Attached Newsletter is an attempt to cover monthly issues relevant in the context of transactions - covers SEBI, Companies Act, Income Tax, Stamp duty and other regulatory changes

1. TRANSACTION ADVISORS
Missive
Volume XI – February 2012

2. Topics Page No
Dear Patron Corporate law 1
FEMA 3
Here we are with the Eleventh successive issue of our monthly ‘Missive’. SEBI 6
International Taxation 8
We trust you will enjoy reading this Missive, even while soaking in the contents. We Transfer Pricing 9
would very much appreciate your feedback which consistently helps us in improving Recent Transactions that 10
and upgrading the contents. made headlines
Thanks and regards,
Akhil Bansal
Editor, Knowledge Management Team Change your thoughts,… & you
change your words !!!

3. Corporate Law § All companies who were earlier issued company specific orders
prior to 31st March, 2011 but are later covered either by this
Audit of cost accounts in certain cases – Order under section 233B (1)
of the Companies Act, 1956 industry specific order and/or by earlier similar orders dated 2nd
May 2011 or 30th June 2011 [subject to their meeting with the
§ The Central Government has directed all companies qualifying criteria mentioned therein] shall now comply with the
a. to which the Companies (Cost Accounting Records) Rules, 2011 industry specific orders, as applicable, replacing the earlier
apply, and company specific order. [ORDER [F.No. 52/26/CAB-2010], dated
b. which are engaged in the production, processing, 24-1-2012]
manufacturing or mining of the specified products/activities,
including intermediate products and articles or allied products Impact: If a company contravenes any provisions of these orders, the
thereof, and company and every officer thereof who is in default, including the
c. wherein the aggregate value of turnover made by the company persons referred to in sub-section (6) of section 209 of the Companies
from sale or supply of all its products/activities during the Act, 1956, shall be punishable as provided under sub-section (2) of
immediately preceding financial year exceeds hundred crores section 642 read with sub-section (11) of section 233B of the
of rupees; or wherein the company’s equity or debt securities Companies Act, 1956 (1 of 1956).
are listed or are in the process of listing on any stock exchange,
whether in India or outside India,
shall get its cost accounting records, in respect of each of its Important Notice on Digital Certificates (SHA2)
financial year commencing on or after 1st day of April, 2012,
audited by a cost auditor. For using Digital Certificate issued post 1st January, 2012 (SHA2), it is
essential to have Windows XP (SP3) / Windows Vista/ Windows 7
§ Every company to which these orders apply shall follow the revised installed. All users using below mentioned services on MCA21 are
procedure for appointment of cost auditor as laid down vide required to download JDK 1.6 updated version:
Ministry of Corporate Affairs’ General Circular No. 15/2011 dated
11th April 2011. i) Any user logging on MCA21 using a DSC
ii) Any existing user registering/updating a DSC
§ All company specific cost audit orders issued to the individual iii) Any new user registering using a DSC
companies prior to 31st March, 2011 directing them to get their
cost records audited for the products/activities specified in such Impact: This requirement is a part of the interoperability initiative of
orders stand withdrawn with effect from the financial year the Controller of Certifying Authorities, India (CCA), for enhancing
commencing on or after the 1st day of April, 2012. security for Digital certificates.
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4. Refund of Statutory / ROC Fees paid by mistake to MCA Impact: Earlier there was no process in MCA21 for refund of fees
wrongly paid by the stakeholder while availing various services at
MCA has introduced process of refund of statutory fees paid for certain MCA 21. New refund e-Form needs to be filed by the stakeholder
services. The refund of MCA21 fees is available in the following cases: applying for refund and upon processing of the same the refund
request shall be approved or rejected.
a) Multiple Payments
b) Incorrect Payments
c) Excess Payment Government proposes to set up National Company Law Tribunal
(NCLT) and National Company Law Appellate Tribunal (NCLAT)
Refund process is not applicable for certain services/e-forms like public
inspection of documents, request for certified copies, payment for The Ministry of Corporate Affairs Government proposes to set up
transfer deeds, stamp duty fee (D series SRN), IEPF payment, STP National Company Law Tribunal (NCLT) and National Company Law
forms, DIN eForm, etc. Appellate Tribunal (NCLAT) which will replace Company Law Board,
Board for Industrial and Financial Reconstruction and Appellate
The refund form is to be filed within the stipulated time period. Also, Authority for Industrial and Financial Reconstruction.
there shall be deduction in the amount to be refunded based on time
period within which refund e-form is filed. The following is the time It may be noted that provisions regarding constitution of NCLT and
slab for filing refund form and the corresponding deduction in refund NCLAT were incorporated in the Companies (Second Amendment) Act,
amount: 2002. The Act was, however, challenged in the Madras High Court. The
matter was finally decided by the Supreme Court vide their judgment
Time within which the Default value for dated 11.5.2010. The revised Companies Bill, 2011 introduced in the
refund application is made deduction winter session of Parliament also incorporates the guidelines provided
0-90 days 2.5% by the Supreme Court in their said judgment.
91-180 days 5%
181-270 days 7.5%
271-365 days 10%
>365 days 25%
Filing of refund form shall not be allowed after expiry of 1095 days of
filing of the original request. For all earlier cases, (i.e. cases filed before
introduction of refund process), the time limit shall be considered from
the date on which refund process is introduced i.e. from 01.05.2011.
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5. FEMA
Company Law Board (Amendment) Regulations, 2012 – Amendment
in regulation 30 Revised average maturity guidelines as a result of enhancement of
ECB limits
Company Law Board has made the following regulations further to
amend the Company Law Board Regulations, 1991. A few important The ECB limit for eligible borrowers under the automatic route was
ones are given below:- enhanced to USD 750 million or equivalent per financial year per
borrower for permissible end-uses under automatic route vide A.P.
1. Revision of fees payable in terms of Regulation 29 and 30 of (DIR Series) Circular No. 27 dated September 23, 2011. Consequent to
the Company Law Board Regulations, 1991 for inspection of the enhancement in limits, the revised average maturity guidelines
the documents from Rs. 10/- to Rs. 50/- per day. The fee for under the automatic route are as follows:
supply of certified copies of order or any other documents has a) ECB up to USD 20 million or equivalent in a financial year with
also been doubled from Rs. 5/- to Rs. 10/- per page and the minimum average maturity of three years; and
inspection of record shall be pre-requirement for supply of b) ECB above USD 20 million and up to USD 750 million or
certified copy of a case. equivalent with minimum average maturity of five years.
2. A person, who is not a party to the proceedings, has, however,
no right to inspect or to obtain certified copies of the records The requirement of average maturity period, prepayment and call/put
of a pending case except with the consent of the party who has options specified vide A.P. (DIR Series) Circular No. 17 dated December
filed the case or under the orders of the Bench. 4, 2006 (for additional amount of USD 250 million) has been dispensed
3. The inspection of record shall not be permitted on the date with.
fixed for its hearing without the order of the Bench.
4. After receipt of an application, the inspection shall be allowed It is also clarified that the eligible borrowers under the automatic route
within a period of two working days and certified copies shall can raise Foreign Currency Convertible Bonds (FCCBs) up to USD 750
be supplied within a period of three working days respectively. million or equivalent per financial year for permissible end-uses.
Notification No. G.S.R. 32(E)[F.No.10/36/2001-CLB], dated 18-1-2012 Further the Corporate in specified service sectors, viz. hotel, hospital
and software, can raise FCCBs up to USD 200 million or equivalent for
permissible end-uses during a financial year subject to the condition
that the proceeds of the ECB should not be used for acquisition of land.
And the ECB / FCCB availed of for the purpose of refinancing the
existing outstanding FCCB will be reckoned as part of the limit of USD
750 million available under the automatic route.
[A.P. (DIR Series) Circular No. 64 dated 5th January, 2012]
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6. Export of Goods and Services – Forwarder’s Cargo Receipt (FCR) in
Impact: The enhancement in the ECB/FCCB comes at a time when lieu of Bill of Lading
India Inc is staring huge FCCB and ECB redemptions in 2011-12. This
move is considered as a bid to give India Inc respite from possible The authorised dealers may accept Forwarder’s Cargo Receipts (FCR)
pressures arising from redemption of foreign currency convertible issued by IATA approved agents, in lieu of bill of lading, for
bonds. FCCB as a hybrid debt and equity instrument issued in foreign negotiation/collection of shipping documents, in respect of export
currency, not only gives the bondholder regular coupon and principal transactions backed by letters of credit, if the relative letter of credit
payments, but also gives the option to convert the bond into shares. specifically provides for negotiation of this document in lieu of bill of
lading even if the relative sale contract with the overseas buyer does
not provide for acceptance of FCR as a shipping document, in lieu of
Scheme for Investment by Qualified Foreign Investors (QFIs) in equity bill of lading. [A.P. (DIR Series) Circular No. 65 dated 12th January, 2012]
shares
It has been decided by RBI to allow QFIs to invest through SEBI Scheme for Investment by Qualified Foreign Investors in Rupee
registered Depository Participants (DPs) only in equity shares of listed Denominated Units of Domestic Mutual Funds – Revised
Indian companies through recognised brokers or recognised stock
exchanges in India as well as in equity shares of Indian companies The time period for which funds (by way of foreign inward remittance
which are offered to public in India in terms of applicable SEBI through normal banking channels from QFIs as well as by way of credit
guidelines/regulations. Only QFIs from jurisdictions which are FATF of redemption proceeds of the units of domestic Mutual Funds by QFIs
compliant and with which SEBI has signed MOU’s under the IOSCO in India) can be kept in the single rupee pool bank account of the DP
framework will be eligible to invest in equity shares under this scheme. under the scheme for investment by QFIs in units of domestic Mutual
Funds has been modified to five working days (including the day of
The individual and aggregate investment limits for the QFIs shall be 5% credit of funds received by way of foreign inward remittance through
and 10% respectively of the paid-up capital of an Indian company. [A.P. normal banking channels from QFIs as well as by redemption proceeds
(DIR Series) Circular No. 66 dated 13th January, 2012] of the units of domestic Mutual Funds by QFIs in India).
Impact: So far QFIs were only permitted to invest in equity and debt [A.P. (DIR Series) Circular No. 66 dated 13th January, 2012]
schemes of mutual funds and in debt infrastructure funds. All
transactions by QFIs have to necessarily be carried out by a qualified
depository participant (DP) registered with the Securities and
Exchange Board of India (SEBI). While the government should be
applauded for the attempt to liberalise access to Indian markets, one
is unsure if QFI is the appropriate structure for small foreign retail
investors.
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7. 100% Foreign Investment in Single-Brand Retail Trading allowed External Commercial Borrowings (ECB) Policy – Infrastructure Finance
Companies (IFCs)
RBI has permitted FDI up to 100% in Single Brand product trading
under the Government route subject to such terms and conditions as As per the extant guidelines, NBFCs categorised as Infrastructure
stipulated in Press Note No. 1 (2012 series) dated January 10, 2012 Finance Companies (IFCs) by the Reserve Bank and complying with the
issued by Department of Industrial Policy & Promotion, Ministry of norms prescribed in this regard are permitted to avail of ECBs, up to 50
Commerce and Industry, Government of India. per cent of their owned funds under the automatic route. ECBs by IFCs
above 50 per cent of their owned funds are being considered under the
[A.P. (DIR Series) Circular No. 67 dated 13th January, 2012] approval route. The permitted end-use should be for on-lending to the
infrastructure sector. IFCs should also hedge their currency risk in full.
Impact: This is a great announcement for many foreign brands who It has now been decided that the designated AD Category – I banks
already have their presence in India as well as those who don’t (Likes should certify the leverage ratio (i.e. outside liabilities /owned funds)
of IKEA, GUCCI etc). However, they were not able to grow fully due to of IFCs desirous of availing ECBs under the approval route while
restriction in FDI investment. With Indian Government now allowing forwarding such proposals to the Reserve Bank if India. [A.P. (DIR
100% FDI, they would aggressively invest in fast Indian Market. Series) Circular No. 70 dated 25th January, 2012]
Risk Management and Inter-Bank Dealings – Commodity Hedging External Commercial Borrowings – Simplification of procedure
RBI has allowed all AD Category – I banks to grant permission to As a measure of simplification of the existing procedures, it has been
companies to hedge the price risk in respect of any commodity (except decided to delegate powers to the designated AD category – I banks to
gold, silver, platinum) in international commodity exchanges/markets approve the following requests from the ECB borrowers, subject to the
as specified under the delegated route. Unlisted companies have also specified conditions:
been granted permission to hedge price risk on import/export in a) Cancellation of LRN (Loan Registration Number)
respect of any commodity (except gold, silver, platinum) in the b) Change in the end-use of ECBs availed under automatic route
international commodity exchanges /markets subject to the specified
guidelines provided in the circular. [A.P. (DIR Series) Circular No. 68 However, change in the end-use of ECBs availed under the approval
dated 17th January, 2012] route will continue to be referred to the Foreign Exchange
Department, Central Office, Reserve Bank of India, as hitherto. [A.P.
(DIR Series) Circular No. 69 dated 25th January, 2012]
Impact: This can be construed as a move that will simplify and speed
up external commercial borrowing (ECB) transactions.
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8. SEBI investors, attract more foreign funds, reduce market vitality and to
deepen the Indian capital market. In order t facilitate the same and in
SEBI cut the timeline for completion of buy back of shares by listed consultation with the Government and RBI, it has been decided that
companies to 34-44 days foreign investors (termed as QFIs) who meet prescribed Know Your
Customer (KYC) requirements may invest in equity shares listed on the
SEBI has reduced the time line for completion of buy-back of shares by recognised stock exchanges and in equity shares offered to public in
companies to 34-44 days. Earlier, the buy-back process could take India. In order to enable this they will hold equity shares in a demat
anywhere between 63 and 114 days. These changes form a part of account opened with SEBI registered qualified Depository Participant.
amendments made by a regulator in the SEBI (Buy-Back of Securities)
Regulations, 1998. They have come into effect from January 3. Impact: This is a step to increase the number of players and make the
stock markets deeper. Under the present arrangement related to
The government has fixed a mammoth Rs 40,000 crore dis-investment foreign portfolio investments, only FIIs/sub-accounts and NRIs are
target for the fiscal, but till date it has only managed to raise Rs 1,145 allowed to directly invest in the equity market. Others come through
crore by selling its shares in the Power Finance Corporation. The an instrument, called participatory notes, issued by FIIs. In the
Department of Dis-investment (DoD) has sought Cabinet approval to absence of a direct route, many QFIs faced difficulties in investing. It
use the buyback mode for dis-investment. The DoD had also pointed is a positive development, but may not have an immediate effect. If
out to the SEBI that the buyback norms are not in line with the the market conditions recover, probably, some investment may
principle of equitable treatment to shareholders in the acceptance of come.
shares through tender offer.
Impact: According to the earlier norms, in case of buyback the Eligibility criteria for Qualified Depository Participant
company is required to accept the shares tendered by the
shareholders in proportion to the shares tendered by the shareholder The revised eligibility criteria to act as qualified DP are as follows:
and not in proportion to the shares held. However, this has been
modified. SEBI has also made changes in the record date and 1. DP shall have net worth of Rs. 50 crore or more;
requirement of public notice and public announcement norms in the 2. DP shall be either a clearing bank or clearing member of any of
buyback regulations. the clearing corporations;
3. DP shall have appropriate arrangements for receipt and
remittance of money with a designated Authorised Dealer (AD)
SEBI circular on Investment by Qualified Foreign Investors (QFI) in Category – I Bank;
Indian equity shares 4. DP shall demonstrate that it has systems and procedures to
comply with the FATF Standards, Prevention of Money
The Central Government has announced its decision to allow QFIs to Laundering (PML) Act, Rules and SEBI circulars issued from
directly invest in Indian equity market in order to widen the class of time to time;
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9. 5. DP shall obtain prior approval of SEBI before commencing the SEBI News Snippets
activities relating to opening of accounts of QFI.
§ SEBI has launched a toll free helpline service number 1800 22
7575 for investors. This service will be available to investors
SEBI waives certain requirements relating to preferential allotment to from all over India.
Insurance Companies and Mutual Funds
§ SEBI has permitted the introduction of cash settled futures on
Regulator’s announcements 2-year and 5-year notional coupon bearing Government of
India (GoI) security on currency derivatives segment of Stock
§ Waives six month lock-in period for insurance companies and Exchanges. Eligible Stock Exchanges may do so after obtaining
MFs participating in preferential allotment of shares prior approval from SEBI.
§ Maintains post-allotment requirement of a lock-in period of six
months § Manner of increasing minimum public shareholding to
§ Increases minimum investment limit per client from R5 lakh to comply with Securities Contract Regulation (Rules), 1957 and
Rs 25 lakh in a portfolio management scheme Amendment to SEBI (Buyback of Securities) Regulations,
§ Reservation for convertible debt holders in rights/bonus issues 1998: Two additional methods viz., Institutional Placement
only to compulsorily convertible debt holders Programme (IPP) and Offer for Sale of Shares through the stock
§ Amends investment valuation norms for MFs to provide fair exchange for the purpose of compliance with SCRR
treatment to existing investors and also to those that seek to requirements are being introduced.
purchase or redeem units at any point of time
§ Changes in Re-investment period of FII debt limit: It has been
Tightening the valuation norms for liquid funds, the regulator also decided that henceforth re-investment period shall not be
decided to amend the SEBI mutual fund regulations to bring down the allowed for all new allocations of debt limit to FIIs/sub-
threshold for marked-to-market requirements on debt and money accounts. Thus, limits acquired in the bidding sessions
market securities to 60 days from 91 days earlier. [PR No. 15/2012] henceforth shall expire/lapse on either sale or redemption at
maturity of the debt investments. These limits then shall again
Impact: Currently, regulations preclude companies from issuing be allocated in subsequent bidding processes.
preferential allotment to entities which have sold any of their
holdings during the six month period prior to relevant date. Further, § SEBI vide its various communications has mandated all stock
allottees in preferential allotment are required to lock-in their entire exchanges that not be more than twenty per cent of the
pre-preferential holdings for a period of six months from date of members of the arbitration committee/panel of all stock
preferential allotment. This measure is taken as a matter of exchanges. It is, henceforth, stipulated that the arbitration
liberalisation. committee/panel shall not comprise of any trading members.
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10. Income Tax In this regard, the following factors should be kept in mind on the
facts of the instant case:
§ Vodafone wins $2.50 billion tax case tax case in Supreme Court.
Hutchison Essar is an Indian Company, the controlling interest of § the concept of participation in investment
Hutchison Essar is held by a SPV of Cayman Island (CGP § the duration of time during which the Holding Structure
Investments Holding Ltd.). CGP is owned by Hutchison exists
Telecommunications International Ltd (HTIL), Hongkong. In this § the period of business operations in India
manner the controlling interest of Hutchison Essar is held by HTIL, § the generation of taxable revenues in India
Hongkong through an intermediary Cayman Island company (CGP). § the timing of the exit
Vodafone International Holdings, Netherland entered into an § the continuity of business on such exit.
agreement with HTIL, Hongkong to buy the shares of CGP (Cayman
Island). Since CGP is holding directly and indirectly 67% shares of The Hon'ble Court examined the above facts. After a detailed
Hutchison Essar (India), the above transaction results in transfer of analysis, the Hon'ble Court found that the aforesaid factors are
shares and controlling interest of Hutchison Essar(India) from HTIL, in favour of Vodafone and therefore, held the entire
Hongkong to Vodafone International Holding, Netherland. The transaction as not a sham and bogus transaction.
consideration for transfer is stated to be USD 11.1 Billion.
The Income-tax Department issued a notice to Vodafone to show
cause as to why it should not be treated as assessee in default for
not withholding the Indian Capital Gain Tax on the payment made
by it to HTIL for the transaction of sale of share of CGP (which in
turn holds controlling interest of HTIL)
One of the important principle determined by the court was a to
what principles should be applied to treat a transaction as sham
and bogus?
The Hon'ble Apex Court has dealt with this issue in detail and has
held that every foreign direct investment coming to India, as an
investment destination, should be seen in a holistic manner.
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11. Transfer pricing § Transfer pricing is founded on the principles of economic
substance and hence, it is fact specific –[Bindview India P. Ltd. Vs.
§ In TNMM, net profit margin from a comparable uncontrolled DCIT (ITAT Pune)]
transaction to be considered i.e. it should not only be comparable
but also have uncontrolled transaction. [Hinduja Ventures Ltd vs. § ALP of Interest-Free Loan – ITAT Delhi Explains Law [M/s Aithent
ACIT (ITAT Mumbai)] Technologies Pvt Ltd. V/s. ITO (ITAT Delhi)]
§ TPO can rely on “contemporaneous” data even if not available at § ITAT Explains Law On Adjusting For Differences In Comparables
specified date. [Kodiak Networks (India) Pvt Ltd vs. ACIT (ITAT [Demag Cranes & Components (India) Pvt. Limited Vs. DCIT (ITAT
Bangalore)] Pune)]
§ Sharing of net revenue consistently and uncontrolled transactions § Non-Reference To TPO Renders Order ‘Erroneous’ and prejudicial
held as a valid comparable uncontrolled price. [ACIT vs. Agility to revenue [Ranbaxy Laboratories Ltd vs. CIT (Delhi High Court)]
Logistics Pvt. Ltd (ITAT Mumbai)]
§ Rule of consistency affirmed. [Hosley India vs. DCIT (ITAT Delhi)]
§ Adjustments are required to be made by employing certain
techniques like “FAR” analysis. [Knoah Solutions Pvt. Ltd vs. ITO
(ITAT Hyderabad)]
§ TPO can determine ALP only on the international transactions
referred by AO. [Glaxo Smithkline Consumer vs. ACIT (ITAT
Chandigarh)]
§ Risk undertaken by the tested party is required to be considered
for deciding the nature of service provided. [AIA Engineering Ltd
vs. ACIT (ITAT Ahmedabad)]
§ TPO is duty bound to eliminate differences in comparables’ data.
[Demag Cranes & Components vs. DCIT (ITAT Pune)]
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12. Recent Transactions that made the Headlines
§ NTT Communications to acquire 74% stake in Netmagic Solutions
§ Reliance Infra eyes Kinder Morgan assets: Report
§ Fortis Healthcare arm acquires 85% stake in RadLink-Asia
§ The Walt Disney arm to acquire stake in UTV
§ Warburg Pincus sells part stake in Kotak Mahindra Bank
§ Reliance in talks to buy El Paso's E&P unit
§ Starbucks to enter India,in deal with Tata to open cafes in India.
Targets 50 outlets by year-end
§ Fidelity in talks to sell India mutual fund business-report
§ HSBC sells Latin America units for $800 mn
§ Robert Wiseman agrees to Müller's £279.5m offer
§ Apple buys Israeli technology firm Anobit
§ Samsung may consider alliance with Japan's Olympus - source
§ Intel to buy QLogic's InfiniBand assets for $125 mln
§ Cairn in talks on possible Greenland stake sale
§ Pan American Silver to buy Minefinders for C$1.5 bln
§ Morgan Stanley nears Quilter wealth unit sale -sources
§ HSBC sells LatAm units for $800 mln
§ Crescent Point to buy Wild Stream for C$770 mln
§ SAP to delay buyback until SuccessFactors loan repaid
§ Siemens to buy Canada's RuggedCom for C$382 mln
§ Strides Arcolab sells its Australian arm to Watson
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TRANSACTION ADVISORS
This publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has been prepared
for the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon the information contained in this
publication without obtaining specific professional advise. Due care has been taken while compiling the information , however, no representation (express or
implied) is given as to the accuracy or completeness of the information contained in this publication