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Saturday, May 14, 2011
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The Supreme Court has stated that the Customs, Excise & Service Tax Appellate Tribunal had applied wrong principles while rejecting the claim for customs duty drawback in the case, Siddachalam Exports Ltd. vs. Commissioner of Central Excise. The exporter was accused of inflating shipping bills for export of ladies' tops land denim shirts consigned to a Russian firm. The Court stated that instead of first determining the value of the goods on the basis of contemporaneous exports of identical goods, the revenue department erroneously resorted to a market inquiry. If for any reason data of contemporaneous exports of identical goods was not available, the procedure laid down under the 1988 Rules should be followed and market inquiry could be conducted only as a last resort.
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The amendment to the Finance Act introducing service tax on lawyers has been stayed by the Gauhati High Court. After the amendment, the representation by an advocate in any court, tribunal or authority will be subject to levy of service tax. Similar stay is granted for tax on representation services by CAs by Delhi High Court.
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The Government and Reserve Bank of India (RBI) have decided to make it mandatory for corporate groups wanting to set up banks to ring-fence their financial sector operations from other businesses by setting up a Financial Holding Company (FHC). For the existing financial conglomerates, however, conversion into FHC would be optional. Officials also indicated that companies being
investigated by the CBI, Central Vigilance Commission and Enforcement Directorate will not be permitted entry in the banking sector. This could dash hopes of some companies which are embroiled in the 2G spectrum scam but are known to be interested in a foray into the banking sector.
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Reserve Bank of India (RBI) vide its Circular RBI/2010-11/492 A.P. (DIR Series) Circular No. 55 dated April 29, 2011 has enhanced the limits of investments by Foreign Institutional Investors (FIIs) in Corporate Debt in Secondary Market. Now FIIs can invest in listed non convertible debentures / bonds upto USD 40 billion (with a sub limit of USD 25 billion for investment in listed non-convertible debentures / bonds issued by corporate in the infrastructure sector).
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Credit Information Bureau (India) Limited (CIBIL), the agency gathering data on credit histories of individuals, has now made credit scores available to individuals for a fee of Rs. 450/- per request. An individual's credit score would be a three-digit numeric summary of his credit history for the last three years, and this would be rated on a scale of 300-900. The higher an individual's score, the
better would be his chances of securing a loan. Banks have, since the last two years, used this data as an important factor in deciding on whether to approve or reject a loan. Making credit scores available to borrowers can also be seen as a step towards risk-based pricing.
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  • This is for the first time that any regulatory body will be publishing names of competing candidates right at the beginning of selection.
  • Following the 2G scam, RBI, in consultation of the ministry of finance, has decided not to take chances  in selection.
  • Pre requisites for getting selected would be a spotless image, and also, applicants need to have enough exposure to the financial sector.
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The RBI has imposed penalties on 19 commercial banks for flouting instructions related to derivative. The banks that have been fined include six private sector banks, nine foreign banks and one public sector bank. According to the RBI, the penalties have been imposed on these banks for contravention of various instructions issued by the Reserve Bank in respect of derivatives. Such as, failure to carry out due diligence in regard to suitability of products, selling derivative products to users not having
risk management policies and not verifying the underlying/adequacy of underlying and eligible limits
under past performance route.
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Insurance regulator IRDA relaxed accounting norms for insurance companies to take care of higher liability arising out of enhanced outgo towards gratuity for their employees. The regulator allowed
the insurance and reinsurance companies to amortise (pay off in regular intervals) the additional liability on account of gratuity over a period of five years starting from financial year 2010-11.
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The Reserve Bank of India (RBI) has relaxed norms regarding setting aside money for bad loans- a move which has come as a major relief for all commercial banks. The banking regulator has
said banks should maintain 70% of the provision coverage ratio (PCR) of their gross bad loans as on September 2010, but they do not have to maintain 70% of PCR on an ongoing basis. RBI has said from September, 2010 on wards, on incremental NPAs banks would have to set aside money based on the income recognition norms. This ranges from 10% in the initial months when the asset is classified as substandard to 100% when it is classified as a loss asset after a few years.
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The Reserve Bank of India (RBI) has increased the provisioning requirements. Under the new guidelines, loans classified as sub-standard will attract a provision of 15 per cent as against the
existing 10 per cent requirement. For unsecured loans that are classified as sub-standard assets an additional 10 per cent provision has to be made over the 15 per cent. So, the total provisioning for
sub-standard unsecured loans will now be 25 per cent instead of 20 per cent as mandated earlier. The central bank also raised the provision required for the secured portion of advances, which
have remained in the doubtful category for up to one year, to 25 per cent from the present 20 per cent. The secured advances in this category for more than one year but up to three years will now attract a provision of 40 per cent instead of 30 per cent. The restructured loans classified under the standard category will need a provision of two per cent in the first two years from the date of restructuring. In case of moratorium on payment of interest and principal after restructuring, two per cent provision has to be maintained for the period covering the moratorium and two years thereafter, RBI said. If restructured loans, which are classified as non-performing advances, are upgraded to the standard category, banks have to make a provision of two per cent in the first year from the date of upgrade. The existing provision on these loans was 0.25-1.00 per cent depending on the category of advances.
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Corporates are masking their true identities to jump regulatory hurdles and form holding entities that help them lower their tax burden. Promoters of at least 30 companies have formed limited liability partnerships (LLPs) by suppressing the information that the newly-floated LLPs would serve as group investment companies, a disclosure that would have called for a non-objection certificate from the Reserve Bank of India (RBI).
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The Division Bench of Chief Justice Dipak Misra and Justice Sanjiv Khanna of the Delhi High Court, held in a judgment passed on April 25 that the opinion expressed by the assessing officer (AO) while giving a certificate for deduction of tax at a lower rate under section 197 of the Income Tax Act, 1961 is interim or tentative or provisional in nature and would not bar the AO from initiating proceedings under section 147 of the Act on the ground that there has been a change of opinion. Areva T&D had filed a writ petition before the High Court claiming that a mere change of opinion does not confer jurisdiction on the authority to initiate a proceeding under section 147 of the Act after it has issued a
certificate under section 197 of the Act.
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The Authority for Advance Rulings (AAR), a quasi-judicial panel, has ruled that capital gains arising from transfer of shares held by a Mauritian company in an Indian firm are not taxable in India.
The ruling, in response to a plea by DB Zwirn Mauritius to ascertain its tax ability on transfer of equity shares of Quippo Telecom Infrastructure, will come as a major relief to UK-based Vodafone which has sought the authority's opinion in a transaction of similar nature. Vodafone has sought AAR's opinion on if the company was required to deduct tax on payment made to Essar
for the 22% stake held by the Indian company through a Mauritius- based entity.
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The government has released norms for appointment of relatives in companies, a decision that will allow directors or managers to engage services of close ones without seeking permission of the
Centre. A company, however, will be required to seek the permission of the central Government if monthly payment made to relatives is more than Rs 2,50,000, the Corporate Affairs Ministry said in a notification. Earlier, approval of the Corporate Affairs Ministry was required for appointment of relatives of directors or managers, in case the monthly remuneration to be paid to the person exceeded Rs 50,000. Further, with regard to selection of such relatives of directors or managers of a listed company, the Ministry has maintained that it would be done by the Selection Committee
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Reserve Bank of India (RBI) vide its Circular RBI/2010-11 /497 A. P. (DIR Series) Circular No. 57 dated May 02, 2011 has reviewed the guidelines relating to Pledge of Shares by non-resident investor.
RBI delegated its powers to the AD Category - I banks to allow pledge of shares of an Indian company held by non-resident investor(s) in accordance with the FDI policy in the following
cases subject to defined compliance's:

  • Shares of an Indian company held by the non-resident investor can be pledged in favour of an Indian bank in India to secure the credit facilities being extended to the resident investee company for bona fide business purposes subject to the defined conditions.
  • Shares of the Indian company held by the non-resident investor can be pledged in favour of an overseas bank to secure the credit facilities being extended to the non-resident investor / non-resident promoter of the Indian company or its overseas group company, subject to the defined conditions.
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To provide structured flexibility and easiness to the resident/non-resident shareholders of Indian Company, Reserve Bank of India (RBI) vide its Circular RBI/2010-11/ 498 A. P. (DIR Series)
Circular No. 58 dated May 02, 2011 has decided to permit AD category -1 banks to open and maintain, without prior approval of the Reserve Bank, non-interest bearing Escrow accounts in Indian
Rupees in India on behalf of residents and/or non-residents, towards payment of share purchase consideration and / or provide Escrow facilities for keeping securities to facilitate FDI transactions subject to the terms and conditions. Further, It has also been decided to permit SEBI authorized Depository Participants, to open and maintain, without prior approval of the Reserve Bank, Escrow
accounts for securities subject to the terms and conditions. These facilities will be applicable for both issue of fresh shares to the non- residents as well as transfer of shares from / to the non- residents.
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The Government of India, Reserve Bank of India, Planning Commission and the various economic experts of the country have been concerned about increase in inflation rate and have been exercising a very old technique of Economics to control inflation, by substantially reducing the liquidity in the system as well as increase in the interest rate. In spite of the efforts made by the Government on the monetary side, the inflation has been on the rise, more particularly in food articles and items of necessity, thereby impacting the common man. The impact of increase in rate of interest and absence of liquidity in the market has already started impacting the growth of the capital goods sectors, large industries, real estate and housing sectors as well as various other important businesses.. In case appropriate and adequate action is not taken immediately, the growth rate of Indian economy may go
even in 7% range from 9% range expected few months ago. This is a matter of great concern to the economy as a whole. The Government need to immediately take necessary steps to provide the oxygen and blood of finance and reasonable rate of interest to the Indian businesses so that the
competitiveness is not lost internationally and the dithering growth rate do not impact the common man on a long term basis. The monetary policy needs revision. The control on extravagant Government expenditure would also be necessary at this crucial hour. On the other hand, it is important for the Government to ensure, through necessary regulatory and financial support mechanism that the increase in food, vegetable and other agricultural goods prices reaches the agriculturist and is not usurped by intermediaries. In case India is able to achieve this target, the increased inflation rate will be rather more beneficial to the Indian economy and will bring inclusive growth to a section of the society which has been neglected over last few decades. It will also be important to take adequate care of the hand workers and fixed salary classes appropriately to take care of increased costs of living by raising minimum wages and improving efficacy of labour related legislation. Some of the labour laws including ESI, PF, Industrial disputes Act, Minimum wages Act, Factories Act and Shop and Establishments Act etc. require comprehensive new outlook to meet changed expectation and requirement of labour and working class. A close monitoring of working
hours, labour welfare, labour empowerment and judicious treatment would be necessary to ensure
inclusive equitable growth.

Impact of Scams on Economic Outlook:

The Government is busy in prosecuting the corrupt and in certain cases even undertaking witch hunting. There is no justification to trap business professionals and even senior industrialists in such a manner that it may vitiate business atmosphere, credit ability of the system and create a sense of terror It is important for the Government to nab the real guilty and most importantly to bring necessary systematic changes to eradicate corruption by transparency and a social movement towards increased education, awareness and commitment towards ethics and integrity. The Government is ignoring open corruption in tax department, licensing, land development wings, power, water departments, hospitals and education. 

Bank Licensing:

RBI has recently decided to grant more licenses for setting up banks. The terms and conditions for such setting up must be fair, transparent and just. Even the norms stipulating the eligibility for tender or open offer must not appear to be motivated. We hope that Bank Licensing shall be undertaken professionally with appropriate weight age being assigned for CAs/ other Qualified professionals with core finance or banking exposure in order to derive higher level of excellence in the area. It should not be distributed in the manner that only people with deep pocket make them deeper. At least 30% of Banking Licences must be reserved for Finance Professionals. The concentration of Economic power with Industry and business groups may be dangerous. The Government decisions in this regard should be after consulting all political parties, Business Associations and Professional bodies. 
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The Commodity markets in India have witnessed unprecedented speculative activities after the advent of commodity exchanges in India. The international commodity exchanges trading activity
in Brent crude oil, gold, silver and other commodities have witnessed a hyper speculated increase in prices and sudden downfall recently. The speculative activities have been recently curbed by the US Government and we could witness its direct impact on the Indian commodities markets' speculative activities. The recent days have seen very high speculative rise in prices of gold, silver and crude and other commodities during March 2011 to April 2011 followed by recent very severe downfall in May 2011. The Government of India is keeping its eyes and ears closed and are not able to appreciate the brutal implication such activity has on the pockets of large cross section of illegal speculative
"Investors" who are lured ruthless increase in prices and hefty "track record" of earnings, which ultimately lead to severe losses, large debt trap, suicide and other social evils. The Government of India brought back the commodity derivatives for the purpose of hedging the risk of market fluctuations to mitigate actual risk being undertaken by the businesses or the agriculturalists and other stakeholders. This is however, being converted into a legalized casino as 99 percent trades are happening without any hedging motive and are purely speculative. The price discovery is marred by traders and dealers who have no direct or indirect relation with the commodity in question.

Gold Loans- another area of concern:

Recently activities on the front of gold loans have suddenly increased by very active advertisement and publicity by certain non banking financial companies openly lending money against security of gold. The Gold Loaning Companies may get unjustly richer with the poor ones misfortunes. The Money lending business need close monitoring and regulations. The regulatory risk and possibility of serious threat to a large number of borrowers as well as investors from these non banking financial companies, is looming large. RBI or Finance Ministry has not come out with any detailed guidelines or safeguard so that the potential risk of losing the gold itself or excessive leverage impact on the viability and sustainability could be addressed effectively. Securities Exchange Board of India also need to look out the safety and security of gold reserve with exchange traded funds, depositories, spot and commodity exchanges and approved warehouses. The entire chains of intermediaries will require a serious examination to ensure that the potential risk is managed, before it is too late. It is recommended that SEBI, RBI and Ministry of Finance should set up a Special Task Force to review its money lending and security guidelines so that patch work action does not adversely affected the borrowers, the investors as well as the non banking financial companies. The regulatory dose should be adequate and effective as well as timely. 

Micro Finance Companies:

The micro finance companies have recently suffered due to lack of adequate and timely regulations followed by knee jerk reactions. The MFCs need to be empowered financially with necessary regulatory and development initiative so as to achieve a proper balance.