REGULATORY

UPDATE October &

November 2014

REAL ESTATE INVESTMENT TRUSTS REGULATIONS 2014 (REIT) IN FORCE

On September 26, 2014, the Securities and Exchange Board of India (SEBI) had published and brought into force the Real Estate Investment Trusts Regulations, 2014. A real estate investment trust (REIT) is a trust set up for the purpose of investing in (i) real estate assets in India; and/or (ii) securities of special purpose vehicles (SPVs) holding real estate assets in India, in each case, in accordance with the offer document/follow-on offer document. Important features of the REIT are as under:

A REIT cannot invest in vacant land or agricultural land or mortgages other than mortgage backed securities. It cannot invest in units of other REITs. At least 80% of the value of the REIT Assets should be invested proportionate to the holding of the REITs in completed

and rent generating properties, i.e., properties which have been leased or rented out in accordance with an agreement entered into for the purpose.

It can invest in at least two projects, directly or through the SPV, with not more than 60% of value of assets, proportionately on a consolidated basis, invested in one project.

A REIT is required to hold completed and rent generating property, whether directly or through the SPV, for a period of not less than three years from the date of purchase of such property by the REIT or SPV.

No schemes can be launched by REITs. A REIT is required to have a minimum of 200 investors (forming part of public). The valuer for REIT properties should not be an associate of the sponsor, manager or trustee and should have not

less than five years of experience in valuation of real estate.

Not less than 75% of the revenue of the REIT and the SPV, other than gains arising from disposal of properties, should, at all times, be from rental, leasing and letting real estate assets or any other income incidental to the leasing of such assets. Not less than 75% of values of the REIT assets should be rent generating proportionately on a consolidated basis.

A REIT is required to distribute not less than 90% of its net distributable income after tax as dividend to the unit holders on a half yearly basis in accordance with the procedure mentioned in the offer document or follow-on offer document. Such distribution is required to be declared and made not less than once every six months in every financial year and not more than 15 days from the date of such declaration. (Sited from AZB Partners Newsletter Inter alia dated October 2014)

NATIONAL TEXTILE CORPORATION PROTECTED FROM RENT CONTROL LAWS BY ORDINANCE

On October 24, 2014, the President of India approved an ordinance to shield National Textile Corporation from rent control laws that have been used to evict its sick textile units from prime land in several cities. He also restored NTCs rights over leased property lost in court battles due to expiry of the lease period to the original landlord. Cabinet had cleared the Textile Undertakings (Nationalisation) Laws (Amendment and Validation) Ordinance 2014 at its meeting in October, which has been notified and placed in public domain.

REGULATORY UPDATES

OCTOBER & NOVEMBER 2014

REGULATORY

UPDATE October &

November 2014

This ordinance was passed to mitigate the 2011 Supreme Court judgment where it was held preposterous for the NTC to claim to be the governments agent and was ordered eviction from a prime 2.5 acre plot in Mumbai. NTC had lost land on similar grounds elsewhere and had placed other sick mills on tenanted land at risk. This ordinance will help protect public investment made to revive sick textile mills transferred to the NTC and amends the Sick Textile Undertakings (Nationalisation) Act 1974 and the Textile Undertakings (Nationalisation) Act 1995. The Ordinance explicitly clarifies that the lease-hold rights of the sick textile undertakings continue to remain vested in the Central Government and is aimed at reversing the effect of judicial pronouncements that make a distinction between NTC and the government. (News Report)

DIRECTORS INVOLVED IN DAY-TO-DAY RUNNING OF COMPANY LIABLE FOR BOUNCING OF CHEQUES

The Supreme Court of India opined that all directors involved in the day-to-day running of a company can be made liable for a bounced cheque; however a director who resigned before the cheque was issued cannot be made liable. The Apex Court clarified the position at law and directed that the directors should normally face prosecution if there is no incontrovertible evidence to show their non-involvement such as long illness, resignation, etc.

It opines that vicarious/indirect liability is contemplated in the Negotiable Instruments Act to ensure greater transparency in commercial transactions. Therefore, in cheque-bouncing cases, the managing directors in charge of the affairs of the company as well as the directors or officers who sign cheques can be arraigned as accused. Other officers of a company can be made liable in such a case if a specific role by way of consent, connivance or negligence is alleged against them. (Gunmala Sales Pvt Ltd v. Navkar Infra Projects Pvt Ltd, SC 2014)

SUPREME COURT RESTRICTS JURISDICTION IN CHEQUE DISHNOUR CASES TO PLACE WHERE CEHQUE IS DISHONOURED

The Supreme Court of India, while hearing a Cheque dishonor case, emphasized that the concepts of Civil law for invoking territorial jurisdiction are wider and cannot be strictly applied in criminal matters (i.e. Dishonor of Cheque under Negotiable Instruments Act). A crime is committed on fulfilling the conditions in law (presentation of cheque within validity, notice demanding payment and drawers failure to pay etc.) and once the crime is committed, the jurisdiction of the court to try the offence should be determined by reference to the place where the cheque is dishonored.

The Apex Court opined that law endeavors to book the culprit and to provide relief to aggrieved party but not to harass the culprit. With the above observation, it held that the place, sites or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank is located.

It further stated that courts were burdened by the pending cases on account of multiplicity of complainants at various places; consequently, restricting jurisdiction of courts in Cheque dishonor cases would reduce multiplicity of litigation and stop harassment of the person issuing the Cheque. (Dasarth Rupsingh Rathod Vs State of Maharashtra SC)

RETURN OF MORTGAGED PROPERTY TO MORTGAGER MUST FOR CLOSER OF MORTAGE DEED

The Supreme Court of India, while addressing the claim for the possession of property after redemption of mortgage amount under the mortgage deed, observed that as per the established law, if the mortgagee continues to be in possession as a tenant

REGULATORY

UPDATE October &

November 2014

after redemption, the action amounts to a clog/obstacle for redemption of the property. This prevents the mortgagor from getting back the property in the same condition as he gave it when the mortgage was executed. (Thakar Singh vs. Mula Singh dated 14.10.2014 SC)

COURTS TO SET ASIDE ONLY ILLEGAL OR ERRONEOUS ARBITRATION AWARDS

The Supreme Court of India held that the Arbitrators decision is generally considered binding between the parties and therefore, the power of the Court to set aside the award would be exercised only in cases where the Court finds that the arbitral award is erroneous or patently illegal or in contravention of the provisions of the Act.

The Apex Court opined that courts cannot ordinarily substitute its interpretation for that of the Arbitrator. Similarly, when the parties have arrived at a concluded contract and acted on the basis of those terms and conditions of the contract, then substituting new terms in the contract by the Arbitrator or by the Court would be erroneous or illegal. It is equally well settled that the Arbitrator appointed by the parties is the final judge of the facts. The finding of facts recorded by him cannot be interfered with on the ground that the terms of the contract were not correctly interpreted by him. (Swan Gold Mining Ltd. vs. Hindustan Copper Ltd. 22.09.2014 - SC)

CENTRAL GOVERNMENT PLANS TO RECAST LABOUR LAWS

The Central Government plans to push through labour reforms by revamping the existing 44 labour laws into five broad codes dealing with key issues. The plan is based on the Second National Labour Commission's report of 2002, which suggested that labour laws should be grouped in to five categories, viz., (i) industrial relations, (ii) wages, (iii) social security, (iv) safety and welfare, and (v) working conditions. The ministry has set up an inter-ministerial group for implementation of the plan, which held its first meeting and presented the draft on the five codes on labour laws based on the recommendations of the Second National Commission on Labour. The draft will now be reviewed by the inter-ministerial group set up for the purpose.

DLF ALLOWED TO DEPOSIT CCI FINE OF RS 480 CRORE IN INSTALMENTS

Real estate major DLF, on November 28, 2014, got a breather from the Supreme Court, which allowed it to deposit in monthly instalments the remaining Rs 480 crore of the Rs 630 crore fine slapped on it by Competition Commission of India (CCI) for allegedly resorting to unfair business practices wherein it was found violating fair trade norms following a complaint by Belaire Owners Association in Gurgaon.

The Apex Court has ordered the real estate firm to commence the payment of the balance instalments of Rs 75 crore from January 15, 2015 year. DLF had, till November 28, 2014, deposited Rs 150 crore with the apex court registry in compliance of the order dated August 27, 2014 wherein it was required to deposit the total amount within period of three months with its Registry pending the outcome of the appeal filed by DLF. DLF has also offered to pledge land in lieu of the outstanding amount and said its land would remain pledged till it deposited the money in the apex courts registry. (News story dated November 28, 2014)

REGULATORY

UPDATE October &

November 2014

DELHI HIGH COURT UPHOLDS LEGITIMACY OF DDA ELIGIBILITY REGULATION

The Delhi High Court, while hearing a case filed by Amit Mukhopadhyay challenging the validity and the legality of clause (7) of the DDA (Management and Disposal of Housing Estate) Regulations, 1968, has upheld the eligibility criterion for a person to apply for residential properties under the DDA (Management and Disposal of Housing Estate) Regulations, 1968. The said regulation stipulated that for a person to apply for a residential property under the said regulations, he or she should not own a residential property, plot or a flat in Delhi irrespective of the fact whether he is residing in Delhi or not. The High Court opined that the Indian Constitution supports the regulation as its objective is no one possesses more than one flat and consequently, cannot be held arbitrary or unreasonable.

MONEY PAID TO SETTLE DISPUTES CAN BE TREATED AS BUSINESS EXPENDITURE: ITAT

The Income Tax Appellate Tribunal (ITAT) has clarified that money paid under the consent decree mechanism to settle disputes is permissible as business expenditure and cannot be equated to penalty levied for breaching law. The clarification will set precedence as many companies are currently negotiating with the market regulators to settle disputes under the consent mechanism by paying a fee but without admitting or denying guilt.They can record such costs as normal business expenditure and claim tax exemption. No such tax benefit can be taken on penalties levied for breaching law.

The ruling of the ITAT came in a case related to Reliance Shares & Stock Broker, where company had declared a loss of Rs 1.55 lakh in its Income Tax return. The assessing officer observed that it had paid Rs 50 lakh to the Securities and Exchange Board of India to settle a dispute, and disallowed it as business expenses. The regulator had recommended for suspension of the company's certificate of registration as a stock broker for nine months for allegedly violating various regulations. The tax departments contention that the company had paid a penalty for not following rules under the SEBI Act was overruled ITAT and the assessing officer's decision to disallow the record as business expense was set aside. (News story dated November 12, 2014)

In case of any requests or clarifications, please contact:

R Hiranmai Yash Sanchiher Regional Director South & South East Asia Manager Tel: +91 40 40465699 Tel: +91 124 469 5555 r.hiranmai@ap.cushwake.com yash.sanchiher@ap.cushwake.com

Disclaimer This update has been prepared solely for information purposes. The information on which this update is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete. Please note that this email cannot be sent out individually by you to clients or any other external sources as the information is intended for internal employees only.