GIFT for Gujarat: Sebi clears IFSC rules, nod for municipal bonds

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New Delhi | Updated: March 23, 2015 1:06:19 AM

The Securities and Exchange Board of India (Sebi) on Sunday announced guidelines for International Finance Services Centres...

Gujarat International Finance Tec-City, GIFT city, narendra modi, SEZ, Sebi, Sebi GIFT regulation, Sebi IFSC, U K Sinha, Arun JaitleyFinance minister Arun Jaitley and Sebi chairman UK Sinha after the first post-Budget meeting with the regulator’s board in New Delhi on Sunday.

The Securities and Exchange Board of India (Sebi) on Sunday announced guidelines for International Finance Services Centres (IFSCs), the first of which will be the Gujarat International Finance Tec-City (GIFT). These economic zones will compete with financial hubs like Singapore and Dubai and attempt to corner a share of the global financial services business. The guidelines allow foreign firms to raise capital within the economic zone via depository receipts and debt securities and require stock exchanges to do business with a relatively low level of capital.

The regulator also allowed an easier pricing formula for banks converting debt to equity of companies in distress; lenders can now convert at a price arrived at by a ‘fair price formula’ which is not lower than the face value. “Creditors can take a 51% stake in a troubled company at a fair value or the face value of the share, whichever is higher, chairman UK Sinha told reporters after a board meeting in the capital.

Sebi also put out norms for municipalities to issue bonds under which municipal bodies can raise funds for projects to augment their infrastructure. These norms have built in safeguards such as linking bonds to specific projects and keeping revenue generated from projects in escrow accounts so as to protect investors.

Sinha expects institutional investors, including foreign pension funds, to show interest in such bonds as India plans to build 100 smart cities.

Relaxations have been given to stock exchanges, clearing corporations and depositories to set up business through a subsidiary or the joint venture route in an IFSC. Exchanges–local or foreign–can set up a subsidiary with a capital of  just Rs 25 crore but must raise it to Rs 100 crore in three years. Similarly, clearing corporations can start operations with a capital of Rs 50 crore and increase it to meet the regulatory capital requirement of Rs 300 crore in three years. Sinha said Sebi would engage with potential intermediaries and was willing to make further changes once it received feedback.


Among  relaxations for IFSCs, financial intermediaries will be given three years to meet the norms on shareholding and demutualisation. The guidelines allow foreign companies to raise funds in foreign currency in the international financial centre. Given the extent of offshore fund-raising by Indian corporates, IFSCs could emerge as a hub of foreign currency loan syndication. Similarly, the finance SEZ could help the country lure back large-scale rupee and equity derivatives trading taking place in centres like Singapore and Dubai.

The issues related to tax rates on entities operating in the international financial centre, would be addressed by the government, Sinha said. A low tax rate structure is required to compete with international financial centres which offer a zero or very low tax regime.

The easier conversion norms for lenders converting loans of distressed companies into equity will help banks since they were converting at a price that was often way higher than the market price. “The relaxations are intended to revive such listed companies and provide more flexibility to the lending institutions to acquire control over the company in the process of restructuring, to the benefit of all shareholders,” Sinha said.

Under the current rules, the pricing of preferential allotment of troubled companies is calculated on the basis of the 26-week average or two-week average price of the stock with the date of CDR approval treated as the reference date.

Sebi board meeting

* Approves broad norms for International Financial Service Centres(IFSC)
* Allows domestic and foreign intermediaries to set up stock exchanges, clearing corporations and depositories in subsidiary or joint venture route in GIFT. Gives three year time frame to these entities to meet capital and other regulatory requirements
* Permits issue of depository receipts and debt securities in the International Financial Services Centre in GIFT by domestic as well as foreign firms.
* Allows listing and trading of equity shares by foreign companies, depository receipts, bonds, currency and interest rate derivatives, index based derivatives.
* Mutual Funds and Alternative Investment Funds can invest in securities listed in the International Financial Services Centre.
* Allows lenders to convert debt into equity shares in troubled companies at a fair value determined by the market regulator or face value of the share, whichever is higher
* Municipalities allowed to tap market to raise funds for infrastructure projects. Adds riders such as mandatory rating of bonds and cash generated from projects to flow to a separate escrow account to assure investors

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