Missive Volume XI – February 2012 T R A N S A C T I O N A D V I S O R S

Dear Patron Here we are with the Eleventh successive issue of our monthly ‘Missive’. We trust you will enjoy reading this Missive, even while soaking in the contents. We would very much appreciate your feedback which consistently helps us in improving and upgrading the contents. Thanks and regards, Akhil Bansal Editor, Knowledge Management Team

Topics Page No Corporate law 1 FEMA 3 SEBI 6 International Taxation 8 Transfer Pricing 9 Recent Transactions that made headlines

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Change your thoughts,… & you change your words !!!

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Corporate Law Audit of cost accounts in certain cases – Order under section 233B (1) of the Companies Act, 1956 § The Central Government has directed all companies

a. to which the Companies (Cost Accounting Records) Rules, 2011 apply, and

b. which are engaged in the production, processing, manufacturing or mining of the specified products/activities, including intermediate products and articles or allied products thereof, and

c. wherein the aggregate value of turnover made by the company from sale or supply of all its products/activities during the immediately preceding financial year exceeds hundred crores of rupees; or wherein the company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India,

shall get its cost accounting records, in respect of each of its financial year commencing on or after 1st day of April, 2012, audited by a cost auditor.

§ Every company to which these orders apply shall follow the revised procedure for appointment of cost auditor as laid down vide Ministry of Corporate Affairs’ General Circular No. 15/2011 dated 11th April 2011.

§ All company specific cost audit orders issued to the individual

companies prior to 31st March, 2011 directing them to get their cost records audited for the products/activities specified in such orders stand withdrawn with effect from the financial year commencing on or after the 1st day of April, 2012.

§ All companies who were earlier issued company specific orders prior to 31st March, 2011 but are later covered either by this industry specific order and/or by earlier similar orders dated 2nd May 2011 or 30th June 2011 [subject to their meeting with the qualifying criteria mentioned therein] shall now comply with the industry specific orders, as applicable, replacing the earlier company specific order. [ORDER [F.No. 52/26/CAB-2010], dated 24-1-2012]

Impact: If a company contravenes any provisions of these orders, the company and every officer thereof who is in default, including the persons referred to in sub-section (6) of section 209 of the Companies Act, 1956, shall be punishable as provided under sub-section (2) of section 642 read with sub-section (11) of section 233B of the Companies Act, 1956 (1 of 1956). Important Notice on Digital Certificates (SHA2) For using Digital Certificate issued post 1st January, 2012 (SHA2), it is essential to have Windows XP (SP3) / Windows Vista/ Windows 7 installed. All users using below mentioned services on MCA21 are required to download JDK 1.6 updated version:

i) Any user logging on MCA21 using a DSC ii) Any existing user registering/updating a DSC iii) Any new user registering using a DSC

Impact: This requirement is a part of the interoperability initiative of the Controller of Certifying Authorities, India (CCA), for enhancing security for Digital certificates.

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Refund of Statutory / ROC Fees paid by mistake to MCA MCA has introduced process of refund of statutory fees paid for certain services. The refund of MCA21 fees is available in the following cases:

a) Multiple Payments b) Incorrect Payments c) Excess Payment

Refund process is not applicable for certain services/e-forms like public inspection of documents, request for certified copies, payment for transfer deeds, stamp duty fee (D series SRN), IEPF payment, STP forms, DIN eForm, etc. The refund form is to be filed within the stipulated time period. Also, there shall be deduction in the amount to be refunded based on time period within which refund e-form is filed. The following is the time slab for filing refund form and the corresponding deduction in refund amount:

Time within which the refund application is made

Default value for deduction

0-90 days 2.5% 91-180 days 5%

181-270 days 7.5% 271-365 days 10%

>365 days 25% Filing of refund form shall not be allowed after expiry of 1095 days of filing of the original request. For all earlier cases, (i.e. cases filed before introduction of refund process), the time limit shall be considered from the date on which refund process is introduced i.e. from 01.05.2011.

Impact: Earlier there was no process in MCA21 for refund of fees wrongly paid by the stakeholder while availing various services at MCA 21. New refund e-Form needs to be filed by the stakeholder applying for refund and upon processing of the same the refund request shall be approved or rejected. Government proposes to set up National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) The Ministry of Corporate Affairs Government proposes to set up National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) which will replace Company Law Board, Board for Industrial and Financial Reconstruction and Appellate Authority for Industrial and Financial Reconstruction. It may be noted that provisions regarding constitution of NCLT and NCLAT were incorporated in the Companies (Second Amendment) Act, 2002. The Act was, however, challenged in the Madras High Court. The matter was finally decided by the Supreme Court vide their judgment dated 11.5.2010. The revised Companies Bill, 2011 introduced in the winter session of Parliament also incorporates the guidelines provided by the Supreme Court in their said judgment.

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Company Law Board (Amendment) Regulations, 2012 – Amendment in regulation 30 Company Law Board has made the following regulations further to amend the Company Law Board Regulations, 1991. A few important ones are given below:-

1. Revision of fees payable in terms of Regulation 29 and 30 of the Company Law Board Regulations, 1991 for inspection of the documents from Rs. 10/- to Rs. 50/- per day. The fee for supply of certified copies of order or any other documents has also been doubled from Rs. 5/- to Rs. 10/- per page and the inspection of record shall be pre-requirement for supply of certified copy of a case.

2. A person, who is not a party to the proceedings, has, however, no right to inspect or to obtain certified copies of the records of a pending case except with the consent of the party who has filed the case or under the orders of the Bench.

3. The inspection of record shall not be permitted on the date fixed for its hearing without the order of the Bench.

4. After receipt of an application, the inspection shall be allowed within a period of two working days and certified copies shall be supplied within a period of three working days respectively.

Notification No. G.S.R. 32(E)[F.No.10/36/2001-CLB], dated 18-1-2012

FEMA Revised average maturity guidelines as a result of enhancement of ECB limits The ECB limit for eligible borrowers under the automatic route was enhanced to USD 750 million or equivalent per financial year per borrower for permissible end-uses under automatic route vide A.P. (DIR Series) Circular No. 27 dated September 23, 2011. Consequent to the enhancement in limits, the revised average maturity guidelines under the automatic route are as follows:

a) ECB up to USD 20 million or equivalent in a financial year with minimum average maturity of three years; and

b) ECB above USD 20 million and up to USD 750 million or equivalent with minimum average maturity of five years.

The requirement of average maturity period, prepayment and call/put options specified vide A.P. (DIR Series) Circular No. 17 dated December 4, 2006 (for additional amount of USD 250 million) has been dispensed with. It is also clarified that the eligible borrowers under the automatic route can raise Foreign Currency Convertible Bonds (FCCBs) up to USD 750 million or equivalent per financial year for permissible end-uses. Further the Corporate in specified service sectors, viz. hotel, hospital and software, can raise FCCBs up to USD 200 million or equivalent for permissible end-uses during a financial year subject to the condition that the proceeds of the ECB should not be used for acquisition of land. And the ECB / FCCB availed of for the purpose of refinancing the existing outstanding FCCB will be reckoned as part of the limit of USD 750 million available under the automatic route. [A.P. (DIR Series) Circular No. 64 dated 5th January, 2012]

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Impact: The enhancement in the ECB/FCCB comes at a time when India Inc is staring huge FCCB and ECB redemptions in 2011-12. This move is considered as a bid to give India Inc respite from possible pressures arising from redemption of foreign currency convertible bonds. FCCB as a hybrid debt and equity instrument issued in foreign currency, not only gives the bondholder regular coupon and principal payments, but also gives the option to convert the bond into shares. Scheme for Investment by Qualified Foreign Investors (QFIs) in equity shares It has been decided by RBI to allow QFIs to invest through SEBI registered Depository Participants (DPs) only in equity shares of listed Indian companies through recognised brokers or recognised stock exchanges in India as well as in equity shares of Indian companies which are offered to public in India in terms of applicable SEBI guidelines/regulations. Only QFIs from jurisdictions which are FATF compliant and with which SEBI has signed MOU’s under the IOSCO framework will be eligible to invest in equity shares under this scheme. The individual and aggregate investment limits for the QFIs shall be 5% and 10% respectively of the paid-up capital of an Indian company. [A.P. (DIR Series) Circular No. 66 dated 13th January, 2012] Impact: So far QFIs were only permitted to invest in equity and debt schemes of mutual funds and in debt infrastructure funds. All transactions by QFIs have to necessarily be carried out by a qualified depository participant (DP) registered with the Securities and Exchange Board of India (SEBI). While the government should be applauded for the attempt to liberalise access to Indian markets, one is unsure if QFI is the appropriate structure for small foreign retail investors.

Export of Goods and Services – Forwarder’s Cargo Receipt (FCR) in lieu of Bill of Lading The authorised dealers may accept Forwarder’s Cargo Receipts (FCR) issued by IATA approved agents, in lieu of bill of lading, for negotiation/collection of shipping documents, in respect of export transactions backed by letters of credit, if the relative letter of credit specifically provides for negotiation of this document in lieu of bill of lading even if the relative sale contract with the overseas buyer does not provide for acceptance of FCR as a shipping document, in lieu of bill of lading. [A.P. (DIR Series) Circular No. 65 dated 12th January, 2012] Scheme for Investment by Qualified Foreign Investors in Rupee Denominated Units of Domestic Mutual Funds – Revised The time period for which funds (by way of foreign inward remittance through normal banking channels from QFIs as well as by way of credit of redemption proceeds of the units of domestic Mutual Funds by QFIs in India) can be kept in the single rupee pool bank account of the DP under the scheme for investment by QFIs in units of domestic Mutual Funds has been modified to five working days (including the day of credit of funds received by way of foreign inward remittance through normal banking channels from QFIs as well as by redemption proceeds of the units of domestic Mutual Funds by QFIs in India). [A.P. (DIR Series) Circular No. 66 dated 13th January, 2012]

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100% Foreign Investment in Single-Brand Retail Trading allowed RBI has permitted FDI up to 100% in Single Brand product trading under the Government route subject to such terms and conditions as stipulated in Press Note No. 1 (2012 series) dated January 10, 2012 issued by Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Government of India. [A.P. (DIR Series) Circular No. 67 dated 13th January, 2012] Impact: This is a great announcement for many foreign brands who already have their presence in India as well as those who don’t (Likes of IKEA, GUCCI etc). However, they were not able to grow fully due to restriction in FDI investment. With Indian Government now allowing 100% FDI, they would aggressively invest in fast Indian Market. Risk Management and Inter-Bank Dealings – Commodity Hedging RBI has allowed all AD Category – I banks to grant permission to companies to hedge the price risk in respect of any commodity (except gold, silver, platinum) in international commodity exchanges/markets as specified under the delegated route. Unlisted companies have also been granted permission to hedge price risk on import/export in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges /markets subject to the specified guidelines provided in the circular. [A.P. (DIR Series) Circular No. 68 dated 17th January, 2012]

External Commercial Borrowings (ECB) Policy – Infrastructure Finance Companies (IFCs) As per the extant guidelines, NBFCs categorised as Infrastructure Finance Companies (IFCs) by the Reserve Bank and complying with the norms prescribed in this regard are permitted to avail of ECBs, up to 50 per cent of their owned funds under the automatic route. ECBs by IFCs above 50 per cent of their owned funds are being considered under the approval route. The permitted end-use should be for on-lending to the infrastructure sector. IFCs should also hedge their currency risk in full. It has now been decided that the designated AD Category – I banks should certify the leverage ratio (i.e. outside liabilities /owned funds) of IFCs desirous of availing ECBs under the approval route while forwarding such proposals to the Reserve Bank if India. [A.P. (DIR Series) Circular No. 70 dated 25th January, 2012] External Commercial Borrowings – Simplification of procedure As a measure of simplification of the existing procedures, it has been decided to delegate powers to the designated AD category – I banks to approve the following requests from the ECB borrowers, subject to the specified conditions:

a) Cancellation of LRN (Loan Registration Number) b) Change in the end-use of ECBs availed under automatic route

However, change in the end-use of ECBs availed under the approval route will continue to be referred to the Foreign Exchange Department, Central Office, Reserve Bank of India, as hitherto. [A.P. (DIR Series) Circular No. 69 dated 25th January, 2012] Impact: This can be construed as a move that will simplify and speed up external commercial borrowing (ECB) transactions.

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SEBI SEBI cut the timeline for completion of buy back of shares by listed companies to 34-44 days SEBI has reduced the time line for completion of buy-back of shares by companies to 34-44 days. Earlier, the buy-back process could take anywhere between 63 and 114 days. These changes form a part of amendments made by a regulator in the SEBI (Buy-Back of Securities) Regulations, 1998. They have come into effect from January 3. The government has fixed a mammoth Rs 40,000 crore dis-investment target for the fiscal, but till date it has only managed to raise Rs 1,145 crore by selling its shares in the Power Finance Corporation. The Department of Dis-investment (DoD) has sought Cabinet approval to use the buyback mode for dis-investment. The DoD had also pointed out to the SEBI that the buyback norms are not in line with the principle of equitable treatment to shareholders in the acceptance of shares through tender offer. Impact: According to the earlier norms, in case of buyback the company is required to accept the shares tendered by the shareholders in proportion to the shares tendered by the shareholder and not in proportion to the shares held. However, this has been modified. SEBI has also made changes in the record date and requirement of public notice and public announcement norms in the buyback regulations. SEBI circular on Investment by Qualified Foreign Investors (QFI) in Indian equity shares The Central Government has announced its decision to allow QFIs to directly invest in Indian equity market in order to widen the class of

investors, attract more foreign funds, reduce market vitality and to deepen the Indian capital market. In order t facilitate the same and in consultation with the Government and RBI, it has been decided that foreign investors (termed as QFIs) who meet prescribed Know Your Customer (KYC) requirements may invest in equity shares listed on the recognised stock exchanges and in equity shares offered to public in India. In order to enable this they will hold equity shares in a demat account opened with SEBI registered qualified Depository Participant. Impact: This is a step to increase the number of players and make the stock markets deeper. Under the present arrangement related to foreign portfolio investments, only FIIs/sub-accounts and NRIs are allowed to directly invest in the equity market. Others come through an instrument, called participatory notes, issued by FIIs. In the absence of a direct route, many QFIs faced difficulties in investing. It is a positive development, but may not have an immediate effect. If the market conditions recover, probably, some investment may come. Eligibility criteria for Qualified Depository Participant The revised eligibility criteria to act as qualified DP are as follows:

1. DP shall have net worth of Rs. 50 crore or more; 2. DP shall be either a clearing bank or clearing member of any of

the clearing corporations; 3. DP shall have appropriate arrangements for receipt and

remittance of money with a designated Authorised Dealer (AD) Category – I Bank;

4. DP shall demonstrate that it has systems and procedures to comply with the FATF Standards, Prevention of Money Laundering (PML) Act, Rules and SEBI circulars issued from time to time;

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5. DP shall obtain prior approval of SEBI before commencing the activities relating to opening of accounts of QFI.

SEBI waives certain requirements relating to preferential allotment to Insurance Companies and Mutual Funds Regulator’s announcements § Waives six month lock-in period for insurance companies and

MFs participating in preferential allotment of shares § Maintains post-allotment requirement of a lock-in period of six

months § Increases minimum investment limit per client from R5 lakh to

Rs 25 lakh in a portfolio management scheme § Reservation for convertible debt holders in rights/bonus issues

only to compulsorily convertible debt holders § Amends investment valuation norms for MFs to provide fair

treatment to existing investors and also to those that seek to purchase or redeem units at any point of time

Tightening the valuation norms for liquid funds, the regulator also decided to amend the SEBI mutual fund regulations to bring down the threshold for marked-to-market requirements on debt and money market securities to 60 days from 91 days earlier. [PR No. 15/2012] Impact: Currently, regulations preclude companies from issuing preferential allotment to entities which have sold any of their holdings during the six month period prior to relevant date. Further, allottees in preferential allotment are required to lock-in their entire pre-preferential holdings for a period of six months from date of preferential allotment. This measure is taken as a matter of liberalisation.

SEBI News Snippets § SEBI has launched a toll free helpline service number 1800 22

7575 for investors. This service will be available to investors from all over India.

§ SEBI has permitted the introduction of cash settled futures on

2-year and 5-year notional coupon bearing Government of India (GoI) security on currency derivatives segment of Stock Exchanges. Eligible Stock Exchanges may do so after obtaining prior approval from SEBI.

§ Manner of increasing minimum public shareholding to

comply with Securities Contract Regulation (Rules), 1957 and Amendment to SEBI (Buyback of Securities) Regulations, 1998: Two additional methods viz., Institutional Placement Programme (IPP) and Offer for Sale of Shares through the stock exchange for the purpose of compliance with SCRR requirements are being introduced.

§ Changes in Re-investment period of FII debt limit: It has been decided that henceforth re-investment period shall not be allowed for all new allocations of debt limit to FIIs/sub-accounts. Thus, limits acquired in the bidding sessions henceforth shall expire/lapse on either sale or redemption at maturity of the debt investments. These limits then shall again be allocated in subsequent bidding processes.

§ SEBI vide its various communications has mandated all stock exchanges that not be more than twenty per cent of the members of the arbitration committee/panel of all stock exchanges. It is, henceforth, stipulated that the arbitration committee/panel shall not comprise of any trading members.

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Income Tax § Vodafone wins $2.50 billion tax case tax case in Supreme Court.

Hutchison Essar is an Indian Company, the controlling interest of Hutchison Essar is held by a SPV of Cayman Island (CGP Investments Holding Ltd.). CGP is owned by Hutchison Telecommunications International Ltd (HTIL), Hongkong. In this manner the controlling interest of Hutchison Essar is held by HTIL, Hongkong through an intermediary Cayman Island company (CGP). Vodafone International Holdings, Netherland entered into an agreement with HTIL, Hongkong to buy the shares of CGP (Cayman Island). Since CGP is holding directly and indirectly 67% shares of Hutchison Essar (India), the above transaction results in transfer of shares and controlling interest of Hutchison Essar(India) from HTIL, Hongkong to Vodafone International Holding, Netherland. The consideration for transfer is stated to be USD 11.1 Billion. The Income-tax Department issued a notice to Vodafone to show cause as to why it should not be treated as assessee in default for not withholding the Indian Capital Gain Tax on the payment made by it to HTIL for the transaction of sale of share of CGP (which in turn holds controlling interest of HTIL) One of the important principle determined by the court was a to what principles should be applied to treat a transaction as sham and bogus? The Hon'ble Apex Court has dealt with this issue in detail and has held that every foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner.

In this regard, the following factors should be kept in mind on the facts of the instant case:

§ the concept of participation in investment § the duration of time during which the Holding Structure

exists § the period of business operations in India § the generation of taxable revenues in India § the timing of the exit § the continuity of business on such exit.

The Hon'ble Court examined the above facts. After a detailed analysis, the Hon'ble Court found that the aforesaid factors are in favour of Vodafone and therefore, held the entire transaction as not a sham and bogus transaction.

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Transfer pricing

§ In TNMM, net profit margin from a comparable uncontrolled transaction to be considered i.e. it should not only be comparable but also have uncontrolled transaction. [Hinduja Ventures Ltd vs. ACIT (ITAT Mumbai)]

§ TPO can rely on “contemporaneous” data even if not available at

specified date. [Kodiak Networks (India) Pvt Ltd vs. ACIT (ITAT Bangalore)]

§ Sharing of net revenue consistently and uncontrolled transactions

held as a valid comparable uncontrolled price. [ACIT vs. Agility Logistics Pvt. Ltd (ITAT Mumbai)]

§ Rule of consistency affirmed. [Hosley India vs. DCIT (ITAT Delhi)]

§ Adjustments are required to be made by employing certain

techniques like “FAR” analysis. [Knoah Solutions Pvt. Ltd vs. ITO (ITAT Hyderabad)]

§ TPO can determine ALP only on the international transactions

referred by AO. [Glaxo Smithkline Consumer vs. ACIT (ITAT Chandigarh)]

§ Risk undertaken by the tested party is required to be considered

for deciding the nature of service provided. [AIA Engineering Ltd vs. ACIT (ITAT Ahmedabad)]

§ TPO is duty bound to eliminate differences in comparables’ data.

[Demag Cranes & Components vs. DCIT (ITAT Pune)]

§ Transfer pricing is founded on the principles of economic substance and hence, it is fact specific –[Bindview India P. Ltd. Vs. DCIT (ITAT Pune)]

§ ALP of Interest-Free Loan – ITAT Delhi Explains Law [M/s Aithent

Technologies Pvt Ltd. V/s. ITO (ITAT Delhi)]

§ ITAT Explains Law On Adjusting For Differences In Comparables [Demag Cranes & Components (India) Pvt. Limited Vs. DCIT (ITAT Pune)]

§ Non-Reference To TPO Renders Order ‘Erroneous’ and prejudicial

to revenue [Ranbaxy Laboratories Ltd vs. CIT (Delhi High Court)]

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Recent Transactions that made the Headlines § NTT Communications to acquire 74% stake in Netmagic Solutions § Reliance Infra eyes Kinder Morgan assets: Report § Fortis Healthcare arm acquires 85% stake in RadLink-Asia § The Walt Disney arm to acquire stake in UTV § Warburg Pincus sells part stake in Kotak Mahindra Bank § Reliance in talks to buy El Paso's E&P unit § Starbucks to enter India,in deal with Tata to open cafes in India.

Targets 50 outlets by year-end § Fidelity in talks to sell India mutual fund business-report § HSBC sells Latin America units for $800 mn § Robert Wiseman agrees to Müller's £279.5m offer § Apple buys Israeli technology firm Anobit § Samsung may consider alliance with Japan's Olympus - source § Intel to buy QLogic's InfiniBand assets for $125 mln § Cairn in talks on possible Greenland stake sale § Pan American Silver to buy Minefinders for C$1.5 bln § Morgan Stanley nears Quilter wealth unit sale -sources § HSBC sells LatAm units for $800 mln § Crescent Point to buy Wild Stream for C$770 mln § SAP to delay buyback until SuccessFactors loan repaid § Siemens to buy Canada's RuggedCom for C$382 mln § Strides Arcolab sells its Australian arm to Watson

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

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

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