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LEGAL UPDATES

1st 12th OCTOBER, 2012

For internal circulation only

TABLE OF CONTENTS 1. CORPORATE LAWS ...................................................................................................... 2


1.1 1.2 1.3 Amendment Of Companies (IDR) Rules, 2004 ...................................................................... 2 Union Cabinet approves amendments to the Companies Bill, 2011 ....................................... 3 Proposed changes to Competition Act, 2002 ......................................................................... 4

2.

FOREIGN EXCHANGE ................................................................................................. 6


2.1 2.2 2.3 All in cost ceilings for ECBs and trade credits ...................................................................... 6 Foreign investment in NBFC Sector Amendment to FDI Scheme ....................................... 6 DIPP to bring Cabinet note on FDI in pharma soon ............................................................. 7

3.

CAPITAL MARKETS ..................................................................................................... 9


Issue of SEBI (Framework for Rejection of Draft Offer Documents) Order, 2012............................. 9

4.

INDIRECT TAXES ........................................................................................................ 11


A brief purview of the new Goods and Services Tax (GST) regime ............................................. 11

5.

FOOD LAWS .................................................................................................................. 14


FSSAI sets new laboratory testing procedures for imported food ................................................... 14

6.

MISCELLANEOUS ....................................................................................................... 15
Union Cabinet to consider amendment to indecency laws ............................................................... 15

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1. CORPORATE LAWS

NOTIFICATIONS, CIRCULARS, AMENDMENTS ETC 1.1 Amendment Of Companies (IDR) Rules, 2004 Contributed by: Madhusudan The Ministry of Corporate Affairs has vide its notification dated 1st October, 2012 amended the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) to provide that: "A holder of IDRs may transfer the IDRs, may ask the domestic depository to redeem them or, any person may seek reissuance of IDRs by conversion of underlying equity shares, subject to the provisions of the Foreign Exchange Management Act, 1999 Securities and Exchange Board of India Act, 1992 or the rules, regulations or guidelines issued under these Acts, or other law for the time being in force." The amendment comes into force with effect from 1st October, 2012. Comments (i) IDRs are instruments issued in India in the form of a depository receipt against the underlying equity shares of an issuing company incorporated outside India. Inspite of the IDR Rules having been issued in 2004, so far, only Standard Chartered PLC, the UK based banking company, had listed its IDRs in India in 2010.

(ii)

(iii) As per PTI reports (8th October, 2012), This would enable Indian shareholders to convert their depository receipts into equity shares of the issuer company and vice versa The move is expected to help in attracting foreign entities to list their IDRs on domestic bourses... The restrictions on fungibility was seen as one of the major factors for foreign entities keeping away from listing their IDRs.

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NEWS

1.2

Union Cabinet approves amendments to the Companies Bill, 2011 Contributed by: Varnika In view of the developments in corporate sector, the Companies Bill was introduced in the Lok Sabha on 3rd August 2009. Thereafter, various recommendations were made by the Parliamentary Standing Committee on Finance, and the bill was reintroduced in the Lok Sabha on 14th December, 2011. The Parliamentary Standing Committee on Finance suggested further modifications to the Companies Bill by way of official amendments to the Companies Bill, 2011, which have been approved by the Union Cabinet on the 4th of October 2012. Some of the relevant amendments approved by the Cabinet deal with the following: (i) The company shall give preference to local areas where it operates, for spending amount earmarked for Corporate Social Responsibility (CSR) activities. Falsely inducing a person to enter into any agreement with bank or financial institution, with a view to obtaining credit facilities made punishable.

(ii)

(iii) The rate of interest on inter corporate loans will be the prevailing rate of interest on dated Government Securities. (iv) In certain cases, a class of companies having multiple business and separate divisional Managing Directors, the same person may be appointed as Chairman as well as Managing Director. (v) Provisions relating to extent of criminal liability of auditors particularly in case of partners of an audit firm reviewed to bring clarity.

(vi) The limit in respect of maximum number of companies in which a person may be appointed as auditor has been proposed as twenty companies. (vii) Appointment of auditors for five years shall be subject to ratification by members at every Annual General Meeting. (viii) 'Whole-time director' has been included in the definition of the term 'key managerial personnel'.

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(ix) The term 'private placement' has been defined. (x) Approval of the Tribunal shall be required for consolidation and division of share capital only if the voting percentage of shareholders changes as a result of such consolidation.

(xi) 'Independent Directors' shall be excluded for the purpose of computing 'one third of retiring Directors'. (xii) Provisions in respect of removal of difficulty modified to provide that the power to remove difficulties may be exercised by the Central Government upto 'five years' (after enactment of the legislation) in stead of earlier upto 'three years'. 1.3 Proposed changes to Competition Act, 2002 Contributed by: Upamanyu As per reports in the media, the Government is proposing to carry out various important changes in the merger control regulations under the Competition Act, 2002 (Act). Accordingly, there are three key aspects of the merger control regime which are intended to be amended. (i) Changes pertaining to merger regime a. Definitions Turnover- Section 2 (y) of Act, defines the term turnover as: includes value of sale of goods or services. The definition is very broad and gives rise to confusion in ascertaining turnover. By amending the definition the government seeks to provide a precise manner for calculating turnover value. Group- The term group is used in two different contexts in the Act. Firstly under Section 4 dealing with abuse of dominant position; and secondly, under Section 5, which prescribes the notification thresholds for mergers and acquisitions. The definition is slated to undergo changes. b. Waiting period: The waiting period for getting an approval or rejection of a merger notification filed with the CCI is been reduced to 180 days in place of the existing 210 days. c. Section 5A: The introduction of a new Section 5A aims at introducing the flexibility to specify separate asset/turnover thresholds for sectors which the government considers sensitive and would like to keep a closer watch at.
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(ii) Search and seizure powers to DG: DG is to be empowered with search and seizure powers under the provisions of the Act. Note: These changes will become enforceable only when they are approved by the Parliament of India.

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2.

FOREIGN EXCHANGE

NOTIFICATIONS, CIRCULARS, AMENDMENTS ETC 2.1 All in cost ceilings for ECBs and trade credits Contributed by: Vasu Reserve Bank of India (RBI) has vide A.P. (DIR Series) Circulars No.39 and 40, communicated that all-in-cost ceilings prescribed for External Commercial Borrowings (ECBs) and trade credits for imports into India will remain unchanged until further review. For the sake of reference, the prevailing all in costs ceilings for ECBs and trade credits for imports are given hereunder:

ECBs Maturity All in cost ceilings over 6 month LIBOR Three years and upto 350 basis points five years More than five years 500 basis points Average Period

Trade credits for imports into India Average Maturity All in cost ceilings Period over 6 month LIBOR Upto one year 350 basis points More than one year but less than three years

2.2

Foreign investment in NBFC Sector Amendment to FDI Scheme Contributed by: Vasu RBI has vide A.P. (DIR Series) Circular No.41 amended Sr.No.24.2 of Annex B to A.P. (DIR Series) Circular No. 137 dated June 28, 2012 pertaining to sector specific conditions for FDI in NBFCs. This has been done to harmonise the provisions of RBI Regulations with changes to FDI Policy by Ministry of Commerce and Industry vide Press Note No.9 dated 3rd October, 2012. The details of the changes made are reproduced hereunder:

Earlier Condition (Old Sr.No.24.2(1)(iv) 100% foreign owned NBFCs with a minimum capitalisation of US$50

Revised Condition (New Sr.No.24.2(1)(iv) NBFCs (i) having foreign investment more than 75% and up to 100%, and (ii)
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million can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital. The minimum capitalization condition as mandated by para 3.10.4.1, therefore, shall not apply to downstream subsidiaries.

with a minimum capitalisation of US$ 50million, can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital. The minimum capitalization condition as mandated by para 3.10.4.1 of DIPP Circular 1of 2012 dated April 10, 2012 on Consolidated FDI Policy, therefore, shall not apply to downstream subsidiaries.

Comments (a) A basic principle under FDI policy is that all restrictions relating to entry route, conditions etc apply with respect to downstream investments also, as they apply in case of foreign direct investment. In case of NBFCs, a special exception had been carved out for 100% foreign owned NBFCs. These 100% foreign owned NBFCs could set up any number of step down subsidiaries for specific NBFC activities without those subsidiaries being bound to comply with capitalization conditions applicable for FDI in NBFCs. The above relaxation has now been further extended in respect of NBFCs in which foreign investment is over 75%.

(b)

(c)

NEWS 2.3 DIPP to bring Cabinet note on FDI in pharma soon Contributed by: Madhusudan (ET, 9th October, 2012) The department of industrial policy and promotion (DIPP) will bring a Cabinet note on the foreign direct investment (FDI) in the pharmaceutical sector soon. Finance minister P Chidambaram today said that, meanwhile, the foreign investment promotion board (FIPB) will continue clearing the FDI
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proposals in the sector on a case-by-case basis. We have approved 8 cases (of the pharma sector) in the last FIPB meeting. The larger policy is being worked out by DIPP. A paper is coming into the Cabinet. On a caseby-case basis whatever case comes to FIPB for approval will be done, the minister said at the Economic Editors Conference. Earlier, in a meeting held on August 24, the FIPB had cleared 8 cases worth over Rs 1,800 crore from the sector, on the basis of the inter-ministerial group (IMG) recommendations submitted to the government. Comments (a) The Ministry of Commerce and Industry had, through its press release dated 10th October, 2011, communicated that brownfield investments in the pharma sector, will be allowed through the FIPB approval route for a period of upto six months. Thereafter, the requisite oversight will be done by the Competition Commission of India (CCI) entirely in accordance with the competition laws of the country. However, later, reports emerged that DIPP was of the opinion that FIPB route would be made mandatory for all proposals for brownfield investment in pharma. The cabinet note on foreign direct investment in the pharma sector is expected to clarify the policy of the government and lay down a clear policy on entry route for foreign investor in the pharma sector in the country.

(b)

(c)

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3.

CAPITAL MARKETS

NOTIFICATIONS, CIRCULARS, AMENDMENTS ETC Issue of SEBI (Framework for Rejection of Draft Offer Documents) Order, 2012 Contributed by: Amit Prakash In a recent endeavour to protect the interests of investors in the capital markets, Securities and Exchange Board of India has come up with an order dated October 9, 2012, applicable with immediate effect. The order termed as SEBI (Framework for Rejection of Draft Offer Documents) Order, 2012 provides for the criteria, considering which the offer documents filed by the Companies with SEBI for the purpose of issue of securities may be rejected on grounds of inadequacy of disclosures or insufficiency of facts, necessary for an investor to assess the risks associated with the issue. The criteria for rejection of the offer documents are as follows: (a) In relation to capital structure If the capital structure involves (i) existence of circular transaction for building up net-worth; (ii) non-identification of promoters; (iii) promoters contribution to be non-compliant of ICDR Regulations. (b) In relation to object of the issue If an object of the issue (i) is vague for activities where maximum proceeds have to be applied; (ii) is to repay the loan and issuer not in a position to disclose ultimate purpose for which the loan has been obtained; (iii) is to utilize major portion of issue to create tangible assets e.g. advertisements and has no justification in terms of past experience, performance and concrete business plan; (iv) is to set some plant and relevant clearances/licenses are not in place and it gives impression that proceeds may be applied for purpose other than stated; and (v) time gap between raising funds and proposed utilization is unreasonably long. (c) In relation to business model If business model of an issuer is complex and misleading. (d) In relation to scrutiny of financial statements If found through financial statements that (i) there is a sudden spurt of business and no justification for the same; (ii) auditor have raised concerns over accounting policies and will include the subsidiary, JVs and entities where the proceeds proposed to be utilized; (iii) there is a change in accounting policies in contradiction with accounting norms to show the issue to be lucrative; (iv) majority

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of the business is with related parties or circular transactions exist to show enhanced prospects. (e) In relation to litigation If such major litigation is pending upon which survival of issuer depends and which has been willfully concealed. (f) Other General Criteria (i) Failure to provide complete documents in accordance with ICDR Regulations. (ii) Submission of incorrect, misleading or vague information to Board. (iii) Non-resolution of conflict with Merchant Banker regarding the bookbuilding process. (iv) Final view on rejection shall be taken by the Board after considering the materiality of findings and facts and circumstances in each case. (g) One time withdrawal opportunity One time withdrawal opportunity for issuer is available within one month of this order. (h) Consequences of Rejection of Offer Documents (i) No access to capital markets for minimum 1 year from rejection which may be extended on quantum of commission/omission. (ii) No refund of filing fees with the Board. (iii) Right of Rejection, without prejudice to other legal remedies against Issuer or Merchant Banker. (iv) Dissemination of rejection information by SEBI through placement on website.

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4.

INDIRECT TAXES

NEWS, ARTICLES ETC. A brief purview of the new Goods and Services Tax (GST) regime Contributed by: Vrinda A brief on the new tax model which will take over the existing VAT / sales tax and Service tax laws: (a) The inception of GST will be clear a lot of confusion which arises in cases whether to treat tax it as Goods (VAT) or Service (Service Tax). For the same GST will make no differentiation between Good and Services as the GST is levied at each stage in the supply chain. (b) The problem of double taxation was addressed by the Supreme Court of India in the landmark decision of BSNL Vs UOI (see here). The Supreme Court had held that the same activity cannot be regarded as both goods and services and hence both service tax and VST should not be applicable on the same set of transaction. However, inspite of the ruling in the BSNL case, there has been a lot of confusion whether to treat specified activities as goods or services . (c) In India the Joint Working Group has recommended the Dual GST method to be implemented: (d) The JWC laid down various recommendation including to have two GST components viz. Central tax and single uniform state tax across the country, levying of a tax over and above GST by the states on tobacco, petroleum and liquor, GST with a quadruple tax structure comprising of a central tax on goods extending up to retail level, a central tax on goods extending up to the retail level, a central service tax, state VAT on goods, and a state VAT on services. Further it recommended that because of quadruple structure, there may be at least four rate categories one for each of the components given above. In this system the taxpayer may be required to calculate tax liability separately for the different rates of tax. (i) The states must tax intra-state services while inter-state services must remain with the centre.

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(ii)

Petroleum products, including crude, high speed diesel and petrol, may remain outside the ambit of GST. (iii) Central cess like education and oil cess may be kept outside the dual GST structure to be introduced from April 2010. (iv) Levies like the toll tax, environment tax and road tax to be kept outside the GST ambit, as these are user charges; and (v) That the levies which are in the nature of user chargers and royalty for use of minerals must be kept out of the purview of the proposed tax.

(e) An example will make it easier to understand the working model of GST: Only one level example is taken, i.e., from Producer to Wholesale: S.no 1. Goods sold from Producer to Wholesaler: Taxes applied Cost of production Under VAT Regime 100 Under GST Regime 100

2. 3. 4.

Add: Profit Margin Base Price: Add: Central Excise @ 8%

20 120 8

Add: Service tax for transportation and other labour services @ 10%

20 120 Nil (no CE under GST regime; as it is already included in GST) Nil (Service tax component included under GST) NIL 14.4 9.6 144/-

5.

Add: VAT @ 12.5% Add: Central GST @ 12% Add: State GST @ 8% Total price after includes taxes

16.5

6.

148.5/-

(f) Main differences between existing VAT system and proposed model of GST in India: S.No. 1. 2. Value Added Tax Only levied by States, Centre has no role to play. Only levied on goods Goods & Service Tax To be imposed by the Centre in coordination with the State bodies. Centre and States to tax both goods and services
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3. 4.

States exclusive legislative power to tax sale of goods Replaces only the State sales tax; central excise and other taxes are unaffected. No input tax credit for inter-State transactions.

5.

Centre to be empowered to tax goods; States to be empowered to tax services Will replace central excise and service tax etc. imposed by the Centre, and VAT, entry tax etc. imposed by the State. Tax paid in exporting State would be available as credit against inter-State transactions

Please note: (a) Applicability of other indirect taxes: It is proposed that the taxes to be subsumed under CGST will include Central Excise Duty (CENVAT), Service Tax and Additional Duties of Customs and the Taxes to be subsumed under the SGST will include value Added Tax, Central Sales Tax, Purchase Tax, Entertainment Tax, Luxury Tax, Octoroi, Lottery Taxes, Electricity Duty and State Surcharges relating to supply of goods and services. Specific Cess, Excise duty on tobacco products and State Taxes like taxes on items containing alcohol, entertainment tax (local Bodies), entry tax for local bodies and electricity duty are proposed to be included in GST. (b) Threshold: The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across States is desirable and, therefore, it is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States .

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5.

FOOD LAWS

NEWS

FSSAI sets new laboratory testing procedures for imported food Contributed by: Vrinda (a) On August 21, 2012, the Food Safety and Standards Authority (FSSAI) of India published new guidelines for laboratory testing of imported food in line with the provisions of the Food Safety and Standards Regulations, 2011. (b) The guidelines establish approved methodologies and chemical testing parameters for food products regulated by the Food Safety and Standards Regulations, 2011. The new guidelines, developed in consultation with the Central Food Technological Research Institute (CFTRI) in Mysore, have been sent to all authorized food laboratories (including reference laboratories) in India. (c) As the new guidelines are effective immediately, the FSSAI hopes to encourage greater harmonization in the testing procedures for imported food products. The products list in inclusive and includes vegetable oils, beverages, milk and milk products amongst others. A list of products is provided here. For the full text of notification issued on August 2, 2012 see here.

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6.

MISCELLANEOUS

NEWS Union Cabinet to consider amendment to indecency laws Contributed by: Varnika Union cabinet is likely to consider amendments to indecency laws in order to provide tougher punishment for those who forward pornographic MMSs or emails. Further, the law will be updated to include electronic content, keeping in view the proliferation of smart phones, computers and other electronic devices. On 11th October 2012, the Union Cabinet has approved the introduction of amendments to the Indecent Representation of Women (Prohibition) Act, 1986, in Parliament to cover new forms of audio-visual media such as internet and satellite-based television broadcasting, among others. The salient features of the amendments are as follows: (a) For the first conviction, a fine of not less than Rs.50,000 and to a maximum of Rs.100,000 and imprisonment up to three years. (b) For a second conviction, a fine of not less than Rs.100,000 and to a maximum of Rs.500,000 and imprisonment between two to seven years. (c) Police officials of the rank of inspector or above will be allowed to carry out search and seizure operations in a complaint on the indecent representation of women. In addition, any centre or state government employee can be appointed by the government for search operations.

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