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SPVs not to come under cap on investment firms
New Delhi, June 09: The cap on the number of investment companies being floated by companies will not apply to Special Purpose Vehicles set up to route funds into new ventures.
New Delhi, June 09: The cap on the number of investment companies being floated by companies will not apply to Special Purpose Vehicles set up to route funds into new ventures.
Sources with the Department of Company Affairs (DCA) said that the cap of one investment company per company was meant to ensure that investment and trading in securities of other companies was carried out through a single entity. The provision had been included in the recently introduced Companies (Amendment) Bill ’03, based on the recommendation of the joint parliamentary committee that probed the stock scam of ’01.
Senior officials in the DCA said the clause, proposed to be inserted in section 372A, does not stop companies from investing in new ventures. They feel it has been needlessly misinterpreted by some people.
“We wanted to ensure that investments in shares, debentures and securities are routed through one company,” the sources said. The Companies (Amendment) Bill ’03 has defined an investment company as one whose principal business was acquisition of shares, debentures or securities. Effectively, an investment company is thus one which earns a major portion of its income from acquisition of shares, debentures or securities.
In practice, Indian companies have been using several entities — in some cases more than a 100 firms — within its fold to acquire and trade in securities. This led to a situation where — as was seen during the stock market scams — pinning down the identity of the actual person/company entering a transaction in securities was difficult, if not impossible.
The government wanted to change all that to bring more transparency in the securities transactions of companies, and hence this provision.
A section of corporates, however, had interpreted the clause as meaning to imply that investment in new ventures would also have to be routed through a single company. Protesting the insertion of the proposed provision, this section of corporate India had said the clause would limit the ability of companies to grow laterally and horizontally. They said that the corporate sector had used the investment subsidiary/SPV route partly to contain the risk in the parent company’s balance sheets. It has been a practice among companies to set up new subsidiaries to invest in overseas ventures, to form JV in the domestic market as well as to establish new projects that are not directly related to its core business. Bureau Report
Sources with the Department of Company Affairs (DCA) said that the cap of one investment company per company was meant to ensure that investment and trading in securities of other companies was carried out through a single entity. The provision had been included in the recently introduced Companies (Amendment) Bill ’03, based on the recommendation of the joint parliamentary committee that probed the stock scam of ’01.
Senior officials in the DCA said the clause, proposed to be inserted in section 372A, does not stop companies from investing in new ventures. They feel it has been needlessly misinterpreted by some people.
“We wanted to ensure that investments in shares, debentures and securities are routed through one company,” the sources said. The Companies (Amendment) Bill ’03 has defined an investment company as one whose principal business was acquisition of shares, debentures or securities. Effectively, an investment company is thus one which earns a major portion of its income from acquisition of shares, debentures or securities.
In practice, Indian companies have been using several entities — in some cases more than a 100 firms — within its fold to acquire and trade in securities. This led to a situation where — as was seen during the stock market scams — pinning down the identity of the actual person/company entering a transaction in securities was difficult, if not impossible.
The government wanted to change all that to bring more transparency in the securities transactions of companies, and hence this provision.
A section of corporates, however, had interpreted the clause as meaning to imply that investment in new ventures would also have to be routed through a single company. Protesting the insertion of the proposed provision, this section of corporate India had said the clause would limit the ability of companies to grow laterally and horizontally. They said that the corporate sector had used the investment subsidiary/SPV route partly to contain the risk in the parent company’s balance sheets. It has been a practice among companies to set up new subsidiaries to invest in overseas ventures, to form JV in the domestic market as well as to establish new projects that are not directly related to its core business. Bureau Report