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Saturday, October 14, 2006
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E-FILING OF INCOME TAX RETURN - FAILING GOVERNMENT INFRASTRUCTURE - NON-WORKING OF GOVERNMENT PORTAL - JITTERS FOR CORPORATE ASSESSEES

The Income Tax Department, Government of India has achieved another milestone by again failing to deliver. The department made it mandatory for corporate assessees to compulsorily file Income Tax Returns electronically and thereafter to take out physical print out and to file the return physically. The concept was noble and once implemented successfully, will make the task of income tax return filing easier and free from hassle. However, as per track record of the government the following major pitfall have severely impacted the entire process:

  • The revised Form No. 1 to be used for electronic filing is highly complicated, full of errors and very cumbersome to fill up. After completing all necessary preparations, most of the efficient professionals have to spend at least 6 to 10 hours to fill up this form.
  • The form was notified on 24/07/06 and was launched on the depatment’s e-portal www.incometaxindiaefi ling.gov. in was launched only towards the end of September, 2006 whereas the last date of filing of income tax return, will be 31st October, 2006 for the assessment year 2006-07, for which it has been made mandatory.
  • No proper publicity or training was given to the assessees or professionals.
  • The architecture of the system, hardware as well as software launched by the government is highly inadequate and cannot support such a mammoth requirement of more than 6 lakh Companies who are expected to file their income tax return mandatory, as per the new system.
  • There are several data structure errors and technical infirmities in the software and in the form.
  • The form has been notified for electronic fi ling only for the current assessment year i.e. 2006-07.
  • No software is available which can effectively support e.filing to the Income Tax Portal and for the purpose of preparing the returns in the new format. This is in view of very short notice and time given by the Government.
  • The Government has failed to provide any physical front offices, which could provide necessary technical assistance to the assessees.
The All India Chartered Accountants’ Society has taken up this matter with Senior Government Officials including the Revenue Secretary, CBDT Chairman, Member Legislation (CBDT) and others and has submitted detailed memorandum with the following suggestions:
  • Allow the assessees to use the earlier Form No.1, at least for the Asst. Year 2006-2007 and to permit it to be filed manually.
  • The software and hardware of the income tax e filing portal should be upgraded and made user friendly.
  • The physical front offices of income tax department should provide necessary free support for e filing from all district headquarters.
  • It may be worthwhile to permit voluntary e fi ling in the new form. The currently notified Form No. 1 in present format is highly complicated error prone and cumbersome and at this stage, it is nearly impossible to comply with the requirements of these returns. This should be considered for simplification.
  • Enclosures in the form of scanned copies of balance sheet and other detailed document may be permitted to avoid heavy load of data and unnecessary feeding of data by assessees.
  • It is inevitable to extend the date of submission of return for the assessees opting to file their returns electronically. 
The CA profession has always been willing to fully support the government initiative of e.fi ling and e.governance. This initiative will not only facilitate professional delivery, improve fi nancial discipline but will also signifi cantly reduce the corruption. The government should make a commitment to electronically provide refunds as well as respond to other requirements of assessees fully electronically on the lines of MCA-21 Project of Ministry of Company Affairs. The benchmark of MCA-21 is fairly high and the tax department needs to excel. Our professionals are technically equipped not only to implement a technically feasible solution but also to educate and train the public at large so that e.governance initiative of the government is implemented effectively in the larger interest of the society
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BANKS ALLOWED TO APPOINT STATUTORY AUDITORS WITHOUT RESERVE BANK OF INDIA APPROVAL - CAs OPPOSE THIS DEPORABLE MOVE

The Government’s decision to allow chairman of public sector banks the freedom to appoint statutory auditors without approvals from the Reserve Bank of India has led to chaos. Statutory auditors have expressed to the RBI their unwillingness to be engaged directly by the banks board and have also accordingly made a representation to the government seeking a review. The All India Chartered Accountants Society has demanded that the Government should withdraw and/or revoke its decision to permit public sector bank Board of Directors to appoint auditors. The intellectual group and leading economists are of the view that it will cause great risk to the independent functioning of public sector banks and will give leverage to the Senior Government Officials, Ministers and other Politicians to misuse public fund with the help of government nominated Board of Directors, in the absence of an independent audit. This decision of the government has the propensity to completely perish the financial sector. This decision will also promote corrupts practices in relation to appointments. The smaller firms and those who are not ‘well connected’ will loose these Audits to those who are close to the Board of Directors.

The CA profession has demanded from the Council of the Institute of Chartered Accountants of India to pass necessary resolution directing the professionals to decline acceptance of appointment as auditors, such appointments being severely marred by non-independence, in case it is made by the Board of Directors rather than by the Reserve Bank of India in consultation with CAG as per the existing practice or by any other independent authority. The auditors are supposed to critically examine the deeds and mis-deeds of the Board of Directors and top management and this most important function of the auditors will be severely impacted by the decision of the government.

Also, some public sector banks have declined to enjoy the freedom and want to continue to avail of the services of the auditors empanelled by the RBI. These banks do not wish to be questioned by public or CBI or courts in case of allegation of financial impropriety. Since this requires the RBI to continue with the practice of selecting a panel of auditors, the banking regulator has written to the finance ministry for clarification. The confusion has delayed finalization of the new panel of auditors for auditing public sector banks’ accounts in the current financial year. Some are of the view that the stalemate may result in PSBs being forced to get their financial statements for the half year ending September 30 audited by the old panel of auditors. Auditors fear doing away with the practice of RBI maintaining a panel of auditors will surely lead to a conflict of interest. They feel that audit firms might lose their freedom in recording their qualifications if they are chosen by Chairman or the Board of PSBs themselves.
Auditing financial statements of banks has become risky following failure of a number of private sector banks in last 2 years, the private sector banks being audited by the auditors appointed by the Banks’ management / owners. It may be noted that Global Trust Bank, United Western Bank and several other banks have recently been closed down / merged with public sector banks in view of their poor financial position and in the backdrop of serious allegations of improper financial reporting. The Reserve Bank of India despite its best regulatory practices, has failed to monitor the private sector banks and foreign banks, several times in past, in the absence of a detailed audit by independent auditors. On the other hand the public sector banks have shown an all round growth and recovery in their financial strength, supported by financial discipline resulted out of true and fair financial reporting by the conduct of auditors appointed independent of the Banks hitherto.
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REALTY AUDIT AVENUE

Benami property transactions and registration of undervalued real estate deals may not be that easy if the government has its way. The centre is likely to make third-party auditing mandatory for all property transactions. Property transactions would require a certification from chartered accountants to ascertain that the property has not been undervalued to save registration fee. Registration fee, which varies from state to state, is levied on the value of the property. According to sources in the urban development ministry, the proposal is already being discussed.
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APPROPRIATION FROM RESERVE FUND : RBI DIRECTIONS

RBI has advised the banks that :

  • All expenses including provisions and write-offs recognized in a period, whether mandatory or prudential, should be reflected in the profit and loss account for the period as an ‘above the line’ item (i.e. before arriving at the net profit); 
  •  Banks are also advised in their own interest to take prior approval from the Reserve Bank before any appropriation is made from the statutory reserve or any other reserves.
  • Wherever draw down from reserves takes place with the prior approval of Reserve Bank, it should be effected only ‘below the line’ (i.e. after arriving at the profit/loss for the year); and 
  • It should also be ensured that suitable disclosures are made of such draw down of reserves in the ‘Notes on Accounts’ to the Balance Sheet.
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SUBMISSION OF STATUTORY AUDITORS CERTIFICATE BY NBFCs

In terms of Section 45-IA of the RBI Act, 1934 it is mandatory for a company to obtain Certificate of Registration (CoR) from Reserve Bank of India (RBI) before commencing or to carry on business of a non-banking financial institution. It has been observed that there are NBFCs which are no longer engaged in the business of NBFI but still continue to hold the CoR even though they are not required/eligible to hold the CoR granted by RBI. In order to ensure that only NBFCs which are actually engaged in the business of NBFI hold CoR, it has been decided that all NBFCs should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act, 1934. The first such certificate should relate to the financial year ending March 31, 2006. The certificate from the Statutory Auditors in this regard may be submitted to the Regional Offi ce of the Department of Non-Banking Supervision under whose jurisdiction the NBFC is registered, latest by June 30, every year with reference to the position of the company as on March 31 of that year. The certificate for the year ending March 31, 2006 need to be submitted latest by October 31, 2006
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DIGITAL SIGNATURE - MISUSERS BWARE

The prevalence of using the digital signatures will grow at a break-neck speed in very near future with the advent of increasing emphasis on e-governance. With such phenomenon, the need to safe gaurd its usage becomes immensely important. It is an imperative obligation on the part of our fraternity to educate our service recipients on the risks annexed to the usage of digital signatures. RBI has expressed concern over use of smart cards, as these could compromise security. Raising this issue in a speech, deputy governor of RBI, V Leeladhar pointed out that a smart card could fall into wrong hands who would then have access to the digital signature within.
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LARGE COS TO PAY SSIS 18% ON DUES

Large enterprises may soon have to pay interest rate as high as 18% on unpaid dues of purchases from small scale enterprises. The much awaited policy decision has become operational with the Micro, Small and Medium Enterprises Development (MSMED) Act coming into effect from October 2, 2006. Companies will now have to pay the interest on their liability after the Act comes into play. The interest rate charged will be compounded on a monthly basis. Buyers will also have to declare outstanding amounts to SSIs in their balance sheet as per the Act.  
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E X P O R T S EFFECTED BY EOUS THROUGH THIRD PARTY ELIGIBLE FOR DTA SALE ENTITLEMENTS

The facility of DTA sale to EOUs is available against physical export of goods manufactured in EOU and earning positive net foreign exchange. Exports effected through third party and foreign exchange realized in the name of the third party for those goods which have been manufactured in the EOU and are directly transferred from the unit to the port of shipment are eligible exports and this export is also counted for the purpose of fulfillment of export obligation of EOU. The EOU is, therefore, eligible to get DTA sale benefits on exports effected through third party. The Shipping Bills must indicate the names of both the manufacturer and the third party. While indicating the name of the manufacturer in such cases, the status of the unit i.e. Export Orient Unit must be clearly indicated. The entitlement of DTA sale will, however, be calculated on the basis of the price at which the goods are supplied by EOUs to third party exporter. Para 6.19 (e) of Handbook is not intended to preclude DTA sale facility against third party exports.
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CORPORATE LAW DECISIONS


  • Subir Roy v. P.R. productions (P) Ltd. [2006) 70 SCL (CLB)] S. Balasubramanian, Chairman. Companies Act, 1956 – Section 111 – Transmission of shares – Deceased indebted to the company – company demanding the settlement of debt before registering the transmission – Whether valid – Held, No.
  • Precot Mills Ltd. v. Commissioner of Central Excise [(2006 5 STT 1 (CESAT)] T.K. Jayaraman (T) & Dr. S.L. Peeran, (J] Service Tax – Assessee having several units – inter unit services – Whether service rendered by one unit to another unit is liable to tax – Held No.
  • C.P.P. Mandal v. Commissioner of Central Excise [(2006) 5 STT 1 (Bom)] R. M. Lodha & J.P. Devadhar, JJ. - Service Tax – Mandap keeper – Assessee leased out the premises exclusively to ‘S’ on certain consideration – ‘S’ rendering catering services to the hirers of the premises – Whether assessee is liable for service tax for the catering done by ’S’ – Held, No.
  • Alembic Glass Industries Ltd. v. Commissioner of Central Excise [2006(201) ELT 161 (SC)] Arijit Pasayat and Tarun Chatterjee, JJ - Central Excise Act, 1944 – Valuation – Advertisement cost borne by purchaser – Whether includible in the assessable value in the hands of the manufacturer – Held, No.
  • Esss Vee Traders & Ors. Vs. M/s. Ambuja Cement Rajasthan Limited [131(2006) DLT 341] Badar Durrez Ahmed, J - Arbitration and Conciliation Act, 1996 read with the Indian Partnership Act, 1932 – Unregistered partnership fi rm – Plaintiff applied to High court for the appointment of arbitrator – Whether an unregistered fi rm could apply – Held, No.
  • Jyoti Sarup Mittal v. Water and Power Consultancy Services (India) Ltd. [131(2006) DLT 503] Vikramajit Sen, J - Arbitration and Conciliation Act, 1996 – Section 11 – Appointment of arbitrator by court – Contract named the sole arbitrator – Whether court could appoint an arbitrator in the place of named arbitrator – Held, No. 
  • Sadhu Singh v. Gurdwara Sahib Narike & Ors [JT2006 (8) SC 525] B.P. Singh & P.K. Balasubramanyan, JJ. - Hindu Succession Act, 1956 – Will – Testator creating life interest in favour of his wife and after her death bequeathing the properties to his nephews – Wife sold the property – Nephew fi led suit for repossession – Whether a person having only life interest could sell the willed property – Held, No. 
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INSURANCE BROKERS SEEK LOWER MINIMUM CAPITAL REQUIREMENT

Insurance brokers are seeking a reduction in minimum capital requirement for securing a licence. Currently, an insurance broker is required to have a minimum capital base of Rs. 50 lakh while for a composite broker who also does reinsurance business, should have a higher limit of Rs. 2.5 crore. The broking community contributes around 15 per cent of the non-life premium.
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DETARIFFING TO TRIGGER SHAKEOUT IN INSURANCE

The detariffing of insurance rates after January 1 in the country may trigger shake-out in Indian general insurance sector. “After post detarriffing, there will be premium volatility, the need for the capital will be higher and the pressure on the profitability in the industry will make the survival of small companies difficult”. Going by the global experience, the premium prices will plummet with insurers opting for predatory pricing resulting the insurance companies suffering underwriting losses after the detariffing begins. “The price differentiation will have a social implication as those who can least afford the insurance premium will be excluded.” There will be substantial cross-subsidisation in the industry and the insurers will re-focus on under-writing/ technical pricing, emphasis on data quality and there will be a need for internal control/ guide-lines for the insurers. The regulator IRDA will have to be very active to ensure fair practices, transparence and fair competition. The industry on the other hand fear a hefty increase in cost of insurance. The silver lining is in the expected new products, new features and better coverage.
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REVIEW SCALE OF CHARGES FOR NRI REMITTANCE : RBI

Several recommendations made by RBI on the issue of remittances by Non Resident Indians (NRIs) are as follows:

  •  Review charges at both foreign and domestic ends and resort to latest technology for handling large volume of transactions
  • Extend e-transfer facilities
  • Cap on brance numbers may be reviewed
  • NRIs remittances through Indian bank or a foreign bank having a branch in India
  • Indian Banks should explore tie-ups with more correspondent banks which would bring down the cost for the NRIs at the foreign centers. 
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FOREIGN FUNDS IN TELECOM / SEZS MAY BE SCREENED

The commerce ministry wants companies that are in the race to set up Special Economic Zones (SEZs) or to invest in telecom business, to disclose the extent and source of foreign direct investment proposed. This comes in the wake of increased security concerns of FDI inflows, especially with regard to telecom and port based SEZs. The Government has modified the checklist recently to include three parameters pertaining to FDI to be examined keeping in view:

  • Extent of FDI
  • Its source, and asking the applicant to reveal the country and name of the company bringing in the investment.
The Government has also made it mandatory for applicants who have proposed to set up telecom and port SEZs to confirm if the FDI is according to the norms of Press Note 5, 2005, which imposes various security related conditions”.
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DETAILS OF FOREIGN BUYERS IN SHIPPING BILLS NOT NEEDED.

Exporters need not henceforth divulge details of the foreign buyers in the shipping bills submitted to the Government for claiming benefits under various export promotion schemes. The Government has now allowed exporters to keep back such details by defacing the name and address of the foreign buyers in the shipping bills. This move is aimed eat preventing leakage of confidential business information, according to a circular issued by the Directorate General of Foreign Trade (DGFT).
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LEVY OF SERVICE TAX ON CLUBS OR ASSOCIATIONS

Central Board of Excise & Customs (CBEC) has clarified that exemption to any club or association under the Income Tax Act on the ground of being a public charitable institution is of no consequence to levy of service tax. Levy of service tax is entirely governed by the provisions contained in the Finance Act, 1994 and the rules made there under. CBEC has further clarified that the definition of “charity” and “charitable” as defined in Black’s Law Dictionary may be kept in mind. “Charity” is defined as “aid given to the poor, the suffering or the general community for religious, educational, economic, public safety, or medical purposes”, and “charitable” as “dedicated to a general public purpose, usually for the benefit of needy people who cannot pay for the benefits received”. 
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MORE TRANSFER PRICING CASES TO BE AUDITED

The revenue department plans to increase the number of cases picked up for transfer pricing audit to keep pace with the increase in the volume of business transaction. The Government has last year audited 1,500 companies. The adjustments have been made in 350 out of 1,500 cases taken up for audit last year during 2004-05. The Government intend to increase that number since the department has been able to realize more revenue from the audit exercise.
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CBEC UNVEILS SCHEME TO AVOID ADJUDICATION

The Central Board of Excise and Customs (CBEC) has announced that assesses faced with show cause notices in cases involving fraud or misstatements could avoid the regours of adjudication procedure if they were to opt for a scheme that provides for voluntary payment of duty along with interest and penalty. Penalty under the scheme would be 25 per cent of the duty and assesses opting for such a scheme would have to make the entire payment within 30 days of the receipt of the show cause notice. This ”trade facility” would be available for both Central excise and customs duty cases, which are at the show-cause notices stage.
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BANKS TO GIVE POST OFFICES A RUN FOR THEIR MONEY

Life is not going to be the same again for the umpteen small savings schemes with a tax saver bait as commercial banks are hitting the streets in full force with a new Fixed Deposit (FD) scheme with a locking period of 5 years and tax savings features were by a deduction is allowed under section 80C of up to Rs. 1 lakh to the assesses investing. The icing on the cake is that the new scheme offers a higher rate of interest than the competing schemes like National Savings Certificate (NSC) and others.
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SIMPLIFIED I-T LAW LIKELY FROM APRIL 1, 2008

A brand new income tax law that provides for “easy reading and understanding” of the provision may become a reality from April 1, 2008? An expert group of Central Board of Direct Taxes (CBDT) that was constituted to suggest simplification of the Income-Tax Act, 1961, has submitted its report to the Union Finance Ministry. The Finance Minister said that the new Income Tax Act will replace the existing one and will be applicable for the assessments made in assessment year 2009-2010.
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SAT UPHOLDLS SEBI ORDER ON NO CHARGES FOR CHANGING DP

The Securities Appellate Tribunal (SAT) recently upheld Sebi’s order directing the depositories and their participants not to levy transaction charges when an investor transfers his securities from one depository participant (DP) to another at the time of closure of DP account.
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SEBI PARES TURNOVER FEES FOR BROKERS

The Securities and Exchange Board of India has reduced the turnover fees for brokerages with effect from October 1, 2006. Under the new fees structure, broking houses are required to pay Rs. 20 per Crore worth transactions (0.0002 %) on all transactions in the securities market, down from earlier Rs. 1000 per Rs. 1 Crore worth transactions (0.01 %). Similarly, for debt transactions, the rate has been brought down to Rs. 5 per Rs. 1 Crore transactions (0.00005 %) from the existing Rs. 1000 per Rs. one Crore transactions. In the futures & options segment, the fee has been doubled to Rs. 20 per Crore (0.0002 %) from the existing Rs. 10 per Crore. The revision has been broadly along the lines suggested by an expert committee headed by Mr. Anjaria. The revision in the fee structure was brought about by a notification, amending the relevant Sebi regulations.
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MANDATORY REQUIREMENT OF PAN – ISSUES AND CLARIFICATIONS


  • This is further to SEBI Circular No. MRD/DoP/SE/Cir-8/2006 dated July 13, 2006 making, inter-alia, PAN mandatory for trading in the cash market with effect from October 1, 2006. Similarly Demat account holders were to mandatorily obtain PAN, even if they are non resident. The demat accounts of non compliant account holders were to be frozen by 30th of September 2006.
  • Subsequent to the issue of above referred SEBI Circulars, market participants have made further representations and suggestions and sought clarifications on the various issues from SEBI. 
  • The present deadline of September 30, 2006 has been extended to December 31, 2006, as a one time measure.
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SEBI DOUBLES INTERMEDIARY CHARGES

The Securities and Exchange Board of India (SEBI) has doubled the fees for application, registration and renewal of licences of market intermediaries such as merchant bankers, credit rating agencies, underwriters, share transfer agents, debenture trustees, bankers to the issue, foreign venture capital funds and local venture funds with immediate effect. SEBI earlier imposed hefty filing fee for offer documents and others. The intermediary cost increase will directly impact fund raising cost and cost of other services in the capital market.
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FAIR PRACTICE CODES FOR NBFCs


  • NBFCs to issue sanction letter indicating loan amount and annualised rate of interest.
  • NBFCs to issue notice to borrower for any change in terms and conditions. Any change in rate or charge to effected prospectively
  • Decision to recall payment should be in consonance with the loan agreement.
  • NBFCs to release all securities on repayment of all dues.
  •  In case borrower requests for transfer of borrowal account, NBFC to notify its consent or otherwise within 21 days from the date of receipt of request.
  • NBFCs not resort to undue harassment in the matter of recovery of loans.
  • Fair Practices Code based on the guidelines issued to be put in place by all NBFCs with the approval of their Boards within one month from the date of issue of this circular. 
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MNCs MAY BE ALLOWED TO OFFER ESOPs TO STAFF IN INDIAN ARMS

The Government is likely to allow foreign companies to offer Employee Stock Options (ESOPs) to employees in Indian subsidiaries, through the India Depository Receipts (IDR) route. For example, Microsoft USA wants to offer Esops to employees of Microsoft India, which is not listed here. It can fl oat an IDR and earmark a percentage of the same for Indian employees.
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DEMAT LETTER OF CREDIT SET TO SPEED UP EXPORTS

Exporters will soon be able to realise export proceeds in days instead of weeks. Banks are working on dematerialising the letter of credit and documents that accompany it. As against the current practice where the exporter has to physically transmit the letter of credit between bank branches, LCs will soon be sent across bank branches in an electronic format to prevent defrauding and ensure security.
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CHINA TO RAISE INVESTMENTS IN ALTERNATIVE ENERGY PROJECTS

China will step up investments in projects involving development of bio-energy and other alternative energies between 2006 and 2010 to ensure energy security and maintain its high economic growth. India to learn lesson and consider their experience to solve India power problem issues.
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CODE OF CONDUCT FOR HOME LOAN FOR LENDER

Homeowners and potential buyers can now look forward to a better deal from their lenders. The regulator for Housing Finance Companies (HFCs) - the National Housing Bank (NHB) - has directed them to provide sufficient notice to customers before hiking interest rates or prior to introducing new charges. Like banks, HFCs will now have to adopt a fair practices code for dealing with customers. NHB wants HFCs to notify customers 30 days before raising charges or introducing new ones. Any change in the terms and conditions of a loan agreement, carried out without notice, would also have to be notified within 30 days. If the new changes are to the disadvantage of the customers, they should be allowed to close or switch accounts without paying any charge or interest. A customer can then exit without giving any notice within 60 days.
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MoF SPIKES M A N D A T O R Y PROMOTER SURETY FOR BANK LOANS

Ministry of Finance (MOF) has rejected a proposal for mandatory personal guarantees from promoters of companies that borrow from PSU banks. Acceptance of the proposal, the ministry said, would prompt companies to shift their accounts from public sector banks to private and foreign banks.
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SEZ BOARD FIXES MINIMUM INVESTMENT NORMS FOR DEVELOPERS

Board of Approval for SEZs has set forth list of authorized operations for building social infrastructure within the various SEZs and criteria for developers to qualify for tax breaks. The board has given in-principle nod of 14 SEZs, taking the total number of SEZs approved so far to 164. Out of this, 25 SEZs have been notified. Minimum investment or net worth of the promoter company in the SEZs prescribed is as follows:

  • Sector-specific SEZ developers must plough in a minimum investment of Rs.250 Crore or have net worth of Rs. 50 Crore. 
  •  For multi-product SEZs, minimum investment is Rs. 1,000 Crore and net worth Rs. 250 Crore is required.