COMPANY

Foreign investors can get equity in lieu of dividend source business standard and business line
SURAJEET DAS GUPTA
New Delhi, 18 December
In a significant liberalisation of the foreign direct investment policy, the government has permitted the issuance of additional equity shares to aforeign investor that already has shareholding in a company in lieu of its dividend income.
The approval will, however, be subject to the regular conditions on valuation and pricing norms laid down by the Reserve Bank of India.
Such transactions are not permitted under the prevailing policy. The issue of shares other than against cash requires FIPB (Foreign Investment Promotion Board) clearance. But, the policy does not provide for the issuance of equity shares in lieu of dividend to foreign investors.
However, according to the international practice, reinvested earnings are considered foreign direct investment in many countries. That is why, the Department of Industrial Policy & Promotion (DIPP) had referred the issue to the FIPB for suggestions on a policy change or to take a call.
The issue came up before the government when the Bangalore-based Grameen Financial Services Pvt Ltd, engaged in the business of credit financing to groups and individuals, as well as providing credit, thrift and other financial services, made an application to the FIPB. The company wanted approval for the issuance of 28,409 equity shares to its foreign investor, Aavishkar Goodwell India Microfinance Development Company, based in Mauritius, at a premium of ~23 in lieu of its total dividend of ~937,505 payable to the investor for its preference shares in the company.
The company had issued compulsorily cumulative preference shares to the investor in 2009, which were also converted into equity shares.
In the deliberations on the issue, the Department of Financial Services in the ministry of finance conveyed to the FIPB that the matter had been examined in consultation with the Reserve Bank of India and both were of the opinion it should be permitted. However, the department of revenue, also a part of the ministry of finance, opined that the grant of approval for the issuance of equity shares in lieu of dividends should be examined by the DIPP and the Department of Economic Affairs.
The revenue department, however, had objections to the specific proposal on the ground that investment into India was being routed through Mauritius to take advantage of the India-Mauritius DTAC, making it a clear case of treaty shopping.
However, the board in its final decision said the objection of the revenue department was general in nature and could be overruled. Clearance to the change in policy was then granted.
Change in keeping with global practice of treating reinvested earnings as FDI POLICYSHIFT
|Such transactions not permitted under prevailing policy |Issue of shares other than against cash requires FIPB clearance |In many countries, reinvested earnings are considered FDI |New norms to be subject to conditions on valuation and pricing norms laid down by RBI
MISSING TAXREFORM DEADLINES
New direct taxes code unlikely in next Budget

VRISHTI BENIWAL
New Delhi, 18 December
The Direct Taxes Code (DTC), which will replace the Income Tax Act, 1961, is unlikely to be implemented from the next financial year as planned earlier.
Unfazed, the finance ministry is considering announcing some DTC provisions in the Budget 2012-13.
The delay in the roll-out may occur as the chances of Parliament’s standing committee on finance submitting its report on the Bill in the ongoing Winter Session, which concludes on December 23, are bleak.
The ministry is identifying DTC provisions which cannot wait for another year and would best be rolled out from the next financial year itself. These may include some measures in international taxation such as Controlled Foreign Corporation (CFC) and General Anti-Avoidance Rules (GAAR).
“About five to six provisions of DTC, such as CFC and GAAR, may come as part of the Finance Bill in the Budget if the DTC introduction date is pushed ahead,” a finance ministry official told Business Standard .
With barely a week left for the Winter Session to conclude, the ministry fears the report may not be tabled in the current session and DTC would miss the April 2012 deadline. Unlike the Goods and Services Tax (GST), DTC cannot be introduced in the middle of the year.
When asked whether the report would be tabled in the current session, standing committee chairman Yashwant Sinha said, “It looks difficult because only a few days are left.” The fate of GST is already uncertain, with states and the Centre still not able to arrive at a consensus on most of the contentious issues. While the government can’t do much for timely implementation of GST, it does not want to take the blame for stalling direct tax reforms, entirely in its domain.
DTC has already missed one deadline. Earlier, it was scheduled to be implemented from April 2011. But the government postponed it by a year, saying it wanted to give more time to the industry to adjust to the new system.
CFC and GAAR are two key highlights of the proposed DTC and are not there in the existing I-T Act. The DTC Bill has proposed to introduce CFC rules in India for the first time. The rules will allow authorities to tax foreign companies controlled by residents which defer payment of tax. At present, taxing these companies gets deferred as companies delay the payment of dividends. Foreign companies controlled by residents are taxed in the hands of the Indian company only when distributed in the form of dividends.
GAAR and CFC details will be provided separately in the rules to be framed by the finance ministry.
Thin capitalisation rules, which help tax authorities reclassify some of the interest paid on debt as dividend and deduct tax on it, may also come under GAAR. The rules will be introduced to check tax evasion by companies which show higher capital infusion by way of loans instead of equity because interest paid on debt is eligible for tax deduction. Dividends, on the other hand, do not enjoy any deduction as they are paid from the income post-tax.
The DTC Bill, aimed at simplifying tax rules and widening the tax base, was tabled in the Lok Sabha in August 2010 and referred to the standing committee for scrutiny.
Turn to Page 16 >But, govt plans to bring some provisions that can’t wait
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Direct taxes code unlikely...
It proposed a corporate tax rate of 30 per cent, against about 33 per cent at present, and sought to widen tax slabs for taxation of personal income.
Among other things, it proposed book profits be paid at 20 per cent, against 18 per cent at present, in computation of the minimum alternate tax, a levy of wealth tax at one per cent on property worth ~1 crore. It also proposed to switch to investment-linked deductions from profit-linked deductions for Special Economic Zones.

FROM PAGE 1

Sebi againstpolicing role

PRESS TRUST OF INDIA
New Delhi, 18 December
Rejecting the idea of assuming a CVC-like role of anti-corruption watchdog for the private sector, capital market regulator, The Securities and Exchange Board of India (Sebi) has said it wants listed entities to follow a nine-point disclosure norm against non-ethical business practices instead.
Sebi, which regulates thousands of listed companies as well as hundreds of other market entities like brokers, merchant banks and ratings agencies, has informed its board that it can not adopt a private sector role similar to that of the Central Vigilance Commission (CVC) for government entities.
In a memorandum submitted to its board at its last meeting on November 24, Sebi said aCVC-like role “is not within the mandate of Sebi under the existing legal framework”.
At the same board meeting, Sebi approved a new disclosure-based regime for listed companies with respect to nonethical business practices.
As per the decision, companies would need to submit a ‘Business Responsibility Report’, along with their annual reports, to help assess the fulfillment of their environmental, social and the corporate governance responsibilities.
These disclosures, which Sebi has proposed to be based on nine key principles of responsible, transparent and ethical business practices, would initially apply to the top 100 companies.
Regarding the adoption of a CVC-like role in respect of activities of private sector companies, Sebi said its jurisdiction extends to listed companies in the private sector on certain matters delegated under the Companies Act.
“Further, Sebi has been established to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market as enshrined in the Sebi Act," the regulator told its board.
The matter came up for discussion in the backdrop of a proposal to Sebi by Transparency International, a global civil society organisation working against corruption, for exploring the possibility of Sebi performing a CVC-like role with respect to the activities of private companies.
The CVC was set up by the government with a mandate to inquire into offences alleged to have been committed under the Prevention of Corruption Act by certain categories of central government employees, corporations established by or under any Central Act, government companies and other entities owned and controlled by the central government.
Sebi said that Transparency International India (TII) was also working toward eradication of corruption by "bringing together relevant players from government, civil society, business and the media to promote transparency in elections, in public administration, in procurement and in business.” In a letter sent to Sebi in July, inviting the regulator to participate in a Conference on Ethics in Business, TII had suggested exploring the possibility of Sebi performing a role similar to the CVC with regard to the activities of private sector firms.
Sebi participated in the conference, held in August.
Sebi said the conference was focused on the performance of Integrity Pacts (IP), a tool developed by TII for preventing corruption in public contracting.
An IP is an agreement between agovernment agency and all the bidders for a public contract and lays down each parties rights and obligations for prevention of bribery and other corrupt practices.
This tool also introduces a monitoring system with the approval of the CVC that provides for independent oversight and accountability.
Sebi told its board that it was also informed by the TII representatives about their initiatives for extending the principles of business ethics and adoption of IP by corporates in private sector in their business dealings.
Sebi also noted that the “CVC has issued various circulars emphasising the necessity of adopting IP in government organisations in their major procurement activities.” However, in view of the limited procurement activities of public sector banks, insurance companies and financial institutions, these organisations were exempted from the IPs.
Noting that Sebi, being a government organisation, was covered under the said circulars of the CVC, the board was told ". The fact remains that Sebi has only very limited procurement activities.” On the Business Responsibility Report, Sebi told its board that companies were "accountable not merely to their shareholders from a revenue and profitability perspective, but also to the larger society, which is also its stakeholder." “Hence, adoption of responsible business practices in the interest of the social setup and the environment are as vital as their financial and operational performance.” “This is all the more relevant for listed entities, which, considering the fact that they have accessed funds from the public, have an element of public interest involved, and are obligated to make exhaustive continuous disclosures on a regular basis,” the board was informed.
The nine key principles proposed for the new disclosures include the companies conduct and governance being based on ethics, transparency and accountability, promotion of the well-being of all employees, respect toward human rights and environmental issues, among others.
They also call for businesses to act responsibly when engaged in influencing public and regulatory policy.
Says it can’t assume a role for private entities in line with CVC’s for public ones

LEGAL DIGEST
Kolkata multi-storied building
The Supreme Court last week set aside the judgment of the Calcutta high court which had upheld the acquisition of several floors of a building in Kolkata occupied by certain companies. The West Bengal government earlier requisitioned the floors but at the end of the 25-year period, notified the property for acquisition for “public purpose”, namely for permanent office accommodation of the Public Works Department. This was opposed by the owners. However, they were not given a proper hearing and the property was acquired. When the government action was challenged in the high court, both the single judge and the division bench dismissed the petition. In the appeal before the Supreme Court, it was argued that the right to raise objections and being heard was not an empty formality and have been raised to the level of a fundamental right by the court. Agreeing with the contentions, the Supreme Court stated in the judgment, Kamal Trading Ltd vs State of West Bengal, that the objections of the owners were rejected on a “very vague ground”. Mere use of the words “for greater interest of public” is not enough, the court asserted while quashing the acquisition. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Suspicion cannotjustify IT search
The Bombay high court has stated that a roving enquiry based on mere suspicion about the sudden growth of a company did not justify search warrant. The satisfaction of the authorities to authorise search contemplated under Section 132 of the Income Tax Act must be based upon “contemporaneous material and information becoming available to the competent authorities prescribed in that Section. Its availability and nature as also time factor must also be ascertainable from relevant records containing such satisfaction note. Loose satisfaction notes, placed by authorities before each other cannot meet these requirements of law,” the division bench said in the judgment, Spacewood Furnishers vs Director General of Income Tax. The company was searched on a mere suspicion about its sudden spurt in growth. The Assistant Director of Income Tax suspected that the company has been suppressing substantial portion of income by inflating purchases and other expenses. He also felt that the company was catering to high end customers and enjoying very high margins, availing loans against third party NRI deposits whose identity and genuineness was doubtful. It was also alleged that substantial unreconciled amounts were found in the bank account of the company. The high court, however, did not find substance in the allegations and quashed the search undertaken by the authorities. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Internetdomain name dispute
The Delhi high court last week upheld the arbitral award in the dispute between Stephen Koenig and Jagdish Purohit over the domain name internet.in. The arbitrator directed striking off of the name in favour of Koenig. It also held that Purohit was not entitled to the transfer of the name in his favour. Purohit filed a complaint before the .IN Registry of the National Internet Exchange of India (NIXI) invoking the .IN Domain Name Dispute Resolution Policy (INDRP) to the effect that the domain name internet.in registered by Stephen Koenig was identical and confusingly similar to his registered trade mark internet. He also argued that Koenig had no rights or legitimate interests in respect of the domain name and that the name was being used in bad faith. The Koenig defended the domain name registration in his favour. The arbitrator passed the award in which he concluded that the domain name internet.in should be struck off and confiscated and kept by the .IN Registry. He rejected the prayer of Purohit that the domain name should be transferred to him. The high court largely upheld the award, observing that the arbitrator was justified in doubting the purposes of Koenig in having to register as many as 1,747 domain names to carry on his business. The high court also set aside the direction in the award that the domain name internet.in should be confiscated and kept by the .in Registry. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Challenge to airportradartender
The Delhi high court last week dismissed with cost the writ petition of Thales Air Systems SA challenging the revised price bid invited by Airport Authority of India in a global tender. The government and the authority invited bids for supply, installation, testing and commissioning of eight co-located airport surveillance radars for airports at Amritsar, Chennai, Cochin, Kolkata, Mumbai and Delhi. The company claimed it was the lowest bidder and therefore the letter of award should have been issued to it. It further alleged that the authorities wanted to choose either Canada Radar Systems or Eldis and therefore revised the price and called for fresh tender. Eldis offered the lowest bid, but it was contended that it was technically disqualified. After examining the procedure adopted for the tender, the court concluded that the decision was not flawed.

MJ ANTONY
December 15, 2011:
(This column, the first in a series that analyses the Companies Bill 2011, has been contributed by vakilsearch (www.vakilsearch.com), an online legal guidance and legal solutions provider.)
The paramount law governing commercial activity in our country is the Companies Act, 1956.
The Companies Act and the Companies created under the Act dominate industry and even the services sector (in particular IT and ITES), which contribute almost 85 per cent of the Indian economy. Some companies created under it like Tata Sons, Reliance and Wipro are global titans too.
So any change to the law is bound to create economy wide ripples.
On Wednesday, the Companies Bill 2011 was tabled in Parliament by the Corporate Affairs Minister, Mr Veerappa Moily. The much-anticipated Bill proposes sweeping changes to the existing law. While the existing Act has more than 700 sections, the new Bill has been presented with just 470 clauses.
The new Bill was introduced to incorporate the changes that had been suggested by many stakeholders and members after the 2009 Bill had been presented before Parliament.
The Statement of Objects and Reasons of the new Bill state:
The Companies Act, 1956 had been enacted with the object to consolidate and amend the law relating to the companies and certain other associations. The said Act has been in force for about 55 years and had been amended several times.
In view of changes in the national and international economic environment and expansion and growth of economy of our country, the Central Government after due deliberations decided to repeal the Companies Act, 1956 and enact a new legislation to provide for new provisions to meet the changed national and international, economic environment and further accelerate the expansion and growth of our economy. And for this purpose a Bill, namely, the Companies Bill, 2009 was introduced on August 3, 2009 in the Lok Sabha along with the Statement of Objects and Reasons appended to the said Bill outlining its salient features.
The said Bill was referred to the Parliamentary Standing Committee on Finance for examination and report and the Committee gave its Report on August 31, 2010.
Subsequent to the introduction of the Companies Bill, 2009 in the Lok Sabha, the Central Government received several suggestions for amendments in the said Bill. The Parliamentary Standing Committee on Finance also made numerous recommendations in its Report. The Central Government has accepted in general the recommendations of the Standing Committee and also considered the suggestions received by it from various stakeholders.
In view of large amendments to the Companies Bill, 2009 arising out of the recommendations of the Parliamentary Standing Committee on Finance and suggestions of the stakeholders, the Central Government decided to withdraw the Companies Bill, 2009 and introduce a fresh Bill incorporating therein the recommendations of Standing Committee and suggestions of the stakeholder.
Apart from reducing the number of sections drastically, the Bill also brings in changes like a ‘one man company' (which was crucial to bring the Indian law up to steam with developments in corporate law). Some of the changes are:
1. A more extensive range of activities will now be possible online
2. The inclusion of the expression ‘Corporation Sole' within the definition of Company
3. The changing role of Company Secretaries
4. The Mandatory Rotation of Auditors every five years
5. The changes in provisions relating to ‘Independent directors'
6. Bringing in the concept of a ‘One Man Company' to India
7. Corporate Social Responsibility has been made mandatory
8. Substantial judicial powers will be given to the National Company Law Tribunal
9. Increase in the powers of the executive to legislate through notifications
10. Changes relating to managerial remuneration
11. The change in the legal position with regard to Oppression and Mismanagement
And many more.
As is clear, the new Bill seeks to repair and fine tune the 1956 Act. While the intentions are good, it cannot be forgotten that the road to hell is paved with good intentions too.
This series of articles is our sincere attempt to critically analyse the Bill to shed light on vital parts and give you an insight on the things to come.
(To be continued)
Keywords: Companies Bill, 2011, analysis,