2014

Indo-Japan Trade & Investment

Bulletin August Issue

Japan Desk, Corporate Professionals

Indo-Japan Trade & Investment Highlights

Toshiba to buy 26% stake in UEM India from existing shareholders

Nissan to build Micra for European market in France instead of Chennai

Mahindra Conveyor Systems group firm forms JV with Japanese Tsubaki

India’s Karbonn to make phone batteries with a Japanese researcher

Sun Pharmaceutical, with Daiichi, to tap the Japanese market

Japan may allow India to produce parts for US-2 amphibious aircraft

Ricoh seeks to double revenue from Indian market

Japan’s Keihin corp is set to develop facilities in Bangalore

India’s Suzlon in talks for Japanese offshore wind partner

Sony plans to set up a manufacturing plant in India

Toto opens its new plant in India

Amtek and Riken join hands to form 50:50 JV

Knowledge Centre

Regulatory Framework of Non-Banking Financial Companies in India

INDEX

Toshiba to buy 26% stake in UEM India from existing shareholders

Japanese electronic goods major, Toshiba is set to purchase a stake of 26% from its existing

shareholders, including private equity investor, India Value Fund, in UEM India, which is an

unlisted water and waste management company. As a part of this deal, Toshiba will also get a

representation on the board. In July 2010, India Value Fund Advisors (IVFA) purchased a 70%

stake in UEM and IVFA will continue to own a majority stake in UEM. Naohiro Noro, vice-

president, environmental systems division of Toshiba Corporation said in a statement that the deal

is a strategic growth area for Toshiba and efforts are being made to bring global access to the

company and learn from UEM's vast experience in delivering complex, turn-key projects around

the world. The deal signifies a sustained interest of Japanese firms to buy companies in India,

which is the second-largest Asian economy. Last November, Hitachi Corporation bought out

Indian automated teller machine (ATM) maker Prism Payments.

Nissan to build Micra for European market in France instead of Chennai

Japanese auto giant Nissan is planning to manufacture the next generation Micra from the

manufacturing facility in France instead of its facility in India, which based in Chennai. The next

generation Micra is meant for the European market. Nissan moved Micra production from its plant

in Sunderland, England, to Chennai, India, in 2010. The said change is a part of company's new

strategy to be more focused on the domestic market, which would demand more from the existing

capacity in its manufacturing facility near Chennai, India. Andy Palmer, chief planning officer of

Nissan Motor Co, Ltd recently said in a statement that the Company is expecting that the Chennai

factory will be full and there won’t be any capacity to put the next generation Micra model, because

of the growth in the domestic market. Nissan exported 1.16 lakh units from India last year, which

made it the second largest exporter of cars from India.

Indo-Japan Trade & Investment Highlights

Mahindra Conveyor Systems group firm forms JV with Japanese Tsubaki

India based Mahindra Conveyor Systems (MCS), which is a leading supplier of material handling

equipment and systems, has entered into a joint venture agreement with Tsubakimoto Chain Co of

Japan, under which 51% stake in the Joint Venture entity will be held by Tsubaki and the remaining

49% by MCS. MCS will now be renamed as Mahindra Tsubaki Conveyor Systems Pvt Ltd. The

alliance is formed as a part of Japan’s focus on various global markets including Europe and

Middle East. Tsubaki and MCS already have an existing tie-up for technical know-how. Mahindra

Conveyor Systems (MCS) said in a statement that Tsubaki will assist the Company in making

inroads into new markets in Asia, Africa, the Middle East and Europe. MCS specialises in supply

of bulk material handling equipment and systems to cement and other process industries and has

recently diversified into supply of unit handling systems comprising of conveyors for auto and

auto component manufacturing. Tsubakimoto Chain Co, based in Osaka, manufactures various

products including power transmission units and components, and automotive timing chain drive

systems.

India’s Karbonn to make phone batteries with a Japanese researcher

The Chairman of Karbonn, which is a well-known Indian smartphone brand, Mr. Sudhir Hasija,

along with a Japanese researcher is developing a mobile phone battery twice as powerful and

thinner as any other smartphone battery of Indian phones. The name of the Japanese partner has

not been disclosed yet. The deal has been said to be closed for about $5,00,000 (Rs 2 crore) and

the battery will be exclusively used only for phones manufactured by Karbonn.

Sun Pharmaceutical, with Daiichi, to tap the Japanese market

Sun Pharmaceutical Industries is in the process of acquiring control of Ranbaxy Laboratories from

Daiichi Sankyo. Sun Pharmaceutical will be working the $4 million deal in order to rationalize

research and other costs of the company. Sun Pharmaceutical intends to utilize this acquisition to

tap the Japanese market. Post three-four years of closing of the said deal, Sun Pharma will make

an entry in Japan. Though the deal had been announced in the month of April this year, it is still

awaiting various regulatory clearances in India. As most Indian pharma players have not been able

to succeed in Japan on their own, Sun Pharma’s move of partnering with Daiichi, which is a top

drugmaker of Japan, is indeed a discreet strategy. Sun Pharma is hopeful that that about 60 per

cent of synergies between the companies will accrue in the third year of closing the deal. Further,

during the third and fifth year of closure of the said deal, Sun intends to utilize Ranbaxy's

infrastructure to launch its own products in various emerging markets of the world.

Japan may allow India to produce parts for US-2 amphibious aircraft

The Japanese government is likely to allow India to manufacture parts for US-2 amphibian aircraft

and may conclude a sales deal with the Indian government. The Indian Prime minister is scheduled

to meet his Japanese counterpart on September 1st of this year and it is expected that the Japanese

Prime Minister, Shinzo Abe may convey to him, his intention to approve production of some parts

for the aircraft by India. Recently, Tokyo relaxed its rules on the sale of defense equipment and

transfer of defense technology after almost a decade and the two countries have been in talks

regarding the aircraft sale since December last year. Japan’s main concern had been regarding

technological leakage or transfers to third parties by India. This deal, if put through, will allow the

Japanese government to strengthen its domestic defense industry through overseas sales even

under strict conditions.

Ricoh seeks to double revenue from Indian market

Japanese technology company, Ricoh India is planning its expansion in the ever growing Indian

market. Ricoh India is targeting to double its revenues from the Indian market. The main focus of

the company was on healthcare, education, manufacturing and BFSI. Ricoh had seen great success

during the last three years in India, last year alone we have grown by 65 per cent. In the last few

years, the company has focused IT service business which now contributes its 45 per cent business.

In addition to this, the company has set up a toner bottling manufacturing facility in Gandhinagar

in Gujarat last year with the total investment of Rs 200 crore1. Further, the company has set up

data centres in Kolkata and Delhi to accommodate its growing IT solution business. Ricoh India

sees India as one of the key countries for growth and it is targeting to more than double its revenues

in financial year 2015.

1 One Crore = Ten Million

Japan’s Keihin Corp is set to develop facilities in Bangalore

Japanese automotive components manufacturer, Keihin Corporation, which is worth about $3-

billion, is looking to invest an around Rs 200 crore to set up a carburettor and automotive

components manufacturing facility at Doddaballapur. The project is being implemented by a joint

venture company by the name of Keihin Fie. This will be the global power products and systems

giant’s third plant in India after Bawal in Haryana and Chakan near Pune. The plant is expected to

be operationalized in October this year. Keihin Corporation was founded in Shinjuku Ward,

Tokyo, Japan. The company has focused on developing support systems for its network of overseas

facilities. It has been imparting special training to employees from its overseas subsidiaries in India

and other countries. In India, Keihin operates under three subsidiaries, namely Keihin Panalfa Ltd,

Keihin FIE Pvt Ltd and Keihin Automotive Systems India Pvt Ltd.

India’s Suzlon in talks for Japanese offshore wind partner

India’s Suzlon Energy Ltd may seek a Japanese partner to make offshore wind turbines. Suzlon

chairman Tulsi Tanti said in a recent statement that the German unit of Suzlon, Senvion SE, is the

third-biggest supplier of offshore turbines and is in talks with Japanese companies about forming

a potential joint venture. However, Mr. Tanti refused to name the Japanese companies approached

by Suzlon. Further to this discussion, the Japanese government has introduced a fixed rate, known

as a feed-in tariff, for offshore wind power in April this year. The rate of ¥36,000 ($347) a

megawatt-hour is double the tariff Germany offers.

Sony plans to set up a manufacturing plant in India

India is the fourth-largest market in the world for Sony after China, US and Japan. The company’s

local sales in India were seen as high as Rs 10,000 crore by March 31 of this year. Kenichiro Hibi,

Sony’s managing director in India said that the company has taken seriously the Indian Prime

Minister’s stress on "zero defect manufacturing", which complements the Japanese manufacturing

philosophy. The recent developments by the Indian government, such as allowing foreign

companies manufacturing in India to directly sell their products online, stable exchange rate etc.

have got Sony’s management all the more interested in making India as a potential manufacturing

base for the company. At present, most of Sony’s products that are being sold in India are from

the company’s plants in Thailand, Malaysia, China and Japan.

Toto opens its new plant in India

Japanese bathroom and sanitary ware maker has opened its first plant in India. The company is

said to have invested approximately $58 million on the manufacturing facility in Gujarat, India

which is equipped to make about 500,000 toilets per year.

Amtek and Riken join hands to form 50:50 JV

Amtek India and Tokyo based Riken Corporation have agreed to form a 50:50 joint venture

company named Amtek Riken Casting Pvt. Ltd. with an aim to build iron casting foundry in India

for production of camshafts for the automobile industry. The foundry proposed to be built at

Bhiwadi in Rajasthan will initially have a production capacity of 15 lakh iron camshafts a year and

is likely to begin operation from fourth quarter of 2015.

Riken Corporation having manufacturing facilities in Japan, China, Taiwan, Indonesia, Thailand,

US and Mexico will provide the necessary technology to the joint venture company. Amtek India

on the other hand is a subsidiary of Amtek Auto limited, manufacturer of machines and cast

components for automotive industry, has three manufacturing units in India i.e. Gurgaon in

Haryana, Solan in Himachal Pradesh and Bhiwadi in Rajasthan. Amtek is also an OEM to Maruti

Udyog, JCB, New Holland Tractors, John Deere Tractors, Hundai Motors and Eicher Motor.

Regulatory Framework of Non- Banking Financial Companies in India

This article discusses the concept of Non- Banking Financial Companies (“NBFCs”) in India, and

the regulatory framework governing the business and activities of the NBFCs.

NBFCs are the companies which are engaged in the business of providing finance through loans

and/or investments in other companies. As per the provisions of Section 45I of the RBI Act, a

company registered under the Companies Act, 1956 or any other corresponding legislation for the

time being in force, which is engaged in the business of acquisition of

shares/bonds/debentures/securities or other marketable securities like leasing, hire-purchase,

insurance business, chit business, loans and advances is considered as an NBFC. Similarly, a

company engaged in the business of receiving deposits under a scheme or arrangement of lump

sum or instalments (by way of contributions or any other manner) is also included within the ambit

of the NBFCs. However, NBFCs do not include any institution whose principal business is that of

the following:

i. agriculture activity;

ii. industrial activity;

iii. purchase or sale of any goods (other than securities); or

iv. providing any services and sale/purchase/construction of immovable property.

NBFCs lend and make investments and therefore their business activities are similar to that of

banks; however there are a few differences as given below:

i. NBFC cannot accept demand deposits;

ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques

drawn on themselves; and

iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not

available to depositors of NBFCs, unlike in case of banks.

Knowledge Center

Definition of NBFC under Reserve Bank of India Act, 1934

Section 45I (f) of the RBI Act, 1934 (“RBI Act”) defines an NBFC as:

i. a financial institution* which is a company;

ii. a non-banking institution which is a company and which has as its principal business the

receiving of deposits, under any scheme or arrangement or in any other manner, or lending

in any manner;

iii. such other non-banking institution or class of such institutions, as the Bank may, with the

previous approval of the Central Government and by notification in the Official Gazette,

specify;

* Section 45I (a) of the RBI Act defines the business of a Non-Banking Financial Institution

(‘NBFI’) to mean carrying on the business of a financial institution and includes the business of

an NBFC. Section 45I(c) of the RBI Act defines a financial institution as any non-banking

institution which carries on any of the following business activities:

(i) the financing of any activity other than its own;

(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a Government or

local authority or other marketable securities of a like nature;

(iii) delivering of any goods to a hirer under a hire-purchase agreement;

(iv) the carrying on of any class of insurance business;

(v) managing, conducting of chits or kuries, or any business, which is similar thereto;

(vi) collecting monies by way of subscriptions or by sale of units or other instruments or otherwise

and awarding prizes or gifts, or disbursing monies in any other way, to persons from whom

monies are collected or to any other person.

What is the relevance of the term ‘‘principal business’’ in the above mentioned section for

the purpose of identification of a company as an NBFC?

The term ‘principal business’ is pertinent in view of Section 45I of the RBI Act as an NBFC

requires compulsory registration with RBI to commence or carry on the financial business and

since, the term 'principal business' has not been defined anywhere in law, the RBI decided the

description of ‘principal business’ vide an amendment to NBFC regulations regarding Certificate

of Registration (‘CoR’) issued under Section 45-IA of the RBI Acton Oct 19, 2006, in view of

which, a company will be treated as an NBFC if its financial assets are more than 50 per cent of

its total assets (less intangible assets, if any) and income from financial assets is more than 50 per

cent of the gross income. Both these tests are required to be satisfied as the determinant factor for

principal business of a company.

Types of NBFCs

NBFCs may be categorized depending upon the nature and purpose of finance provided by them.

Eight main categories of NBFCs have been discussed herein below:

i. Asset Finance Company(AFC): An AFC is a company which is carrying the principal

business of financing of physical assets such as automobiles, tractors, lathe machines,

generator sets, earth moving and material handling equipments, moving on own power and

general purpose industrial machines.

ii. Investment Company (IC): IC means a company which carries on the principal business

of acquisition of securities.

iii. Loan Company (LC): LC means a company which carries on the principal business of

providing finance by making loans or advances but does not include an AFC.

iv. Infrastructure Finance Company (IFC): IFC is an NBFC which utilizes at least 75 per

cent of its total assets in infrastructure loans, has a minimum Net Owned Funds of Rs. 300

crore, has a minimum credit rating of ‘A‘ or equivalent and a CRAR of 15%.

v. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an

NBFC carrying on the business of acquisition of shares and securities which satisfies the

following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares,

preference shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily convertible

into equity shares within a period not exceeding 10 years from the date of issue) in group

companies constitutes not less than 60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies except

through block sale for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f)

of the RBI Act except investment in bank deposits, money market instruments, government

securities, loans to and investments in debt issuances of group companies or guarantees

issued on behalf of group companies;

(e) Its asset size is Rs 100 crore or above, and

(f) It accepts public funds.

vi. Infrastructure Debt Fund (IDF-NBFCs): IDF-NBFC is a company which facilitates the

flow of long term debt into infrastructure projects. IDF-NBFCs raise resources through

issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only IFCs can

sponsor IDF-NBFCs.

vii. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFIs): NBFC-

MFI is a non-deposit taking NBFC engaged in the business of providing micro finance and

which satisfies the prescribed conditions.

viii. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-

deposit taking NBFC engaged in the principal business of factoring. The financial assets

in the factoring business should constitute at least 75 percent of its total assets and its

income derived from factoring business should not be less than 75 percent of its gross

income.

For regulatory purposes, NBFCs have been classified into the 3 broad categories, (a) those

accepting public deposits; (b) those not accepting public deposits but engaged in financial

business; and (c) core investment companies (which are exempted from the requirement of

obtaining registration from the RBI, except CIC-ND-SI).

Registration with RBI

In terms of Section 45-IA of the RBI Act, no NBFC can commence or carry on business of a non-

banking financial institution without obtaining a certificate of registration from the RBI and

without having Net Owned Funds of Rs. 25 lakhs2 (Rupees two crore since April 1999). Section

2 One Lakh = 100,000

45-IA of the RBI Act defines Net Owned Fund as the aggregate of the paid-up equity capital and

free reserves as disclosed in the latest balance-sheet of the company after deducting there from:

i. accumulated balance of loss;

ii. deferred revenue expenditure;

iii. other intangible assets;

iv. investments of such company in shares of its subsidiaries, companies in the same group3,

all other non-banking financial companies; and

v. the book value of debentures, bonds, outstanding loans and advances (including hire-

purchase and lease finance) made to, and deposits with subsidiaries of such company and

companies in the same group to the extent such amount exceeds ten per cent of Owned

Funds i.e. aggregate of the paid-up equity capital and free reserves as disclosed in the latest

balance-sheet of the company after deducting accumulated losses, deferred revenue

expenditure and other intangible assets.

RBI vide its press release ‘Temporary suspension of issuing Certificate of Registration (COR for

conducting business of NBFI’ dated 1st April, 2014, announced its decision to keep in abeyance

the issue of certificate of registration to the companies proposing to conduct business of NBFI in

terms of Section 45IA of the RBI Act for a period of one year, except for CIC-ND-SIs, IFCs, IDF-

NBFCs and NBFC-MFIs.

Exemption from Registration

Certain categories of NBFCs are exempted from the requirement of obtaining registration from the

RBI like Venture Capital Fund/Merchant Banking companies/Stock broking companies registered

with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi

companies as notified under the Companies Act, 1956 or any corresponding legislation for the

time being in force, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act,

1982, Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a

Mutual Benefit company.

3 “Subsidiaries” and “companies in the same group” shall have the same meanings assigned to them in

the Companies Act.

FDI in NBFCs

In terms of the extant Foreign Direct Investment Policy of 2014, issued by the Department of

Industrial Policy and Promotion, Government of India (“FDI Policy), FDI in prescribed categories

of NBFCs is allowed under the automatic route (which excludes ICs, in which FDI may be brought

only after obtaining prior approval of GOI; power delegated to Foreign Investment Promotion

Board). However, FDI in the prescribed categories under the automatic route will be subject to

minimum capitalization norms and guidelines of the relevant regulator(s), if any applicable.

RBI approval for restructuring of NBFCs

On 17th September, 2009 RBI vide circular ‘RBI/2009-10/162, DNBS (PD) CC.No. 160

/03.10.001/2009-10’ had decided that any takeover / acquisition of shares of a deposit taking

NBFC or merger/amalgamation of a deposit taking NBFC with another entity or any

merger/amalgamation of an entity with a deposit taking NBFC that would give the acquirer /

another entity control of the deposit taking NBFC, would require prior permission of RBI.

Recently, on May 26th, 2014, RBI vide circular ‘RBI/2013-14/606, DNBS (PD)

CC.No.376/03.10.001/2013-14’, mandated NBFCs (whether deposit accepting or non-deposit

accepting) to obtain prior written permission of RBI for:

i. any takeover of an NBFC, any merger/amalgamation of an NBFC with another entity; or

ii. any merger/amalgamation of an entity with an NBFC that would give such another entity

control of the NBFC; or

iii. any merger/amalgamation of an NBFC with another entity or any merger/amalgamation of

an entity with an NBFC which would result in acquisition/transfer of shareholding in

excess of 10 percent of the paid up capital of the NBFCs.

In terms of the said circular, the companies (NBFCs) shall obtain RBI approval before approaching

the court or tribunal under Section 391-394 of the Companies Act, 1956 or Section 230-233 of

Companies Act, 2013 for seeking an order for mergers or amalgamations.

DISCLAIMER:

The document has been prepared and produced only for the information purpose only and is not to be construed as an advertisement,

solicitation, invitation, personal communication or inducement of any kind by the Firm, the author or any of its Partner or associates. The

entire content of this document has been developed on the basis of relevant statutory provisions and as per the information available at

the time of the preparation. Though the author has made utmost efforts to provide authentic information, however, the material contained

in this document does not constitute/substitute professional advice that may be required before acting on any matter. The author and the

firm expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of

consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

CONTACT US

PANKAJ SINGLA

Japan Desk, Corporate Professionals

NEW DELHI

D-28, South Extension Part - I, New

Delhi – 110049

Tel: +91-11-40622200

Dir: +91-11-40622293

Fax: +91-11-40622201

Mob:+91-99715-08320

Email: pankaj@indiacp.com

MUMBAI

Mastermind- I, Royal Palms Estate, Aarey Colony,

Goregaon(East), Mumbai -400065

Tel: +91 9820079664

Fax: +91 9810037390

BEDFORD (UNITED KINGDOM)

2-4 Mill Street, Bedford MK40 3HD U.K.

Tel: +44 (0) 2030063240

Fax: +44 (0) 2030063241