Feb 2013 Legal Bulletin

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FEBRUARY - 2013

SNG Editorial Team


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Dear Readers,

It is the spirit and not the form of law that keeps justice alive Earl Warren

It gives us great joy in sharing with you news highlights in form of Feb 2013 edition of SNG Updates.

The edition has been divided into the following sections:

NEWS UPDATES CORPORATE UPDATES RBI UPDATES SEBI UPDATES JUDGEMENT UPDATES LEGAL OPINION WORD OF THE MONTH

The second month of 2013 has been also a happening month, like its previous month with many newguidelines, circulars, notifications from the regulators along with introduction of new laws and alsoamendments to existing laws.

It may be noticed that now issues related to KYC/determination of beneficial ownership is being takenvery seriously by all Regulators, be it SEBI, RBI or IRDA. Last month in Jan 2013, RBI had issued amaster circular on KYC Norms / AML Standards / Combating Financing of Terrorism / Obligation of banks under PMLA, 2002, SEBI issued guidelines on Identification of Beneficial Ownership and now inFeb 2013 not remaining behind of either regulators, even IRDA has issued a circular on AML/CFTguidelines related to Procedures for Determination of Beneficial Ownership. Further RBI has also issuedtwo separate circulars addressing Authorized Persons carrying out Money Changing activities and all

NBFCs and RNBCs providing their obligations under PMLA, 2002.RBI issued a long time awaited guideline on Licensing of New Banks in the Private Sector on 22nd Feb,2013, which will allow new entrants in the Banking sector. There are many applicants ready to welcomethe same and are working in full swing to get a Banking license.

SEBI has recently come out with two different circulars in respect to illiquid scrips wherein one circulartalks about enhancing liquidity in the illiquid scirps by promoting incentives by stock exchanges ontrading in such scrips, another circular aims at curbing manipulations in the illiquid scrips byintroducing Periodic Call Auction in illiquid scrips.


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Bombay Stock Exchange Ltd (BSE) has entered into a long- term strategic partnership with Standardand Poor's Dow Jones Indices forming a new JV, S&P BSE Sensex . With this BSE will be able to usethe S&P brand for Sensex and other indices such as BSE 200 and BSE 100. Accordingly the 30 stock benchmark index will now be managed and operated by S&P BSE Sensex which will in turn help theSensex to get a wider international recognition.

SEBI has been sharpening its axe by bringing major changes in securities laws in order to nail down themanipulators. SEBI has also sought powers to conduct search and seizure operations and to demandinformation from any person in relation to its investigations. The Board has suggested that monetary finesbe recovered via Income-Tax arrears mode and by setting up special courts to deal with criminalprosecution for violation of securities laws and recognition of SEBI s counsels as public prosecutors. Byforwarding the proposal to the Finance Ministry, SEBI has proposed necessary amendments to therelevant securities laws.

Supreme Court has initiated action and has asked why contempt action should not be initiated againstSahara for not complying with the court s order. The apex court had on 31.08.2012 directed the twoSahara companies, i.e., Sahara India Real Estate Corporation and Sahara Housing InvestmentCorporation to refund around Rs. 24,000 crore to their investors within three months with 15% interestper annum, for raising the amount from its investors in violation of rules and regulations. The SupremeCourt has clarified that, SEBI is free to freeze accounts and seize properties of Sahara's two companiesfor defying court orders and not refunding the amount to investors. The apex court also pulled up theSEBI for not taking action against the two companies since the order had asked it to attach properties andfreeze bank accounts of the companies.

The Reserve Bank has informed that there is a limited scope for easing of monetary policy over the nextfew months as there is a risk of inflation escalation as well as concerns over fiscal and current accountdeficits.

In our Legal Opinion section, in keeping with the current market sentiments, we bring you an analysis of newly inserted Section 115BBE of Income Tax Act, 1961 and its Implications for Small Tax Payers.

We also look forward to receiving valuable suggestions and queries, if any. Please feel free to write to usat [email protected]

Thanking you

Chetan Gandhi

B.Com., LL.M., ACSEditor


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AML/CFT guidelines-Procedures for Determination of Beneficial Ownership

In order to provide clarity on beneficial owner across the insurance industry in aninsurance contract, Insurance Regulatory and Development Authority (IRDA) hasadvised that insurance companies should implement appropriate procedures for determining beneficial ownership.

In order to have a uniform approach across the financial sector, Government of India, Ministry of Finance in consultation with various financial sector regulatorshas specified the procedures for determination of Beneficial Ownership.

In September 2010, IRDA had issued a circular on the Anti-MoneyLaundering/Counter-Financing of Terrorism (AML/CFT)-Guidelines that requiredinsurers to identity and verify the beneficial owner to an insurance contract.

Beneficial owner means the natural person(s) who ultimately owns or controls acustomer and/or the person on whose behalf a transaction is being conducted. Italso incorporates those persons who exercise ultimate effective control over alegal person or arrangement.

As per the guidelines, where the customer is a person other than an individual or trust, the insurer need to verify the identity of the natural person, who, whether acting alone or together, or through one or more juridical person, exercises controlthrough ownership or who ultimately has a controlling ownership interest.

It has been clarified that where the customer is a trust, the insurance company,shall identify the beneficial owners of the customer through the identity of thesettler of the trust, the trustee, the protector, the beneficiaries with 15% or moreinterest in the trust and any other natural person exercising ultimate effectivecontrol over the trust through a chain of control or ownership.

Where the customer or the owner of the controlling interest is a company listed ona stock exchange, or is a majority-owned subsidiary of such a company, it is notnecessary to identify and verify the identity of any shareholder or beneficial owner of such companies.

IRDA has stated that the above procedures shall be applied above a premiumthreshold in case of insurance contracts, which would be Rs 1 lakh/policy for Key-Man insurance contracts, Rs 2 lakh/policy for partnership policies and Rs 1lakh/policy for others (which include HUFs, Trusts).


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Further, employer-employee policies in the nature of group insurance policies shallbe exempt from the requirements of identification of beneficial ownership. In caseswhere Employer- Employee policies are in the nature Individual business,thresholds laid down above, as relevant to the constitution of the juridical persontaking insurance contract shall apply.

IRDA added that the procedures prescribed above will have to be applied whenever the Know-Your-Customer (KYC) norms are to be carried out as per the requirementsunder the extant AML/CFT guidelines. Insurance companies have been advised byIRDA to amend their AML/CFT policy suitably and implement the above by 1st April2013.

Click here for the News Report
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Criminal Law (Amendment) Ordinance, 2013

This Ordinance has been promulgated by the President of India, Mr. Pranab

Mukherjee, on 3 February 2013 which provides for amendment of Indian PenalCode, Indian Evidence Act, and Code of Criminal Procedure, 1973 on laws related tosexual offences.

On 22 December 2012, a judicial committee headed by J. S. Verma, a former Chief Justice of India, was appointed by the Central government to submit a report, tosuggest amendments to criminal law to sternly deal with sexual assault cases. Thereport indicated that failures on the part of the Government and Police were theroot cause behind crimes against women.

The Cabinet Ministers, on 1 February 2013; gave approval for bringing an ordinance,for giving effect to the changes in law as suggested by the Verma CommitteeReport.

This new Ordinance has provided for new offences. These new offences like, acidattack, sexual harassment, voyeurism, stalking and assault to disrobe a woman hasbeen incorporated into the Indian Penal Code (IPC). It amends the definition of existing sexual offences and their penalties. The amendments proposed seek to

replace the offence of rape with sexual assault which has a wider definition. TheOrdinance has increased the consent age from 16 to 18 years.

This also amends the procedure to be followed in investigation and trial of sexualoffences. The Ordinance protects the victim by penalizing public servants who failto record FIRs relating to sexual offences. They also require the victims to beprovided with legal and medical assistance. The Ordinance prescribes higher punishments for sexual assault resulting in death or persistent vegetative state,gang sexual assault and repeat offenders.

The Ordinance requires certain steps to be taken when the statement of avictimized woman or a differently-abled person is being recorded in sexual offencecases. These are: (a) that the statements should be recorded at a place of thevictims choice; and (b) that the vi ctim should be provided with assistance fromlawyers, health care workers or womens organizations. Furthermore, statements of physically or mentally disabled victims would have to be video-graphed and thevictims have to be provided with special educators. The Bill also includes theseprovisions, however, it does not make special provisions for disabled persons.
http://en.wikipedia.org/wiki/J._S._Vermahttp://en.wikipedia.org/wiki/J._S._Verma


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Under the Ordinance, men below 18 years and above 65 years of age, and womencannot be required to attend as witnesses at any place other than the personsresidence. Prior to the Ordinance, apart from women, this provision only applied tomen below 15 years of age.

Further the Ordinance also prescribes that the Court may take steps to ensure thatvictims of sexual offences, who are minors, should not be confronted by theaccused at the time of taking the victims evidence.



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Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT)-Guidelines for General Insurers

The Guidelines on Anti-Money laundering/Counter Financing of Terrorism (AML/CFT),issued in 2006 were made applicable to general insurance companies formeffective from 1st January 2007. Based on various representations received fromthe industry in the matter, some of the stipulations, as applicable to the generalinsurance companies have been reviewed and revised in consultation with GeneralInsurance Council. Accordingly on 7 th Feb, 2013, IRDA has issued detailedGuidelines for General Insurers in respect of Anti-Money Laundering/Counter Financing of Terrorism and the same is effective from 1st April 2013. In order toensure compliance Insurance companies have been advised to amend their AML/CFT policy suitably.

The guidelines covers what is money laundering, along with the three commonstages of money laundering. Further in order to discharge the statutoryresponsibility to detect possible attempts of money laundering or financing of terrorism, every insurer needs to have an AML/CFT program which should, at aminimum, include: (1) Internal policies, procedures, and controls; (2) Appointmentof a Principal compliance officer; (3) Recruitment and training of employees/agents;and (4) Internal Control/Audit.

Each insurance company has to establish and implement policies, procedures, andinternal controls in its AML/CFT program covering (1) Know Your Customer (KYC)Norms, (2) Implementation of Section 51A of UAPA, (3) Reporting Obligations and(4) Record Keeping.

The AML/CFT program envisages submission of Reports on certain transactions to aFinancial Intelligence Unit-India (FIU-IND) set up by the Government of India totrack possible money laundering attempts and for further investigation and action.

This covers (i)Suspicious Transactions Reports; (ii)Monitoring and Reporting of Cash Transactions; (iii) Reporting of receipts by Non-Profit Organizations; and (iv)Reporting of Counterfeit Currency/Forged Bank notes (CCR).

A detailed AML/CFT Policy should be drawn up encompassing aspects of Customer acceptance policy, Customer Identification procedure, Monitoring of transactions,Risk management framework as evolved by the insurer. The policy should have theapproval of the board. The policy should be reviewed annually and changeseffected based on experience.


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Further it is also necessary that steps are taken to strengthen the level of controlon the agents and corporate agents engaged by the insurers. A list of rules andregulations covering performance of agents and corporate agents must be put inplace. A clause should be added making KYC norms mandatory and specificprocess document can be included as part of the contracts.

The companies should designate a Principal Compliance Officer (PCO) under AML/CFT guidelines whose name should be communicated to IRDA and FIU.

The committee monitoring the agents should monitor sales practices followed byagents and ensure that if any unfair practice is being reported then action is taken

after due investigation; Periodic risk management reviews should be conducted toensure company's strict adherence to laid down process and strong ethical andcontrol environment.

Insurance companies should have adequate screening procedures when hiringemployees. Instruction Manuals on the procedures for selling insurance products,customer identification, record-keeping, acceptance and processing of insuranceproposals, issue of insurance policies should be set out by the Insurance Company.The concept of AML/CFT should be part of in-house training curriculum for agents.

Records of training imparted to staff in the various categories detailed aboveshould be maintained.

Insurance companies' internal audit/inspection departments should verify on aregular basis, compliance with policies, procedures and controls required to be inplace under these guidelines. The reports should specifically comment on therobustness of the internal policies and processes in this regard and makeconstructive suggestions where necessary, to strengthen the policy andimplementation aspects. Exception reporting under AML/CFT policy should be doneto Audit Committee of the Board.



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Employees Provident Funds (Amendment) Scheme, 2013

The Central Government has introduced Employees' Provident Funds (Amendment)Scheme, 2013 vide notification dated 1 st Feb, 2013. The same will be effective onthe date of its publication in the Official Gazette.

Through this amendment the term Interest Account has been introduced.Accordingly in the Employees' Provident Funds Scheme, 1952, for paragraph 51, thefollowing paragraph shall be substituted, namely:-

51. Interest Account.-- All interest, rent and other income realized, and net profitsor losses, if any, from the sale or investments not including therein the transactionsof the Administration Account, shall be credited or debited, as the case may be, toan account called "Interest Account", and the brokerage and commission of thepurchase and sale of securities and other investments, shall be included in thepurchase or sale price, as the case may be, and not separately charged to the"Interest Account".



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Filing of Balance Sheet and Profit and Loss Account in extensible BusinessReporting Language (XBRL) mode for the financial year commencing on orafter 01.04.2011

XBRL (Extensible Business Reporting Language) is another advanced reportinglanguage of the XML family. XBRL ensures that the figures reported to governmentauthorities and other organization does not remain dormant piece of papers but thefigures can be used in data analysis.

The Ministry of Corporate Affairs has extended the time limit to file the financialstatements in the XBRL mode without any additional fee/penalty up to 28thFebruary 2013 or within 30 days from the due date of AGM of the company,

whichever is later.

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MCA Clarification regarding Debenture Redemption Reserve

MCA has provide a clarification on adequacy of DRR and other related matters

No DRR is required for debentures issued by All India Financial Institutions (AIFIs)regulated by Reserve Bank of India and Banking Companies for both public as wellas privately placed debentures. For other Financial Institutions (FIs) within themeaning of Section 4A of the Companies Act, 1956, DRR will be as applicable toNBFCs registered with RBI.

For NBFCs registered with the RBI under Section 45-lA of the RBI (Amendment) Act,1997,'the adequacy' of DRR will be 25% of the value of debentures issued throughpublic issue as per present SEBI (Issue and Listing of Debt Securities) Regulations,

2008, and no DRR is required in the case of privately placed debentures.

For other companies including manufacturing and infrastructure companies, theadequacy of DRR will be 25% of the value of debentures issued through public issueas per present SEBI (Issue and Listing of Debt Securities), Regulations 2OO8 andalso 25% DRR is required in the case of privately placed debentures by listedcompanies. For unlisted companies issuing debentures on private placement basis,the DRR will be 25% of the value of debentures.

Every company required to create/maintain DRR shall before the 30th day of April of each year, deposit or invest, as the case may be, a sum which shall not be lessthan 15% of the amount of its debentures maturing during the year ending on the31st day of March next following in any one or more of the following methods,namely:(a) in deposits with any scheduled bank, free from charge or lien(b) in unencumbered securities of the Central Government or of any StateGovernment;(c) in unencumbered securities mentioned in section 20 (a) to (d) and (ee) of the

Indian Trusts Act, 1882;(d) in unencumbered bonds issued by any other company which is notified under section 20(f) of the Indian Trusts Act, 1882;

The amount deposited or invested, as the case may be, above shall not be utilizedfor any purpose other than for the repayment of debentures maturing during theyear referred to above, provided that the amount remaining deposited or invested,as the case may be, shall not at any time fall below 15% of the amount of debentures maturing during the 3lst day of March of that year.

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Bank Finance for Purchase of Gold

The Reserve Bank of India (RBI) has directed State and Central Co-Operative Banksnot to grant loans for purchase of gold in any form in order to check the significant

rise in import of the precious metal in recent years.

In view of the concerns RBI has notified that the state and central co-operativebanks should not grant any advance for purchase of gold in any form, includingprimary gold, gold bullion, gold jewelry, gold coins, units of gold Exchange TradedFunds (ETF) and units of gold Mutual Funds

Presently, these banks are permitted to grant loans against pledge of goldornaments, but not permitted to grant any advance for purchase of gold in any form.

They grant loans for various purposes against the security of gold/gold ornamentsas part of their lending policy.

RBI has stated that considering the Second Quarter Review of Monetary Policy2012-13, significant rise in import of gold in recent years was raising concerns anddirect financing for purchase of the precious metal could fuel speculative activities.

It was then proposed that other than working capital finance, banks will not bepermitted to finance purchase of gold in any form.

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Gold Deposit Scheme

Reserve Bank of India has started a new gold deposit scheme. This scheme will beenhancing the features of previous gold deposit scheme.

The Central Government, with a view to bringing privately held stock of gold incirculation, reduce the countrys rel iance on import of gold and providing its ownerswith some income apart from freeing them from the problems of storage, movementand security of gold in their possession, had notified Gold Deposit Scheme 1999 onSeptember 14, 1999. Accordingly, RBI in 1999 had formulated guidelines for GoldDeposit Scheme to enable banks authorized to deal in gold to prepare their ownGold Deposit Schemes.

In order unfreeze idle gold, the RBI has made the Gold Deposit Schemes of banksmore attractive by lowering the deposits maturing in 6 months to 7 years periodcompared with 3 years to 7 years earlier. The central bank also clarified that thebanks does not need to obtain its approval for floating such schemes. Banksshould, however, inform the details of the scheme including names of branchesoperating the scheme to RBI. Banks would be required to report the gold mobilizedunder the scheme by all branches in a consolidated manner on a monthly basis inthe revised prescribed format. The Central Bank wants to channelize the idle goldfor productive purposes and also check the demand for imports.

Further RBI has provided that, SEBI registered mutual funds and exchange tradedfunds may deposit under the scheme.

These changes follow the announcement of the Finance Ministry last month to linkthe gold Exchange Traded Funds (ETFs) of mutual funds with gold deposit schemesof banks with a view to increase domestic availability of physical gold.



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Guidelines on Fair Practices Code for NBFCs Grievance RedressalMechanism - Nodal Officer

RBI has revised the guidelines on 18 th Feb, 2013, for Fair Practice code for NBFCs

and has directed that all NBFCs are required to display prominently, for the benefitof their customers, at their branches / places where business is transacted, thedetails of the Grievance Redressal Officer belonging to their company as also thatof the local office of RBI.

The FPC should be revised to include the following:

The name and contact details (Telephone / Mobile nos. as also email address) of the Grievance Redressal Officer who can be approached by the public for

resolution of complaints against the Company. If the complaint / dispute is not redressed within a period of one month, thecustomer may appeal to the Officer-in-Charge of the Regional Office of Department of Non-Banking Supervision (DNBS) of RBI (complete contactdetails), under whose jurisdiction the registered office of the NBFC falls.

The NBFCs are required to make suitable amendments in their existing FPC andshould be put in place by all NBFCs with the approval of their Boards within 1 (one)month from the date of issue of this circular and should be published and

disseminated on the web-site of the company, if any, for the information of thepublic.



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Know Your Customer (KYC) norms/Anti-Money Laundering (AML)Standards/Combating the Financing of Terrorism (CFT) Standards Obligation of Authorized Persons under Prevention of Money Laundering

Act (PMLA), 2002 as amended by PML (Amendment) Act 2009 MoneyChanging activities

Know Your Customer (KYC) norms /Anti-Money Laundering (AML)Standards/Combating of Financing of Terrorism (CFT)/Obligation of banksunder Prevention of Money Laundering Act (PMLA), 2002

Prevention of Money Laundering Rules 2005 requires that every Authorized Personunder money changing activity / Banks and NBFCs shall identify the beneficialowner and take all reasonable steps to verify his identity while undertaking moneychanging activities. RBI has specified the procedure for determination of BeneficialOwnership.

Where the client is a person other than an individual or trust, the Authorized Person/ Banks and NBFCs, shall identify the beneficial owners of the client and takereasonable measures to verify the identity of such persons.

Where the client is a trust, the Authorized Person / Banks and NBFCs shall identifythe beneficial owners of the client and take reasonable measures to verify theidentity of such persons, through the identity of the settler of the trust, the trustee,the protector, the beneficiaries with 15% or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chainof control or ownership.

Where the client or the owner of the controlling interest is a company listed on astock exchange, or is a majority-owned subsidiary of such a company, it is notnecessary to identify and verify the identity of any shareholder or beneficial owner

of such companies.

These guidelines are also applicable mutatis mutandis* to all agents/ franchisees of Authorized Persons / Banks and NBFCs and it will be the sole responsibility of thefranchisers to ensure that their agents / franchisees also adhere to theseguidelines.

Further necessary changes needs to be incorporated in the KYC Policy brining themin compliance with the said circular.



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Licensing of New Banks in the Private Sector

After the announcement made by the Honble Finance Minister in his BudgetSpeech for the year 2010-11, the Reserve Bank had put out a Discussion Paper on

its website on August 11, 2010 inviting feedback and comments. Thereafter, thedraft guidelines on the licensing of new banks were released on the Reserve Bankwebsite on August 29, 2011 inviting views and comments. After the vitalamendments to the Banking Regulation Act, 1949 were carried out in December 2012 and after consulting with the Government of India, the guidelines for Licensing of New Banks in the Private Sector have now been finalised.

RBI released a guideline on Licensing of New Banks in the Private Sector on 22 nd Feb., 2012.

The salient features of the said guidelines could be summarized as below: Corporates and its group, PSUs and NBFCs can set up a bank. The group shall be

eligible to set up a bank through a wholly-owned Non-Operative FinancialHolding Company (NOFHC).

The applicant should have 10 years of successful financial track record, soundcredentials and integrity.

RBI will seek feedback on applicants' background from other regulators, IncomeTax, SEBI, CBI and ED.

The NOFHC shall be wholly owned by the Promoter / Promoter Group. TheNOFHC shall hold the bank as well as all the other financial services entities of the group.

Minimum paid-up equity capital to be Rs. 500 crore. New banks to get listed within 3 years of the commencement of business. Foreign shareholding shall not exceed 49% for the first 5 years. The Board is required to have majority of independent directors. The prudential norms on similar lines as that of the bank will be applicable on

stand-alone as well as on a consolidated basis. No bar on entities in sectors like brokerage, realty. The bank shall not invest in the equity / debt capital instruments of any financial

entities held by the NOFHC. In order to comply with priority sector lending targets; they are required to open

at least 25% branches in unbanked rural areas. Business plan should be realistic, viable and address financial inclusion. Applications will be screened by RBI and then referred to a High Level Advisory

Committee. To ensure transparency, names of the applicants will be placed on RBI's

website. Last date for applying for the licence is July 1, 2013.



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Security and Risk Mitigation Measures for Electronic Payment Transactions

With the increase in popularity of making payments through alternate paymentproducts/channels among the customers with more and more banks providing such

facilities to their customers it has not become necessary that the banks ensurethose transactions effected through such channels are safe and secure and noteasily amenable to fraudulent usage.

Recently, there have been reports of frauds committed through the electronicpayment channels and fraudulent usage of cards globally. Even while the fraudsreported are not alarming compared to the total transactions effected throughthese channels, RBI, has proactively engaged with the stakeholders to ensure thesecurity of such transactions. One such initiative taken earlier was the mandating

of additional factor of authentication for all card not present (CNP) transactions.Measures for security of card present (CP) transactions have also been initiated byRBI through the implementation of recommendations of the Working Group onSecuring Card Present transactions.

With cyber-attacks becoming more unpredictable, and fraudsters moving to newmethods, banks are required to put in place certain minimum checks and balancesto minimize the impact of such attacks and to arrest/mitigate the damage.However, in order to ensure that customers of banks are not vulnerable to such

attacks, RBI has issued new guidelines to the stakeholders to further strengthenthe security and risk mitigation measures of cards and electronic bankingtransactions.

RBI has prescribed necessary steps to be carried out for Securing Card PaymentTransactions and for Securing Electronic Payment Transactions

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Liquidity Enhancement Schemes for Illiquid Securities in Equity Cashmarket

SEBI had permitted Liquidity Enhancement Schemes (LES) in derivatives segmentto enhance liquidity in illiquid derivative products. On similar lines, there has beena demand for a similar scheme to be introduced for the Equity Cash market.Accordingly SEBI has decided to permit stock exchanges to introduce LES toenhance liquidity of illiquid scrips of Equity Cash Market Segment.

As per the circular the stock exchanges will come out with the list of illiquidsecurities to qualify for LES. LES shall be applied to any of the following securities:

a. Securities having a mean impact cost greater than or equal to 2% for an order size of Rs.1 lakh, where mean impact cost of the security on the stockexchange is calculated over the past 60 trading days.

b. Securities introduced for trading in the permitted to trade category.

Any security which is introduced under LES by one stock exchange may also beintroduced by another stock exchange (even if such security in not eligible on thatexchange).

Discontinuance of any security from LES by any stock exchange shall be done after an advance notice of 15 days.

The stock exchanges are required to ensure other requirements also i.e., necessaryBoard approval, incentives, its distribution and obligations of participating parties(i.e. stock brokers, market makers etc.) and shall ensure transparency, marketintegrity and compliance with all the relevant laws.

From a market integrity perspective, Stock Exchanges are required to ensure the

following:

Not provide any incentives to trading members indulging in trades solely for seeking incentives

No incentives will be provided for trades, where the counterparty is self (i.e.buy and sale by same entity)

The Stock Exchange shall submit half-yearly reports on the working of its LES for review of SEBI.

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Increase in FII debt limit for Government and Corporate Debt category

RBI had in January 2013 enhanced the limit for investment by FIIs in thegovernment debt long term category by US$5 billion to US$15 billion and thecorporate non-infrastructure debt category by US$5 billion. In addition to thechanges prescribed in the said circular RBI has further summarized the changesvide circular dated 8.02.2013.

In the government debt long term category, the provision regarding 3 years residualmaturity at the time of first purchase shall no longer be applicable. However, withinthis category, FIIs shall not be allowed to invest in short term paper like treasurybills.

The limit of US$5 billion in the corporate non-infrastructure debt will not beavailable for investment in Certificate of Deposits (CD) and Commercial Papers(CP). Investments in Certificate of Deposits are not permitted within the limit of US$20 billion.

The US$1 billion limit for QFIs shall continue to be over and above the revised limitof US$25 billion available for FII investment in corporate non-infrastructure debtcategory.

For the US$ 12 billion investment in Corporate Long Term Infra bonds restriction of 1 year lock-in period has been removed and the 5 year initial maturity restrictionhas been removed. At the time of first purchase by FIIs, the residual maturity shallbe 15 months.

For the sub-category of US$ 10 billion reserved for FII investments in InfrastructureDebt Funds (IDFs), the restriction of 1 year lock-in has been removed. Therequirement of residual maturity of 15 months at the time of first purchase remainsunchanged.

SEBI had permitted QFIs to invest in those debt mutual fund schemes that hold atleast 25% of their assets (either in debt or equity or both) in the infrastructuresector under the US$ 3 billion investment limit for debt mutual fund schemes.These schemes were required to invest in infrastructure debt having a minimumresidual maturity of 5 years. This restriction of 5 years residual maturity has beenremoved while the restriction of 3 years initial maturity has been introduced.

All the above changes in lock-in, initial maturity and residual maturity requirements

shall apply for investments by FIIs and Sub-Accounts in debt securities to be madeafter the date of this circular.



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Introduction of Periodic Call Auction for Illiquid Scrips and Extension of Pre-open Session to all Scrips

In order to curb price manipulations and artificial and non genuine trades in illiquidscrips, SEBI has mandated trading only though periodic call auction mechanism inilliquid scrips in the equity market. The call auction facility for all scrips, includingilliquid ones, would be effective from April 1, 2013. Besides, it is also available for Initial Public Offering (IPO) as well as re-listed shares. SEBI has decided to "extendthe pre-open session to all other scrips in the equity market" as well as "introducetrading through periodic call auction for illiquid scrips in equity market". The pre-open call auction session would be open to scrips in all exchanges.

As per the norms for periodic call auctions for illiquid scrips, a scrip would beilliquid if its average daily trading volume in a quarter is less than 10,000, theaverage daily number of trades is less than 50 in a quarter and if it is classified asilliquid at all exchanges where it is traded. The illiquid scrips are required to beidentified by the stock exchanges at the beginning of every quarter. These sharescan exit from the call auction mechanism to the normal trading session providedthey have remained in session for at least two quarters and are not illiquid.

Further, a notice of two trading days would have to be submitted with the marketfor entry and exit of scrips. Accordingly, periodic call auction have to be conductedfor one hour each throughout the trading hours with the first session starting at9:30 am.

SEBI has fixed the maximum price band of 20% on the scrips. However, exchangesmay reduce the price bands uniformly based on surveillance related concerns.

Penalties could be imposed on trades where "maximum of buy price entered by aclient is equal to or higher than the minimum sell price entered by that client and if the same results into trades. The penalty shall be calculated and charged by theexchange and collected from trading members on a daily basis. Trading membersmay recover the penalty from clients. The penalty so collected shall be depositedto Investor Protection Fund.



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Gold Exchange Traded Fund Scheme (Gold ETFs) Investment in GoldDeposit Scheme (GDS) of Banks

In an attempt to boost Gold ETF's in the country, India's securities regulator,Securities and Exchange Board of India (SEBI) has allowed gold exchange-tradedfunds (ETFs) to invest in gold deposit schemes (GDS) of banks. The move wouldbring additional returns to gold ETFs allowing them to beat their benchmarks.

As per SEBI guidelines, before investing in GDS, mutual funds will have to put inplace a written policy related to the investment with due approval from the Boardof the Asset Management Company and the Trustees. The policy should haveprovision to make it necessary for the mutual funds to obtain prior approval of their trustees for each investment proposal in GDS of any Bank. The policy shall bereviewed by mutual funds, at least once a year.

The total investment in GDS cannot exceed 20% of the total assets under management of any scheme.

Further mutual funds will hold Gold certificates issued by Banks in respect of investments made by Gold ETFs in GDS only in dematerialized form.



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Scheme of Arrangement under the Companies Act, 1956 Revisedrequirements for the Stock Exchanges and Listed Companies

Listed companies, desirous of getting their equity shares listed after merger /demerger / amalgamation etc., could seek exemption under Rule 19(7) of theSecurities Contracts (Regulation) Rules, 1957 (SCRR) from strict enforcement of Rule 19(2)(b) provisions. Such companies are mandated by Clause 24(f) of theListing Agreement to file any scheme/petition, proposed to be filed before any Courtor Tribunal under sections 391, 394 and 101 of the Companies Act, 1956, with thestock exchange, for approval, at least a month before it is presented to the Court or Tribunal.

However, in the recent past, SEBI has received applications, seeking exemption,from certain entities containing, inter alia, (a) inadequate disclosures, (b)convoluted schemes of arrangement, (c) exaggerated valuations, etc. SEBI is of theview that granting listing permission or exemption from the requirements of Rule19(2)(b) of SCRR based on such applications may not be in the interest of minorityshareholders. At the same time, if listing permission or such an exemption isdelayed or denied, it would add to the uncertainty and would deprive shareholdersof an exit opportunity.

In order to avoid such situations, SEBI has revised the existing requirements for listed companies and the stock exchanges for Scheme of Arrangement under theCompanies Act, 1956. In brief following are the revised requirements:

1. Obligation on listed companies

a. Listed Companies need to file draft scheme of arrangement with the stockexchanges as per Clause 24(f) of the Listing Agreement (1 month beforethe scheme is presented to the Court) along with prescribed documents.

b. Audit Committee to furnish a report recommending the Draft Scheme

taking into consideration a valuation report obtained from an IndependentChartered Accountant.

c. One of the stock exchanges having nation-wide trading terminals to bechosen as the designated stock exchange for the purpose of coordinatingwith SEBI.

d. Observation letter of stock exchanges to be included in the notice sent toshareholders and also to bring the same to the notice of the High Court atthe time of seeking shareholder approval.


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2. Obligation on the stock exchanges for processing of the documents, release of observation letter etc. within stipulated timelines

3. Disclosure on the website of all material documents related to the Draft Scheme

of arrangement

4. Provisions for Redressal of complaints.

5. Approval of shareholders to scheme through postal ballot and e- voting through aspecial resolution.

6. Obligations on listed companies and the stock exchanges after the Scheme issanctioned by the High Court.

7. Compliance requirements for listing of equity shares with differential rights or for listing of warrants offered along with non convertible debentures (NCDs).

The revised requirements shall be applicable to listed companies which have notsubmitted the Scheme with the High Court and shall also be applicable in caseswhere in the companies have submitted the Draft Scheme with the stockexchanges under Clause 24(f) of Listing Agreement and such schemes have not yetbeen submitted with the High Court for approval



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SEBI (ICDR) (AMENDMENT) REGULATIONS, 2013 - AMENDMENT INREGULATION 100

Pursuant to the notification dated 27.02.2013 SEBI has amended Regulation 100 of

SEBI (Issue of Capital and Disclosure Requirements), 2009. Previously Regulationprovided that The Indian depository Receipts shall not be automatically fungibleinto underly ing equity shares of issuing company.

Now the regulation 100 shall be substituted with the following, namely

Fungibility - 100The Indian Depository Receipts shall be fungible into underlying equity shares of the issuing company in the manner specified by the Board and Reserve Bank of

India, from time to time.



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Supreme CourtLucknow Development Authority Vs Shyam Kapoor

Civil Appeal No. 936 of 2013 (Arising out of SLP (C) No. 19556 of 2012)05.02.2013

Brief Summary:

The Respondent preferred a complaint before District Consumer Forum assertingthat he had deposited a sum of Rs. 5,000/- with the Appellant. In order to defeat theclaim of the Respondent-complainant the stand of the Appellant was that thecomplaint was barred by time. It was also contended that the complainant was nota consumer, and as such, the District Forum had no jurisdiction in the matter.

Aggrieved with the order passed by the District Forum, the Appellant preferred anappeal before the Consumer Disputes Redressal Commission. While issuing notice,the State Commission stayed the order of the District Forum. Aggrieved with theorder passed by National Commission, dismissing the Revision Petition preferred bythe Appellant, the Appellant had approached this Court by preferring the instantappeal.

It was held that, it was clear that the Tribunals were creatures of the Statute andderived their power from the express provisions of the Statute. The District Forumsand the State Commissions had not been given any power to set aside ex- parteorders and power of review and the powers which had not been expressly given bythe Statute could not be exercised.

The legislature chose to give the National Commission power to review its ex-parte orders. Before amendment, against dismissal of any case by the Commission,the consumer had to rush to this Court. The amendment in Section 22 andintroduction of Section 22A were done for the convenience of the consumers. Inview of the above, the choice of the Appellant, in approaching the "National

Commission" rather than the "State Commission" could not have been described asfrivolous. Thus, the revision petition filed by the Lucknow Development Authoritybefore the National Commission was procedurally in order.

It was imperative for the Lucknow Development Authority to seek condonation of delay, for some justifiable reason as the National Commission was beingapproached after four and a half years. In the absence of valid justification for condoning delay, the National Commission had no other option, but to pass theorder. Even before this Court, the Appellant had failed to express any valid

justification for having approached the National Commission belatedly. Thus, thiscourt found no good ground to set aside the order passed by the NationalCommission. Thus, instant appeal was disposed of.

Click here for the Judgement
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Supreme Court

State of Andhra Pradesh Vs State of Maharashtra and Ors.

(Original Suit No. 1 of 2006, Writ Petition (C) Nos. 134 of 2006, 207 and 210 of 2007and Contempt Petition (C) No. 142 of 2009 in Original Suit No. 1 of 2006)

28.02.2013

Brief Summary:

A suit filed under Article 131 of the Constitution of India read with Order XXIII Rules

1, 2 and 3 of the Supreme Court Rules, 1966.

The suit was filed by State of Andhra Pradesh (Plaintiff) complaining violations byMaharashtra (1st Defendant) of the agreements containing decision and final order given by the Godavari Water Disputes Tribunal.

The violations alleged by Andhra Pradesh against Maharashtra were in respect of construction of Babhali barrage into their reservoir/water spread area of Pochampad project. Held, in the minutes of the technical committee meetingconvened by Chairman, CWC, it was stated that the project report of the Babhalibarrage had been prepared according to the standard guidelines of theCommission. The project report of Babhali barrage which had been approved fromCWC clearly indicated that the monthly yield from November during post monsoonseason was 2.64 TMC.

The project report also showed that there was no scope for Maharashtra for withdrawing more than 2.73 TMC. Maharashtra's assertion that Babhali barragewould trap maximum 0.6 TMC of the Pochampad storage was not a new plea raisedfor the first time before this Court in the amended written statement.

As a matter of fact, before filing the suit by Andhra Pradesh, the said aspect washighlighted by Maharashtra in the technical committee's meeting convened byChairman, CWC. The minutes of that meeting record storage of Babhali barrage waswell within the banks. There was no diminution of flow during monsoon irrespectiveof construction of Babhali barrage by Maharashtra.


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The only difficulty was in respect of non-monsoon season which contributed about10 per cent of the flows that too was not well defined and well spread. If this

difficulty was taken care of, virtually there was no injury to Andhra Pradesh muchless substantial injury in as much as the inhabitants of seven districts (Adilabad,Nizamabad, Karimnagar, Warrangal, Nalgonda, Khammam and Medak) should notbe deprived of water for drinking purpose and irrigation which was the mainconcern of Andhra Pradesh.

Apprehensions of Andhra Pradesh were bona fide and genuine. However, theseapprehensions could be largely overcome and addressed. There was no reason whysupervisory committee could not oversee the compliance of commitments which

Maharashtra had made to this Court by way of pleadings and also in the course of hearing.

Cases referred to: i.) Orient Papers and Industries Ltd. and Anr. v. Tahsildar-cum-Irrigation Officer and Ors.

Hence, writ Petitions were disposed of.



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Supreme Court

The Rajasthan State Industrial Development and Investment Corporation andAnr. Vs Diamond and Gem Development Corporation Ltd. and Anr.

Civil Appeal Nos. 7252-7253 and 8222-8223 of 2003

12.02.2013

Brief Summary:

Present appeals were preferred against the impugned judgment passed by the High

Court by which the High Court had allowed the writ petitions filed by theRespondent Company for quashing the order of cancellation of allotment of landand directing the Appellants for providing the approach/access road.

Whether, the High Court had committed an error, by quashing the order of cancellation and, in issuing a direction for the restoration of possession and for theprovision of the access road and thus appeals deserved to be allowed.

It was held that, while providing justification for the non-completion of construction

and commencement of production, it was submitted by the Respondent-companythat extension of time was sought from statutory authorities. However, the saidapplication did not specify how much more time the company was seeking, andthat too, without meeting any requirements provided in the statutory rules.

According to Clause 2(d) of the lease deed the entire project was to be completedwithin a period of five years. But it was evident from the material on record thatconstruction was just made on the fraction of the entire land. Clause 2(i)contemplated that the lessee would not transfer nor sub-let nor relinquished rights

without prior permission from the Appellant-RIICO.

However, it was evident from the record that the Respondent-company hadnegotiated with a third party for development of the land. The cancellation of allotment was made by Appellant-RIICO in exercise of its power under Rule 24 of the Rules 1979 read with the terms of the lease agreement. Such an order of cancellation could have been challenged by filing a review application before thecompetent authority under Rule 24 (aa) and the Respondent-company could havepreferred an appeal under Rule 24(bb)(ii) before Infrastructure DevelopmentCommittee of the Board.


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The Respondent-company ought to have resorted to the arbitration clause provided

in the lease deed in the event of a dispute, and the District Collector would havethen, decided the case. However, the Respondent-company did not resort to thestatutory remedy, rather preferred a writ petition which could not have beenentertained by the High Court.

It was settled law that writ did not lie merely because it was lawful to do so.

Thus, appeals were allowed. Judgment and order impugned were set aside and theorder of cancellation of allotment in favor of the Respondent-company by theAppellant was restored.



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Bombay High Court

Tata Capital Financial Services Limited, 2. L & T Finance Limited Vs 1. M/SDeccan Chronicle Holdings Limited, 2. Mr. T. Venkatram Reddy

Arbitration Petition No. 1321, 1095 of 2012

21.02.2013

Brief Summary:

Present petitions were filed under Section 9 of the Arbitration & Conciliation Act,

1996, wherein Petitioner sought appointment of Court Receiver in respect of various properties described in the petition, for injunction and for an order anddirection against the respondents to secure, in favor of the Petitioner, its claimwith interest.

As the Respondents had raised various issues on maintainability of both thesepetitions, which were common in both the petitions, same were heard together andwere being disposed of by a common order.

Whether, before considering the grant of any interim measure under Section 9 of the Act, this Court would have to first decide the issue as to whether an interimorder could be passed in favor of Petitioner when the dispute between the partieswere non-arbitrable.

It was held, perusal of the averments in the petition indicated that Petitioner hadplaced on record sufficient material, which indicated that financial condition of Respondents was in very bad shape and Respondents were proposing to take stepsto sell its assets so as to deprive Petitioners of recovery of its legitimate dues.Petitioners had pleaded that there were large number of creditors and liabilities toRespondents which might be more than Rs. 3000 crores with multiple lenders,which averment was not disputed by Respondents in the affidavit in reply.Petitioners had also pleaded that there were several proceedings pending,including winding up proceedings against Respondents.

On perusal of record, it indicated that Respondents were about to alienate itsproperties which were required to be protected. Petitioner had made out a case for attachment before judgment and satisfied the principles of order 38 Rule 5 in thiscase and deserved to be granted interim measures. Respondents had not replied tothe legal notice issued by Petitioner. Even in the affidavit in reply, there was vaguedenial of the claim.


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This Court had already appointed ad interim Receiver in respect of the assets of Respondents and had already granted ad interim relief which had not beenimpugned by Respondents by filing any appeal. Record indicated that theproceedings were not filed on the basis of any newspaper reports, but was filedindependently and such averments were not disputed by Respondents.

Hence, petition was disposed of.



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Section -115BBE of Income Tax Act, 1961- Implications for Small TaxPayers

The Finance Act 2012, inserted Section 115BBE though applicable to all assesses,but it essentially denies the benefit of basic exemption limit to individual or HUF inrespect of incomes referred to in Section 68, Section 69, Section 69A, Section 69B,Section 69C and 69D, and to charge tax thereon at flat rate of 30%. The rationaleof bringing this provision is to curb practice of laundering of unaccounted moneythrough marginal tax payers by taking advantage of basic exemption limit.

. Structure and working of Provisions of Section 115BBE

15BBE.(1) Tax on income referred to in section 68 or Section 69 or Section 69A or section69B or Section 69C or Section 69D. (1) Where the total income of an assesseeincludes any income referred to in Section 68, Section 69, Section 69A, Section 69B,Section 69C or Section 69D, the income-tax payable shall be the aggregate of (a) the amount of income-tax calculated on income referred to in Section 68, Section

69, Section 69A, Section 69B, Section 69C or Section 69D, at the rate of thirty per cent. ; and

(b) the amount of income-tax with which the assessee would have been chargeable

had his total income been reduced by the amount of income referred to in clause(a).

(2) Notwithstanding anything contained in this Act, no deduction in respect of anyexpenditure or allowance shall be allowed to the assessee under any provision of thisAct in computing his income referred to in clause (a) of sub-section (1).

Comments

i. This Section is under Chapter XII, containing provisions for levy of tax at specifiedrates on various kinds of incomes, treating such incomes as separate block.

ii. Clause (a) of sub-Section 1 of Section 115BBE provides that income referred toin Section 68, Section 69, Section 69A, Section 69B, Section 69C and 69D will becharged to tax @ 30%. However, surcharge and cess will be applicable as per theprovisions of relevant Finance Act over and above such rate of 30%.

iii. Clause (b) of sub- Section (1) of Section 115BBE provides that assessees totalincome would be reduced by the income taxed under Clause (a) and the tax wouldbe calculated on the balance of income as per the slab rate applicable thereto.

The total tax liability would be on the amount of tax computed under Clause (a)and Clause (b).


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iv. Sub-Section 2 provides that no deduction in respect of any expenditure or

allowance shall be allowed to the assessee under any provisions of the Act, whilecomputing his income referred to Clause (a) of sub-Section 1.

B. Legal issues involved

i. The Assessee may be eligible for deduction in Chapter VI- A /set off of current yearsloss under the other heads as per the provisions of Section 71. However, the samewould be ignored, while computing the tax liability under Section 115BBE, hence,total income may be actually less but the tax liability would be substantially higher.

ii. As the sub-Section (1) refers to income under Section 68, Section 69, Section 69A,Section 69B, Section 69C and 69D, moot question which arises is, where assesseevoluntarily returns income for taxation, whether Assessing Officer would be

justified for taxing the same by applying the deeming provisions of Section 115BBE.To find the answer to this question, one will have to go through the structure of Section 68, Section 69, Section 69A, Section 69B, Section 69C and 69D which dealswith computation of deemed incomes under specific circumstances. Section 68starts with any sum which is a very vide term and even the cash sales appearing

in the books of assessee may be deemed as unexplained income for want of verification of buyer being insisted upon by the department. The AgriculturalIncome, Investments, Sundry Creditors, purchases, expenditure etc., may also betreated as unexplained income under other sections referred to in, as above. In thecase of small tax payers, it is observed that generally they are not required tomaintain the Books of Account nor they are well conversant with the rigors of lawor in some cases, the returns are not filed regularly, but cash in hand kept withthem is deposited in the bank account in lump sum in other financial year(s) and, insuch cases, they may be required to pay more tax under new tax regime in spite of being genuine and honest. Further, since the provision is being brought on statue tocurb black money, the assessees action of offering income voluntarily at n ormalrates would be opposed to the object of this provision, hence, suchaction/arguement may not be tenable in law now.

i. There could also be a situation, where income is chargeable at a flat rate specifiedin Section of 44AD, the assessee declares income at specified or higher percentageto get assessed under that section and is not required to maintain the Books of Account. In case, the assessee declares higher profits, the Assessing Officer mayform a view that unaccounted money is being shown. Hence, instead of acceptingthat income as such, the Assessing Officer may invoke Section 115BBE even insuch a case nullifying the purpose of scheme of presumptive taxation in case of small tax payers.


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C. Conclusion

Though no one can deny the need for curbing the menace of black money, however,targeting the small tax payers in such a harsh manner would be counter-productive,as there would be substantial increase in litigation due to overzealous applicationof this section by the Assessing Authorities to garner more revenue and the cost of litigation would certainly be higher than the revenue generated by the Departmenton one hand and on the other hand the big fishes would escape the attention andfocus of the department due to their focus on small tax payers which couldotherwise lead to more revenue. Hence, to avoid such a situation, this section maybe deleted or otherwise CBDT must issue guidelines to the Assessing Officers to

not to invoke this provision in a routine manner, specify the acceptability criteria inregard to claims of the assessee in regard to nature and source of same, and thepresent rate of tax of 30% may be reduced to 10% as that would be equivalent taxon regular total income of Rs. 4,00,000/-.

WORD OF THE MONTH UNION BUDGET

As per Business dictionary the term Budget means an estimate of costs,revenues, and resources over a specified period, reflecting a reading of futurefinancial conditions and goals. One of the most important administrative tools, abudget serves also as a (1) plan of action for achieving quantified objectives, (2)standard for measuring performance, and (3) device for coping with foreseeableadverse situations.

The Union Budget of India, referred to as the Annual Financial Statement in Article112 of the Constitution of India, is the annual budget of the Republic of India,presented each year on the last working day of February by the Finance Minister of India in Parliament.

The Finance Minister puts down a report that contains Government of Indiasrevenue and expenditure for one fiscal year. The fiscal year runs from April 01 toMarch 31.

The Budget is the most extensive account of the Government`s finances, in whichrevenues from all sources and expenses of all activities undertaken areaggregated.


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Revenue receipts = Revenues from tax + other sources

Revenue expenses = the payment incurred for the normal day-to-day running of government departments

+ various services that it offers to its citizens.

apital receipts = loans raised by Government from public (Market Loans)+ borrowings by Government from RBI+ other parties through sale of Treasury Bills+ loans received from foreign Governments and bodies+ recoveries of loans granted by Central Government to State andUnion

Territory Governments and other parties.

apital payments = capital expenditure on acquisition of assets like land, buildings,etc

+ loans and advances granted by Central Government to State andUnion Territory Governments, Government companies, Corporations andother parties.

As per Article 112 of Constitution of India The President shall in respect of everynancial year cause to be laid before both the Houses of Parliament a statement of thestimated receipts and expenditure of the Government of India for that year, in this Parteferred to as the annual financial statement .

he Union Budget of India for 2013 2014 was presented by Mr. P. Chidambaram on 28thebruary 2013, Thursday.

BUDGET

REVENUE BUDGET CAPITAL BUDGET

REVENUE RECEIPTS CAPITAL RECEIPTSREVENUE EXPENSES CAPITAL EXPENSES


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Feb 2013 Legal Bulletin

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