KANTH AND ASSOCIATES. Newsletter CONTENTS K & A NEWS ALERTS TAX

Transcription

1 TAX NEWS ALERTS India signs and ratifies Convention on Mutual Administrative Assistance in tax matters th On 26 January, 2012, India has signed a Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The Convention was amended to for developing a broader multilateral approach to improve the effectiveness of exchange of information, co-operation between the countries in the assessment and collection of taxes, with a view to combating tax avoidance and evasion. India became th the 13 country and the first non-oecd nation to ratify the 'Multilateral Convention on Mutual Administrative Assistance st in Tax Matters' on 21 February, The salient features of this multilateral Convention are that it is based on international standard of transparency and exchange of information; provides extensive co-operation among the signatories on all taxes; provides for assistance in the recovery of taxes; provides for automatic and spontaneous exchange of information; provides for service of documents in other country; allows exchange of past information in criminal tax matters; the information received under this Convention can also be used for other purposes besides those related to tax co-operation, etc. Assessing officer can't be part of tax appellate body deciding the appeal An Income Tax Commissioner, responsible for an assessment order, cannot be a part of the body that decides the appeal against the same order. According to the Income Tax Appellate Tribunal, the second appellate forum that decides on tax disputes, involving a tax official in deciding an appeal against an assessment order would be against the principles of natural justice, especially if the official had been party to the same assessment order. CORPORATE, CAPITAL MARKET & FOREIGN TRADE Refund of statutory / ROC fees paid by mistake to MCA The Ministry of Corporate Affairs by virtue of a press release has decided to refund the statutory fees paid for certain services. Earlier there was no process in MCA21 for refund of fees wrongly paid by the stakeholder while availing various services at MCA21. Now the Ministry has introduced process of refund of statutory fees paid for certain services. The refund of MCA21 fees is available in the following cases: a) Multiple Payments; b) Incorrect Payments & c) Excess Payment. Refund process is not applicable for certain services/ eforms like Public Inspection of documents, Request for Certified Copies, Payment for transfer deeds, CONTENTS News Alerts Tax 1 Corporate, Capital Market & Foreign Trade 1 Intellectual Property Rights 3 Judgments 3 Article 4 Investor Exit Options Stamp duty fee (D series SRN), IEPF Payment, STP Forms, DIN eform, etc. The refund form is to be filed within the stipulated time period. Also, there shall be deduction in the amount to be refunded based on time period within which refund eform is filed. SEBI notifies IPP norms to help promoters dilute stake For expediting the Government's disinvestment process, Securities & Exchange Board of India (SEBI) notified the Institutional Placement Programme (IPP) guidelines that will allow companies to reduce promoter shareholding through private placement. As per the new norms, even the companies would be allowed to issue fresh equity to institutional investors to dilute stake of promoters. A company, according to the SEBI (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2012, will be allowed to dilute only 10 per cent of its equity through sale of promoter stake or issuance of fresh equity. According to SEBI, the provisions shall apply to issuance of fresh shares and or offer for sale of shares in a listed issuer for the purpose of achieving minimum public shareholding. While any company can come out with a Qualified Institutional Placement, IPP will be permitted only for reducing promoter shareholding. As per government norms, at least 10 per cent of the shareholding in all listed stateowned companies should be with the public by June 2013, though in the case of private sector companies it has to be 25 per cent. SEBI amends Equity Listing Agreement SEBI has carried out the certain amendments to the Equity Listing Agreement. In clause 40A, in addition to the existing methods which listed company can adopt to achieve minimum public shareholding, the listed company may also achieve the minimum level of public shareholding through Institutional Placement Programme in terms of Chapter VIII-A of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended. In clause 43 & 43A, in order

2 to enhance disclosure requirements, listed entities have been mandated to disclose utilization of funds raised upon conversion/ exercise of warrants issued along with public or rights issue of specified securities. The aforementioned listing conditions are specified in exercise of the powers conferred under Section 11 read with Section 11A of the Securities and Exchange Board of India Act, 1992 and the same shall form part of the existing Listing Agreement of the stock exchange. Share transfer among promoters is equity sale SEBI has said that any transfer of shares even within the promoter group of a company would be considered as an equity sale, when it comes to promoters getting a preferential treatment for allotment of fresh shares or warrants. Accordingly, the promoters of a listed company would not be eligible for preferential allotment of shares or warrants, if there has been any inter-se transfer of shares among the promoter group firms in the past six months. The regulations bar any entity from being allotted shares on preferential basis if it has sold the shares of the same company in the previous six months. According to SEBI, as per the extant regulations, if there is any inter-se transfer among the promoter group entities in the preceding six months, then all the persons/entities forming part of 'promoter(s) and promoter group' shall become ineligible for allotment of specified securities on preferential basis. SEBI enhances minimum investment amount in Portfolio Management Scheme SEBI, with a view to keeping retail investors away from the portfolio management schemes (PMS), has raised the minimum investment amount of clients for such schemes to Rs.25 Lakh from the earlier Rs.5 Lakh. PMS offers investors a range of specialized investment strategies to capitalize on opportunities in the market and made suitable to the needs of individual clients. It was also laid down that existing investments of clients can continue as such till maturity of the particular investment. In the amendments, SEBI has also said that henceforth portfolio manager will not be allowed to hold the unlisted securities, besides the listed securities, belonging to the portfolio account, in its own name on behalf of its clients. RBI's permission no longer required for cut in sanctioned ECB limit As per the extant External Commercial Borrowings (ECB) procedures, requests for reduction in the amount of ECB, changes in the drawdown schedule and reduction in the allin-cost of the ECB after obtaining the loan registration number is required to be referred by the concerned bank to the Reserve Bank of India (RBI) for necessary approval. Simplifying norms for overseas borrowers, the RBI, vide A.P. (DIR Series) Circular No. 75 dated -February 07, 2012, said that they will no longer require its approval to raise an amount lesser than sanctioned ECB as the power to authorize the same has been delegated to banks. According to RBI, as a measure of simplification of existing procedures, it has been decided to delegate powers to the designated AD category-i banks to approve requests from ECB borrowers for reduction in loan amount in respect of ECBs availed under the automatic route. The circular further states that the reduction in loan amount can be sanctioned if the consent of the lender for such a step has been obtained. Besides, the average maturity period of the ECB has to be maintained and there has to be no change in the other terms and conditions of the ECB. The RBI also said that the drawdown schedule, or the estimate of the gradual transfer of the committed investment funds, can be modified or changed by the banks provided there are no changes in the repayment schedule of the ECB and the average maturity period of borrowing is reduced as against the original average maturity period stated at the time of obtaining the loan registration number. The bank must also ensure that the reduced average maturity period complies with the stipulated minimum average as ECB guidelines. However any elongation/rollover in the repayment, on expiry of the original maturity, of the ECB, would however, continue to require the prior approval of the RBI. The circular further said that the designated AD Category-I bank may approve requests from ECB borrowers for reduction in all-in-cost, in respect of ECBs availed both under the automatic and approval routes. The all-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. RBI clarifies reporting requirements for purchase of immovable property in India As per the extant Regulations, a person resident outside India, acquiring a branch, office or other place of business in India excluding a liaison office, may also acquire any immovable property in India, which is necessary for or incidental to carry on such activity, subject to the condition that such person is required to report to Reserve Bank of India (RBI) in the declaration Form IPI within 90 (ninety) days of such acquisition. The said provision seems to convey that every person resident outside India acquiring immovable property in India is required to do such reporting to the RBI. The RBI vide a circular dated has clarified its interpretation, stating that the extant regulations do not prescribe any reporting requirements for transactions where such person resident outside India is a citizen of India or a Person of Indian Origin who acquires any immovable property

3 in accordance with the provisions of Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, Competition Commission of India amends combination regulations The Competition Commission of India (CCI) has notified amendments and changes to its merger control guidelines that came into force on 1st June, 2011 making an effort to remove ambiguities, to simplify the procedures and to liberalize notice requirements. Some of the key provisions that are amended are as follows - amendments have been made in Regulation 5(2) and 5(3) of the Combination Regulations thereby bring more clarity with respect to filing of Form I or Form II; the time period for CCI to form its prima facie opinion has been amended; clarity has been brought with respect to the valuation of business for the purpose of the combinations by insertion of the new sub-regulation 5(9); in cases of acquisitions as well as mergers and amalgamations, now company secretaries duly authorized by the Board of Directors, are further authorized to sign Form I or Form II; filing fees for Form I & Form II have been increased substantially by amending the provisions of Regulation 11, etc. INTELLECTUAL PROPERTY RIGHTS Incomplete and incorrect trademark applications shall not be processed The Trademark Registry of India, with an aim to speed up the trademark registration process in India, has recently issued a public notice stating that trademark applications will not be processed if complete and correct information is not provided or there are deficiencies in the trademark applications. The notice further specifies that such applications shall not be processed unless the following information is provided in the application: actual description of goods /services; names of proprietors in case of proprietorship firm, names of all partners in case of partnership firm, name of managing trustee in case of trust and name of person representing the society in case of a society; actual date, month and the year in case of user of trademark; proper translation / transliteration of the trade mark in case of non-english / Hindi characters appearing in the mark; and clearly visible trademark. CGPDTM notifies International Non- Proprietary Names The Controller General of Patents, Designs and Trade Marks (CGPDTM) has published a notification providing that no International Non- Proprietary Names (INNs) or any word which is similar or deceptively similar to such name, as published in the list of INNs published by the CGPDTM (declared by World Health Organization), shall be registrable as a trademark under the Section 13 of the Trade Marks Act Section 13(b) of the Trade Marks Act, 1999 prohibits the registration of any word as a trademark which is or is similar or is deceptively similar to INNs declared by WHO and notified by the Registrar of Trade Marks. JUDGMENTS Supreme Court rules on payment of compensation to literate claimant in motor vehicles accident case In motor vehicles accident compensation claims, the entire amount may be disbursed to the claimant if he or she is literate. It is not necessary to deposit it in a bank for the safety of the dependents as some tribunals do. The tribunals often ask the insurance companies to deposit the compensation amount in long-term fixed deposits in the bank so that the money is not wasted and minors and women are not rendered penniless. But this should not be taken as a rigid rule. Such orders are useful to safeguard the interests of minors, illiterate persons and widows, but if the claimant is capable of handling the money, the entire compensation should be given to him or her. Proceedings in bounced cheque cases to continue despite of revival of sick company: SC It was held by the Supreme Court that cases of bounced cheques are independent of the revival bid of a sick company. The proceedings in bounced cheque cases under the Negotiable Instruments Act will continue even if there is a scheme to revive the sick company. The revival attempt under the Companies Act will not affect prosecution of charges under Section 138 of the Negotiable Instruments Act. The charges cannot be compounded as in other cases under the Code of Criminal Procedure, 1973 (CrPC). The charges cannot be compounded as provided under Section 320 of the CrPC without the consent of the secured and unsecured creditors. Though Section 147 of the Negotiable Instruments Act provides for compounding, it does not provide for a special procedure. In its absence, the procedure under the CrPC should be followed. Therefore, the Court was of the view that the consent of the creditors is essential. Mandatory death penalty unconstitutional: SC The Supreme Court has ruled that mandatory death penalty for an offender under the Arms Act was unconstitutional as it violated fundamental rights guaranteed to a citizen. The Hon'ble Court said Section 27(3) of the Arms Act, which imposed mandatory death penalty, was also ultra vires and void as it restricts the powers of the court in awarding sentences to an accused in such cases. The Court further opined that a law which is not consistent with notions of fairness while it imposes an irreversible penalty like death penalty is repugnant to the concept of right and reason. The

4 Apex Court was of the view that the provision of Section 27(3) of the Act is violative of Article 14 and Article 21 of the Constitution of India. Landlords cannot increase rent over 10 percent in every three years: Delhi HC The Hon'ble High Court of Delhi has ruled that the landlords of residential as well as commercial properties cannot ask for more than 10 per cent hike in the rent in 3 (three) years and demand a raise according to the inflation rate. The Court has ruled that the landlords cannot increase the rents in line with inflation or cost price index. The Court further stated that the 10 per cent increase in rent every 3 (three) years provided under the Delhi Rent Act may be perceived as inadequate, but that is no reason to provide for a higher or more frequent increase. A landlord, governed by the Delhi Rent Control Act, 1958, is entitled to have increase in rent only in accordance with the rules and not otherwise. The Court further observed that such a landlord cannot approach the civil court contending that the rent stands increased or should be increased in accordance with the inflation or cost price index. It was also observed that the rent could not be increased by the landlord more than the stipulated rate of 10 per cent in every three years as per Section 6 read with Section 8 of the Delhi Rent Act. INVESTOR EXIT OPTIONS ARTICLE Investment by a private equity investor is generally preceded by a SWOT analysis with respect to the investment, intense discussions, risk taking ability, and the future scope of the investee company. However, the concentration in effect is always in terms of the returns expected by the investor. Rate of Return is what the investor looks into while making an investment choice. Not surprisingly then, the mode and manner of exit is one key aspect which is one of the first issues to be settled by the investor prior to injecting such investment. The mode and manners of exit option, therefore is integral to any arrangement between the investee and the investor. Over a period of time, the investors have considered the following modes or their combination for exits. It may be mentioned here that this is not an exhaustive list containing the mode of exits and varying structures may exists depending upon the structure and mode of investment involved: A. Initial Public Offer ( IPO ) IPO briefly means first sale of the shares of a company in the primary market through a recognized stock exchange. IPO was considered to be the most effective mode of exit until a couple of years ago both from the company's perspective of generating a huge amount of cash for funding its growth and from the investor's perspective of getting handsome returns. Every arrangement of investment inevitably consisted of the IPO as one of the foremost modes of exit yielding more than desired returns. The voracious growth rate attracted loads of private equity investors into the Indian market to make handsome profits. The IPO and listing gave such investors manifold returns to bring more of such foreign funds into India. However, the IPO as an exit option has seen a major hit owing to the existing uncertainties in the economy in general and markets in particular and considering the economy, IPO is no longer considered to be a preferred mode of exit notwithstanding the presence of such a provision or in the investment arrangement. B. Split free or Break ups At times a business may consist of diverse businesses which may not be performing to their potential. The primary reason being the businesses are joint. The investor might after adequate due diligence decide to invest in such business on the condition that such business would be split free into separate businesses to realize their full potential. The price of investment at a stage preceding such split free would be much lesser compared to the post split free value of the individual businesses carved out of such main entity. This makes an ideal investment opportunity for the investors. C. Sale to strategic buyers or financial buyers A sale to a strategic buyer interested in the business of the investee company has been considered to be another effective mode of exit. Such sale may also be made to a financial buyer. However, the investor would be more inclined to sale to a strategic investor rather to a financial investor. This is in view of the difference in the approach of a financial investor and a strategic investor. A financial investor generally has a short term outlook and works on buy low and exit high strategy. The exit may be at any time when a high as per the investor is reached. A financial investor is not concerned with efforts in the growth of the business of

5 the investee company. This is in complete contrast to the outlook of a strategic investor who works on buy and hold. A strategic investor therefore, is the one who takes participation in the management of the investee company to realize the returns at a desired rate of return and is therefore willing to value the business more than a financial buyer. However, investment made by a strategic investor may meet some resistance in view of the apprehension by the promoters of being taken over. D. Put option Put Option briefly means an owner having the right but not an obligation to sell a certain quantity of security within a specified time and at a specified price. Investors keep this option in relation to the promoters of the Indian company. The put option or the right to sell back thus has been an effective mode of garnering the desired returns. However, the pricing guidelines during the exercise of such options have to be borne prior to the transfer of such shares in accordance with the Reserve Bank of India (the RBI ) prescribed regulations under Foreign Exchange Management Act, 1999 ( FEMA ). Put Option, however, has been a subject of much debate recently due to the RBI's stance in holding such instruments as debt and as derivative deals thus violating the FEMA, Notification 20 (regulations 3, 4 and 5) wherein only SEBI-registered foreign institutional investors and non-resident Indians are allowed to invest in exchange-traded derivative contracts where the underlying securities are equity shares of an Indian firm. E. Right of first offer (ROFO), Right of first refusal (ROFR) Another structuring of rights in relation to the exit mechanism is ROFO and ROFR which is almost a standard clause with respect to such investment arrangements. A ROFR requires that in the event the investor receives an offer to purchase the shares from a third party that the investor is willing to accept, then the investor must submit this offer to the promoter or any nominee of the promoter, who then has the right to purchase such shares at the same terms and conditions as offered by the third party. In the event the promoter or such nominee refuses such offer, the investor can sell such shares to the third party. In contrast, the ROFO requires that prior to offering the shares for sale, the investor must give notice to the promoter that a subject shares are being offered for sale on the terms set forth in the investor's offer, and that the promoter has the right to purchase the shares pursuant to that offer by giving the investor notice of its election. However, generally the investors are keen on having a ROFO in their favour as it helps in taking control of pricing of the shares. The exit options or mechanisms as stated in (D) and (E) above have been in the arena of judicial scrutiny in view of their restrictive nature. A single judge bench of the Bombay High Court, in the case of Western Maharashtra Development Corporation Ltd. vs. Bajaj Auto Ltd. [(2010) 154 Company Cases 593 (Bom)], had held that in view of Section 111A of the Companies Act, any contractual arrangement which restricts the free transferability of shares of public companies is void and unenforceable. In 2005, a Delhi High Court's judgment in the case of Smt. Pushpa Katoch vs. Manu Maharani Hotels Ltd. [(2006) 131 CompCas 42 Delhi] had taken a similar view. This view had the potential of seriously jeopardizing the investor concerns with respect to utilization of the specified exit routes. However, this was overruled by a Division Bench of the Bombay High Court in Messers Holdings Limited v. Shyam Madanmohan Ruia holding that a consensual private arrangement between shareholders of a public limited company on a voluntary basis for putting restrictions in share transfer is not violative of Section 111A of the Companies Act The Court held that the expression freely transferable under Section 111A is with reference to the Board of Directors against providing any hindrance in the transfer of shares, unless there is ample cause for doing so. The said provision cannot be interpreted to mean that it also takes away the rights of the members to enter into mutually agreeable arrangement with a purchaser. The restrictive clauses, therefore have been held to be valid and enforceable arrangement between the shareholders. The exit options and mechanisms thus, have to be structured and exercised carefully in view of the investor's aim of maximization of return without getting involved in the legal disputes. Though, there have been uncertainties on certain aspects of exit and put options in particular, it is expected that the same would be resolved sooner than later.

6 References i) Regulators-frown-at-put-option.html (accessed on February 27, 2012) Iii) Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, Ii) /news/ _1_fdi-deals-fdi-policyand-fema-derivative-deals (accessed on February 27, 2012) Contact details: A-9, Nizamuddin East, New Delhi , India Phone No: (+91) (11) / 4 / 7; Fax: (+91) (11) info@kanthcorp.com