[Federal Register Volume 63, Number 147 (Friday, July 31, 1998)]
[Pages 40944-40945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20449]



[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.


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 

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 
    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]