azb & partners - fujitsu...azb & partners advocates & solicitors inter alia…is a legal newsletter...

2 september 2013

AZB & PARTNERS ADVOCATES & SOLICITORS

Corporate & SCRA

v The Companies Act, 2013 (‘2013 Act’), which will replace the Companies Act, 1956 (‘1956 Act’) in a phased manner, received Presidential assent on August 29, 2013, and was published in the Official Gazette on August 30, 2013, with only Section 1 of the 2013 Act being notified (which deals with the title, extent of operation and applicability of the 2013 Act). The Ministry of Corpo-rate Affairs, Government of India (‘MCA’) has subsequently notified 98 Sections of the 2013 Act, which have taken effect from September 12, 2013. By a subsequent clarification issued by MCA on September 18, 2013, the relevant Sections of the 1956 Act, which correspond to the notified Sec-tions (although the specific repealed Sections of the 1956 Act have not been listed out by the Gov-ernment), have ceased to have effect from September 12, 2013. Apart from the Sections of the 1956 Act that have been repealed by the aforesaid clarification, all other provisions under the 1956 Act continue to be in force.

Some of the key provisions of the 2013 Act that have been notified, and are effective as of date, include inter alia:

i. Provisions relating to public offers. Notably, however, provisions relating to private placement are yet to be notified.

ii. Section 58(2) of the 2013 Act, which provides that a contract or arrangement between two or more persons in respect of the transfer of securities of a public company is now enforceable as a contract. This, therefore, lays to rest company law concerns (as existing under the 1956 Act) with regard to the enforceability of share transfer re-strictions in a public company. Also, please refer to the write up “Notification under the Securities Contract (Regulation) Act, 1956” below, which sets out the position on enforceability of put/call options in relation to the shares of public companies.

iii. Section 180 of the 2013 Act (corresponding to Section 293 of the 1956 Act), which re-stricts the ability of the board of directors of a company to undertake certain acts without the prior approval of the shareholders by way of a special resolution, includ-ing inter alia disposing of the whole or substantially the whole of the undertaking of the company, making investments, borrowing money etc. The significant differences between Section 180 and the corresponding law under the 1956 Act are that: (i) the provisions of this Section are now applicable to all companies and not just public companies; and (ii) the threshold of shareholders’ approval for the prescribed ac-tions has been raised from an ordinary resolution to a special resolution. Further, unlike the corresponding Section in the 1956 Act, this Section has defined an “under-taking” and “substantially the whole of the undertaking”. However, in doing so, while the 2013 Act does specify thresholds of income and investment in an “undertaking”, it fails to clarify what would constitute an “undertaking”.

iv. Section 185 of the 2013 Act (corresponding to Section 295 of the 1956 Act) governing loans to directors (and any person in whom such director is interested). Pursuant to this provision, loans/ guarantees by a company to its directors/ persons in whom such directors are interested have been prohibited (unless otherwise permitted by the 2013 Act). What is significant about this Section, when compared with the existing law is that (i) the provisions have now been made applicable to all companies and not just public companies; and (ii) existing exemptions with regard to loans/ guarantees from a holding company to/ in relation to a wholly owned subsidiary have been removed. This effectively means that a holding company may not be able to provide a loan to/ a guarantee in relation to the indebtedness of a wholly owned subsidiary where there is, for instance, any common director on the board of directors of such entities, which is very likely in group structures. It remains to be seen whether this provision will be clarified/ relaxed by way of rules.

v. Section 192 of the 2013 Act, which places a restriction on non-cash transactions in-volving directors. Under this provision, no company is permitted to enter into an ar-rangement by which a director of the company or its holding, subsidiary or associate company or a person connected with him or the company acquires or is to acquire assets for consideration other than cash, from the company or such director respec-tively, except with prior shareholder approval for such arrangement.

vi. The following new provisions dealing with the prohibition on forward dealings and prohibition on insider trading:•Pursuant to Section 194, directors and key managerial personnel are prohibited

from buying, in a company, its holding company, subsidiary or associate company, a right to call for, or a right, as they may elect, to call for delivery, or a right to make delivery at a specified price and within a specified time, of a specified number of

v Companies Act, 2013

september 2013 3


relevant shares or a specified amount of relevant debentures.•Pursuant to Section 195, insider trading in securities has been prohibited in all

companies, and not just with regard to listed companies, which is quite unusual. The Section extends in particular to insider trading by directors/ key managerial personnel, and defines the term “insider trading”. It is not clear how this will im-pact the ability of promoter directors to deal with shares held by them, and/or the status of stock options held by directors/key managerial personnel.

It may be noted that pursuant to Section 458 of the 2013 Act, the power to enforce Sections 194 and 195 with regard to listed companies has been delegated to the Securi-ties and Exchange Board of India (‘SEBI’).

vii. Section 447, which defines “fraud” extremely broadly. Any “officer who is in default”, which will include directors and key managerial personnel, could be held liable for fraud. The punishment prescribed in relation to a fraudulent act is imprisonment for a period ranging from six months to 10 years, and a fine being not less than the amount involved in the fraud, but extending up to three times the amount involved in such fraud.

viii. A number of Sections giving the Central Government the power to constitute bodies, including the National Company Law Tribunal (‘Tribunal’), and to specify rules in relation thereto have been notified.

MCA has clarified that until a date is notified by the Central Government under Section 434 of the 2013 Act, for transfer of all matters, proceedings or cases to the Tribunal, the Board of the Company Law Administration will exercise the powers of the Tribunal under Sections 24, 58 and 59 of the 2013 Act.

Several provisions of the 2013 Act require drafting and notification of rules in relation thereto. In this regard, the Central Government has published two tranches of draft rules, as well as draft forms corresponding to various provisions of the 2013 Act. Stakeholders have been pro-vided with time up to October 8, 2013 and October 19, 2013 (respectively) to provide comments/ suggestions on these draft rules.

v On October 3, 2013, SEBI issued a notification under Sections 16 and 28 of the Securities Con-tracts (Regulation) Act, 1956 (‘SCRA’), permitting the entering into of the following types of con-tracts: (a) spot delivery contracts; (b) contracts for sale or purchase of securities or contracts in derivatives, as permissible under SCRA, the SEBI Act, 1992 (‘SEBI Act’) and the rules and regula-tions made under such statutes; and rules, as well as the regulations and bye-laws of a recognised stock exchange; (c) contracts for pre-emption, including right of first refusal, tag-along or drag-along rights contained in the shareholders agreements or articles of association of companies; and (d) contracts containing an option for purchase or sale of securities. Any other contracts for the sale or purchase of securities may be entered into, only with the prior approval of SEBI.

In particular, contracts containing an option for purchase or sale of securities (i.e., a “put” option or a “call” option) are permissible, subject to satisfaction of the following conditions:

i. the title and ownership of the underlying securities are held continuously by the sell-ing party to such a contract for a minimum period of one year from the date of enter-ing into the contract;

ii. the price or consideration payable for the sale or purchase of the underlying securi-ties, pursuant to the exercise of any option contained therein, is in compliance with all the laws for the time being in force, as applicable; and

iii. the contract has to be settled by way of actual delivery of the underlying securities.This notification clarifies that it does not affect or validate any contract entered into prior

to October 3, 2013. The SEBI notification further rescinds the notification dated March 1, 2000 (except with respect to things done or omitted to be done prior to such rescission), by which only: (a) spot delivery contracts; and (b) contracts for cash or hand delivery or special delivery or contract in derivatives as permissible under SCRA or the SEBI Act and rules and regulations made under such statues; and rules, regulations and bye-laws of a recognised stock exchange could be entered into without the prior consent of SEBI. This notification, therefore, puts to rest issues pertaining to the enforceability of put options and call options with respect to such op-tions entered into on or after October 3, 2013.

v Notification under the Securities Contracts (Regulation) Act, 1956

4 september 2013


Capital Markets & Securities

v SEBI, by way of a circular dated July 29, 2013 (‘AIF Circular’), issued directions concerning operational, prudential and reporting norms for Alternative Investment Funds (‘AIF’). SEBI has provided certain additional requirements for Category III AIFs including risk management and compliance, redemption norms and prudential requirements. Additionally, all categories of AIFs are required to submit reports in a prescribed format to SEBI in varying frequencies, depending on whether or not such AIFs undertake leverage.

v SEBI has, on August 8, 2013, issued the SEBI (Buy Back of Securities) (Amendment) Regula-tions, 2013 (‘Buy Back Amendment’) amending the SEBI (Buy Back of Securities) Regulations, 1998, which are applicable to listed Indian companies. The key changes pursuant to the Buy Back Amendment are:

i. The size of a buy back offer undertaken through the open market cannot exceed 15% or more of the paid-up capital and free reserves of a company, where previously, there was no prescribed limit;

ii. A company cannot make any offer of a buy back within a period of one year from the date of closure of a preceding offer for buy back, where previously, this restriction extended only for a period of six months;

iii. The restriction on dealing in securities of the company whose shares are the subject matter of a buy back offer during the period of such offer has been expanded to in-clude off-market transfers, including inter se transfers of shares amongst promoters. Furthermore, the restriction will now be applicable from the date of the resolution passed by the shareholders or the board of directors of the company, as the case may be (as versus only during the offer period), up to the closing of the buy back offer; and

iv. Upon closure of a buy back offer, the company must not raise further capital for a period of one year from such closure of the offer, except in discharge of subsisting obligations, this restriction was also previously only for a period of six months.

v SEBI constituted a Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments (‘Committee’) chaired by Mr K. M. Chandrasekhar, comprising representatives from the Government of India, the Reserve Bank of India (‘RBI’) and various market participants, including AZB & Partners’ Managing Partner, Ms Zia Mody. The Commit-tee recently submitted its report containing recommendations regarding the regulatory frame-work for rationalisation of foreign portfolio investments. The key recommendations of the Committee include the following:

i. Creation of a single investor class of foreign portfolio investors (‘FPI’) by merging the present day foreign institutional investor (‘FII’), qualified foreign investor (‘QFI’) and non resident Indian (‘NRI’) regimes with common market entry, limit monitoring and reporting norms.

ii. Defining portfolio investments as investments by any single investor or investor group in up to 10 per cent of the equity securities of listed Indian companies and investments in non-voting securities of Indian companies, listed or not, up to pre-scribed levels.

iii. Simplification of entry norms and risk based know your customer (‘KYC’) for differ-ent categories of foreign portfolio investors (‘FPIs’); and

iv. Amendments of existing laws and regulations to reflect the recommendations above.Based on the recommendations of the Committee, SEBI recently approved the draft SEBI

(Foreign Portfolio Investors) Regulations, 2013 incorporating the aforesaid recommendations.

Foreign Investment & Trade

v The Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India (‘DIPP’), by its Press Note No. 5 (2013 Series) dated August 22, 2013, has amended the conditions in the existing foreign direct investment (‘FDI’) policy with respect to FDI multi-brand retail trading as follows:

i. At least 50% of the total FDI brought in the first tranche of US$100 million must be invested in backend infrastructure within three years;

ii. At least 30% of the value of procurement of manufactured/processed products pur-chased, must be sourced from Indian micro, small and medium industries (i.e. those having a total investment in plant and machinery not exceeding US$2 million. How-

v Operational, Prudential and Reporting Norms for Alternative Investment Funds

v Amendment to the SEBI (Buy Back of Securities) (Amendment) Regulations, 2013

v Chandrashkhar Committee Recommendations regarding Harmonization of Routes for Portfolio Investments

v Revisions in the FDI Policy

september 2013 5


ever, an entity will continue to qualify as a small industry even if the above mentioned investment outgrows US$2 million, following the initial engagement with the entity;

iii. Retail sales outlets may be set up in cities with a population of more than one million or any other city, as per the decision of the respective State Government.

Further, DIPP, by its Press Note No. 6 (2013 Series) dated August 22, 2013 has amended the existing policy on FDI, by liberalising FDI caps/ approval requirements in the following sectors, as under:

sector cap route

Tea Sector including tea plantations 100% Approval

Petroleum and Natural Gas 49% Automatic

Courier Services 100% Automatic

Telecom Services Upto 49% Automatic 49% to 100% Approval

Test Marketing 100% Automatic

Single Brand Product Retail Upto 49% Automatic 49% to 100% Approval

Asset Reconstruction Companies Upto 49% Automatic 49% to 100% Approval

Commodity Exchanges 49% Automatic

Credit Information Companies 74% Automatic

Infrastructure Company in the Securities Market 49% Automatic

Power Exchanges 49% Automatic

Defense Cabinet Committee on Security (‘CCS’) may approve proposals on case to case basis beyond 26% which are likely to result in access to state of the art technology in the country.

Further, certain specific conditions/restrictions have been imposed, as mentioned sector wise below:

i. Tea sector: The requirement of 26% compulsory divestment in favor of an Indian partner/ Indian public within a period of five years has been deleted.

ii. Defense: Applications for FDI above 26% will be considered in cases that are likely to result in the access to modern and state of the art technology. These will be examined by the Department of the Defense Production (‘DoDP’) in addition to the Foreign In-vestment Promotion Board (‘FIPB’). Based on the recommendations of FIPB and the DoDP, approval of CCS will be sought.

iii. Single Brand Retailing: A non resident entity or entities who are owners of the brand or otherwise is permitted to undertake single brand product retailing. This may be undertaken either directly or through an agreement with the brand owner.

iv. Credit Information Companies: A registered foreign institutional investor (‘FII’) un-der the Portfolio Investment Scheme (‘PIS’) will be permitted to invest upto 24% only in listed credit information companies within the overall limit of 74% of the permit-ted foreign investment.

v The RBI has, by a circular dated August 14, 2013, reduced the limit applicable for overseas di-rect investments (‘ODI’) of an Indian party, under the automatic route. The existing ODI limit for all fresh transactions under the automatic route has been reduced from 400% of the net worth of an Indian party to 100% of its net worth, as on the date of the last audited balance sheet. The reduced limit will also apply to remittances made under the ODI scheme by Indian companies for setting up unincorporated entities outside India in the energy and natural resources sectors. This reduced limit is, however, not applicable to ODIs by Navaratna Public Sector Undertakings, ONGC Videsh Limited and Oil India Ltd. in overseas unincorporated entities and incorporated entities in the oil sector. RBI subsequently issued a clarification on September 4, 2013 clarifying that the new 100% limit will not apply to financial commitments funded out of exchange earn-ers’ foreign currency account, or out of funds raised by way of American Depository Receipts and Global Depository Receipts by the Indian party. Also, the limit of 400% of the net worth of the Indian party has been retained for financial commitments funded by way of eligible external commercial borrowings. A carve out has also been provided for existing financial commitments exceeding the revised limit.

v RBI has, by its circular dated August 14, 2013, reduced the limit of remittances that may be made by resident individuals under the liberalised remittance scheme (‘LRS’) from US$200,000 to US$75,000 per financial year. Further, the LRS is no longer permitted to be used for acquisition of immovable property outside India. Resident individuals are now allowed to set up joint ven-

v Overseas Direct Investment

v Revised limit for Liberalised Remittance Scheme for Resident Individuals

6 september 2013


tures/wholly owned subsidiaries outside India under the ODI route within the revised LRS limit. RBI has, by a notification dated August 14, 2013, amended the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 to give effect to the revised LRS limit.

v RBI has, by a circular dated August 19, 2013 increased the limit for FDI in asset reconstruc-tion companies (‘ARCs’) from 49% to 74%, subject to the condition that no sponsor is permitted to hold more than 50% of the shareholding in an ARC, under the FDI or FII route. Since this 74% cap is applicable to foreign investment under both FDI and FII routes, the earlier prohibition on investment by FIIs in ARCs will no longer be applicable. Additionally, the total shareholding of a single FII is not permitted to exceed 10% of the total paid up capital of an ARC. Further, the limit of FII investment in security receipts has been enhanced from 49% to 74% of the paid up value of each tranche of scheme of security receipts issued by ARC, and the individual investment limit of 10% of a single FII in each tranche of security receipts issued by ARCs has been dispensed with.

v RBI has, by its circular dated August 20, 2013, made amendments to Schedule 3 of the For-eign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, thereby liberalising the manner in which NRIs may invest under the PIS on a repatriation and/or non-repatriation basis in shares and convertible debentures, and/or may purchase and sell shares or convertible debentures under the PIS through an Authorised Dealer (‘AD’). Such investment by NRIs under the PIS is subject to prescribed conditions including inter alia:

i. An NRI intending to buy and sell shares/convertible debentures of an Indian com-pany must apply in the prescribed form to the designated AD, while submitting all true relevant information;

ii. An NRI is not permitted to hold more than 5% of the paid up capital/ paid up value of each series of convertible debentures of any Indian company;

iii. The AD will have to open a separated sub account of NRE/NRO account for the exclu-sive purpose of routing the PIS transactions for such NRI, for which a classification must be made between permissible credits and debits in the account;

iv. The purchase of equity shares or series convertible debentures in an Indian company by NRIs must not exceed 5% of the paid up capital of the company, subject to an over-all ceiling of 10% of the total paid up capital of the company;

v. Such purchased shares or convertible debentures will be held and registered in the name of the NRI and may be sold on Indian stock exchanges without any lock-in pe-riod; and

vi. Prescribed transfer restrictions as well as certain other reporting and monitoring requirements for the AD.

Banking & Finance

v RBI has, by a circular dated September 4, 2013, permitted borrowings under the external commercial borrowing route to be utilised for general corporate purposes under the approval route, subject to the following conditions:

i. The lender (i.e. the foreign equity holder) directly holding at least 25% of the equity of the borrower;

ii. End-uses for any other purpose restricted under the ECB guidelines, not be under-taken with the proceeds; and

iii. No prepayment or repayment to be permitted before the lapse of seven years from the average drawdown date.

v Following an announcement made by the recently appointed RBI Governor Dr. Raghuram Rajan, RBI constituted a Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households chaired by Mr. Nachiket Mor (‘RBI Committee’). The terms of ref-erence of the RBI committee include framing a clear and detailed vision; and devising design principles to guide institutional frameworks and regulations for achieving financial inclusion and financial deepening in India. Ms Zia Mody, the managing partner of AZB & Partners is one of members of the RBI Committee.

v RBI has, by a circular dated August 14, 2013, advised that with effect from August 24, 2013 and July 26, 2013, respectively, fresh deposit liabilities in the nature of FCNR(B) and NR(E), with ma-turities beyond three years, will not be taken into account for calculating the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). By another circular on the same date, the existing

v Foreign Investments in Asset Reconstruction Companies

v Investments by Non-resident Indians under Portfolio Investment Scheme - Liberalisation of Policy

v External Commercial Borrowings from Foreign Equity Holder

v RBI Committee on Comprehensive Financial Inclusion

v Incentives to mobilise FCNR(B) and NR(E) deposits

september 2013 7


regulatory interest ceiling applicable for NR(E) deposits with maturities of over three years, has been removed and banks are free to set interest rates for such deposits as they deem fit. Similarly, the existing regulatory interest ceiling applicable for FCNR(B) deposits of maturity three to five years has been raised to LIBOR + 4.00% (from LIBOR + 3.00%).

These measures indirectly amount to incentives for banks to raise such deposits, which are exclusively funded through inward remittances of foreign currency and appear to be another step in encouraging foreign currency inflow into India.

v RBI has, by a circular dated September 2, 2013, permitted certain banks to make variations to the methodology of computation of their Base Rates. This dispensation has been permitted for banks that have not yet completed one year of banking operations as on September 2, 2013 and is available till the completion of one year. Banks commencing banking operations after Septem-ber 2, 2013 are also permitted to revise the methodology within one year from commencement.

v RBI has, by a circular dated September 3, 2013, mandated that housing loans sanctioned by banks to individuals for purchase of houses under construction must be disbursed solely to cor-respond with the scheduled progress of construction. This puts an end to the practice of upfront disbursement of a disproportionately large amount of the loan in the absence of corresponding physical completion of the housing project. It may be noted that this practice is customary in project finance where disbursements are usually tied to monitoring and certification of project progress during the construction period.

Telecom & Media

v Keeping in mind the National Telecom Policy 2012, the Department of Telecommunications (‘DoT’) under the Ministry of Communications and Information Technology has introduced the concept of a Unified License (‘UL’). On August 19, 2013, DoT released certain guidelines, which will govern the grant of the UL. With the introduction of the UL, licenses for telecom service pro-viders will be delinked from the previous ‘spectrum’ license regime. While a company can hold only one license, it can get permits for multiple services, including access, internet, national long distance, international long distance etc.

Following are some of the key guidelines released by DoT:i. The UL will be for a period of 20 years, irrespective of the validity period of the li-

cense already held. There is an option of renewal for a further period of 10 years if the application is made during the 19th year.

ii. Guidelines specify that the licensee “shall not hold any other license for the services covered under the scope of Unified License. In case the Licensee obtains any other Li-cense by way of acquisition or merger, the License so obtained shall have to be migrated and merged to the aforesaid Unified License as per prescribed procedure”. Accordingly, no telecom operator can hold any stake in a rival operator in the same telecom circle. As of now, an operator can hold up to 9.99% stake in a competitor in the same circle.

iii. Telecom operators will have to pay ¤150 million as non-refundable entry fee, as well as an annual license fee as a percentage of Adjusted Gross Revenue (‘AGR’) for the relevant service-area. The license fee will be 8% of the AGR, an increment to the cur-rent 5%.

iv. Licensees should ensure that foreign equity in the company does not exceed 74% dur-ing the entire license period. FDI of up to 49% will be allowed under the automatic route, and up to 74% through prior approval of FIPB.

v. Licensees should have a minimum paid-up capital and a combined minimum net worth of at least ¤250 million.

v Pursuant to a request dated July 12, 2013 from the Ministry of Information and Broadcast-ing, the Telecom Regulatory Authority of India (‘TRAI’) on July 30, 2013, issued a consultation paper on issues relating to FDI in the broadcasting sector (‘FDI Consultation Paper’). The FDI Consultation Paper was issued to obtain views from stakeholders for liberalising the existing limits of foreign investment in the broadcasting sector. Stakeholders were invited to provide their views on the FDI Consultation Paper by August 12, 2013. Pursuant to the comments received by the stakeholders, TRAI has on August 22, 2013 released recommendations, including inter alia:

i. enhancement of the FDI limit for the broadcast carriage services to 100% from the existing limit of 74%;

ii. status quo to be maintained regarding FDI limits (100% through the approval route) for uplinking of “non-news and current affairs” TV channels and downlinking of TV channels;

v Special Permission for Change to Methodology in Computation of Base Rate

v Disbursal of Housing Loans

v Guidelines for Grant of Unified License

v TRAI has issued Recommendations for Enhancement of FDI in the Broadcasting Sector

8 september 2013


iii. for uplinking of “news & current affairs” TV channels and FM radio services, it is pro-posed to enhance the FDI limit to 49% from the existing limit of 26%; and

iv. streamlining of the FIPB approval process and making it time bound.v. The proposed limits are yet to be approved by DIPP.

v Pursuant to a request from the Ministry of Information and Broadcasting (‘MIB’), TRAI, on April 17, 2013, issued a consultation paper on Guidelines/Accreditation Mechanism for Televi-sion Rating (‘TRP’) Agencies in India (‘TRP Consultation Paper’) to obtain views on the issues relating to the same. Stakeholders were invited to provide their views on the TRP Consultation Paper by May 9, 2013. Pursuant to the comments received by stakeholders, TRAI has, inter alia, issued certain recommendations on September 11, 2013, and the proposed guidelines are to be notified by MIB within a period of two months.

Insurance & Real Estate

v On July 19, 2013, the Insurance Regulatory Development Authority (‘IRDA’) notified the IRDA (Licensing of Banks as Insurance Brokers) Regulations, 2013 (‘Insurance Regulations’). Under the Insurance Regulations, IRDA has permitted scheduled banks to act as insurance bro-kers. The proposal has been made to enable insurance companies to expand their distribution network. Any bank seeking to obtain a license to act as an insurance broker is required to obtain the prior approval of RBI for the same. The roles and responsibilities and caps on brokerage payable by a bank acting as an insurance broker are in line with the roles and responsibilities outlined for non-bank brokers. Interestingly, there is no stipulation permitting banks to act as reinsurance brokers.

v On August 29, 2013, the Lok Sabha passed the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2013 (‘Land Bill’). On September 4, 2013, the Rajya Sabha also passed the Land Bill. The Land Bill seeks to replace the existing Land Acquisition Act, 1894 (‘Land Act’), and has received the Presidential assent on September 26, 2013. The Land Bill will come into force once the same is notified.

The Land Bill inter alia requires the consent of 80% of land owners for acquisition of land by a private company for public purposes, and consent of 70% of land owners for acquisition of land for public-private partnership projects. It also stipulates that a “social impact assessment” and “environment impact assessment”, if required, be carried out by an expert group prior to every acquisition. In case of irrigation projects that are subject to environment impact assess-ment under any other law, the requirements of carrying out social impact assessment will not apply. The award for the compensation is to be determined on the basis of the market value of the land considering the prescribed parameters, and a rehabilitation and resettlement scheme for the affected persons is to be formulated, along with the appointment of an administrator for the same. The possession of the land will be granted by the Collector only after ensuring payment of full compensation and monetary relief under the rehabilitation and resettlement award within the prescribed time period.

Under the Land Bill, the definition of ‘public purpose’ inter alia includes (i) strategic pur-poses i.e., naval, military, air force and armed forces; (ii) infrastructure projects; (iii) projects for project-affected families; and (iv) housing projects/planned development for villages, and residential projects for weaker sections of society, poor, landless, etc.

The Land Bill also requires unutilised land to be returned to the original owner/heirs if the same is not utilised, within five years, for the purpose for which it was acquired. The Land Bill further provides that if acquired land is transferred to any person for consideration, and if no development has taken place for five years from the acquisition, then 40% of the appreciated land value will be shared with the original owners/heirs. This will be applicable only on the first sale/transfer of such acquired land.

Although the Land Bill provides adequate safeguards to land owners/occupants in the form of resettlement and compensation packages, and transparency in the process of acquisition/compensation/ rehabilitation, etc., the Land Bill also impacts the ability of private owners to pur-chase land exceeding the prescribed threshold limits (as maybe prescribed by each State Gov-ernment) through private negotiations, which was earlier unrestricted.

v Licensing of Banks as Insurance Brokers

v The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2013

v TRAI has Issued Recommendations on Guidelines for Television Rating Agencies

september 2013 9


Taxation

v In order to reduce the increasing number of Transfer Pricing (‘TP’) disputes, Section 92CB has been inserted in the Income-tax Act, 1961 (‘ITA’) pursuant to the Finance (No.2) Act, 2009, to provide that determination of arm’s length price will be subject to the Safe Harbour Rules (‘Rules’). “Safe Harbour” means circumstances in which the Indian revenue authorities will ac-cept the taxpayer’s declared transfer price.

The Rules have now been finalised by the Central Board of Direct Taxes (‘CBDT’) as below1:

Activity / Sector

Software development services & Information technology enabled services

Knowledge processes outsourcing services

Intra-group loan to wholly owned subsidiary (‘WOS’) where such loan is: Less than ¤500 million Greater than ¤500 million

Corporate guarantee to WOS with amount: • Less than ¤ one billion • More than ¤ one billion and WOS accorded safest credit rating

Contract research and development (‘R&D’) services relating to software development

Contract R&D services relating to generic pharmaceutical drugs

Manufacture and export of core auto components

Manufacture and export of non-core auto components

Recommended Safe Harbour

Minimum operating profit margin to be: 20% where transaction value ≤ ¤ five billion 22% where transaction value ≥ ¤ five billion

Minimum operating profit margin to be 25%

Base rate of State Bank of India as on 30th June of the relevant previous year plus • 150 basis points • 300 basis points

Commission / fee rate to be: • ≥ 2% per annum on the amount guaranteed • ≥ 1.75% per annum on the amount guaranteed




Minimum operating profit margin to be 8.5%

It is further provided that in implementation of these Rules, the Safe Harbour for the speci-fied sector will be applicable for five assessment years (‘AYs’) beginning from 2013-14. Impor-tantly, the Rules are applicable only where a taxpayer exercises its option to be governed by such Rules, and furnishes details in a specified form (Form 3CEFA) by the due date of filing of Return of Income.

v ITA (as amended by Finance Act, 2013) provided that Tax Residency Certificate (‘TRC’) will be sufficient proof for a non resident (‘NR’) to claim treaty benefits. It was further provided, however, that the NR will be required to furnish such additional information as may be pre-scribed. CBDT has now prescribed2 that in addition to a TRC, a NR will be required to furnish information in Form No. 10F, which includes key details including status; nationality/country of incorporation; tax identification number in the country of residence; period for which the residential status, as mentioned in TRC, is applicable; and address of the assessee in the country outside India, during the period for which the TRC, is applicable.

To the extent information required in Form No. 10F is already contained in TRC, the same need not be reproduced in Form No. 10F. Further, the NR may be required to provide back-up material in support of information provided in such form.

v In continuation of Finance Minister’s Budget Speech 2013-14, the Government has set up a Tax Administration Reform Commission (‘TARC’) under the chairmanship of Dr. Parthasarathi Shome to review the application of tax policies and tax laws and submit periodic reports for its implementation on a continuous basis.3

Additionally, the Finance Minister has also constituted a forum under the chairmanship of Dr. Shome for exchange of views between industry groups and the Government on tax related issues/ disputes4.

v As per amendments made to ITA by Finance Act, 2013, the General Anti Avoidance Rule (‘GAAR’) provisions will apply to income arising on or after April 1, 2015 i.e. Financial Year 2015-

1 Notification No. 73 of 2013 [F.No.142/28/2013-TPL]/SO 2810 (E) dated September 18, 2013, issued by Government of India, Ministry of Finance, Department of Revenue.

2 Income-tax (Eleventh Amendment) Rules, 2013; Notification No. 57/2013 [F.NO.142/16/2013-TPL]/SO 2331(E), dated August 01, 2013.

3 Press release dated August 13, 2013 and August 26, 2013, issued by Press Information Bureau, Government of India.

4 Press release dated July 18, 2013, issued by Press Information Bureau, Government of India.

v Central Board of Direct Taxes issues the Safe Harbour Rules

v CBDT prescribes Additional Requirement for Non-Residents Claiming Treaty Benefits

v Key Steps Taken by Government for Formulation/ Rationalisation of Tax Policy

v CBDT Notifies Rules for Application of General Anti Avoidance Rule

10 september 2013


16/ AY 2016-17. CBDT has now notified rules5 for application of GAAR. These rules, inter alia, pro-vide for certain exemptions from applicability of GAAR and the procedures for application of GAAR by the tax authorities. In terms of these rules, the following transactions/persons are ex-empt from applicability of GAAR:

i. Arrangement where tax benefit in relevant AYs in aggregate, to all the parties in-volved, does not exceed ¤ thirty million;

ii. FIIs not availing treaty benefits;iii. NR investors in FIIs; andiv. Any income accruing/ arising/ deemed to accrue or arise to any person from transfer

of investments made before August 30, 2010.

Intellectual Property

v The Drugs and Cosmetics Rules, 1945 (‘DCR’) had been amended in January 2013, thereby inserting a Rule 122DAB and a new Appendix XII in Schedule Y (‘DCR Compensation Rules’). The DCR Compensation Rules inter alia specify a procedure for processing of reports of Serious Adverse Events (‘SAEs’), including deaths occurring during clinical trials to arrive at the cause of death and to determine the quantum of compensation.

Subsequently, on March 14, 2013, the Drugs Controller General of India (‘DCGI’) constituted three independent expert committees under the chairmanship of Dr AK Agarwal, Maulana Azad Medical College (‘Expert Committee’) to inter alia examine the SAEs of deaths occurring dur-ing clinical trials, and to recommend the cause of death, and further, to determine the quantum of compensation, if any, to be paid by the sponsor or his representative, whoever had obtained permission from DCGI.

The Expert Committee has now arrived at a formula to be followed for the determination of quantum of compensation in case of clinical trial related death. The Expert Committee has re-lied on the Workmen’s Compensation Act, 1923 (‘WC Act’) and the factors mentioned under the WC Act for calculating the amount of compensation in case of clinical trial related deaths. The Expert Committee was of the view that a constant base amount should be decided on which the variables such as age and risk should be applied to determine the quantum of compensation. The Expert Committee arrived at a formula factoring in age, risk and base amount for computing the quantum of compensation in case of SAEs related to clinical trial death. The Expert Committee has also mandated that a fixed amount of ¤200,000 should be paid to patients whose expected mortality is 90% or more within 30 days. As the Expert Committee has been constituted by DCGI, it appears that DCGI will henceforth take the above formula into consideration for determina-tion of the quantum of compensation in the cases of clinical trial related SAEs resulting in death.

Litigation

v Acknowledging the possible threat to persons who file complaints accusing public servants of corruption, the Supreme Court (‘SC’) held, in the case of Manjeet Singh Khera v. State of Maharashtra6, that in cases where the prosecuting authority acts on a complaint against corrup-tion, conducts its enquiry and lodges a criminal case on the basis of such enquiry, the accused person cannot be said to be prejudiced by the non-disclosure of the complaint or the identity of the Complainant.

The Petitioner before SC was an accused facing trial under Section 13(2) read with Section 13(1)(e) of the Prevention of Corruption Act, 1988 (‘Act’) along with Section 109 of the Indian Penal Code, 1860 before the Special Sessions Court, Greater Bombay, Maharashtra. The sections invoked under the Act pertain to criminal misconduct by a public servant where he cannot ac-count for pecuniary resources or property disproportionate to his income. The Petitioner had applied to the Special Sessions Court for a copy of the complaint and the name of the Com-plainant on the basis of which the Anti-Corruption Bureau, State of Maharashtra conducted an enquiry and lodged a criminal case. The Special Sessions Court passed an order rejecting the Petitioner’s application. The order of the Special Sessions Court was upheld by Bombay High Court (‘Bombay HC’) in the Petitioner’s appeal and, hence, the Petitioner moved SC.

The Petitioner relied on the judgment of SC in V.K. Sasikala v. State Represented by Super-

5 Income-tax (17th Amendment) Rules, 2013; Notification No. 75/2013/ [F.No.142/19/2013-TPL], dated September 23, 2013

6 2013 (10) SCALE 525

v Compensation Formula by DCGI for Cases of Clinical Trial Related SAEs of Death

v The Supreme Court Prevents Identity of Complainant from being Disclosed to an Accused Facing Trial under Prevention of Corruption Act, 1988

september 2013 11


intendent of Police7 to contend that the prosecuting authority is duty bound to supply docu-ments that lead to investigation. SC distinguished the ratio of the V.K. Sasikala (supra) judgment by observing that in that case, unlike the Petitioner’s case, the accused had sought copies of doc-uments that formed part of the police report and were in the custody of the Court. SC held that the complaint in question only triggered the investigation, based on which an enquiry report was prepared that ultimately led to the criminal case being lodged.

It was observed that in many situations a person may not want to disclose the identity as well as the information/complaint passed to the Anti-Corruption Bureau for fear of embarrass-ment or a threat to their life. In these circumstances, SC refused to interfere with the order of Bombay HC and dismissed the petition filed by the Petitioner.

v In the case of The Bank of New York Mellon v. Zenith8 a Single Judge of the Bombay HC admitted a winding-up petition against Zenith Infotech Limited (‘Zenith’) and appointed an administrator to take symbolic possession of Zenith’s assets. The winding up petition was ad-mitted despite the fact that Zenith had filed a reference before the Board for Industrial and Fi-nancial Reconstruction (‘BIFR’) under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) which provides for timely detection of sick companies and preven-tive and remedial measures in relation to such companies. The provisions of SICA provide for a freeze of legal proceedings, including winding up proceedings, upon a reference being made under it.

The Single Judge had held that the bar stipulated in Section 22 of SICA (which provides that no winding-up proceedings against a company will lie or be proceeded with further, except with the consent of the BIFR) does not begin to operate by virtue of the mere filing of a reference with the BIFR, as opposed to such reference being registered by BIFR’s Registrar.

By an order dated September 2, 20139, a Division Bench of Bombay HC upheld a decision of the Single Judge of the same Court.

The winding-up petition has been filed by AZB & Partners representing the Bank of New York Mellon (‘BNYM’) in its capacity as a trustee in view of Zenith’s admitted debt, admitted insolvency and admitted default in respect of Foreign Currency Convertible Bonds (‘FCCBs’) in the sum of approximately US$89 million, issued in two tranches, in 2006 and 2007, which became due and payable in August, 2011.

A Special Leave Petition to appeal against the order of the Division Bench was preferred by Zenith before SC, which was dismissed as withdrawn on September 30, 2013.

Incidentally, during the pendency of the appeal before the Division Bench, by way of an or-der stated August 12, 2013, BIFR’s Registrar rejected Zenith’s reference on the ground that Zenith is not an “industrial undertaking”, and is, therefore, not entitled to apply under SICA. Zenith’s appeal against this order to the Secretary, BIFR, was also rejected. The Secretary, BIFR, stated in his order that Zenith had manipulated its accounts, to appear to be an industrial undertaking, given the blatant inaccuracies in Zenith’s balance sheet, its appeal would be rejected. We under-stand that Zenith has preferred a further appeal before the learned Chairman, BIFR.

7 (2012) 9 SCC 771

8 Company Petition No. 28 of 2012 along with Company Application No. 66 of 2012

9 Zenith Infotech Ltd. v. The Bank of New York Mellon Branch; Appeal (L) Nos. 344,347 of 2013 in Company Petition No. 28 of 2012

v Winding up Petition Admitted Despite Reference being Filed under the Provisions of Sick Industrial Companies (Special Provisions) Act, 1985

12 september 2013


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