In its board meeting yesterday, SEBI announced that it would issue a new set of regulations governing the listing of non-convertible redeemable preference shares and perpetual securities. More than a decade ago, companies used the issue of preference shares as a mode of raising capital from the public, particularly because that did not result in a dilution in equity shareholding (and consequently...
RBI Guidelines for Licensing of New Private Sector Banks
The Reserve Bank of India (RBI) has issued a final set of guidelines for licensing of new banks in the private sector. These guidelines will becomes operational with effect from July 1, 2013 and applications under them for establishing new banks must be submitted to the RBI before that date. These guidelines are based on the draft issued by the RBI in August 2011. Since then, the RBI has received...
New York Courts’ Long-Arm Jurisdiction
The Harvard Corporate Governance Blog has a post discussing a recent judgment that confers significant long-arm jurisdiction to the New York Courts. Here is the summary: On November 20, 2012, the New York Court of Appeals issued an opinion that is of substantial importance to international banks and financial institutions that maintain and use correspondent banking accounts in New York. In Licci...
Willful Defaulters and Derivatives Transactions
The Supreme Court was recently confronted with a question as to whether a company that had entered into a derivatives transaction with a bank could be categorized as a “willful defaulter” under the Reserve Bank of India’s Master Circular on Willful Defaulters on account of non-performance of payment obligations. More specifically, the question was whether a bank could be treated as a “lender” in...
Prepayment fees in loan transactions
It is common practice for loan agreements to provide for a fee/ premium where a loan is repaid earlier than its contractual due date. The said fee is designed to compensate the lender/s for the loss of anticipated income from the transaction and is usually expressed as a percentage of the principal amount prepaid. While the loan agreement sets out the circumstances in which the prepayment fee...
A Review and Analysis of the CDR Mechanism
The out-of-court approach for corporate debt restructuring (CDR) was instituted by the Reserve Bank of India (RBI) over a decade ago. While it has been successful in several cases, there have also been significant shortcomings with the CDR mechanism. In a recent speech, a Deputy Governor of the RBI undertakes a review of the CDR mechanism. A number of issues are examined in the speech, including...
Guarantees and Performance Bonds
Payment obligations under commercial contracts are often secured by means of guarantees issued by banks, which guarantee the performance of the payment obligation by the buyer. For instance, if A and B enter into a contract whereby A agrees to sell B a ship for the price of $50 million, B’s bank may issue to a payment guarantee to A to secure the payment of this amount from B. In the...
The LIBOR Crisis and Corporate Governance
Whenever a corporate crisis erupts (a phenomenon all so common these days), questions quickly emerge regarding the role of governance (or failure thereof) at the companies involved. On a similar note, questions are being raised regarding the failure of board oversight, risk management systems and internal controls at banks such as Barclays that failed to curb manipulation in “fixing” the LIBOR...
JP Morgan’s Trading Losses: Regulation and Governance
There has been a great deal of debate surrounding JP Morgan’s hedging losses announced last week. There is some mystery surrounding the nature of the transactions involved, without full clarity yet on the amount of losses. Andrew Ross Sorkin has a brief explanation of the episode in the New York Times: … Here’s an overly simplistic primer, but you’ll probably get the idea: The company’s...
Regulating the Pay of Bankers in the Private Sector
Last week, the Reserve Bank of India (RBI) issued compensation guidelines for implementation by private sector and foreign banks that become operational from the financial year 2012-2013. This approach is consistent with the trend that corporate governance norms in the banking sector tend to be more controlled than in other industry sectors. Apart from the fact that the pay of CEOs and wholetime...
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