Economic melt-down and Indian Resilience

The dark clouds enveloping global economy since 2007 turned into unabated torrential crises hitting the Global Economic Behemoths in an unprecedented manner. Many financial giants ducked for cover developed countries including Germany, Japan, the UK and the Netherlands were declared officially to be in recession. Others like US and France are not much better.

Against this very gloomy world scenario it was truly heart-warming and a huge relief to hear Mr. Chidambaram (former Finance Minister) emphasize that India is nowhere near a recession. Not only that, even though the country’s growth may moderate to a level between 7 and 8 per cent (as opposed to 3 consecutive years of plus 9 percent ) yet, India would still be the second fastest growing large economy in the world in the current juncture of global economic slowdown. Now that is truly cause for comfort!

Policy initiatives by the Indian Government are afoot to tackle the global situation and devise solutions to protect the domestic economy as best as we can. India is in talks with the World Bank to double its annual loan assistance to India from the current $3 billion to $6 billion. For fiscal consolidation, the Government has also provided for more expenditure in the current year as a counter cyclical measure.

Even FII investments in India have turned positive in November 2008, after net selling by them in September and October 2008 due to redemption pressures from abroad. The share market has shown positive movements and the inflation has been contained!

Obviously there are sectors which are hard-hit due to the inter-linkages with world economies e.g. India's IT and IT-enabled services (IT-ITES) industry, where the United States accounts for the largest share-a over 50 percent--of the Indian software and outsourcing market. But even this space has the silver lining amid the gloom - the number of acquisitions by Indian IT-ITES companies in the United States during the first two months of 2008, increased by nearly 75 percent. Additionally, India's domestic demand is booming too. Yet another blessing in disguise is that the sub-prime crisis, slowing economy and fear of layoffs in the United States has accelerated the desire of India-born professionals based in the United States to return to their home soil.

As for the current monetary policy, the Reserve Bank of India announced a reduction of the cash reserve ratio (CRR) for scheduled banks by 50 basis points to 8.5 per cent of net demand and time liabilities (NDTL) (beginning October 11,2008). Clearly this was intended towards injecting liquidity into domestic financial markets. Again on 6th December, 2008 RBI cut its key short term rates – the repo and reverse repo – by one percentage point each ( to 6.5 per cent from 7.5 cent and the reverse repo to 5 per cent from 6 per cent).

We trust that the recent reduction in interest rates and various other measurers announced by the Reserve Bank of India will put certain core sectors, including real estate and automobile, back on track.

It is amply evident that the macroeconomic fundamentals of the Indian economy are strong and resilient and that India's financial system is sound, well-capitalized and well-regulated. Money and forex markets in India have been operating in a relatively orderly manner.

RBI’s clarion-call for fair-play by Lending Institutions

As the ancient saying goes “A banker is a person who lends you his umbrella when its bright, cheerful sunshine; but demands it back at the slightest indication of bad weather!”

Well its as ironic (and darkly humorous) as it is true! Perhaps to partially mitigate the hardship of the borrowers and ensuring a more level-playing field, the Reserve Bank of India (RBI) has recently issued an advisory. The Fair Practices code reiterates the need for banks and other financial institutions to practice more transparent functioning. It underlines that all information regarding charges/fees for processing of loan application forms must be disclosed and that these institutions must inform ‘all-in-cost’ to the customer so as to facilitate the customer to make an informed decision by clearly understanding and comparing the rate-structures/fees etc of other similarly placed sources of finance.

RBI has issued this new advisory since it came to its knowledge that some banks are charging over and above the defined/declared processing fee, without disclosing this to the borrower in the first instance. Such practice has categorically been labelled as unfair practice.

Incidentally, such unfair practices were rampant despite clear RBI Guidelines issued in March 2007, wherein banks/FIs were advised that loan application forms in respect of all categories of loans, irrespective of the amount of loan sought by the borrower, should be comprehensive and should include information about the fees/charges, if any, payable for processing. Furthermore, the amount of such fees should be refundable in cases of non acceptance of application, pre-payment options and any other matter which affects the interest of the borrower.

The underlying rationale of the new advisory (as also the earlier one) is to facilitate the borrower in making an informed decision after comparing the offerings of various lending institutions in a free and fair manner.

Hopefully the Regulator has finally curbed truant behaviour of lending institutions.

Reverse Mortgage Scheme

Making reverse mortgage a living reality, the Government of India has notified the Reverse Mortgage Scheme, 2008 under clause (xvi) of section 47 of the Income-tax Act, 1961. The new law comes as a wonderful respite for those persons who, for whatever reason, did not plan their retirement and are left with no asset other than the house they live in.

Under the scheme any individual who is sixty years of age or above or any married couple (where either the husband or the wife is sixty or above) are “eligible persons” for entering into a reverse mortgage transaction with an approved bank/lending institution. It is necessary that the mortgaged asset should be owned by the eligible person and free from encumbrance.

In the case of reverse mortgage, the borrower mortgages the house with the housing finance company and in return receives, either monthly or periodic payment, from the housing finance company. So in this case the lender institution pays the borrower individual(s) either monthly or periodically or issues a line of credit for a certain amount.

After the death of the borrower(s), the housing finance company sells the house and settles the loan account from that amount and pays the balance amount to the legal heirs.

Also at any time during the pendency of the loan, the borrower or the legal heirs, as the case may be, can settle the loan amount and the house then becomes mortgage free.

Truly a case of out-of-the-box-thinking…which can meaningfully help people in their sunset years!

Note: It may be recalled that Finance Act, 2008 has amended the Income Tax Act, 1961 to stipulate that reverse mortgage would not amount to "transfer” and such amount will not be included in the total income.

ECB Policy

Moving forward on its avowed objectives of continued liberalisation, the RBI has further modified External Commercial Borrowings Policy (ECB). Translated simply this means that under the revised scheme of things, ECB upto USD 500 million, per borrower-per financial year, s allowed under the Automatic Route for Rupee expenditure and / or foreign currency expenditure for permissible end - uses. Accordingly, the requirement of minimum average maturity period of seven years for ECB more than USD 100 million, for Rupee capital expenditure, by the borrowers in the infrastructure sector, has been dispensed with.

Similarly, certain other policy changes have been introduced for parking the ECB until actual requirement. This is designed to arm borrowers with flexibility - to either keep these funds off-shore in a manner prescribed or keep it with the overseas branches / subsidiaries of Indian banks or to remit these funds to India for credit to their Rupee accounts with AD Category-I banks in India till they are utilised for permissible end-uses.

Obviously such elbow-room would facilitate borrowers by providing a larger basket of options as well more breathing time in business decisions.

SSI units to get bold and brave!

There is no gainsaying the fact that excessive protection kills initiative and stunts growth. Keeping this in view, the Indian Government has, since the advent of liberalisation in early 1990s, taken several policy measures for enabling Indian industry become increasingly competitive. Simultaneously a special status was accorded to the “Small Scale Industry Sector” (SSIs) which enjoyed certain protections and privileges since it was believed that they needed to grow in a protected environment. However in the last few years, have seen the gradual and calibrated removal of this protective sheath. This has meant reduction in the number of items to be exclusively produced in the Small Scale Sector. From 2005 Government has de-reserved 579 items and only 35 items were remaining for exclusive manufacture in the SSI Sector.

Now, the Government has de-reserved another 14 items so that there are on date, only 21 items which can be exclusively manufactured in the Small Scale Sector.

Clearly this needs to be interpreted as a big step forward since it demonstrates a growing confidence in the capability of Indian industries to face international competition.

As they say ‘you never know what you can do until you try’!

SSI units to get bold and brave!

There is no gainsaying the fact that excessive protection kills initiative and stunts growth. Keeping this in view, the Indian Government has, since the advent of liberalisation in early 1990s, taken several policy measures for enabling Indian industry become increasingly competitive. Simultaneously a special status was accorded to the “Small Scale Industry Sector” (SSIs) which enjoyed certain protections and privileges since it was believed that they needed to grow in a protected environment. However in the last few years, have seen the gradual and calibrated removal of this protective sheath. This has meant reduction in the number of items to be exclusively produced in the Small Scale Sector. From 2005 Government has de-reserved 579 items and only 35 items were remaining for exclusive manufacture in the SSI Sector.

Now, the Government has de-reserved another 14 items so that there are on date, only 21 items which can be exclusively manufactured in the Small Scale Sector.

Clearly this needs to be interpreted as a big step forward since it demonstrates a growing confidence in the capability of Indian industries to face international competition.

As they say ‘you never know what you can do until you try’!

FIIs-Allocation of investment between debt and equity

Yet another instance of the Indian Economy’s growing self-confidence is the RBI’s decision to remove the stipulation on FIIs, on the allocation of their total investment, between equity and debt instruments (including dated Government Securities and Treasury Bills in the Indian Capital market) in the ratio of 70:30. Reason: to allow flexibility to the FIIs to allocate their investments across equity and debt instruments. The decision follows the decision of Securities and Exchange Board of India (SEBI) taken in consultation with the Government of India.

However, FIIs investing upto 100 per cent in the debt market will have to form a 100 per cent fund for this purpose and get it registered with SEBI.

The decision was timely since it came at a time when FIIs were pulling out of the Indian equity market and pumping money into the debt market.

Limited Liability Partnership Act, 2008

The very long-awaited and eminently feasible entity - the Limited Liability Partnership (LLP) is now a ground reality…and it has’nt come easily. Parliament passed the Limited Liability Partnership Bill 2008, paving the way for an alternative corporate business vehicle that will give the benefits of limited liability and allow businesses to organize their internal structure as a partnership based on an agreement.

Viewed against the backdrop of the Service sector playing such a significant role in the national economy, the need for such enabling legislation for LLP was felt since long. However the gestation period proved to be a long one.

The Limited Liability Partnership Bill which was introduced in the parliament in 2006 was referred to the Parliamentary Standing Committee on Finance for examination and report. Based on the Committee’s recommendations the 2006 Bill was withdrawn, modified and reintroduced as ‘The Limited Liability Partnership Bill, 2008.

The salient features of the LLP Bill, 2008 are as follows:

• LLP shall be a body corporate and a legal entity separate from its partners with perpetual succession.
• The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.
• The Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.
• While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.
• No partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
• There is no upper limit on the number of partners in an LLP. The designated partners (at least one to be a resident in India) will be responsible for ensuring compliance with statutory obligations.
• Foreign LLP may establish a place of business in India, in accordance with rules which are to be separately framed and notified by the government.

CAs can partner with non-CAs

The Institute of Chartered Accountants of India seems to be more progressive than its counterparts, like the Bar Association of India.

The Institute has recently amended its Regulations permitting CAs to enter into partnerships with non-CAs like Company Secretary, Cost Accountant, Advocate, Engineer, Architect, Actuary and certain other recognized professional bodies or institutions outside India. This is certainly a progressive step in the right direction, unlike the Bar Council of India Rules which is very restrictive and conservative in such matters and still remains closed to partnerships with those who are not advocates.

Bar Council - are you listening??

ONGC- India’s success story in E&P

Oil & Natural Gas Corporation (ONGC) and its partners have bagged 20 out of the 44 blocks that have been awarded under the New Exploration Licensing Policy (NELP-VII). Of the 20 blocks that ONGC and its partners bagged, three are for deep-water, five for shallow-water and the balance 12 for on-land blocks. It has been reported that the government hopes to make its next offering of acreages for oil and gas prospecting in February 2009.

Of the 45 blocks that received bids in NELP VII, the Cabinet Committee on Economic Affairs did not award a deepwater block in Mumbai basin to Cairn Energy India as it has reportedly found that the low bid by the sole bidder is "detrimental to the government's interest in future in terms of profit petroleum."

‘International Workers’ sought to be covered under the Employees’ Provident Fund and Employees’ Pension Schemes

Modifications to the Employees’ Provident Fund Scheme

Ministry of Labour, by way of notification has recently announced certain significant changes in the Employees’ Provident Fund and Employees’ Pension Schemes. The notification has broadened the ambit of both the Schemes to include certain category of Indian employees working outside India and certain expatriate employees working in India. (termed as ‘International Worker’).

As per the amendments, every International Worker employed with an establishment to whom the Schemes apply would be required to become member of the Provident Fund/Pension Schemes, unless he/she qualifies as an “Excluded Worker”. In addition to this, every employer is required to do certain statutory filings with the authorities within stipulated periods.

Consortium/JV is an AOP and liable to pay Income Tax…

The Authority for Advance Ruling held that a joint venture can be treated as an association of persons (AOP) and is liable to be assessed as such under the Income Tax Act, 1961(“ITA”) when all the partners of J.V. have joined in for common purpose on their own volition to produce income which is shared in certain ratio. It was held that the fact that payments from the client get credited in the respective Bank accounts of the J.V. members will not be of much help to the applicant, because it is a J.V.

Allotment of shares

The Supreme Court held that an allotment of shares is a “creation” of shares and not a “transfer” of shares. It is the creation of shares by appropriation out of the unappropriated share capital to a particular person.

Vodafone loses India Tax Case

The acquisition of shares in Hutch Essar by Vodafone from Hutchison in a multi-billion dollar M&A overseas deal last year resulted in a dispute on the taxability of capital gains on the transaction. Vodafone-Essar filed a writ petition in the Bombay High Court against the show cause notice issued by the income tax department asking Vodafone-Essar as to why it should not be treated as assessee in default for not deducting tax at source (TDS) while making payment for the 11.1 billion dollar deal and why tax/penalty should not be levied on the company.

The main issue involved is whether the transfer of shares in a foreign company which results in an “extinguishment of rights” and “relinquishment” by the transferor in the shares of the Indian company, is taxable in India.

It is learnt that the High court has not only dismissed the case but also imposed costs on them for not producing vital documents holding the key to resolution of the issue. Vodafone is reportedly planning to move the Supreme Court of India seeking reversal of the High Court verdict. It is expected that a final decision in this case will have far reaching impact and the revenue may have a relook at various similar transactions.

Uphold the Agreement instead of rushing to step in…

In a recent judgment, the Supreme Court of India advised courts in the country to first ensure that the remedies provided for in an agreement, pertaining to the appointment of an Arbitrator, must first be exhausted, before the court appoints an arbitrator. The Court held that the terms of the agreement should be adhered to and given effect as closely as possible.

Dept. Circulars cannot be given primacy over the Supreme Court decisions

In a recent case decided by the Supreme Court, it was held that the circulars and instructions issued by the Central Board of Excise and Customs are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court.
So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the Court. It is not for the Executives but for the Court to declare what the particular provision of statute says. Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.

No evasion of accrued tax by amending contract retrospectively

According to the Supreme Court, the law permits the contracting parties to lawfully change their stipulations by mutual agreement and, therefore, the assessee and the vendee had no legal impediment in modifying the terms of their contract; however, it could not be given any retrospective effect so as to facilitate evasion of tax liability that had already arisen.

Uphold the Agreement instead of rushing to step in…

In a recent judgment, the Supreme Court of India advised courts in the country to first ensure that the remedies provided for in an agreement, pertaining to the appointment of an Arbitrator, must first be exhausted, before the court appoints an arbitrator. The Court held that the terms of the agreement should be adhered to and given effect as closely as possible. 

Whatever be the name, it is the intent that matters! Consortium/JV is an AOP and liable to pay Income Tax…

The Authority for Advance Ruling held that a joint venture can be treated as an association of persons (AOP) and is liable to be assessed as such under the Income Tax Act, 1961(“ITA”) when all the partners of J.V. have joined in for common purpose on their own volition to produce income which is shared in certain ratio. It was held that the fact that payments from the client get credited in the respective Bank accounts of the J.V. members will not be of much help to the applicant, because it is a J.V

You are an idiot only if you can prove it!!

According to the Supreme Court, “An idiot is one who is of non-sane memory from his birth, by a perpetual infirmity, without lucid intervals: and those are said to be idiots who cannot count upto 20, or tell the days of the week or who do not know their fathers or mothers or the like”. Based on the Evidence Act, the court further held that it was for the accused to prove they were idiots or otherwise of unsound mind. It is not understood how a person who fits into the definition can be burdened with onus of proof!!

If a person can prove that he/she is an idiot, can you truly call them an idiot??

Trainees are not employees…at least not for PF

The Supreme Court has held that Trainees/ Apprentices are not employees under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and have no right to employment. An employer is not liable to pay Provident Fund contribution for them.

Better safe than sorry! Importance of Corporate House Keeping…

A US company (Petitioner) filed a petition for winding up a Joint Venture Company (JVC) on just and equitable grounds under the Companies Act, 1956 because there was total deadlock on joint venture and management of the JVC. The Petitioner claimed being a 50% shareholder in the JVC since the original shareholder (also a US company) was merged into the petitioner company and hence ceased to exist.

The JVC and the other shareholder objected to the maintainability of the petition on several grounds including that the Petitioner was not a shareholder on the JVC’s register and, therefore, had no standing to maintain the petition for winding up; that the registered holder of 50% of the equity share capital of the JVC is the original JV Partner, which has ceased to exist; that at no point of time, any application for transfer of share certificates and/or substitution of the name of the Petitioner had been made; that the assignment of shares to the Petitioner was without the consent of the JVC and the other partner and therefore was contrary to the Shareholders Agreement and could not be given effect to.

The term "contributory" means every person liable to contribute to the assets of a company in the event of its being wound up, and includes the holder of any shares which are fully paid-up.

The Petitioner argued that the JVC as well as the shareholder had all along accepted the Petitioner as shareholder and that there was no ''assignment'' as contemplated under the Shareholders Agreement and, therefore, no consent of JVC and/or other shareholder was required. The Petitioner also asserted that it has stepped into the shoes of the original JV Partner, which has ceased to exist and was entitled to maintain a petition for winding up of the Company.

Therefore, the question before the Court was whether the Petitioner who was not a promoter and whose name was not entered in the Register of Shareholders/ Members can maintain the petition as a contributory?

The Court held that the petition is not maintainable by the petitioner in the capacity as a contributory because of the stipulation in Section 439 (4) (b) of the Companies Act. This section provides that a contributory shall not be entitled to present a petition for winding up a company unless the shares in respect of which he is a contributory, or some of them, either were originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up, or have devolved on him through the death of a former holder.

Another interesting question which arose was –Can the original shareholding company which got merged with the petitioner and therefore ceased to exist   can be said to have died? And can it be said that the shares have devolved on the Petitioner through the death of former holder? According to the Petitioner the merger in the petitioner of the original shareholder the latter had effectively met its “civil death”, and its shares had then devolved upon the petitioner.

The Court held that use of the word ‘death’ normally applies to the death of a natural person and not of corporate entities.

This judgment seems to be a first dealing with the subject and highlights the importance of complying with technical requirements, like ensuring that the shares are issued and registered appropriately to protect the interests of the concerned party. Those who sleep over their rights may lose it.

Certainly a ‘Person’ in its own right! German Partnership firm eligible for Treaty Benefits

The Mumbai Bench of the Income Tax Appellate Tribunal (“ITAT”) held that a Limited Partnership Firm with the suffix “GmbH and Co. Kg”, incorporated under the law of Germany, is a “person” as defined in the India-Germany Double Taxation Avoidance Agreement (DTAA) because it is assessed for “Trade Tax” in Germany and would be entitled to benefits under the India-Germany Tax Treaty. 

Mere illusion? Of course not! The loss is “actual” says the Apex Court… Sanctity of the Production Sharing Contract

In a recent Judgment the Supreme Court of India had the occasion to examine Production Sharing Contract (PSC) with certain special provisions under the Income Tax Act, to see whether certain ‘translations’ (such as currency gains and losses) fall within the scope of Section 42 and will be guided by the terms of the PSC?

The Court observed that PSC is a contract in which the Central Government is not only a party; rather it is a partner in the process. Such contracts are required to be placed before each House of Parliament under Section 42. PSC has an independent accounting regime which includes tax treatment of costs, expenses, incomes, profits etc. It prescribes a separate rule of accounting. In normal accounting, in the case of fixed assets, when currency fluctuation results in exchange loss, an addition is made to the value of the asset for depreciation. However, under the PSC, instead of increasing the value of expenditure incurred on account of currency variation in the expenses itself, the E&P Contractor is required to book losses separately. "PSC accounting" obliterated the difference between capital and revenue expenditure. Therefore, PSC represented an independent regime. The shares of the Government and the contractors were also determined on that basis

It was held that expenses deductible under Section 42 had to be determined as per the PSC. This implied that expenses had to be accounted for, only as contemplated by the PSC. If so read, it is clear that the primary object of the PSC is to ensure a fair "take" to the Government. The said "take" comprised of profit oil, royalty, cesses and taxes.

The capital contribution had to be converted under the PSC at one rate whereas the expenditure had to be converted at a different rate. This exercise resulted into loss/profit on conversion. The question before the Court was whether translation losses are illusory or real? According to the Department, they are illusory losses. The Court held that they are not illusory losses, but actual losses and held in favour of the E&P Contractor.

A much-needed shot-in-the-arm! Overseas investment in Hospitals

In keeping with ‘Health as High priority’, the RBI has allowed Registered Trusts and Societies which have set up hospital(s) in India to make investment in the same sector in a Joint Venture or Wholly Owned Subsidiary outside India, with prior approval. 

Look before you leap! RBI plays the good watchdog…

To safeguard the interest of the unsuspecting common man against unscrupulous conmen, the RBI has issued caution against lottery and other fictitious money-circulation schemes designed to lure/defraud the public. The caution basically reiterates that remittances in any form, towards participation in lottery / lottery-like schemes, functioning under different names, such as money-circulation-scheme or remittances for purposes of securing prize money/awards etc. is prohibited under Foreign Exchange Management Act, 1999. 

The ‘Magic Lamp of Alladin’ grants yet another wish! Mobile banking gets official nod

Modernisation of Banking sector and Payment Systems in India has certainly come a long way from Cash based systems to Card based and now moving towards virtual accounts and e-payments. (Refer the August Edition of our Newsletter) As always the magic of the market-place where Consumer is King has led to launching of new services in the form of Internet Banking, Mobile Banking, National Electronic Funds Transfer (NEFT) and Cheque Truncation System.

The Payment and Settlement Systems Act, 2007 designated the Reserve Bank of India (RBI) authorised to regulate and supervise payment systems in India.

Moving forward on the matter, the RBI has recently issued the operative guidelines for mobile banking transactions enabling bank customers in India to transfer funds from an account in one bank to any other account in the same or any other bank on real time basis, irrespective of the mobile network a customer has subscribed to.

According to the RBI, a transaction limit of INR 2,500 should be imposed per mobile banking transaction. This is subject to an overall cap of Rs 5,000 per day, per customer, it said. Banks may also put in place monthly transaction limits depending on each bank’s own risk perception regarding any individual customer.

The Guidelines require the banks to devise/have an effective mechanism by way of risk-mitigation measures like fraud checks, AML checks etc depending based on the bank’s own risk perception unless specifically mandated by the Reserve Bank.

Yet another instance of Regulator turning Facilitator!

The much-awaited makeover…Indian Companies Act in its proposed New ‘Avatar’

As the Government of India reportedly plans introducing the Companies Bill, 2008 in Parliament, hopes for a long overdue modernisation of company law seem close to fulfilment.

The review/redrafting of the Companies Bill was carried out by an Expert Committee through a consultative process, by eliciting views of various Ministries, Departments and Government Regulators.

Primarily intended to revitalise the Corporate reality of emergent India the Bill aims to bring it at par with the international best practices geared towards fostering/facilitating entrepreneurship, investment and growth.

The Bill, with its thrust on Good Corporate Governance, is expected to emphasise:

·   Stronger protection of the rights of minority stake-holders; responsible self-regulation with disclosures and accountability; substitution of government control over internal corporate processes and decisions by shareholder control.

·   A new entity in the form of One-Person Company.

·   Retains the concept of Producer Companies, while providing a more stringent regime for ‘not-for–profit’ companies to check misuse.

·   Expansion of e-Governance initiative of the Ministry of Corporate Affairs (MCA-21) to all processes of compliances and also provide access to corporate data through internet to all stakeholders, round the clock.

·   Relaxation of extant restrictions which limit the number of partners in entities (e.g. partnership firms, banking companies)to a maximum 100 - with no ceiling as to professions regulated by Special Acts.

·   Mandatory consolidation of financial statements of subsidiaries with those of holding companies.

·   Single forum for approval of M&As along with concept of ‘deemed approval’ in certain situations.

·   Revised framework for insolvency, including rehabilitation, winding-up and liquidation of companies, based on models suggested by the United Nations Commission on International Trade Law (UNCITRAL).

·   Consolidation of fora for dealing with rehabilitation of companies, their liquidation and winding up in the single forum of National Company Law Tribunal with appeal to National Company Law Appellate Tribunal. Special Courts to deal with offences under the Bill.

From Dependence to Inter-Dependence…The changing dynamics of Defence Procuremt

In keeping with the overall leitmotif of India’s economic and technological sophistication, the Ministry of Defence has unveiled the much-awaited revised policy for defence purchases.

Effective September 1, 2008, Defence Procurement Policy or DPP 2008, envisages the long-term goal of indigenisation of India’s defence requirements. Towards this, the policy provides for a private company to have an industrial licence only if stipulated under the licensing requirement for the defence industry, issued by the ministry of commerce.

The salient distinguishing feature of DPP 2008 over DPP 2006 is the introduction of “Banking of defence offsets”. This needs to be understood against the background of the emerging reality of India with its own captive market for defence products, is fast becoming an attractive and favoured destination to forge strategic alliances towards more cost-effective production. Banking of offset credits will allow foreign vendors to bank credit and claim it as an offset against defence contract(s) signed subsequently.

Additionally the policy provides that where the foreign vendor in collaboration with its Indian JV partner is bidding for a defence procurement contract and offers indigenously developed product, to an extent of at least 50%, there the offset obligation would not be applicable. It is legitimately expected that this Win-Win proposition will secure greater engagement of global industries in promotion of indigenous defence industry in India.

Unadulterated Abundance… ‘Reliance’ on Nature’s Bounty

Graphically described as a “huge factory set-up on the sea bed 7000-8000 feet under water”, with “temperatures close to freezing” and “run entirely with robots” it is truly a gigantic leap forward towards the country’s energy security. This ambitious project is attributable to Reliance Industries Ltd which has commercially started pumping oil from its field in the Krishna-Godavari basin off the Andhra coast.

It is expected that from an initial flow of 5,000 barrels a day, the total oil and gas output from the field could potentially rise to 5,50,000 barrels a day in 18 to 24 months. Pegged at about 40 per cent of the current indigenous production in India, the project is clearly poised towards enhancing India’s energy security as well as substantial savings on oil import bills for the country.

No wonder this is claimed to be the fastest exploration and production effort in any deep water basin in the world!

Equally gratifying is the dawning awareness that the country has even more hydrocarbon treasure-troves waiting to be discovered deep below the eastern seabed!

Indeed a heart-warming thought! 

Quick. Qualitative. Quasi-Judicial…

The ‘Alternative’ Route to Dispute Resolution

Long-acknowledged as a wonderfully effective mechanism for settling international commercial disputes, the ‘Permanent Court of Arbitration’ (PCA), is slated to establish its branch facility on Indian soil soon. The Union Cabinet recently gave its nod for setting up of a “Regional Facility (RF) of the PCA for South Asia” in New Delhi.  The RF is envisaged to provide same services as the parent body based at The Hague, Netherlands.

Established under the 1899 Convention for the Pacific Settlement of International Disputes, the PCA took initial shape at the first Hague Peace Conference. The 1899 Convention was revised in 1907 at the second Hague Peace Conference. India had acceded to the Convention on July 29, 1950.

Clearly a positive step in the right direction, it is reasonable to hold that of the proposed RF would become a veritable platform for Dispute Resolution, national and international in a speedy and cost-effective manner.

Inflation above 12%

Completely unmindful of the havoc it wreaks on one and all, the monster called Inflation is surging ahead…relentlessly. Inching beyond 12%, it has left the RBI with hardly any choices but to resort to credit squeeze and interest hike yet again.

July 29, 2008 once again saw the repo rate raised by 50 basis points to a seven-year high of 9%.Not to be left behind is the cash reserve ratio (CRR which is the proportion of funds that banks must keep on deposit with RBI), which went up 25 basis points to 9%.

The dominoes effect is obviously there for all to see and feel the pinch of. Following the announcement of the RBI, many commercial banks announced increase in their lending and deposit rates. The immediate victims of the interest hike are the automobile and real-estate industries, because of an immediate reduction in demand due to high cost of loans. Obviously, if the inflationary trend continues for a longer duration, higher financing cost will adversely affect other sectors too.

Bleak scenario indeed, with little respite in sight!

Industrial Park Scheme – the embrace widens

It was not very long ago when the drawing-rooms of upscale, urban India echoed the sardonic, stale and cynical banter like “If you want to start a new venture or get an industrial plan/project expedited just go to the nearest Government Department…and then go off to a Rip Van Winkle sleep…because the Department would be sleeping too!” Of course this was an exaggeration but then like all satire, such self-deprecatory humour had more than a little ring of truth to it.

Indeed we have come a very long way from the strangle-hold of the ‘license-permit-quota-raj’ where the ‘babu-dom’ tried every trick in the book to thwart or at least delay economic enterprise in the country. Refreshingly, the new watchwords are ‘Enable’ ‘Empower’ and ‘Facilitate’ Industry-(manufacturing as well as other sectors). The latest step forward in this direction is the notified amendments dated 2nd July 2008, issued by the Central Board of Direct Taxes (CBDT) to the Industrial Park Scheme 2008. (Refer sub-section (4) of section 80IA, IT Act1961) According to the amended scheme, the ambit of “industrial activity” has been expanded to include three additional types of industrial activity viz. (i) Research and Experimental development on natural sciences and engineering as defined in section K, division 73, group 731 of the National Industrial Classification, 2004 Code, issued by the Central Statistical Organisation, Department of Statistics; (ii) Development of computer software; and (iii) ITES covered under notification S.O. 890(E),dt.26th September 2000 (pertaining to sections 10A, 10B and 80HHE of the IT Act)

Moving ahead in this direction, the amendments provide for further easing the eligibility under the scheme through the following:

• a reduction in the minimum constructed floor area requirement from the earlier 50,000 to the current 15000 sq. metres;
• the area allocated or to be allocated to industrial units reduced to 75% of the allocable area (from earlier 90%); and
• Provision to allocate area for commercial activity with a cap of 10% of the allocable area.

The original scheme was notified on 8th January 2008.

Location Restriction-going, going…gone?

Yet another roadblock to the process of Industrial march falls by the wayside as the Indian Union Cabinet gave its approval for removal of ‘location restriction’ in setting up of industries.

The extant restriction under Industries (Development & Regulation) (IDRA) Act 1951 categorically states that a proposed project shall not be located within 25 kms from the periphery of the standard urban area limits of cities having a population of more than 10 lakhs according to 1991 census. The only exception permissible is - industries in electronics, computer software and printing & other non-polluting sectors and all such industries, provided they are located within industrial areas designated by the State Governments before July 24, 1991.

In consonance with its new mindset the Indian Cabinet found this restriction an unnecessary hurdle in setting up of industries, which clearly merits removal from the rule-book. And happily enough, it seems to be on its way out.

Move aside ‘old order’…there’s work to be done here!

‘Department of Pharmaceuticals’ created

Cognizant of the need to give the Pharmaceutical industry a definite fillip - particularly to the R&D aspect, the Indian government has created a brand-new Department of Pharmaceuticals under the Ministry of Chemicals and Fertilisers. Notification to this effect was issued recently.

This Department will be responsible for the following:

• Drugs and Pharmaceuticals, excluding those specifically allotted to other departments;
• Promotion and co-ordination of basic, applied and other research;
• Development of infrastructure, manpower and skills in this sector along-with management of related information;
• Education and training including high-end research and grant of fellowships in India and abroad; exchange of information and technical guidance on all matters relating to pharmaceutical sector;
• Promotion of Public–Private–Partnership in pharmaceutical related areas;
• International co-operation in pharmaceutical research, including work related to international conferences;
• Inter-sectoral coordination - between organizations and institutes under the Central and State Governments, in areas related to the subjects entrusted to the Department;
• Technical support for dealing with national hazards in the pharmaceutical sector;
• All matters relating to National Pharmaceutical Pricing Authority including related functions of price control/ monitoring;
• All matters relating to National Institutes for Pharmacy Education and Research;
• Planning, development and control of, and assistance to, all industries dealt with by the Department.

Apart from the above, the Department will also be in charge of certain public sector drugs and pharmaceuticals companies e.g. Hindustan Antibiotics Limited, Indian Drugs and Pharmaceuticals Limited.

Clearly, a much-needed shot in the arm to improve the health of the pharmaceutical sector.

Mobile Phones for making payments–RBI guidelines

There is no gainsaying the fact that the modern version of the mythical lamp of Alladin is none other than the multi-functional, much-adored mobile phone. The latest use this wonder-gadget is being put to is for making payments for sundry services, ranging from utility bills to cinema tickets.

But before this becomes an everyday reality, some guiding mechanism needs to be in place. Towards this, the Reserve Bank of India (RBI) is finalizing the Operative Guidelines for banks on mobile payments. The Draft Guidelines were placed on RBI website for comments from interested parties and the process is expected to take some time. Meanwhile, RBI has cautioned the banks (which have already started offering mobile payment services to their customers) that due care needs to be taken since such transactions entail a number of attendant issues that need careful examination. Hence banks are advised to keep on hold any such services till issuance of the final Guidelines.

However, it has been clarified that RBI has no objection for use of mobile channel to provide basic services such as mobile alerts for credit or debit entry, balance enquiry etc. which merely provide information.

Security for ECB

Under the External Commercial Borrowings (ECB) guidelines, the choice of security to be provided to the overseas lender/supplier (for securing ECB) is left to the borrower. However, creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender is subject to specific Regulations of RBI.

As a rationalisation measure, the RBI has considered the proposals for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees, on behalf of the borrower, in favour of the overseas lender.

As an enabling step it has been decided to allow Authorised Dealer Category I Banks to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate/personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower. All that is needed is for the Banks to satisfy the conditions laid down by RBI, before they issue ‘no objection’.

Playing by the rules…No double taxation please!

The applicant, a foreign company incorporated and based in Singapore, offers a full range of real estate services to its local and international clients. It has also developed certain international client relationships and in accordance with the global policy, various offices provide referral services to other group offices, wherein one group Office would refer client to other group office, depending on the requirements of the clients. In respect of such referrals, as per the applicant, each serving group Company is liable to pay a ‘referral fee’ to the referring group company in accordance with the international fee-sharing rules of the group.

The AAR on the facts and in the circumstances of the case held that the receipt on account of the referral fee arising to the applicant would not be taxable in India, having regard to the provisions of the Income Tax Act and the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. No tax is attracted either under the head business income, or royalty income or income by way of FTS. Consequently there will be no obligation to withhold any tax under section 195 of the Act, while making remittance abroad.

Not at all ‘royal’ty……………..

The Authority for Advance Ruling (AAR), a quasi judicial body dealing in tax issues related to foreign companies, has held that monthly payments made by the Indian arm of a company to an overseas entity for voice and data services provided through telecom networks, is not ‘royalty’ and hence not taxable.

Basic Wage and Leave Encashment

The question before the Supreme Court, in a recently decided case was whether the amount received by encashing the earned leave is a part of "basic wage" under Section 2(b) of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 requiring the employer's contribution on a pro-rata basis. In many cases the employees do not take leave and encash it at the time of retirement or encashment happens after his/her death. These can be deemed as uncertainties and contingencies–by way of an option available to the employee. However some employees may avail it and some may not. In other words, the test of universality is not satisfied. Accordingly the Court held that ‘basic wage’ was never intended to include amounts received for leave encashment and therefore there was no obligation on the employer’s part towards pro rata contribution.

They grow old but they never die!!

“Is there an expiry date for stamp papers?” was the question posed to the Supreme Court in a recent case. The apex court ruled that there isn’t. Examining closely Section 54 of The Indian Stamp Act, 1899, the court observed that it nowhere prescribes any expiry date for use of a stamp paper. The Section merely provides that a person possessing a stamp paper for which he has no immediate use (which is not spoiled or rendered unfit or useless), can seek refund of the value thereof by surrendering such stamp paper to the Collector, provided it was purchased within the period of six months next preceding the date on which it was so surrendered.

The stipulation of the period of six months prescribed in section 54 is only for the purpose of seeking refund of the value of the unused stamp paper, and not for use of the stamp paper. Section 54 does not require the person who has purchased a stamp paper, to use it within six months. Therefore, there is no impediment for a stamp paper purchased more than six months prior to the proposed date of execution, being used for a document.

Another interesting point before the Court was the validity of a document made on two stamp papers purchased on 25.8.1973 and 7.8.1978. The Trial Court and the High Court doubted the genuineness of the agreement dated 5.1.1980 because it was written on two stamp papers purchased on 25.8.1973 and 7.8.1978.

However the Supreme Court held that a document cannot be termed as invalid merely because it is written on two stamp papers purchased by the same person on different dates. Elaborating further the Court observed that the fact that very old stamp papers of different dates have been used, may certainly be a circumstance which can be used as a piece of evidence to cast doubt on the authenticity of the agreement. But that cannot be clinching evidence.

It is advisable however to check the Rules made by the State Government before taking such chances. Similarly, it may be safer to secure any bona-fide transactions by using recently purchased and consecutively numbers stamp papers to obviate any difficulties later.

LIAISON OFFICE NOT TO BE TAXED

As per the current regulations, a foreign company can open a liaison office (LO) in India by seeking approval from the RBI. An LO can only engage in activities specifically allowed by the regulations and that too with RBI’s permission. An LO has the limited role/authority to act as a bridge between the parent company and the vendors in India. No commercial activities are permitted. Income Tax law says that liaison offices, which merely assist the export of goods on behalf of the foreign parent, are exempt from tax liability. Tax authorities, however, in their over enthusiasm to collect more tax, have of late been arguing that LOs of foreign companies carry out commercial activity in the country, which results in business connection for the parent multi-national in India.

CAPITAL GAINS

According to the Mumbai Income Tax Appellate Tribunal (ITAT) the difference between the cost price and the prevailing market price cannot be construed as capital gains, if the shares were transferred at the cost price.

The appellant, an investment company, under an MOU between the group companies, transferred shares of a group company to another group company at a cost price, which was less than the market price. The Income Tax department disregarded the transfer price and levied capital gains tax on the difference between market price and the cost price of shares.

Overturning the order of the IT department, the ITAT held that capital gains which had never actually accrued to a tax payer, cannot be brought under capital gains tax. For computing capital gains, the transfer price of the capital asset is that which the transferor actually receives for the assets that he transfers. It cannot include prevailing market price of asset which was never received by the taxpayer. Hence, Capital gain is to be computed as the difference between full value of consideration received or accruing as the result of the transfer of capital asset and not the fair value of capital asset so transferred.

YOU CAN’T CHANGE THE TUNE HALF-WAY THROUGH…

No unilateral alteration of contract says Supreme Court.

The Supreme Court in a case involving the Delhi Development Authority, a statutory body, stated that a party to the contract cannot at a later stage, while the contract was being performed, impose terms and conditions which were not part of the offer and which were based upon unilateral issuance of office orders, but not communicated to the other party to the contract. Elaborating on its reasoning the Court said that the terms and conditions of the contract can indisputably be altered or modified by the parties. They cannot, however, be done unilaterally, unless there exists any provision either in contract itself or in law. Novation of contract in terms of Section 60 of the Contract Act must precede the contract making process i.e. the offer and acceptance. The parties thereto must be ‘ad idem’ so far as the terms and conditions are concerned.

SMART ALECS GET OUT-SMARTED…AT LONG LAST!

The Supreme Court of India in a recent judgment held that if the consideration clause in a ‘Technical Assistance and Trade Mark Agreement’ indicates that the importer/ buyer had adjusted the price of the imported goods in the guise of enhanced royalty or where the department finds that the buyer had misled the department by such pricing adjustments then the adjudicating authority would be justified in adding the royalty/ licence fees payment to the price of the imported goods for Customs Valuation.

This is an exception to the views expressed by the Court in earlier cases where it was held that royalty and technology transfer fees relating to manufacture cannot be added to the value of imported goods and unless the fees relate to the imported goods in question, the loading would be unjustified.

Now, as per the new judgment two concepts operate simultaneously, namely, the price for the imported goods and the royalty/ licence fees paid to the foreign supplier. The department is required to look not only at technical assistance and trade mark agreement but also the pricing arrangement/ agreement between the Indian buyer and the foreign collaborator.

Definitely a case of ‘Better late than Never!’

THE MONITOR JUST GOT MORE LIBERAL!

Trusts’/ Societies’ overseas ambitions…

Continuing with its avowed liberalisation objectives, to steer the economy forward, the RBI has come up with yet another enabling provision which permits overseas investments by Registered Trusts and Societies. Unlike before, any Trust/Society, engaged in manufacturing/educational sector) can now investment in ‘the same sector(s)’ whether by entering into a JV or through a ‘Wholly Owned Subsidiary’ outside India, by taking prior approval from RBI. The eligibility criteria have been prescribed and applications in the prescribed form/manner are to be submitted to the RBI by the intending trusts/societies.

SEBI - SENSE AND SIMPLICITY

Wanting to create a viable market for corporate bonds, the Securities and Exchange Board of India (SEBI) has promulgated Regulations for Issue and Listing of Debt Securities, resulting in a much-simplified regulatory framework for issuance and listing of non-convertible debt securities (excluding bonds issued by Governments) issued by any company, public sector undertaking or statutory corporations.

Whereas the time-consuming requirements of filing of draft offer documents with SEBI have been dispensed with, more vigilant obligations like due diligence, adequate disclosures, and credit ratings are being put in place for ensuring transparency. The Regulations also emphasize on the role and obligations of the debenture trustees, execution of trust deed, creation of security and creation of debenture redemption reserve in accordance with the stipulations of the Companies Act.

The Regulations provide for rationalized disclosure requirements for public issues and flexibility to issuers to structure their instruments and decide on the mode of offering, without diluting the areas of regulatory concern. In case of public issues, while the disclosures specified under Schedule II of the Companies Act, 1956 shall be made, the Regulations require additional disclosures about the issuer and the instrument viz. nature of instruments, rating rationale, face value, issue size, etc.

Going a big step forward, electronic disclosures have been allowed. Additionally option has been given to the issuers to list their debt securities on private placement basis subject to compliance. For a better enforcement of these regulations a rationalized listing agreement for debt securities is also under preparation.

Clearly, “Corporate Governance” has come a long way from the times when it was little more than a fashionable new mantra in corporate conclaves!

RUNNING AMOK…ITS FURY UNABATED!

Irascible Inflation

Comparing runaway inflation to a raging bull gone mad, is obviously old hat. Except that never before has the sense of high drama been so chillingly close to our every-day lives… literally leaving us gasping for breath. Laden as it is with the unenviable task of somehow containing this mad monster, the Indian Reserve Bank (RBI) is taking all possible steps to tackle Inflation; currently at a 13 year high of 11.91%. Among other steps are the raising of the Repo rate and Cash Reserve Ratio (CRR) to 50 basis point (100 basis point equals to 1%). (Please refer our Newsletter Editions of May & June 08)

CRR is the rate of amount that is to be maintained by all the commercial banks with the RBI. The CRR has been increased from 8.25% to 8.75% in two stages. From July 5, CRR will be set at 8.50%, and from July 19, at 8.75%.

Repo rate, the rate at which the commercial banks borrow from the RBI, has also been increased to 8.5% from 8% with immediate effect. A rise in repo rate will make it more expensive for banks to get money from RBI, which is likely to force them to charge customers a higher interest rate.

These measures aim at reducing the liquidity in the economy and thereby reigning in inflation. Commercial banks will also raise prime lending rates (PLR). The interest on the consumer loans, home loans, and personal loans from commercial banks is expected to go up and some banks have already taken steps in this direction. Whereas these steps are conventionally applied (with predictable results of containing inflationary trends) they clearly have a downside; adverse impact on overall economic growth. It comes as no surprise therefore that the RBI’s actions have made Indian Industry jittery.

Obviously the general public is severely hit since the family budgets have gone for a toss, with the prices of every single commodity having touched an all-time-high. The long-term scenario is indeed grim because the Great Indian Growth story seems to be in a “pause” mode…for now.

EXPORTERS BREATHE EASIER AS RBI LOOSENS THE REINS…JUST A LITTLE!

Gone are the days when Indian exports were ‘Neighbours envy; owner’s pride!’ With the gradual appreciation of the Indian Rupee in relation to the USD/Euro etc., over the years the export sector has been hit hard. To mitigate the hardships faced by Indian exporters, to some extent, the Reserve Bank of India (RBI) has decided to increase the time limit for realization/repatriation of export proceeds to India from six months to twelve months from the date of export. This is subject to review after one year. However for units situated in Special Economic Zone (SEZ) and cases where exports are made to warehouses established outside India, the position remains as before.
Some respite, that….howsoever modest!

POLICY PUZZLE - THE PIECES JUST DON’T FIT!

No tax holiday if it is Natural Gas….says the Finance Ministry!

Clearly the move defies comprehension! In an economic scenario characterised by skyrocketing petroleum prices, anyone would have thought that the government would leave no stone unturned to accelerate in-house oil exploration in terms of the New Exploration Licensing Policy (NELP-VII).

In fact the Ministry of Petroleum & Natural Gas (MOPNG), in the last few months, had postponed NELP-VII bid dates three times, in its efforts to convince the Finance Ministry to offer same tax breaks to natural gas production that were available to crude oil production.

Obviously it came as a rude shock to prospective bidders when they were advised through the ministry’s official website that no Income Tax rebates were available for commercial production of Natural Gas, as against “Crude Oil” which would enjoy a 7 year Income tax rebate from the date of Commercial production.
No wonder this last minute communiqué (issued just three days before the closing of bid submission!) acted as a definite dampener to the seventh round NELP bids…….and the consequences are plain as daylight!

By the Government’s own admission, it has received just 181 bids for 45 blocks by the bid closing date i.e. June 30, 2008. What is more is that of the 57 blocks offered there was not a single bid for 12 blocks (viz. 7 deep water blocks, 2 shallow water blocks and 3 on-land blocks).Out of the remaining blocks,19 blocks received single bids only.

A total of 96 companies (21 foreign and 75 Indian) have bid either on their own or as a consortium. 42 new players have bid for the nine S-type blocks, either singly or as parts of a consortium. Similarly, in the deep water blocks 2 ‘Super majors’ viz. BP and BHP Billiton have bid in consortium with Indian companies, namely, RIL and GVK, respectively. Other bidders in deepwater include ONGC, Cairn and GSPC. It is not yet clear if global giants like Exxon, Mobil and Chevron have evinced any interest in the seventh round of NELP.

Evaluation of the bids will be undertaken by the Government and the blocks are expected to be awarded by August 31, 2008 culminating in the contracts being signed by September 30, 2008.

Recapping the preceding six rounds of NELP, there is cause for satisfaction that the awarded contracts for 162 blocks have yielded 49 oil and gas discoveries in Cambay on-land, North East Coast and Krishna Godavari deepwater areas, accreting over 600 million tonnes of reserves. Obviously the process needs to go on.

CALIBRATION AND CONSOLIDATION

FDI Policy revisited

In an ongoing effort towards streamlining the Government of India’s stance on Foreign Direct Investment, the Ministry of Commerce & Industry, in Press Note No. 7 dated June 16, 2008 has reviewed/consolidated the FDI policy, making it more comprehensive and self-contained than the earlier Press Note 4 of 2006. A corrigendum pertaining to “non-banking finance companies (NBFCs)” was also issued on June 27, 2008. Apart from listing out the sector-specific policy for FDI, the new Press Note also lists sectors, which are prohibited for FDI. These prohibited sectors cover retail (except single brand retailing), atomic energy, lottery, gambling & betting, chit funds business and trading in transferable development rights.

With the exit of the left parties from the ruling coalition, it is expected that the economic reforms will now get a big push forward. Some of the areas which need immediate attention are permitting foreign equity in multi-brand retailing, higher equity for foreign companies in single-brand retailing, higher foreign equity for foreign companies in insurance sector, development of a vibrant corporate bond market, easier norms for foreign banks to set up operations in India, divestment of government equity in public sector undertakings, privatisation of state-run companies, liberal labour policies for corporate sector etc. Subject to the government proving its majority in Parliament, these and other areas may get a fresh look soon - hopefully !! Clouds do have silver linings!

INTERNATIONAL COMMERCIAL ARBITRATION

A recent decision of the Supreme Court of India in Venture Global Engineering (which reiterated its earlier decision in Bhatia International) has resulted in wide discussions on whether it is advantageous for a party to an international contract, to specifically exclude application of Part-1 of the Arbitration & Conciliation Act, 1996.
Part-I of the Act contains provisions including issues like what constitutes an arbitration agreement; the composition of the arbitral tribunal; jurisdiction; arbitral proceedings; making of an arbitral award; termination of proceedings; ground for challenging an award etc.
Part-11 deals with the enforcement of foreign awards made in countries which are parties to the New York Convention and/or Geneva Convention.
Till the Bhatia case, the view expressed by many Indian High Courts was that Part-I of the Act will apply only to domestic awards and international commercial arbitration held in India. This perception now stands changed due to the SC ruling.
Since both the above named cases were initiated by foreign parties who had argued in favour of the application of Part-I and since the SC’s ruling has gone in their favour.
Considering the facts involved in the above mentioned cases, it may not be always advantageous to exclude the application of Part-I of the Act. The advantage or disadvantage will depend on which side of the fence you are at the relevant time.

YOU CANNOT RUNAWAY FROM JURISDICTION!

Can two companies incorporated in India subject themselves to the law and jurisdiction of another country if disputes arise between them?

According to the petitioner before the Supreme Court of India, when the central management and control of a company is exercised in Malaysia, despite the fact that the company is incorporated and registered in India, it will become resident of Malaysia. NO - said the Supreme Court of India...... Very well said.

The nationality of a company, which is a legal person, is determined by the law of the country in which it is incorporated and from which it derives its personality.
Thus, when both companies are incorporated in India, neither can claim ‘international commercial arbitration’ on the averment that the management and control of either or both is situated outside India.

According to the Arbitration and Conciliation Act, 1996, in arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India. As part of public policy of the country, the intention of the legislature appears to be that Indian nationals should not be permitted to avoid Indian law.

The Court, however clarified that , for the purpose of taxation, test of residence may not be the registration but where the company does its real business and where the central management and control exists.

ALL ROADS LEAD THROUGH … (NO IT’S NOT ROME...CONTINUES TO BE MAURITIUS!!)

Courtesy DTAA - Mauritius continues being the favoured route for Investors :

India and Mauritius signed a Double Taxation Avoidance Agreement (DTAA) 26 years ago. That Mauritius currently accounts for nearly half of all foreign direct investment (FDI) inflows into India. DTAA provides/allows tax benefits for investments flowing from/through Mauritius .This special status accorded to investments from/through Mauritius came up for judicial review few years back. However the Supreme Court of India had refused to interfere and so the status quo continues.
On the flip side however, the said agreement with Mauritius is costing the Indian exchequer over INR 40 billion annually on account of the capital gains exemption for investors who route their funds through Mauritius to avail this benefit. To address the issue, the Indian government tried negotiating for an amendment in the DTAA. The idea was to move from a 'residence-based system of taxation' to a 'source-based' system. Under the proposed ‘source-based’ system, investors from Mauritius would need more than a ‘postbox’ registered office in Mauritius to qualify for the tax benefit.
However, it is reported that Mauritius has rejected India’s proposal for modifying the DTAA, despite India’s offer to compensate Mauritius for any loss of revenue resulting from changes in the existing agreement.
Therefore, as of now, Mauritius continues to be a favored route for FDI to India.