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Thursday, October 15, 2009
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FOLLOW ACCOUNTING STANDARDS CORPORATE RESTRUCTURING

Securities And Exchange Board of India (SEBI) has decided that it would bring out applicable accounting standards to be followed by a listed company undergoing corporate restructuring by way of merger, demerger or amalgamation. Such listed companies will have to submit an auditor's certificate to the stock exchanges to the effect that the accounting treatment followed in respect of financials contained in the corporate restructuring scheme, is as prescribed by SEBI. The Board will prescribe 'applicable accounting standards' through an amendment to the listing agreements.
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SEBI CRACKS DOWN ON NON- COMPLAINT CLIENT ACCOUNTs

The portfolio manager may discontinue the services to those clients who are not co-operating for opening separate client accounts, after serving at least three notices, and return the securities/funds to the client. The portfolio manager shall maintain such client-wise records for a period of eight years.
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SEZs GET INFRASTRUCTURE LENDING STATUS

The Reserve Bank of India (RBI) has classified loans to Special Economic Zones as infrastructure lending. The policy instructions came about a month after the finance ministry had allowed SEZ developers to access overseas loans through the external commercial borrowing route. RBI has also said exposure of banks towards acquisition of SEZ units or purchase and working capital requirements, loans to developers, who have entered in to lease contracts with units for a period
equal to the repayment time of the credit availed and loans to captive SEZs, like the ones being developed by Infosys and TCS will be treated as infrastructure lending.
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LICENSE NECESSARY TO IMPORT ELECTRICITY

In a bid to monitor import of electricity from power plants in the neighboring countries, the government has clarified that electricity from overseas generation facilities will be allowed in to the country only if a license is obtained. According to CBEC guidelines, electric power has a tariff code of 27160000 and attracts an import duty of Rs. 2,000 per 1,000 kwh.
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CBDT ORDERS SCRUTINY OF NEW REVENUE SOURCES

The Central Board of Direct Taxes has issued instructions to take all returns filed by companies paying royalty on mining contracts for scrutiny assessment. The CBDT has directed that the interest payments on delayed compensation and wheeling charges paid by electricity distribution companies to transmission line owners will be subject to tax deducted at source under section 194A. Under Section 194A, "which deals with tax deducted at source on interest other than interest on securities", TDS will be deducted at 20.6 per cent. The board has directed the department to make a scrutiny of all companies, especially the loss making ones, to have deferred TDS payments. The board has also asked the department to take return of all sports bodies engaged in commercial activities and private educational institutions for scrutiny assessment. This is because the definition of charitable purpose has been amended, making some of the income of trusts taxable.
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I-T SET TO RECOVER Rs. 125 CR FROM STOCK EXCHANGE MEMBER- BROKERS

The Income tax department seeks to raise Rs. 125 crore from stock brokers who hold membership card with stock exchanges.The decision to send demand notices to card holding brokers came after a recent high court ruling which held that the depreciation cannot be claimed on membership cards, while calculating tax liabilities.
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PURCHASE OF SOFTWARE FROM GLOBAL VENDORS ATTRACT TDS

The Karnataka High Court has ruled that technology firms are subject to withholding tax (deduction of tax at source) on purchase of software from global vendors such as Microsoft. This would push
technology firms and branded software distributors into a corner as they will be required to withhold 10- 20% on their software sale.The division bench of Justice DV Shylendra Kumar and Justice Arvind Kumar pronounced the judgment while upholding an appeal by the income-tax department that technology firms were legally obliged to withhold tax on software purchases. The order is with retrospective effect.
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I-T LENS ON BUYOUTS OF UNLISTED FOREIGN FIRMS

Acquisition of unlisted foreign companies by Indian corporate has come under the scanner of income tax authorities who plan to scrutinize the deals to ensure they are not being structured to evade tax. Deals involving equity swaps are particularly in focus, as these could be used to transfer part-ownership of Indian companies to overseas jurisdictions. Valuation of unlisted entities in many countries is an unregulated area as no public interest is involved. This allows acquisition of unlisted foreign companies at inflated valuations. As a result, a large amount of cash or ownership of Indian company moves to a foreign entity and essentially amounts to asset-stripping of the domestic firm, which could have tax implications. The fundamental objective behind the department's proposal is to prevent tax evasion by domestic entities, as they may not declare actual profit or gain through these transactions.
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PICK & DROP FACILITY NOT TAXABLE

ITAT has ruled that Pick-up and drop transport facility provided by employers is not a perquisite and hence not liable to tax. In a decision that has implications for sectors such as BPO and IT, the Mumbai Income Tax Appellate Tribunal has held that companies providing such a facility were not liable to deduct tax on the expenditure incurred on it.
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ISSUE OF BANK GUARANTEE ON BEHALF OF SERVICE IMPORTERS

Banks are now permitted to issue guarantee for amount not exceeding USD 500,000 or its equivalent
in favour of a non-resident service provider, on behalf of a resident customer who is a service importer, subject to following conditions

  • Satisfied about the bona fides of the transaction
  • Ensure submission of documentary evidence for import of services
  • Guarantee to secure direct contractual liability arising out of a contract between a resident & a non-resident.
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ADVANCE REMITTANCE FOR IMPORT OF SERVICES

The limit for advance remittance for all admissible current account transactions for import of services
without bank guarantee has been raised from USD 100,000 to USD 500,000 or its equivalent. It is clarified that the increase in the limit for advance remittance for all admissible current account transactions for import of services without bank guarantee is not applicable for a Public Sector Company or a Department/ Undertaking of the Government of India/ State Governments.
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MORE FOREIGN INVESTMENT FOR NEWBORN FIRMS

The government has decided that a newly-formed company 'not having operations or downstream
investments' should not attract para 5 of Press Note 4 if its proposed field of business is clearly defined and does not require prior approval. Press Note 4 divides foreign investment-seeking companies into four classes: ones that undertake only business operations, ones that undertake business as well as investment, ones that undertake only investment and ones that do neither. According to guidelines, the companies that undertake only investment activities or the ones that have neither investment not business operations need government approval for foreign investment, but the conditional relaxation is for the second category. Such companies can now raise foreign investment up to the limit allowed in that business activity since the intention of doing business is evident from a company's charter filed with the registrar of companies.
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IRDA GUIDELINES ON INSURANCE SERVICE BY AGENTS

According to the circular issued to the insurers and agents (both individual and corporate), the agreement between the agent and the insurer must be for a  minimum of three years, unless there is instance of fraud or non-performance. Moreover, the onus of servicing the existing policies would lie with the insurer. This includes verification of the details of the policyholders by the insurer and the agent and identifying officials for future servicing of the policies. The circular adds that all policies are to be serviced by the insurer in keeping with the standards prescribed.
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SYSTEMS AUDIT OF MUTUAL FUNDS

Considering the importance of systems audit in the technology driven asset management activity, it has been decided that mutual funds shall have a systems audit conducted by an independent CISA/CISM qualified or equivalent auditor (DISA). The systems audit should be comprehensive
encompassing audit of systems and processes inter alia related to examination of integration of front office system with the back office system, fund accounting system for calculation of net asset values, financial accounting and reporting system for the AMC, Unit-holder administration and servicing systems for customer service, funds flow process, system processes for meeting regulatory requirements, prudential investment limits and access rights to systems interface. Accordingly, MF are advised to get the above systems audit conducted once in two years. For the financial years April 2008 - March 2010, the systems audit should be completed by September 30, 2010.
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PRUDENTIAL NORMS ON INCOME RECOGNITION

On an account turning NPA, banks should reverse the interest already charged and not collected by debiting Profit and Loss account, and stop further application of interest. However, banks may continue to record such accrued interest in a Memorandum account in their books, as is the practice currently followed by some banks. For the purpose of computing Gross Advances, interest recorded in the Memorandum account should not be taken into account.
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FINANCE FOR HOUSING PROJECTS

The Hon'ble High Court of Judicature at Bombay observed that the bank granting finance to housing /
development projects should insist on disclosure of the charge / or any other liability on the plot, in the brochure, pamphlets etc., which may be published by developer / owner inviting public at large to purchase flats and properties. The Court also added that this obviously would be part of the terms and
conditions on which the loan may be sanctioned by the bank.
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INTRODUCTION OF INTEREST RATE FUTURES - NBFCs

It has been decided that NBFCs may participate in the designated interest rate futures exchanges
recognized by SEBI, as clients, subject to RBI / SEBI guidelines in the matter, for the purpose of hedging their underlying exposures. NBFCs participating in IRF exchanges may submit the data in this regard half yearly, in the format prescribed by RBI/SEBI.
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PRIOR APPROVAL OF RBI IN CASES OF ACQUISITION / TRANSFER OF CONTROL OF NBFCs ACCEPTING DEPOSITS

To enable RBI to verify that the 'fit and proper' character of the management of NBFCs is continuously maintained, it has been decided that any take over / acquisition of shares of a deposit taking NBFC or merger/amalgamation of a deposit taking NBFC with another entity or any merger/
amalgamation of an entity with a deposit accepting NBFC that would give the acquirer / another entity control of the deposit accepting NBFC, would require prior permission of RBI.
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CREDIT OFFTAKE NORMS FOR HOTELS RELAXED

Reserve Bank of India (RBI) has relaxed the norms for credit off-take for the hospitality sector. Under the new guidelines, hotels have been taken out of the real estate exposure for banks. However,
the rider in the guidelines is that it will be applicable to “those entrepreneurs who themselves run
these ventures”. As a result, the loans becoming cheaper as well as easier to avail for the hospitality
sector.
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RBI, SEBI TO REGULATE NCDs JOINTLY

Non-convertible debentures (NCDs) of less than one- year maturity will now be regulated jointly by financial and market regulators. The decision was taken at a meeting between the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). The two regulators agreed that NCDs needs to be regulated following huge investments by mutual funds in fixed income plans and banks as it posed a systemic risk in case there was any problem in redemption of these instruments.
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NO MULTIPLE BPLRs

The Reserve Bank of India (RBI) is not in favour of a multiple Benchmark Prime Lending Rate (BPLR) mechanism as proposed by bankers. BPLR is the rate at which banks should lend to the more creditworthy customers, and factors in the cost of funds, factors in the risk, the operational cost and a margin.However, corporate loans with a tenure of less than a year and housing loans could be kept outside the purview of the new reference rate mechanism.
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RBI CAUTIONS BANKS ON GROUP EXPOSURE RISK IN REALTY SECTOR

The Reserve Bank of India (RBI) has told banks to meticulously assess the inherent group risk on
borrowal accounts coming under the real estate category. Further, while assessing the loan requirements of large builders/land developers, banks should carefully analyse the financial credentials / viability of the borrowers on a consolidated basis supported by the consolidated accounts / position of the group. Banks should also examine the financial credentials/ viability of the relevant unconsolidated related entities such as special purpose vehicles (SPVs).The current practice in the real estate sector is that builders / developers hive off each project as a special purpose vehicle so that projects are ring-fenced from each other.
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PRIORITY SECTOR LENDING -SERVICE SECTOR

It has been decided to include loans granted by banks in respect of following activities under Micro and Small (Service) Enterprises within the priority sector, provided such enterprises satisfy the definition of Micro and Small (Service) Enterprises

  • Consultancy Services including Management Services
  • Composite Broker Services in Risk and Insurance Management
  • Third Party Administration (TPA) Services for Medical Insurance Claims of Policy Holders
  • Seed Grading Services
  • Training-cum-Incubator Centre
  • Educational Institutions
  • Training Institutes
  • Retail Trade
  • Practice of Law, i.e. legal services
  • Trading in medical instruments (brand new)
  • Placement and Management Consultancy Services and
  • Advertising agency and Training centres

Accordingly, there will be no separate category for "Retail Trade" under priority sector. Loans granted by banks for Retail Trade (i.e. advances granted to retail traders dealing in essential commodities, consumer co-operative stores; and advances granted to private retail traders with credit limits not exceeding Rs. 20 lakh) would henceforth be part of the Small (Service) Enterprises.
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ICAI EDUCATIONAL INITIATIVE TOWARDS SUSTAINABLE GROWTH

The profession of chartered accountants is facing new challenges as well as larger opportunities. The course curriculum of the Institute has been revised continuously to cater to the changing needs of industrial and service sector as well as potential clientele. The education delivery system of the Institute is further required to be geared up to provide for high quality and low cost structured class room education to students of chartered accountancy. It is not only important to provide detailed classroom teaching at the CA Intermediate level (PCC/IPCC) as well as at the Final level, it is all the more important to provide for the effective class-room education to build capable professionals, duly equipped with communication, presentation and professional skills. The class-room education is to be supplemented by practical case study, group working, group discussion and effective monitoring of practical training being provided to the students of chartered accountancy. It is very important to bring forth a high level of quality education and training across India to all sections of students undergoing training in large, medium and small chartered accountant firms. The class-room education can be provided on the platform of the Institute, may be held on Saturdays and Sundays, to improve real competitive edge of the chartered accountants over other professions and to inculcate skills to develop management skills and entrepreneurial skills among st CA profession. In the process support to the students in mufussil towns will be inevitable and important. Lot of migration to big cities
happens only because of opportunities of class room education available there. Why the students leave the coziness of their homes at the young age and take unwarranted stress amidst the anxiety of big city life. Time to rethink.
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CA PROFESSION: INITIATIVES FOR PROFESSIONAL OPPORTUNIIES

The Indian industry and service sector has shown impressive recovery and the capital market is towards new take off. The growth of the Indian economy as well as the international economy has
started regaining momentum. In this backdrop, it is important to prepare the profession of Chartered
Accountants to reap the increasing opportunities knocking at the door. The following important initiatives are required to be taken at the level of institute and the profession:

  • Undertake comprehensive branding of CAs
  • Organize campus interviews for placement and employment of chartered accountants in industry and service sector in a more planned and effective manner.
  • It is important to leverage various centers of excellence, education forums and professional development forums of the Institute and the profession to further enhance and update the specialized professional skills with enhanced presentation and communication profile of chartered accountants to enable them to reap the opportunities which they duly deserve.

It may be necessary to have a structured institutionalized mechanism to support the
members willing to establish themselves as practicing professionals and to provide them hand-holding support and guidance as well as opportunities.
  • A large number of employers in large scale as well as in medium scale are looking for proactive chartered accountants to man various strategic positions. It is important to provide a link and channelize skilled chartered accountants to these positions in the varied sectors of accounting, auditing, taxation, compliance, finance, knowledge process outsourcing (KPO) and commercial functions besides middle level and top level management positions.
  • A large number of newly qualified and experienced chartered accountants wish to establish as practicing professionals in view of increasing requirements from potential clients arising out of the economic growth. It may be necessary to have a structured institutionalized mechanism to support the members willing to establish themselves as practicing professionals and to provide them hand-holding support and guidance as well as opportunities.
  • To provide more and more opportunities for impalement of chartered accountant firms towards various opportunities being created in the public sector and in the government sector.
  • The government should consider appointment of auditors by regulators like RBI, SEBI, TRAI, MCA and ICAI in companies in which public is substantially interested either as joint auditors or as special auditors. This will also improve corporate governance.
  • The present system of inviting tenders by various government and semi government bodies and institutions is not working effectively and appropriately. It is important to provide for certain minimum level of professional fee based on number of hours. The tendering may be restricted to obtaining  technical bid and the government and semi-government organizations may offer a reasonable remuneration based on the fee scale recommended by the Institute of Chartered Accountants of India rather than on the basis of L-1 (lowest price offered).
  • The voluntary bodies of chartered accountants need to play a proactive role to harness the increasing professional opportunities for members in industry and members in practice.
  • While a special emphasis and support is required to younger professionals and sole proprietary firms, it is also important to strategize build up of strong mid size and large size firms to cater to the increasing requirements of large scale sector.