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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KANTH AND ASSOCIATESAttorneys and International Legal Consultants

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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




K & ANewsletter

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



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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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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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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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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A-9, Nizamuddin East, New Delhi-110013, IndiaPhone No: (+91) (11) 24359593 / 4 / 7; Fax: (+91) (11) 41825223Email- [email protected]

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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.

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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