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Suresh Surana & Associates
Mumbai (Andheri) 310, Ahura Centre, 82, Mahakali Caves Road, Andheri (E), Mumbai - 400 093. New Delhi F-116, Himalaya House, 23, K. G. Marg, Connaught Place, New Delhi – 110 001 Chennai 1A, Chamiers Apartments, New No. 121, Chamiers Road, R.A. Puram,Chennai – 600 028 Kolkata 2058/A,Mercantile Buildings, Block"A" 9 Lalbazar Street, Kolkata-700001 Gandhidham 216, Golden Arcade, Oslo Road, Plot No. 141 & 142, Sector 8, Gandhidham - 370201 Tel : (91-22) 2287 5770 / 6696 0644 Email : emails@ss-associates.com * * Mumbai (Nariman Point) 602/603, Regent Chambers, 6th Floor, 208, Nariman Point, Mumbai 400021. Bangalore 358, 1st ‘A’ Main Road, 7th Block Koramangala, Bangalore – 560 095 Surat 604-605, Tirupati Plaza, Athwa Gate, Nanpura, Surat - 395 001 Ahmedabad 504, Narnarayan Complex, Navrangpura, Ahmedabad - 380 Mumbai (Executive Search Operations) 608, Sagar Tech Plaza B, Sakinaka, Andheri (E), Mumbai – 400 072 Fax : (91-22) 2287 5771 / 2820 5685 Website : www.ss-associates.com
Suresh Surana & Associates
Reference: SSA/NEW/0307 EXECUTIVE SUMMARY 1.0 1.1 FEMA
September 2007
RBI has issued certain clarification on the revised guidelines for foreign investments in preference shares. Some of the key clarifications are – - only preference shares which are fully and mandatorily convertible into equity within a specified time would be reckoned as part of share capital and eligible to be issued to persons resident outside India under the Foreign Direct Investment Scheme. - Foreign investments in other types of preference shares (i.e. non-convertible, optionally convertible or partially convertible) for issue of which, funds have been received on or after 1 May 2007 would be considered as debt and shall conform to External Commercial Borrowings (ECB) guidelines / caps In line with its clarifications on foreign investment in Preference shares, stated in para 1.1 above, RBI has issued certain clarification on raising funds through issue of hybrid instruments such as optionally convertible/ partially convertible debentures i.e debt-like instruments. The clarification states that henceforth, only instruments which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy. RBI has further liberalized the regulations relating to overseas direct investments. Under these revised regulations the permissible limit of total overseas investment of an Indian party in all its Joint Ventures (JVs) and / or Wholly Owned Subsidiaries (WOSs) abroad has been enhanced from 200 per cent of the net worth to 300 per cent of the net worth. Listed Indian Companies were permitted to invest up to 25% of their net worth in the equity of listed foreign companies on recognized stock exchange, which has been enhanced up to 35% of their net worth as on the date of its last audited balance sheet, subject to certain terms and conditions TDS deductible under section 195 includes Business Income also. At the time of making the remittance, Remitter of Foreign Exchange has to submit Chartered Accountant’s Certificate to Authorised dealer as per the prescribed format given by CBDT vide Circular No 10/2002.Certificate deals with remittances for supply of articles or things or computer software and business income. RBI has issued revised External Commercial Borrowing (ECB) guidelines stating that the borrowers raising ECB more than USD 20 million shall park the ECB proceeds overseas for use as foreign currency expenditures for permissible end-uses and shall not remit the funds to India. RBI has clarified that NRI employees of the Indian Companies would get the Loan from Authorised Dealer Category-I Bank in Indian Currency for the purpose of acquiring the shares of the Indian Companies under the ESOP scheme to the extent of 90% of the purchase price of shares or Rs. 20 lacs whichever is lower. COMPANIES ACT AND SEBI SEBI has revised clause 41 of the listing agreement in order to rationalize and modify the process and formats for submission of financial results to the stock exchanges and also with a view to simply the same.
1.2
1.3
1.4
1.5
1.6
2.0 2.1
SSA Newsletter September 2007
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2.2 2.3
Disclosure of certain additional information by the companies issuing debentures is made mandatory by the SEBI. SEBI has decided to discontinue with the requirement of Unique Identification Number (UIN) as PAN will now be the sole identification number for all participants in the securities market, irrespective of the amount of transaction. SEBI has issued certain guidelines for investments by registered Venture Capital Funds (VCFs) in an offshore Venture Capital Undertaking (VCU). Practising Professionals also serving as Directors of Companies, do not require Multiple Digital Signature Certificates (DSC) for their different roles and their existing DSC can be registered multiple times on the MCA Portal under the appropriate roles (Practising Professional/Director) that they discharge . INCOME TAX Cost Inflation Index for the year 2007-2008 will be 551. CBDT Has clarified that TDS is deductible on gross amount of bill including service tax for the purposes of section 194C, 194H, 194J and 194I. CBDT has issued a circular elaborating certain tests for distinction between shares held as stock-in-trade and shares held as investment. SERVICE TAX CBEC has issued 2 comprehensive circulars providing clarification on certain technical and procedural issues related to the Service Tax Regulations. . Abatement for services provided by a tour operator in respect of certain specified services has been enhanced.
2.4 2.5
3.0 3.1 3.2 3.3
4.0 4.1 4.2
SSA Newsletter September 2007
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Suresh Surana & Associates
1.0 1.1
FEMA RBI has issued certain clarification on the revised guidelines for foreign investments in preference shares. It has clarified that: with effect from 1 May 2007, only preference shares which are fully and mandatorily convertible into equity within a specified time would be reckoned as part of share capital and eligible to be issued to persons resident outside India under the Foreign Direct Investment Scheme. Foreign investments in other types of preference shares (i.e. non-convertible, optionally convertible or partially convertible) for issue of which, funds have been received on or after 1 May 2007 would be considered as debt and shall conform to External Commercial Borrowings (ECB) guidelines / caps. Accordingly, all the norms applicable for ECBs, viz. eligible borrowers, recognised lenders, amount and maturity, end use stipulations, etc. would apply. Since these instruments would be denominated in rupees, the rupee interest rate will be based on the swap equivalent of LIBOR plus the spread as permissible for ECBs of corresponding maturity. companies which have received funds from outside India for issue of partially/optionally convertible or redeemable preference shares on or up to 30 April 2007 may issue such instruments. Further, the existing investments in such preference shares which are not fully convertible may continue till their current maturity.
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(www.rbi.org.in, A. P. (DIR Series) Circular No. 73 dated 8 June 2007)
1.2 1.2.1
RBI has issued certain clarifications on foreign investment in debentures. Certain significant aspects that are clarified are : Henceforth, only instruments which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy and eligible to be issued to persons resident outside India under the Foreign Direct Investment Scheme. FIIs, registered with SEBI, would be eligible to invest as hitherto in listed non-convertible debentures/ bonds issued by Indian companies in terms of RBI/SEBI norms on investment in rupee debt instruments, including the ceilings prescribed from time to time. companies which have already received funds from outside India for issue of partially/optionally convertible instruments on or before 7 June 2007 may issue such instruments. Further, the existing investments in instruments which are not fully and mandatorily convertible into equity may continue till their current maturity.
(www.rbi.org.in, A. P. (DIR Series) Circular No. 74 dated 8 June 2007)
1.2.2
1.2.3
1.3 1.3.1
RBI has further liberalized the regulations relating to overseas direct investments. The key aspects of the revised regulations are : Enhancement of limit for Overseas Direct Investment Currently, the total overseas investment of an Indian party in all its Joint Ventures (JVs) and / or Wholly Owned Subsidiaries (WOSs) abroad engaged in any bonafide business activity should not exceed 200 per cent of its net worth. In order to provide greater flexibility to Indian parties (companies incorporated in India or created under an Act of Parliament) for investments abroad, the existing limit of 200 per cent of the net worth of the Indian party has been enhanced to 300 per cent of the net worth. However, the limit applicable to registered partnership firms for overseas investment will continue to be 200 per cent of their net worth.
SSA Newsletter September 2007
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1.3.2
Portfolio Investment by Listed Indian Companies Listed Indian companies are permitted to invest up to 25 per cent of their net worth in the equity of listed foreign companies, which are listed on a recognised stock exchange and having shareholding of at least 10 per cent in Indian companies listed on a recognised stock exchange in India and rated bonds / fixed income securities issued by overseas companies, under the portfolio investment scheme. In order to provide greater opportunities to listed Indian companies for portfolio investments, the existing limit of 25 per cent has been enhanced to 35 per cent of the net worth of the investing company as on the date of its last audited balance sheet. All other terms and conditions stipulated in this Regulation shall remain unchanged.
(www.rbi.org.in, A. P. (DIR Series) Circular No. 75 dated 14 June 2007)
1.4 1.4.1
Certification for Import Payments RBI is clarified that under Section 195 of the Income Tax Act read with Rule 29B of the IT Rules, any person responsible for making payment to a non-resident or to a foreign company, any interest or any other sum chargeable under the IT Act, shall at the time of payment or credit of the amount deduct Income Tax thereon at the rate in force. Section 195 of the IT Act is not limited to interest income and it takes into account business income also. Further, points 7 and 8 of the Chartered Accountant's certificate deals with remittances for supply of articles or things (plant, machinery, equipment, etc.) or computer software and business income, respectively. Accordingly, a remitter of foreign exchange is required to submit to the authorised dealer, an undertaking and Chartered Accountant's certificate in the format prescribed by CBDT vide circular No. 10/2002 dated 9 October 2002 at the time of making the remittance in foreign exchange to non-residents including remittances which are in the nature of trade transactions such as import payments.
(A. P. (DIR Series) Circular No. 03 dated July 19, 2007)
1.4.2
1.5 1.5.1
Certain significant aspects of the RBI’s revised ECB guidelines are given below ECB more than USD 20 million per borrower company per financial year would be permitted only for foreign currency expenditure for permissible end-uses of ECB. Accordingly, borrowers raising ECB more than USD 20 million shall park the ECB proceeds overseas for use as foreign currency expenditures for permissible enduses and shall not remit the funds to India. The above modifications would be applicable to ECB exceeding USD 20 million per financial year both under the Automatic Route and under the Approval Route. ECB up to USD 20 million per borrowing company per financial year would be permitted for foreign currency expenditures for permissible end-uses under the Automatic Route and these funds shall be parked overseas and not be remitted to India. Borrowers proposing to avail ECB up to USD 20 million for Rupee expenditure for permissible end-uses would require prior approval of the Reserve Bank under the Approval Route. However, such funds shall be continued to be parked overseas until actual requirement in India. All other aspects of ECB policy remain unchanged. These conditions will not apply to borrowers who have already entered into loan agreement and obtained loan registration numbers from the Reserve Bank. Borrowers who have taken verifiable and effective steps wherein the loan agreement has been entered into to avail of ECB under the previous dispensation, and not obtained the loan registration number, may apply to the Reserve Bank through their Authorised Dealer.
(www.rbi.org.in, A. P. (DIR Series) Circular No. 4 dated 7 August 2007)
1.5.2
1.5.3 1.5.4
1.6
Rupee loans to NRI employees of Indian companies for acquiring shares of the companies under the ESOP Scheme
SSA Newsletter September 2007
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Suresh Surana & Associates
RBI has been decided to allow Authorised Dealer Category – I (AD Category – I) banks to grant Rupee loans to NRI employees of Indian companies for acquiring shares of the companies under the ESOP Scheme. The loan scheme should be as per the policy approved by the bank’s Board and would further be subject to the following conditions : • • • • • The loan amount should not exceed 90 per cent of the purchase price of the shares or Rupees 20 lakhs per NRI employee, whichever is lower. The rate of interest and margin on such loans may be decided by the banks, subject to the directives issued by the Reserve Bank from time to time. The amount shall be paid directly by the bank to the company and should not be credited to the borrowers’ non-resident accounts in India. The loan amount should be repaid by the borrower by way of inward remittances or by debit to his NRO / NRE / FCNR(B) account. The loans will be included for reckoning capital market exposures and the bank will ensure compliance with prudential limits, prescribed by the Reserve Bank (DBOD) from time to time, for such exposure to capital market.
(A. P. (DIR Series) Circular No. 07 dated 22 August 2007)
2.0 2.1
COMPANIES ACT AND SEBI In order to simplify and rationalize the process and formats for submission of financial results to the stock exchanges, SEBI has revised the clause 41 of the listing agreement which will be effective for all filings made to the stock exchanges in respect of accounting periods commencing on or after 1 July 2007. Some of the key changes are – As per the current clause 41, if there is a variation of 20% or more in the items of the un-audited and audited quarterly / year to date / annual results of the Company, than the Company is required to provide explanation for the same. However, the revised clause requires the Company to provide explanation for variation only with respect to net profit or loss after tax and for exceptional / extraordinary items. And further the percentage for the said purpose has also been reduced from 20% or more to 10% or Rs. 10 Lakh, whichever is higher. Companies having subsidiaries have an option of submitting quarterly consolidated financial statements in addition to the stand alone financial results. However, such Companies are required to submit annual consolidated financial results along with the annual stand alone financial statements to the stock exchanges.. Companies who file both stand alone and consolidated results to the stock exchanges are provided with an option of publishing of either stand alone or consolidated results, subject to the condition that a choice once made cannot be changed during the year. Where the company decides to change its option in any subsequent financial year, than it shall furnish comparative figures for the previous financial year in accordance with the option exercised for the current year. The companies who opts to publish consolidated financial results only, will now be required to disclose in the advertisement the places where the stand alone financial statements will be available. The companies who opts to publish stand alone financial financial results only, will now be required to publish information in respect of consolidated turnover, net profit after tax and earnings per share.
(www.sebi.gov.in, Circular No. SEBI/CFD/DIL/LA/3/2007/10/07 dated 10 July 2007)
2.1.1
2.1.2
2.2
Additional Information required to be disclosed by companies issuing the debentures:
SSA Newsletter September 2007
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The companies issuing debentures and the respective debenture trustees/stock exchanges shall disseminate all information regarding the debentures to the investors and the general public. Debenture Trustee shall disclose the information to the investors and the general public by issuing a press release in any of the following events: 1) default by issuer company to pay interest on debentures or redemption amount, 2) failure to create a charge on the assets, 3) revision of rating assigned to the debentures. Such information shall also be placed on the website of the debenture trustee, the issuer company and the stock exchanges. Further, all information/reports on debentures issued including compliance reports filed by the companies and the debenture trustees shall be made public by disseminating on the websites of the companies and the debenture trustees. The same shall also be submitted to the stock exchanges for dissemination through their websites.
(www.sebi.gov.in, Circular No. MIRSD/DPS III//Cir- 11/07 dated 6 August 2007)
2.3
SEBI has decided to discontinue with the requirement of Unique Identification Number (UIN) as PAN will now be the sole identification number for all participants in the securities market, irrespective of the amount of transaction.
(www.sebi.gov.in, Circular No. MRD/DoP/Cir- 08/2007 dated 25 June 2007)
2.4
SEBI registered VCFs desirous of making investments in offshore VCUs are required to obtain prior approval from SEBI by making application in the prescribed format. Some of the key clarifications are: - no separate approval for such investments will be necessary from RBI - Investment is permissible only in those VCUs which have an Indian connection i.e company having front office overseas and back office operations in India. - Such investments will be upto 10% of the investible funds of a VCF
(www.sebi.gov.in, Circular No. SEBI/VCF/ cir no 1/98645/2007 dated 9 August 2007)
2.5
Requirement of multiple Digital Signature Certificate’s (DSCs) abolished All the Practising professionals who also serve as Directors of Companies, will now not be required to take multiple DSCs for their different roles. Their existing DSC can be registered multiple times on the MCA portal under the appropriate roles (Practising Professional/ Director) that they discharge. Accordingly, the requirement of having multiple DSC’s, i.e one for Professionalism and other for Directorship, has been done away with.
3.0 3.1 3.2
INCOME TAX Cost Inflation Index for the year 2007-2008 will be 551.
(www.incometaxindia.gov.in, NOTIFICATION NO. 214/2007, DATED 3 August 2007)
CBDT Has clarified that TDS is deductible on gross amount of bill including service tax for the purposes of section 194C, 194H, 194J and 194I.
(Circular CIT(TDS)/RTI/2007-08 dated 3 July 2007 and CBDT ref. F no. 275/1/2006-IT(B) dated 21 July 2006)
3.3
CBDT has issued a circular elaborating certain tests for distinction between shares held as stock-in-trade and shares held as investment. The circular elaborates certain landmark decisions in this respect. CBDT has also emphasised that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.
(www.incometaxindia.gov.in, CIRCULAR NO. 4/2007, DATED 15 June 2007)
SSA Newsletter September 2007
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4.0 4.1
SERVICE TAX CBEC has issued certain clarifications on technical and procedural issued being faced by the assessees. The circulars can be seen on www.servicetaxindia.gov.in and the circular numbers are Circular No.96/7/2007STand Circular No. 97 / 8 /2007 both dated 23 August 2007. The abatement benefit available to tour operators in respect of the following services has been enhanced from current 60% to 75% Services provided or to be provided to any person, by a tour operator in relation to a package tour. Provided that the bill issued for this purpose indicates that it is inclusive of charges for such a tour. Explanation.- The expression “package tour” means a tour wherein transportation, accommodation for stay, food, tourist guide, entry to monuments and other similar services in relation to tour are provided by the tour operator as part of the package tour to the person undertaking the tour.
4.2
“People who complain about taxes can be divided into two classes: men and women.” — Unknown
Prepared by:
Suresh Surana & Associates
NOTE: - This newsletter is not meant for circulation and is general in nature. In this newsletter, we have endeavored to prepare a summary of various important changes in tax and other laws, as a measure to serve our clients. It may be noted that nothing contained in this newsletter should be regarded as our opinion and facts of each case will need to be analyzed to ascertain applicability or otherwise of tax and other laws and professional advice should be sought for applicability of legal provisions based on specific facts. We are not responsible for any liability arising from any statements or error contained in this newsletter.
SSA Newsletter September 2007
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