TRANSACTION ADVISORS

Missive Volume IV July 2011

Dear Patron Here we are again with the Fourth successive issue of our monthly Missive. FDI in India was up by 43% in April to USD 3.12 billion. India Inc raised $2 bn in April through ECBs & FCCBs. Private equity investments in India touched US$ 6,141 million in value terms in the first six months of 2011, a rise of 52% over the corresponding period in previous year. Above statistics are themselves evident of the fact that the Indian growth story is gaining momentum. Our Impact analysis on the critical updates has been widely acclaimed, prompting us to cover more updates under the said analysis. At the same time, we would very much appreciate your feedback which consistently helps us in improving and upgrading the contents. We trust you will enjoy reading this Missive. Thanks and regards, Akhil Bansal Editor, Knowledge Management Team

Topics Corporate Law SEBI FEMA Regulatory Updates Regulatory News International Taxation Transfer Pricing Recent News in Transactions that made headlines

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Positive thinking is not

EXPECTING the Best to happen. It is about ACCEPTING that whatever happens is always the BEST.

Corporate Law
Filing of Financial statements in XBRL mode [General Circular No. 37/2011 dated June 7, 2011] Superseding its earlier circulars, MCA has mandated the following companies to file their balance sheet and profit & loss account along with the Directors' and Auditor's Report for the year 2010-11 onwards by using XBRL Taxonomy: All companies listed in India and their Indian subsidiaries; All companies having paid up capital of INR 5 crores and above; and All companies having turnover of INR 100 crores and above. However, banking, power, insurance and non-banking financial companies are exempted from XBRL filing till further orders. Impact: XBRL is increasingly gaining importance from Indian regulators. SEBI is in the process of adopting XBRL. BSE and NSE have already offered a unified XBRL-enabled platform called corpfiling system' to electronically file their disclosures, giving instant access to the investors. XBRL taxonomy for the banks has been finalised; and for insurance sector and NBFCs, taxonomy is going to be developed shortly. Now, the Ministry of Finance and other ministries are also preparing for the transition Companies (Cost Accounting Records) Rules, 2011 and Companies (Cost Audit Report) Rules, 2011 The new rules will apply to every company, including a foreign company, engaged in the production, processing, manufacturing or mining activities and which has: Net worth exceeding Rs. 5 crores as on the last date of the immediately preceding financial year; Turnover exceeding Rs. 20 crores from sale or supply of all products or activities during the immediately preceding financial year, or Issued equity or debt securities that are listed or are in the process of listing on any stock exchange, whether in or outside India. MCA has also done away with a 46-year system of prescribing sectorspecific cost accounting record maintenance rules for 36 industrial segments. Instead, it has notified a common rule that outlines the broad principles which companies need to follow. However, the practice of notifying such record continues for only 8 sectors where government control over pricing, production or distribution exists today (i.e medicines, fertiliser, sugar, industrial alcohol, electricity, petroleum, and telecommunications) MCA has also issued The Companies (Cost Audit Report) Rules, 2011 which will apply to every company in respect of which an audit of the cost records has been ordered by the Central Government under sub-

section (1) of section 233B of the Act. The rules, among other matters, provide the format of the cost audit report, time-limit for submission and penalties for default. Green Initiatives in the Corporate Governance Clarification regarding participation by shareholders or Directors in meetings under the Companies Act, 1956 through electronic mode [General Circular 35/2011 dated June 6, 2011] MCA has clarified that it is not mandatory for companies to provide the facility of video conferencing to its directors for the meeting. As far as shareholders meeting for FY 2011-12 is concerned, it is optional for the company to provide such facility. Even thereafter, the same would be mandatory only for listed companies. Draft Rules for mandatory dematerialisation of share certificate by Public Companies MCA has issued Companies (Dematerialisation of Certificates) Rules, 2011 (Draft Rules) for public comments. Rules will be applicable to all public companies and their subsidiaries which have raised money by issue of shares, debentures, by accepting public deposits, stock, bond or any other financial instruments from public, other than from directors of the company. Rules further provides that such companies shall issue and keep share certificates, debenture certificates and certificates issued for receipt of deposits, stock, bond or any other

financial instruments only in dematerialised form. Rules proposed to be effective from October 1st, 2011. Impact: Both shareholder and companies would need registration with NSDL or CSDL which would not only be a time consuming process but would also involve cost. Fast Track Exit mode for defunct companies under section 560 of the Companies Act, 1956 (General Circular No.36/2011 dated June 7th, 2011) At present a company that is desirous of getting its name struck off, has to apply to RoC in e-form 61. All pending statutory returns are required to be filed alongwith. To make an easy exit route for the defunct companies, the ministry has prescribed the new guidelines effective July 3rd, 2011. However, the defunct company is one which does not have any asset or liability and is not involved in any business activity one year prior to making application to the RoC. Impact: The FTE Guidelines is an improvement over the previous Easy Exit Scheme (EES) and will provide an opportunity to the defunct companies to exit with minimal compliance. Other Updates Central Government has issued the Companies (Passing of Resolution by Postal Ballot) Rules, 2011 (New Rules), which will supersede the Principal Rules. The new Rules provide for the

mechanism for electronic voting which would involve appointment of agencies like NSDL or CSDL. This initiative is in furtherance of the Green Initiative in the Corporate Governance released by MCA in May 2011. The provision for electronic mode of voting is expected to increase the members participation in decisions taken at meetings. Further, it will reduce both time and costs incurred by the Companies as well as its members on meetings. Government had amended the guidelines for declaring financial institution as Public Financial Institutions (PFI) under Section 4A of the Companies Act, 1956. Private companies, primarily engaged in infrastructure funding, have been permitted to attain the status of a PFI and, seek tax and other benefits. Under the new norms notified by the Ministry of Corporate Affairs, any company which has been in existence for more than three years and earns more than 50% income from industrial and infrastructural financing can opt to be a PFI [vide General Circular No: 34/2011 Dated- 02.06.2011] MCA had now made it mandatory for CAs, CSs to digitally sign DIN applications [General Circular No 32/2011 dated May 31st, 2011]

SEBI
Shareholding of promoter / promoter group to be in dematerialized mode [Circular No. Cir/ISD/ 3/2011 dated June 17, 2011] SEBI had asked the promoters of listed companies to convert their entire equity holding in the dematerialized form by September 2011, failing which it will ban trading of such shares in the normal segment of the market. The non-compliance would require trading of shares under the trade segment. Under the trade segment, it is mandatory to take delivery of shares and most companies prefer to get their equities traded under the normal segment'. Impact: SEBI intends to encourage transparency in the dealings of shares by promoters including pledge / usage as collateral, to moderate sharp and destabilizing price movements in shares of companies and to encourage better price discovery. Redemption of Indian Depository Receipts (IDRs) into Underlying Equity Shares [Circular CIR/CFD/DIL/3/2011 dated June 03, 2011] SEBI has provided restrictions on redemption of IDRs to their corresponding underlying shares. As per the circular, a conversion would be possible only if the trading volume over the last six months was less than 5% (annualized) of the total IDRs issued. Impact: This circular by SEBI is being seen as change of rules midway by the existing IDR holders and FIIs putting them into disadvantageous position as they will not be able to acquire the
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underlying shares and therefore will have to exit through IDRs in losses. The SEBI circular has raised serious questions about the future of the instrument. SEBI circular relaxes norms on changing names by Listed Companies [Circular No. CIR/MRD/DP/ 07 /2011, Dated- June 16, 2011]. In addition to the existing norm that at least 50% of its total revenue in the preceding 1 year period should have been accounted for by the new activity suggested by the new name, SEBI had further provided relaxation by saying that a company can change its name provided the amount invested in new projects associated with the new name is at least 50 per cent of its assets. Impact: Companies where the gestation period of the business is usually longer and the revenue stream often delayed found it difficult to comply with the earlier provision, will now benefit from the additional criteria.

FEMA
Repatriating foreign nationals permitted to retain India bank account [A.P. DIR Circular No. 70 dated June 9, 2011] RBI has issued a circular permitting Authorized Dealer Category I banks [AD] to re-designate resident accounts of repatriating foreign nationals as Non-Resident (Ordinary) [NRO] accounts. Impact: The re-designation of resident account into NRO account will enable foreign nationals to receive their bona fide dues such as refund of provident fund balance and income tax refund even after they leave the country. Prior to this, foreign nationals had to close their resident accounts at the time of repatriation from India. Issue of Equity Shares under the FDI scheme now allowed even under the government route [A.P. DIR Circular No. 74, dated June 30, 2011] FDI in activities not covered under the automatic route requires prior approval of the government. RBI had now allowed issues of equity and preference shares to overseas entities in such cases, against money payable for importing capital goods and pre-operative expenses. However, certain conditions require compliance. Impact: Permitting Companies to issue shares against non-cash considerations (primarily the start-up expenditure and capital expenditures) will enable the Companies to obtain financing easily and without undue hassles

Other Updates Extension of time limit for buyback of FCCBs - Earlier, RBI had permitted buyback of FCCBs at discounted rates by Indian companies. The facility has now been extended until March 2012, both under the automatic route as well as the approval route. The discount rates have been decreased from 15% to 8% for premature buyback under the automatic route and from 25% to 20% under the approval route.

(Scheme of Amalgamation and Transfer of General Insurance Business) Regulations, 2011]. Government had extended the DEPB scheme for 3 more months i.e. till September 2011 India had inked DTAA with Mozambique India has signed Protocol Amending DTAA with Singapore; to help in Effective Exchange of Information in Tax Matters Ministry of Finance has issued a press release that paves the way for setting up Infrastructure Debt Funds (IDFs) in order to accelerate and enhance the flow of long term debt in infrastructure projects. The proposal contemplates two organizational structures for IDFs. The first is a vehicle in the form of a mutual fund using the traditional trust structure. The second is a company structure that is established in the form of a NBFC.

Regulatory Updates
IRDA, the Insurance regulator, has notified the M&A guidelines for general insurance companies thereby paving way for consolidation in the sector. The regulator has retained with itself the power to vet the valuations arrived at by the companies involved in M&As. Besides IRDA, an acquirer would need to have approvals from RBI and the finance ministry, in case it has FDI. It also needs to have clearance of SEBI & CCI. [The Insurance Regulatory and Development Authority (Irda)
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UK Bribery Act 2010 is scheduled to become effective July 1st, 2011. Under the Act, Indian companies with a demonstrable corporate presence in the UK which are unable to demonstrate that they have implemented adequate procedures to prevent corrupt practices within their organisations or through third parties on their behalf, can be exposed to unlimited fines, as well as other collateral consequences, such as long-term imprisonment for their directors.

Regulatory News
Discussion Paper on FDI Equity Caps by DIPP - The discussion paper introduces the possibility of abolishing all sectoral caps for foreign equity shareholding below 49%. As per the paper, from a legal point of view, it doesn't matter whether the equity holding is 26% or 49% as in both cases, the investor will exercise the same control. Central government is considering allowing 51% FDI in multi brand retail sector with a rider that permission of the states would be a must to open stores. At present, India allows FDI only in single-brand retail chains like Nike, Louis Vuitton with a cap of 51%. However, the development (i.e. the proposal for seeking permission from the states) could be a big dampener for the global chains like Wal-Mart, Metro and Carrefour which have been waiting since long for India to open FDI in the multibrand retail. Provident fund trusts may soon have to park funds with EPFO Companies managing provident fund accumulations of their employees in-house may soon have to hand over the entire corpus to the Employees Provident Fund Organisation as the government looks for ways to ensure retirement savings of workers are protected. SEBI has decided to reopen its probe into multi-crore IPO scam of 2003-2006 CCI had penalised NSE for abusing dominant market position.
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RBI has decided to place the data on Overseas Direct Investment in the public domain. The report will consist of the following fields, viz., the name of the Indian Company / Party, name of the JV/WOS, name of the country where the investment is made, major activity of the JV/WOS, financial commitment of the parent company in the JV/WOS comprising equity, loan and guarantee issued in USD million. SEBI had directed two Sahara group to immediately refund the money collected through sales of optionally fully convertible debentures with annual interest of 15%, citing violation of regulatory norms. The group had moved the Supreme Court against said order. The much-hyped Microfinance Institutions Bill, proposed to be introduced in Parliament, has gone into cold storage. Some grounds on which the Bill has been put on hold are the caps on interest margin and rate of interest, and the redundancy of a central law when the RBI is the sole regulator for nearly 92 per cent of NBFC-MFIs

International Taxation
Significant Decisions Reimbursement of salary to seconded employees is fees for included services as they are rendering managerial services [AAR] Discounting Charges paid to a non-resident on discounting of bills of exchange are not interest, liable for withholding [High Court Delhi] A relation between the business of a non-resident and activity carried on in India would result in a business connection for the purpose of deemed accrual of income in India as well as for considering the resident as agent of the non-resident [ITAT Mumbai] Taxpayer not eligible to claim short stay exemption under the DTAA as the salary was paid directly by the Indian subsidiary [High Court Madras]

Transfer Pricing
Significant Decisions Arm Length Price of royalty payments cannot be nil merely because taxpayer continues to incur losses [ITAT Delhi] Transactional Net Margin Method at enterprise Level Invalid [ITAT Mumbai] Even Loss/High-Profit Companies Can Be Compared for TP purposes [ITAT Mumbai] Cost only reimbursement (without any mark-up) from AE is not justifiable as no part of the income derived by the AE from the activity of the Taxpayer is shared with the Taxpayer and the entire benefit of the activity is enjoyed by the AE [ITAT Mumbai] Existence of actual cross border transaction and motive to shift profits or evade taxes not necessary pre conditions for TP provisions to apply [ITAT Delhi] Once the TPO accepted arms length price of royalty payments, the AO could not examine the reasonableness of the said expenditure for disallowance [High Court Delhi]

Recent Transactions that made Headlines

Tata Steel had sold its 26% stake in Australian coal miner Riversdale to Rio Tinto (an Anglo-Australian giant) for USD 1.1 billion Reliance Industries will acquire a controlling stake in two insurance companiesBharti AXA Life Insurance Co. Ltd and Bharti AXA General Insurance Co. Ltdfrom Bharti Enterprises Ltd. Frances Schneider Electric SA proposes to buy 74% of privately held Indian inverter manufacturer Luminous Power Technologies Pvt. Ltd for around 215 million to boost revenue and market share in Asias third largest economy. P&G said to be readying 38-Billion Bid for Rival Unilever State-run power financier REC is planning to raise up to $1.75 billion through a combination of FCCBs and ECBs Vedanta Plans to Invest Another 10,000 Cr in Jharsuguda Project

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TRANSACTION ADVISORS

This publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has been prepared for the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon the information contained in this publication without obtaining specific professional advise. Due care has been taken while compiling the information , however, no representation (express or implied) is given as to the accuracy or completeness of the information contained in this publication