or more but up to 75% i.e maximum permissible non-public holding shall be eligible for creeping acquisition of 5% each financial year.

3. Open Offer Trigger Point based on Individual Holding:

Now the Individual Acquirer Shareholding shall also be considered for determining the Open Offer Trigger Points apart from consolidated promoter shareholding. (Regulation 3(3) of SEBI (SAST) Regulations, 2011)

4. Increase in Offer Size from 20% to 26%.

The Offer Size is increased only upto 26% instead of TRAC Recommendation of 100%. It’s a good move from the point of view of domestic acquirers on account of lack of proper bank funding options available in India

5. New Provisions in case of increase in shareholding beyond the maximum permissible non-public shareholding due to Open Offer

Obligation on the acquirer to bring down the non-public shareholding to the level specified and within the time permitted under Securities Contract (Regulation) Rules, 1957; 

Ineligibility to make a voluntary delisting offer under SEBI (Delisting of Equity Shares) Regulations, 2009, unless a period of twelve months has elapsed from the date of the completion of the offer period. 

6. Abolition of Non-compete fees.

SEBI has accepted the TRAC Recommendation of scrapping the non-compete fee or control premium. Any amount paid to the Promoters/Sellers whether as consideration, non-compete fee or control premium or otherwise, shall be added in Offer Price and hence public shareholders shall be given offer at the highest of such prices.

7. Definition of “Control” modified:

A new definition of Control has been introduced in the new Regulation which is similar to recommendation of TRAC Report with an exception that the word “Ability” has been removed. The definition is as under:

“Control” includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner:

Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position

8. Change in Control

Any change in control of the listed company shall be only after Open Offer. The exemption from Open Offer available in case of change in control without acquisition of substantial shares, through a special resolution by postal ballot process, has been withdrawn and now the only route available for change in management and control is through the Open Offer to the shareholders of the Target Company. This is in contrast with the Regulation 12 of the SEBI (SAST) Regulations, 1997 which provides for the change in control through the special resolution passed by way of postal ballot.

9. No Exemption in case of acquisition from other competing acquirer

10. Frequently Traded Shares

For determining the frequency of trading in shares, the trading turnover during the 12 months preceding the month in which the Public Announcement is made will be considered. Further, the volume of trading for frequently traded company increase from 5% to 10% to have a more realistic picture.

11. New Definitions Introduced

“Enterprise Value” means the value calculated as market capitalization of a company plus debt, minority interest and preferred shares, minus total cash and cash equivalents. 

“Volume weighted average market price” means the product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares traded on the stock exchange. 

“Volume weighted average price” means the product of the number of equity shares bought and price of each such equity share divided by the total number of equity shares bought. 

“Weighted average number of total shares” means the number of shares at the beginning of a period, adjusted for shares cancelled, bought back or issued during the aforesaid period, multiplied by a time-weighing factor. 

12. New Formats Introduced for PA, LOO, and Disclosures, Exemptions, Recommendation on the Open Offer by the Board of Directors and so on.

13. Detailed provisions for Voluntary Open Offer

The concept of voluntary open offer has been separately dealt in the SEBI (SAST) Regulations, 2011.In case of voluntary open offer, the offer size may be of 10% or more of the voting rights at the will of the Acquirer.

14. Detailed provisions relating to Indirect Acquisition:

The New Regulations prescribes detailed provisions relating to Indirect Acquisitions which is a welcome move as there was quite confusion. The New Regulations define the situations which will be deemed as Indirect Acquisition.

15. Recommendation on the Open Offer by the Board of Target Company

A recommendation on the offer by the Board of Target Company has been made mandatory and such recommendations shall be published at least two working days before the commencement of the tendering period in the same newspapers where the public announcement of the open offer was published, and simultaneously, a copy of the same shall be sent to SEBI, Stock Exchange and Manager to the Offer.

16. Revision in SEBI fees to be given while submitting the draft letter of offer

17. Provisions relating to Exemption from Open Offer has been modified

18. Other Consequential Amendments

Simultaneously with the amendment in SEBI (SAST) Regulations, 2011, the format of disclosure of shareholding as provided under Clause 35 of the Listing Agreement in respect of following has been replaced

        a. Statement showing holding of securities (including shares, warrants, convertible securities) of persons belonging to the category “Promoter and Promoter Group”, : 

        b. Statement showing holding of securities (including shares, warrants, convertible securities) of persons belonging to the category “Public” and holding more than 1% of the total number of shares; 

       c. Statement showing holding of securities (including shares, warrants, convertible securities) of persons (together with PAC) belonging to the category “Public” and holding more than 5% of the total number of shares of the company. 

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Development in Corporate Governance After Satyam Scam

SATYAM SCAM: REGULATORY REFORM AND THE IMPORTANCE OF CORPORATE GOVERNANCE

The Satyam scandal has shocked India. It is being called India's Enron. Many in the financial circles are dismayed that the biggest-ever corporate fraud in the country could have escaped unnoticed for so many years. It has brought into question the levels of corporate governance in the country, and has cast an ugly shadow on the once shining image of Indian industry overseas. The National Stock Exchange has excluded Satyam, which has received several prominent awards for corporate governance in the past India has seen corporate scandals in the past, but never one of this magnitude. A software company, touted as a success story, the 4th largest software company in India and one that services around 1/3rd of the Fortune 500 companies, the events of the past one month have been a total shock. They have called into question the entire range of issues related to ethics, corporate governance, fiduciary responsibilities, professional auditing, and so on. 

The Satyam scandal highlights the importance of securities laws and corporate governance in emerging markets. Mounting evidence suggests that weak corporate governance slows economic development. There is a broad consensus that emerging market countries must strive to create a regulatory environment in their securities markets that fosters effective corporate governance. India has managed its transition into a global economy well, and although it suffers from corporate governance issues, it is not alone as both developed countries and emerging countries experience accounting and corporate governance scandals.

CORPORATE GOVERNANCE

Corporate governance is important for economic development. Research shows that the ratio of stock market capitalization to GDP in countries that rank in the highest quartile for corporate governance is four times higher than stock markets that rank in the lowest quartile for corporate governance. Poor corporate governance significantly hampers the ability of businesses to raise capital and impedes economic growth. Effective corporate governance provides for more efficient allocation of resources, as the return on assets in countries with the highest levels of corporate governance is double that of the return on assets in countries with the lowest levels of corporate governance. India has been proactive throughout its past 20 years of economic liberalization in bringing regulations to help foster effective corporate governance that contributed to its economic growth.

India immediately portrayed the Satyam scandal as an aberration to try to salvage the remaining confidence in its capital markets. Several commentators, however, claimed that the scandal was not an aberration, but a sign of governance issues in India. 

REFORMS AFTER SATYAM SCAM

After the Satyam scandal, investors and regulators called for strengthening the regulatory environment in the securities markets. In response to the scandal, the SEBI revised corporate governance requirements as well as financial reporting requirements for publicly traded corporations listed in the country. The SEBI also strengthened its commitment to the adoption of International Financial Accounting Reporting Standards. In addition, the Ministry of Corporate Affairs is devising a new Corporate Code and is considering changing the securities laws to make it easier for shareholders to bring class action lawsuits.

1. Governance Reform – Independent Directors

The Satyam scandal reinforced the Indian regulators' commitment to continue the process of corporate governance reform. Even before the Satyam scandal broke, India was in the process of updating its 1956 Companies Act, which sets out key Indian corporate governance rules. The SEBI is considering several proposals ranging from mandating increased due diligence on transactions to increasing personal liability of board members. If reform continues on its current course, reform within the 1956 Companies Act will make it easier for shareholders to sue officers and directors of corporations. The SEBI is also considering making publicly listed companies carry director and officer liability insurance to protect shareholders from damages. Additionally, the SEBI proposed creating a law that provides whistleblowers with protection for reporting fraudulent activity. Finally, the SEBI revised takeover regulations to increase disclosure in takeovers.

2. Disclosure of Pledged Securities

After Satyam, the SEBI increased disclosure obligations of promoters and controlling shareholders. Before the Satyam scandal, promoters[2]and controlling shareholders were not required to disclose to investors if they had pledged their stock. Pledging stock is the process whereby a person offers his or her stock to a bank or other institution as collateral for a loan. The problem with a controlling shareholder pledging stock is that once the stock drops below a certain level, the drop will trigger a margin call. After receiving a margin call, the person who pledged the stock must provide additional collateral. If the person cannot provide additional collateral, the lender will liquidate the stock that the person posted as collateral, potentially causing a significant decline in a company's stock price. This hurts minority shareholders who are unaware that the controlling shareholder had pledged his or her stock. Two weeks after Satyam's collapse, the SEBI made it mandatory for controlling shareholders to disclose any share pledges.

3. Increased Financial Accounting Disclosures

The SEBI also recently proposed requiring companies to disclose their balance sheet positions twice a year. Pre-Satyam, the regulations only required disclosure of balance sheet positions once a year. The increased reporting of companies' balance sheets will provide investors with more information on the stability of a company's financial position. The increased reporting requirements of balance sheets will probably eventually lead to the requirement that companies provide a statement of cash flow in its biannual reports as well. Increasing both the frequency and detail of disclosure will help provide for a more robust market check—e.g. investors will be able to police companies better and pay more attention to accounting irregularities. For example, increased frequency of disclosure of Satyam's balance sheet could have led to an investor discovering, and pressing the board to investigate, the claimed large cash deposits in non-interest bearing accounts more quickly.

4. IFRS (Adoption of International Standards)

Satyam strengthened India's commitment to adopting International Financial Reporting Standards ("IFRS") by 2011. Currently, Indian Generally Accepted Accounting Practices and the IFRS differ significantly. Globally, more and more countries are moving towards IFRS, as currently more than 100 countries require, permit, or are converting to IFRS. Adopting IFRS will facilitate investor comparisons of financial performance across country lines and will increase confidence in the accounting numbers.

5. Creation of New Corporate Code - Ministry of Corporate Affairs

In addition to the new SEBI regulatory requirements, the Indian Ministry of Corporate Affairs is drafting a new corporate code for Indian publicly listed companies. Adherence to the Code will be voluntary; however, every company that deviates from the code's requirements must disclose the deviations to the ministry. The Ministry of Corporate Affairs anticipates that the new code will impose more stringent disclosure obligations than the SEBI currently requires.

The Ministry of Corporate Affairs recently proposed a new law that would make it easier for Indian investors to form class action lawsuits against fraudulent actors in the company. Indian Corporate Affairs Minister, Salman Khushid, stated that he envisioned drafting the law to provide investors with a claim similar to the shareholder derivative suit[3] that U.S. law permits. Indian law currently creates obstacles to investors filing class action lawsuits. The Ministry of Corporate Affairs hopes that this new law will provide Indian citizens with the confidence to invest in the financial markets.

NABARD's refinance is available to State Co-operative Agriculture and Rural Development Banks (SCARDBs), State Co-operative Banks (SCBs), Regional Rural Banks (RRBs), Commercial Banks (CBs) and other financial institutions approved by RBI. While the ultimate beneficiaries of investment credit can be individuals, partnership concerns, companies, State-owned corporations or co-operative societies, production credit is generally given to individuals. NABARD has its head office at Mumbai, India..

Criteria for refinance

 

1.	Technical feasibility of the project and adequate response from prospective beneficiaries
2.	Financial viability and adequate incremental income to ultimate borrower to repay the loan within a reasonable period
3.	Organisational capability to ensure close supervision

ü      The refinance is provided to SCARDBs, SCBs, CBs and RRBs. However, the beneficiaries of the programme are partnership concerns, companies, state-owned corporations or cooperative societies. But, finally the assistance reaches the individuals, who are members of the primary credit institutions.

ü      The refinance is usually 50% to 95% of the project cost. The balance will be met by the banks and the concerned state governments or the Government of India in the case of SCARDBs. With a view to ensure credit flow to certain thrust areas, the quantum of refinance is enhanced to 100% as in the case of special category beneficiaries like SC/ST members and self help groups.

Institutions Eligible for Refinance:

  State Co-operative Agriculture & Rural Development Banks (SCARDBs)

  Regional Rural Banks (RRBs)

  State Co-operative Banks (SCBs)

  Commercial Banks (CBs)

  State Agricultural Development Finance Companies (ADFCs)

  Scheduled Primary Urban Co-operative Banks (PUCBs)

  North East Development Finance Corporation (NEDFC)

  Non-Banking Financial Companies (NBFCs)

Purposes:

  Farm Sector :

Agriculture and allied activities such as minor irrigation, farm mechanization, land development, soil conservation, dairy, sheep/goat rearing, poultry, piggery, plantation/horticulture, forestry, fishery, storage and market yards, bio-gas and other alternate sources of energy, sericulture, apiculture, animals and animal driven carts, agro-processing, agro-service centres, etc.

  Non-Farm Sector :

Artisans, Small & Micro Enterprises, handicrafts, handlooms, power looms, etc

Loan Period :

  Upto a maximum of 15 years

Refinance Windows

1. Automatic Refinance Facility (ARF): Automatic Refinance Facility (ARF) will be extended to the Commercial Banks/State Coop Banks/ Regional Rural Banks/Primary Urban Coop Banks/ADFCs/NEDFi/NBFCs without any upper ceiling on quantum of refinance, bank loan or TFO for all kinds of projects under Farm Sector (FS) & Non Farm Sector (NFS). However, ARF will be extended to the SCARDBs for projects with TFO up to `50.00 lakh for all kinds of projects under Farm Sector (FS) and Non- Farm Sector (NFS).
2. Pre-sanction Procedure: In case, any bank intends to avail refinance under pre-sanction procedure, they may submit projects to NABARD.
3. Project based lending ( Subject to Appraisal & Prior Sanction by NABARD )

Extent of Refinance

The extent of refinance will be as under:

1. States in Eastern Region, North Eastern Region including Sikkim, Hilly States, Chhattisgarh and Lakshwadeep: 100% of eligible bank loans for all purposes.
2. For Other Regions: 100% for all thrust areas as explained in Policy Circulars
3. 95% for all other diversified purposes and 80% for Krishak Sathi Yojana. 70% to NBFCs for all eligible purposes.

Ultimate Borrowers

Although refinance is provided to SCARDBs/SCBs/CBs/RRBs/ADFCs/PUCBs/NEDFC the ultimate borrowers of investment finance may be individuals, proprietory/partnership concerns, companies, state-owned corporations or co-operative societies.

Interim finance

SCARDBs are being extended interim finance in order to enable them to provide investment credit to ultimate borrowers and avail refinance within 3 months against the same.

Types of Refinance Facilities

Agency	Credit Facilities
Commercial Banks	Long-term credit for investment purposes Financing the working capital requirements of Weavers' Co-operative Societies (WCS) & State Handloom Development Corporations
Short-term Co-operative Structure (State Co-operative Banks, District Central Co- operative Banks, Primary Agricultural Credit Societies)	Short-term (crop and other loans) Medium-term (conversion) loans Term loans for investment purposes Financing WCS for production and marketing purposes Financing State Handloom Development Corporations for working capital by State Co-operative Banks
Long-term Co-operative Structure (State Co-operative Agriculture and Rural Development Banks, Primary Co-operative Agriculture and Rural Development Banks)	Term loans for investment purposes Pilot scheme for financing short term loans in three states
Regional Rural Banks (RRBs)	Short-term (crop and other loans) Term loans for investment purposes
State Governments	Long-term loans for equity participation in co-operatives Rural Infrastructure Development Fund (RIDF) loans for infrastructure projects
Non-Governmental Organisations (NGOs) - Informal Credit Delivery System	Revolving Fund Assistance for various micro-credit delivery innovations and promotional projects under 'Credit and Financial Services Fund' (CFSF) and 'Rural Promotion Corpus Fund' (RPCF) respectively

Interest Rates

REVISION IN RATE OF INTEREST ON REFINANCE

The rate of interest on refinance have been revised as under w.e.f 5 November 2011

S.No.	Agency	Rate of interest as applicable in other than NER states & Sikkim (%)	Rate of interest as applicable in NER states & Sikkim (%)
1	Commercial Banks	10.50 (min)	10
2	RRBs	10	10
3	SCBs /PUCBs/NEDFi	10	10
4	SCARDBs	10	10
5	NBFCs	11.25	10
6	ADFCs/NABFINS	9	-

Co-Finance

Eligible Projects.

• Geographical areas and sectors to which credit is not flowing for various reasons; • Projects involving Sunrise technologies where risk perceptions of banks are very   high

• Thrust areas where NABARD has an important role to play

• Areas / projects where large outlays and long gestation period keep the banks  away.

• Projects involving longer repayment period.

Farm Sector Schemes

Village Adoption/Village development Plan, Backward Blocks, Bamboo Farming, MACs, Bio Fuels, Crop Insurance, Agriculture Commodities, SGSY, Farm Mechanisation, Land Purchase, Scheme for AgriClinic/ Agri-Business Centres (ACABCs), SEMFEX, Capacity Building for Adoption of Technology (CAT)

Agri Export Zone (AEZ), Contract Farming, Farmer's Club

Non-Farm Sector Schemes

1. Enterprise Loan Scheme (ELS)

The refinance schemes which are in force viz. Integrated Loan Scheme (ILS) and Composite Loan Scheme (CLS) have been merged and modified into a new scheme ie. Enterprise Loan Scheme (ELS).

Salient features

Institutions eligible - for drawal of refinance. Commercial Banks, Regional Rural Banks, State Co-operative Banks, State Co-operative Agriculture and Rural Development Banks and Scheduled Primary Urban Cooperative Banks.

Borrowers - Individuals, artisans, small entrepreneurs, groups of individuals, associations (formal and informal), proprietary/partnership firms, co-operative societies, registered institutions/ trusts, NGOs/voluntary agencies, private and public limited companies, etc financed by the above eligible institutions.

Purpose - To set up new units as well as for modernisation/ renovation/ expansion/diversification of existing units and also for replacement of old and obsolete machinery even if the units were not initially financed by the banks and refinanced by NABARD.

To change over to new process of manufacturing/introduction of new technology/ computerization, etc.  For Expansion/Diversification, any unit which is in existence for at least two years will be eligible.

Eligible activities - All manufacturing, processing, marketing and approved service activities in the SSI sector with emphasis on Cottage, Village, Tiny Industries, Rural Artisans and Rural Crafts. All activities in rural areas or benefiting rural areas that are income generating and/or employment generating, including all service sector activities, are eligible activities under NFS for refinance assistance.

Project Components - For block and/or working capital requirements of tiny/SSI/Service sector units.

In respect of cottage and village industries, artisans, etc, a component for consumption credit could be built in the Working Capital component keeping in view the value of the family labour engaged in the productive activity. If a unit avails Working Capital alone, the ceiling for refinance limit per unit shall be limited to Rs 10 lakh.

Repayment period of loan - The repayment period should be fixed between 2 years and 10 years with a need based moratorium of upto 18 months for individual cases, based on the debt servicing capacity of the borrower and taking into account the nature of activity to be financed, operating cycle, cash flow and the borrower’s sustenance needs.

2.Small Road and Water Transport Operators Scheme (SRWTO)

Borrowers - Individuals, groups of individuals including partnership/ proprietary firms and co-operative enterprises would be eligible for assistance under the scheme. The borrowers should be from the "rural areas" and should utilise the vehicle mainly for transportation of rural farm and non-farm products and inputs and passengers to/ from marketing centres.

Vehicles - The vehicle should be duly registered with Regional Transport Authority (RTA) as "public transport" vehicle.

The number of vehicles to be financed shall be subject to the ceiling on such number as stipulated by RBI for financing under priority sector lending (at present 10 vehicles).

Other t & c also to be complied.

Security and Insurance - The vehicle should be registered as 'public goods/ passenger carrier' with the Regional Transport Authority (RTA). The loan will be advanced against the hypothecation of the vehicle in favour of the financing institution. The hypothecation clause/ bank's lien should be noted with the RTA.

The vehicle should be comprehensively insured for the full value covering all risks. The insurance policy may be either in the joint names of the borrower and the bank or assigned in favour of the latter. The vehicle should be adequately insured at all times without any break.

The vehicle should be inspected periodically by the financing bank.

Repayment- Generally, the loan is repayable within 5 years with a moratorium period of 6 months.

3.Soft Loan Assistance Scheme for Margin Money

Objective - The objective of the scheme is to provide financial assistance to the prospective entrepreneurs who have the requisite talents and traits of entrepreneurship, but lack necessary monetary resources of their own for setting up units/implementing projects under NABARD refinance schemes for non-farm sector, SEMFEX II borrowers and innovative, high tech projects, export oriented units, agro-processing schemes, and agriculture graduates for setting up of Agriclinics and Agribusiness Centres covered under the farm sector.

Eligibility  - The loan assistance towards margin money will be available to the entrepreneurs/promoters comprising individuals, proprietary/partnership concerns, groups of individuals, industrial co-operative societies, government/quasi-government agencies, promotional agencies, development corporations, registered and charitable institutions and voluntary organisations.

Soft Loan Assistance for Margin Money will not be available for SRWTO schemes (with the exception to SEMFEX II borrowers) and Rural Housing.

Mode of Assistance

Margin Money assistance will be by way of soft loans to the entrepreneur/ promoter.

Scope of assistance

Margin money assistance shall be available to the deserving entrepreneurs of all categories covered under this scheme under ARF whether or not the financing bank avails refinance from NABARD, subject to the conditions stipulated in the following paragraphs.

Quantum of Assistance

The quantum of assistance will be determined, among other things, on the basis of the gap between the normal level of borrower's contribution (margin) prescribed by RBI and the borrower's own minimum contribution (stake) for the project to be stipulated by the bank and also the other subsidies/incentives/assistance, if any, provided by the Central/State Government(s).

Extent of refinance :

Refinance assistance to the financing banks will be provided to the extent of 100% of the margin money loan .

Rate of interest :

The refinance assistance provided against the loan for margin money will be, for the present, free of interest. However, the financing bank will be allowed to levy a service charge upto a maximum of 5% p.a (except for Agri-Clinic/Agri-Business where it is 2% p.a) simple rate at the discretion of the bank, on the outstanding amount of margin money loan. In the case of borrowers of SEMFEX-II, the banks may waive the service charge at their discretion.

Repayment period :

Margin Money loan will be recovered along with the term loan in suitable instalments.

Schemes under pre - sanction procedure

(i) Term Loan to SSI units (through CBs & Scheduled PCBs)

Borrowers

Individuals, Proprietary / Partnership concerns, Private/ Public Limited Companies, Promotional/ Developmental Organisations, State Level Federations/ Corporations, Joint Sector Undertakings.

Purpose

Setting up of new units and modernisation/ renovation/ expansion/ diversification of existing units (other than agro-industries).

Eligible items for investment

Land and Site Development (including cost of land upto margin money required to be brought in by the borrower).

Construction of workshed (including civil structure, godowns for storage, market outlets and other essential amenities).

Plant & Machinery. (including machinery/ equipment required for packaging and preservation)

Equipment and tools.

Delivery van.

Project formulation and consultancy charges.

Preliminary and pre-operative expenses.

Margin for working capital.

Repayment period

3 to 10 years with moratorium of 12 months.

Debt Equity Ratio (DER) - 3 : 1

(ii) Term Loan to Industrial Co-operatives (through SCBs)

 Borrowers

Industrial Co-operative Societies identified as viable/ potentially viable by the State Government.

Eligible items of investment

a) Acquisition of equipment and tools.   b)Construction of workshed.

c)Showroom.                           d)Godown.       e)Purchase of delivery van

 

(iii) Project Finance for Agro-Industries (through CBs, Scheduled PCBs & SCBs)

 Borrowers

a) State level corporations such as agro-industries corporations, forest/ tribal development corporations, KVIC/ KVIB, state level cooperative societies/ federations, co-operative marketing/ processing and industrial societies, joint sector undertakings, registered societies in KVIC/ KVIB fold.

b) Public/ private limited companies, partnership firms and proprietary concerns.

Items eligible for term-loan assistance

Cost of land (upto the limit of margin to be brought in by the borrower), site development, construction of worksheds/ building, plant and machinery, equipment and tools, cost of technology upgradation, technical know-how and engineering, preliminary and pre-operative expenses, project formulation and consultancy fees, acquisition of transport vehicle, preservation including cold storage, packaging and marketing, etc.

Repayment period

3 to 10 years with moratorium of 12 months.

Debt Equity Ratio - 3 : 1

* * *

All about Section 25 Company

SECTION 25 COMPANY

1.MEANING

Companies which are formed for the following purpose are known as Section 25 Companies or Association not for Profit

• For the purposes of promoting commerce, art, science, religion, charity to any other useful object
• With intention to apply its profits or other income for promoting its objects, and • Which prohibits payment of any dividend to its members,

Section 25 Company is a voluntary association of person formed for promotional activities. Besides establishing a Trust and Society, the other alternative to establish a Non – Profit organization is Section 25 Company.

Section 25 Companies are formed as Public or Private Company having a limited liability under the Companies Act 1956. These companies can be formed with or without share capital, in case they are formed without capital, the necessary funds for carrying the business are brought in form of donations , subscriptions from members and general public.

Section 25 Companies can be formed only after obtaining the necessary licence from the Central Government, which imposes certain terms and conditions while granting the approval. In case the company fails to comply with the terms and condition at any point of time, the licence can be cancelled.

Section 25 Companies are not required to add the suffix Limited or Private Limited at the end of their name.

Due to their nature of business, the Government of India has relaxed the application of various provisions of the Companies Act on such companies.

2.PROCEDURE FOR REGISTRATION

Section 25 i.e. a non-profit company may be public or private. If the non-profit company is a private company a minimum of only two members is required to form it. However, if the non-profit from is for a public purpose, then a minimum of seven are needed.

1. Application for a name applying for availability of name to the Registrar of Companies is the first step towards registration of the non-profit company. Four names are to be suggested to the Registrar in prescribed Form.

2. Memorandum and Articles Memorandum and Articles of the non-profit company are required to be approved by the Regional Director and the ROC. The documents required for submission of application are:

i)             Three printed copies of the memorandum and articles of association of the applicant company, signed by all the promoters with full name, address and occupation (No stamp duty is payable on the Memorandum and Articles of Association)

ii)            A declaration by an advocate or a chartered accountant that the memorandum and articles of association have been drawn up in conformity with the provisions of the Act and that all the requirements of the Act and the rules made there under have been duly complied with, in respect of registration;

iii)           List of the names, addresses and occupation of the promoters, members of board of directors, name of companies, associations and other institutions in which promoters of the applicant company are directors or hold positions, description of the positions held by them (three copies)

iv)           Statement of assets and liabilities (“only existing company)

v)            Source of income of the Applicant Company and estimate of annual expenditure;

vi)           A statement giving a brief description of the work, if any, already done by the association and of the work proposed to be done by it after registration in pursuance of section 25;

vii)         A statement on grounds on which the application is made under section 25 of the Companies Act, 1956;

viii)        A declaration by each of the persons making the application that he/she is of sound mind, not an undischarged solvent, not convicted by a court for any offence and does not stand disqualified under section 203 of the Companies Act, 1956 for appointment as director.

 3. License under section 25 An application for the license under 25 for the company is to be submitted to the Regional Director (Department of Company Affairs). The license essentially permits the word 'Limited' or 'Private Limited' to be deleted from name of the company. It could take upto 12 weeks after application to receive the license under section 25 of the Companies Act 1956. Pursuant to application to the Regional Director (within seven days thereafter), the applicant company has to publish a notice in a newspaper where the registered office is situate and certified copy of the notice to filed with the Regional director.

 4. Registration with ROC Registration certificate is normally granted within one month after filing section 25 licenses; Converting existing company to section 25 companies The Companies Act, 1956 also facilitates the conversion of an existing company to a non-profit company. Foreign Director There is no bar under Indian law for a foreigner to be a Director in a section 25 company, (relevant permissions prescribed under the Foreign Exchange Management Act.).

 

3.ADVANTAGES OF A SECTION 25 COMPANY

1 .Freedom in choice of name

Indian companies are required to  use the term ‘limited’ or ‘private limited’ as the case may be in their names as required by section 13. But section 25 companies are allowed to dispense with the use of term ‘limited’ or ‘private limited’ from their names. This helps the company to enjoy limited liability without disclosing to the public the nature of liability of its members.

2. Minimum Share Capital

Section 25 Companies have been exempted from this requirement regarding minimum share capital by insertion of sub-section (6) through Amendment Act of 2000. As such they can be registered even if they have share capital less than the statutory minimum.

3.Type of a NON PROFIT ORGANISATION

IN INDIA, a NON-PROFIT ORGANISATION can be formed in the following three business structures only:

Trust
Society

Section-25 Company.

So, you can form a NGO under section25company form and can enjoy its privileges.

4. Publication of Name

A section 25 company has been exempted from the provisions of  section 147 and as such is not required to mention its name and address as required in case of all other companies.

5. Time and Place of AGM

Section 25 Company are free to determine the date, place and time of its AGM according to their convenience and feasibility, provided the time, place and date of the AGM has been decided before hand by the Board of Directors

6. Notice of AGM

Section 25 Company can hold an AGM after giving a notice of 14 days length instead of 21 days as required by section 171(1). Therefore they can call an AGM at a short notice of 14 days instead of 21 days.

7.Maintaining of Books of Accounts

Section 25 Company is required to maintain books of account relating to a period of only four years instead of eight years immediately preceding the current year.

8.Service of Copies of Certain Document

A Section 25 Company is allowed to send the required documents at least fourteen days before the date of meeting instead of 21 days.

9.Right of Persons other that Retiring Director to stand for Directorship

If the Articles of the Section 25 Company provide for election of the Directors by ballot system then the provisions of section 257 will not apply to such a company and as a result a person who is not a retiring director and is intending to stand for directorship will not have to follow the procedure laid down by section 257. But if the Articles of the company do not provide for election of director by ballot then section 257 will have to be complied in whole.

10. Increase in Number of Directors

Section 25 Companies are exempted from section 259 and are thus free to increase the number of its directors without seeking approval of central Government.

11. Admission of partnership firm

Despite of the fact that law does not allow partnership firm to become a member of a body corporate as it does not have a legal personality of its own. But, still in case of section25 company, partnership firm is allowed to become its member.

12.Annual Returns of a Company not having Share Capital

Every company not having a share capital is required by provisions of section 160 to file within 60 days of every Annual General Meeting, a return with the Registrar . Section 25 Company without a share capital is also required to file returns with the Registrar as required by section 160 but it has been exempted from mentioning the particulars of the members who are presently with the company or have ceased to be members since holding of its last AGM.

13. Filing of Consent for Directorship

Every person who intends to stand for directorship in accordance with section 257 is required by section 264(1) to file with the company his consent to act as a director if he gets appointed as such. But this has been made non-applicable to the Section 25 Company and as such a person seeking appointment as director for first time need not file his consent in advance with the company for working as a director if appointed.

14. Board Meetings

Under section 285 the meeting of Board of Directors should be held atleast once in every three months and four meetings should be held in a year. However section 25 companies are required to hold meetings of Board of Directors/Executive Committee/Governing Committee only once in every six months but should have held four meetings in a year.

15. Quorum for Meetings

The required quorum for a board meeting of any company under section 287 is one/third of its total strength which is arrived at after deducting the number of interested directors from the t1otal number of directors on the Board or atleast two whichever is higher. But the section 25 company is exempt from this section to the extent that the required quorum for any board meeting is eight members or one/fourth of its total strength whichever is less provided it should not be less than two members in any case.

 16.Exercise of certain Powers

Under section 292 there are certain specified powers which a Board of Directors of the concerned company can exercise only by passing of resolution at the meeting. The Board can exercise all other powers by passing of resolutions by circulation instead of taking them at meetings by following the procedure specified in section 289 of the Act. However section 25 companies are allowed to decide following three matters by passing a resolution by circulation instead of at meetings:

1.                    the power to borrow moneys other than on debentures,

2.                    the power to invest funds of the company, and

3.                    the power to make loans.

17. Disclosure of Interest

Section 25 companies are allowed to conduct trade or business with private companies, firms or persons where some director may be having an interest provided such private company, firm or person regularly does trade or business in such a contract without seeking approval of Board again and again where the cost of such contracts exceeds five thousand rupees in a particular year in which such a contract is entered or seeking approval of central government where share capital of the company exceeds one crore rupees.

18.Maintenance of Registers of Contracts

Under section 301 a company is required to maintain register of all the contracts to which section 297 or 299 applies. But a section 25 company is exempt to the extent that it allowed to maintain register of only those contracts to which sub-sections (1) and (3) of section 297 apply. Thus they are exempted from maintaining registers of those contracts which are made in pursuance of sub-section (2) of section 297 or are covered by section 299.

19. Maintenance of Register of Directors

Under section 303 of the companies act every company is required to maintain a register containing particulars of its Directors, Managing Directors, Managers and Secretary in manner prescribed. These companies are further required to send to the Registrar of Company a duplicate in prescribed form containing all particulars of such register and a notification in duplicate informing the Registrar of nay changes within 30 days of such changes. Section 25 company are not required to notify changes among its directors, etc to the Registrar. They are only required to maintain Registers of their Directors, Managing Directors, Managers and Secretary in prescribed format containing specified particulars and updating the register by making changes in it as when there is some change among the Directors, Managing Directors, Managers and Secretary of the company.

20. Qualification for Secretaryship

Section 25 Company is exempt from the provision of Companies (Appointment and Qualifications of Secretary) Rules, 1988 to the extent that the rules regarding the qualification of a Secretary do not apply to them. Thus they are free to appoint any person as its Secretary whom it feels fit and proper for the same.

4.DISADVANTAGES OF A SECTION 25 COMPANY

1.Restriction on profits earned

A Section 25 Company has to ensure that its profits and all other incomes are utilized only for the purpose of promoting its objects and not for any other purpose. It should also ensure that its profits are not distributed as dividend among its members.

2.Restriction on alteration of memorandum

Section 25 Company cannot alter its objects clause in its Memorandum without seeking the written approval of central government. If an existing company obtains a license under section 25 it has to ensure that its objects are confined to those mentioned in section 25 itself and if not make proper alteration to its memorandum and articles.

3.Compulsory compliances

If the Central Government has imposed some conditions and regulations upon the company for granting a license under section 25 then such a company is bind by such conditions and has to ensure adequate compliance with them.

4,Taxation

Section 25 Company is regarded as a ‘company’ within the meaning of the Income Tax Act, 1961 and as such its income is taxable according to the applicable rates similar to those applying to other companies.

5.DIFFERENCE AMONG TRUST,SECTION 25 COMPANIES AND SOCIETY

BASIS OF DIFFERENCE	SECTION 25 COMPANY	SOCIETY	TRUST
BASIC DOCUMENT	Memorandum of Association Articles of Association	Memorandum of Association Articles of Association with rules & regulations.	Trust Deed – which contains objects of the trust (bye-law)
FORMATION	Little Hard	Simple	Easy
JURISDICTION	Registrar of Comapnies	Registrar of Societies	Deputy Registrar / Charity Commisioner
LEGISLATION / STATUTE	Indian Companies Act 1956	Societies Registration Act 1860	Relavent state Trust Act
OBJECTS	Nonprofit Activities	Literary, Charitable, Scientific and resource oriented	Social benefits & Charitable
MODIFICATION OF OBJECTS	Complicated Legal Procedures	Easy Legal Procedures	Alteration can be undertaken only by the Founder. If the founder is deceased alteration of objects is impossible
REQUIRED MEMBERS	Minimum = 7 Maximum = No limit	Minimum = 7 Maximum = No limit	Minimum = 2 Maximum = No limit
REGISTRATION	As per Companies Act under Section 25	As Society with Society Registrar	As Trust with the Registrar.
STAMP DUTY	No Stamp paper required for Memorandum of association and articles of association.	No stamp paper required for Memorandum of association, and rules and regulations.	4% of Trust property Value will be executed in non judicial stamp paper with the registrar
NAME	Prior approval required from Registrar of Companies.	Very easy to choose	Very easy to choose
MANAGEMENT BOARD	Board of Directors &  Management committee	Governing Body	Trustees
SUCCESSION IN MANAGEMENT	By Appointment	By Election	By Election
MEETINGS	Quite Extensive as per the provision of Company Law	Annual Meeting As per Law. Governing Body meeting as per the rules of Society.	No provisions
LEGAL STATUS	Full Legal Status	Limited Legal Status	Limited Legal Status
STATUTORY REGULATIONS	Exhaustive	Limited	Nominal
MEMBERSHIP TRANSFER	Free or Control as per desire.	Impossible	Impossible
MEMBER ADMISSION	General Body or Board Control through issue of Capital.	Governing Body Control	Not applicable
DISSOLUTION OR TAKE OVER BY STATE	Very risky and difficult	Possible	Possible
PAYMENT TO MEMBERS	As approved by Company & State.	Not restricted	As notified in Trust deed