Investor Issues
Government amends rules for depository receipts conversion into shares

RBI and SEBI had already approved partial conversion of IDRs into equity shares late in August, while capping the funds to be raised through IDRs at $5 billion

New Delhi: The Government has amended the rules governing Indian depository receipts (IDR) issued here by foreign companies, after financial regulators Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) allowed part-conversion of securities into equity shares by investors, reports PTI.


The amendment, notified by the Ministry of Corporate Affairs (MCA) in the Companies (Issue of Indian Depository Receipts) Rules, have come into effect from 1st October, as per a ministry notification.


As per the MCA notification, "A holder of IDRs may transfer the IDRs, may ask the domestic depository to redeem them or, any person may seek re-issuance of IDRs by conversion of underlying equity shares," subject to the provisions of Foreign Exchange Management Act (FEMA) and SEBI rules at the time.


Banking regulator RBI and capital markets watchdog SEBI had approved partial conversion of IDRs into equity shares late in August, while capping the funds to be raised through IDRs at $5 billion.


The move is expected to help in attracting foreign entities to list their IDRs on domestic bourses.


"... to retain the domestic liquidity, it is decided to allow partial fungibility of IDRs (i.e. redemption/ conversion of IDRs into underlying equity shares) in a financial year to the extent of 25% of the IDRs originally issued," SEBI had said in its circular on 28th August.


In 2012-13 Budget, the government had proposed to allow two-way fungibility of IDRs to encourage greater foreign participation in the Indian capital market.


In a separate circular, the Reserve Bank also said on 28th August that there would be an overall cap of $5 billion for raising of capital through IDRs by foreign companies in Indian markets.


"This cap would be akin to the caps imposed for FII investment in debt securities and would be monitored by SEBI," it said.


The two-way fungibility allowed for IDRs is similar to the limited two-way flexibility allowed for ADRs and GDRs issued by domestic companies in foreign markets.


This would enable Indian shareholders to convert their depository receipts into equity shares of the issuer company and vice versa.


The restrictions on fungibility was seen as one of the major factors for foreign entities keeping away from listing their IDRs. So far, only foreign company, UK-based banking major Standard Chartered, has listed its IDRs in India.


SEBI had said it decided to prescribe a frame work for two-way fungibility of IDRs to improve the attractiveness and long-term sustainability of such instruments.


Is SBI, BoB, Union Bank and HDFC Bank lending money to builders without any security?

Lenders are indirectly financing builders under a tripartite agreement where the bank can create equitable mortgage only after completion of the project. Till such time, the advances or loan provided directly to the builder by the bank remain unsecured and risky

Several lenders like State Bank of India (SBI), Bank of Baroda (BoB), Union Bank of India (UBI) and HDFC Bank are indirectly providing funding to builders without any tangible security under the guise of “tripartite agreements”.


Indore-based consumer activist Mahesh Natani, who along with his friend got the Reserve Bank of India (RBI) to issue directions to banks for computing interest on savings bank account on a daily basis, has questioned the practice adopted by banks on indirect financing to builders. He had also filed several applications with public sector banks under the Right to Information (RTI) Act, 2005.


In a letter to DK Mittal, secretary, Department of Financial Services, Mr Natani has said that state-run lenders are reluctant to share any information or data regarding loans under the “tripartite agreements”. All the three public sector banks, gave same reply to Mr Natani's applications filed under the RTI Act.


“...the information on how much advanced have been made on the basis of tripartite agreement is not complied during the ordinary course of our business, and compilation of the same would disproportionately divert the resources of the public authority. Hence, the information cannot be provided u/s 7(9) of the RTI Act, 2005,” reads the answer provided by all the three PSU banks.


Here are the replies received by Mr Natani under the RTI Act, 2005...

According to Mr Natani, what is surprising is banks are concealing the information. “I am of the opinion that SBI is not sharing this information because it may have shown the housing loans sanctioned under “tripartite agreements” as “secured by tangible securities”, which is probably not true. Such loans remain unsecured till the borrower creates an equitable mortgage (EM) in favour of the bank which is possible only after project completion which usually takes two to three years depending on the size of the project,” he said.


Specially in case of SBI, such unsecured home loans were worth about Rs60,000 crore or 60% of the lender’s housing portfolio of Rs1 lakh crore as on 31 March 2012. By not making adequate provisions for such unsecured housing loans, SBI was able to show inflated profit for FY12, Mr Natani said.


How the banks provide indirect funding to builders...

1. The modus operandi:

The bank tends to advance housing loan under “tripartite agreement” for housing projects under construction. Under such agreement reached between the bank, builder and the borrower, the builder undertakes to execute sale deed of the flat in favour of the borrower after completion of the project (after about 18-20 months) and the borrower in turn agrees to create equitable mortgage or EM of the said flat in favour of the bank. In fact by doing so, the bank is indirectly financing the builder under the guise of a home loan.

2. What is the risk to the bank?

The bank starts disbursing the loan amount to the builder on behalf of the borrower as soon as they all sign the “tripartite agreement”. In such a situation, the bank does not have the home loan secured by any tangible security till the EM of such flat is created by the borrower in favour of the bank. This usually happens only after 18-20 months, the time take by the builder to execute the sale deed of the flat or property in favour of the borrower. In case, the builder goes bust due to over exposure to real estate market or slowdown in the markets, the bank may be without any tangible security. This may be detriment to the interest of deposit-holders of the bank.

3. Banks involved in this practice:

Among public sector banks, SBI is the leader followed by BoB and UBI. In the private sector, HDFC Bank is engaged in advancing such type of unsecured housing loans.

4. Banks do not have any data:

All the three public sector banks do not have any data on such advances and denied to share the information. The reason (mentioned above) given by these PSU banks does not hold water, especially in the present era of computerisation when central offices are able to monitor big loans on daily basis. According to Mr Natani, the banks might be trying to conceal the details on two grounds.

a) They might have shown these advances as “secured by tangible securities” despite not being so; and

b) Had they shown these advances as “not secured by tangible securities”, they might have been asked by the auditors to make provisions for such unsecured advances, which could have dented their profitability.

5. Not keeping centralised record is against banking prudential norms:

If the bank’s central office is not aware of details of such advances whose securities are yet to be created in favour of the bank, then how will the central office be able to monitor the process of creation of securities by all its branches? It shows lack of prudence on part of these commercial banks, which needs to be rectified at the earliest.

6. RBI’s role as regulator also questionable:

Mr Natani said he sent one letter to RBI on 13 October 2010 in this regard. “The casual reply sent by the RBI after a gap of five months shows lackadaisical approach on its part in taking timely steps to prevent commercial banks from getting involved in reckless and unsecured housing loans under tripartite agreement.” The reply by the RBI proves that its inspectors are not carrying out properly audit of these commercial banks indulged in advancing unsecured home loans in order to boost their priority sector lending.




5 years ago

No doubt about it. The executives get paid for this too.

sivaraman anant narayan

5 years ago

There is some confusion in this article. I am sure in all these cases of home loans, the individual buyer of home is the borrower and he is liable to repay.Not the builder. Collateral from borrower is usually asked for and guaranters too are sought. The builder is roped in to ensure his obligation of executing the sale deed ,which gives the borrower a marketable title which is sought to be mortgaged to the bank. In fact bringing in the builder ensures builder's commitment,which improves the bank's recourse.This is my understanding as a layman ,not as a banker or builder!

Bank of India reduces term deposit rates by 0.10% to 1.25%

For deposits of less than Rs15 lakh, Bank of India lowered its interest rate to 6.5% from 7% for maturity between 31 days to 45 days

Mumbai: State-run lender Bank of India (BoI) has lowered its term-deposit rates by 0.10% to 1.25% in select maturities with effect from Monday, reports PTI.


For deposits of less than Rs15 lakh it has lowered the interest rate to 6.5% from 7% for maturity between 31 days to 45 days, the public sector bank it said in a BSE filing.


For maturity of one year to less than two years, the rate has been slashed by 0.25% to nine% and for 555 days maturity it has been cut by 0.10% to 9.25%, it added.


While for maturity of eight years and above and up to 10 years, the new rate will be 8.75% from 9%.


For deposits of Rs15 lakh and above but less than Rs1 crore, maturity of 31-45 days will attract 6.50% interest rate from 7%, 9% from 9.25% for maturity of one year to less than two years and 9.25% from 9.35% for 555 days maturity.


Also, for maturity of five years to less than eight years the new rate will be 8.75% from 9% and for eight years and above up to 10 years, the rate has been slashed by 0.25% to 8.75%.


BoI has also cut the interest rate by 0.25% to 4.25% for deposits of Rs one crore and above but less than Rs 10 crore for maturity of 7-14 days.


For 15-30 days, the rate has been slashed by 0.25% to 4.75% and for 31-45 days the rate has been cut by 1.25% to 6.75% from 8% earlier.


For 91-179 days, the new rate will be 7.75% from 8% while for 180-269 days, it will be 8.25% from 8.50%.


Earlier, State Bank of India and Oriental Bank of Commerce also cut interest rates on select maturities.


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