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Monday, December 15, 2008
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The labour ministry has changed the definition of pensionable salary for foreign employees, including Indian citizens working aboard. Pensionable salary of foreign or international employees
contributing to Employees Provident Fund Organization (EPFO) will now be average monthly pay drawn during the entire contributory period of service instead of the average of last 12 month's salary. The new definition is not applicable on domestic EPFO subscribers as they are already regulated by a ceiling of 6500 per month placed by employee pension scheme, 1995(EPS) on their pensionable salary. This means that the employer's contribution of 8.33% of eligible earning of the employee
to the EPS cannot exceed Rs. 6500 per month even if the calculated sum is higher. The ceiling does not exist for the international employee.
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The Supreme Court ruled in Paschimanchal Vidyut Vitran Nigam vs. DVS Steels & Alloys that a rule requiring the new owner of the premises to clear electricity arrears of the former was valid. The
distribution company in this case, successor to UP Electricity Board, insisted on the company to pay the arrears of the former owner before getting the connection.
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According to the Supreme Court, there could be arbitration of disputes between a company and its director who also functions as an employee,. The Supreme Court said that as a director is involved in policy making, the contract is not merely one of employment, Consultancy agreements are commercial.
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The Insurance Regulatory & Development Authority (IRDA) has taken free pricing to next level by giving non-life insurance companies more freedom to design their own products. Both individual and
businesses, who buy non-life insurance, can now look forward to policies that are either more comprehensive or better designed to meet their requirement.
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Essar Gujarat Limited (Essar) imported certain goods in three consignments and transferred the goods directly from the port to the factory of the loan licensee (being the taxpayer). The taxpayer availed Cenvat credit of the countervailing duty (CVD) paid by Essar. The Revenue sought to deny the credit on the ground that goods were received in the factory under the cover of delivery challans, which were not the appropriate documents for availing of credit. The Supreme Court held that the taxpayer produced the triplicate copy of the bill of entry in respect of two consignments; and hence, was entitled to Cenvat credit. However, in respect of the third consignment, the taxpayer did not produce the triplicate copy of the bill of entry; hence, the credit was not admissible.
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The Supreme Court held that filing a bill of entry was mandatory for importers to obtain release of goods. Further, the Apex Court observed that filing of the bill of entry was required for custom appraisal. Accordingly, the Supreme Court here permitted the Revenue to en cash the bank guarantee on the grounds that the goods had been released.
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The taxpayer was engaged in the business of oil exploration and had entered into a Production Sharing Contract (PSC) with the Government along with other consortium members. The taxpayer
claimed deduction of foreign exchange loss arising on the translation of expenses incurred in foreign currency at the end of the accounting period. The Assessing Officer (AO) held that the loss recognised by the taxpayer was notional and accordingly, did not allow deduction for such loss.
On appeal, the Income tax Appellate Tribunal (Tribunal) and the High Court held that loss arising on account of devaluation of rupee was allowable for tax purposes in the year in which the same had
been incurred. On appeal by the Revenue authorities before the Supreme Court, the Court observed that the PSC established an independent mechanism for the treatment of costs, expenses, income,
profits, etc incurred or earned by the consortium members engaged in oil exploration. Accordingly, the accounting and tax treatment of expenditure / income provided for in the PSC prevailed over
the normal provisions of the Act. The PSC was considered to represent a distinct, complete code, which provided for specific accounting and tax treatment of income/ expenses. In the instant case,
since the PSC provided that the loss arising on account of foreign currency translation could be claimed as a tax deduction in the same year, such expenses were required to be allowed as a tax deduction.
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The High court in the case of CIT vs KLM Royal Dutch Airline, upheld the tribunal decision, which said that the assessee did not derive any income other than profits from the operation of aircraft in international traffic and hence, in terms of articles 8, the same was not subject to tax in the Netherlands.
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In a setback to Vodafone, the Bombay high court dismissed the telco's writ petition against the income tax department's show cause notice seeking around $1.7 billion as capital gains tax. Vodafone will now move to the Supreme Court. The high court is learnt to have dismissed the plea mainly on
the ground that there is no "patent illegality" in I-T Department's show cause notice. Also, as per sources, the petitioner, Vodafone international, has suppressed a very important agreement dated February 11, 2007, between Hutchison and Vodafone international. Vodafone, based on advice
received, continues to believe that the transaction is not subject to tax in India and is confident of positive outcome ultimately.
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  • Three slabs of excise duty-14%, 12% and 8% applicable to non petroleum products have been reduced by 4% each. Revised rates will be 10%, 8% & 4%
  • Duty on cotton textiles and textiles articles has been reduced from 4% to nil.
  • Ad-valorem on car of 1500 cc and above has been reduced from 24% to 20%.
  • Duty on cement has been reduced from 12% to 8%.
  • Naphtha, imported for generation of electric energy, has been fully exempted from basic custom duty.
  • Export duty of 8% on iron ore fines has been withdrawn
  • Export duty on iron ore lumps has been reduced by 10% to 5%.
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Housing finance companies are the latest to get access to the special liquidity facility extended by the Reserve Bank of India (RBI) to mutual funds and non-banking finance companies (NBFCs). The
central bank has also extended the liquidity adjustment facility (LAF) from its current deadline of March 31, 2009 to June 30 2009.
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  • Provisioning Norms: The provisioning requirements in case of Tier II UCBs for all types of standard assets stand reduced to a uniform level of 0.40 per cent except in the case of direct advances to agricultural and SME sectors, which shall continue to attract a provisioning of 0.25 per cent, as hitherto. Tier I UCBs will continue to make a general provision of 0.25% on all their standard assets
  • Loans and advances secured by commercial real estate: Such loans would attract a risk weight of 100 per cent as against the extant risk weight of 150 per cent.
  • Loans and advances to NBFCs: The risk weights on exposure to such companies will remain unchanged at 100 per cent.
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Interest Rates effective from November 28, 2008 to April 30, 2009 will not be exceeding BPLR* minus 2.5 percentage points per annum for the following categories of Export Credit.

Categories of Export Credit

Pre-shipment Credit

  • Up to 270 days
  • Against incentives receivable from Government covered by ECGC Guarantee up to 90 days.
Post-shipment Credit

  • On demand bills for 
    transit period (as 
    specified by FEDAI)
  • Usance bills (for total period comprising usance period of export bills, transit period as specified by FEDAI, and grace period, wherever applicable)
  • Up to 180 days
  • Up to 365 days for exporters under the Gold Card Scheme.
  • Against incentives receivable from Govt. (covered by ECGC Guarantee) up to 90 days
  • Against un drawn balances (up to 90 days)
  • Against retention money (for supplies portion only) payable within one year from the date of shipment (up to 90 days)
  • Since these are ceiling rates, banks would be free to charge any rate below the ceiling rates.
  • Interest rates for the above-mentioned categories of export credit beyond the tenors as prescribed above are deregulated and banks are free to decide the rate of interest, keeping in view the BPLR and spread guidelines.
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The unprecedented invasion on Indian sovereignty by terrorists has shaken the very nerves of every Indian. It is a warning signal to the entire society to be more vigilant, more demanding and more forthcoming to defend themselves. It is necessary to brutally weed out all terrorists and also to strategically eliminate terrorism. Terrorists have no religion. Hindu, Muslim, Sikh, Christian, Jain and Bodh all the religions teach and preach to inculcate human values, to ensure a peaceful and constructive living for one and all to make this mother earth a beautiful place for humanity to survive and flourish. There is no reason to have suspicion or to divide the society in the name of religion. We all have to live together with mutual trust and harmony. Faith is the most important element which needs to be kept by word, by thoughts and conduct by each and every member of society. Polity and the politicians are one of the most important necessities of society and for successful and effective
functioning of democracy. Unnecessarily maligning politicians as a class will only desist good people to join politics, which will be suicidal for society. At the same time, the time has come where politicians have to do soul searching that power is not for enjoyment but to serve citizenry. Only the citizens with the zeal to serve with righteous virtues are needed in the polity. Some important suggestions to be considered by the society, thinkers, politicians and opinion makers of this country are as follows:

  • Strategically create mutual trust and faith among various religions, classes of society. Involve religious leaders proactively.
  • Deal aggressively with the terrorists, their supply line in terms of logistics, money, arms and ammunitions and most importantly banish moral and local support.
  • Internationally ensure that terrorists are not able to have access to arms and ammunitions. All soverign countries, manufactures and dealers of arms and ammunitions must have self regulatory and ethical Code of Conduct in place to ensure that they do not eventually serve the terrorism by supplying, directly or indirectly, their products to unwarranted elements. Failure to follow a well publicized code of ethics in this regard can be made very severely punishable by international collective action.
  • It is important to have a very quick trial and punishment mechanism for terrorists. In most cases it may not be necessary to give them benefit of principles of natural justice, civil liberties and human rights. Terrorists cannot have any rights of any kind whatsoever.
  • The design of terrorists and the forces behind them for aggression against India is to destabilize our economy, tourism, the economic growth and our strategy to become number one economic power in the world. We cannot permit any invasion of any kind.
  • The media, including the electronic and print media may be subjected to ethical discipline by ensuring that the terrorist activities are least publicized to reduce the impact of terrorism. Terrorist understand very well that the media is there to make their (in)human acts known to all. Once publicity is restricted the brutal and evil designs of terrorist will not be propagated.
  • It is very important to ensure that the names of the terrorists are not published or publicized with a view to maintain religious harmony, as the names, most of the times give wrong signals and result to provide benefit to divisive forces only. Terrorist is a terrorist, has no religion.
  • There is need to have a hard talk with Pakistan and if necessary to aggressively weed out terrorist camps by combat action. 

We as a nation are one, India will not any recurrence of such event.
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The recent turmoil in the US economy has shaken the confidence of the Indian businesses in the economic and monetary system of the world. The sentiments have been hurt very significantly. The distress sale of Indian Companies shares by foreign investors of more than US $ 25 billion, non renewal of short-term international funding of about US $ 50 billion and reduction in growth rate of foreign direct investments during last 3 months have impacted the exchange rate, market sentiment,
international demand for exports and the resultant reduction in confidence of the Indian businesses. We must thank Dr. Manmohan Singh that after assuming the charge of Finance Minister he has been able to very quickly take very important strategic action including substantial reduction in excise duty rates and certain initial steps to improve the liquidity into the system. This is indicative of only a very good beginning towards the future steps which may be inevitable to provide necessary impetus
to growth.

The Government of India, the thinkers and the opinion makers may consider the following suggestions for immediate implementation for revival of growth rate of the Indian economy:

  • As a sequel to reduction in excise duty, it may be very important to immediately announce reduction in service tax rates to 8% and 4% slabs to give boost to the service sector. In view of CENVAT this is also a natural requirement.
  • The central government and the State governments need to consider reduction of VAT rate comprehensively to provide further fuel to the growth path. The Chartered Accountants community is quite confident that even if the rates are reduced by 40% to 50%, the overall collection of the revenue of the Government will be rather more as compared to the collection in terms of the present rate, by improved compliance and improved business activities due to higher demand.
  • It is important to immediately announce deficit funded infrastructure projects by at least Rs. 200000 crore for immediate commencement of their implementation to put back necessary confidence into the economy.
  • The reduction in commodity prices including oil, metal and other important commodities internationally is a natural correction in the backdrop of speculative rise in prices in last 2 years.
  • The Real Estate Sector and the Infrastructure Sector will require special attention of the Government. The comprehensive reduction of interest rates, taxes on these sectors and adequate money supply will be necessary to stimulate the growth of housing, real estate and infrastructure sector.
  • Special incentive package is needed to boost tourism and hospitality industry. Aviation is seen severely hit, flights moving at abysmally low capacity, lower travel by businesses warrant removal of FBT.
  • Inflation cannot be the 1st agenda as an economy. The important agenda at this stage would be to bring back the activity and positive outlook into the economy. A substantial reduction in CRR and SLR would be mandatory as the Indian Banking Sector will need at least additional flow of Rs. 2 lakh crore within next 2 months which can be released from the system by the Reserve Bank of India.
  • The Indian banking sector and the financial market need not have apprehension about possible NPA's and should not desist from lending. The position of the Indian economy and the Indian businesses is reasonably strong and apprehensions of the banking sector is mainly impacting adequate flow of money and has adversely reduced the growth rate of M3 (Money supply).

The aforesaid suggestions may be considered in the backdrop of detailed reasoning and suggestions
given in our Editorial of November Issue. We are glad to say that a significant number of our suggestions have been accepted by the Government and partly implemented already. We as a nation with progressive outlook are on the right path and would request Dr. Manmohan Singh to continue with the dual charge at this crucial hour where his technology as a finance minister is most needed by the Indian economy. Let our (business) spirits be high.
Saturday, November 15, 2008
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The SEBI has lifted curbs on foreign institutional investors (FIIs) imposed a year ago to stem huge sales by FIIs that have triggered a 42 per cent slide in the Sen sex this year. A requirement forcing investors to register in India before buying shares and limits on offshore derivatives that were imposed last October have been lifted with immediate effect. Under the October rules, foreign investors could only issue offshore derivatives linked to stocks up to a limit of 40 per cent of assets
under custody as of September 30. The regulator also overturned rules that banned overseas investors from issuing participatory notes (P-notes) on derivatives. This means investors can issue P-notes on single stock and index F & O.
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In a move that could halt short selling through Participatory notes (P notes), the Securities and Exchange Board of India (SEBI) has asked foreign institutional investors (FIIs) and their sub accounts to provide details of such lending and borrowing in overseas market. FIIs have been lending third party shares held through P notes to other investors overseas, who in turn were selling such shares in Indian markets. SEBI has now said that sales in the Indian market by FIIs and sub accounts are also possible on account of the securities being lent by these entities abroad. In order to lend more transparency to the market, it has been decided that the position of the securities lent by these entities abroad shall be disseminated on a consolidated basis twice a week-Tuesday and Friday.
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Promoters can increase their stake up to 75 per cent through creeping acquisition, instead of 55 per cent earlier. However, they will have to buy shares through normal market purchase and not through bulk, block or negotiated deals. Through a creeping acquisition, the promoters of a company can increase their stake in the company by buying up to five per cent of the company’s equity annually.
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With a view to ensure market safety and safeguard the interest of investors, it has now been decided
that the exposure margin for exchange traded equity derivatives shall be higher of 10% or 1.5 times the standard deviation (of daily logarithmic returns of the stock price), with effect from October 21, 2008.
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SEBI has made amendments to Clause 49 of the listing agreement that deals with corporate governance norms. The amendments have been made after representations from entities requested SEBI to bring about further clarity on the amendment (made on April 8) where the promoter of a listed company is a listed or an unlisted entity. According to SEBI, “If the promoter is a listed entity, its directors – other than the independent directors, its employees, or its nominees – shall be deemed to be related to it.” but, “if the promoter is an unlisted entity, its directors, employees or nominees shall be deemed to be related to it.”
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Overdue receivables representing positive mark-to-market (MTM) value of a derivative contract should be treated as a non-performing asset, if these remain unpaid for 90 days or more. In a notification on the prudential norms for off-balance sheet exposure of banks, the Reserve Bank of India said that all other facilities granted to the client should also be classified as NPAs based on
the principle of borrower-wise classification.

  • Restructured Derivatives: In case where a derivatives contract is restructured, the MTM value of the contract on the date of restructuring should be cash settled .For this purpose, any change in any of the parameters of the original contract would be treated as restructuring .This instruction will also be applicable to the foreign branches of the Indian Banks.
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Acting tough on the single commodity exchanges, the Forward Markets Commission (FMC) has
tightened the process for granting permission to restore futures trading in de-licensed commodities.
The commodity markets regulator has sought details of steps taken by commodities exchanges to
make contracts liquid, in at least two cases.
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With the mayhem in the stock markets and dip in sales of unit-linked insurance plans (ULIPs), insurance regulator IRDA has decided to direct life insurers to furnish data on the performance of their funds. Worried that the drastic fall in the net asset values (NAVs) of ULIPs may affect
the popularity of life insurance policies, the regulator is looking at imposing some restrictions on ULIPs. Currently, companies have full freedom to sell ULIPS or traditional policies or a mix of both.
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Accounting Standard 21 – which speaks of consolidated financial statements – gives holding companies the leeway of not showing the composite effect of all its subsidiaries if the control in the subsidiary is intended to be temporary. That is, if the subsidiary is acquired and held with a view that it will be subsequently disposed in the near future, consolidation of financial statements is not required. It is alleged that holding companies often abuse this relaxation to prevent poor performance
of loss-making subsidiaries causing a dip in their consolidated profits. The proposal for mandatory consolidation may help investors to take an informed decision on the financial status of companies.
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The IASB and the FASB have announced further details on their joint approach to dealing with
reporting issues arising from the global financial crisis. The boards reiterated the importance of working cooperatively and in an internationally coordinated manner to consider accounting issues emerging from the global crisis. The boards also emphasized the role of high quality financial reporting in helping enhance confidence in the financial markets by responding in a timely manner that improves transparency and provides greater global consistency in financial reporting.

  • Rapid appointment of a high-level advisory group: The boards agreed that the advisory group shall be comprised of senior leaders with broad international experience with financial markets.
  • Public round tables in Asia, Europe, and North America: In the coming weeks, while the advisory group is being established, the IASB and the FASB will organise three round tables—one each in asia, Europe, and North America.
  • Common long-term solutions to reporting of financial  instruments for Reducing Complexity in Reporting Financial Instruments: In addition to considering the potential for short-term responses to the credit crisis, both boards emphasized their commitment to developing common solutions aimed at providing greater transparency and reduced complexity in the accounting of financial instruments. The boards will use their joint discussion paper, the responses received to the discussion paper, and the deliberations of the high-level advisory group as starting points for this longer term objective. The boards will reconsider the composition of the existing IASB Financial Instruments Working Group to ensure that working group provides appropriate and balanced advice to both boards.
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The International Accounting Standards Board (IASB) and the US Financial Accounting Standards
Board (FASB) has published for public comment a Discussion Paper on financial statement presentation. The Discussion Paper contains an analysis of the current issues in financial statement presentation and presents the Boards’ initial thinking on how those issues could be addressed in a possible future format. International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) provide only limited presentation guidance. In addition,
presentation guidelines in US GAAP are dispersed across standards. Moreover, users of financial
statements have often expressed dissatisfaction that information is not linked across the different statements and that dissimilar items are in some cases aggregated in one number. To address these issues, the IASB and the FASB propose to introduce cohesiveness and dis aggregation as the two main objectives for financial statement presentation. Cohesiveness would ensure that a reader of financial statements can follow the flow of information through the different statements of an entity;
dis aggregation would ensure that items that respond differently to economic events are shown separately. To achieve these main objectives, the Boards have developed a principle-based format
that is presented in the Discussion Paper. The Boards seek views from interested parties on both the
objectives for the presentation of financial statements and the proposed format.
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Supreme Court in the case of Unnissi (I) Ltd. vs PGI has ruled that even if one party has not signed a formal agreement, threre could be a consensus on arbitration by implication. It asserted that no agreement was executed and there was no arbitration clause. On appeal, the Supreme Court ruled that there was an arbitration clause in the tender document itself. Since the document was accepted by
PGI, there was an arbitration clause.
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The Supreme Court (SC) has reiterated that a holding company could not be held liable for recovery
of provident fund dues of its subsidiary company. The Orissa High Court had allowed the petition of ABS Spinning Orissa Ltd, which had challenged the demand of the provident fund commissioner for
provident fund dues. The commissioner appealed to the SC which dismissed the petition stating that “we are of the view that the subsidiary company has an independent existence as against the holding company and therefore the holding company is not liable to clear the provident funds dues of its
subsidiary company”.
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ITAT Mumbai in the case of ITO vs. Daga Capital (I) has ruled that sec 14A of IT Act, which says that no deduction shall be allowed for expenditure incurred in relation to any tax free income, will apply in respect of tax free dividend income earned from shares held as stock in trade. The assessee had agrued that as income by way of profit from trading in shares is taxable, sec 14A should not be applicable on the dividend earned in the process of trading. The bench turned down the contention of the assessee and further held the fact that the dividend income is “incidental” to the purchase of
shares is irrelevant. The question as to whether the onus is on the assessee or the AO for bringing an
item of expenditure within sec14A is also irrelevant in view of Rule 8D.
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Interest paid by domestic entities to foreign companies in respect of borrowing through convertible
bonds is liable for tax deduction at source (TDS). The Authority for Advance Ruling (AAR) on Income Tax has held that TDS provisioning has to be made in respect of interest paid by Indian companies towards borrowings made by issuing convertible bonds under the foreign investment schemes
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Cos can’t set off Mark-To-Market Losses against profit to reduce tax liability. In a double whammy of sorts, companies hit by mark-to-market (MTM) losses due to exposure to forex derivatives are unlikely to get the income-tax department to treat these losses as deduction. The reason is that there are no specific provisions in the Income Tax Act dealing with this issue.
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The Supreme Court in its judgment in case of Southern Sales & Services Vs Sauermilch Design & Handels GMBH ruled that in a suit for money decree, a party defending the claim may be asked to deposit part of the admitted amount as a condition to hear his petition. In this case, the foreign company filed a suit against the Indian firm for recovery of Rs. 4 crore. The latter moved the civil judge in Bangalore who imposed a condition to hear the suit. The Indian firm moved the Karnataka High Court against this order. The high court ruled that the firm should deposit 55 per cent of the undisputed amount before hearing it. In the appeal, the Supreme Court confirmed high court order, quoting Order 37 of the Civil Procedure Coe. It explained that earlier, the code granted hearing
without any condition, but after an amendment to the code in 1977, a condition to deposit part of the
undisputed amount can be imposed by the civil court.
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The Reserve Bank of India (RBI) has allowed Clearing Corporation of India (CCIL) to provide guarantee to inter-bank currency forward transactions. The move will help banks use their capital optimally and bring more safety in the currency forward market. At present, currency forwards are
settled on CCIL. The central bank’s approval will enable CCIL to start providing guarantee for currency forward deals between banks within a month. Currently, Banks have to provide capital for exposure to the currency forward market as these deals are not guaranteed on gross basis .This results in banks setting aside additional capital for every buy and sell transaction, adding to their trading cost. After CCIL starts providing guarantee for deals struck on its platform between banks, it
could save a lot for banks, which can utilize capital optimally.
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In a bid to help non-banking financial companies (NBFCs) meet their fund requirements and maintain capital adequacy requirements, the Reserve Bank of India has allowed these
companies to issue perpetual debt instruments (PDI) in Indian rupee to raise funds. The PDIs will be eligible for inclusion as Tier I Capital to the extent of 15 per cent of total Tier I capital of the company as on March 31 of the previous accounting year. The amount of PDI, which is in excess
of the amount allowed as Tier I capital, would qualify as Tier II capital. RBI has stipulated Rs. 5 lakh
as the minimum investment in each issue by a single investor. All NBFCs with an asset size of more than Rs. 100 crore can raise funds by issuing PDI as bonds or debentures, but these funds would not be treated as public deposits.
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State Bank of India has signed a memorandum of understanding with the Credit Guarantee Fund for Micro and Small Enterprises (CGTMSE) under which the risk of providing collateral-free credit facilities to micro and small enterprises will be shared between the two. For all collateral-
free loans between Rs. 50 lakh to Rs. 1 crore given by SBI to micro and small enterprises, CGTMSE will provide a 50 per cent guarantee cover and the balance 50 per cent risk will be borne by SBI. The guarantee fee and annual service fee charges under this scheme will be 0.75 per cent and 0.375 per cent respectively.
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The Reserve Bank of India (RBI) has issued fresh guidelines in connection with interest rates on non resident (external) rupee (NRE) term deposits and FCNR (B) deposits. As per the guidelines, the interest rates on fresh NRE term deposits for one to three years maturity should not exceed the
libor/swap rates plus 100 basis points as on the last working day of the previous month, for US dollar of corresponding maturities as against libor/swap rates plus 50 basis points effective from the close of business.
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The reserve bank of India (RBI) has further relaxed banking norms by allowing holders of certain types of savings bonds to raise fund by pledging the government paper as collateral with cooperative banks. Following the decision, the holders of savings bonds will be able to borrow money for their needs from the urban cooperative banks
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The Reserve Bank of India said that the Banks can now take trading positions in interest rate futures
(IRFs). These guidelines will also be applicable to overseas branches of Indian Banks. Earlier banks were allowed to transact in IRFs for the purpose of hedging the risk in their underlying investment portfolio. Earlier banks could only buy IRFs, now they can also sell. This may improve volumes in the IRFs market. However, with the requirements of margins in the future market, the impact may not be much. This is just one more instrument for banks for hedging.
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RBI extended a facility under which mutual funds could borrow using short-term debt securities as
collateral for an unlimited period to help them meet cash requirements. Further, the RBI allowed banks to extend loans to mutual funds against the so-called certificates of deposits or buy back such securities issued by themselves for a period of 15 days. This facility has been extended for an unspecified period now.
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  • ECB up to USD 500 million per borrower per financial year would be permitted for Rupee Expenditure and / or foreign currency expenditure for permissible end - uses under the Automatic Route. 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.
  • Parking of Funds: It has now been decided that henceforth the borrowers will be extended the flexibility to either keep these funds off-shore as above or keep it with the overseas branches /subsidiaries of Indian banks abroad or to remit these funds to India for credit to their Rupee accounts with AD Category I banks in India, pending utilization for permissible end-uses. However, the rupee funds will not be permitted to be used for investment in capital markets, real estate or for inter-corporate lending.
  • Hedging: Keeping in view the risks associated with unhedged foreign exchange exposures of SMEs, a system of monitoring such unhedged exposures by the banks on a regular basis is being put in place.
  • End-use-Definition of infrastructure sector: It has been decided to expand the definition of Infrastructure sector for the purpose of availing of ECB. Accordingly, the Infrastructure sector would henceforth be defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport (vi) industrial parks (vii) urban infrastructure (water supply, sanitation and sewage projects) and (viii) mining, exploration and refining. Payment for obtaining license/permit for 3G Spectrum will be considered an eligible end-use for the purpose of ECB.
  • Other conditions: All other aspects of ECB policy such as USD 500 million limit per company per financial year under the Automatic Route, eligible borrower, recognized lender, end-use, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements remain unchanged
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The economic meltdown in the US and Europe has taken a big toll and the economic crisis in the
developed world reached a new depth. The US and European governments have become hyper
active to arrest the losses and to put back the faith in their respective economies, banking system, investment business and financial services sector. The business scenarios in India seem to have been impacted by poor sentiments, falling commodity prices and negative news flowing from the western countries. The substantial reduction in market cap in Indian stock exchanges has further impaired the sentiments. The chartered accountants community and its leadership has been trying to diagnose as to whether there are any symptoms of serious financial problem in the Indian economy and more particularly in the financial sector including banks, insurance companies, non banking financial companies and other important constituents of financial markets and Indian economy. The reflection of global melt down is also appearing on Indian economy. The question is being asked whether Indian economy is safe and sound. The Indian economy is completely resilient and there are no reasons to have pessimism or lack of confidence. The fall in shares prices is partly a natural correction and partly arising out of panic sales and negative sentiments. The banks in India are safe in view of very severe regulatory mechanism of Reserve Bank of India and detailed audit being conducted by chartered accountants who are independently appointed, more importantly in the public sector banking system. But we cannot sit pretty confident that nothing is going to impact Indian economy. We have to review the entire regulatory mechanism and take appropriate steps to build
reasonable protection mechanism. In respect of private sector banks and mutual funds as well as
private sector insurance companies, there are neither negative signals nor are there symptoms of any impropriety. How the reporting by the private sector banks, mutual funds and insurance companies can give more confidence about it being true, fair, proper and completely transparent will depend on
the independence of audit. Most of the time in these cases the appointing authority and those in charge of management are not independent of each other and therefore there is a great degree of risk in the system. It is important for the society, Government, RBI, SEBI, IRDA and all other regulatory bodies; and most importantly the political leadership of the country to consider that in certain cases large scale public funds are involved and the funds contributed to a particular business by the owners of the business are fairly insignificant proportion and in some cases even less than 10% of the entire business assets e.g in mutual funds, banks and Insurance companies. Auditors also have a very important role to play in all such cases. It may be necessary that Auditors/special joint auditors are
appointed by an independent Regulatory Authority. In such case the scope, coverage and reporting
requirements can be foolproof and the auditors’ independence is not impacted. Auditors’ appointment, remuneration, continuation and removal has to be independent of owners and those directly or indirectly in-charge of management. In addition to India, even the international community including G20 summit which is happening at the behest of US should consider as to
whether the accounting practices, reporting requirements and most importantly the audit process of their financial sector is factually independent and a debate is necessary towards shifting the appointment of auditors through regulatory mechanism so that such auditors are directly answerable to these regulators as well as to the society. Hectic activities are going on in the area of convergence of accounting standards world over. Fair Valuation is being considered as better basis of accounting than historical cost. In the present circumstances, this definitely requires a relook.

The Indian economy, the Indian businesses, Indian banks as well as Indian financial sector is fully safe based on the informal feedback being received by the chartered accountants community from various quarters including most importantly through the informal networking of Chartered Accountants as auditors, tax advisers and management consultants, CFOs and CAs at other managerial positions and working closely with the business community. There appears to be no
serious problem in the economic and business framework of the country. However, it is important to ensure that the business sentiments are restored and the government of India needs to –

  • Significantly reduce indirect taxes in those sectors which may be impacted due to lack of export, international trade and considerable reduction in commodity prices. The tax burden is too high in almost all sectors and need a candid review.
  • The compliance's burden is to be reduced significantly.
  • We suggest that the government should immediately commit at least Rs. 200,000 crore towards infrastructure projects and start inviting contracts and take steps to implement the same. This will boost the economic sentiments very significantly and the multiplier effect will rejuvenate the economy.
  • The interest rate for hotel industry, real estate sector and housing below the cost of Rs. 50 lakhs needs to be considerably reduced by at least 500 basis point. The risk factors determined by RBI also require positive reconsideration. 
  • The liquidity in the system has to be further increased by further reduction of SLR and CRR.
  • A fresh dose of cut in the REPO rate is very necessary.
  • The oil prices need an immediate reduction in view of 60% reduction in international prices.

These are only some suggestions to put back the economy in the right direction. At the same time the 
Government needs to reconsider its decision regarding growth of derivative in securities markets, 
foreign currency markets and commodity markets. The unnecessary speculations in these markets have given birth to new instruments, new structures, new greed and even a greater risk. The derivative market need to be restricted only to actual hedging of actual underlying risk. Only simple
vanilla options or derivatives should be permitted and complex derivative instruments including securitization instruments full of complex financial structures need not be permitted as these give rise to serious risk similar to the risk which has resulted into fall of Lehman Brothers and severely impacted all the top investment bankers of the world in the international crisis. We invite suggestions from chartered accountants, thinkers and all those who are committed to the growth of Indian economy to send their comments, suggestions and views. In the meantime just consider this Indian Economy is slated to grow at least 6-7% in the current fiscal against global average of 3.6% in 2008. This can by no means be a perpetrator of weaning confidence. It just provides positive and bright light at the end of tunnel, then why lose heart. Just be positive and continue to carry out your work with the same zeal, zest and passion.
Wednesday, October 15, 2008
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At present, borrowers in the infrastructure sector are allowed to avail ECB up to USD100 million per financial year for Rupee expenditure for permissible end-uses under the Approval Route. Considering the huge funding requirements of the sector ,particularly for meeting Rupee expenditure, the existing limit of USD 100 million has been raised to USD 500 million per financial year for the borrowers in the infrastructure sector for Rupee expenditure under the Approval Route. ECBs in excess of USD 100 million for Rupee expenditure should have a minimum average maturity period of 7 years. The amendments to the ECB guidelines will come into force with immediate effect. All other aspects of the ECB policy such as USD 500 million limit per borrower per financial year under the Automatic Route, eligible borrower, recognized lender, end-use of foreign currency expenditure for import of capital goods and overseas investments, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements remain unchanged. The existing limit of USD 50 million for Rupee expenditure under the Approval Route for borrowers other than those in the infrastructure sector also remains unchanged.
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“Foreign Currency Exchangeable Bond” means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB may be denominated in any freely convertible Foreign currency.

  • Eligible Issuer: The Issuing Company shall be part of the promoter group of the Offered Company and shall hold the equity share/s being offered at the time of issuance of FCEB.
  • Offered Company: The Offered Company shall be a listed company, which is engaged in a sector eligible to receive Foreign Direct Investment and eligible to issue or avail of Foreign Currency Convertible Bond (FCCB) or External Commercial Borrowings (ECB).
  • Entities not eligible to issue FCEB: An Indian company, which is not eligible to raise Funds from the Indian securities market, including a company which has been restrained from accessing the securities market by the SEBI shall not be eligible to issue FCEB.
  • End-use of FCEB proceeds:
  • Issuing Company: (i) The proceeds of FCEB may be invested by the issuing company overseas by way of direct investment including in Joint Ventures or Wholly Owned Subsidiaries abroad, subject to the existing guidelines on overseas investment in Joint Ventures / Wholly Owned Subsidiaries.
  • The proceeds of FCEB may be invested by the issuing company in the promoter group companies.
  •  Promoter Group Companies: Promoter Group Companies receiving investments out of the FCEB proceeds may utilize the amount in accordance with end-uses prescribed under the ECB policy.
  • End-uses not permitted : The promoter group company receiving such investments will not be permitted to utilise the proceeds for investments in the capital market or in real estate in India
  •  Average Maturity: Minimum maturity of FCEB shall be five years. The exchange option can be exercised at any time before redemption. While exercising the exchange option, the holder of the FCEB shall take delivery of the offered shares. Cash (Net) settlement of FCEB shall not be permissible.
  • Parking of FCEB proceeds abroad: The proceeds of FCEB shall be retained and / or deployed overseas by the issuing / promoter group companies in accordance with the policy for the ECB. There are also condition of all-in-cost ceiling, issue pricing etc.
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While allowing telecom software services firm Sasken to go ahead with its Rs.40 crore buyback offer, Securities Appellate Tribunal (SAT) has said that market regulator SEBI has no right to advise a company regarding the price it needs to put for the buyback offer. The tribunal said the company has already informed SEBI that the buyback will be from open market through the stock exchange mechanism, which obviously means that the shares will be purchased at the prevailing price as determined by the system subject to maximum price. “This being the position, there was hardly a need to tell the company to place its but orders at the market price,”
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SEBI has introduced the facility of making applications through “Applications Supported by Blocked Amount” process, in book built public issues vide its circular dated July 30, 2008. It has now been decided to enable process of ASBA in Rights Issues on a pilot basis Merchant Bankers, Registrars and Self Certified Syndicate Banks (SCSBs) are advised to provide the ASBA facility in rights issues with suitable modifications to ASBA process specified by SEBI for public issue through book building route, as deemed fit. ASBA process in rights issue shall have the following features:

  •  All shareholders of the company as on record date shall be eligible to apply through ASBA (hereinafter referred as “ASBA shareholder”) provided if he applies through a bank account maintained with SCSBs.
  • The SCSB shall then block in the bank account, the application money specified in the application, on the basis of an authorization to this effect given by the account holder in the application. The application data captured by SCSB shall be made available to the Registrar.
  • The Registrars shall take give suitable instructions to the SCSBs for transfer of money to the issuer account after satisfying the designated stock exchange about receipt of Minimum subscription of 90% in terms of provisions of SEBI (DIP) guidelines, and for any other matter relevant to a rights issue.
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The Supreme Court has defended the requirement of pre deposit of penalty amount before hearing the appeal of a firm which was accused of acquiring foreign exchange contravening the provisions of the Foreign Exchange Management Act. In this case, Monotosh Saha vs. Special Director, Enforcement Directorate, the firm was imposed a penalty of Rs. 25 lakh. When it moved the appellate tribunal (foreign exchange), it directed the firm to deposit 60 per cent of the penalty amount if it wanted the appeal to be heard. The firm appealed to the Calcutta High Court contending that the order imposed ‘undue hardship’ on it. The high court rejected it. The Supreme Court justified the condition stating that “for a hardship to be undue, it must be shown that the burden is out of proportion to the nature of the requirement and the hardship is greater than the circumstances warrant.” It was not so in this case.
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In a departure from the existing norms, the Government allowed Indian editions of foreign news and current affairs magazines stipulating a 26-per cent foreign direct investment ceiling. Magazines such as the Time and Newsweek will now be able to publish Indian editions, as long as they follow the FDI ownership cap and rope in an Indian partner.
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It has been decided to raise the limit of USD100,000 for advance remittance for all admissible current account transactions for import of services without bank guarantee to USD 500,000 or its equivalent. Where the amount of advance exceeds USD 500,000 or its equivalent, a guarantee from a bank of international repute situated outside India, or a guarantee from an AD Category I bank in India, if such a guarantee is issued against the counter-guarantee of a bank of international repute situated outside India, should be obtained from the overseas beneficiary.
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There is no exclusion to SEZs in the Chapter V of the Finance Act, 1994 (Service Tax law). Taxable services received by SEZ units and SEZ developers for consumption within the SEZ are exempt for service tax under notification No. 4/2004-ST, dated 31.3.2004 . However, service tax is applicable on taxable services provided by SEZ units, except such services which are exempt by notification No. 4/2004-ST. The C &AG, it in recent report has pointed out instances, where SEZ units in Chennai & Cochin were providing taxable services like manpower supply service, technical testing and analysis service etc., to units / persons outside SEZ, without payment of service tax.
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The service tax tribunal has held that with respect to services of the hire purchase the rate of service tax applicable is the rate prevailing on the day on which the hire purchase agreement is entered into. In this case the assessee was engaged in the providing services of hire purchase and was registered under the category of “Banking and other financial services “.They have been paying service tax at the rate of 5%. Subsequently the rate of service tax was increased to 8% with effect from 14 may 2003. The department contended that service tax at 8% would be applicable on monthly installments which were paid after 14 may 2003. The assessee contended that in respect of hire purchase contract, the rate of tax applicable is the rate prevailing on the day the contact is entered into. The higher rate is not applicable for the contract entered prior to the hike. The tribunal accepted the arguments of the assessee and held that when the hire purchase contract is entered, the taxable event occurs and therefore the rate of service tax will be rate prevailing on the day on which the contact is entered into.
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The Allahabad High Court has held that a contract for transportation of passengers, where the contractor uses its own vehicles, operates staff like drivers and conductors and bears all running expenses, would not be liable to sales tax as a transfer of the right to use goods since at no point in time is control and possession in the vehicles transferred to the contractee. The assessee contended that the possession of the buses was never given to any party at any point of time and the control over buses was always with them. The High Court accepted the arguments of the assessee.
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Manufacturing companies will now have to file an annual statement of their installed capacity. The Central Board of Excise and Customs (CBEC) has made it mandatory for companies to give these details, in a move that is targeted at curbing rampant evasion in excise duty Every assessee shall submit to the superintendent of Central Excise, an Annual Installed Capacity Statement declaring the annual production capacity of the factory for the financial year to which the statement relates in the form specified by notification by the Board by 30th day of April of the succeeding financial year.
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THE Gujarat High Court, in a recent ruling, has held that an assessing officer (AO) cannot make addition to the income while working out the book profit for the purpose of minimum Alternate Tax- under section 115J on the Income Tax Act – with regard to the difference arising due to change in the method of depreciation adopted by the assessee. The assessee has changed his method of providing depreciation from Straight Line Method (SLM) to Written Down Value (WDV) method during the year. The AO was of the view that assessee was required to provide depreciation in its books as per rates provided in schedule of the companies Act and could not the WDV method as per the I-T Act . The Gujarat High Court has held the AO has limited power of making changes in the net profit while working out the book profit in terms of section 115J, as provided for in explanation to the said section and has limited jurisdiction to the specific extend provided in the explanation. Accordingly the court rejected the contention of the A.O.
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The Delhi High Court has held that where expenditure is incurred on account of commercial expediency , it would be an allowable business expense though it has not arisen explicitly based on contract. The assessee incurred settlement expenditure so as to avoid the possibility of the litigation ensuing, in respect of its early exit from the premises it had obtained on lease. The nonpayment of the same could have resulted in suit of damages for breach of contract and/or specific performance. The assessee claimed the same as business expenditure under section 37. The assessee paid the said amount considering various factors like avoiding higher user charges for unexpired lease period, getting back immediate payment of the interest free security period, etc. The AO was of the view that under the contract there was no legal obligation of the assesee to pay the settlement expense and hence, the same was not wholly and exclusively laid out for the purpose of the business. The court observed that the settlement expense paid in relation to early exit from the premises falls squarely within the meaning of the expression “commercial expediency” when seen from the perspective from an assessee’s business. Accordingly, the same is an allowable expense under section 37.
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The Supreme Court has ruled that provisioning for bad debt cannot be considered for deduction against the taxable income. The Supreme Court’s decision pertains to a company following the Minimum Alternate Tax (MAT) under Section 115JA of the Income Tax Act, 1961. According to the judgement, a provision for liability will be eligible for deduction from the taxable income and not a provision for bad debt.
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The Supreme Court has said the income-tax department has to accept the authenticity of the accounts maintained in accordance with the provisions of the Companies Act and certified by the auditors. The assessing officer cannot go beyond the net profit shown in the profit and loss account, except to examine whether the books of accounts were duly certified by the authorities and properly maintained. The AO does not have the jurisdiction to go beyond the net profits shown in the profit and loss account except to the extent provided in the explanation (appended to Section 115J of the Income Tax Act).
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Foreign companies without a permanent establishment in India and providing research facilities to Indian firms for developing new drugs are exempt from paying tax in the country. Further, the Authority for Advanced Rulings (Income Tax) has said unless there is a transfer of technology or know how to the recipient of the service, it cannot be classified as technical services. Anapharm had sought to know whether the fee it received from the pharmaceutical companies for undertaking clinical and bio analytical studies under the agreements would be subject to tax in India under DTAA between India and Canada. The AAR has ruled that its fees should be considered as business income, but since it does not have a permanent establishment in India, it is not liable to pay tax in the country under the Indo-Canadian DTAA
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The U.S. financial market debacle has initiated a debate on weaknesses in U.S. GAAP and International Financial Reporting Standards (IFRS). The major debate is around Fair Value Accounting which permit business entities to account for financial instruments on the basis of their fair value. This concept enable accounting of mark to market profits as well as mark to market losses. The upsurge in market value of financial instruments based on fair value valuation techniques is recognized in accounts and even unrealized gains are considered in profitability and earnings besides assets and net worth. In terms of currently prevailing accounting standards in India, unrealized gains can not be considered as profits. In India, the fixed assets are accounted for on historical cost. The current assets are generally accounted for on cost or net realizable value whichever is lower. Except the investments held to maturity or as long term investments, the investment and derivatives are mark to market. The mark to market losses are accounted for and mark to market profit are not considered as income. The Indian Regulators including RBI, SEBI, IRDA and ICAI have been actively considering shifting over to fair value accounting shortly by implementing AS30, AS31 ad AS32 and adopting International Financial Reporting Standards. The crucial issue is how fair is the fair value estimation in the absence of a reliable and robust valuation, tremendous fluctuations and volatility even in the stock market and commodity market. The OTC (Over the Counter Market) in case of foreign exchange, unlisted securities and derivatives being non transparent and highly illiquid, the valuation of fair value of these financial instruments pose a major challenge to valuers. The credit ability of valuation is tested in times of falling financial market and may pose a greater risk. How to ensure fairness of fair value valuation? Should Indian accounting system allow mark to market profit accounting for financial asset/ financial liability valuation, recognitions, measurement and disclosure of profitability, net worth and assets besides for distribution of profits.

The Regulators need to openly debate as to how will they address risk of manipulation, Risk of error of judgement and resultant risk on liquidity & solvency of business Enterprises, banks, insurance companies, financial services sector and mutual funds Incase a debacle like U.S. hit the Indian Financial System.
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The recent fall of world largest investment bankers including Lehman Brothers, Goldman Sach, Morgan Stanley and Merryil Lynch followed by failure of a number of largest American and European Banks have brought the international financial market to a halt. American Insurance Group (AIG), one of the largest insurance company of United States of America had to be nationalized by US Government. This is followed by insolvency of a Japan’s largest insurance company. The G- 7, Group of 7 largest economies of the world, at the highest level have decided to nationalize a larger number of Banks in American and European countries to arrest the loss of complete confidence and also to address liquidity crises. The U.S. President had to approach the senate and U.S. Congress to grant relief of about 700 billion US$(Bailout Package) to the ailing financial system.
The Indian financial market and capital market is witnessing worst period of negative sentiments. The stock markets are on a falling spree with sensex nearing 4 figures (a fall of about 50% since January 2008, whereas some of the blue chip shares loosing 70% to 90% in their market capitalization.

The truth of financial debacle started unfolding about a year ago when sub prime crises hit the U.S. market. The source of problem was indiscriminate lending by US Banks and financial services companies to Real Estate acquisitions and other sub-prime lending, with larger risk and of course decent returns 

The credit risk of these high risk - high yield loans were hived off into “credit link notes” derivative instruments. The high risk derivatives were bundled with low risk derivatives and marketed and the credit risk were insured by companies like AIG to further improve the credit rating. The top notch credit rating companies provided investment grade credit rating to these derivative instruments. The top notch investment bankers, largest hedge funds and top bankers in the world invested in these credit risk linked derivatives to substantially improve their earning levels and increased bonus to operating top executives. The investment bankers and international banks were highly leveraged financially with lower capital adequacy than was needed. The sub prime borrowers started defaulting towards end of 2006 and beginning of 2007 resulting into sale of real estate by mortgage financiers. This fueled a substantial fall in real estate prices, the most common underlying security for these loans. The default in sub-prime loans rose aggressively towards the beginning of 2008, in spite of substantial reduction in US federal interest rates by more than 60% to about 2% per annum.

The problem got aggravated when the financial system stopped lending against mortgage-backed securities and banks were unwilling to sell them at a loss. The market price reduction of mortgage backed securities and credit linked derivatives is so substantial that not only liquidity but also solvency of all banks, hedge funds and investment bankers became a matter of serious concern. It is apprehended that this crises will take a further toll much deeper and harder and International Monetary Fund has predicted a world wide recession comparable to 1929 worlds worst recession. The banks are not willing to lend other banks and inter bank financial lending system has came to a halt with LIBOR and EURIBOR ruling at about 200 to 300 basis points over Federal Rates as compared to usual margin of 25 bps to 30 bps. The money is not even available at these rates.

Impact on India?

The Indian Stock Market is already witnessing a selling spree not only by FIIs but also by mutual funds and other domestic institutions and investors. The capital market may see another 20%- 30% fall from current levels. The mutual funds are witnessing indiscriminate withdrawal (redemptions) and Indian Mutual Funds are facing liquidity crisis besides a substantial fall in Net Asset Value (NAV) across the board. There is apprehension of failure of some of Indian private sector banks. RBI and Govt. Of India has announced that there is no such risk. The Indian banking system is also facing severe liquidity crunch with call rates and MIBORC (Mumbai Inter-bank offering rate) touching a high of about 18% to 20%. RBI has recently (during 6th – 11th October week) reduced cash reserve ratio by 1.5 per cent injecting Rs. 60,000 crores in the banking system to address liquidity crisis. In view of a very small exposure (about 450 million $) of Indian banking system to credit link notes and credit derivatives, the Indian banking system appears to be safe. The information technology companies, BPOs, KPOs and other IT enabled services companies are highly dependent on U.S. market and more particularly U.S. financial services corporates, banks and funds. The order book of these IT and IT enabled companies has already taken a substantial hit and top I.T. companies have not only retrenched software engineers on the bench but have also initiated cost reduction exercise including substantial cut in salaries and bonuses. The textile sector and other export dependent industries may also take a hit. However India’s dependence on U.S. and European markets is limited and may at best hit India’s GDP growth rate adversely. The Real Estate market may also witness a severe cut in market price. Indian economy is robust. It may however be very important for Indian Government, Reserve Bank of India, SEBI and other Indian Regulators to strategically move firmly and fast and take necessary corrective actions and regulatory measures.
Monday, September 15, 2008
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Foreign companies having their operations in India would not have to be taxed in the country if their Indian activities have been adequately remunerated in the hands of the Indian entity. In a landmark judgment, the Bombay High court overturned the earlier order of Income Tax Appellate Tribunal Mumbai in a case involving Sony Entertainment Television (SET) Satellite, Singapore and its Indian agent SET Satellite India, and said there is no tax liability on its income generated in the country but relayed abroad. The ruling would imply that foreign companies remunerating their dependent agents in India on an arm’s length basis will not be liable to pay tax in the country. This is because although the agents will constitute a permanent establishment (PE), no profits can be attributed to them. Arms
length price means a price, which is applied or proposed to be applied in such transactions between persons other than, associated enterprises, in uncontrolled conditions.
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Profits of a foreign company arising from offshore supplies to Indian projects are not liable to be taxed in India if the foreign company’s office in India has no role in these projects, according to a ruling by the Income-Tax Appellate Tribunal. The ITAT order last week was on an appeal filed by South Korean company LG Cables Ltd. In this case, the ITAT bench headed by president Vimal Gandi, held that though the agreement for supply of equipment was entered in India, this alone cannot be the ground for taxing the income of the foreign company from these projects.
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In a recent judgment, the Tax Tribunal in New Delhi has held that revenue earned by a non-
resident company from services, which are in the nature of processing of seismic data for oil exploration / extraction project in India, cannot be taxed as fees for technical services as per the provisions of the Indo- Australian Tax Treaty. As per the relevant article of the treaty, if rendering of services results in making available technical knowledge, experience, skill etc. then the same are said to be in the nature of fees for technical services and may be taxed accordingly. Considering the
provisions of this article, the tribunal observed that the processing of seismic data provided by the Indian company to the Australian company, being area specific, cannot be made use of by the Indian company in future without referenced to the Australian company. Therefore, the provisions of said article of the treaty are not attracted and the receipts are not taxable as fees for technical services.
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The Supreme Court ruled that penalty can be imposed on an assessee even if the return income is a loss. The amendment made by the Finance Act, 2002, which came into effect from April 1, 2003, in Explanation 4 to Section 271(1)(c)(iii) of the Income Tax Act could be applied retrospectively. A bench comprising Justice Arijit Pasayat, Justice P Sathasivam and Justice Aftab Alam said Explanation 4(a) to Section l271(i)(c) of the Act intended to levy the penalty not only in a case where after addition of concealed income a loss returned, after assessment becomes positive income but
also in a case where addition of concealed income reduces the returned loss and finally the assessed income is also a loss or a minus figure. The court said that even during the period between April 1, 1976 to April 1, 2003 the position was that the penalty was leviable even in a case where addition of
concealed income reduces the returned loss. It said that when the word “income” is read to include loss it becomes crystal clear that even in a case where on account of addition of concealed income the returned loss stands reduced and even if the final assessed income is a loss, still penalty was leviable
prior to the period of April 1, 2003.
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The Mumbai Income-Tax Tribunal has held that in case of a refund claim that was returned by the authorities to the assessee with directions to submit additional information, the limitation period in relation to such a claim will be computed from the date on which the original claim was filed. In this
case, the assessee, a telecom service provider who was selling recharge coupons for pre-paid services to its distributors, filed a refund claim. The claim filed was returned by the revenue authorities after three months, directing the assessee to submit evidence. When the assessee resubmitted the claim providing the additional information, the department contended that the re-submitted application will be seen as a fresh refund claim and the relevant date of the claim would be the date of the re-submitted application. The tribunal held that the refund claim re-submitted by the assessee was to be treated as being in continuation of the original claim. Hence, the resubmitted application could not be treated as a fresh claim and there was therefore no question of barring it on the ground of limitation.
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The controversy over the ownership of stock options by nominee directors of financial institutions (FIs) may be over. The market regulator SEBI has said that nominee directors can own stock options if the FI which has nominated them permit them to do so, clarifying a hitherto grey area in the employees stock option plan.
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SEBI has amended the norms for portfolio management services (PMS), including asking portfolio managers to maintain an enhanced net worth of Rs. 2 crore from Rs. 50 lakh earlier and PMS to keep assets of their clients in different accounts. SEBI has also notified the SEBI (Stockbrokers and Sub-brokers) (amendment) regulations, 2008 to Include registration of trading and clearing members of
currency derivatives segment.
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Reduction in timelines for rights issue

In order to mitigate risks and to enable listed companies to raise funds from its shareholders in a
more time effective manner, SEBI has decided to reduce the timeline taken for rights issues to 43 days from 109 days currently. The timeline includes starting from the notice period required for calling a board meeting of the issuer to consider the rights issue up to the period stipulated for completion of allotment and commencement of listing and trading of the shares so issued.

Definition of “Qualified Institutional Buyers (QIBs)”

Presently, Foreign Institutional Investors (FIIs) registered with SEBI are included in the definition of QIBs. These FIIs invest in securities in the primary market, either on their account or on behalf of their sub-account(s), in terms of the SEBI (FII) Regulations, 1995. It has been decided to exclude
sub-accounts falling in the categories of “foreign corporate” and “foreign individual” from the definition of QIBs.

Eligibility for making Qualified Institutions Placement (QIP)

Presently, the eligibility criteria for listed companies desirous of making QIP include a condition
that the equity shares of the same class of such companies shall have been listed on a stock
exchange having nationwide terminals, for a period of at least one year as on the date of issuance of notice to shareholders for considering the QIP. It is noted that companies, which have been listed during the preceding one year pursuant to approved scheme(s) of merger/demerger/ arrangement entered into by such companies with companies which have been listed for more than one year in
such stock exchange(s). Such companies may take into account the listing history of the listed companies with which they have entered into the approved scheme(s) of merger / demerger/arrangement.

Pricing norms for QI Placement

In order to facilitate eligible listed companies to raise funds through QIP route, it has been decided to modify the pricing guidelines for QIP by bringing the issue price of the securities offered closer to their market price. The pricing norms for QIPs and for preferential allotment will now be based on
the last two weeks’ average price. Earlier, it was the last 6 months’ average price or the last 2 weeks, whichever was higher.

Lock-in on shares on exercise of warrants issued on preferential basis

Presently, as per the guidelines on preferential allotment, warrants issued on preferential basis are subject to lock-in for a period of one year or three years, as the case may be and lock-in on shares allotted on exercise of such warrants is reduced to the extent such warrants have already been locked-in. It has been decided to subject the shares so allotted pursuant to exercise of warrants to full lock-in period of one year or three years, as the case may be, from the date of allotment of such shares.

Eligibility of shares for promoters’ contribution and offer for sale-Restructuring

Presently, the SEBI (DIP) Guidelines provide that only those shares, which are held by shareholders for a period of at least one year at the time of filing of draft offer document with SEBI, are eligible (i) to be offered for sale and (ii) to be included for the purpose of promoters’ contribution (except in cases where the shares have been issued at the same issue price during the preceding one year). It has been decided to permit offer for sale and inclusion in the promoters’ contribution of those shares which have been acquired pursuant to a restructuring exercise approved by High Court(s), in lieu of business and invested capital which had been in existence for a period of more than one year prior to the restructuring exercise.

Filing of offer documents at SEBI Regional Offices

At present, draft offer documents of issue size up to Rs.20 crores can be filed by lead merchant bankers with such Regional Office of SEBI under the jurisdiction of which the registered office of the issuer company falls. It has been decided to increase this limit to Rs.50 crores.
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The Reserve Bank of India has revamped the norms for restructuring advances, including non-industrial credit. Now, the non industrial companies can also use the corporate debt restructuring mechanism (CDR). The new regulations harmonize the prudential norms across all debt restructuring mechanisms. “Since the principles underlying the restructuring of all advances are identical, the prudential regulations too need to be aligned in all cases.”
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Private sector managed provident funds and superannuation trusts can now have greater exposure in the stock markets. They can soon directly invest up to 15 per cent of their investible funds in share of
companies on which derivatives are available in the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) This has been provided in the new investment pattern for non-government provident, superannuation and gratuity funds issued by the Finance Ministry.
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Bank customers who do not operate their accounts regularly will continue to earn interest rate
of 3.5% on savings bank accounts and on fixed deposits after the maturity period. “Interest on savings bank account should be credited on regular basis whether the accounts is operative or not. If
a fixed deposit matures and proceeds are unpaid, the amount left unclaimed with the bank will attract savings bank rate of interest. Currently, banks pay interest rate of 3.5% on savings bank deposits. RBI has also barred banks from charging any fee of activation of inoperative accounts.
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AD Category – I banks may make remittances for imports, where the import bills / documents have been received directly by the importer from the overseas supplier and the value of import bill does not exceed USD 300,000, subject to the following conditions :

  • Prevailing Foreign Trade Policy.
  • Bonafides of the transactions.
  • KYC / AML guidelines
  • Due diligence about the financial standing / status and track record of the importer customer.
  • It is customary in that trade to receive import documents directly from the overseas exporter.
  • In case the AD Category – I bank has suspicions about the genuineness of the transaction, it should be reported through the Suspicious Transaction Report (STR) to FIU_IND (Financial Intelligence Unit in India).
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It has been decided to allow AD Category - I banks, to regularize cases of dispatch of shipping
documents by the exporter direct to the consignee or his agent resident in the country of the final destination of goods, up to USD 1 million or its equivalent, per export shipment, subject to the following conditions:

  • The export proceeds have been realized in full.
  • The exporter is a regular customer of bank for a period of at least six months.
  • KYC / AML guidelines.
  • Bonafides of the transaction.
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The fluctuations in the foreign exchange market in the recent months have resulted into large foreign exchanges losses. The foreign exchange exposure is becoming a matter of concern.RBI has permitted forward contract, options, swap and similar other structures for hedging foreign exchange risk. Recently there have been serious complaints from the banks’ customers that banks have written options on their behalf without properly apprising them of the risk involved resulting into losses of several hundred crores to business community. Writing of forex options by the banks customers are prohibited by RBI. But banking industry took the liberty in view of certain loopholes in the language of RBI Circular permitting banks to offer cost reduction structures. This is required to be appropriately clarified and corrected by RBI on an urgent basis. A significant lesson has been learnt by financial experts that buying simple vanilla options is most advantageous. RBI and SEBI have recently permitted currency future to be traded on stock exchanges. This is an excellent idea; however, the currency future should be restricted only to persons having underlying currency risk for hedging and not for the purpose of speculation.

The foreign currency future dealings by speculators could be very dangerous and is against the spirit of RBI policy of permitting hedging in foreign currency on the basis of underlying or expected exposures only. The government of India may reconsider the matter in consultation with SEBI and RBI to ensure that large losses are not incurred by small uninformed investors in the currency futures
market. It may also be worthwhile to consider permitting vanilla options contract through transparent
mechanism of the stock exchanges, wherein the authorized dealer category-1 (Banks) may be permitted to write the option and the user of the banking system can buy the option. Risk management for banks also needs detailed regulatory advice.
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The Government of India, as it appears from the media report, is considering a mandatory approval by Foreign Investment Promotion Board (FIPB) / Secretariat of Industrial Approval (SIA) Govt. of India before any downstream investments are made by the Companies who are currently owned partly or fully by non-resident Companies or non- resident individuals.
As per the current policy investments in India by foreign companies and foreign nationals besides non-resident Indians are quite liberal and except a very small list of activities in which foreign investments are banned and some sectoral caps in certain specific industries / service sectors, the investment by foreign companies, foreign nationals and non-resident Indians are under automatic route. In only some specific circumstances the list being very small, permission of the Government of India is necessary. The proposed amendment is being brought in, in view of apprehended misuse of the automatic approval scheme. The proposal of the Government would create a big hurdle in operation of a large number of Indian Companies where there is a certain degree of foreign shareholding and almost all major or minor investments made by these Companies will require approval of the Government of India. This is against the liberalized policy and the Government should reconsider its thinking.

Government of India to prescribe that all the Companies having shareholding of foreign companies, foreigners and non resident Indians may disclose such shareholding in their financial statements and / or annual returns filed with the Registrar of Companies. Besides such a disclosure they should also enclose a certificate from the auditors of the Company that the downstream investments made by these Companies adhere to FEMA restrictions including sectoral caps and the fact that neither directly nor indirectly, the beneficial interest of foreigners and foreign companies have breached beyond sectoral limits. This Certificate from auditors can also confirm that no such investments have been made by such companies in the prohibited sectors including real estate, agriculture, SSI etc. The Reserve Bank of India may consider making it mandatory for all the Companies having foreign shareholding to file the aforesaid Certificate with RBI on an annual basis. The Department of Industrial Policy and Promotion, Ministry of Industries, Government of India may please consider an appropriate revision of Press Note No. 9 (1999 series).
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In continuation with the Circular No.F.1/5/SE/83 dated May 31, 1984 of Government of India, Ministry of Finance, Department of Economics Affairs, Stock Exchange Division, stock brokers/clearing members are directed to carry out complete internal audit on a half yearly basis by independent qualified Chartered Accountants. The scope of such audit shall cover, interalia, the existence, scope and efficiency of the internal control system, compliance with the provisions of the SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, circulars issued by SEBI, agreements, KYC requirements, Bye Laws of the Exchanges, data security and insurance in respect of the operations of stock brokers/clearing members. The first such audit period should be from October 1, 2008 to March 31, 2009.
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The government has directed all commodity exchanges to divest foreign equity exceeding the
permitted ceiling of 49% by June 30, 2009. According to guidelines for foreign investment in commodity INSURANCE exchanges, a composite ceiling of 49% is allowed, comprising 23% under portfolio investment and 26% under FDI route. The direction by the Department of Industrial Policy and Promotion (DIPP) forms part of Press Note 2 of 2008.
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It has been decided, in consultation with the Government of India, to allow Registered Trusts and Societies which have set up hospital(s) in India to make investment in the same sector(s) in a Joint
Venture or Wholly Owned Subsidiary outside India, with the prior approval of the Reserve Bank. Trusts / Societies satisfying the eligibility criteria as prescribed in the Annex to the above mentioned circular may submit the application/s in Form ODI-Part I, through their AD Category - I bank/s to the
Reserve Bank for consideration. The other terms and conditions and reporting requirements listed in the above mentioned A.P. (Dir Series) Circular No. 53 dated June 27, 2008 remain unchanged.
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The finance ministry exempted from excise duty small-scale industries (SSI) that manufacture branded goods for large companies. The exemption shall be available for a turnover of goods not exceeding Rs. 90 lakh in the remaining part of the financial year. SSI units with clearances not exceeding Rs. 4 crore in 2007-08 would be eligible for the exemption.
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The Centre has pitched for a unified goods & services Tax (GST) model as opposed to the
position taken by the states. The empowered committee, which represents the states, had suggested separate goods and services taxes. The Centre, which is giving finishing touches to its response
to empowered committee’s report on GST, is understood to be in favour of the conventional model followed globally.
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In a significant ruling, the larger Bench of the Delhi Income-Tax has held that service tax liability
of the recipient of a taxable service who receives such service in India from a non- resident, commences from January 1, 2005 and not since August 16, 2002. The tribunal held that a definition clause cannot be read as a substantive provision creating a liability in a tax statute. As the taxable
services were only notified through Jan 1, 2005 notification, the recipient could be made liable to tax from that date alone.
Thursday, August 14, 2008
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The Ministry of Consumer Affairs has given in principle approval to the proposal of India bulls and MMTC to set up the country’s fourth national level commodity exchange to facilitate trade in commodities across all sectors. The exchange was proposed to be set up in Gurgaon on the outskirts of the national capital
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Those who have cleared Inter Exam Can Be A/C Technicians. The Institute of Chartered Accountants of India has opened new career option for unsuccessful candidates aspiring to become chartered accountants. Candidates who could not clear CA finals will just have to appear for 100-hour computer training to get the accounting technician certificate.
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SAT has set aside the impugned order of the SEBI board barring D-Link India Ltd from dealing in securities for one month, saying it had provided misleading information to the investors relating to the buyback of its shares SAT has held that a company is under no obligation to buyback its securities even after its shareholders have passed a special resolution authorizing it to do so. Section 77 A of the Companies Act is only an enabling provision. Moreover, Regulation 15 of the buyback regulation read with regulation 8 requiring the company to make a public announcement, if the company wanted to buyback makes it abundantly clear that it is only when the second step of making an offer to the shareholders has been taken that the company is obliged to go through the buyback.
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The securities Appellate Tribunal has set aside the SEBI order which had directed German company Heidelberg Cement (represented by Cementrum IB.V) to pay the pubic shareholders of Mysore Cements Rs 72.50 per equity share in its open offer , instead of Rs 58 per equity share that it had paid. Basically SEBI was asking that the non-compete fee paid by Cementrum to the promoters of Mysore Cements should be added to what was paid to the delay.