KANTH AND ASSOCIATES · 2014-11-12 · coal mining projects that have a production capacity of more...

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K & A Newsletter

NEWS ALERTS

TAX

CORPORATE, CAPITAL MARKET, ECONOMY & FOREIGN TRADE

India enters DTAA with Bhutan

India signs Services & Investment Free Trade Pact with ASEAN

An Agreement was entered into between the Government of the Republic of India and the Royal Government of Bhutan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income which was signed in India on the 04th day of March 2013. The date of entry into force of the said Agreement is the 17th day of July 2013, being the date of later of the notifications of the completion of the procedures required by the respective laws for entry into force of the said Agreement.

Now, the Central Government in view of the aforesaid and in exercise of powers conferred by section 90 of the Income Tax Act, 1961, vide notification dated 05.09.2014, has notified that all the provisions of the said Agreement between the Government of the Republic of India and the Royal Government of Bhutan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income shall be given effect to in the Union of India with effect from 01st day of April following the calendar year in which the Agreement enters into force.

India signed a free trade pact in services and investment with the 10-member Association of South-East Asian Nations (ASEAN) in New Delhi. The said agreement is aimed at allowing freer movement of professionals and encouraging investment. The agreement will help provide market access to Indian professionals in the ASEAN region including those from the ITITeS (information technology enabled services) sector. Nine out of 10 ASEAN countries have signed the accord, while the Philippines is expected to do so soon after completing domestic procedures. The services pact signed with ASEAN covers issues

CONTENTS

— News AlertsTax 1Corporate, Capital Market, Economy & Foreign Trade 1

Judgments 4

— Article 5

Labour 2

3Legislations/Notifications 3

Amendments to Clause 49 of the Listing AgreementBy Mr. Syed Zomael Hussain, Associate, K&A

Land/Real Estate 2Environment

such as transparency, domestic regulations, recognition, market access, national treatment, increasing participation of developing countries, joint committee on services, review, dispute settlement and depute settlement and denial of benefits, etc.

The Reserve Bank of India (RBI), easing foreign direct investment (FDI) norms, has allowed companies to issue equity shares to a resident outside India against any type of fund subject to certain conditions. The RBI reviewed the extant guidelines for issue of shares or convertible debentures under the automatic route in consultation with the Government of India and has permitted issue of equity shares against any fund payable by the investee company, remittance of which does not require prior permission of the Government or the RBI. The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines, etc. as amended by the RBI from time to time. The issue of equity shares under this provision shall be subject to tax laws as applicable to the funds payable and the conversion to equity should be net of applicable taxes.

The Government is set to substantially ease norms for foreign investment in the construction sector and seriously considering the removal of all restrictions on size and minimum capitalization for the smart

RBI eases norms for equity share issue under FDI

Govt. likely to ease norms for FDI in construction

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cities as well as affordable housing projects. The new policy is also expected to provide easier exit windows. The new foreign direct investment (FDI) regime may allow developers to exit after the completion of the project or through the approval of the Foreign Investment Promotion Board (FIPB) against the three-year lock-in period currently imposed. Developers will be exempt from restrictions related to minimum capitalization and exits if they commit 30% of the project cost to affordable housing. The thrust will be on affordable housing and smart cities. The minimum built-up area has been proposed to be cut to 20,000 sq mt from 50,000 sq mt while the minimum capitalization requirement will be halved to $5 million from $10 million.

The Government has made changes to norms for determining depreciation of assets providing more clarity for companies. The new Companies Act emphasizes on the concept of useful life of assets by providing indicative life and residual value for assets in Schedule II. In the Companies Act, 1956, there were specified minimum rates in this regard. The Ministry of Corporate Affairs has now said that useful lives of assets and the residual value specified in Schedule II should be ordinarily used by companies. In case, companies are using values that are different from the Schedule II, then they would be required to adequate disclosures in their financial statements to justify the variation along with technical advice. Further, the concept of component accounting has been included in Schedule II. In case of a fixed asset, where there are significant individual components having different useful lives, then each such component would have to be depreciated separately. According to the Ministry, the requirement would be voluntary this fiscal year and mandatory for financial statements with respect to fiscal year starting on or after April 1, 2015.

The Reserve Bank of India (RBI), in order to expedite credit decision, asked banks to set a timeline for

Government amends accounting norms for depreciation

Disposal of loan proposals should be time-bound: RBI

disposal of loan proposals, but did not ascribe a particular time frame for the same. As per the notification issued by the RBI, banks should clearly delineate the procedure for disposal of loan proposals, with appropriate timelines, and institute a suitable monitoring mechanism for reviewing applications pending beyond the specified period. The RBI also asked banks to make suitable disclosures about timelines by conveying credit decisions through their websites, notice boards and product literature, among others. However, the banks should not compromise on due diligence requirements.

The Ministry of Labour and Employment, vide its notification dated 22.08.2014, has increased Employee Provident Fund (EPF) Limit to Rs.15000/- from existing Rs.6500/- with effect from 01.09.2014. The Central Government, in exercise of the powers conferred by Employees' Provident Funds and Miscellaneous Provisions Act, 1952, has made amendments to the Employees' Provident Funds Scheme, 1952. This Scheme may be called the Employees' Provident Funds (Amendment) Scheme, 2014and the same shall come into force on and from the 01.09.2014.

Further, the Ministry of Labour and Employment, vide its notification dated 28.08.2014, has enhanced the statutory wage ceiling from existing Rs.6,500/- to Rs.15,000/-, fixing minimum pension of Rs.1000/- per month and 20% additional relief on the amount of assurance benefit admissible under EDLI Scheme, 1976.

The Union Ministry of Urban Development has extended the date for regularization of existing farmhouses in the city to March 31, 2015. The Ministry based on the recommendations of the Delhi Development Authority (DDA) took the decision. The extension will be made on the rates already notified.

LABOUR

LAND/REAL ESTATE

EPF limit increased to Rs.15000/-

Date for regularization of existing farmhouses extended




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The three municipal corporations have been directed to accept applications online only in order to bring transparency and accountability in the process of sanction of building plans. The entire related information will be kept in public domain on their respective websites.

The Ministry of Environment and Forests has set up a committee to review environment-related laws and statutes. The Ministry, in one of the orders, has specifically listed five laws, namely, the Environment (Protection) Act, 1986, Forest (Conservation) Act, 1980, Wildlife (Protection) Act, 1972, The Water (Prevention and Control of Pollution) Act, 1974 and The Air (Prevention and Control of Pollution) Act, 1981 for the said Committee to look into and suggest amendments to ensure that these laws meet their objectives. The Committee has two months to review the laws and recommend amendments. The ministry has also asked the Committee to suggest amendments to the existing laws to reflect the various court orders and judicial pronouncements that relate to these laws.

The Ministry of Environment and Forests (MoEF) has decided to give one-time exemption from holding public hearing for expansion plans for few big coal mining projects. This will come as a relief to public sector as well as some private players as several of their coal mining projects are held up for want of environmental clearance. According to MoEF, it has been decided to give a one-time exemption from holding public hearing for expansion plans of existing coal mining projects that have a production capacity of more than 20 million tonnes per annum. The Environment Appraisal Committee may after due diligence consider exempting public hearing if the transportation of additional production of coal is proposed by means of a conveyor and/ or rail transport. The MoEF has also taken policy measures to ensure that key projects are not delayed for want

ENVIRONMENT

Government sets up committee to review environment-related laws

Environment Ministry eases norms for coal mines' expansion projects

of green nod. According to MoEF officials, new projects seeking expansion of coal mining stuck in MoEF are being taken on priority basis as the coal stocks are reducing.

The Environment Ministry is likely to give a blanket approval to the master plans of major ports instead of clearing individual projects that would help avoid delays that expansion works. The nation's 12 government-owned major ports would have to provide detailed plans indicating future expansion, additional construction and dredging operations that they would undertake along with their time phasing to the Environment Ministry. Any change to this master plan would not require further environment clearance provided an accredited third party guarantees that there is no additional pollution load.

The Government has decided to draw up a list of serious and life-threatening diseases, and ailments that are particularly relevant to India, for which a new drug can be considered for exemption from local clinical trials if it has already been approved and marketed safely in developed countries such as the United States, UK, Canada, Japan and Australia. The ministry had based on recommendations of an expert panel earlier decided that such waiver of mandatory trials for new drugs might be considered only in cases of national emergency, extreme urgency, epidemics and so-called orphan drugs for rare diseases and drugs indicated for conditions for which no therapies exist. Under the current norms, all new drugs that have not been used in India have to undergo trials on a specified minimum number of patients to get a marketing approval from the Drug Controller General of India. However, the drug regulator can grant exemption from trial in 'public interest'.

India had banned testing of cosmetics on around six months back and now the Government is all set to

Environment Ministry likely to give blanket approval for port projects

Government may exempt critical drugs from local clinical trials

Cosmetics tested on animals to face ban soon

LEGISLATIONS/NOTIFICATIONS




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prohibit even the import of such products. The Health Minister said that the ban would soon be notified as a new rule under the Drug and Cosmetics Act, 1945, in the Gazette. The impending move would apply to shampoos, makeup, fragrances, hair, nail and skin-care products, concedes to the long-standing concerns raised by animal welfare organizations. The proposed ban, once approved would have a huge bearing on the cosmetics industry since many companies/firms will need to alter countries from where they import. Cosmetic testing is carried out from anything between six months to two years to see if there are any health risks involved and the animals are usually killed after the procedure. All 28 countries under European Union have banned import and sale of such products.

The Supreme Court, in a landmark judgment, said it would review its own decisions on death row prisoners in an open court, calling it a "fundamental right". Review petitions, or petitions requesting the Supreme Court to review its own decision to reject a death row prisoner's appeal, are currently taken up in the chambers of judges. A Constitution bench comprising of five senior judges said if a petition has been rejected and the death sentence has not been carried out, the convict can seek an open court hearing by three judges and will get half an hour to address the court. However, the convicts will not have this option if their last legal recourse against execution, or a curative petition, has been rejected.

The Supreme Court has expressed concerns over deaths in police encounters and ruled that registration of First Information Reports (FIRs) will be mandatory in all such cases along with an independent probe and a magisterial inquiry so as to deter policemen from taking law into their own hands. The Court said that no awards or out-of-turn promotions should be given to any policeman in the aftermath of any encounter till his gallantry was established beyond doubt. The Apex Court for the

JUDGMENTS

Supreme Court's new rules for reviewing its decisions on death row prisoners

Magistrate probe post-encounter a must: SC

first time also granted the right to families of victims to complain to a judicial magistrate if they are not satisfied that the new norms are being followed and also to get compensation in such cases. The Court ruled that all information related to deaths in encounters should be documented and there must also be an independent probe by a senior officer of a neighbouring police station or CID in case of death of any person in any such encounter. The police officer must surrender his arms and face the probe. Disciplinary action by way of suspension must follow once the probe is over and the report must be sent to a competent court, a charge-sheet filed and trial must be completed as soon as possible. The Court further observed that in a society governed by rule of law, it is imperative that extra-judicial killings are properly and independently investigated so that justice may be done.

The Supreme Court cleared up a key ambiguity in the amended Land Acquisition Act by saying that delays caused by litigation would count under the legislation. The clause says if physical possession of land has not been taken or compensation has not been paid to the landowner five years after the initiation of acquisition proceedings, the landowner is entitled to reclaim possession of the land. The Court ruled a plain reading of the relevant clause made it clear that it does not exclude any period during which the land acquisition proceeding might have remained stayed on account of stay or injunction granted by any court. The Court held that it can be safely concluded that the Legislature has consciously omitted to extend the period of five years indicated in Section 24(2) even if the proceedings had been delayed on account of an order of stay or injunction granted by a court of law or for any reason.

The Supreme Court has held that the State Governments have the right to adopt any language as the second language as long as it is in use in the State and figures in the official languages listed in the Constitution. The Court said that the States reserve this right in addition to having Hindi as the second

SC clears key ambiguity in Land Acquisition Act

States free to adopt second language: SC




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language, clarifying that there is no such impediment to declaring Hindi as an official language even if it is not in use in the State since it is the official language of the country. The Court held that there was nothing in Article 345 of the Constitution which bars the State from declaring one or more of the languages in use in the state, in addition to Hindi, as the second official language. The Court further observed that, “this can only be at the cost of distorting the provision....the plain language...which empowers the State Legislature to make law for adoption of one or more of the languages in use in the State leaves no manner of doubt that such power may be exercised by the state legislature from time to time”.

The Supreme Court, in order to check illegal mining including that of sand, has said that police need not wait for a complaint to be filed under the Mines and Minerals Development and Regulation Act to take action against illegal mining. It was held that the Court shall take notice of the fact that over the years, rivers in India have been affected by the alarming rate of unrestricted sand mining, which is damaging the eco-system of the rivers and safety of bridges. Regarding illegal sand mining, the court said “it also weakens river beds, fish breeding and destroys the natural habitat of many organisms. If these illegal activities are not stopped by the State and the police authorities of the State, it will cause serious repercussions. It will not only change the river hydrology but also will deplete the ground water levels”.

The Madras High Court has ruled that a Right to Information (RTI) applicant must cite reasons for seeking information. The said ruling has been denounced by the activists, according to whom, there is no such requirement under the law and that the said order can be misused by public authorities to turn down requests. The Court ruled that any person who seeks information under the RTI Act must show it is either for his “personal interest or for a public interest”. The Court further observed that if such

Police can take action to check illegal mining sans a complaint: SC

Cite reasons for seeking information under RTI: Madras HC

details are either absent or not disclosed, such query cannot be construed as the one satisfying the requirement of the RTI Act. The Court said that “right” under the RTI Act is not defined and therefore it must be coupled with an object and purpose and such object and purpose must, undoubtedly, have a legal basis or be legally sustainable and enforceable. As per the ruling passed by the Madras High Court, a public information officer (PIO) can ask an applicant to provide reasons, failing which an application could be rejected.

ARTICLE

The Companies Act, 2013 ("Act"), which replaces the erstwhile Companies Act, 1956 with key changes and major implications for stakeholders, has set out Corporate Governance norms of global standards. These changes in law are aimed at ensuring higher standards of transparency and accountability, and seek to align the corporate governance practices in India with global best practices. In consonance with the Act, the Security Exchange Board of India (“SEBI”) vide Circular No. CIR/CFD/POLICY CELL/2/2014 dated 17th of April, 2014 amended Clause 35 and 49 of the Listing Agreement previously recognized under Master Circular SEBI/CFD/DIL/ CG/2004/12/10 dated 29th of October, 2004.

However, the new Clause 49 imposes a more onerous regime on the companies than the Act. Earlier, when additional governance measures were introduced by SEBI in 2004, their implementation was delayed by nearly 18 months until January 1, 2006 on account of the pressure from the industry. SEBI was therefore, concerned with the issues of discrepancies as well as industry-preparedness while considering the implementation of the new clause 49.

Hence, on account of numerous representations from market participants including companies and industry associations, highlighting certain practical difficulties in ensuring compliance, seeking clarifications on interpretation of certain provisions and suggesting various options to ease the process of

Amendments to Clause 49 of the Listing Agreement

By Mr. Syed Zomael Hussain, Associate, K&A




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implementation, SEBI has further amended clause 49 of Listing Agreement vide circular dated CIR/CFD/POLICY CELL/7/2014 dated 15th of September, 2014 (“Circular”). By way of the Circular, certain classes of companies have been excluded from the applicability and purview of the Clause 49. The Circular also brings further clarity with respect to independent directors, women directors, nomination and remuneration committee, material subsidiary companies, risk management, related party transactions amongst others.

As per the new amendments, compliance with the provisions of Clause 49 shall not be mandatory, for the time being, in respect of (a) Companies having paid up equity share capital not exceeding Rs.10 crore and net worth not exceeding Rs.25 crore, as on the last day of the previous financial year; and (b) Companies whose equity share capital is listed exclusively on the SME and SME-ITP Platforms. However, it also mandates compliance of Clause 49 within six months from the date on which the

1provisions became applicable to any company.

The mandatory appointment of woman director under the new amendment is to be effective from 1st April, 2015 which has been done by duly amending Clause 49(II)(A)(1) of the Listing Agreement. Further, the term 'material' has been inserted vide the new amendments in 49(II)(B)(1)(c) of the Listing Agreement duly amending the previous, 'independent director' which shall mean a non-executive director, other than a nominee director of the company: “apart from receiving director's remuneration, has or had no pecuniary relationship with the company…”, with “has or had no material pecuniary relationship with the company”.

The Circular has also amended Clause 49(II)(B)(3)(a) of the Listing Agreement which deals with the maximum tenure of independent directors. The Circular states that "The maximum tenure of Independent Directors shall be in accordance with the Companies Act, 2013 and clarifications/ circulars issued by the Ministry of Corporate Affairs, in this regard, from time to time." For the avoidance of any doubts, the Ministry of Corporate Affairs vide General Circular No. 14/2014 dated 09.06.2014 have clarified that section 149(10) of the Act provides for a term of upto 5 consecutive years for an Independent

Director. As such while appointment of Independent Director for a term of less than 5 years would be permissible, appointment for any term less than (whether for five years or less) is to be treated as one term under section 149(10) of the Act. Further under section 149 (11) of the Act, no Independent Directors shall hold office for more than two consecutive terms.

As regards Clause 49(II)(B)(4)(b) of the Listing Agreement which required that the letter of appointment along with the detailed profile of independent director shall be disclosed on the websites of the company and to the Stock Exchanges not later than one working day from the date of such appointment. The same has been relaxed vide the said Circular which now requires only the terms and conditions of appointment of Independent Directors to be disclosed on the website of the company.

Clause 49(II) (B)(7) of the Listing Agreement vide the Circular now also mandates the company to provide the details of familiarization programmes to be disclosed not only in the Annual Report but also on the company's website and a web link thereto.

Vide the said Circular, companies have also been directed to constitute the nomination and remuneration committee. Provided that, the chairperson of the company (whether executive or nonexecutive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee. Additionally 49(VI)(C) has been substituted to the effect that “The company through its Board of Directors shall constitute a Risk Management Committee. The Board shall define the roles and responsibilities of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit.”

The Circular further amends the provisions of 49(VII) (G) with respect to Subsidiary Companies. The provision clarifies that unless the sale/disposal/ lease of assets is made under a scheme of arrangement duly approved by a Court/Tribunal, such sale/disposal/lease of assets shall require prior approval of shareholders by way of special resolution.

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The definition of Related Party Transactions has also been widened. As per the Circular, “A transaction with a related party shall be construed to include single transaction or a group of transactions in a contract” has been added after “A related party transaction is a transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged”. Likewise, amendment is also witnessed under Clause 49 (VII) (B) which is adequately substituted with “For the purpose of Clause 49 (VII), an entity shall be considered as related to the company if: (i) such entity is a related party under Section 2(76) of the Companies Act, 2013; or (ii) such entity is a related party under the applicable accounting standards”.

Also Clause 49(VII)(C) has been substituted to the effect that a transaction with a related party shall be considered material if the transaction / transactions to be entered into individually or taken together with previous transactions during a financial year, exceeds ten percent of the annual consolidated turnover of the company as per the last audited financial statements of the company. As per the earlier amendment dated 17th April, 2014 the threshold towards determination of material related party transaction was set at ten percent.

Clause 49 (VII) (D) of the Circular further prescribes prior approval of the Audit Committee of the company with respect to all Related Party Transactions (“RPTs”). Alternatively, the Audit Committee may grant omnibus approval for related party transactions subject to certain conditions. However, the proviso to the referred clause clarifies the position in the event the need for RPT cannot be foreseen. In such case, the proviso directs the Audit Committee to grant omnibus approval for such transactions subject to their value not exceeding Rs.1 crore per transaction.

Undoubtedly, the most significant change is brought in the Explanation (ii) under Clause 49 (VII) (E), wherein SEBI requires all the entities which fall under the definition of related party to abstain from voting irrespective of whether the entity is a party to the particular transaction or not. Whereas the MCA General Circular No. 30/2014 categorically clarified that the term related party in the context of Section

188 of the Act would refer to only such related party as may be a related party in the context of the contract or arrangement for which the said special resolution is being passed. This new explanation under revised clause 49 therefore again creates a similar confusion related to related parties existing prior to the MCA General Circular.

SEBI's amendment to Clause 49 of the Listing Agreement appears to be a mixed bag of relaxations and clarifications. It is encouraging to note that SEBI, through its outreach to large corporations have gauged their readiness and identified the areas with implementation challenges, which led to these amendments. Overall, the revised position appears to seek an appropriate balance. On one hand, the intention of the regulator to progress along the path of a more robust set of governance norms is clear and on the other, it has also shown willingness to consider the practical difficulties in cases where the SEBI norms have gone far beyond the Act. Hence, SEBI has attempted to streamline the position so as to make it more acceptable to industry and garner greater compliance.

The amended Clause 49 is applicable with effect from 1st October, 2014 except Clause 49(II)(A)(1) dealing with appointment of woman director, which is applicable with effect from 1st April, 2015.

1. SEBI Circular CIR/CFD/POLICY CELL/7/2014 [http://www.sebi.gov.in/cms/sebi_data/attachdocs/1410777212906.pdf] accessed on 29.09.2014

2. General Circular No. 14/2014 [available at http://www.mca.gov.in/Ministry/pdf/General_Circular_14_2014.pdf] accessed on 29.09.2014

3. SEBI Circular No. CIR/CFD/POLICY CELL/7/2014 [available at http://www.sebi.gov.in/cms/sebi_data/ attachdocs/1410777212906.pdf] accessed on 29.09.2014

References:




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