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Thursday, November 13, 2014
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Norms for Defence Sector firms eased

The licensee shall be allowed to sell defence items to government entities under the control of Ministry of Home Affairs, State Governments, PSUs and other valid defence licensed companies without prior approval of the Department of Defence Production (DoDP). The government has also decided to deregulate the annual capacity for production of defence items by industrial licensees with the condition that licensees shall submit half yearly production returns to the Department of Industrial Policy and Promotion and DoDP.
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FDI for Construction eased

  • Minimum Foreign investment cut to $5m from $10 m
  • Conditions set aside for hospital, tourism, SEZ, NRIs and old age homes
  • Minimum Floor area cut to 20000 sq m from 50000 sq m
  • 3 years lock in removed; developer can exit on completion, if earlier
  • Minimum land area condition for serviced housing plots removed
  • The Indian entity investing in the project will only be allowed to sell plots for which trunk infrastructure, including roads, water supply, street lighting, drainage and sewerage, have been developed.
  • Earlier exits may be allowed
  • Investor can transfer stake to another before completion of a project, subject to FIPB clearance.
  • In completed projects, 100 per cent FDI under the automatic route is allowed for operation and management of townships, malls/shopping complexes and business centres.
  • Projects committing at least 30 per cent of the total cost for low-cost affordable housing would be exempted from the minimum built- p area and capitalization requirements, with a three-year lock-in period.
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Jaitley Recommend an Auditor's Role

Finance minister Arun Jaitley said that Government auditors must undertake their work in a straightforward manner and not sensationalize or convert public opinion into a lynch mob, cautioning them against aiding an environment of finger pointing through their reports. Auditor has to scrutinize thoroughly the decision-making process. Auditors should distinguish between a decision that's wrong in hindsight and corruption. "If he finds a corrupt view, then the level of discretion he exercises in commenting has to be (an) entirely different standard. If he finds two views are possible and his own view is probably different, he then can have a more liberal approach. The minister said audits were a requirement of good governance because accountability and transparency are essential for this.
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Auditors Duty regarding Internal Control

For the purposes of clause (i) of sub-section (3) of section 143 for the financial years commencing on or after 1st April, 2015, the report of the auditor shall state about existence of adequate internal financial controls system and its operating effectiveness. The auditor of a company may voluntarily include the statement referred above for the financial year commencing on or after 1st April, 2014 and ending on or before 31st March, 2015.
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Government notifies 25% Minimum Public Holding norms for Listed PSUs

Paving way for sale of PSU shares worth an estimated Rs 60,000 crore over three years, the government has notified rules for minimum 25 per cent public shareholding in listed state-owned firms. To comply with these norms, over 30 listed PSUs will need to raise their public shareholding to minimum 25 per cent by August 21, 2017.
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SAT raps SEBI for Over-regulation

The Securities Appellate Tribunal (SAT) came down heavily on the Securities and Exchange Board of India (SEBI) in the DLF case over what it termed as over-regulation. SAT said, "You pass 10 such orders and the whole economy will crash. Is this regulation or abolition?... They (SEBI) are going more towards abolition mode than regulation...and it is clearly over-regulation. What do you get, what pleasure, out of such orders? You cannot recognise the effect of such orders. They are not to be called word-class regulators."
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Single Registration for Stock Brokers & Clearing Members for all Stock Exchanges

Existing requirement of obtaining registration as stock broker/clearing member for each stock exchange/clearing corporation has been done away with and instead a single registration with any stock exchange/clearing corporation shall be required. For operating in any other stock exchange(s)/clearing corporation(s), approval will be required from the concerned stock exchange or clearing corporation.
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Refund of deposit to Loosing Directors under section 160 by Section 8 Company (Erstwhile Section 25)

In case the companies registered under section 8 of the Companies Act, 2013 (corresponding to section 25 of Companies Act, 1956) receive deposit of rupees one lakh under sub-section (1) of section 160 of the Companies Act, 2013, then the Board of directors of the section 8 company is to decide as to whether the deposit made by or on behalf of the person failing to secure more than twenty-five percent of the valid votes is to be forfeited or refunded.
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Clarification u/s 164(2) - Disqualification of Directors - Non Filing of Annual Returns

The matter has been examined and it is hereby clarified that in case of companies, who have filed their balance sheets and annual accounts on or after 01/04/2014, but prior to launch of CLSS- 2014, disqualifications under clause (a) of sub- section (2) of section 164 of the Companies Act, 2013 shall apply only for prospective defaults, if any, by such companies.
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Directors can be held liable for Dishonour of Cheques

The Supreme Court has said that all directors involved in the day-to-day running of a company can be made liable for a bounced cheque, but not one who resigned before the cheque was issued. The Supreme Court said that a case can only be quashed under Section 482 of the Criminal Procedure Code by a High Court if a director is wrongly arraigned. In cheque-bouncing cases, the court said managing directors in charge of company affairs, directors or officers who sign cheques can be arraigned as accused. Any other director can also be made liable if the person was in charge of and was responsible for the conduct of business. Other officers of a company can be made liable in such a case if a specific role by way of consent, connivance or negligence is alleged against them.
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Clarifications on matters relating Disclosures in Consolidated Financial Statements (CFS)

It is clarified that Schedule III to the Companies Act, read with the applicable Accounting Standards does not envisage that a company while preparing its CFS merely repeats the disclosures made by it under stand-alone accounts being consolidated. In the CFS, the company would need to give all disclosures relevant for CFS only.
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Companies (Accounts) Rules, 2014 - Manner of Consolidation - No Subsidiary

Nothing in Rule 6 shall apply in respect of preparation of consolidated financial statement by an intermediate wholly-owned subsidiary, other than a wholly-owned subsidiary whose immediate parent is a company incorporated outside India. No CFS (Consolidated Financial Statements) need to be prepared in such cases at each level. In case of a company which does not have a subsidiary or subsidiaries but has one or more associate companies or joint ventures or both, for the consolidation of financial statement in respect of associate companies or joint ventures or both, will not apply during 2014-15. MCA Notification dtd. 14th October, 2014
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Section 80G - Deductions - Donations to certain funds, charitable institutions (Approval of exemption)

The High Court of Gujarat held that at the time of granting approval of exemption under section 80G, only object of trust is required to be examined and, therefore, assessee’s application seeking approval under section 80G(5) could not be rejected on ground that it failed to incur expenditure to extent of 85 per cent of its income during relevant year
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No TDS Disallowance if Payee has paid tax

Second proviso to Sec. 40(a)(ia) inserted w.e.f. 1.4.2013 should be treated as retrospectively applicable from 1.4.2005 and no dis allowance for want of TDS can be made if payee has paid tax thereon. Assessee must be given opportunity to file Form 26A. As per this newly inserted proviso, the assessee is required to file Form No. 26A as per rule 31ACB of the Income Tax Rules, 1962 so as not to be held as an assessee in default as per the proviso to section 201 of the Act. As held in the decision of the co-ordinate bench in the case of S.M. Anand vs. ACIT (supra), since the assessee in the period under consideration i.e. assessment year 2005-06, could not have contemplated that such a compliance was to be made, we also in the case on hand, remit the matter to the file of the Assessing Officer for affording the assessee adequate opportunity to file Form No.26A and verification of whether the said payee has reflected the payment/receipt in his books of account and offered the same to tax in the period under consideration.
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Sec. 50C: AO cannot straightaway adopt Stamp Duty Value

As a matter of course, in all such cases the assessing officer should give an option to the assessee to have the valuation made by the departmental valuation officer to avoid miscarriage of justice. Even in a case where no such prayer is made by the assessee, who may not have been properly instructed in law, the assessing officer, discharging a quasi judicial function, has the bounden duty to act fairly and to give a fair treatment by giving him an option to follow the course provided by law.
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Capital Infusion is not a TP matter

In a landmark verdict rendered on October 10, the Bombay High Court has held that issuance of shares by an Indian company to its overseas parent is not exigible to arms- length price (ALP) test under Chapter X of the Income Tax Act, which houses the transfer-pricing (TP) law. The HC, allowing Vodafone's writ, declared the order null and void and decided the question of jurisdiction against the tax administration, holding that shares issuance at premium (or inadequate premium) is merely tantamount to capital account transaction and didn't warrant the rigours of transfer-pricing adjustment, a position that has shaken investor confidence in the past few years. The HC held that transfer pricing rigours can be applied only if the transaction yields income to the associated enterprises.
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Tax info can't be disclosed outside specific case: Swiss Government

Amid a debate on disclosure of names of suspected black money holders, the government of Switzerland said information exchanged under the Swiss-India tax treaty cannot be disclosed "in principle" to a court or any other body outside the proceedings of a "specific and relevant" case.
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Common Market for Inter-state Free Trade on the Cards - CST, Octroi, Entry Tax to go

The NDA government is planning to set up a constitutional body to dismantle taxation barriers and create a 'Common National Market' for the entire country to ensure free movement of goods across state borders. A commission will be tasked with dismantling taxation barriers such as tax on inter-state trade of goods (CST) and Octroi or entry tax. Further it will have to design policy interventions to address market failures and identify obsolete legislation which should be repealed.
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Restaurant Service- Clarification

Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess, having the facility of air conditioning or central air heating in any part of the establishment, at any time during the year (hereinafter referred as 'specified restaurant') attracts service tax. In a complex, if
there is more than one restaurant, which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in a non air-conditioned or non centrally air- heated restaurant will not be liable to service tax.
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Audit by Officers of Central Excise

Doubts have been raised in certain quarters regarding powers of a Central Excise officer to conduct audit, in the background of a recent judgment of Hon'ble High Court of Delhi dated 04.08.2014 in case of M/s Travelite (India) [2014- TIOL-1304-HC-DEL-ST] wherein the Hon'ble court has held that the powers to conduct audit as envisaged in Rule 5A (2) of the Service Tax Rules, 1994, does not have appropriate statutory backing and therefore quashed the rule. It may be noted that the judgment did not deal with the issue of audit in Central Excise. It is further clarified that in Central Excise there is adequate statutory backing for audit by the Central Excise Officers. The statutory provisions relevant for audit is clause (x) of Section 37(2) and Rule 22 of the Central Excise Rules, 2002.
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Indian companies get better rates for Foreign Loans

Indian companies have managed to borrow more from overseas markets and that too at lower rates since the new government took office, according to latest data from the Reserve Bank of India (RBI). At the same time, their weighted average margin for floating rate loans came down to below 3 per cent over 6 month London Inter bank Offered Rate (LIBOR) from 4 per cent. For fixed rate loans, the minimum rate came down nearly 200 basis points to 10.5% against over 12.5 % in the same period a year ago.
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Apprentices Protsahan Yojana Subsidy

The Centre will contribute 50% of the total cost incurred on stipend in training one lakh apprentices by 2017 under this new scheme. This will reduce the financial burden on smaller units as well as encourage more youths to take up vocational training. Human Resource Development (HRD) ministry runs a similar scheme in which it contributes to the stipend cost of graduates, technicians and diploma holders.
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KYC - Clarification on Proof of Address

Banks have been advised by RBI to ensure that customers are not unnecessarily asked to submit additional proofs of addresses for current addresses in cases where proofs of addresses for permanent addresses are already available. Banks are requested to confirm latest by October 17, 2014, that the above mentioned instruction has been communicated to all their branches and the same have been meticulously complied with. RBI/2014-15/264 dtd. 13th October, 2014.
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Delhi - Under Tail Spin

The Government of Delhi has revised the circle rate under the Indian Stamp Act for the purpose of payment of stamp duty very substantially as per the Notification No.F.1(953)/Regn. Br./Div. Com./HQ/2014/5943 dated 22nd September, 2014. The modification has come into force from 23rd September, 2014 and has created a big havoc in the real estate market. The circle rates in most of the areas are substantially higher as compared to the market rate prevalent in Delhi, specially in case of commercial, industrial and public utility land uses where the circle rates are multiplied by 2 in case of industrial and public utility uses and multiplied with 3 in case of commercial uses. This situation have not only put additional burden of phenomenal stamp duty to be paid on transfer of properties but have also brought in an additional burden on the buyers as well as on the sellers. In terms of deeming provisions of Section 50C and Section 56 of the Indian Income Tax Act, the difference between the actual transaction rate and the stamp duty circle rates have to be treated as income separately in the hands of buyer as well as in the hands of the seller, unless they are able to prove that the actual market rate is different based on valuation done by the tax department.
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Capital Market Regulation - a Need for Development Perspective

SEBI has undertaken a large number of admirable steps in development of  a modern capital market infrastructure and regulatory framework. A large number of new initiatives have been introduced on the lines of developed international markets including electronic trading, T+2 Settlement, demat shares, option, future and other derivatives, index funds, alternative investment fund, real estate investment trust (REIT), infrastructure investment trust besides detailed regulation on initial public offering (IPO), private placement, listing, trading, stock brokers, insider trading, market manipulation and many other. In spite of so many initiatives, regulations, vigilance, inspection, show cause notices, suspension from capital market and financial penalties, the confidence of investors for investment in the capital market is getting eroded further in last 5 years. The capital market sensex is on its highest level, arising out of significantly improved sentiments on the basis of Modi Government initiatives and action plan. In spite of attaining a record level, in case we consider the impact of inflation the share market prices are at 50% to 60% level as compared to 2008 index levels. The stock market is not able to channelize the genuine investments from the household savings and from other small, medium and large investors. The retail capital market at the primary market level as well as at the level of secondary market investment are at record low level in terms of participation of the retail investors. The cash market delivery transactions are very low. The poor level of activity at the primary market level is seriously impacting availability of Risk capital and resultant growth. It is, therefore, important for SEBI and the Government to examine following important suggestions to bring back necessary confidence in the capital market:

  • Mandatory valuation: Free pricing of equity shares has to be replaced by mandatory valuation as contemplated in the Companies Act 2013. The promoters and the Companies need to take responsibility of projection and estimated discounted cash flow. Alternatively the valuation can be taken from independent Valuers appointed by SEBI.
  • Over Priced Issues - mandatory dilution: In case the actual market price of an Initial Public Offer or FPO fall substantially (more than 20%) below their issue price during the 1st year of the issue (on the basis of a weighted average of delivery transaction during the 1st year of listing), the company must be legally mandated to issue additional shares against consideration already paid to the suffering shareholders to adequately compensate them. The promoters may also be permitted as an option to bring in matching equity in case do not want dilution of their shareholding.
  • Independent Auditors: The Companies Act initiative to not to permit interested shareholders to participate in voting in favour of related party resolution, need to be extended to appointment of auditors. The shareholders who are directly or indirectly connected with those charged with Governance should not be permitted to appoint or retire or remove the statutory auditors. The statutory auditors need to be empowered to look after the interest of minority and of those who are not in day-to-day governance.
  • Limit Derivatives to only actual real hedging: SEBI need to curtail unnecessary speculation and manipulation of market by limiting derivatives and hedging to only underlying existing exposure of the transacting party. The current derivative market is intensely speculative and is in the nature of gambling in majority of cases. The derivative market is also being used to manipulate prices by false turnover and transactions, just to make money at the cost of genuine investor.
  • Unfair and non-competitive market practices: The algo trading (based on mechanized software) and co-location of server of certain specific parties in the premises of Stock Exchange are a completely unfair practice against principles of equal competition and equal opportunity to all investors and traders in the market. The investors of far-flung locations in Assam, Bengal, Orissa , Tamil Nadu, Kerala, Kashmir, Haryana, Punjab and U.P. etc. are completely at a disadvantage vis a vis co-located servers. How can SEBI justify such a wrongful action against the interest of the general investors.
  • The buying and selling based on an electronic software result into large scale fluctuations in the price without bringing any value to the market.
  • Development Role of SEBI: SEBI need to concentrate on development of capital market by inculcating financial literacy and improving corporate governance, credibility and integrity of the capital market.
  • Investor Protection role: SEBI's role need to be limited to making regulations, vigilance, inspection and launching of investigations
  • Independent court prosecution: The decision to commence prosecution and adjudication has to be completely left to specialized courts and cannot be and should not be done internally by SEBI to ensure proper justice and control corruption. The imposition of hefty fines cannot be left to regulator SEBI & should be left to judiciary.
  • Confidentiality: SEBI should not publicize any disciplinary action initiatives by SEBI, till the time the accused is held prima facie guilty by an appropriate court/ independent judicial process and charges are framed. The current practice being unnecessary sensation & impact reputation of accused even before they are prima facie guilty.
  • The Interim orders to suspend promoters, companies or intermediaries and investors from participation in the capital market, without providing an opportunity of being heard, after a proper independent judicial process is completely against the interest of natural justice. In any case no such order should be continued unless confirmed by judiciary within 15 days.
  • Security Disposal right need to be intact: No investor should be prohibited to sell their investment except when such securities are fraudulently acquired or money laundering cases even in cases of suspension from capital market.
  • Investors' Protection Mechanism: SEBI should introduce a proper fast track judicial mechanism under which investors can file cases against market intermediaries, promoters and companies and other participants in the capital market to redress their grievances and to claim compensation for the misstatement, manipulation or fraudulent action. It is important that investors are adequately safeguarded against any manipulative practices. Even NGO's, uninterested independent parties and class action suites may be permitted before such judicial authority with appropriate appellate process. The vibrant capital market and sustained growth in the equity segment as well as in the debt segment are crucial for the Indian economy. The general investors can channelize huge risk capital to the capital market fuelling growth momentum, subject to having credibility, integrity and fair treatment in addition to transparency.