Regulatory Updates - Quarterly Report – December 31, 2019
Key Income-Tax Updates
Clarification regarding tax ability of income earned by a non-resident investor from off-shore
investments routed through an Alternate Investment Fund
July 3, 2019: CBDT: As section 115UB(1) of the Income-tax Act, 1961 (the Act) provides that
the investments made by Category I or Category II AIFs are deemed to have been made by the investor directly. It is clarified that any income in the hands of the non-resident investor from off-shore investments routed through the Category I or Category II AIF, being a deemed direct
investment outside India by the non-resident investor is not taxable in India under section 5(2) of the Act.
It is further clarified that loss arising from the off-shore investment relating to non-resident investor,
being an exempt loss, shall not be allowed to be set-off or carried-forward and set off against the
income of the Category I or Category II AIF.
Union Budget 2019-20
July 5, 2019: The key highlights of Budget inter-alia are as under:
• Increase in applicable surcharge now – @ 25%, where total income exceeds INR 20m and @ 37%,
where total income exceeds INR 50m.
• Reduced tax rate of 25% will be extended to companies with turnover of INR 4bn in FY 2017-18
• Proposal to introduce faceless assessment in electronic mode involving no human interface.
• Tax incentives for units located in the IFSC
Protocol Amending the Agreement between the Government of the Republic of India and the
Government of the People’s Republic of China
July 17, 2019: MoF: The Governments of India and the People’s Republic of China, on 26 November
2018, signed a Protocol amending the Double Taxation Avoidance Agreement between India
and China. India notified this Protocol on 17 July 2019.
Exemption from furnishing return of income for non-residents earning income from
investment fund set-up in IFSC
July 26, 2019: GoI: The Central Government (CG) issued a notification under sub-section (1C)
of section 139 of the Act exempting a non-resident (not being a company) or a foreign company from
furnishing a return of income in India who earns income from investment in an investment fund set- up
in IFSC. An investment fund has been defined to mean a Category I and II AIF, which have been granted
a certificate of registration and are regulated by the SEBI (AIF) Regulations, 2012. The above exemption
from furnishing return of income is subject to the satisfaction of the certain conditions.
United Investments v. ACIT (ITA No. 511/Kol/2017)
July 1, 2019: The Kolkata bench of the Tribunal in its order dated 01 July 2019 has allowed assessee’s
claim for carry forward of long term capital loss from sale of listed shares on which securities transaction
tax has been paid.
CBDT issues clarification on eligibility of small Start-ups to avail tax holiday
August 22, 2019: CBDT: CBDT has clarified that small start-ups with turnover upto Rs. 25 crore will
continue to get the promised tax holiday as specified in Section 80-IAC of the Income Tax Act, 1961
(the Act) which provides deduction for 100 percent of income of an eligible start-up for 3 years out of
7 years from the year of its incorporation.
CBDT constitutes Start-up Cell for redressal of grievances related to Start-ups
August 30, 2019: CBDT: To redress grievances and address various tax related issues in the cases of
Start-ups, a Start-up Cell has been constituted by CBDT.
Consolidated circular for assessment of Startups
August 30, 2019: CBDT: CBDT has issued circular providing clarity on several aspects relating to the
assessment of startups under section 56(2)(viib) of the Act and the recovery of demand therefrom. The
Circular is said to be a consolidated one and is intended to provide a hassle-free tax environment to the
Startups as promised by the Hon’ble Finance Minister.
Gift of shares made by a company under an internal restructuring exercise not a “colourable
device” – rejection of revision under section 263 of the Income-tax Act, 1961 (the Act)
November 1, 2019: The Mumbai bench of the Income-tax Appellate Tribunal holds transfer of shares of a
company as “gift” by a taxpayer to its group company is not a colourable device. It rejected the
Revenue’s contention that the taxpayer had resorted to circular transaction of transfer of shares to
avoid capital gains tax. In addition, the Tribunal quashed the Commissioner of Income-tax’s
revisionary order under section 263 of the Act, as the Tribunal observes that the tax officer had made
due enquiries during the assessment proceedings and the CIT was only trying to substitute its opinion,
which cannot be done by exercising revisionary jurisdiction under section 263 of the Act.
Tribunal holds that valuation of shares under section 56(2)(viib) of the Act, based on the fair
value of assets, cannot be rejected
November 6, 2019: The Delhi bench of the Income-tax Appellate Tribunal held that where
the taxpayer has demonstrated with evidence that the fair market value (FMV) of an asset is much more
than the book value, the tax officer cannot use the book value of the asset, ignoring its FMV,
for valuation of shares under clause (ii) of Explanation (a) to section 56(2)(vii)(b) of the Act. The Tribunal
further ruled that shares should be valued based on various relevant factors and not merely based on
Regulatory Updates - Annual Report – March 31, 2019
A. Key Income-Tax Updates
1. Angel Tax exemption
January 31, 2019 : CBDT: ‘Angel tax’ exemption granted vide notification dated May 24, 2018 has modified
pursuant to revised DIPP notification dated January 16, 2019. As per the modified notification, provisions of
Sec. 56(2)(viib) of the Act shall not apply to consideration received by a company for issue of shares that
exceeds the face value of such shares, if such issue of shares is approved by the CBDT under modified
para 4(3) of DIPP notification of January, 2019. This notification shall be deemed to have come into force
retrospectively from the 16th January, 2019.
2. Definition of start-ups widened and conditions for exemption from “angel tax”amended
February 19, 2019 : DIPP: The definition of start-ups has been expanded. Further, the conditions for
claiming exemption under section 56(2)(viib) of the Income-tax Act, 1961 for start-ups has been
amended. The notification is issued in supersession of the previous notifications dated 11 April, 2018 and
16 January, 2019.
3. HC rules that a Trust is “revocable” in case contributions are revocable, and the income of such Trust
should be taxable in the hands of the contributors
May 18, 2019 : High Court: Madras High Court dismissed the Revenue’s appeal and held that in case the
funds transferred by the contributors to the Trust were revocable, section 62(2) read with section 61(1) of
the Income Tax Act, 1961 (the Act) would become applicable. Accordingly, the income of such Trust
should be taxable in the hands of the contributors and not in the hands of the Trust. The HC, in its
decision, further noted that section 164 of the Act does not apply, as the contributors, their respective
shares and the extent of their beneficial interest in the Trust are identifiable.
4. Non-allowability of set-off of losses against the deemed income under section 115BBE prior to AY 2017-18
June 14, 2019: CBDT: In order to remove any ambiguity of interpretation, it is clarified that since the term
‘or set-off of any loss’ was specifically inserted by the Finance Act, 2016, with effect from 1 April 2017, the
taxpayer is entitled to claim set-off of loss against the income referred under section 115BBE of the
Income-Tax Act, 1961 till the AY 2016-17.
B. Key Indian Regulatory Updates
1. Relaxation from requirement to furnish a copy of PAN for transfer of equity shares of listed entities
executed by non-residents
February 11, 2019 : SEBI: In order to address the difficulties faced by non-resident investors (such as NRIs,
PIOs, OCIs and foreign nationals), it has been decided to grant relaxation to non-residents from the
requirement to furnish PAN and permit them to transfer equity shares held by them in listed entities to
their immediate relatives subject to conditions prescribed.
2. Transfer of securities held in physical mode – clarification
March 27, 2019 : SEBI: Certain clarification has been issued with respect to transfer of securities held in
1. The above decision does not prohibit the investor from holding the shares in physical form; investor has
the option of holding shares in physical form even after April 01, 2019.
2. Any investor who is desirous of transferring shares (which are held in physical form) after April 01,
2019 can do so only after the shares are dematerialized.
3. The transfer deed(s) once lodged prior to deadline and returned due to deficiency in the document may
be re-lodged for transfer even after the deadline of April 01, 2019.
3. Informal Guidance in the matter of VCF JM Financial India Fund
May 2, 2019 : RBI: In the said informal guidance note, it has been clarified by SEBI that VCFs may invest
unutilised funds of investable fund in the units of liquid mutual funds or bank deposits or other liquid assets
of higher quality such as treasury bills, commercial papers, etc. during the term specified in the private
4. Consultation Paper on Innovators Growth Platform (IGP)
May 20, 2019 : SEBI: SEBI has floated a consultation paper on norms for startups listed on IGP, to trade
under regular category of main board of stock exchanges. Some of the key proposals are as under:
• The regulator proposed that the companies listed on IGP, wanting to list on the mainboard, should
complete at least one year of listing on the former platform, and should have minimum 200 shareholders.
• The company, its promoters or directors should not have been debarred from accessing the capital
markets, and should not have been a willful defaulter or fugitive economic offender.
• Minimum promoters’ contribution will be 20 per cent of the total capital, and if there is shortfall, it can be
made up to 10 per cent through contribution from alternative investment funds (AIFs), foreign venture
capital investors, commercial banks, public financial institutions or insurance companies. Such capital shall
be locked for a period of 3 years.
5. Discussion paper on review of buy-back of securities
May 22, 2019 : SEBI: SEBI has issued discussion paper to seek comments / views from the public on
suggestions relating to review of conditions for buy-back of securities. The issue raised is whether SEBI
should consider different approach or similar approach if the subsidiaries of a listed company proposing
buybacks are NBFCs, HFCs and Infrastructure companies.
6. SEBI signs MoU with Ministry of Corporate Affairs (MCA)
June 7, 2019 : SEBI: SEBI has signed a MoU with MCA for data exchange between the two regulatory
organizations. It will enable sharing of specific information such as details of suspended companies, delisted
companies, shareholding pattern from SEBI and financial statements filed with the Registrar by corporates,
returns of allotment of shares, audit reports relating to corporates. The MoU will ensure that both MCA
and SEBI have seamless linkage for regulatory purposes.
7. Annual Return on Foreign Liabilities and Assets
June 28, 2019 : RBI: RBI has operationalized a web-based system online reporting portal – Foreign
Liabilities and Assets Information Reporting (FLAIR) system for submission of foreign liabilities and assets
(FLA) return by 15 July of every year, to enhance the security-level in data submission and improve data
quality. This replaces the present email-based reporting system for submission of FLA return. Further, the circular has now specifically mentioned AIFs and Investment Vehicles as reporting entities required to file FLA return.
Regulatory Updates - Quarterly Report – December 31, 2018
A. Tax Updates:
In this quarter, angel tax has been the topic of attention for the startup ecosystem. The following two changes are worth reporting:
V. No coercive measures on startups to recover demand w.r.t additions u/s 56(2)(viib), directs
January 02, 2019: CBDT: CBDT directs AOs not to take coercive action till further instructions, to
recover outstanding demand in case of start-ups if additions have been made u/s 56(2)(viib) after
modifying /rejecting valuation under Rule 11UA; Also states that the matter is under consideration of the
VI.Government eases process for startups to seek tax exemption
January 16, 2019: DIPP: Government eases procedure for start-ups to seek income tax exemption on
investments from angel funds as part of efforts to address concerns of budding entrepreneurs. The
application procedure has been simplified by making application to CBDT through DIPP. The earlier
requirement for startup to submit a report from the merchant banker specifying the fair market value of
shares has also been removed.
As per the revised procedure, a startup, which is recognised by the DIPP, would be eligible to seek
exemptions, subject to certain conditions. Apart from INR 10 crore threshold for paid-up share capital
and share premium, the conditions also include that:
• An Investor should have returned income of INR 50 lakh or more for the financial year preceding
the year of investment.
• The net worth exceeding INR 2 crore or the amount of investment made/proposed to be made in
the startup, whichever is higher, as on the last date of the financial year preceding the year of
Application for approval under this para shall be made in specified form to DIPP:
• Provided that in case the approval is requested for shares already issues by the startup, no
application shall be made if assessment order has been passed by assessing officer for the relevant
• The application of the recognised startup shall be transmitted by DIPP to CBDT with the necessary
• The CBDT, within a period of 45 days from the date of receipt of application from DIPP, may grant
approval to the startup for the purposes of clause (viib) of sub-section (2) of section 56 of the Act
or decline to grant such approval.
B. Regulatory Updates
I. The Companies (Amendment) Ordinance, 2018
November 06, 2018: MCA: Amendments to certain provisions of the Companies Act, 2013 have been
carried out with effect from November 02, 2018. The key aim of the amendments are, as follows:
• Re-categorisation of certain offences, which are in the category of compoundable offences to an inhouse
adjudication framework, wherein defaults would be subject to the penalty levied by an
• Instituting a transparent and technology driven in-house adjudication mechanism on an online
platform and publication of the orders on the website.
YourNest India VC Fund II: Quarterly Report December 2018 16
Tax & Regulatory Updates
• De-clogging the National Company Law Tribunal by introducing certain amendments and enhancing
the role of the Regional Director.
• Tackling the larger issue of “shell companies,” enhancing accountability with respect to filing documents
related to charges, non-maintenance of registered office, etc.
II. Operating guidelines for AIFs in IFSC
November 26, 2018: SEBI: A circular issued specifying the operating guidelines for AIFs in IFSC. Circular
providing guidelines in relation to: registration process, investment conditions, minimum investment and
corpus requirements, set-up requirements for manager/sponsor of AIFs, requirement to appoint
custodian, requirements for angel funds, and the overseas investments requirements.
III.Extension of deadline for transfer of securities only in demat form
December 03, 2018: SEBI: A notification issued extending the timeline from December 5, 2018 to April
1, 2019 to allow transfer of securities, other than transmission and transposition, only if they are held in
dematerialised form with a depository.
IV.Report of the expert committee for listing of equity shares of companies incorporated in
India on foreign stock exchanges and vice-versa
December 04, 2018: SEBI: Expert Committee submitted its report on listing of equity shares of
companies incorporated in India on foreign stock exchanges and of companies incorporated outside
India on Indian stock exchanges.
V. SEBI Board meeting
December 12, 2018: SEBI: SEBI in its meeting decided on certain matters such as creation of segregated
portfolio by Mutual Funds, review of framework for Institutional Trading Platform, clubbing of investment
limits for FPIs, review of framework for OFS of shares through Stock Exchange mechanism, consultation
paper on uniform valuation methodology for pricing of Corporate Bonds, etc.
VI.FEMA Update – e-Commerce – Clarification issued by DIPP
January 04, 2019: DIPP: In relation to FDI in entities engaged in e-commerce, DIPP has issued clarification
in support of PN 2 / 2018. The clarification specifies the following:
• e-Commerce platform operating on inventory-based model is a violation to FDI under e-Commerce
section as well as under multi-brand retailing;
• PN 2/2018 is applicable only to entities which operate a marketplace for e-commerce and thus, FDI in
other sectors continues to be governed by the specific provisions pertaining to them.
Regulatory Updates - Annual Report – March 31, 2018
A. TAX UPDATES
1) Applicability of Section 56(2)(viib) in case of start-ups
On February 06, 2018: CBDT: An instruction issued stating that, in cases of start-up Companies (as per the DIPP definition), no coercive measure would be taken by the Assessing Officer to recover the outstanding demand for additions made under section 56(2)(viib) of the Income-tax Act, 1961 and also requires expeditious disposal of pending appeals by Commissioner (Appeals).
2) FATCA and CRS – New reporting mechanism
On April 05, 2018: CBDT: A notification issued summarising the updated procedure for registration and submission of Statement of Reportable Account for the purpose of Foreign Account Tax Compliance Act (FATCA) and Common Reporting System (CRS) reporting.
3) Notification on person allowed to issue Valuation report
On May 24, 2018: CBDT: A notification issued wherein the definition of ‘accountant’ has been deleted from Rule 11U of the Income-tax Rules, 1962 (‘the Rules’), and also reference to the word ‘accountant’ has been removed from Rule 11UA(2)(b) of the Rules, which provides the manner for determining the fair market value and the persons to provide the certificate. Accordingly, the CBDT has made it mandatory to obtain a valuation certificate from a Merchant Banker for the purposes of Section 56(2)(x), 56(2)(viib) and Section 50CA of the Income-tax Act, 1961 (‘the Act’).
4) Angel tax exemption notification
On May 24, 2018: CBDT: A notification issued in supersession of its earlier notification, stating that the provisions of Section 56(2)(viib) (i.e. taxability of income from other sources) of the Act, shall not be applicable in case of start-ups. This notification shall be deemed to have come into force retrospectively from April 11, 2018.
5) Overseas investment by AIFs/ VCFs
On July 03, 2018: SEBI: A circular issued increasing the limit for overseas investment by AIFs/ VCFs from US$ 500 mn to US$ 750 mn and prescribing certain disclosures.
B) Regulatory Updates
Conduct of e-assessment proceedings in scrutiny cases
On February 12, 2018: CBDT: CBDT has directed to conduct the pending scrutiny assessments through ‘EProceeding’ facility available in E-filing website:
- Exceptions: (a) search cases; and (b) if the assessee has objected for e-assessment;
- Procedural aspects: notice for enquiries u/s 142(1), other communications and orders to be issued electronically, digitally signed and uploaded in the e-filing a/c of the assessee;
- Online submissions may be filed till the office hours on stipulated date;
- ‘E-Proceeding’ portal shall be automatically closed 7 days before time barring date or upon completion of proceedings;
- Third party enquiries, examination of witness etc. to be conducted manually;
Case records and note sheet to be maintained electronically
Regulatory Updates - Quarterly Report – December 31, 2017
A. TAX UPDATES
- Union Cabinet approves DTAA with Hong Kong
On November 10, 2017, Union Cabinet approves entering into an Agreement between India and the Hong Kong Special Administrative Region (‘HKSAR’) of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income (‘DTAA’).The Agreement will stimulate flow of investment, technology and personnel from India to HKSAR & vice versa, prevent double taxation and provide for exchange of information between the two contracting parties. This Agreement is on similar lines as entered into by India with other countries.
- Indirect transfer provisions: CBDT clarifies in case of redemption of share or interest outside India
On November 7, 2017, the CBDT has issued a circular clarifying that the provisions of section 9(1)(i) of the Income-tax Act, 1961 (the ‘Act’) read with Explanation 5 thereof (i.e. indirect transfer provisions) shall not apply in respect of income accruing or arising to a non-resident on account of redemption or buy-back of its share or interest held indirectly in the specified funds, if such income accrues or arises from or in consequence of transfer of shares or securities held in India by the specified funds and such income is chargeable to tax in India.
B. REGULATORY UPDATES
- Foreign investment in India – Rationalisation
On November 7, 2017, the Reserve Bank of India (‘RBI’) has revised FEMA 20 which deals with foreign investment into India.
Some of the key takeaways pursuant to the above changes are:
- FDI, has been defined to mean investment through capital instruments by a person resident outside India in an unlisted Indian company, or in 10% or more in a listed Indian company
- The timeline of issue of Capital Instruments has been aligned with the Companies Act, 2013. The period was 180 days under the erstwhile regulations. In case of non-issuance of capital instruments within 60 days, money will be required to be refunded within 15 days.
- The following transfers have now been permitted under the automatic route
- Transfer by non-resident of India (NRI) or OCI to person resident outside India by way of sale or gift subject to prescribed conditions;
- Transfer from person resident outside India to another person resident outside India pursuant to liquidation, merger, demerger, amalgamation of foreign companies.
- Consequent changes made in various regulations in relation to investment under Schedule 4 (NRI on non-repatriation basis) considered as investment by resident.
- The definition of “Downstream Investment” has been amended to include investment by Limited Liability Partnership (LLP)/ Investment Vehicle in downstream Indian company or LLP.
- RBI Directions on NBFC – Peer to Peer lending platform
On 4 October 2017, RBI issued the Peer to Peer (P2P) Lending directions . The directions provide a detailed framework for registration of P2P lending platforms as “Non-banking financial company – Peer to Peer Lending Platform” (NBFC-P2P), eligibility criteria, scope of activities, prudential norms, operational guidelines, information technology/security, governance, disclosure and reporting requirements.
- Changes in classifying MSME from ‘investment in plant & machinery/ equipment’ to ‘annual turnover’
The Union Cabinet chaired by Prime Minister Narendra Modi on Wednesday (Feb 7, 2018, New Delhi) approved change in the basis of classifying Micro, Small and Medium enterprises from ‘investment in plant & machinery/equipment’ to ‘annual turnover’.
This will encourage ease of doing business, make the norms of classification growth oriented and align them to the new tax regime revolving around GST (Goods & Services Tax).
Section 7 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 will accordingly be amended to define units producing goods and rendering services in terms of annual turnover as a micro enterprise will be defined as a unit where the annual turnover does not exceed Rs five crore; a small enterprise will be defined as a unit where the annual turnover is more than Rs five crore but does not exceed Rs 75 crore and a medium enterprise will be defined as a unit where the annual turnover is more than Rs 75 crore but does not exceed Rs 250 crore.
Read more at : http://bit.ly/2sKF0ot
- BUDGET 2018: KEY TAX PROPOSALS
- Taxation of long term capital gains
- Exemption for LTCG on transfer of listed equity shares, units of equity oriented mutual fund and units of business trust withdrawn w.e.f. April 01, 2018
- LTCG above INR 1 lakh on following transfers taxable at 10%:
- listed equity shares (STT paid on acquisition and transfer)
- units of equity oriented mutual fund (STT paid on transfer); and
- units of business trust (STT paid on transfer)
- Government to notify transactions exempted from condition of STT on acquisition
- Computation of gains in foreign currency and indexation benefits not available
- Cost of equity shares to be higher of:
- Actual cost of acquisition; and
- Lower of:
- FMV as on 31 January 2018; and
- Value of consideration received upon transfer
- Fund of Funds to be covered in definition of equity oriented mutual fund
- Funds where 90% of assets are invested in other fund and such fund in turn have invested minimum 90% in listed equity shares.
- Dividend distribution tax on deemed dividend
- Deemed dividend under section 2(22)(e) to now attract DDT in the hands of the payer @ 30% without grossing up (instead of withholding tax earlier)
- Income exempt in hands of recipient
- Section 115BBD not to apply to such income
- In case of amalgamated company, accumulated profits for deemed dividend to include accumulated profits of amalgamating company on the date of amalgamation.
- Startups and VCs
- Tax holiday benefit now available to eligible startups incorporated prior to 01 April 2021 (currently 01 April 2019)
- Definition of eligible business substituted to mean “innovation, development or improvement of products or processes or services or scalable business model with high potential of employment generation or wealth creation”
- Turnover should not exceed INR 25 crores for seven years from incorporation (earlier restriction was applicable only up to FY 2020-21).
Regulatory Updates - Annual Report – March 31, 2017
A. TAX UPDATES
- CBDT clarification on taxability of income/loss arising from transfer of unlisted shares – removal of exception for AIFs I and II
CBDT had clarified that where any income arises from transfer of unlisted shares the same would be considered under the head “Capital Gains” irrespective of the period of holding. The said clarification shall not apply in cases where:
1) the genuineness of transactions in unlisted shares itself is questionable; or
2) the transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or
3) the transfer of unlisted shares is made along with the control and management of underlying business.
Now, On 24 January 2017, the CBDT has clarified that exception (3) as mentioned above will not apply in the case of Category I and II AIF rationale being investment by such AIFs are predominantly in unlisted shares of start-ups / ventures and hence some level of control and management is required / exercised to safeguard the interest of the investors.
- Union Budget 2017
On February 1, 2017, the Finance Minister presented the Budget 2017 proposals. The thrust of this year’s Budget is to “Transform, Energise and Clean India”. In line with said agenda and with a view to build stable and stronger institutions in the financial sector, the Finance Minister announced key policy measures entailing the abolition of the Foreign Investment Promotion Board, proposal for further liberalisation of the foreign direct investment policy, categorisation of systemically important NBFCs as QIBs, trading and listing of Securitisation Receipts, etc.
On the tax side, the thrust has been inter alia, on stimulating growth, promoting affordable housing, simplifying tax administration etc. The key tax proposals listed by the Finance Minister include the following:
- Measures for stimulating growth (e.g., sunset provisions for interest income earned from Non convertible debentures (NCDs)/External Commercial Borrowings (ECBs) extended, lowering of corporate tax rates for MSME’s, etc.);
- Ease of doing business (e.g., restricting the scope of domestic transfer pricing, exempting investors in Category I and II FPIs etc.)
Further, the Finance Minister reiterated the commitment of the Government to implement the Goods and Service Tax as per schedule.
- Central Board of Direct Taxes (CBDT) clarification on applicability threshold for Place of effective management (POEM)
On 23 February 2017, the CBDT issued a circular clarifying that provisions of Sec 6(3)(ii) relating to POEM would not apply to companies having turnover or gross receipts less than Rs 50 crores during financial year.
- CBDT Requests for Stakeholder’s comments on Draft Notification to be issued under Section 10(38) of the Income-tax Act, 1961
On April 3, 2017, CBDT issued a press release requesting for stake-holders comments on draft notification to be issued under section 10(38) of the Income-tax Act, 1961. In order to curb the practice of declaring unaccounted income as exempt long term capital gain by entering into sham transactions, the Finance Act, 2017 amended the provisions of section 10 (38) of the Income- tax Act, 1961 to provide that exemption under this section for income arising on transfer of equity share acquired or on after 1st day of October, 2004 shall be available only if the acquisition of share is chargeable to STT.
The stakeholders were requested to submit their comments/suggestions on the draft notification by 11th April, 2017.
- CBDT issued draft rules for determining fair market value
On May 5, 2017, the Central Board of Direct Taxes (CBDT) had issued draft rules for determining the fair market value of unquoted equity shares for the purposes of section 56 (2)(x) and section 50CA of the Income-tax Act, 1961 and it had invited comments from the public on the same.
The draft notification takes into account the assets and liabilities of the company. In this regard, the valuation of assets should be as follows:
- FMV of jewellery, artistic work, shares & securities;
- Stamp duty value in case of immovable property; and
- Book value for the rest of the assets.
For the purposes of valuation of liabilities, the book value of liabilities after making specified adjustments (e.g. paid-up capital of equity shares, reserves and surplus balance, etc.) is to be considered.
On 12 July, 2017, the Central Board of Direct Taxes (CBDT) has issued final rules (Annexure 1) for the determination of fair market value of unquoted equity shares for the purposes of section 56(2)(x) and section 50CA of the Income-tax Act, 1961. The rules apply to all the transactions taxable during financial year(s) ending on or after 01 April, 2017. The final rules are broadly in line with the draft rules released by the CBDT in May this year.
- CBDT issues final Notification providing exemption of tax on long term capital gains where no STT has been paid on purchase
On June 5, 2017, CBDT issued final notification (Annexure 2) specifying a list of transactions which should be eligible for long term capital gain tax exemption on sale of such shares, even if no STT was paid at the time of its acquisition.
- India signs Multilateral Instrument (MLI)
On June 7, 2017, over 65 countries, including India sign historic MLI in Paris, that will amend thousands of bilateral tax treaties, with a view to implement the OECD BEPS Action Plans. Government of India vide its. Press Release on MLI signing stated it will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreement. Instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the Base Erosion and Profit Shifting (BEPS) measures.
Additionally, Organisation for Economic Co-operation and Development (OECD) and the Ministry of Finance and Economic Development of Mauritius vide a press release on 05 July, 2017 announced that Mauritius has become the 69th country to have signed the MLI. 23 Double Taxation Avoidance Agreements (tax treaties) (Covered Tax Agreements – [CTAs]) have been included by Mauritius in the provisional list of reservations and notification submitted to OECD. However, the India-Mauritius tax treaty has not been included in the provisional list submitted by Mauritius. The press release states that Mauritius will have a bilateral discussion with countries not covered by the MLI to implement the Base Erosion and Profit Shifting (BEPS) minimum standards latest by end of 2018.
B. REGULATORY UPDATES
- RBI allows issue on Convertible Notes
On 10 January 2017, the RBI has issued a notification wherein it has introduced a new instrument in case of startups. The notification has amended Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2000 (FEMA 20) to provide for the following key aspects:
- The definition of ‘Convertible Note’ (CNs) has been inserted in FEMA 20 to mean –
- an instrument issued by a startup company evidencing receipt of money initially as debt,
- which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company,
- within a period not exceeding five years from the date of issue of the CN,
- upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.
- A new Regulation 6D on Issue of CNs by startup companies has been inserted to state the following:
- A person resident outside India may purchase CNs issued by an Indian startup company for an amount of twenty-five lakh rupees or more in a single tranche.
A ‘startup company’ means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.
- Government approval to be obtained in cases where the startup company is engaged in a sector where foreign investment requires Government approval.
- Consideration on issue of CNs to be received by inward remittance through banking channels or by debit to the NRE/ FCNR (B)/ Escrow account.
Escrow account to be closed immediately after the requirements are completed or within six months, whichever is earlier.
- NRIs are permitted to invest in CNs on non-repatriation basis in compliance with Schedule 4 of FEMA 20.
- Acquisition or transfer of CNs to be in accordance with the pricing guidelines prescribed by RBI. Prior approval from the Government to be obtained for such transfers in case the startup company is engaged in a sector where foreign investment requires Government approval.
- Reporting to be done by the startup company as prescribed by RBI
- SEBI (Foreign Portfolio Investors) Regulations, 2016 (FPI Regulations)
On 27 February 2017, FPI Regulations, 2014, have been amended to include the following two new categories of permissible investments:
- Unlisted non-convertible debentures/ bonds issued by an Indian company subject to guidelines issued by Ministry of Corporate Affairs, Government of India from time-to-time.
- Securitised debt instruments, including- (i) any certificate or instrument issued by a special purpose vehicle set up for securitisation of asset/s with banks, financial institutions or non-banking financial institutions as originators; and (ii) any certificate or instrument issued and listed in terms of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008.
- Reserve Bank of India (RBI) amends Foreign Direct Investment (FDI) norms in Limited Liability Partnership (LLP)
On March 3, 2017, RBI issued a notification amending norms for FDI in LLPs.
FDI in LLPs is permitted, subject to the following conditions:
- FDI is permitted under the automatic route in LLPs operating in sectors / activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance conditions. For ascertaining such sectors, reference shall be made to Annex B to Schedule 1 of these Regulations
- An Indian company or an LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP engaged in sectors in which 100% FDI is allowed under the automatic route and there are no FDI linked performance conditions. Onus shall be on the Indian company / LLP accepting downstream investment to ensure compliance with the above conditions.
- FDI in LLP is subject to the compliance of the conditions of Limited Liability Partnership Act, 2008.
- A company having foreign investment can be converted into an LLP under the automatic route only if it is engaged in a sector where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions.
Reporting of foreign investment in LLPs and disinvestment/transfer of capital contribution or profit shares between a resident and a non-resident may be made in a manner as prescribed by Reserve Bank of India from time to time.
Regulatory Updates - Quarterly Report – December 31, 2016
A. TAX UPDATES
1) Change in Corporate Tax Rates
- Corporate Tax Rate reduced to 25% for existing domestic companies with turnover or gross receipts in FY 2015-16 =< INR 50 crores;
2) Scope of Tax on Dividend in the hands of recipient
- Existing tax on dividend in excess of INR 10 lakhs under section 115BBDA to be on all residents except domestic company and certain funds, trusts, institutions, etc.;
3) Tax deduction to Start-ups Extended Period
- Existing deduction under section 80-IAC by eligible start-ups can be claimed for any 3 consecutive years out of 7 years (as against existing period of 5 years) beginning from the year in which such eligible start-up is incorporated;
4) Carry forward and set off of loss in case of Eligible Start-ups
In case of eligible start-ups, the loss incurred in any year prior to the previous year shall be carried forward and set off against the income of previous year, if all the shareholders of such company which held shares carrying voting power on the last day of the year or years in which the loss was incurred:
- continue to hold those shares on the last day of such previous year; and
- such loss incurred during the period of seven years beginning from the year in which such company is incorporated;
5) Carry forward of MAT and AMT credit – Extended period and restriction on carry forward
- Minimum Alternate Tax (‘MAT’) and Alternate Minimum Tax (‘AMT’) credit can be carried forward up to 15th assessment years immediately succeeding the assessment years in which such tax credit becomes allowable;
- MAT/ AMT credit not to be allowed to be carried forward to subsequent year to the extent such credit relates to the difference between the amount of foreign tax credit (FTC) allowed against MAT/ AMT and FTC allowable against the tax computed under regular provisions of Act other than the provisions relating to MAT/AMT.
6) Indirect transfer provisions- clarification
- Explanation 5 to section 9(1)(i) not apply to any asset or capital asset mentioned therein being investment held by non-resident, directly or indirectly, in a Foreign Institutional Investor registered as Category-I or Category II Foreign Portfolio Investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992;
(effective from AY 2012-13 and subsequent years)
7) Fee on delay in filing of Return of Income (Section 234F – newly inserted)
For AY 2018-19 and onwards in case, return is not filed within the due dates as per Section 139(1), following fee shall be levied:
- INR 5,000 if return is furnished on or before 31st December of AY;
- INR 10,000 in other cases;
- Aforesaid fee restricted to INR 1,000 in case total income upto INR 5 Lakhs;
- Existing penalty under section 271 F for failure to furnish return dispensed with;
8 ) Exemption of long term capital gains tax u/s 10(38)
- Exemption for income arising on transfer of equity shares to be available only if the acquisition of share is chargeable to Securities Transactions Tax under Chapter VII of the Finance (No 2) Act, 2004;
- However, to protect the exemption for genuine cases, the aforesaid shall not apply on acquisitions of shares to be notified by Central Government in this behalf;
9) Fair Market Value deemed to be the consideration in certain cases
Where consideration for transfer of share of a company (other than quoted share) is less than the Fair Market Value (FMV) of such share determined in accordance with the prescribed manner, the FMV shall be deemed to be the full value of consideration for the purposes of computing capital gains income;
B. REGULATORY UPDATES
1) SEBI Board Meeting
On 23 November 2016, the SEBI held its Board Meeting wherein the following decisions were taken:
- Amend SEBI (Alternative Investment Funds) Regulations, 2012 with respect to ‘Angel Funds’ namely:
- Upper limit for number of angel investors increased from forty nine to two hundred
- Definition of start-up for Angel Funds investments be similar to definition of Department of Industrial Policy and Promotion (DIPP) as given in their startup policy
- Minimum investment in the venture capital undertaking reduced from fifty lakhs to twenty five lakhs
- Lock in requirements of investments reduced from three years to one year
- allowed to invest in overseas venture capital undertakings upto 25% of their investible corpus in line with other Alternative Investment Funds (AIF)
- Amend SEBI (FPI) Regulations, 2014 to allow FPIs to invest in unlisted non-convertible debentures and securitized debt instruments.
- between private equity funds and promoters, directors and key management personnel of listed companies to incentivize the latter.
2) External Commercial Borrowings (ECB) for Start-ups
On 4 October 2016, the Reserve Bank of India (‘RBI’) issued statement on developmental and regulatory policies whereby ECBs were permitted up to USD 3 million in start-ups. Guidelines on the same have been issued on 27 October 2016.
3) RBI Circular on Investment by FVCI
On 20 October 2016, RBI issued an A.P. (DIR Series) Circular in continuation to the FEMA Notification 363/2016 dated 28 April 2016. Two important clarifications in the A.P. (DIR Series) Circular are as follows:
- Downstream investments by a VCF or a Cat-I AIF, which has received investment from FVCI, shall have to comply with the provisions for downstream investment as laid down in Schedule 11 of the Principal Regulations.
- An entity receiving investment directly from a registered FVCI will be required to report the investment, in form FCGPR.
4) Notification of various sections under the Companies Act, 2013
The Ministry of Corporate Affairs has notified the much-awaited sections in the Companies Act, 2013 dealing with amalgamation, compromise, arrangement, liquidation and winding up. The notified sections will be effective from 15 December, 2016, and are likely to bring a paradigm shift in the manner in which these important restructurings are implemented. Going forward, the National Company Law Tribunal (NCLT) will have jurisdiction over these matters, which until now were within the jurisdiction of the High Court. NCLT has been setup as a specialised body to deal with Company Law matters.
Regulatory Updates - Half-yearly Report – September 30, 2016
A. TAX UPDATES
1) Central Board of Direct Taxes (CBDT) notifies final Buy Back Distribution tax rules
- The buy-back of shares (both equity / preference shares) by an unlisted company is subject to buy-back distribution tax (‘Buyback Tax’) at the rate of 23.072% in the hands of the said company which is calculated as difference between (i) the buy-back consideration and (ii) the amount received by the Company for issue of such shares.
- The manner of determining the “Amount received by the Company” under various possible scenarios has been prescribed by the Ministry of Finance by inserting Rule 40BB (‘the Rule’) vide Notification dated October 17, 2016 (attached as Annexure 2). The Rule is effective from 1 June 2016.
- In case of a buyback which involves tender of original shares as well as bonus shares by a shareholder (or buyback of shares subscribed to at different prices), the provisions of the IT Act read with the Rules are not explicit whether the Buyback Tax ought to be calculated qua each shareholder or qua each share. Say in a bonus situation, this issue becomes relevant where the buyback price is less than the original subscription price per share, thereby, buyback of original shares could result in a loss whereas buyback of bonus shares (cost deemed to be nil) will result in an income (in a case where Buyback Tax is to be computed on a per share basis, the loss on original shares cannot be set off against the positive difference on buyback of bonus shares).
- However, a good view appears to be that Buyback Tax ought to be calculated on the aggregate consideration qua each shareholder and not qua each share. Accordingly, it may be argued that Buyback Tax may be calculated on the difference between the aggregate buyback consideration on all shares and original subscription consideration (zero being cost of bonus shares).
2) Frequently Asked Questions (FAQs) on Goods and Services Tax (GST)
On 3 August 2016, Rajya Sabha, the Upper House of Indian Parliament passed the Constitution Amendment Bill paving the way for introduction of GST. Separately, the Government of India has released a set of FAQ on the GST.
3) Constitution Amendment Bill for Goods and Service Tax (GST Bill)
On 8 September 2016, the President of India has given his assent to the Goods and Services Tax (GST) Bill, paving the way for the formation of the GST Council. Thereafter on 12 September 2016, the Union Cabinet, under the chairmanship of the Prime Minister, approved the setting up of the GST Council and its secretariat.
B. REGULATORY UPDATES
1) FAQs on Alternative Investment Fund (AIF)
2) Scheme for grant of Permanent Residency Status (PRS) to foreign investors
On 31 August 2016, the Union Cabinet has approved the scheme for grant of PRS to foreign investors subject to specified conditions. PRS will serve as a multiple entry visa without any stay stipulation, and will provide exemption from the Foreigners Regional Registration Office (FRRO) registration.
3) Amendment to exchange control norms for foreign investment in financial service sector
On 9 September 2016, the Foreign Exchange Department issued a notification in the Official gazette of India to amend exchange control norms for foreign investment in financial service sector on the following key aspects:
- Purely from an exchange control standpoint, FDI upto 100% is allowed under the automatic route in financial services activities regulated by financial sector regulators viz. RBI, SEBI, IRDA, PFRDA, NHB or any other notified regulator [earlier, FDI under the automatic route, was permitted in 18 eligible FS activities enumerated in the FDI regulations – this list of 18 eligible activities is deleted].
- Minimum capitalisation norms as mandated under the FDI policy have been eliminated.
4) Consultation Paper for “Amendments/ clarifications to the SEBI (Investment Advisers) Regulations, 2013
SEBI notified the SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) on January 21, 2013. Under IA Regulations, exemptions from registration as an investment adviser were granted to certain entities who were providing investment advice as an incidental activity to their primary activity.
In order to specify uniform standards and to address the gaps or overlaps in legal or regulatory standards governing all the intermediaries/persons engaged in providing investment advisory services, SEBI Board has approved bringing out a consultation paper proposing certain changes and clarifications in the IA Regulations.
5) Consolidated Foreign Direct Investment Policy Circular of 2016 dated June 07, 2016
Government of India issued consolidated FDI Policy of 2016. The present consolidation subsumes and supersedes all press notes/press releases/circulars issued by DIPP, which were in force as on June 06,2016 and reflect the FDI Policy as on June 07, 2016. Following amendments have been made in the consolidated FDI Policy Circular of 2016:i. Some definitions have been amended and some new definitions have been added to the FDI Policy of 2016. Amended and new definitions are as under:
a) Definition of “Capital” has been amended and warrants and partly paid shares have been included in definition of capital. In erstwhile Policy of 2015, warrants and partly paid shares could be issued only under government approval route. The revised definition is as under:
‘Capital’ means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily &mandatorily convertible debentures and warrants.
Note: The equity shares issued in accordance with the provisions of the Companies Act, as applicable, shall include equity shares that have been partly paid. Preference shares and convertible debentures shall be required to be fully paid, and should be mandatorily and fully convertible. Further, ‘warrant’ includes Share Warrant issued by an Indian Company in accordance to provisions of the Companies Act, as applicable.
b) New definition of “Employees Stock Option” is included. It reads as under:
“Employees’ Stock Option” means the option given to the directors, officers or employees of a company or of its holding company or joint venture or wholly owned overseas subsidiary/ subsidiaries, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.
c) New definition of “Investment Vehicle” is included in FDI Policy of 2016. It reads as under: ‘Investment Vehicle’ shall mean an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose and shall include Real Estate Investment Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014 and Alternative Investment Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012.
d) Definition of “Non-Resident Indian” is amended and the new definition reads as under:
‘Non-Resident Indian’ (NRI) means an individual resident outside India who is a citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955. ‘Person of Indian Origin’ cardholders registered as such under Notification No. 26011/4/98 F.I. dated 19.8.2002 issued by the Central Government are deemed to be ‘Overseas Citizen of India’ cardholders.
e) Definition of company “owned” by resident India citizens is amended and Limited Liability Partnership is also included in the amended definition. In terms of amended definition a Limited Liability Partnership will be considered as owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/or entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian
f) New definition of “Sweat Equity Shares” is included in FDI Policy of 2016. It reads as under:
‘Sweat Equity Shares’ means such equity shares as issued by a company to its directors or employees at a discount or for consideration other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.
g) New definition of “unit” is included in FDI Policy of 2016. It reads as under:
‘Unit’ shall mean beneficial interest of an investor in the Investment Vehicle and shall include shares or partnership interests.
h) Definition of “Venture Capital Fund” is amended. The revised definition reads as under:
‘Venture Capital Fund’ (VCF) means an Alternative Investment Fund which invests primarily in unlisted securities of startups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include an angel fund as defined under Chapter III-A of SEBI (AIF) Regulations, 2012.
i) Following shall be treated as eligible investors:
- A company, trust and partnership firm incorporated outside India and owned and controlled by NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy.
- A Non-Resident Indian may subscribe to National Pension System governed and administered by Pension Fund Regulatory and Development Authority (PFRDA), provided such subscriptions are made through normal banking channels and the person is eligible to invest as per the provisions of the PFRDA.
Regulatory Updates - Annual Report – March 31, 2016
A. TAX UPDATES
1) Finance Act, 2016
- Distribution of non-business income by an Alternative Investment Fund (‘AIF) to a non-resident would be subject to withholding tax as per rates in force (beneficial tax treaty rate should be available). Further, it has been clarified that no withholding shall be made in respect of income that is not chargeable to tax under the Income-tax Act, 1961 (‘the Act’) where the payee is a non-resident.
- Beneficial tax rate of 10% extended to long term capital gains arising to a non-resident on transfer of shares of private company.
- Minimum Alternate Tax (‘MAT’) not applicable to foreign companies (with retrospective effect from 1st April 2001) subject to conditions
- Period of holding to qualify as long term capital asset for unlisted shares reduced to 24 months from 36 months
- Tax incentives for eligible start-ups, as mentioned below:
- A startup shall have the benefit of lower rate of tax i.e. 25% of the total income if the following conditions are satisfied:
- the company has been set-up and registered on or after the 1st day of March, 2016
- the company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and
- the total income of the company has been computed without taking the benefit of profit linked deduction, without set-off and carry forward of losses of earlier years pertaining to these profit linked deductions and depreciation.
- Tax holiday for eligible startup companies for 3 consecutive years out of 5 years from their incorporation, subject to certain conditions. However MAT would be applicable.
- Capital gains arising to an individuals/ HUF on transfer of residential property to be exempt from tax if invested in an eligible start-ups subject, to conditions
- A startup shall have the benefit of lower rate of tax i.e. 25% of the total income if the following conditions are satisfied:
- Scope for the applicability of buyback distribution tax widened. Earlier, it was restricted to buy back under section 77A of Companies Act 1956 now extended to all buy back of unlisted shares conducted as per the provisions of law relating to companies
- Income by way of dividend from a domestic company received by an individual, HUF or firm, resident in India, in excess of Rs. 10 lakhs shall be taxable at the rate of 10%.
2) Period of holding of debentures before conversion to be considered- Rule 8AA notified
The Central Board of Direct Taxes (‘CBDT’) has, vide an amendment to the Income-tax Rules, 1962 (‘the Rules’), notified Rule 8AA. As per the new Rule, the period for which bond, debenture, debenture-stock or deposit certificate, was held by the taxpayer prior to conversion shall be considered for determining the period of holding of shares or debentures acquired upon conversion.
3) Income/loss arising from transfer of unlisted shares to be deemed capital gains
The CBDT vide its instruction has provided that income from transfer of unlisted shares (for which no formal market exists for trading) would be treated as ‘Capital Gain’ irrespective of period of holding. The above would not be necessarily applied in the following cases where the Tax Office would take an appropriate view:
- genuineness of transactions in unlisted shares itself is questionable; or
- transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or
- transfer of unlisted shares is made along with the control and management of underlying business.
4) Protocol for amendment of India-Mauritius tax treaty signed
On 10th May 2016, Governments of India and Mauritius signed a Protocol for amending the treaty dated 24 August, 1982, between India and Mauritius. The key features of the Protocol are as follows:
- Source-based taxation of capital gains on shares:With this Protocol, India gets taxation rights on capital gains arising from alienation of shares acquired on or after 1st April, 2017 in a company resident in India with effect from financial year 2017-18, while simultaneously protection to investments in shares acquired before 1st April, 2017 has also been provided. Further, in respect of capital gains arising (on shares acquired post 31st March, 2017) during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.
- Source-based taxation of interest income:From 1st April, 2017, interest arising in India and paid to a resident of Mauritius should be subject to tax in India at rate of 7.5% of the gross amount of interest if the beneficial owner of the interest is a resident of Mauritius.
- Taxation of Fee for Technical service:From 1st April, 2017, fees for technical services arising in India and paid to a resident of Mauritius should be taxable in India at the rate of 10% of the gross amount of fees for technical services if the beneficial owner of the fees for technical services is a resident of Mauritius
- Taxation of any Other IncomeFrom 1st April, 2017, as per the revised treaty, income not expressly dealt with in any other provision of the treaty may also be taxed in the country in which the income arises.
5) CBDT : Resident persons investing in start-ups not subject to taxation u/s 56(2)(viib)
The CBDT vide its notification has provided that resident persons investing in start-ups will not be subject to provisions of section 56(2)(viib) i.e. tax on excess consideration received upon issue of shares over its fair market value as Income from Other Sources in the hands of the issuing company.
6) GAAR – grandfathering of investments made prior to 1 April 2017
The CBDT has, vide its notification , amended Rule 10U of the Rules. As per the said Rules, the provisions of Chapter X-A (dealing with GAAR) shall not apply to any income accruing or arising to or deemed to accrue or arise to or received or deemed to be received by any person from transfer of investments made before 1 April 2017.
7) CBDT: Notifies rules relaxing TDS u/s 206AA; Payee to furnish Tax Residency Certificate (‘TRC’), Tax identification number
On 24 June 2016, the CBDT issued a notification and has inserted new Rule 37BC providing for details to be submitted by a non-resident payee for relaxation from deduction of tax at higher rate u/s 206AA (applicable when deductee PAN not available); New Rule provides that a non-resident deductee shall not be subject to higher tax u/s 206AA in respect of payments for interest, royalty, FTS, and transfer of capital assets , where the deductee furnishes ‘specified details/documents’; These include TRC and Tax Identification Number (‘TIN’) or unique identification number in the country of residence alongwith name and address.
- Credit shall also be allowed in respect of foreign disputed tax subject to compliance with conditions;
- To claim the FTC, taxpayer must furnish a statement of income from the overseas country offered for tax and details of foreign tax in prescribed Form.
B. REGULATORY UPDATES
1) Changes in key FDI Sectors- There are 10 sectors in which FDI norms has been relaxed.
2) Change in Foreign Exchange Management Act (‘FEMA’) Regulation 20 (FDI Regulations)
i) New revised Schedule 11 introduced replacing the existing Schedule 11 pertaining to investment by a person resident outside India in an Investment vehicle (includes AIF). Key change in the revised schedule 11 is that the ownership and control of an LLP is to be determined as defined in the FDI policy and the SEBI no longer has the power to determine whether an LLP is foreign owned and controlled in case LLP is acting as sponsor or manager or investment manager to an Investment Vehicle.
- FDI Policy defines the ‘owned and controlled’ of an LLP as follows:
- Owned : An LLP is considered as ‘owned’ by resident Indian citizens if more than 50% of the investment in such an LLP in contributed by resident Indian citizens and/ or entities that are ultimately owned and controlled by resident Indian citizens; and such resident Indian citizens and entities have majority of the profit share.
- Control: Right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of the LLP.
ii) New revised Schedule 4 introduced replacing the existing Schedule 4 pertaining to acquisition of securities or units by a Non-resident Indian on Non-repatriation basis
The key changes to revised Schedule 4 is as under:
- A Non-resident Indian (NRI), including a company, a trust and a partnership firm incorporated outside India and owned and controlled by non-resident Indians, may acquire and hold, on non-repatriation basis, equity shares, convertible preference shares, convertible debenture, warrants or units, which will be deemed to be domestic investment at par with the investment made by residents. Without loss of generality, it is stated that
- An NRI may acquire, on non-repatriation basis, any security issued by a company without any limit either on the stock exchange or outside it.
- An NRI may invest, on non-repartition basis, in units issued by an investment vehicle without any limit, either on the stock exchange or outside it.
- An NRI may contribute, on non-repatriation basis, to the capital of a partnership firm, a proprietary firm or a Limited Liability Partnership without any limit.
- The sale/maturity proceeds (net of applicable taxes) of the securities or units acquired under this Schedule shall be credited only to NRO account irrespective of the type of account from which the considerations for acquisition were paid.
iii) New revised Schedule 6 introduced replacing the existing schedule 6 for Foreign Venture Capital Investor (‘FVCI’) investment.
The key changes to revised Schedule 6 is as under:
- FVCI permitted to invest in units of a Venture Capital Fund (‘VCF’) or a Category I Alternative Investment Fund (‘AIF’) or units of a scheme or fund set up by VCF or Category I AIF;
- FVCI permitted to invest in equity / equity linked instruments / debt instruments issued by a start-up irrespective of the sector in which it is engaged. The definition of ‘start-up’ has been included in regulation 2;
- It has been specifically clarified that FVCI shall not require prior RBI approval for any investments made under Schedule 6;
- List of 10 sectors in which FVCI is allowed to invest has been added as Annexure to Schedule 6 and
- FVCI may acquire by purchase or otherwise, from, or transfer, by sale or otherwise to any person resident or non-resident, any security / instrument it is allowed to invest in at a price mutually acceptable to the buyer and the seller/ issuer. FVCI may also receive proceeds of liquidation of VCFs or of Cat-I AIFs or of schemes / funds set up by VCFs or Cat-I AIFs. This will be without any prior RBI approval.
3) Cross border transfer of shares of an Indian company permitted on deferred basis
On 20th May 2016, the RBI issued notification to permit transfer of shares on a deferred basis, subject to compliance with following conditions:
- Maximum 25% of the total consideration can be paid by the buyer on a deferred basis
- The total consideration paid for shares must be compliant with applicable pricing guidelines
- The parties can enter into an escrow arrangement for the consideration payable on deferred basis
- If the total consideration is paid, the seller can furnish an indemnity for the amount of consideration payable on deferred basis
- The consideration payable on deferred basis should be paid within a period of 18 months from date of transfer agreement. Also, the escrow arrangement / period of indemnity cannot exceed 18 months.
The above conditions need to be complied with for transfer of shares on a deferred basis between a resident buyer and a non-resident seller, or vice versa.
4) Companies (Share Capital and Debentures) Third Amendment Rules, 2016
Amendments in relation to startup companies:
- The existing rules restricted companies from issuing sweat equity shares in excess of 25% of the paid up capital at any time and had limitation in terms of the issuance of sweat equity shares per year to 15% of the paid up capital or issue value of Rs.5 crores, whichever is higher. The amendment expressly allows notified start-ups to issue sweat equity shares not exceeding 50% of its paid up capital up to 5 years from the date of its incorporation or registration. However, the yearly limits of 15% of paid up capital or Rs.5 crores, whichever is higher has to be complied with.
- The existing rules restricted issuance of ESOP to employees who are (i) promoters or belong to the promoter group and (ii) director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company. The amendment allows the notified start-ups to issue shares to these classes of employees upto 5 years from the date of incorporation or registration.
Other relevant amendments:
- The existing rules mandated that the securities allotted by way of a preferential issue to be fully paid up at the time of their allotment. Per the amendment, preferential issue of partly paid securities is now permitted.
- The existing rules mandated upfront determination of the price of resultant shares on the basis of a valuation report in case of convertible securities offered on a preferential basis. The amendment permits the issuer to fix the conversion price upfront (at time of issue) or fixing the price 30 days in advance to date when the holder of convertible security becomes entitled to apply for shares based on a valuation report given by the registered valuer not earlier than sixty days of the date when the holder of convertible security becomes entitled to apply for shares. However, the issuer shall take a decision on such fixation of the conversion price at the time of offer of convertible security itself and make such disclosure in the explanatory statement annexed to the notice of the general meeting.
- The existing provisions permitted creation of charge or mortgage as security for debentures issued only on the assets of the issuing company. The amendment allows companies to create charge on the assets of their subsidiaries or holding or associates also in addition to their own assets.
5) Companies (Acceptance of Deposits) Amendment Rules 2016
On 29 June 2016, the Ministry of Corporate Affairs has notified Companies (Acceptance of Deposits) Amendment Rules 2016. The key amendments are:
The Rule 2 of the Deposit Rules has been amended to provide as under:
- Any amount received by the company under any collective investment scheme in compliance with SEBI regulations shall not be regarded as deposit;
- Any amount received by a company from AIF, Domestic Venture Capital Fund (‘DVCF’) and Mutual Funds registered with SEBI in accordance with its regulations shall not be regarded as deposit;
- An amount of INR 25 lakh or more received by a start-up company by way of a convertible note (convertible into equity shares or repayable within a period not exceeding 5 years from the date of issue) in single tranche from a person shall not be regarded as deposit;
- Any amount raised by inter-alia issue of bonds or debentures compulsorily convertible into shares of the company within 10 years shall not be regarded as deposit (earlier, it was convertible into shares within 5 years)
On 17 February 2016, The Department of Industrial Policy and Promotion (DIPP) has issued a notification providing a definition of ‘startup’ to bring uniformity in identifying enterprises which can take benefits of the initiatives taken by various Ministries of the Government of India.
The Notification also states the identified startups as per the definition shall obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification to obtain benefits available to startups.
Regulatory Updates - Quarterly Report – December 31, 2015
A) FOREIGN INVESTMENT IN AIF (Notification No. FEMA.355/2015-RB)
Non-residents including FPIs and NRIs permitted to invest in units of inter-alia, SEBI registered AIFs under the Automatic Route
Downstream investment by AIF to be regarded as foreign investment if neither Sponsor nor Investment Manager of the said AIF is Indian “owned and controlled” as defined under the FEMA Inbound Regulations:
- Amount of foreign investment in corpus of AIF not relevant for determining whether downstream investment by AIF is foreign investment
In case Sponsor or Investment Manager is organized in a form other than a company (i.e. LLP, etc), SEBI to determine whether the Sponsor or Investment Manager is foreign owned and controlled
- Subsequent Press Note by DIPP specifically defines “control” and “ownership” in relation to LLP (refer Annexure)
- Dichotomy between RBI Notification permitting FDI in AIF and Press Note 12 (2015 series) defining the “control” and “ownership” in relation to LLP.
Downstream by AIF having foreign investment to conform to sectoralcaps and conditionalities.
AIF having foreign investment to make such report and in such format to RBI or SEBI as may be prescribed.
No Government approval required for investment in automatic route sectors by way of swap of shares
B) ACTION PLAN: STARTUP INDIA-STANDUP INDIA
Compliance Regime based on Self- Certification: To reduce the regulatory burden on Startups thereby allowing them to focus on their core business and keep compliance cost low.
Rolling-out of Mobile App and Portal: Governments shall introduce a Mobile App to provide on-the-go accessibility.
Legal Support and Fast – tracking Patent Examinations at Lower Costs.
Faster Exit for Startups: To make it easier for Startups to wind up operations.
Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000crore: The Fund will be in the nature if Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds and Life Insurance Corporation (LIC) shall be a co-investor in the Fund of Funds.
Credit Guarantee Fund for Startups: To catalyse entrepreneurship by providing credit to innovators across all sections of society.
Tax Exemption on Capital Gains: To promote investments into Startups by mobilising the capital gains arising from sale of capital assets.
This exceptional initiative that shall make investors to invest in start-ups rather than capital gains bonds or house property. This exemption must allow capital gains to be invested in SEBI registered AIFs, Fund of Funds, and angel investments in the start-ups validated by Inter-Ministerial Board. A clarification in the notification on its scope is essential.
Tax Exemption for Startups for 3 years: To promote the growth of Startups and address working capital requirements.
This shall give a huge relief on working capital blocked in TDS for the start-ups. In reality our start-up are loss-making in the initial 3-7 years as they are chasing growth, but we hope the notification shall clarify that the clients of start-ups shall be exempted from deduction of TDS on the invoices. A saving of cash flow that today gets blocked in TDS for 12-18 months shall enable them to run faster.
Tax Exemption on Investments above Fair Market Value (Start-up Tax (Section 56(2)(vii b)): To encourage seed-capital investment in Startups.
This is only an incremental step of exempting the incubation enters in addition to venture capital funds. The CBDT needs to exempt all angel investments for the start-ups to raise funds freely from angels.
SEBI had constituted a standing committee ‘Alternative Investment Policy Advisory Committee’ (AIPAC) under the chairmanship of Shri. N. R. Narayan Murthy in March 2015. AIPAC has submitted its first report to SEBI with various recommendations (the same is attached). Public comments on the said report are invited by February 10, 2016.
We have summarized below the key recommendations made under the said report:
- Clarity on AIF taxation:
- To either abolish the TDS requirement by AIF on distribution or clarify:
- No TDS on exempt income/ exempt investors/ accredited investors.
- Clarity on TDS by AIFs on net income chargeable to tax in hands of investors as against gross income.
- Income of AIF to be characterized as investment income and not business income.
- Losses of AIF to be available for set off by investors.
- Non-resident investors to be subject to tax as per rates in force; If subject to Section 195 of the Income-tax Act, 1961 (‘Act’), should be exempt from Section 194LBB of the Act.
- Non-resident investors to have the option to obtain a NIL/ lower TDS certificate under Section 197 of the Act.
- To either abolish the TDS requirement by AIF on distribution or clarify:
- Exemption to AIF and portfolio companies from applicability of Sections 56(2)(viia) and 56(2)(viib) of the Act
- Exemption from indirect transfer provisions on gains from transfer of shares or interest of the holding companies/entities above eligible investment funds (EIFs) investing in India
- Liberalisation of Safe Harbour norms
- Introduction of Securities Transaction Tax (‘STT’) on all gross distributions of AIFs and elimination of tax withholding/ other taxes in hands of investors.
- STT to be levied on investment/ purchase and sale of AIF units.
- Other recommendations:
- Investors in angel funds/ social venture funds to get incentive in the form of deduction of upto 50% of investment amount
- Allow management fees to be capitalized as ‘cost of improvement’ or allow standard deduction of 3% of cost of acquisition
- Taxation upon ‘sale’ and reduced taxation rates for unlisted shares acquired via ESOPs/employee incentive schemes
- Clarify tax rate of 10% on LTCG on transfer of private company shares
- To align the treatment of capital gains for listed and unlisted companies, both on holding period and tax breaks
- CCPS conversion to be non-taxable event and period of holding to be from date of investment and not date of conversion
- AIFs to be permissible investments for charitable and religious trusts
- Service tax abatement on services fees in respect of funds raised by an AIF from overseas investors
2. FDI in AIF regulation:
- Investment by NRIs from NRO accounts to be permissible
- Permission to LLPs to act as sponsor/and or managers, etc.
- To exclude AIFs with 100% domestic investments with foreign owned or controlled Sponsor and /Manager from foreign investment conditions
3. Reforms to unlock domestic capital pool
- Pension Funds and Charitable Trusts to be permitted to invest in AIFs
- For Insurance cos:
- Investment limits in AIFs to be increased
- to simplify approval process
- For Banks – increase investment limits and lower risk weightage attached to investments in AIFs
- Accredited investors satisfying prescribed conditions to be eligible for investment in AIFs
- Registrar of Companies to permit LLP to carry on investing activities, i.e. register as AIF
- Single Family Offices to be allowed to register specified investment vehicles as QIBs; Family Offices and dedicated state funded vehicles be eligible for registration as AIFs
- FVCI – sectoral restrictions to be liberalized; single stage approval process at designated depository participant level – akin to FPI
- IPO – Allow all AIFs to get an allocation in an IPO; AIFs like Mutual Funds to be allowed to anchor an IPO, even if the lead manager is a group company
- Amendments to AIF regulations for Angel Funds providing relaxation of minimum investment period, minimum investment amount, maximum no. of investors, permission to invest in overseas VCUs.
4. Reforming AIF Regulatory Regime: To regulate the Fund manager instead of the Fund
- To repeal PMS, AIF and IA regulations and introduce a new “SEBI (Alternative Investment Fund Managers) Regulations” (‘AIFM Regulations’)
- to have specific capitalization requirements, which could provide for sub-categories based on the nature of the AIFM’s business (i.e. discretionary, non-discretionary, customized or collective investments)
- Angel Funds/ network and social venture funds to be a separate category of AIF
- Amendments in AIF Regulation
- The definition of VCF and Category I AIF to be expanded to growth stage investee companies
- Amendments in AIF Regulation
Overseas investment by AIFs: Limits to be extended to (a) 25% of the corpus of an AIF (currently provided by SEBI) or (b) 50% of the offshore component of the corpus of AIF, whichever is higher; SEBI’s requirement of ‘Indian connection’ to be liberalized.
Regulatory Updates - Half-Yearly Report – September 30, 2015
A) VCFs like YourNest permitted to invest upto 25% vs 10% in offshore startups.
Guidelines on overseas investments for AIFs/VCFs circular dated October 1, 2015 (CIR/IMD/DF/7/2015) issued by SEBI as under:
Key changes with respect to overseas investment by VCFs
- VCFs are, from the date of this circular, permitted to invest in Offshore Venture Capital Undertakings which have an India connection upto 25% of the investible funds of the VCF;
- VCFs shall not invest in Joint venture/ Wholly Owned Subsidiary while making overseas investments;
- VCFs shall adhere to FEMA Regulations and other guidelines specified by RBI from time to time with respect to any structure which involves Foreign Direct Investment (FDI) under Overseas Direct Investment (ODI) route;
- VCFs shall comply with all requirements under RBI guidelines on opening of branches/subsidiaries/ Joint venture/ undertaking investment abroad by NBFCs, where more than 50% of the funds of the VCF has been contributed by a single NBFC; and
- The VCFs desirous of making investment in offshore venture capital undertaking shall submit their proposal for investment to SEBI for its prior approval.
B) Fund Tenure period to start from close date:
Guidelines on other issues/clarification circular dated October 1, 2015 (CIR/IMD/DF/7/2015) issued by SEBI as under:
Tenure of any scheme of the AIF shall be calculated from the date of final closing of the scheme (fund launched with effect from 1st October, 2015).
C) Startup Act in Works To Crank up Innovation: Govt plans to simplify rules to unleash entrepreneurial energies & create jobs:(ET, November 3, 2015)
The Narendra Modi government wants to provide a powerful launched for start-ups by drastically simplifying the rules and ensuring that innovators are able to take advantage of such an enabling environment, thus unleashing entrepreneurial energies and creating jobs.
At the heart of the initiative is distilling the cumbersome process of compliances under 22 different laws into a two-page Startup Act, a senior government official told. The Department of Industrial Policy and Promotion (DIPP) is looking to turn India into a startup haven.
On the Agenda of Startup Act:
- One simple Start Up Act replacing multiple laws.
- Focus on reducing compliances & speed up setting of businesses.
- Limit the law to “innovative” product/technology service
- Idea should push manufacturing and generate jobs.
D) New Bankruptcy Bill to Speed up Shutdown of Cost (ET, November 5, 2015):
The Bankruptcy Law reforms commission headed by former secretary TK Viswanathan has proposed insolvency resolution within 180 days and a new regulator oversee the process. It’s also laid down clear and speedy systems for early identification of financial distress and revival of companies.
E) Relatives excluded from definition of “Deposits”
MCA amended the Companies (Acceptance of Deposits) Rules, 2014 on 15th September, 2015 that:
- The definition of “deposit” has been amended to exclude any amount received from a relative of the director of the private company, provided such relative furnishes a declaration that such amount is not out of funds acquired by him by borrowing or accepting loans/deposit from others;
- The company shall disclose the details of money so accepted in the Board’s report.
F) Firms can claim Income-Tax deduction on expenses for IPR acquisition
The Supreme Court on 28th October 2015 (Mangalore Ganesh Beedi Works vs CIT) has held that a firm can claim deduction or depreciation in income tax on expenses incurred for acquisition of intellectual property, such as patent and trademarks rights, copyrights and know-how, as they are capital in nature.
Regulatory Updates - Annual Report – March 31, 2015
GAAR: Applicability deferred to FY 2017-18 onwards. Exits made before March 31, 2017 won’t attract GAAR. All investments made upto March 31, 2017 will be protected from applicability of GAAR by amendment to be made in Income tax rules (to be notified).
Permanent Establishment Safe Harbour- Fund management activity undertaken in India by an eligible fund manager on behalf of an eligible offshore fund will not trigger business income taxation for the offshore fund in India.
Qualifying criteria for an eligible fund include:
- Fund is a non-resident of India (activities of fund manager in India will not itself result in the offshore fund being regarded resident in India).
- Fund must be resident if a country with which India has a treaty (including information exchange treaty).
- Indian residents cannot own more than 5% of the corpus of the fund.
- Fund must be subject to investor protection regulations in home country jurisdiction.
- Fund must have minimum 25 unconnected members.
- No individual investor (including connected person) can hold 10% or more in the fund.
- Participation interest of 10 or less members along with their connected persons shall be less than 50% of the fund.
- Fund cannot invest more than 20% for its corpus in any entity.
- Fund cannot invest in any associate entity.
- Monthly average corpus of the fund cannot be lower than INR 100cr.
- Fund does not undertake any other business in India.
- Fund does not undertake any other activity in India, which can result into a business connection in India and
- Fund remunerates the fund managers on an arm’s length basis.
Key qualifying criteria for the eligible fund manager include:
- Fund manager cannot be connected person of the fund.
- Fund manager must be registered as a fund manager or investment advisors with SEBI under the regulations stipulated for portfolio manager, investment advisor or such other regulations as my be specified by SEBI.
- Fund manager is not entitled to more than 20% profits earned by the Fund.
Residency of Foreign Companies: Any foreign company with place of effective management in India (“POEM”) at any time during the year will qualify as Indian resident- may not be entitled to claim tax treaty. Currently, only 100% management and control in India triggers residency. POEM linked to key management and commercial decisions of an entity as a whole. Specific exemption for eligible Fund Managers covered in 4 above.
Global Depository Receipts: Definition modified to cover only GDRs with underlying listed Securities- tax planning opportunity curtailed.
Tax Pass-through for AIF 1 and 2:
- Eligible for pass through only for capital gains and interest income (but not for business income)-Fund will have to withhold tax @10%
- Income received by the Fund to be exempted from TDS by portfolio companies (notification to be issued)
- Capital loss cannot be passed on to the investors- Fund will have to carry it forward for set off in future years.
- Business income taxable at trust level-correspondingly distribution of such income exempt for investors.
- Fund will need to file tax return.
Indirect Transfer Taxation related relaxation:
- Substantial assets in India deemed at 50%
- Small shareholders holding 5% or less, directly or indirectly, excluded from the indirect transfer tax.
- Indirect transfer taxation restricted to proportion of assets in India v outside India (rules to be prescribed).
- Reporting obligation on Indian entity in case of taxable indirect transfer.
- Exemption for capital gains income earned by FIIs only- Interest income and short term capital gains on NCDs of FII may be subject to MAT.
- Creates a larger issue for investors other than FIIs- like PE and FDI investors- current debate whether MAT is exempt under the Treaty.
- Income from AOP exempt from MAT.
- Effective corporate tax rate (including BDT and DDT) increased for domestic companies due to increase in surcharge by 2%.
- Corporate tax rates to b reduced from existing 30% to 25% over 4 years starting from April, 2016 accompanied by the removal of many incentive provisions (no change in the current year.
Income Computation Disclosure Standards (ICDS): CBDT notified 10 ICDS on March 31, 2015, which is applicable from FY2015-16.
- Applicable to all assesses following mercantile system of accounting.
- Applicable to compute income chargeable under the head of ‘Profit and gains of business or profession’ or ‘Income from other sources’
- In case of a conflict between the provisions of the Income Tax Act and ICDS, provisions of the Act shall prevail.
- Substantial disclosure norms prescribed under each ICDS- manner of disclosure not yet prescribed.
Specified Domestic Transaction: Transfer pricing provisions to apply for transaction above INR 20crores as against INR 5crores.
Direct Tax Code (DTC): DTC is history.
3) Corporate Law
Changes introduced by Companies (Amendment) Act, 2015:
- Requirement of minimum paid up Share Capital by a company done away with
- Requirement of Common Seal non-mandatory
- Certificate of commencement of business no longer required to be obtained
- Penal provisions has been introduced for contravention related to Acceptance of deposit by Companies
- No person shall be entitled to inspect or obtain copies of the Board Resolutions filed with Registrar
- No dividend to be declared unless brought forwards losses and depreciation not provided on previous year are set off against profit of the company for the current year
- Auditor shall report an offence of fraud to Audit Committee or Board of Director and same shall be forwarded to Government.
- Loan/ guarantee/security provided by the holding company to its wholly owned subsidiary exempted from restrictions under Section 185 of Companies Act 2013, provided loans are utilized or its principal business activity
- Special resolution for approving the related party transaction has been done away with (Section 185). Now even a board resolution valid
- No resolutions required if the accounts of holding and subsidiary company are consolidated and place before shareholders in general meeting for approval
Exemption/Relaxations for private companies notified by Ministry of Corporate Affairs (MCA):
- Issuance of equity shares with differential voting rights without complying with stringent conditions, if provided in MOA and AOA
- Holding, subsidiary, associate, fellow subsidiary companies are not subjected to related party transactions. Member being a related party can vote for approval of such transaction
- Resolutions on providing loans (i) to directors/persons in whom the directors are interested OR (ii) to any person for purchase of its own shares not applicable to private companies, provided
- No other body corporate has invested in the share capital of such company
- Its borrowings from banks/FIs/anybody corporate is less than the lower of twice its paid up share capital or INR 50 crs
- It has not defaulted on repayment of such borrowings subsisting at the time of making the transaction
- Acceptance of deposits from its members without complying with specified conditions, provided the deposits accepted do not exceed aggregate of paid-up share capital and free reserves details of the deposits accepted are filed with the Registrar
- Time limit to offer Right Issue- can be less than 15 days, provided approved by 90% members.
- ESOPs can be issued subject to an ordinary resolution
- Possible for a director to participate in a meeting where the contract in which he is interested is discussed, after disclosure of his interest.
Regulatory Updates - Quarterly Report – December 31, 2014
- Indian company permitted to issue partly paid shares and warrants to the FDI Investors under Automatic Route.
- In case of unlisted companies, pricing methodology to determine fair value of shares in case of issue and transfers has been revised.
- Fair value should be determined as per internationally accepted pricing methodology (instead of DCF method prescribed earlier).
- Indian company permitted to issue equity shares, CCPS and CCDs with optionality clause to FDI Investors.
- Subject to lock-in of 1 year or period as applicable to respective sector, whichever is higher; lock-in applicable from date of allotment.
CBDT clarification on Taxation of AIF
- In case Trust Deed either does not name the investors or does not specify their beneficial interest, entire income of the Trust liable to be taxed at MMR-practical difficulties for AIFs set up as Trust.
- In such cases, investors need to be taxed as the corresponding income has already been taxed at MMR at the Trust Level.
- Dividend Distribution Tax increased from 16.995% to 19.994% due to grossing up.
3) Company Law
Companies (Amendment) Bill, 2014-Passed by Lok Sabha
- The requirement of having minimum paid up share capital is omitted, for ease of doing business.
- Having a common seal of the company for authorisation and execution of documents is now optional.
- Ordinary resolution in place of special resolution for approval of related party transactions.
- Board resolution filed with the registrar would not be available for public inspection.
Draft Notification for exemption to Private Company
- Provisions related to equity shares with differential voting rights and related party transactions
- Reduced time limit for making Rights Offer
- Certain relaxations on Loan to Directors or persons in whom director is interested
- Issue of shares under ESOPs to require ordinary resolution instead of special resolution
Regulatory Updates - Half-Yearly Report – September 30, 2014
Foreign Direct Investment (FDI) in India – issue / transfer of shares or convertible debentures – revised pricing guidelines
The RBI has issued A. P. (DIR Series) Circular No. 4 dated 15 July 2014, whereby the extant pricing guidelines in respect of transfer / issue of shares and for exit from investment in equity shares with or without optionality clauses of listed / unlisted Indian companies have been reviewed so as to provide greater freedom and flexibility to the parties concerned under the FDI framework.
The new pricing guidelines shall be as under:
– In case of listed companies:
The issue and transfer of shares including compulsorily convertible preference shares and compulsorily convertible debentures shall be as per the SEBI guidelines;
The pricing guidelines for FDI instruments with optionality clauses shall continue to be in accordance with A.P. (DIR Series) Circular No. 86 dated 9 January 2014, i.e., the non-resident investor shall be eligible to exit at the market price prevailing on the recognised stock exchanges subject to lock-in period as stipulated, without any assured return.
– In case of unlisted companies
The issue and transfer of shares including compulsorily convertible preference shares and compulsorily convertible debentures with or without optionality clauses shall be at a price worked out as per any internationally accepted pricing methodology on arm’s length basis. Thus, the guiding principle will be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment / agreement and shall exit at a fair price computed as above at the time of exit subject to lock-in period requirement as applicable in terms of A.P. (DIR Series) Circular No. 86 dated 9 January 2014.
The changes in the existing pricing guidelines for FDI applicable to transfer / issue of shares and for exit from foreign direct investment with optionality clauses for the unlisted Indian companies are given in the Annex 1 and Annex 2 to the Circular respectively.
An Indian company taking on record in its books any transfer of its shares or convertible debenture by way of sale from a resident to a non-resident and a non-resident to a resident shall disclose in its balance sheet for the financial year, in which the transaction took place, the details of valuation of share or convertible debentures, the pricing methodology adopted for the same as well as the agency that has given / certified the valuation.
Regulatory Updates - Annual Report – March 31, 2014
- Regulatory: Guidelines on disclosures, reporting and clarifications under AIF Regulations (Circular dated June 19, 2014 CIR/IMD/DF/14/2014)
- Regulatory: SEBI’s draft proposals for crowd funding may restrict it to accredited investors, allow crowd fund AIFs
- Securities market regulator Securities & Exchange Board of India (SEBI) has come up with draft proposals which may provide a legal platform for crowd funding in India, an alternate funding route for startups in the country.
- SEBI’s norm will restrict itself to security-based crowd funding and steer clear of donation and rewards based funding as also peer to peer lending which falls under the purview of RBI. The regulator has categorised three types of crowd funding equity-based (EbC), debt-based (DbC) and fund-based (FbC).
- Some of the key proposals include restricting the crowd funding to accredited investors; capping crowd funding up to Rs.10 crore within a 12-month period including over subscription (which shall be restricted to 25 per cent of the intended fund raise); attract money from maximum of 200 individual investors (besides institutional investors); founders or promoters need to maintain a minimum of 5 per cent stake in the company for at least three years from the date of the issue besides allowing a new class of crowd fund AIF (alternate investment fund which currently covers angel, VC, PE and hedge funds in the country) who can pool in money from other investors to invest in a company, among others.
- Corporate Laws: Companies Act, 2013The Ministry of Corporate Affairs (MCA) has notified most of the sections and has largely operationalized the Companies Act 2013 (2013 Act). All of the notified sections of the new Companies Act 2013 are in force from 1 April 2014.MCA vide notice dated 24th June, 2014 invited comments for the draft notification under section 462 of the Companies Act, 2013 to ease the operational activity for Private Companies.
- Income-tax: Budget Speech 2014-15, The Finance Bill, 2014
- Promotion of entrepreneurship and start-up Companies remains a challenge. While there have been some efforts to encourage, one principal limitation has been availability of start-up capital by way of equity to be brought in by the promoters. In order to create a conducive eco-system for the venture capital in the MSME sector it is proposed to establish a INR 10,000 crore fund to act as a catalyst to attract private Capital by way of providing equity, quasi equity, soft loans and other risk capital for start-up companies.
- Income from sale of unlisted shares and units of non-equity oriented mutual fund, not held for more than 36 months to be taxable as Short Term Capital Gain; the earlier threshold was 12 months.
- REITs and Infrastructure Investment Trusts, to be formed as per regulations to be notified by SEBI, shall enjoy tax pass through status (except in respect of capital gains on disposal of assets). This facility is already extended to VCF like YourNest.
- Allowed manufacturing units with FDI, under the automatic route, to sell their products through retail, including e-commerce platforms, without any additional approval. It should enable VCFs with non-resident investors to invest in e-commerce companies with their own manufacturing unit & brand.
- Mutual funds, Securitization trusts, VCC / VCF are required to furnish a return of income if their total income exceeds the maximum amount not chargeable to tax. Accordingly, the requirement of filing prescribed statement (giving particulars of amount of income distributed to investors, the tax paid thereon, etc.) has been done away with in case of mutual funds and securitization trusts.
- Effective 1 October 2014, dividends distributed by domestic companies and mutual funds to be grossed up for the purpose of computing DDT.
- Income Tax: CBDT Clarification-additional income tax cannot be levied either on mutual fund redemption or at the time of allotment of bonus shares to the existing shareholders (vide circular No.6/2014 dated 11th February, 2014)
- Section 115R of the income-tax Act, 1961 (the Act) provides for levy of additional income-tax on distributed income to the unit holders. However, some field authorities are taking a view that mutual funds/specified companies are required to pay additional income tax under Section 115R(2) of the Act, not only on income distributed by way of dividend but also on payment made at the redemption /repurchase of units as well as the time of allotment of bonus units to existing investors.
- Further, the income so distributed by mutual fund or specified company in the hands of the recipient unit holder is specifically exempt from tax under Section 10(35) of the Act. Provision to section 10(35) of the Act stipulates that exemption of income under this section is not applicable to those cases where transfer of units takes place. The recipient of such income is liable to pay capital gains tax, if applicable, on transfer of such units as per the relevant provisions of the Act and shall not be subject to additional income-tax under section 115R of the Act. Similarly, bonus units at the time of issue would not be subjected to additional income tax under Section 115R of the Act since issue of bonus units is not akin to distribute of income by way of dividend. This may be inferred from provisions of Section 55 of the Act.
- RBI permitted issue of non-convertible/ redeemable bonus preference shares or debentures to non-resident shareholders under the automatic routePrior to issuance of this amendment, the companies required RBI approval for issue of bonus instruments to non-resident shareholders and RBI was considering the same on a case-to-case basis. However, RBI vide Circular dated 6 January 2014, has given a general permission to companies to issue of non-convertible/redeemable bonus preference shares or debentures (bonus instruments) to non-resident shareholders under the automatic route out of its general reserves under a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act, as applicable subject to no-objection from the Income Tax Authorities.
Regulatory Updates - Quarterly Report – December 31, 2013
- Unlisted Indian Companies allowed to list and raise capital abroadAt present, unlisted companies incorporated in India are not allowed to directly list in overseas markets without prior or simultaneous listing in Indian markets. It has now been decided that unlisted companies be allowed to raise capital abroad without the requirement of prior or subsequent listing in India. The scheme will be implemented on a pilot basis for a period of two years from 11th October 2013.The approval to list abroad is subject to certain conditions as prescribed in the notification, like the listing company to be fully compliant with FDI policy, comply with SEBI disclosure requirements etc. The Funds raised overseas to be remitted back to India within 15 days and such money shall be parked only in AD (Authorised Dealer) category banks recognized by RBI to be used domestically, if the same are not utilized abroad, as stipulated in the notification.
- SEBI permit pre-emptive rights and put-call options in Shareholders AgreementsRecently, the SEBI has issued a notification wherein it has relaxed certain provisions under Securities Contracts (Regulation) Act, 1956 (‘SCRA’) to boost the interest of investors by allowing them to include preferential clauses like right of first refusal, tag-along, drag-along and call-put option in the share purchase agreements/ Articles of Association subject to certain conditions.
- RBI Notification permitting options
Regulatory Updates - Half-Yearly Report – September 30, 2014
1) The Securities and Exchange Board of India (‘SEBI’) updates regulation in relation to Alternative Investment Fund (“AIF”) and notifies regulation for “Angel Fund”.
With an aim to encourage entrepreneurship in the country by financing small start-ups, SEBI, vide its notification dated 16 September 2013, amended AIF Regulations to notify new norms for angel investors, who provide funding to companies at their initial stages. Such angel funds are to be a sub-category in Category I – Venture Capital Fund.
- This regulation has defined “Qualified Investors” for the purposes of an Angel Fund – In view of the high-risk investments of such funds, certain conditions have been imposed on investors as given below:
- Individual angel investor should have net tangible assets of atleast INR 2 crores (excluding value of his principal residence) and shall satisfy the one of the following conditions:
- has an experience of early stage investment; or
- has experience of a serial entrepreneur; or
- is a senior management professional with at least 10 years of experience
- Corporate angel investor shall be required to have net worth of INR 10 crores; and
- SEBI registered AIF / VCF
- Individual angel investor should have net tangible assets of atleast INR 2 crores (excluding value of his principal residence) and shall satisfy the one of the following conditions:
- The key characteristics of Angel Fund are defined as:
- Angel Fund shall have a corpus of atleast INR 10 crores (as against INR 20 crores for other AIFs);
- Minimum investment by an investor shall be INR 25 lakhs (may be accepted over a period of maximum 3 years) as against INR 1 crore for other AIFs;
- The continuing interest by sponsor / manager in the Angel Fund shall be not less than 2.5% of the corpus or INR 50 lakhs (as against existing limit of INR 5 crores), whichever is less;
- No scheme of Angel Fund shall have more than 49 angel investors;
- Manager of the Angel Fund is required to obtain an undertaking from every angel investor confirming his approval before making any investment in a venture capital undertaking (‘VCU’); and
- Units of Angel Fund cannot be listed on any recognized stock exchange.
(Note: YourNest Angel Fund is a SEBI registered Venture Capital Fund. It does not fall under the new regulations & notification announced by SEBI for an Angel Fund on dated 16 September 2013.)
2) Amendment to Securities Contracts (Regulation) Act, 1956 (‘SCRA’)
SEBI has issued a notification on 3 October 2013 wherein the SEBI has relaxed certain provisions under Securities Contracts (Regulation) Act, 1956 (‘SCRA’) to boost the interest of investors by allowing them to include preferential clauses like right of first refusal (‘ROFR’), tag-along, drag-along and call-put option in the share purchase agreements / Articles of Association subject to certain conditions.
3) Listing of SME
SEBI has notified on 9 October 2013 “SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013” to permit listing of Startups and Small and Medium Enterprises (‘SMEs’) in Institutional Trading Platform (‘ITP’) without making an Initial Public Offering (‘IPO’).. The move is aimed at providing easier exit options to informed investor (such as Angel Investors, Venture Capital Funds and Private Equities).
The key eligibility criteria’s for SMEs are given below:
- The company has not completed more than 10 years from incorporation;
- Revenue has not exceeded INR 100 cr in any previous financial year;
- Paid up capital of the company has not exceeded INR 25 cr in any of the previous financial years;
- No regulatory action has been taken against the company, its promoter or director by prescribed regulatory authorities within a period of 5 years prior to the date of application for listing
- The company shall satisfy any one of the following criteria:
- Investment of atleast INR 50 lakhs in equity shares of the company by AIF, VCF, other SEBI approved investors or specified angel investor;
- Company has received finance (no minimum threshold specified) from a scheduled bank for its project financing / working capital requirement atleast before 3 years and the same has been fully utilised;
- Investment of atleast INR 50 lakhs in equity shares of the company by registered Merchant Banker / Qualified Institutional Buyer which shall be locked in for 3 years from date of listing; and
- a specialised international multilateral agency or domestic agency or a public financial institution has invested in the equity capital of the company (no minimum threshold specified).
4) Unlisted Indian companies allowed to list and raise capital abroad
The Ministry of Finance (MoF) in its Press Release dated 27 September, 2013 dealing with listing of Unlisted Indian Companies on overseas exchanges decided that unlisted companies allowed on a pilot basis for 2 years to raise capital abroad without the requirement of prior or simultaneous listing in India.
Further notification and amendment issued on 11thOctober, 2013 by MoF & on 8th November, 2013 by RBI are as under:
- Unlisted companies shall list abroad only on exchanges in IOSCO or FATF compliant jurisdictions or those jurisdictions with which SEBI has signed bilateral agreements;
- The companies shall file a copy of the return, which they submit to the proposed exchange/ regulators, also to SEBI for the purpose of PMLA. They shall comply with SEBI’s disclosure requirements in addition to that of the primary exchange prior to the listing abroad;
- While raising resources abroad, the listing company shall be fully compliant with the FDI Policy in force;
- In case the funds raised are not utilised abroad, such companies shall remit the money back to India within 15 days and may be used domestically;
- The ADRs/ GDRs shall be issued subject to sectoral cap, entry route, minimum capitalisation norms, pricing norms, etc. as applicable as per FDI regulations notified by the Reserve Bank from time to time;
- The pricing of such ADRs/GDRs to be issued to a person resident outside India shall be determined in accordance with the captioned scheme as prescribed under paragraph 6 of Schedule 1 of Notification No. FEMA. 20 dated May 3, 2000, as amended from time to time;
- The number of underlying equity shares offered for issuance of ADRs/GDRs to be kept with the local custodian shall be determined upfront and ratio of ADRs/GDRs to equity shares shall be decided upfront based on applicable FDI pricing norms of equity shares of unlisted company;
- The unlisted Indian company shall comply with the instructions on downstream investment as notified by the Reserve Bank from time to time;
- The criteria of eligibility of unlisted company raising funds through ADRs/GDRs shall be as prescribed by Government of India;
- The capital raised abroad may be utilised for retiring outstanding overseas debt or for bona fide operations abroad including for acquisitions;
5) Insurance Companies allowed to invest in Category II AIFs
In March 2013, life and general insurance companies were allowed to invest in Category I AIFs, comprising infrastructure funds, SME funds, venture capital funds and social venture funds. The Insurance Regulatory and Development Authority (‘IRDA’), vide its circular dated 23 August 2013, has now expanded the permissible investment category to Category II AIFs subject to the condition that at least 51 per cent of the funds of such AIFs should be invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities. Insurers, however, are not permitted to invest in AIFs that have the nature of funds of funds and leverage funds.
The overall exposure to venture funds and AIFs put together should not exceed 3 per cent in the case of a life insurance company and 5 per cent in the case of a general insurance company. Exposure to a single AIF or venture fund should not be more than 10 per cent of the fund size (20% of the fund size in case of Infrastructure Funds).
B) Corporate Laws
The Companies Act, 2013, which seeks to replace the Companies Act, 1956 in consonance with changes in national and international economic environment, was notifies on August 30, 2013.
The Companies Act, 2013, has, inter alia, introduced enhanced corporate governance standards particularly in relation to the independent directors, audit, corporate social responsibility, mandatory valuation, private placement of securities, cross-border mergers (including merger of Indian companies into foreign companies) and class action suits.
The Companies Act, 2013 has introduced the concept of ‘One Person Company (OPC)’ and a “Small Company” that is a good step for Indian Start-ups. An idea or an Intellectual Property can be floated in an OPC with the benefits of limited liability and perpetual succession. Further, Small Company brings some ease in doing business during the early days of a venture.
- Angel Fund shall have a corpus of atleast INR 10 crores (as against INR 20 crores for other AIFs);
Regulatory Updates - Annual Report – March 31, 2013
SEBI (Investment Advisers) Regulations, 2013
The Securities and Exchange Board of India (“SEBI”) issued the SEBI (Investment Advisers) Regulations, 2013 vide notification dated 21 January, 2013. It is applicable on
- Every person providing investment advice to any person for consideration (including non-cash benefit) would be required to obtain registration under the Regulation.
- Investment advice inter-alia includes advice relating to investing in, purchasing, selling, financial planning or otherwise dealing in securities or investment products, through any means of communication (including oral) for the benefit of the client.
The exempted person from registration includes any fund manager, by whatever name called of a mutual fund, alternative investment fund or any other intermediary or entity registered with the Board.Companies Bill, 2012
The Companies Bill, 2011 was laid before the Parliament in December 2011 and was then referred to the Parliament Standing Committee on Finance headed by Mr. Yashwant Sinha (‘the Committee’). Based on the recommendations of the Committee, the Companies Bill, 2011 was amended and introduced as the Companies Bill, 2012. The Companies Bill, 2012 was passed in the Lok Sabha on December 18, 2012. The Bill has 470 clauses and divided into 29 chapters.
It includes changes such as –
- Concept of “One person company” introduced [Clause 2(62)]
- One of the directors of the Company shall be a person stayed in India for 182 days or more [Clause 149]
- The maximum number of members in case of private company is increased from the existing 50 to 200.
- Concept of “Corporate Social Responsibility” introduced [Clause 135]
- Specific provisions for conversion of LLP into Company [Clause 366]
- Provisions for further issue of capital now applicable to both, private as well as public companies [Clause 62]. Accordingly, any shares will have to be offered to all shareholders on pro-rata basis (except in case of preferential issue through special resolution)
- Definition of listed company provided to mean a company which has any of its securities listed on any recognized stock exchange [Clause 2(52)].
- Indian company can be merged with foreign Company or vice-versa with prior approval of RBI [Clause 234]
- Concept of fast track merger introduced to facilitate merger of 2 or more “small companies” or between holding company and its wholly owned subsidiary [Clause 233]
- Majority shareholders may offer to purchase remaining shares from minority shareholders at a price determined by registered valuer in accordance with rules as may be prescribed (alternatively, minority shareholders may offer to sell) [Clause 236]
- Shares of public company are freely transferable. However, contract or arrangement between two or more persons in respect of transfer of securities (such as pre-emption rights and put / call options shall be an enforceable contract [Clause 58]
The Finance Bill 2013 (“the Bill”) was introduced as part of the Union Budget 2013 on February 28, 2013. The Bill received the assent of the President of India on 13 May 2013.
The key amendments to the Act by the Finance Act 2013, which would be relevant to the Fund and its investors are given below:
- Tax Residency Certificate (TRC) requirement – Section 90A of the Act has been amended to provide that a non-resident assessee, to whom a relevant treaty applies, can obtain the treaty benefits by furnishing the TRC issued by the respective foreign tax authorities.
- Pass through status granted to Category I Alternate Investment Funds (AIF) – The Finance Act, 2013 has extended the pass through status under section 10(23FB) to a Venture Capital Fund (VCF) or a Venture Capital Company (VCC) registered with SEBI as a sub-category of Category I AIF under the SEBI AIF Regulations.
- Distribution tax on buyback of shares by unlisted companies – A distribution tax on the buyback of shares by unlisted companies has been introduced effective from June 1, 2013.
- General Anti-avoidance Rule (GAAR) – GAAR to come in force from 1 April 2016 i.e. FY2015 – 16, AY 2016-17.
Other key announcement from the speech of the Finance Minister include
- Angel investors bring both experience and capital to new ventures. SEBI will prescribe requirements for angel investor pools by which they can be recognised as Category I AIF venture capital funds.
- Incubators play an important role in mentoring new businesses, which start as a small or medium business. The new Companies Bill obliges companies to spend 2 percent of average net profits under Corporate Social Responsibility (CSR). It was announced that the Ministry of Corporate Affairs will notify that funds provided to technology incubators located within academic institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure.
- Expending support to MSMEs through SIDBI and privileges for 3-years beyond scaling up shall enable MSMEs to prosper.
- Listing of MSMEs without IPO for informed investors shall create a market for the risk-capital starved sector.