[Federal Register Volume 63, Number 147 (Friday, July 31, 1998)]
[Notices]
[Pages 40944-40945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20449]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 23331; International Series Rel. No.
1148; 812-11026]
Industrial Development Bank of India;
Notice of Application
July 24, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of an application under section 6(c) of the Investment
Company Act of 1940 (``Act'') for an exemption from all provisions of
the Act.
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SUMMARY OF THE APPLICATION: Applicant Industrial Development Bank of
India (``IDBI''), an industrial development financial institution,
requests an order exempting it from all provisions of the Act in
connection with the offer and sale of its securities in the United
States.
FILING DATES: The application was filed on February 24, 1998.
Applicants have agreed to file an amendment, the substance of which is
included in this notice, during the notice period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on August 18, 1998,
and should be accompanied by proof of service on applicant in the form
of an affidavit or, for lawyers, a certificate of service. Hearing
requests should state the nature of the writer's interest, the reason
for the request, and the issues contested. Persons may request
notification by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicant, c/o Davis Polk & Wardwell, 450 Lexington Avenue, New
York, NY 10017, Attn: Pierre de Saint Phalle.
FOR FURTHER INFORMATION CONTACT: Rachel H. Graham, Senior Counsel,
Christine Y. Greenlees, Branch Chief, (202) 942-0564 (Division of
Investment Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington,
D.C. 20549 (telephone (202) 942-8090).
Applicant's Representations
1. Applicant, a specialized development bank, was established in
1964 by the government of India (``Government'') pursuant to the
Industrial Development Bank of India Act (``IDBI Act''). Applicant
states that it is the largest industrial development financial
institution in India and is a charge of coordinating the activities of
all institutions engaged in the financing, promotion, or development of
industry throughout India.
2. IDBI has been designated as a Development Bank under the IDBI
Act. As a result, IDBI's financing objectives are largely influenced by
Government policies. IDBI also has been designated as a Public
Financial Institution under the Indian Companies Act of 1956, which
entitles it to certain benefits under the tax code and other laws.
3. IDBI primarily provides direct financing to traditional (e.g.,
manufacturing) and non-traditional (e.g., tourism) enterprises for the
establishment, expansion, diversification, and modernization of medium
and large-scale industrial projects. IDBI's other direct financing
activities include equipment loans and leasing, asset credit, direct
discounting of bills of exchange and promissory notes, foreign exchange
loans, long-term working capital loans, venture capital financing, and
short-term general corporate financing. IDBI also provides indirect
assistance, such as loan refinancing, through banks and various
regional financial institutions. IDBI generally does not acquire loans
or investments in the secondary market and has traditionally held its
loans and investments until their maturity.
4. Under the IDBI Act, IDBI has had access to low cost funds from
the Government and the Reserve Bank of India (``RBI'') for the purpose
of granting loans at concessional rates. IDBI also has borrowed,
directly and indirectly, from such institutions as the World Bank and
the Asian Development Bank, and it has contracted lines of credit with
the Export-Import Bank of Japan and Government-sponsored export credit
agencies through European banks.
5. IDBI's credit exposure to individual companies or business
groups is kept below ceilings mandated by the RBI for Public Financial
Institutions (such as IDBI) and for commercial banks. In addition, IDBI
generally does not bear any exchange rate risk with respect to its
foreign currency loans, because it matches the currency of the loans
with its sources of funds. In certain cases, the Government bears the
exchange rate risk either as primary borrower under loans from
multilateral agencies or under government-sponsored exchange risk
pools.
6. In addition to its lending activities, IDBI underwrites
securities issued by industrial concerns and, to some extent,
subscribes directly to their capital issues. Through its in-house
merchant banking division, IDBI provides fee-based services such as
capital market issue management, loan/guarantee syndication, and
advisory services for corporate restructuring, mergers, and
acquisitions. IDBI also offers foreign exchange and debenture trustee
services. In addition, due to deregulation of the Indian financial
sector, IDBI has established separate subsidiaries to engage in
commercial banking, stockbroking, and asset management.
7. IDBI is administered in accordance with the provisions of the
IDBI Act as well as other provisions of Indian law applicable to
business enterprises. IDBI also is subject to extensive regulations by
both the RBI and the Securities and Exchange Board of India (``SEBI'').
The RBI regulates IDBI as a Public Financial Institution and not as a
banking institution or trust company. Specifically, the RBI regulates
IDBI's commercial lending, issuance of certificates of deposit and
finance letters of credit, and foreign currency trading. IDBI adheres
to RBI-issued capital adequacy guidelines for non-bank financial
institutions, which are
[[Page 40945]]
designed to protect the solvency of such institutions by limiting the
amount of leverage that they may incur. IDBI also is subject to
specific RBI guidelines relating to income recognition and asset
allocation, periodic reports, and rates payable on ``fixed'' deposits
(generally, interest-bearing instruments).
8. The SEBI regulates IDBI's underwriting, merchant banking, asset
management, and debenture trusteeship activities. The SEBI prescribes
conditions for the registration of these activities and establishes
standards of obligations and responsibilities. SEBI regulations also
set forth requirements for underwriters and underwriting agreements,
require the adoption of codes of ethics, and prohibit conflicts of
interest and insider trading.
9. In 1995, the Government granted IDBI the authority to raise
equity capital by issuing shares to investors, provided that the
Government's share of IDBI's issued equity capital would not fall below
51%. As of December 31, 1997, the Government owned approximately 72% of
IDBI's equity capital.
10. IDBI proposes to offer and sell equity and debt securities in
the United States. It will not offer or sell any such securities unless
(a) they are registered under the Securities Act of 1933 (``Securities
Act''), (b) in the opinion of special United States counsel for IDBI,
there is an exemption from registration under the Securities Act
available with respect to such offer and sale, or (c) the SEC staff
stats that it would not recommend that the SEC take any action under
the Securities Act if such securities are not registered. IDBI intends
to use the proceeds from any sales of its securities in the United
States as an additional source of funding for industrial development
and general corporate purposes.
11. Although IDBI does not expect that the Government will
guarantee payments on the debt securities that IDBI proposes to sell in
the United States, IDBI states that investors would have the protection
afforded by Indian regulation of IDBI's operations, the requirements of
the Securities Act, and the antifraud provisions of the Securities
Exchange Act of 1934.
Applicant's Legal Analysis
1. Section 3(a)(1)(C) of the Act defines an investment company to
include any issuer engaged in the business of investing, reinvesting,
owning, holding, or trading in securities, and that owns or proposes to
acquire investment securities having a value exceeding 40% of the
issuer's total assets. Section 3(a)(2) of the Act defines the term
``investment securities'' to include all securities except: (A)
government securities; (B) securities issued by employees' securities
companies; and (C) securities issued by majority-owned subsidiaries of
the owner which (i) are not investment companies and (ii) are not
relying on the exception from the definition of investment company in
paragraph (1) or (7) of subsection (c).
2. As of December 31, 1997, more than 76% of IDBI's assets
consisted of obligations of borrowers to repay loans. These obligations
could be deemed to be ``investment securities'' within the meaning of
section 3(a)(2) of the Act. As a result, IDBI may be deemed to be an
``investment company'' under section 3(a)(1)(C) of the Act.
3. Section 6(c) of the Act provides that the SEC may exempt any
person from any provision of the Act or any rule under the Act to the
extent that such exemption is necessary or appropriate in the public
interest and consistent with both the protection of investors and the
purposes fairly intended by the policy and provisions of the Act. IDBI
requests an order under Section 6(c) exempting it from all provisions
of the Act.
4. IDBI states that rule 3a-6 under the Act excludes foreign banks
from the definition of investment company under the Act. A ``foreign
bank'' is defined in the rule to include a banking institution
``engaged substantially in commercial banking activity'' which, in
turn, is defined to include ``extending commercial and other types of
credit, and accepting demand and other types of deposits.'' IDBI
believes that it is functionally equivalent to a foreign bank because
it offers financial services and issues financial products similar to
those offered and issued by traditional foreign banks, and it is
subject to RBI oversight, supervision, and regulation. IDBI states,
however, that because it is not considered a commercial bank under
Indian law and, consequently, is prohibited from accepting demand
deposits, it might not be eligible to rely on rule 3a-6.
5. IDBI represents that RBI regulations governing its activities
are similar to those governing commercial banks. The principal
differences between RBI's regulation of non-bank financial institutions
(such as IDBI) and banks are that non-bank financial institutions are
exempt from RBI regulations relating to minimum cash reserve ratios and
statutory liquidity ratios and from the RBI's authority over the
appointment of bank directors.
6. IDBI asserts that, as a development financial institution
designed to promote and provide a source of finance for industry in
India, it is not within the intent of the Act and its characteristics
differ from the types of entities at which the Act was generally
directed. Applicant thus states that it satisfies the standards for
relief under section 6(c) of the Act.
Applicant's Conditions
Applicant agrees that the order granting the requested relief will
be subject to the following conditions:
1. In connection with any offering by IDBI of its securities in the
United States, IDBI will appoint an agent to accept service of process
in any suit, action, or proceeding brought on the securities and
instituted in any state or federal court in the City or State of New
York by the holder of any such securities. IDBI expressly will submit
to the jurisdiction of the New York state and United States federal
courts sitting in the City of New York with respect to any such suit,
action, or proceeding. IDBI also will waive the defense of an
inconvenient forum to the maintenance of any such action or proceeding.
Such appointment of an agent to accept service of process and such
consent to jurisdiction shall be irrevocable until all amounts due and
to become due in respect of debt securities have been paid and until
any equity securities offered in the United States are no longer
outstanding. No such submission to jurisdiction or appointment of agent
for service of process will affect the right of a holder of any such
security to bring suit in any court that shall have jurisdiction over
IDBI by virtue of the offer and sale of such securities or otherwise.
2. IDBI will rely on this order only so long as (a) its activities
conform in all material respects to the activities described in the
application; and (b) IDBI continues to be regulated by the RBI, SEBI,
or other applicable Indian regulatory authority as a financial
institution, as described in the application.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20449 Filed 7-30-98; 8:45 am]
BILLING CODE 8010-01-M
