Missive Volume XII – March 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 Twelfth 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 2 SEBI 5 Other Regulatory 8 International Taxation 9 Transfer Pricing 9 Recent Transactions that made headlines

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If you can dream it… ….you can do it !!!

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Corporate Law Clarification regarding Filing of conflicting ROC returns by contesting parties Earlier, Ministry vide circular No. 19 and 20 of 2011 issued on 02.05.2011 laid down certain procedure to regulate cases wherein filing of conflicting returns with regard to appointment of Directors or change of Director/Directors was laid down. In the light of some specific cases wherein it appears that either there was lack of consent of the removed/changed director or due process of Law were not followed, Ministry has issued a new circular to supersede those circulars.

Now, in order to avoid such eventualities wherever there is management dispute, the company is required to mandatorily file the attachment relating to cause of cessation along with Form 32 with the ROC concerned irrespective of the ground of cessation, viz (a) retirement; (b) disqualification; (c) death; (d) resignation; (e) vacation of office u/s 283 or 313 or 260; (f) removal u/s 284; (g) withdrawal of nomination by appointing authority or (h) absence of re-appointment. In case, any Director is aggrieved with his cessation in the company, he may file complaint in the Investor Complaint Form. [Ministry of Corporate Affairs General Circular No. 1/2012 Dated the 10th February 2012] Impact: Till such dispute is settled, the documents filed by the company and by the contesting groups of Directors will not be approved/registered/recorded and will thus not be available in the registry for public viewing.

Role-check for the Digital Signatures (DSCs) belonging to authorized signatories of Banks / Financial Institutions. The Ministry has already introduced role-check of DSCs for Directors of the companies from the Director Identification Number (DIN) database and Professionals (Company Secretary/ Chartered Accountant/ Cost Accountant) from the database taken from the respective Institutes. Following the same process, a mechanism has been formulated to implement a similar role-check to establish the veracity of authorized signatories of Banks and Financial Institutions, which is important for charge related services.

The Banks and Fls advance credit to the companies and create a charge on the assets so financed. The charges so created are required to be registered with the ROC in order to be a secured creditor. The registration/ modification/ satisfaction of a charge are filed with the Registrar through the prescribed form which has to bear the Digital Signatures of the company representative as well as that of the Authorized Signatory from the Bank/ FL. The role-check in respect of the Authorized Signatory from the Bank/ Fl is required to ensure that the DSC applied is actually the Digital Signature of the authorized person. [No. HQ,/ 104/ 2007 – Computerisation Dated the 17.02.2012] Impact: In view of critical nature in respect of charge related services, all Banks and Financial Institutions are now requested to follow the Role-check process devised and published through this Circular.

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MCA to receive from SEBI, names of over 500 companies who violated CIS rules

Market regulator SEBI has decided to share with the Ministry of Corporate Affairs the names of over 500 companies, which have garnered money from investors in violation of its Collective Investment Scheme (CIS) rules. SEBI would also give the names of the directors of such entities to the MCA, so that necessary actions can be taken to prevent these companies and persons from being associated with any new company. Impact: While hundreds of the companies have engaged in the CIS activities in the country, just one such entity is registered with SEBI to undertake such kind of business. Generally, the operators of such schemes offer impressive returns in their initial days to lure unsuspecting investors and then suddenly disappear after some time, leaving their investors in a lurch. There is an urgent need to have one single principal regulator to deal with all the cases where pooling of money is taking place and investments are made.

FEMA External Commercial Borrowings (ECB) for Infrastructure within National Manufacturing Investment Zone (NMIZ)

As per the guidelines, availing of ECB is permissible for the infrastructure sector, which is defined to include certain sectors. Keeping in view the infrastructural needs of the proposed National Manufacturing Investment Zones (NMIZs), it has now been decided to allow developers of NMIZ also to avail of ECB under the "approval route" for providing infrastructure facilities within the NMIZ.

[RBI A. P. (DIR Series) Circular No.85, Dated: February 29, 2012]

Impact: The modifications to the ECB policy will come into force with immediate effect. All other aspects of the ECB policy, such as, recognised lender, average maturity, all-in-cost, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged.

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External Commercial Borrowings – Reduction in amount, all-in-cost of ECB and Changes/modifications in the drawdown schedule.

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 specified conditions:

1. Reduction in amount of ECB: 2. Changes/modifications in the drawdown schedule when

original average maturity period is not maintained: 3. Reduction in the all-in-cost of ECB

[A.P. (DIR Series) Circular No. 75 February 07, 2012]

Impact: The above modifications to the ECB guidelines will come into force with immediate effect. All other aspects of the ECB policy, such as, USD 750 million limit per company per financial year under the automatic route, eligible borrower, recognized lender, end-use, all-in-cost ceiling, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged.

Purchase of Immovable Property in India – Reporting requirement- Clarification In terms of existing regulation, when a person resident outside India, who has established in India in accordance with the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000, a branch, office or other place of business, excluding a liaison office, acquires any immovable property in India in accordance with the provision of said regulation, the said person has to file with the Reserve Bank a declaration in the form IPI annexed to those regulations, not later than ninety days from the date of such acquisition. As the form is required to be submitted by such persons only, the form is suitably amended to reflect the position.

It is clarified that the extant regulations do not prescribe any reporting requirements for transactions where a person resident outside India who is a citizen of India or a Person of Indian Origin (PIO) as defined in Regulation 2(c) of Notification No. FEMA 21/2000-RB, ibid, acquire/s immovable property in India in accordance with the said provisions of the aforesaid Notification. Form IPI has been, accordingly, amended for greater clarity.

Impact: RBI has made this clarification for non residents, who are established in India and need to purchase a property. There is a reporting system introduces by RBI and all buyers excluding person resident outside India who is a citizen of India or a Person of Indian Origin (PIO) need to report the RBI, in maximum 90 days from the day of purchase.

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RBI allows exporters to receive advance payment for export of goods which would take more than one year to manufacture and ship. At present, prior approval of the Reserve Bank is required to be obtained by an exporter for receipt of advance where the export agreement provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment. With a view to liberalizing the procedure, it has been decided to permit AD Category- I banks to allow exporters to receive advance payment for export of goods which would take more than one year to manufacture and ship and where the ‘export agreement’ provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment subject to certain conditions.

[RBI/2011-12/403 A.P. (DIR Series) Circular No.81 February 21, 2012]

Increase in limit to USD 5,000 for foreign exchange remittance towards imports without any documentation formalities. At present, payments exceeding USD 500 or its equivalent made by persons, firms and companies towards imports into India must be made in Form A-1. Based on suggestions received from the various stake holders, the said limit has been reviewed and it has been decided as a measure of liberalization to raise the above limit for foreign exchange remittance towards imports without any documentation formalities, from USD 500 or its equivalent to USD 5000 or its equivalent, with immediate effect.

[RBI/2011-12/404 A.P. (DIR Series) Circular No. 82 February 21, 2012.]

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SEBI SEBI notifies Institutional Placement Programme (IPP) norms to help promoters dilute stake

In a move that could expedite government’s disinvestment process, the market regulator SEBI notified the IPP guidelines that will allow companies to reduce promoter shareholding through private placement. As per new norms for Institutional Placement Programme (IPP) of shares, even the companies would be allowed to issue fresh equity to institutional investors to dilute stake of promoters. A company will be allowed to dilute only 10 per cent of its equity through sale of promoter stake or issuance of fresh equity.

The issue, according to the norms, would remain open for a maximum of 2 days and the aggregate demand schedule would have to be displayed by the stock exchanges without disclosing the price.

For coming out with an IPP, the guidelines said, the issuer would be required to obtain an in-principle approval from the stock exchanges and file the offer document with BSE, NSE and SEBI. Impact: The IPP norms are broadly similar to QIP. But the 10 per cent limit for stake sale can create roadblocks for companies where promoters hold above 85 per cent stake. There auction will become compulsory after IPP. While any company can come out with a Qualified Institutional Placement (QIP), IPP will be permitted only for reducing promoter shareholding. As per government norms, at least 10 per cent of the shareholding in all listed state-owned companies should be with the public by June 2013, though in the case of private sector companies it has to be 25 per cent.

Offer for sale by promoters through stock exchange mechanism (OFS) SEBI has permitted BSE and NSE to provide a separate window, i.e. apart from the existing trading system for the normal market segment, to facilitate promoters of listed companies to dilute/offload their holding in listed companies in a transparent manner with wider participation. The minimum size of OFS should be as follows:

Minimum size of OFS / Dilution Paid-up share capital

1% of paid-up share capital, subject to a minimum of Rs. 25 crore

More than Rs. 25 crore at closing price on the specified date*

10% of paid-up share capital or such lesser percentage so as to achieve minimum public shareholding in a single tranche.

Less than Rs. 25 crore at closing price on the specified date*

* Specified date means the last trading day of the last completed quarter.

[CIR/MRD/DP/ 05/2012 February 1, 2012] Impact: The Circular is an additional window (other than the “block deal” window) available on the Stock Exchanges for specific purposes mentioned above. The Stock Exchanges will have to issue a list of top 100 companies based on average market capitalization of the last completed quarter after the completion of every quarter. There is no mandatory requirement under the Circular to appoint a SEBI registered merchant banker for conducting OFS. The Sellers and the buyer(s) will have to comply with the applicable reporting requirements prescribed under the Regulations and under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

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SEBI (Buy-back of Securities) (Amendment) Regulations, 2012 Market regulator SEBI modified norms for share buyback through the tender offer route under which companies will have to reserve 15 per cent of the offer for small shareholders.

"15 per cent of the number of securities which the company proposes to buy back (through tender offer)... shall be reserved for small shareholders," - Securities and Exchange Board of India (Buyback of Securities) (Amendment) Regulations 2012.

Small shareholder refers to a shareholder who holds shares not exceeding Rs Two Lakh of a listed company. The buyback process through the tender offer route can be completed within 41 days of the board approval. As per the guidelines, a company would have to publish advertisement in newspapers within 2 days after securing board approval for the buyback and after 5 days it has to file the offer document with the SEBI.

As per the notification, the offer for buyback shall remain open for 10 working days and within 7 days the company would have to pay the buyback amount to the shareholders.

Impact: At present there are two ways by which a company can come out with a buyback - open market and tender offer. While in open market offer companies can buyback shares from shareholders without knowing the buyer, under tender offer the company has to write to every shareholder saying it is willing to buyback shares in proportion to the issue. Private companies are unlikely to take the tender offer route to buyback as the process is tedious and time taking. The guideline is more theoretical. Companies are likely to execute buyback through the open market route.

SEBI amends Equity Listing Agreement – Amendment in Clause 40A, 43, 43A Securities and Exchange Board of India (SEBI) vide Circular no. CIR/CFD/DIL/1/2012 dated February 8, 2012 has issued a circular on amendments to the Equity Listing Agreement. In the said circular, SEBI has directed the Stock Exchanges to give immediate effect to the above mentioned amendments and appropriately amend the relevant clauses of Equity Listing Agreement in line with the text of the amendments.

As per the circular, it has been decided to amend following clauses of the Listing Agreement – Clause 40A - In addition to the existing methods which listed company can adopt to achieve minimum public shareholding, the listed company may also achieve the minimum level of public shareholding through Institutional Placement Programme (IPP) in terms of Chapter VIII-A of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended.

Clause 43 & 43A – In order to enhance disclosure requirements, listed entities have been mandated to disclose utilization of funds raised upon conversion/ exercise of warrants issued along with public or rights issue of specified securities.

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SEBI enhances minimum investment amount in Portfolio Management Scheme to Rs 25 Lakhs

With a view to keeping retail investors away from the portfolio management schemes (PMS), SEBI raised the minimum investment amount of clients for such schemes to Rs 25 lakh from the earlier Rs 5 lakh. PMS offers investors a range of specialised investment strategies to capitalise on opportunities in the market and made suitable to the needs of individual clients. It added that existing investments of clients can continue as such till maturity of the particular investment.

Impact: SEBI’s enhancement of the minimum limit will help in concentration of quality investors in PMSs and will help them secure qualified and good service. PMS regulations are light touch regulation and SEBI was worried that retail investors are being drawn into it whereas their interest are not as tightly protected or guarded as it is in mutual fund regulation. With the amendments, SEBI has tried to synchronise the PMS rules with actual reality of the present time. SEBI standardize lot size for IPO propose to list on SME exchange/platform and for secondary market trading on such exchange/platform [CIR/MRD/DSA/06/2012 dated February 21, 2012] SEBI vide circular dated May 18, 2010 prescribed the framework for setting up of a stock exchange/trading platform by a recognized stock exchange having nationwide trading terminals for Small and Medium Enterprises (SMEs).

Transfer of shares within promoter group of a company would be considered as an equity sale – SEBI SEBI has said that any transfer of shares even within the promoter group of a company would be considered as an equity sale, when it comes to promoters getting a preferential treatment for allotment of fresh shares or warrants. The issuer shall not make preferential issue of specified securities to any person who has sold any equity shares of the issuer during the six months preceding the relevant date. Accordingly, the promoters of a listed company would not be eligible for preferential allotment of shares or warrants, if there has been any inter-se transfer of shares among the promoter group firms in last six months. SEBI has made its stance clear in this regard in an informal guidance sought by pharma company Strides Arcolab Ltd.

Impact: Thus, as per the extant regulations, if there is any inter-se transfer among the promoter group entities in the preceding six months, then all the persons/entities forming part of ‘promoter(s) and promoter group’ shall become ineligible for allotment of specified securities on preferential basis.

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Other Regulatory Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2012

The Competition Commission of India (CCI) has notified changes to its merger control guidelines. § Increase in shareholding limit for exempt acquisitions:

The Amendment Regulations exempt acquisitions that do not entitle the acquirer to hold 25 per cent or more of the total shares or voting rights of the target in the ordinary course or for investment purposes, while not acquiring control. The earlier threshold of 15 per cent has been increased to bring it in line with the SEBI Takeover Regulations. While assessing the 25 per cent threshold, the Commission may now consider instruments (at the time of their issuance) that entitle the acquirer to hold more than 25 per cent at a future date. Under SEBI Takeover Regulations, the acquisition up to 24.99 per cent is exempted from requirement of open offer. However, SEBI continues to keep convertibles out while determining a “substantial acquisition” or “change in control” trigger breach. The convertibles are considered by SEBI only at the time of their conversion into shares or voting rights.

§ Intra-group mergers

To reduce the compliance burden on the companies in respect of intra-group restructuring, the Amendment Regulations have now dispensed with the requirement of filing a notice for intra-group

mergers or amalgamations involving enterprises wholly owned by the group companies. It is also pertinent to note that not all intra-group mergers/amalgamations have been exempted and some of them would still require a notice to the Commission. Only intra-group mergers or amalgamations between a parent and a subsidiary that is wholly owned by group companies of the parent, or between two subsidiaries that are wholly owned by companies belonging to the same group, are now exempt. This is in contrast to the exemption provided under the Combination Regulations for intra-group acquisitions which equally applies to all entities within the same group irrespective of their ownership patterns.

§ Other exemptions

Acquisitions of shares and voting rights pursuant to a buy-back are now exempt, as long as such acquisitions do not lead to an acquisition of control. Additionally, subscriptions to rights issues of shares, not leading to acquisition of control, are now exempt, even if they are in excess of the acquirer’s entitled proportion.

At the expiry of nine months, the CCI (Commission) has cleared 30 combination notifications without raising any competition issue. It claims the amendments are aimed at making filings simpler.

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International Taxation § Trading by way of re-export of imported goods from SEZ

eligible for tax deduction under section 10AA [DCIT v. Goenka Diamonds and Jewellers Ltd(ITAT Jaipur)

§ Consideration for transfer of limited right to use the know-how taxed as royalty income [Atlas Copco AB of Sweden v. CIT (Bombay High Court)]

§ Business support services of advisory nature under a cost contribution agreement are consultancy services liable to tax withholding [Re Shell Technology India Private Limited (AAR)]

§ Business income accruing or arising to the applicant can be taxed in India only in respect of such operations carried out in India [CTCI Overseas Corporation Ltd. In Re (AAR)]

§ Payment for shrink wrapped software/ off-the-shelf software amounts to ‘royalty’ [CIT v. Synopsys International Old Ltd (Karnataka High Court)]

§ Overseas subsidiary with single shareholder is a separate legal entity for tax purposes [AIA Engineering Ltd v. Add CIT (ITAT Ahmedabad)]

§ Payment of commission to Indian agent at arm’s length price does not relieve non-resident from further attribution of profits to PE in India [MTV Asia LDC Vs. DCIT ITAT]

§ Payments received by the applicant from the distributor for sale of software product is in the nature of royalty [Citrix Systems Asia Pacific Pty. Ltd.(AAR)]

Transfer pricing

§ TPO can rely on ‘contemporaneous’ data even if not available at specified date – ITAT Bangalore [Kodiak Networks (India) Pvt Ltd vs. ACIT (ITAT Bangalore)]

§ Sharing of net revenues consistently in controlled and uncontrolled transactions held as a valid comparable uncontrolled price [ACIT Vs. Agility Logistics Pvt. Ltd.(ITAT Mumbai)]

§ Non-charging of interest in the controlled transactions is comparable with that of non-charging from the uncontrolled transactions, no transfer pricing adjustment can be made on this count [The Dy.Commissioner of Income-tax Vs. M/s.Indo American Jewellery Limited]

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Recent Transactions that made the Headlines § LIC plans to acquire 5% stake in Punjab & Sind Bank: reports § RIL-BP in talks to acquire stake in LNG import terminal: reports § Kellogg Company to acquire P&G's Pringles for US$2.9bn § ITC acquires 4.62% in Hotel Leela from Russell Credit § Mahindra Satyam plans to acquire 2-3 firms: reports § Zensar Technologies plans global buys: reports § HDFC stake sale-Citi takes home US$2bn § Muthoot Finance may sell upto 10% stake: reports § IL&FS Investment in talks to buyout Hershey stake in JV: report § ONGC Offer for Sale completed: BSE, NSE § Premji's fund acquires 7% stake in Fabindia for Rs. 1-1.25bn:

reports § Tech Mahindra, Mahindra Satyam appoints JP Morgan as

bankers for merger process: reports § ITC Chairman YC Deveshwar sells shares worth Rs. 58mn § LIC reduces 2.06% stake in Tata Global: report § Shell announces US$1.57bn bid for Cove Energy § Vodafone mulls bid for C&W Worldwide § ING to sell Asia insurance JVs separately: reports § BP to sell Kansas gas assets for $1.2 bln: reports § Kodak sells online business to Shutterfly: reports

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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