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Saturday, March 14, 2009
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SEBI fines Indiabulls for 'manipulaltive & fraudulent' deals

The Securities and Exchange Board of India has slapped a fine of Rs. 15 lakh to India bulls Securities. As per SEBI, the stock brokers trading in F& O contracts at NSE were buying and selling almost equal quantities of contracts within the day and such buy or sell was synchronized in nature.
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Takeover Code amended –

SEBI has amended its take-over regulations by inserting a regulation (29A) providing relaxation from the strict compliance of certain clauses under chapter III of the regulations to companies whose boards were superseded by government. Chapter III relates to the timing, pricing and size of open offers by acquirer companies.

Bonus issue
In case of bonus issue of shares, SEBI has decided lowering timelines for their completion, from six months to 15 days, in cases where no shareholder approval is required.

Preferential Issue of Warrants
In case of preferential issue of warrants to promoters, the up-front payment has been raised to 25 per cent, from 10 per cent earlier.

Draft Red Herring Prospectus-validity
The validity of SEBI’s observations to a public issue has also been stretched to 12 months, from the earlier three months

Announcement of price band

At present, the floor price or price band in an initial public offer through the book building process is required to be disclosed in the Red Herring Prospectus registered with the Registrar of Companies, before the issue opening date. The amended DIP Guidelines permit the issuer making an initial public offer to announce the floor price or price band after the date of registration of the Red Herring
Prospectus with the Registrar of Companies, at least two working days before the issue opening date.

Differential Right Securities

The DIP Guidelines have now been amended to provide for the policy for considering relaxation from strict enforcement of requirements of rule 19(2) (b) of SCRR in case of proposal for listing of following securities by a listed issuer:-

  • Equity shares with differential rights as to dividend, voting or otherwise, offered through rights or bonus issue.
  • Warrants issued along with Non Convertible Debentures through Qualified Institutions Placement.
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It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within legislation. Keeping this principle in view, the meaning of the term 'used outside India' has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3.

For example

  • under Architect service (a Category I service [Rule 3(1)(i)], even if an Indian architect prepares a design sitting in India for a property located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India
  • if an Indian event manager (a Category II service [Rule 3(1)(ii)] arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India.

For the services that fall under Category III [Rule 3(1) (iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase 'used outside India' is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(1)(iii)], it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. In all the illustrations mentioned above, what is accruing outside India is the benefit in terms of promotion of business of a foreign company. Similar would be the treatment for other Category III [Rule 3(1)(iii)] services as well.
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It is clarified that screening of a movie is not a taxable service except where the distributor leases out the theater and the theater owner gets a fixed rent. In such a case, the service provided by the theater owner would be categorized as 'Renting of immovable property for furtherance of business or commerce' and the theater owner would be liable to pay tax on the rent received from the distributor. The facts of each case and the terms of contract must be examined before a view is taken.
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The Supreme Court has dismissed two appeals by the Kerala Government demanding sales tax on lottery tickets. According to the latest judgment, the tickets are not goods for the purpose of sales tax, the court held that a lottery ticket had no value by itself. It is a mere piece of paper. Its value lies in the fact that it represents a chance or a right to a conditional benefit of winning a prize of a greater value than the consideration paid. Earlier rulings like that of the Constitution bench in Sunrise Associates vs. Govt. of Delhi were followed to reject the government's contention. The judgment emphasized that the claim of the purchaser of a lottery ticket is excluded from the definition of 'goods' under the Sales of Goods Act and the sales tax laws of the states.
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Finance Minister Pranab Mukherjee has given corporate India a very big incentive to move into SEZs. He has allowed companies to keep the tax rebate earned on exports from SEZs separate from a similar rebate earned from units in domestic tariff area (DTAs) - the rest of the country. Mukherjee has promised to bring changes to Section 10AA of the Income Tax Act for this purpose. "This has resulted in discriminatory treatment of assesses having units located both in SEZ and DTA vis-à-vis
assesses having units located only within the SEZs.
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The tax authority in the US has now made disclosure of offshore accounts mandatory even for non-resident individuals or corporates who have significant business in the US. This has ramifications for Indians working or having business interest in the US and also the subsidiaries of Indian companies registered there. The expanded regulation requires certain non-residents to declare their 'financial account' in a foreign country if the aggregate value of these accounts exceeds $10,000 (about Rs.5, 00,000) at any time during the calendar year.
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When an expenditure payable is waived subsequently, resulting in refund or benefit to the assessee, it is taxable as income. The expenditure might have been paid out and hence refunded or the expenditure is recorded in the books as payable and allowed as a deduction previously - on waiver, would be covered by Section 41(1) of the Act. The condition for applying Section 41(1) is the allowance of deduction earlier and subjecting it to tax later on its waiver. Explanation 1 to Section 41(1) covers even unilateral transfer of liability by write off in the books of account by the taxpayer.
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Banks can now open and renew diamond dollar accounts (DDA) without the central bank’s prior approval, the Reserve Bank of India said in a notification. DDAs were opened by companies dealing in purchase or sale of rough/cut & polished diamonds or with a track record of at least three years in import/export of diamonds and colored gemstones and having an average annual turnover of Rs. 5 crore or more in the preceding three licensing years (starting April-March 2010).
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Department of Industrial Policy and Promotion (DIPP) have brought out four press notes significantly amending the existing FDI norms.

Press Note 1 (2009), allows Foreign Investment in the following two sectors-

  • Facsimile of foreign newspaper

FDI up to 100% is permitted with prior approval of the Government in publication of facsimile edition of foreign newspaper provided the FDI is by the owner of the original foreign newspaper whose facsimile edition is proposed to be published in India. Only companies registered under the provisions of the Companies Act 1956 can undertake the publication of such facsimile edition.

  • Indian edition of foreign magazine
Foreign Investment upto 26% is permitted with prior approval of the Government in publication of Indian editions of foreign magazines. Foreign Investment for this purpose includes FDI and investment by NRIs/PIOs/ FII.

Foreign Investment Computation
Press Note 2 (2009 series), issues the new guidelines for calculation of Total Foreign Investment in
  • Total Foreign Investment means Direct as well as Indirect Foreign Investment.
  • Counting of Direct Foreign Investment
All investment directly by a non resident entity into the Indian company would be counted towards foreign investment.

  • Counting of Indirect Foreign direct Investment
Foreign Investment through the investing Indian Company would not be considered for the purpose of Indirect Foreign Investment in case of investing Indian Company is owned and controlled by the resident Indian Citizens and/or Indian Companies which are owned and controlled by resident Indian Citizens. If the Investing Company is owned or controlled by Non-Resident Entities then all such investment would be considered for the purpose of Indirect Foreign Investment except where Investee Company is 100% subsidiary of investing company, indirect foreign investment will be limited to proportionate foreign investment in investing company.

Additional conditions for approval by Government of India include disclosure of information 
about ownership and control details in the Indian investing Company and any shareholder or interse
agreement having effect on the appointment of Board of Directors, exercise of voting rights, creation of disproportionate voting rights, any incidental matter thereof.

Transfer of Ownership - Mandatory Govt. approval where sectoral cap is there

Press Note 3 (2009 series) provides guidelines for transfer of ownership or control of Indian
Companies in sector with caps from Resident Indian Citizens to Non-Resident entities. It is to be noted that this guideline will not be applicable for sectors where 100% foreign investment is permitted under automatic route. In sector with caps, Government/FIPB approval will be required in the following cases-

  • An Indian Company is being established with foreign investment and is owned or controlled by a Non-resident entity.
  • The control or ownership of an existing Indian company, which is currently owned or controlled by resident Indian citizens and Indian companies which are owned or controlled by resident Indian citizen, is preferred to transferred to a non-resident entity as a consequence of transfer of shares by way of amalgamation, merger, acquisition.
Downstream Investment

Press Note 4 (2009 series) clarifies the Guidelines for downstream investment by investing Indian
companies owned or controlled by Non Resident Indians
Policy of Downstream Investment applies to:

  • Operating Companies: Foreign Investment in Operating Companies must comply with the Sectoral conditions and caps with regard to the sectors in which these companies are operating.
  • Operating cum Investing companies: Foreign Investment in such companies as well as the Indian Company in which downstream investment is made by such companies must comply the Sectoral caps and conditions of the sector in which they are operating.
  • Investing companies: Foreign Investment in investing companies will require prior approval of Government/FIPB regardless of the amount or extent of foreign investment. Indian Company in which downstream investment is made by such  investing companies: Foreign Investment in 
  • investing companies will require prior approval of Government/FIPB regardless of the amount or extent of foreign investment. Indian Company in which downstream investment is made by such
Downstream Investment shall be subject to following conditions:
  • Company making investment must within 30 days notify SIA, DIPP and FIPB of such investment;
  • Resolution by the Board of Directors supported by the Shareholders Agreement, if any for the induction of foreign equity;
  • Issue/transfer pricing/ valuation shall comply with the SEBI/RBI Guidelines;
  • Investing companies need to bring the requisite funds from abroad rather than using leverage funds from domestic market. This does not restrict the downstream operating companies to raise debt in the domestic market.
New Definitions

  • Resident Indian citizen means a person resident in India AND a citizen of India.
  • Non-resident entity is a person resident outside India.
  • Investing Company means an Indian company making equity/preference/CCD investment into another Indian Company.
  • Owned by resident Indian citizen and Indian companies, which are owned and controlled by resident Indian citizen means that more that 50% of the equity interest is beneficially owned by resident Indian citizen and Indian companies, which are owned and controlled by resident Indian citizen
  • Controlled by resident Indian citizen and Indian companies, which are owned and controlled by resident Indian citizen means that resident Indian citizen and Indian companies, which are owned and controlled by resident Indian citizen have the power to appoint majority of its directors.
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New valuation, licensing Norms set for Cos

CERC has reduced the types of licences from six to three. The category-I license holder will have no
restriction on the volume of electricity to be traded in a year but it will show a higher net worth of Rs. 50 crore. The category –II licensee will have to limit trading of electricity to a maximum of 500 million units in a year and have to have net worth of Rs. 25 crore while category-III licensee will be permitted to trade up to 100 million units of electricity in a year and have a net worth of Rs. 5 crore.
The net worth definition has also been revised to discount loans and advances given to associates. So far, CERC has issued trading licenses to 42 companies, such as Tata Power, Reliance Energy, RPG Power, GMR Energy and DLF Power. The new regulation has also specified that CERC will also regulate electricity imported from other countries.
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In order to strengthen the information sharing system among banks in respect of the borrowers enjoying credit facilities from multiple banks, the banks are required to obtain regular certification by a professional, preferably a Chartered Accountant, regarding compliance of various statutory prescriptions that are in vogue. In addition to Chartered Accountant, banks can also accept the
certification by a Company Secretaries & Cost Accountants.
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A delegation led by Mr. Vinod Jain, Member Central Council of The Institute of Chartered Accountants of India and Mr. Avineesh Matta, President, AICAS met Shri Uttam Prakash Agarwal, President of the Institute of Chartered Accountants of India and Shri Amarjit Chopra, Vice
President ICAI on 7th March, 2009. The president and vice president apprised the members of the delegation about actions being taken by the Institute including meeting Mr. Pawan Bansal State Minister of Finance, meeting RBI Executive Director and General Manager as well as meeting Deputy CAG to ensure that branch auditors as well as central statutory auditors of banks are appointed by an Independent Regulatory Authority in future. The Council of the Institute is committed to vigorously take up the aforesaid matter. The President and Vice President of the Institute committed to the delegation that the Institute will further intensify its efforts to take up the
matter at the highest level in the Government including the Prime Minister, RBI Governor, senior bureaucrats as well as senior political leaders to convince them that in the interest of corporate governance as well as in the interest of equitable allocation of bank audits, it is important that the appointment of auditors are made by independent regulatory authority and Board of Directors of the banks should not be allowed to appoint auditors. The earlier system designed at the behest of the then secretary NIRC Mr. Vinod Jain in 1983 has worked well for last 25 years plus and is only needed to be more transparent and equitable. The All India Chartered Accountants’ Society and the members of the delegation assured the Institute to supplement Institute’s efforts including meetings with senior political leaders, bureaucrats and media. The delegation included Mr. Pramod Kapur, Vice President
AICAs, Mr. Ajay Matta, Mr. Rajiv Kohli, Mr. Rajesh Rustagi, Mr. Yatinder Khemka, Mr. Pramod Jain, and Mr. Manoj Pahwa, Mr. Deepak Bahl, Mr. Sanjiv Sood, Mr. V.P. Jain, Mrs. Binu Nanda, Mr. Sanjiv Goel besides large number of senior and young chartered accountants.
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The Indian economy which has been growing at the rate of more than 8-10% per annum for last about 5 years met a road block and the growth has severely slowed down. The manufacturing sector has
shown a negative growth in the recent months besides substantial downfall in demand for automobiles, textile, exports, information technology, cement and steel. The real estate and infrastructure sector is witnessing a very severe cash flow issue due to sudden halt in investment inflows. Most of the housing and commercial real estate projects implementation has significantly slowed down. On the other hand the banks are not eager to lend money to manufacturing sector, infrastructure sector, real estate sector, housing sector and even to service sector. The banks are flush with funds, in view of diversion of most of the public savings towards banks fixed deposits. The banks are neither giving credit nor have been able to reduce the lending rate significantly. In the international market, to curb recessionary tendencies, US federal has reduced the federal interest to almost near to zero whereas Bank of England has reduced its reference rate to 1% , lowest in last 300 years. The foreign exchange rates, more particularly US dollar is moving upward and has created a new record high. The reason for demand supply gap is to be diagnosed. The American and European economy are still moving downwards and are expected to reverse their trend only in next 6 to 9 months. The reduction of inflation rate to 2.43% (7 years low) indicate a threat of deflation & increasing money supply (M3) at this stage is crucial to address this major risk. The Indian economy is apprehensive to get into recessionary mode due to lack of sincere efforts and initiative on the part of Government of India. The Government has taken a laudable step to reduce excise duty rates and service tax rates but has failed to withdraw multiple central taxes and has also not been able to convince State Governments to significantly reduce VAT and other state levies to provide a push to
the Indian economy. The Government has also not undertaken any major capital expenditure on infrastructure, power and manufacturing sector, which is very necessary to provide demand push into the economy. Massive rural, irrigation & infrastructure development projects can be started by the govt. Revenue spending by govt. need to be reduced significantly. Only large advertisements for
inaugurating certain major initiative are seen regularly in the newspaper and in the media. However, no significant amount has been spent or even committed to indicate the seriousness of the Government. No major contracts have been awarded. The availability of sufficient credit at reasonable cost has to be ensured by the Government. The announcements reducing interest rate on new housing loans and car loans are elusive, in the absence of enough borrowings due to lack of confidence. The larger size, medium size as well as small sector industries are severely suffering due to difficulties in financial closure and lack of resources. The capital market has already dried up. The private equity investors have become apprehensive. The Government can consider equity funding of PPP projects in various sectors and can also incentivise and convince the banks to lend for all genuine
projects and borrower needs. The distress sale of real estate projects as well as inadequate implementation of projects under progress will only add perils to the current economic outlook.
The export of textile, handicraft & other item have fallen sharply. The govt. has failed to support the export sector. The non-resident Indians can be approached with aggressive marketing to invest in India as a safe heaven. The investing & working conditions are to be improved significantly by infrastructure & fiscal support. The Indian economy is at a stage that things can become positive very fast, provided the Government is able to bring back the confidence into the economy. Our dependence on the international economy is limited. The Chinese economy has already shown certain sign of improvement and India can follow. We need a strong and active political leadership to lead us back to growth. Indian public is in the election mood and we convey our best wishes for the right selection of right candidates and political parties, who can take adequate strategic action.