2012 – A Look Back at Some Key Corporate and Regulatory Developments in India*

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Qualified Foreign Investor (QFI) Framework

Government of India opened the vibrant Indian stock market to another set of potential investors i.e. QFIs. QFIs have been defined as “ buy prednisone 40 in vancouver canada discount prices. canada no prescription best prices, can you buy prednisone legally yes here (i) Resident in a country that is a member of Financial Action Task Force (FATF) or a member of a group which is a member of FATF; and (ii) Resident in a country that  is a signatory to IOSCO’s MMOU (Appendix A Signatories) or a signatory of a bilateral MOU with SEBI. Provided that the person is not resident in a country listed in the public statements issued by FATF from time to time on – (i) jurisdictions having a strategic Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) deficiencies to which counter measures apply, (ii) jurisdictions that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies” who is neither a resident in India as per the Indian Income Tax Act, 1961 or the applicable tax laws nor registered with SEBI as Foreign Institutional Investor or Sub-account or as a Foreign Venture Capital Investor. QFIs need to be Know Your Customer compliant and need to invest through authorised depository participants. QFIs are permitted to avail this route for dealing in listed equities, corporate debt and mutual funds only (with prescribed caps). Under this route, QFIs must transact on delivery basis and are prohibited from investing on behalf of any other investor on the basis of participatory notes or similar instruments. The total limit of shareholding in a company per QFI (including investment under Foreign Direct Investment route) is 5% and 10% for all QFIs put together.

Alternative Investment Fund Regulations

Keeping in mind the need of the hour, the Securities and Exchange Board of India notified the Alternative Investment Fund (AIF) Regulations this year. The new regime provides for establishment of and investments by privately pooled funds with varied investment strategies. Accordingly, three kinds of AIFs have been recognised under the Regulations. Category I AIFs invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable. All funds in respect of which any incentives or concessions have been granted by any Indian regulator or the Indian government are included in this category. Category III AIFs include funds employing diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Hedge funds would fall in this category. Category II AIFs are the ones which neither fall in Category I nor III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in these Regulations. Generally speaking, private equity funds or debt funds in respect of which any incentives or concessions have not been granted by any Indian regulator or the Indian government would fall under this category. The regulatory framework for each of these categories varies. For eg, category III AIF cannot invest more than 10% of the paid up capital in any single company. However, a category I and II AIF have been prescribed a limit of 25%.

General Anti Avoidance Rules (GAAR)

GAAR is an anti avoidance measure which empowers tax authorities to call a business arrangement or a transaction ‘impermissible avoidance arrangement’ and thereby deny tax benefits to the parties.  In the Budget of Assessment Year 2013-14, the Indian Government sought to introduce GAAR in order to plug revenue leakages in cases where parties availed tax benefits in impermissible arrangements or arrangements which are not bonafide. The announcement of the GAAR provisions and the test laid down in these particularly stirred a huge hue and cry within the international investors’ community. There was tremendous confusion over its applicability in terms of type of transactions and effective date.

Under the original proposed rules, an arrangement’ would be an impermissible avoidance arrangement’ if, (a) its main purpose was to obtain a ‘tax benefit’, and (b) it also had one of the following characteristics: (i) it created rights and obligations, which were not normally created between parties dealing at arm’s length; (ii) it resulted in misuse or abuse of the provisions of the tax law; (iii) it lacked commercial substance; (iv) it was carried out by means or in a manner which is normally not employed for an authentic (bonafide) purpose. A ‘tax benefit’ has been defined to mean (i) a reduction or avoidance or deferral of tax or other amount payable under the Act or as a result of a tax treaty; (ii) an increase in a refund of tax or other amount that would be payable under the Act or as a result of tax treaty; (iii) a reduction in total income including an increase in loss.

This was followed by a huge drain capital outflow from India. Given the serious concerns raised by the international investors’ community, the Government postponed the implementation of GAAR for a year to begin with and formed a high level committee to review the proposed provisions. In June 2012, the committee, in its report, attempted to tone down the some of the drastic implications by clarifying certain provisions. For instance, the committee suggested including an express onus of proof that the transaction in question was not bonafide or was purely to avoid tax, on the department. Also, amongst others, it suggested prospective application of the chapter.

Keeping in mind the widespread dissatisfaction, the Government further constituted an independent committee under the Chairmanship of Dr. Parthasarathi Shome. The committee, in its report of November 2012, submitted its final report. The committee suggested deference of application of GAAR provisions to 2016-17. Amongst others, it has also suggested that GAAR should not be invoked in intra-group transactions. It further said that a monetary threshold of Rs 30,000,000 (approx. USD 0.55 mn) of tax benefit should be fixed while applying the provision. Importantly, the report has suggested that where circular number 789 of 2000 with respect to Mauritius is applicable (under which certificate of residence of the Mauritian entity is sufficient evidence of residential status and of ownership), GAAR provisions should not be applied to examine the genuineness of the residency of an entity set up in that country.

Closer to the end of the year, the Finance Ministry has confirmed that amendments to Chapter 10A of the Income Tax Act have been finalised and being discussed with the PM’s office. As per the latest announcement, GAAR has been pushed to 1 April 2016, which has brought cheer to the stock markets. It has also been announced that no deal prior to 30 August 2010 would be scrutinized under the new rules.

New Companies’ Law

Towards the end of the year, the much awaited Companies’ Bill, 2011 was cleared by the Lok Sabha (the Lower House of the Parliament). Unfortunately, the bill could not be taken up in the Rajya Sabha (the Upper House of the Parliament) due to end of the Winter Session. The bill will be taken up in the Budget Session now. Once passed, the Bill will replace a 54 year old Companies’ Act.

Some of the key features of the bill which distinguish the new law from the prevailing one are introduction of the concept of a one person company, increase in number of maximum number of members of a private company from the present 50 to 200, provision for regulation of private placements to a greater extent especially the number of persons and amount limit, introduction of mandatory committee for CSR, specific provisions for class action suits etc.

Developments in Foreign Direct Investment Framework

Year on year, the policy and framework for foreign direct investment into India has been liberalised by the Government and the Reserve Bank of India. In the face of stringent opposition, the Government pushed reforms to open markets to international players in supermarket segment (popularly known as multi-brand retail). This decision of the Government was put to vote in both the Houses and it won by a small margin.

In order to boost the slowing economy further, the Government announced the following measures of liberalisation in foreign investment policies and regime:

1. Foreign direct investment (FDI) limit in single brand retail (B2C trade of single brand goods branded during manufacturing and sold under one roof) has been removed. Now 100% FDI is permitted with conditions like sourcing of 30% of the value of products sold would have to be done from Indian ‘small industries/ village and cottage industries, artisans and craftsmen’ if FDI is beyond 51%. purchase discount medication! buy dapoxetine with paypal . next day delivery, buy cheap .

2. FDI in multi brand retail (B2C trade of several brands of goods) has been introduced. Now 51% FDI is permitted in this sub-sector provided certain conditions are fulfilled. One such condition is an investment of atleast USD $100 mn out of which atleast 50% shall be used for investment in back-end infrastructure. Amongst several other conditions, at least 30% of the value of procurement of manufactured or processed products purchased shall be sourced from Indian ‘small industries’ which have a total investment in plant & machinery not exceeding US $ 1 mn. Retail sales outlets may be set up only in cities with a population of more than 1 mn as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The policy is an enabling one and the Government of India has left it to the Governments of the State and Union Territories for implementation. Currently some states including, amongst others, Andhra Pradesh, Delhi, Haryana and Maharashtra have conveyed their approval.

It would be pertinent to note here that ecommerce has been expressly excluded from the purview of this liberalisation. FDI in ecommerce remains closed for the moment.

1. Although 100% foreign investment is permitted in the power sector, foreign investment in power exchanges was not permitted hitherto. After reviewing the position, Government of India permitted up to 49%, in Power Exchanges. Within this limit, a sub-limit of 26% has been set for FDI and 23% for FII (Foreign Institutional Investor) route. Government approval is required for investment under the FDI route. Under the FII route, only secondary purchases have been permitted. In this sub-sector, there is a prohibition on any single non resident investor (individual or entity) from holding more than 5% of the paid-up capital of these companies, including persons acting in concert.

2. Government has increased foreign investment limits from 49% to 74% in the  purchase discount medication! buy zoloft cod . approved pharmacy, costs. broadcasting sectorin teleports (setting up up-linking HUBs/ teleports); Direct to Home (DTH), Cable Networks (MSOs operating at National or State or District level and undertaking upgradation of networks towards digitalization and addressability) and in Mobile TV as follows:

–Foreign investment up to 49% under the automatic route; and

–Foreign investment beyond 49% and up to 74% permitted under the Government route.

Foreign airlines were, hitherto, not permitted to acquire stake in Indian domestic airlines. Now, the Government has permitted an investment upto 49% by foreign airlines under Government approval route.


 Central Government Press Release dated 1 January 2012, SEBI Circular CIR/ IMD/FII&C/3/2012 dated 13 January 2012 and further amendments.

 Securities And Exchange Board Of India Notification dated 21 May, 2012

 Chapter 10A of the Indian Income Tax Act, 1961

 W.e.f. 10 January 2012.

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* Source: Noerr LLP India Desk Newsletter

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