KANTH AND ASSOCIATES · 2014-06-12 · clauses of the Income Tax Rules, 1962 and the same shall come into force with effect from 01.04.2014. The Government has reissued the ordinance
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Copyright © 2014 Kanth and AssociatesDISCLAIMER- Kanth and Associates newsletter is for private circulation only. It does not purport to be or should
not be treated as professional advice or legal opinion. Kanth and Associates also disclaim any responsibility and hereby accept no liability for consequences of any person acting or refraining to act on the basis of any information contained herein.
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NEWS ALERTS
TAX
CORPORATE, CAPITAL MARKET, ECONOMY & FOREIGN
TRADE
CBDT notifies Income-tax (4th Amendment) Rules,
2014
Ponzi Ordinance reissued with checks
The Central Board of Direct Taxes (CBDT), in exercise of
the powers conferred by Section 295 of the Income Tax
Act, 1961, vide its notification dated 01.04.2014, has
made rules to amend the Income Tax Rules, 1962. The
said rules may be called the Income Tax (4th
Amendment) Rules, 2014 which has substituted certain
clauses of the Income Tax Rules, 1962 and the same
shall come into force with effect from 01.04.2014.
The Government has reissued the ordinance that seeks
to empower the Securities and Exchange Board of India
(SEBI) to take action against pyramid schemes. The
ordinance adds checks to prevent giving unbridled
power to SEBI. The re-promulgated Securities Laws
(Amendment) Ordinance, 2014 provides that the SEBI
Chairman shall record the reasons in writing while
issuing an order for search and seizure. The ordinance
also introduced some additional provisions based on the
recommendations of the parliamentary standing
committee of finance and inputs from SEBI. The
ordinance also mandates that an authorized officer may
requisition the services of a police officer or any officer
of the Central Government to assist in search and
seizure. It also empowers the SEBI to recall and enhance
the penalty imposed by the adjudicating officer. The
original ordinance empowered SEBI to regulate any
money pooling scheme worth Rs.100 Crore or more and
gave it powers to attach assets in cases of non-
compliance. It also empowers SEBI to seek information,
such as telephone call records, from any persons or
entities with respect to any securities transaction being
investigated. It also gives powers to the SEBI Chairman
to order searches and seizures.
CONTENTS
— News AlertsTax 1Corporate, Capital Market, Economy & Foreign Trade 1
Judgments 4
— Article 5
Labour 3
SEBI'S New Corporate Governance NormsBy Mr. Umang Joshi, Associate, K&A
FEMA – Merchanting Trade Transactions – Revised
guidelines
The Reserve Bank of India (RBI), vide its Circular dated
28.03.2014, reviewed the existing guidelines
containing directions relating to merchanting trade
transactions to further liberalize and simplify the
procedure. Some of the important points among various
others laid down by the revised guidelines are as
follows: (a) For a trade to be classified as merchanting
trade following conditions should be satisfied - Goods
acquired should not enter the Domestic Tariff Area; and
the state of the goods should not undergo any
transformation; (b) Goods involved in the merchanting
trade transactions would be the ones that are
permitted for exports / imports under the prevailing
Foreign Trade Policy (FTP) of India, as on the date of
shipment and all the rules, regulations and directions
applicable to exports (except Export Declaration Form)
and imports (except Bill of Entry), are complied with for
the export leg and import leg respectively; (c) AD bank
should be satisfied with the bonafides of the
transactions. Further, KYC and AML guidelines should be
observed by the AD bank while handling such
transactions; (d) both the legs of a merchanting trade
transaction are routed through the same AD bank. The
bank should verify the documents like invoice, packing
list, transport documents and insurance documents (if
originals are not available, Non-negotiable copies duly
authenticated by the bank handling documents may be
taken) and satisfy itself about the genuineness of the
trade; (e) Letter of credit to the supplier is permitted
against confirmed export order keeping in view the
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outlay and completion of the transaction within nine
months; (f) Payment for import leg may also be allowed
to be made out of the balances in Exchange Earners
Foreign Currency Account (EEFC) of the merchant
trader; etc. The contents of the said circular would
come into effect in respect of merchanting trade
transactions initiated after 17.01.2014.
The Government has issued the rules governing the
audit and auditors, which also contain details of
mandatory rotation of auditors. These rules will be
operational from 01.04.2014. The Ministry of Corporate
Affairs has so far rolled out rules for 11 chapters of the
new Companies Act. In the final rules, the Ministry has
specified the threshold for identifying the class of
companies that have to implement mandatory rotation.
The final rules say that unlisted public companies with a
paid up share capital of Rs.10 Crore or more, private
limited companies with a paid up share capital of Rs.20
Crore or more, and companies with public borrowings
from financial institutions, banks or public deposits of
Rs.50 Crore or more will have to comply with the
auditor rotation requirement.
Bank customers may no longer have to maintain a
minimum balance in their savings account as the
Reserve Bank of India (RBI) has directed banks to do
away with the practice of levying penalty on account
holders who don't do so. While this spells good news for
account holders, some bankers said this would increase
their costs and they might start charging for some of the
services they were offering free. RBI has urged banks to
limit the liability of customers in cases like non-
maintenance of balance or electronic transactions
where banks are not able to prove customer
negligence. The RBI, however, suggested that banks
may withdraw the services available on savings
accounts in case customers do not maintain minimum
balance. The services can be restored when the
balances improve to the minimum required level. The
RBI has also told banks to allow borrowers to prepay
floating rate term loans without any penalty.
New rules for auditors issued by Govt.
No Penalty on account balance below limit: RBI
Easier exit likely for PEs in new foreign listing rules
SEBI notifies corporate governance rule overhaul
The Finance Ministry is likely to free private equity
investors and venture capital funds invested in
companies seeking to list abroad from the 25% minimum
shareholding rule, effectively allowing them to sell
their entire stake through a public issue. The lock-in
rule had forced several companies with large PE and VC
investments to hold back their overseas listing plans, as
the Securities and Exchange Board of India identified
these investors as promoters. The Government had
earlier allowed unlisted Indian companies to raise
capital abroad and list their shares on overseas bourses
without first listing them in India. Besides the listing
rules, companies are also required to be fully compliant
with the foreign direct investment policy while raising
funds overseas.
The Companies Act, 2013 was enacted on August 30,
2013 which provides for a major overhaul in the
Corporate Governance norms for all companies. The
rules pertaining to Corporate Governance were notified
on 27.03.2014. The requirements under the Companies
Act, 2013 and the rules notified there under would be
applicable for every company or a class of companies
(both listed and unlisted) as may be provided therein. It
has been decided to review the provisions of the Listing
Agreement in this regard with the objectives to align
with the provisions of the Companies Act, 2013, adopt
best practices on corporate governance and to make
the corporate governance framework more effective.
SEBI, vide its Circular dated 17.04.2014 carried out
amendments in Clause 35B and 49 of the Equity Listing
Agreement.
The listing conditions as set out in this Circular of SEBI
are specified in exercise of the powers conferred under
Section 11 read with Section 11A of the Securities and
Exchange Board of India Act, 1992. The said listing
conditions should form part of the existing Equity
Listing Agreement of the Stock Exchange. All Stock
Exchanges are advised to ensure compliance with this
circular and carry out the amendments to their Listing
Agreement as per Part-A and Part-B of this Circular. This
master circular will supersede all other earlier circulars
Copyright © 2014 Kanth and AssociatesDISCLAIMER- Kanth and Associates newsletter is for private circulation only. It does not purport to be or should
not be treated as professional advice or legal opinion. Kanth and Associates also disclaim any responsibility and hereby accept no liability for consequences of any person acting or refraining to act on the basis of any information contained herein.
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issued by SEBI on Clauses 35B and 49 of the Equity
Listing Agreement.
The Reserve Bank of India (RBI) has come up with some
uniform accounting rules for asset reconstruction
companies (ARCs). In the wake of deteriorating credit
quality, banks have of late started selling bad loans to
ARCs, which acquire them from lenders and try
recovering pending dues from defaulting borrowers. In
between, companies earn commissions. Such
transactions can take place in a combination of security
receipts (SRs) and cash. The RBI has mandated certain
regulations in terms of revenue recognition, valuation
of SRs, acquisition costs and others. The RBI has further
asked all ARCs to show expenses incurred at the time of
acquiring bad loans on account of due diligence,
immediately in the statement of profit and loss. The RBI
stated that yield should be recognized only after the
full redemption of the entire principal amount of SRs.
Higher income should be recognized only after full
redemption of security receipts. SRs are securities to be
subscribed by select qualified institutional buyers,
including banks and traded in the secondary market. As
and when ARCs recover loans, they repay back to those
SR holders. In the case of a more than expected
recovery, ARCs receive incentives and vice versa. SRs
are rated by rating companies. The higher the rating,
the better is the quality. Considering nature of
investment in SRs where underlying cash flows are
dependent on realization from non-performing assets,
it can be classified as available for sale. Thus, according
to RBI, investments in SRs may be aggregated for the
purpose of arriving at net depreciation / appreciation
of investments under the category.
The Competition Commission of India (CCI) has
tightened its rules to ensure that companies do not
escape its scrutiny through innovative structuring of
mergers and acquisitions. The CCI has clarified that it
will look at the substance of the transaction and not
just the structure while approving any merger. Most of
the combinations involving Indian companies or having
presence in India have to get CCI nod. The requirement
Uniform accounting rules for ARCs
CCI tightens rules to see through M&A structures
Copyright © 2014 Kanth and AssociatesDISCLAIMER- Kanth and Associates newsletter is for private circulation only. It does not purport to be or should
not be treated as professional advice or legal opinion. Kanth and Associates also disclaim any responsibility and hereby accept no liability for consequences of any person acting or refraining to act on the basis of any information contained herein.
of filing notice under Regulation 5 of these regulations
shall be determined with respect to the substance of
the transaction and any structure of the transaction.
The CCI has also deleted a clause under the merger
regulations pertaining to the relaxation of transactions
that take place entirely outside the Indian jurisdiction.
CCI has said that there is no need for seeking its
approval if the transaction has taken place entirely
outside India with insignificant local nexus and effect
on markets in India. The Commission has also said
parties that decide to merge will now be required to
provide their audited annual accounts of immediate
preceding two financial years. The fee for filing forms
by enterprises has been increased. Moreover,
enterprises entering into combination would now have
to furnish details related to whether the proposed
transaction is subject to filing requirements in other
jurisdictions.
Organized sector employees going abroad for offshore
work can now fill their provident fund (PF) details
online for seeking the Certificate of Coverage which
attests that the person concerned is covered under
social security schemes, and get it in three working
days. Applicants will be able to enter their data such as
names, PF account numbers and the period for which
Certificate of Coverage is required. The retirement
fund body said the software has been upgraded for the
purpose allowing applicants to fill data online. This is
expected to eliminate mistakes. The employees need
to download their applications after filling it up online
and get it countersigned by employers. The employer
would have to submit the document to the concerned
Regional Provident Fund Commissioner, who will issue
the Certificate of Coverage within three working days.
At present, organized sector workers covered under
social security schemes run by EPFO are exempted from
contribution towards such schemes in other countries
with whom India has singed social security agreements.
But for availing such benefit, they are required to
produce Certificate of Coverage.
LABOUR
Employees going abroad can fill PF data online
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Copyright © 2014 Kanth and AssociatesDISCLAIMER- Kanth and Associates newsletter is for private circulation only. It does not purport to be or should
not be treated as professional advice or legal opinion. Kanth and Associates also disclaim any responsibility and hereby accept no liability for consequences of any person acting or refraining to act on the basis of any information contained herein.
JUDGMENTS
Supreme Court recognizes transgenders as 'third
gender'
CAG can audit books of private telcos: SC
The Supreme Court in a landmark judgment created the
"third gender" status for eunuchs or transgenders.
Earlier, they were forced to write male or female
against their gender. The SC asked the Central
Government to treat transgender as socially and
economically backward. The Apex Court said that
transgenders will be allowed admission in educational
institutions and given employment on the basis that
they belonged to the third gender category. The Court
said absence of law recognizing eunuchs as third gender
could not be continued as a ground to discriminate
them in availing equal opportunities in education and
employment. This is for the first time that the third
gender has got a formal recognition. The Apex Court
said that the third gender people will be considered as
OBCs and they will be given educational and
employment reservation as OBCs. The Court also said
States and the Centre will devise social welfare
schemes for third gender community and run a public
awareness campaign to erase social stigma. The Court
further stated that the States must construct special
public toilets and departments to look into their special
medical issues. The Court also added that if a person
surgically changes his/her sex, then he or she is entitled
to her changed sex and cannot be discriminated.
However, the Court clarified that its verdict pertains
only to eunuchs and not other sections of society like
gay, lesbian and bisexuals who are also considered
under the umbrella term 'transgender'.
The Supreme Court, in a landmark judgment said that
the Comptroller and Auditor General of India (CAG) can
scrutinize the books of private telecom operators that
share revenue with the Government on spectrum use.
The Supreme Court, however, stopped short of terming
this as a statutory audit. CAG can carry out examination
into the economy, efficacy and effectiveness with
which the Union of India has used its resources, and
whether it has realized the entire license fee, spectrum
charges and also whether the Union has correctly
carried out the audit under the UAS (unified access
service) license agreement. The Court opined CAGs
examination of accounts of service providers in a
revenue sharing contract is extremely important to
ascertain whether there is an unlawful gain to the
service provider and an unlawful loss to the Union,
because the revenue generated out of that has to be
credited to the Consolidated Fund. This judgment of
the Supreme Court provides legal underpinning to the
notion that non-state companies are subject to checks
by the national auditor as long as they are involved in
public-private partnership (PPP) projects and similar
ventures. The Court rejected a ruling by the Telecom
Disputes Settlement and Appellate Tribunal (TDSAT)
which had said that a CAG audit would be subject to a
finding by the Department of Telecom (DoT) that
statements submitted to it were misleading. This would
deprive CAG of its power to conduct an audit, enquiry or
inspection. CAG was entitled to seek records of telcos
that they were currently expected to share with the
Telecom Regulatory Authority of India and DoT,
including revenues, operational expenses, cash inflows
etc. In the process, CAG won't actually be auditing the
accounts of the service providers as such, but
examining receipts to ascertain whether the Union is
getting its due share by way of license fees and
spectrum charges. Service providers are, therefore,
bound to provide all records and documents called for
by the CAG. The court has held that CAG can examine
the accounts of the service providers for the limited
purpose of ascertaining whether the Union is getting its
due share of the revenue.
The Supreme Court in a case has laid down that
judiciary should deal with iron hand the misuse of
Public Interest Litigation (PIL) which is being exploited
for the benefit of individuals. The concept of Public
Interest Litigation is a phenomenon which is evolved to
bring justice to the reach of people who are
handicapped by ignorance, indigence, illiteracy and
other down trodden people. Through the Public Interest
Litigation, the cause of several people who are not able
to approach the Court is espoused. In the guise of Public
Interest Litigation, we are coming across several cases
where it is exploited for the benefit of certain
individuals. The Courts have to be very cautious and
Deal with the misuse of Public Interest Litigation with
iron hand: SC
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Copyright © 2014 Kanth and AssociatesDISCLAIMER- Kanth and Associates newsletter is for private circulation only. It does not purport to be or should
not be treated as professional advice or legal opinion. Kanth and Associates also disclaim any responsibility and hereby accept no liability for consequences of any person acting or refraining to act on the basis of any information contained herein.
careful while entertaining Public Interest Litigation.
The Judiciary should deal with the misuse of Public
Interest Litigation with iron hand. If the Public Interest
Litigation is permitted to be misused the very purpose
for which it is conceived, namely to come to the rescue
of the poor and down trodden will be defeated. The
Courts should discourage the unjustified litigants at the
initial stage itself and the person who misuses the
forum should be made accountable for it. In the realm
of Public Interest Litigation, the Courts while
protecting the larger public interest involved, should at
the same time have to look at the effective way in
which the relief can be granted to the people, whose
rights are adversely affected or at stake. When their
interest can be protected and the controversy or the
dispute can be adjudicated by a mechanism created
under a particular statute, the parties should be
relegated to the appropriate forum, instead of
entertaining the writ petition filed as Public Interest
Litigation.
The Supreme Court held that a woman employee of the
Central Government can get uninterrupted leave for
two years for childcare, which also includes needs like
examination and sickness. The Court set aside an order
of the Calcutta High Court which had held that the
Central Civil Services (Leave) Rules did not permit
uninterrupted CCL (childcare leave) for 730 days. The
Court said that on perusal of circulars and Rule 43-C, it
is apparent that a woman government employee having
minor children can avail CCL for a maximum period of
730 days i.e. during the entire service period for taking
care of up to two children. The Court passed the order
on a Petition challenging the Government's decision not
to grant her leave of 730 days for helping her son
prepare for examinations.
ARTICLE
Govt. woman employee can get uninterrupted 2 year
leave for child care: SC
SEBI'S NEW CORPORATE GOVERNANCE NORMS
By Mr. Umang Joshi, Associate, K&A
The Securities and Exchange Board of India (SEBI), has recently come out with a comprehensive code for
corporate governance norms for listed companies which mandate stricter disclosures and protection of investor rights in addition to equitable treatment of minority and foreign shareholders. The said norms were approved by SEBI during its meeting held in February 2014 and were much needed to ensure strict compliance by the listed companies.
The new corporate governance norms which will become effective from October 1, 2014 replace the existing clause 49 and 35B of the listing agreement. Furthermore, the said norms are in consonance with the Companies Act, 2013 and the primary aim in bringing these changes is to ensure that companies adopt best practices on corporate governance. It essentially addresses various corporate governance issues prominent in India, such as the protection of minority shareholders in the backdrop of the dominance by the promoters in companies and can be considered to be an important event with respect to corporate governance in relation to the existing listed companies.
The key changes brought about by the new norms vis a vis clause 49 are as follows:
• Rights of Shareholders - The new norms provide greater rights to the shareholders thereby ensuring that there is effective shareholder participation in key corporate governance decisions coupled with greater participation in the decision making process of the company. Several examples abound in the new clause 49 are as follows: (i) express recognition of the role and protection of minority shareholders; (ii) greater participation of shareholding in the process of corporate democracy; (iii) stringent regulation of related party transactions, including by requiring a “majority of the minority” voting process.
• Role of stakeholders in Corporate Governance- It requires the company to recognise the rights of stakeholders and encourage cooperation between company and the stakeholders. The objective is to ensure that the stakeholders obtain effective redress for violation of their rights and that there is employee participation in the governance of the company.
• Disclosure and transparency – The new governance code also mandates timely and
accurate disclosure on all material matters including the financial situation, performance, ownership, and governance of the company which will thereby ensure greater transparency in the dissemination of the information.
• Responsibil ities of the Board – The responsibilities of the board have also been laid down to ensure greater corporate governance. It is pertinent to note that members of the board are required to disclose to the board their material interest in any transaction or matter directly affecting the company. This is to ensure that there is no conflict of interest and that there is greater accountability on the board of directors.
• Composition of Board - The requirement for basic composition of the Board has not been changed as per the new corporate governance norms. The requirement for independent directors, though different from Companies Act, has been retained. It is pertinent to note that as per the new corporate governance norms, a person cannot serve as an independent director in more than seven listed companies and any person who is serving as a whole time director in any listed company can serve as an independent director in not more than three listed companies.
• Whistle Blower policy - The new corporate governance code incorporates a provision for whistle blower policy in line with the Companies Act, 2013. As per the said provision, the company is required to establish a vigil mechanism so as to report concerns about unethical behaviour, actual or suspected fraud or violation of the company's code of conduct or ethics policy. Furthermore, the mechanism should provide adequate safeguards to the whistle blowers against victimization and it should also provide for direct access to the Chairman of the Audit Committee in exceptional cases.
• Audit committee (AC) – The new norms also provide for an audit committee and its role has been considerably expanded so as to ensure greater financial accountability. The new code provides that the audit committee must
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Copyright © 2014 Kanth and AssociatesDISCLAIMER- Kanth and Associates newsletter is for private circulation only. It does not purport to be or should
not be treated as professional advice or legal opinion. Kanth and Associates also disclaim any responsibility and hereby accept no liability for consequences of any person acting or refraining to act on the basis of any information contained herein.
comprise of minimum three directors as its members and two-thirds of members of AC have to be independent directors. It is pertinent to note that the Companies Act, 2013 requires at least half of the AC members to be independent. Similarly it provides that the chairman of the AC must be an independent director. The role of Audit Committee under the new code also incorporates matters from the Companies Act such as reviewing and monitoring auditor independence, approval of transactions with related parties, scrutiny of inter corporate loans, valuations and evaluation of internal financial controls and risk management systems. The role of the Audit Committee under the new norms is as follows:
a) Oversight of the company's financial
reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible;
b) Recommendation for appointment, remuneration and terms of appointment of auditors of the company;
c) Approval of payment to statutory auditors for any other services rendered by the statutory auditors;
The new norms have also amended clause 35B of the listing agreement and the same is as follows:
The revised clause 35B provides e-voting facility to the shareholders, in respect of all shareholders' resolutions required to be passed at general meetings or through postal ballot. This provision is in consonance with the Companies Act, 2013 and is aimed to promote active participation in the decision making process by the minority and foreign shareholders.
The new norms also require a company to obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance. The said certificate must also be sent to the Stock Exchanges along with the annual report filed by the company. This has been done to ensure effective compliance of the new corporate governance norms and so that the affairs of the company are carried out in accordance with the said norms.
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Copyright © 2014 Kanth and AssociatesDISCLAIMER- Kanth and Associates newsletter is for private circulation only. It does not purport to be or should
not be treated as professional advice or legal opinion. Kanth and Associates also disclaim any responsibility and hereby accept no liability for consequences of any person acting or refraining to act on the basis of any information contained herein.
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The new corporate governance norms by SEBI are a step in the right direction addressing specific issues such as shareholders rights, whistle blower policy and greater accountability by the board of directors which is in line with the requirements of the new Companies Act, 2013. The overall objective is to ensure that the companies adopt best practices on corporate governance. Though,
the applicability might add to greater compliance costs, the compliance of the new corporate governance norms should be ensured through its effective implementation and enforcement which will thereby pave the way for a robust corporate governance regime in the country.
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