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.