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

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1 TAX NEWS ALERTS CBDT notifies Income-tax (4th Amendment) Rules, 2014 The Central Board of Direct Taxes (CBDT), in exercise of the powers conferred by Section 295 of the Income Tax Act, 1961, vide its notification dated , has made rules to amend the Income Tax Rules, The said rules may be called the Income Tax (4th Amendment) Rules, 2014 which has substituted certain clauses of the Income Tax Rules, 1962 and the same shall come into force with effect from CORPORATE, CAPITAL MARKET, ECONOMY & FOREIGN TRADE Ponzi Ordinance reissued with checks The Government has reissued the ordinance that seeks to empower the Securities and Exchange Board of India (SEBI) to take action against pyramid schemes. The ordinance adds checks to prevent giving unbridled power to SEBI. The re-promulgated Securities Laws (Amendment) Ordinance, 2014 provides that the SEBI Chairman shall record the reasons in writing while issuing an order for search and seizure. The ordinance also introduced some additional provisions based on the recommendations of the parliamentary standing committee of finance and inputs from SEBI. The ordinance also mandates that an authorized officer may requisition the services of a police officer or any officer of the Central Government to assist in search and seizure. It also empowers the SEBI to recall and enhance the penalty imposed by the adjudicating officer. The original ordinance empowered SEBI to regulate any money pooling scheme worth Rs.100 Crore or more and gave it powers to attach assets in cases of noncompliance. It also empowers SEBI to seek information, such as telephone call records, from any persons or entities with respect to any securities transaction being investigated. It also gives powers to the SEBI Chairman to order searches and seizures. CONTENTS News Alerts Tax 1 Corporate, Capital Market, Economy & Foreign Trade 1 Labour 3 Judgments 4 Article 5 SEBI'S New Corporate Governance Norms By Mr. Umang Joshi, Associate, K&A FEMA Merchanting Trade Transactions Revised guidelines The Reserve Bank of India (RBI), vide its Circular dated , reviewed the existing guidelines containing directions relating to merchanting trade transactions to further liberalize and simplify the procedure. Some of the important points among various others laid down by the revised guidelines are as follows: (a) For a trade to be classified as merchanting trade following conditions should be satisfied - Goods acquired should not enter the Domestic Tariff Area; and the state of the goods should not undergo any transformation; (b) Goods involved in the merchanting trade transactions would be the ones that are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India, as on the date of shipment and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry), are complied with for the export leg and import leg respectively; (c) AD bank should be satisfied with the bonafides of the transactions. Further, KYC and AML guidelines should be observed by the AD bank while handling such transactions; (d) both the legs of a merchanting trade transaction are routed through the same AD bank. The bank should verify the documents like invoice, packing list, transport documents and insurance documents (if originals are not available, Non-negotiable copies duly authenticated by the bank handling documents may be taken) and satisfy itself about the genuineness of the trade; (e) Letter of credit to the supplier is permitted against confirmed export order keeping in view the

2 outlay and completion of the transaction within nine months; (f) Payment for import leg may also be allowed to be made out of the balances in Exchange Earners Foreign Currency Account (EEFC) of the merchant trader; etc. The contents of the said circular would come into effect in respect of merchanting trade transactions initiated after New rules for auditors issued by Govt. The Government has issued the rules governing the audit and auditors, which also contain details of mandatory rotation of auditors. These rules will be operational from The Ministry of Corporate Affairs has so far rolled out rules for 11 chapters of the new Companies Act. In the final rules, the Ministry has specified the threshold for identifying the class of companies that have to implement mandatory rotation. The final rules say that unlisted public companies with a paid up share capital of Rs.10 Crore or more, private limited companies with a paid up share capital of Rs.20 Crore or more, and companies with public borrowings from financial institutions, banks or public deposits of Rs.50 Crore or more will have to comply with the auditor rotation requirement. No Penalty on account balance below limit: RBI Bank customers may no longer have to maintain a minimum balance in their savings account as the Reserve Bank of India (RBI) has directed banks to do away with the practice of levying penalty on account holders who don't do so. While this spells good news for account holders, some bankers said this would increase their costs and they might start charging for some of the services they were offering free. RBI has urged banks to limit the liability of customers in cases like nonmaintenance of balance or electronic transactions where banks are not able to prove customer negligence. The RBI, however, suggested that banks may withdraw the services available on savings accounts in case customers do not maintain minimum balance. The services can be restored when the balances improve to the minimum required level. The RBI has also told banks to allow borrowers to prepay floating rate term loans without any penalty. Easier exit likely for PEs in new foreign listing rules The Finance Ministry is likely to free private equity investors and venture capital funds invested in companies seeking to list abroad from the 25% minimum shareholding rule, effectively allowing them to sell their entire stake through a public issue. The lock-in rule had forced several companies with large PE and VC investments to hold back their overseas listing plans, as the Securities and Exchange Board of India identified these investors as promoters. The Government had earlier allowed unlisted Indian companies to raise capital abroad and list their shares on overseas bourses without first listing them in India. Besides the listing rules, companies are also required to be fully compliant with the foreign direct investment policy while raising funds overseas. SEBI notifies corporate governance rule overhaul The Companies Act, 2013 was enacted on August 30, 2013 which provides for a major overhaul in the Corporate Governance norms for all companies. The rules pertaining to Corporate Governance were notified on The requirements under the Companies Act, 2013 and the rules notified there under would be applicable for every company or a class of companies (both listed and unlisted) as may be provided therein. It has been decided to review the provisions of the Listing Agreement in this regard with the objectives to align with the provisions of the Companies Act, 2013, adopt best practices on corporate governance and to make the corporate governance framework more effective. SEBI, vide its Circular dated carried out amendments in Clause 35B and 49 of the Equity Listing Agreement. The listing conditions as set out in this Circular of SEBI are specified in exercise of the powers conferred under Section 11 read with Section 11A of the Securities and Exchange Board of India Act, The said listing conditions should form part of the existing Equity Listing Agreement of the Stock Exchange. All Stock Exchanges are advised to ensure compliance with this circular and carry out the amendments to their Listing Agreement as per Part-A and Part-B of this Circular. This master circular will supersede all other earlier circulars

3 issued by SEBI on Clauses 35B and 49 of the Equity Listing Agreement. Uniform accounting rules for ARCs The Reserve Bank of India (RBI) has come up with some uniform accounting rules for asset reconstruction companies (ARCs). In the wake of deteriorating credit quality, banks have of late started selling bad loans to ARCs, which acquire them from lenders and try recovering pending dues from defaulting borrowers. In between, companies earn commissions. Such transactions can take place in a combination of security receipts (SRs) and cash. The RBI has mandated certain regulations in terms of revenue recognition, valuation of SRs, acquisition costs and others. The RBI has further asked all ARCs to show expenses incurred at the time of acquiring bad loans on account of due diligence, immediately in the statement of profit and loss. The RBI stated that yield should be recognized only after the full redemption of the entire principal amount of SRs. Higher income should be recognized only after full redemption of security receipts. SRs are securities to be subscribed by select qualified institutional buyers, including banks and traded in the secondary market. As and when ARCs recover loans, they repay back to those SR holders. In the case of a more than expected recovery, ARCs receive incentives and vice versa. SRs are rated by rating companies. The higher the rating, the better is the quality. Considering nature of investment in SRs where underlying cash flows are dependent on realization from non-performing assets, it can be classified as available for sale. Thus, according to RBI, investments in SRs may be aggregated for the purpose of arriving at net depreciation / appreciation of investments under the category. CCI tightens rules to see through M&A structures The Competition Commission of India (CCI) has tightened its rules to ensure that companies do not escape its scrutiny through innovative structuring of mergers and acquisitions. The CCI has clarified that it will look at the substance of the transaction and not just the structure while approving any merger. Most of the combinations involving Indian companies or having presence in India have to get CCI nod. The requirement of filing notice under Regulation 5 of these regulations shall be determined with respect to the substance of the transaction and any structure of the transaction. The CCI has also deleted a clause under the merger regulations pertaining to the relaxation of transactions that take place entirely outside the Indian jurisdiction. CCI has said that there is no need for seeking its approval if the transaction has taken place entirely outside India with insignificant local nexus and effect on markets in India. The Commission has also said parties that decide to merge will now be required to provide their audited annual accounts of immediate preceding two financial years. The fee for filing forms by enterprises has been increased. Moreover, enterprises entering into combination would now have to furnish details related to whether the proposed transaction is subject to filing requirements in other jurisdictions. LABOUR Employees going abroad can fill PF data online Organized sector employees going abroad for offshore work can now fill their provident fund (PF) details online for seeking the Certificate of Coverage which attests that the person concerned is covered under social security schemes, and get it in three working days. Applicants will be able to enter their data such as names, PF account numbers and the period for which Certificate of Coverage is required. The retirement fund body said the software has been upgraded for the purpose allowing applicants to fill data online. This is expected to eliminate mistakes. The employees need to download their applications after filling it up online and get it countersigned by employers. The employer would have to submit the document to the concerned Regional Provident Fund Commissioner, who will issue the Certificate of Coverage within three working days. At present, organized sector workers covered under social security schemes run by EPFO are exempted from contribution towards such schemes in other countries with whom India has singed social security agreements. But for availing such benefit, they are required to produce Certificate of Coverage.

4 JUDGMENTS Supreme Court recognizes transgenders as 'third gender' The Supreme Court in a landmark judgment created the "third gender" status for eunuchs or transgenders. Earlier, they were forced to write male or female against their gender. The SC asked the Central Government to treat transgender as socially and economically backward. The Apex Court said that transgenders will be allowed admission in educational institutions and given employment on the basis that they belonged to the third gender category. The Court said absence of law recognizing eunuchs as third gender could not be continued as a ground to discriminate them in availing equal opportunities in education and employment. This is for the first time that the third gender has got a formal recognition. The Apex Court said that the third gender people will be considered as OBCs and they will be given educational and employment reservation as OBCs. The Court also said States and the Centre will devise social welfare schemes for third gender community and run a public awareness campaign to erase social stigma. The Court further stated that the States must construct special public toilets and departments to look into their special medical issues. The Court also added that if a person surgically changes his/her sex, then he or she is entitled to her changed sex and cannot be discriminated. However, the Court clarified that its verdict pertains only to eunuchs and not other sections of society like gay, lesbian and bisexuals who are also considered under the umbrella term 'transgender'. CAG can audit books of private telcos: SC The Supreme Court, in a landmark judgment said that the Comptroller and Auditor General of India (CAG) can scrutinize the books of private telecom operators that share revenue with the Government on spectrum use. The Supreme Court, however, stopped short of terming this as a statutory audit. CAG can carry out examination into the economy, efficacy and effectiveness with which the Union of India has used its resources, and whether it has realized the entire license fee, spectrum charges and also whether the Union has correctly carried out the audit under the UAS (unified access service) license agreement. The Court opined CAGs examination of accounts of service providers in a revenue sharing contract is extremely important to ascertain whether there is an unlawful gain to the service provider and an unlawful loss to the Union, because the revenue generated out of that has to be credited to the Consolidated Fund. This judgment of the Supreme Court provides legal underpinning to the notion that non-state companies are subject to checks by the national auditor as long as they are involved in public-private partnership (PPP) projects and similar ventures. The Court rejected a ruling by the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) which had said that a CAG audit would be subject to a finding by the Department of Telecom (DoT) that statements submitted to it were misleading. This would deprive CAG of its power to conduct an audit, enquiry or inspection. CAG was entitled to seek records of telcos that they were currently expected to share with the Telecom Regulatory Authority of India and DoT, including revenues, operational expenses, cash inflows etc. In the process, CAG won't actually be auditing the accounts of the service providers as such, but examining receipts to ascertain whether the Union is getting its due share by way of license fees and spectrum charges. Service providers are, therefore, bound to provide all records and documents called for by the CAG. The court has held that CAG can examine the accounts of the service providers for the limited purpose of ascertaining whether the Union is getting its due share of the revenue. Deal with the misuse of Public Interest Litigation with iron hand: SC The Supreme Court in a case has laid down that judiciary should deal with iron hand the misuse of Public Interest Litigation (PIL) which is being exploited for the benefit of individuals. The concept of Public Interest Litigation is a phenomenon which is evolved to bring justice to the reach of people who are handicapped by ignorance, indigence, illiteracy and other down trodden people. Through the Public Interest Litigation, the cause of several people who are not able to approach the Court is espoused. In the guise of Public Interest Litigation, we are coming across several cases where it is exploited for the benefit of certain individuals. The Courts have to be very cautious and

5 careful while entertaining Public Interest Litigation. The Judiciary should deal with the misuse of Public Interest Litigation with iron hand. If the Public Interest Litigation is permitted to be misused the very purpose for which it is conceived, namely to come to the rescue of the poor and down trodden will be defeated. The Courts should discourage the unjustified litigants at the initial stage itself and the person who misuses the forum should be made accountable for it. In the realm of Public Interest Litigation, the Courts while protecting the larger public interest involved, should at the same time have to look at the effective way in which the relief can be granted to the people, whose rights are adversely affected or at stake. When their interest can be protected and the controversy or the dispute can be adjudicated by a mechanism created under a particular statute, the parties should be relegated to the appropriate forum, instead of entertaining the writ petition filed as Public Interest Litigation. Govt. woman employee can get uninterrupted 2 year leave for child care: SC The Supreme Court held that a woman employee of the Central Government can get uninterrupted leave for two years for childcare, which also includes needs like examination and sickness. The Court set aside an order of the Calcutta High Court which had held that the Central Civil Services (Leave) Rules did not permit uninterrupted CCL (childcare leave) for 730 days. The Court said that on perusal of circulars and Rule 43-C, it is apparent that a woman government employee having minor children can avail CCL for a maximum period of 730 days i.e. during the entire service period for taking care of up to two children. The Court passed the order on a Petition challenging the Government's decision not to grant her leave of 730 days for helping her son prepare for examinations. ARTICLE SEBI'S NEW CORPORATE GOVERNANCE NORMS By Mr. Umang Joshi, Associate, K&A The Securities and Exchange Board of India (SEBI), has recently come out with a comprehensive code for corporate governance norms for listed companies which mandate stricter disclosures and protection of investor rights in addition to equitable treatment of minority and foreign shareholders. The said norms were approved by SEBI during its meeting held in February 2014 and were much needed to ensure strict compliance by the listed companies. The new corporate governance norms which will become effective from October 1, 2014 replace the existing clause 49 and 35B of the listing agreement. Furthermore, the said norms are in consonance with the Companies Act, 2013 and the primary aim in bringing these changes is to ensure that companies adopt best practices on corporate governance. It essentially addresses various corporate governance issues prominent in India, such as the protection of minority shareholders in the backdrop of the dominance by the promoters in companies and can be considered to be an important event with respect to corporate governance in relation to the existing listed companies. The key changes brought about by the new norms vis a vis clause 49 are as follows: Rights of Shareholders - The new norms provide greater rights to the shareholders thereby ensuring that there is effective shareholder participation in key corporate governance decisions coupled with greater participation in the decision making process of the company. Several examples abound in the new clause 49 are as follows: (i) express recognition of the role and protection of minority shareholders; (ii) greater participation of shareholding in the process of corporate democracy; (iii) stringent regulation of related party transactions, including by requiring a majority of the minority voting process. Role of stakeholders in Corporate Governance- It requires the company to recognise the rights of stakeholders and encourage cooperation between company and the stakeholders. The objective is to ensure that the stakeholders obtain effective redress for violation of their rights and that there is employee participation in the governance of the company. Disclosure and transparency The new governance code also mandates timely and

6 accurate disclosure on all material matters including the financial situation, performance, ownership, and governance of the company which will thereby ensure greater transparency in the dissemination of the information. Responsibilities of the Board The responsibilities of the board have also been laid down to ensure greater corporate governance. It is pertinent to note that members of the board are required to disclose to the board their material interest in any transaction or matter directly affecting the company. This is to ensure that there is no conflict of interest and that there is greater accountability on the board of directors. comprise of minimum three directors as its members and two-thirds of members of AC have to be independent directors. It is pertinent to note that the Companies Act, 2013 requires at least half of the AC members to be independent. Similarly it provides that the chairman of the AC must be an independent director. The role of Audit Committee under the new code also incorporates matters from the Companies Act such as reviewing and monitoring auditor independence, approval of transactions with related parties, scrutiny of inter corporate loans, valuations and evaluation of internal financial controls and risk management systems. The role of the Audit Committee under the new norms is as follows: Composition of Board - The requirement for basic composition of the Board has not been changed as per the new corporate governance norms. The requirement for independent directors, though different from Companies Act, has been retained. It is pertinent to note that as per the new corporate governance norms, a person cannot serve as an independent director in more than seven listed companies and any person who is serving as a whole time director in any listed company can serve as an independent director in not more than three listed companies. Whistle Blower policy - The new corporate governance code incorporates a provision for whistle blower policy in line with the Companies Act, As per the said provision, the company is required to establish a vigil mechanism so as to report concerns about unethical behaviour, actual or suspected fraud or violation of the company's code of conduct or ethics policy. Furthermore, the mechanism should provide adequate safeguards to the whistle blowers against victimization and it should also provide for direct access to the Chairman of the Audit Committee in exceptional cases. Audit committee (AC) The new norms also provide for an audit committee and its role has been considerably expanded so as to ensure greater financial accountability. The new code provides that the audit committee must a) Oversight of the company's financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible; b) Recommendation for appointment, remuneration and terms of appointment of auditors of the company; c) Approval of payment to statutory auditors for any other services rendered by the statutory auditors; The new norms have also amended clause 35B of the listing agreement and the same is as follows: The revised clause 35B provides e-voting facility to the shareholders, in respect of all shareholders' resolutions required to be passed at general meetings or through postal ballot. This provision is in consonance with the Companies Act, 2013 and is aimed to promote active participation in the decision making process by the minority and foreign shareholders. The new norms also require a company to obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance. The said certificate must also be sent to the Stock Exchanges along with the annual report filed by the company. This has been done to ensure effective compliance of the new corporate governance norms and so that the affairs of the company are carried out in accordance with the said norms.

7 The new corporate governance norms by SEBI are a step in the right direction addressing specific issues such as shareholders rights, whistle blower policy and greater accountability by the board of directors which is in line with the requirements of the new Companies Act, The overall objective is to ensure that the companies adopt best practices on corporate governance. Though, the applicability might add to greater compliance costs, the compliance of the new corporate governance norms should be ensured through its effective implementation and enforcement which will thereby pave the way for a robust corporate governance regime in the country. Contact details: A-9, Nizamuddin East, New Delhi , India Phone No: (+91) (11) / 4 / 7; Fax: (+91) (11) info@kanthcorp.com