How 3 European banks helped bring back black money as foreign funds

FP : PTI : 12 Aug 2013

At least three large European banks’ dealings with Indian companies and individuals are being probed for alleged round-tripping of funds by using certain multi-layered transactions in violation of regulator Sebi norms.

It is suspected that some portfolio managers at these banks, which have significant presence in Indian financial markets, could have helped their Indian clients to route their money back into India in disguise of foreign funds through use of investment vehicles across various jurisdictions. The regulator fears that some promoters might also have been involved in such practices to boost share prices of their companies by showing a strong FII interest, a senior official said.

It is suspected that some portfolio managers at these banks, which have significant presence in Indian financial markets, could have helped their Indian clients to route their money back into India in disguise of foreign funds through use of investment vehicles across various jurisdictions. Reuters

Sebi is coordinating with other regulators and agencies in India and abroad as part of investigations into this case, where some well-known companies and industrialists are also suspected to be involved, the official added.

Two of these three banks are from Switzerland and one is from the UK, sources said, while adding that they might not be involved directly and it could be the case that their employees were dealing with the clients directly without keeping the banks in the loop.

Still, the banks could face action on the negligence ground if allegations of wrongdoing come true, a senior official said, while refusing to divulge the identity of the banks and their Indian clients.

Among others, Sebi is looking into the possible use of Protected Cell Companies (PCCs) from places like Mauritius, British Virgin Islands, Cayman Islands and Seychelles for alleged round-tripping of funds back into the capital market in the form of foreign institutional investors (FIIs) and overseas venture capital money.

In 2010, Sebi had barred PCCs to invest in Indian markets through FII (Foreign Institutional Investor) route after it came across instances where certain Indians had used these entities to route their money back into markets as FII funds.

However, the regulator fears that funds structured as PCCs, which are legal entities in many jurisdictions, might be looking at a re-entry into Indian markets through routes like Foreign Venture Capital Funds and other avenues for the purpose of round-tripping of funds.

PCCs are specially designed entities that might comprise of various cells, having funds of various investors, in such a manner that there is legal segregation and protection of assets and liabilities for each cell. Also, the insolvency of one cell does not affect the business of the entire PCC or that of the other cells. Besides tax-related benefits for being considered as a single entity despite having various cells, foreign banks have also been found in the past of hard-selling these schemes to their wealthy clients for reasons like protection of identity.

PTI

New company law to change CSR landscape

A file photo of the BSE building in Mumbai. Companies with a net worth of more than Rs.500 crore or revenue of more than Rs.1,000 crore or net profit of more than Rs.5 crore have been asked to spend at least 2% of their annual net profit towards CSR. Photo: Mint

Live Mint :  Aman Malik  |  Cordelia Jenkins  Mon, Aug 12 2013. 01 45 AM IST

Experts see mixed blessings from new company law; some say the move will result in rise in CSR consulting

New Delhi: India’s firm nudge towards philanthropy in the new companies law, which replaces an outdated legislation with more streamlined rules, is being viewed with misgivings by some, but is likely to boost corporate charitable activity in the country.

The new law to govern firms doing business in India, which has been approved in Parliament and requires a formal presidential sanction, has for the first time laid down ground rules for corporate social responsibility (CSR).

Companies with a net worth of more than Rs.500 crore or revenue of more than Rs.1,000 crore or net profit of more than Rs.5 crore have been asked to spend at least 2% of their annual net profit towards CSR. Although the law does not stipulate penalties for non-compliance, companies are required to justify any shortcoming in this regard.

“It is no surprise that the imposition of such obligations has not been well received by a large section of the corporates,” Shardul Shroff, managing partner of law firm Amarchand Mangaldas, said by email. “While the new Act does give companies leeway in case they are unable to make such contribution, most companies fear the obligation will eventually snowball into becoming a mandatory provision.”

As an immediate impact, the CSR economy in India will grow manifold, experts say.

Taken together, registered companies in India would likely spend Rs.18,000 crore on CSR activities, according to Pavan Kumar Vijay, managing director of New Delhi-based Corporate Professionals Capital Pvt. Ltd, a legal and financial services firm.

“Companies will now be required to spend money on structured activities rather than, say, on religious causes and such like,” said Vijay. “This would mean that there is a big scope for CSR consulting, and we expect this activity to grow.”

The new regulation would mean that the top 100 companies by annual net sales in 2012 will spendRs.5,611 crore on CSR activities, compared with Rs.1,765 crore that they are spending now, according to a March report published in the Forbes India magazine. Government-owned companies account for a significant portion of the current CSR spending.

The rules being framed for the new law are likely to specify 10-15 such activities, which could include allowing expenditure on areas such as education, rural skill development and sports, with built-in safeguards to ensure they are not circumvented.

The CSR provisions could have a “cascading impact” on philanthropy, according to Rohini Nilekani, chairperson and founder of non-profit Arghyam and wife of Nandan Nilekani, a co-founder of software service firm Infosys Ltd and chairman of the Unique Identification Authority of India that aims to provide a unique identity number to all residents of India.

But it could be a mixed blessing, she said.

“CSR has been so narrowly defined within the companies. Until now, what they did with their profits after tax was left up to them,” Rohini Nilekani said. “They were innovating. If they wanted to try out something interesting, they had the freedom. Now they will feel that they better follow the letter of the law.”

India will see a lot more CSR consultancies as a result of the new stipulation, said Dhaval Udani, chief executive officer of Give India, a charitable donation website.

“There are three to four organizations that have been doing it for some time now, but I think we will see a lot more organizations getting into this and individuals consulting companies,” he said in a phone interview.

While several companies today are engaged in such activities in the form of employees volunteering or other non-financial commitments, they are not necessarily counting these as part of their official CSR initiatives because the regulations do not require them to do so, Udani said.

Such efforts may now lose momentum, he said. “It shouldn’t be only about the money given. If companies use their resources or their skills, I believe that is far more useful,” Udani said.

“I wonder, because of this, will that element of CSR start drying up?”

The jury is still out on the impact the new rules will have on the non-profit sector.

“Already we are seeing that many in the NGO (non-government organization) sector have started moving into corporate CSR. There will be a shortage of people available for non-CSR activities,” Rohini Nilekani said over the phone. “Companies will have to start thinking of what additional HR (human resources) they will need in their organizations, many professionals will move into that. Already the existing NGO sector is under so much pressure. This is just one more form. It will definitely have an impact.”

To be sure, it is unlikely to affect the country’s bigger philanthropic organisations much.

“Now we have to make the best of it. For people like me, personal philanthropy could extend into the more political areas and innovation that is high-risk,” Rohini Nilekani said.

“Anything that falls outside the scope of the CSR Bill should be taken up more by personal philanthropic capital.”

The new regulations will have little impact on other forms of philanthropy, and private charitable work and CSR will continue hand in hand, according to Deval Sanghavi, partner and co-founder of Dasra, a philanthropy foundation.

“Many small business owners are the decision makers, but the cheque comes from the company. There is already quite a lot of promoter-led CSR,” Sanghavi said in a phone interview.

“Bill Gates has done more with his personal wealth than Microsoft has. Rohini Nilekani has sold shares recently. That’s an example of how personal philanthropy can at times do more than corporate, when the individual has far greater wealth to give.”

Rohini Nilekani raised Rs.164 crore for philanthropic activities by selling a portion of her shares in Infosys, the company said in a BSE filing on 3 August.

“I think there’s going to be an unlocking of large amounts of capital, which needs guidance and support,” Sanghavi said. “At least, this opens up the conversation now.”