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Tuesday, December 15, 2009
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100% asset cover

Issuer is required to maintain 100% asset cover (earlier 100% security cover) sufficient to discharge
the principal amount at all times for the debt securities issued. Issuer shall disclose the extent and nature of security created and maintained to the stock exchange on half-yearly basis and also in the annual financial statements. Issuer shall submit a certificate from practicing chartered accountants to the debenture trustee on half-yearly basis regarding maintenance of 100% asset cover along with the half-yearly financial results.

Issuers whose equity shares are listed

Issuers can issue unsecured debt instruments and list the same on the stock exchange provided there is 100% asset cover.The requirements of equity listing agreement for submission of a draft offer document to SEBI for observations and obtaining an acknowledgement card are not applicable to an issue of debt securities made pursuant to SEBI (Issue and Listing of Debt Securities) Regulations, 2008.

Issuers whose equity shares are not listed
Submission of financial statements: Issuer to publish / furnish to the stock exchange audited or un-audited (subject to limited review) financial results on a half-yearly basis within 45 days from the end of the half- year.

Security deposit of 1% of issue proceeds: Issuer are required to give a security deposit @ 1% of the
debt securities offered for subscription to the public, of which 50% should be paid in cash (subject to
maximum of Rs. 30 million) and the balance amount can be provided for by way of a bank guarantee.

Statement of deviation in use of issue proceeds: Issuer is required to furnish to the stock exchange, on a half yearly basis, a statement indicating material deviations, if any, in the use of proceeds of debt
securities from the objects stated in the offer document.
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National Securities Depository (NSDL) has launched a facility named SIMPLE (Submission of Instruction through Mobile Phone Login Easily), which will enable investors to submit delivery instructions to transfer securities to their broker account (Clearing Member Pool Account). For the purpose of availing this service, investors have to register for SPEED-e service (facility to submit delivery instructions through the internet) as a password user through NSDL Depository Participants.
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The Central Board of Direct Taxes (CBDT) has come out with the basic ground rules for the functioning of Dispute Resolution Panels (DRP). The concept of DRPs was announced in Budge 2009-10 to ensure faster resolution of transfer pricing and other international tax related disputes. The rules deal with aspects such as the places where the DRPs would be set up, its jurisdiction, constitution, manner of approaching it, procedure relating to the hearings etc. The DRP is basically a collegium of three commissioners. The orders of the DRP are binding on the Revenue Department. The Centre proposes to constitute eight panels across major cities - Delhi, Mumbai, Kolkata, Chennai, Bangalore, Ahmedabad, Pune and Hyderabad.
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The Supreme Court (SC) has modified the compensation awarded by the Delhi high court in a road accident because of higher deduction in calculation the loss of income. In this case, baby Radhika vs. Oriental Insurance Co., the earning member died at 32, and his annual income was nearly Rs 2 lakh. The tribunal awarded Rs 45 lakh, but reduced by the high court to Rs 5.8 lakh. The high court deducted two-thirds of the income as expenses of the deceased, though normally it was one-third. The SC agreed with the one-third formula.
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Shareholders can now cast their votes on corporate proposals through the click of a mouse without having to worry whether their response has reached the company or not. CDSL ventures (CVL), a wholly owned subsidiary of Central Depository Services (India) has launched the e-voting system for listed companies. The e-voting system would permit a company or its registrar to set up the schedule on the e-voting website and upload the resolution and register of shareholders. CVL would then generate and print a password on a pin mailer for each shareholder, which would be communicated to them along with the notices of the resolutions. Shareholders can access the e-voting website and cast their votes at any time during the voting period at a place of their convenience.
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When a person signs a document, there is a presumption he has read it and understood it and only
then he had affixed his signature, the SC stated in the judgement, Grasim Industries Ltd. vs. Agarwal Steel. The presumption is stronger in the case of businesspersons as money is involved. The SC stated this while setting aside the judgement of the Madhya Pradesh high court in an arbitration case.
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In an important judgment, the Bombay high court held that a moneylender, who does not possess a license, cannot approach the criminal court if a repayment cheque given by debtor bounces. The court has held that carrying on money-lending business without license debars a person from recovering the amount through court. The High Court further noted that as per section 10 of Bombay Money Lenders Act, 1946 no court shall pass a decree in favour of a money lender unless the court is satisfied that the moneylender held a valid license at relevant time.
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The Ministry of Commerce & Industry has issued an instruction to all development commissioners clarifying that Net Foreign Exchange Earning (NFE) for SEZ units is to be calculated in rupee terms only. In case a unit claims that the NFE is negative due to foreign exchange fluctuations, the Approval Committee may consider the same, on case to case basis, provided the NFE computations are certified by the Authorized Banker of the unit.
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The Income-Tax department will recover close to Rs. 1,000 crore from infrastructure development companies, after a recent tax tribunal order clarified that the exemption available for infrastructure development cannot be extended to contractors or subcontractors. The order puts an end to the practice of contractors and subcontractors claiming benefits under section 80 IA of Income-tax Act, which was incorporated to encourage investment in infrastructure projects.
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The Assessee company is in the business of manufacturing audio magnetic sound heads used in a
variety of audio systems. It entered into an agreement with a Singapore Company (M/s Sankyo Seiki Pvt Ltd.) for supply of plant know how and product know how. Supply of plant know how includes delivery of technical and engineering data, design, drawings, sketches and photographs. The agreement was entered into in Singapore. The agreement is valid for a period of five years after which the data and technical know how would remain the property of assessee company for full and free use. The assessee applied for No Objection Certificate (NOC) for remittance of amounts to the foreign company without deduction of tax at source on the ground that no income had accrued in India. NOC was denied by the Assessing Officer (AO) holding the same as fee for technical services under the Income Tax Act, 1961. The Commissioner of Income–tax (Appeals) allowed assessee’s claim and directed the AO to issue the NOC. On appeal by revenue, the Appellate Tribunal upheld the decision of the CIT(A) and held that the payments related to acquisition of plant know how outside India and no income of the foreign company arose in India. The Appellate Tribunal further held that the payments were also outside the ambit of the extended definition of royalty under the Act. The revenue, thereafter, filed an appeal before the High Court. The High Court held that the payment to the Singapore Company was towards purchase of the plant and not towards royalty since the title in the documents was transferred to the assessee company outside India for its full and free use.
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The Delhi Income Tax Appellate Tribunal (ITAT) in the case of DCIT vs Dolphin Drilling Pte. Ltd.
(Taxpayer) has held that the conversion of business income earned in foreign currency into INR, in
accordance with Rule 115 of the Indian Tax Law (ITL), is to be made by adopting the conversion rate
prevailing at the end of the tax year. It also held that the Taxpayer, a company incorporated in Singapore and engaged in the business of hiring out drill-ship in India, is entitled to claim depreciation on the value of the drill-ship.
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The Delhi Income-tax Appellate Tribunal (ITAT) has held that difference of opinion cannot be a ground for levying penalty in transfer pricing issues. The ITAT said there should be sufficient ground to believe that the assessee had malafide intention before levying a penalty under section 271(I)(c) of the Income Tax Act.
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As per new rule of the Tax department, Third party administrators (TPAs) facilitating cashless treatment in hospitals for individuals holding health insurance will have to deduct tax upfront while making payments to hospitals on behalf of patients. The 10% tax to be deducted (TDS) will affect working capital management of hospitals and, thereby, erode profitability marginally. The Central Board of Direct Taxes has issued a circular making it mandatory for TPAs to deduct tax at source on payments to hospitals.


Granting Income Tax relief to companies for deductions for contributions to provident fund (PF),
the Supreme Court has dismissed over 60 appeals by the commissioner of income tax. The Finance Act 2003, which operated from April 1, 2004, deleted a provision relating to deduction against PF and other welfare funds. According to the deleted provisions, if the contribution stood paid after the date of filing of returns, it stood disallowed. This resulted in hardship as the financial year did not coincide with the accounting year in many cases. After a representation to the government and the Kelkar committee report, the provision was deleted. In the present batch of appeals, the government took the stand that the benefit would accrue to the employers from 2004 after the amendment, and not retrospectively from 1988. The court ruled it was not an amendment but a "curative" step and therefore applicable since 1988.
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Foreign companies or individuals, including foreign institutional investors, having business or profession in India can enjoy lower capital gains tax on off-market deals if the stocks are purchased in foreign currency.According to a recent decision of the Mumbai bench of the Income Tax Appellate Tribunal, non-resident companies and individuals are entitled to a beneficial rate of tax of 10% on long-term capital gains arising from the sale of shares of listed entities. Earlier, non-resident assesses were taxed at the rate of 20%. Currently, off-market deals attract a capital gains tax of 20% with indexation benefit (where the gains is adjusted for inflation) and 10% without indexation benefit. While this was largely perceived to apply to residents, the tribunal has now spelt out that foreigners
are also entitled to the lower rate of tax. Further tribunal said that there should not be any discrimination between a foreign and an Indian entity in this regard.
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The Union Cabinet, on November 5, 2009, approved a proposal of the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry to permit the following payments under automatic route and subject to FEMA (Current Account Transaction) Rules, 2000; without any restriction:

  • Payments for royalty / lumps sum fee for technology transfer
  • Payments for use of trademark/ brand name
Post Reporting Requirements

In order to get the information about the nature/details of technology and the amount paid for it, a suitable post reporting requirement would be devised within three months in consultation with Department of Economic Affairs and Reserve Bank of India.
Existing caps on royalty payments - Automatic Route
Under Foreign Technology Collaborations for foreign technology transfers

Nature of Payment                        Existing ceilings

Lump sum payment                     up to USD 2 Million

Recurring payment                      5% of domestic sales

                                                     8% of export sales

For use of Trademark/ Brand Name of foreign collaborator without technology transfer

Nature of Payment                         Existing ceilings

Recurring payment                       1% of domestic sales

                                                      2% of export sales

Beyond above limits, prior permission of the Government of India was required
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Market regulator Securities and Exchange Board of India's (SEBI) latest decision to mandate disclosure of balance sheets by companies on a half-yearly basis is being viewed as a precursor for listed companies to mandatory disclose their cash flow statements. Auditors said that move will improve transparency by giving investors a better picture of the financial health of the company. The two half yearly balance sheets may not be exhaustive, compared to the one provided to the investors at the end of the year. But using the two balance sheets, an investor will be able to work out the cash flow details of the company.
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Minister of state for road transport and highways, RPN Singh informed the Rajya Sabha that Highway projects worth about Rs 1,10,000 crore will be executed in the country over the next three years. According to him the Government has formulated work plans for National Highways sector for 2009-10 for projects aggregating to 15,911 Km. Out of this, 11,947 Kms are under various phases of National Highway Development Project (NHDP) that are being implemented through National Highways Authority of India at an approximate cost of more than Rs. 100,000 crore. The remaining 3,964 Km under NHDP Phase-VI-A and other projects are to be implemented through NHAI and the state government at an approximate cost of Rs 9,892 crore.
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Under pressure from employees' representatives, a key advisory body of retirement fund manager,
Employee Provident Fund Organization (EPFO) has rejected the Finance Ministry's proposal to invest 3% to 5% of the Rs. 2.57 lakh crore corpus in stock indices. It is now left to EFPO's apex body, Central Board of Trustees, to take a call on the Finance and Investment Committee's recommendations to reject the Finance Ministry proposal of investing in stock indices.
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The Reserve Bank of India (RBI) has said that the banks have violated Foreign Exchange Regulations
Act (FEMA) while transacting in currency derivatives in the last few years. The central bank has stated in a submission to the Orissa High Court in response to a public interest litigation that violation of FEMA guidelines were committed by banks and exporters, who in many cases entered into derivative contracts far in excess of their genuine underlying exposure and also tried to use the hedging tools as profit making tools. The central bank may further penalize those who violated FEMA norms.
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Life Insurance Corporation of India (LIC), has pumped around Rs. 26,000 crore into the equities
markets (April 2009-October 2009). In comparison, overseas funds during the same period have bought Indian stock worth about $16 billion. The largest insurer in the country has also increased its
investments in non convertible debentures of many blue chip companies and has invested a little over Rs 17,000 crore in the same period. NCDs are structured debt product that cannot be converted into equity shares of the issuing company but carry a high interest rate. The life insurer has also disbursed close to Rs 5,000 crore towards various infrastructure projects including power, roads, airport and education in the current financial year.
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International Finance Corporation (IFC), the commercial lending arm of the World Bank, is looking
at hiking exposure to Indian entities provided it gets more capital support. According to Lars Thunell,
executive vice president & chief executive of the IFC, IFC is currently committed to invest $1 billion annually and this may increase that if it gets the $2.4 billion capital support that it has asked its shareholders. India is one of the largest markets for IFC investments and its current India exposure is around $3.4 billion. IFC among other things plans to increase its lending support to the small and medium enterprises (SMEs) through the commercial banks in the country.
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In what would make online commerce faster for customers, the Reserve Bank of India has mandated
that all payments for such transactions be credited directly to merchants, instead of getting cleared by
intermediaries such as CC Avenue and Paypal. Currently until a payment is authorized and processed
by intermediaries, a transaction is not completed. For instance, online retailers such as eBay do not ship goods purchased online unless funds are credited to their account, before being routed through an intermediary. CC Avenue, Bill Desk, Direct Pay, ICICI Pay Seal and Paypal are among major payment gateways in India.
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The Indian Diaspora has more than doubled the money parked with various Indian banks during April- September 2009. As per latest data released by RBI, Indian banks have mobilized $2.7 billion during April- September 2009 from non-resident Indians (NRIs) against inflows worth $1.1 billion in the year-ago period.
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The government and the Reserve Bank of India (RBI) have decided to withdraw, from January a facility that allowed Indian firms to buy back foreign currency convertible bonds (FCCBs) issued to an overseas investors, in yet another move to unwind another measures introduced last year at the height of global credit crisis.
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The recent decision of Reserve Bank of India and Government of India to delegate the powers of at the central statutory level as well as at the level of branches to the Board of Directors of concerned Banks have brought the greatest risk to the public sector Banks and entire financial system. Recently when the central statutory auditors of several public sector banks were to be appointed, within 48 hours of a green signal from the Reserve Bank of India, Public Sector Banks' Chairman and the top management quickly selected the 'auditors of their choice'. The names of selected Auditors were sent to RBI even without following any transparent procedure. No meetings of Audit committees or Board of Directors were held in most of the banks for selection of names. RBI proposes to provide similar choice to the banks' top management to select the auditors at the branch level. This will further put all the public sector banks to greater risk of fraud and material misstatement very seriously. The manner in which the top managements have chosen "comfortable" auditors at the head office level, similarly
they will appoint comfortable auditors at the crucial branch level in the name of autonomy. How an auditor selected by the chairman and the top management of the bank will be able to review and
critically comment on the decision of the top management? This seems to be a very big criminal conspiracy on the part of certain interested quarters with perceptible questionable and malicious intentions and only appropriate corrective actions by bringing back the appointment of auditors with RBI itself can save the entire financial system from big risk of a fraud. In case RBI is not very comfortable in appointing auditors, an independent regulatory authority can appoint Auditors in consultation with ICAI.  The top management will put necessary undue influence to avoid making provisions for non-performing assets, and not to comment on unauthorized business, non compliance of RBI instructions, reckless advancing of money and lack of due diligence on the part of top management of public sector banks. This is a very serious issue and requires intervention at the level of Honorable Prime Minister, Finance Minister and CAG so that this menace can be restricted at this stage itself. We openly call upon the society, media, the bureaucracy and the thinkers and most importantly the intelligentsia of the society to mull over this great risk to the Indian financial system. In fact it is important for the society to ensure that all banks including private sector banks, foreign banks are subjected to audit by independent auditors appointed in a transparent manner from a panel by an independent regulatory authority completely independent of the top management, failing which the society will greatly suffer. In US, about 135 banks have failed in last one year and there have been few cases in India of failure of banks; and in all those cases auditors were appointed by those who are in-charge of governance. Auditors' independence is under biggest threat in the Indian financial sector. The banking system and the society should take lessons from failure of Satyam or failures of Global Trust Bank and should come forward for an appointment of independent auditors. It is the responsibility of the society to provide adequate strength, powers and independence to the auditors
and not to leave the appointment, remuneration and removal of auditors at the mercy of those who are in charge of governance.

Let us take some lessons before it is too late.
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The House of Lords in a famous historical decision announced "Auditor is a watch-dog and is not a blood hound". It is well established that the role of an auditor is to provide an assurance against the fraud, error and misstatement. No auditor can provide insurance or a guarantee against fraud or error.
In United States, 135 banks have been wound up in last 12 months. Similarly Lehman Brothers, one of the largest investment bankers in the world was liquidated suddenly within a period of 3 months
from a very strong position. Similar corporate failures took place like Enron and World Com in US but later on after a long trial in US, the US Justice Department decided to drop Arthur Andersen's prosecution.

Whenever there is a corporate fraud or reported major financial indiscipline, it is natural that the society and the other stake holders will ask "what the auditor was doing". In case when after unbiased investigations, it is revealed that the auditor has been grossly negligent, it may be appropriate to professionally punish the auditor and also to levy financial penalty through disciplinary process. It would be dangerous to assume that the auditor was grossly negligent in all cases where the fraud or material error is detected. It is important to understand the ground realities of the audit process including the manner in which the audit is conducted or can be conducted and what is the mandate given to an auditor. The auditor can at best act as a watch-dog against fraud and error, which would really mean that the auditors presence, due diligence and audit process provide a deterrent against
fraud and error. The audit also assures the overall financial discipline and a check on the working of
internal controls in an organization and their efficacy of working. The society and the stake holders on the other hand expect that once an auditor is appointed and the Audit is conducted, no fraud or error should occur and that the auditor should exercise necessary due diligence and detailed audit procedure to ensure a complete safeguard against fraud and error.

This is a big expectation gap from what an audit is and what is perceived as 'the auditor should be'.

The proposed provisions in Companies Bill 2009 proposing imposition of imprisonment up to one year, even for technical non-compliance, is completely unacceptable in the current perspective unless the position of auditors are transformed from a watch-dog to blood hound. And that will certainly change the face of auditor, alter radically the nature and the process of audit in addition to heavy time or cost implications to the businesses. Needless to say, in that situation rights and powers of the auditors shall surely be required not only of a police investigative officer. Are the businesses ready for it, is government appreciative of it or for that matter is that situation required at all? These are the question society and all concerned need to answer and have a concurrence upon.

The society, the government and the judiciary cannot and should not punish an auditor by imprisonment before impartial trial unless prime facie , the auditor is knowingly and willingly party to a fraud or the nature of fraud and / or mis-statement in the financial statement is such that a criminal conspiracy, criminal breach of trust or criminal abatement can be established. Unless a criminal involvement of an auditor is established beyond doubt, it may be completely inappropriate to provide for imprisonment as a penalty. In case auditors are found guilty, in some exceptional cases of gross negligence they can be punished by the Institute of Chartered Accountants by withdrawal of his Certificate of Practice for an appropriate period commensurate to the nature and gravity of the guilt besides imposing necessary financial penalty. We all need to educate the society, bureaucracy, media
and the judiciary about the role of an auditor. The recent trend of arresting the auditors and not even
granting the bail at a stage when the guilt of an auditor is not established is against the principles of natural justice. We need to provide a fair trial and in case the evidences establish the criminal guilt, the criminal prosecution, imprisonment and harsh penalty should be imposed.