The document provides a summary of regulatory updates from various bodies such as SEBI, MCA, RBI, and ITAT. Some key points from the document include: 1) SEBI raised the threshold for mandatory open offers from 15% to 25% stake in a company. 2) MCA allowed for online incorporation of companies within 24 hours. 3) RBI allowed refinancing of FCCBs and revised share issue norms for FDI. 4) International taxation cases related to royalty, capital expenditures, and taxability of foreign companies were summarized. The document covered a range of regulatory changes across corporate law, FEMA, and taxation.

1. TRANSACTION ADVISORS
Missive
Volume V – August 2011

2. Topics Page No
Dear Patron SEBI 1
Corporate Law 1
Here we are again with the Fifth successive issue of our monthly ‘Missive’. FEMA 4
Other Regulatory Updates 5
The macroeconomic indicators of India are bullish even in the wake of weak global Regulatory News 6
cues. India has entered the club of top 20 exporters of goods and reclaimed its International Taxation 7
position among top 10 services exporters in 2010. FDI inflow rose by more than 100% Transfer Pricing 8
to US$ 4.66 billion in May 2011—the highest monthly inflow in 39 months. Exports Recent Transactions that 9
grew by 46.4% year-on-year (y-o-y) to US$ 29.2 billion, driven by high-end products made headlines
such as engineering goods.
With high growth prospects in sight, Ministries are running overdrive to keep pace
with the needs of Indian industry which is evident from the host of circulars issued “Ships in Harbour are safe,
by MCA.
but that is not what ships are
We trust you will enjoy reading this Missive. We would very much appreciate your built for”
feedback which consistently helps us in improving and upgrading the contents.
Thanks and regards,
Akhil Bansal
Editor, Knowledge Management Team

3. SEBI Corporate Law
Overhaul of Takeover Code clauses Online Incorporation of Companies within 24 hours [General Circular
No. 49/2011 dated July 23, 2011]
SEBI has raised the initial trigger threshold for an open offer, from the
existing 15% to 25%, accepting in process most of the If a new Company which intends to be incorporated, files e-forms 1, 18
recommendations of the Takeover Regulation Advisory Committee and 32 and e-forms for Memorandum of Association and Articles of
(TRAC). As per the new rules Association of the Company certified by the practicing professional
regarding the correctness of the information and declarations given by
§ Open offer size has been increased from 20% to 26%; the minimum the subscribers, the application shall be processed electronically and
stake that an acquirer will obtain in a target company after the the digital certificate of incorporation shall be issued immediately
open offer would now be 51% online by the Registrar of Companies (ROC). This facility will be optional
to the existing process and is likely to be implemented with effect from
§ Non-compete fee provision has been done away with and 11th August, 2011.
shareholders shall be allowed to exit at the same price
Impact: This facility provides faster setting up of business in India by
§ In case of competitive offers, the successful bidder can acquire avoiding often criticised delays in Company formation formalities.
shares of other bidders after the offer period without attracting MCA has already implemented online approval of DIN and names of
open offer obligations. Voluntary offers subject to certain the proposed company.
conditions have also been allowed
§ Auto de-listing has not been accepted considering that there would MCA simplifies procedure for obtaining confirmation of shifting of
be no level playing field between Indian and foreign acquirers. registered office from one state to another state u/s. 17 of the
Companies Act, 1956 [General Circular No. 50 /2011, Dated 25th July,
Impact: This would give Indian companies considerable leeway in 2011]
raising funds (say, through private equity placements), without
triggering open offer conditions. MCA has decided to delegate the work relating to confirmation of
shifting of registered office from one state to another to the respective
RoC under whose jurisdiction the registered office of the company is
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4. situated. The above simplified process is likely to be implemented with Impact: This is yet another step to simplify the procedural steps to be
effect from 24th September, 2011. taken by a corporate for various approvals.
Simplified procedure for rectification of register of charges under
section 141 of the Companies Act [General Circular No. 51/2011 dated Waiver of approval of Central Government for payment of
July 25, 2011] remuneration to professional managerial person by companies having
no profits or inadequate profits [General Circular No. 46/2011 dated
The work relating to rectification of register of charges under section July 14, 2011]
141 of the Cos Act has been shifted from the jurisdiction of Company
Law Board to the respective RoC under whose jurisdiction the No approval of Central Government will be required by the listed
registered office of the company is situated. companies and their subsidiary companies, which are not having profits
or having inadequate profits for payment of remunerations exceeding
Impact: The shifting of responsibility to RoC in certain cases has been Rs. 4 lakhs per month. This relaxation is provided only if the managerial
taken by MCA to cut down time and cost involved in the respective person satisfies certain conditions viz. not having any direct or indirect
cases. interest in the group, having certain qualification levels, etc
Impact: This waiver has come as a welcome step from MCA, to
Simplified procedure for obtaining online approval of Central promote the development of Indian Corporate sector and towards
Government under section 297 of the Companies Act, 1956 [General simplification of procedure under the Companies Act. The underlying
Circular No. 52/2011 dated July 25, 2011] condition of not having interest in capital will ensure high degree of
Corporate Governance.
MCA has decided to simplify the procedure for obtaining approval of
Central Government under section 297 with regards to the transactions
entered into by a Company with Companies in which directors’ are Guidelines issued by Ministry of Corporate Affairs to Regional
interested. The approval will be available online, if the proposed Directors / Registrar of Companies in respect of scheme of
contract has been approved by the shareholders by way of special arrangement / amalgamation under section 391 - 394 of the
resolutions in a general meeting. The process of online approval is likely Companies Act [General Circular No. 53/2011 dated July 26, 2011]
to be implemented with effect from 24th September, 2011.
The Circular seeks to bring rationalisation in RD and ROC procedures
under 391-394 process, and lays out definitive timelines to be adhered
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5. by RD/ROC for submitting the report to the High Court against the Filing of Balance Sheet in Extensible Business Reporting Language
notice served u/s 394A of the Cos Act. The guideline inter-alia seeks to (XBRL) mode [General Circular No. 43/2011 dated July 7, 2011 and
lay emphasis on matters such as serving timely notices to the Circular No. 57/2011 dated July 28, 2011]
concerned regulatory authorities in case of scheme involving
companies in sensitive sectors, scrutiny of the valuation forming part of MCA has now mandated that the filing of Balance Sheet in XBRL mode
the scheme and more active role of Law Ministry, including providing will be effective in respect of financial statements closing on or after
guidance on the technical / legal issues associated with the Scheme. March 31st, 2011 instead of the year 2011-12. All companies falling in
Phase-I class are permitted to file their financial statements without
Impact: The Circular attempts to provide guidance with respect to the any additional fee up to 30-11-2011 or within 60 days of their due date,
framework that can be used by RDs/ROCs for reviewing the schemes whichever is later. Further, a professional like CA / CS / CWA in whole
of arrangement / amalgamation. time practice has to certify the financial statements prepared in XBRL
mode for filing on MCA portal.
Prosecution of Nominee Directors [General Circular No.47/2011 dated Impact: The advancement of date for filing of financial statements in
14th July, 2011] XBRL mode for the year ended on March 31, 2011 and mandating
them to be certified by statutory auditors’ of the Company confirms
No nominee director on behalf of Public Financial Institutions, Financial the importance of XBRL for the Indian regulators. Now the Phase-I
Institutions and banks on the board of companies shall be held liable companies will have to gear up for adoption of the XBRL mode of
for any act of the company which constitute a breach or violation of any reporting.
provision of the Cos Act and which occurred without his knowledge.
Impact: The Circular imposes greater obligations on RoC to verify Integration of DIN issued under Companies Act, 1956 with DPIN issued
relevant information and records before initiating prosecution against under Limited Liability Partnership (LLP) Act, 2008 [General Circular
independent or nominee directors. This is a welcome move as it No. 44/2011 dated July 8, 2011]
prevents harassment of innocent directors who have been kept in the
dark by managements. MCA has clarified that w.e.f July 9, 2011, no fresh DPINs will be issued.
Any person desiring to become a designated partner in a LLP has to
obtain DIN by filing e-form DIN-1. If a person has been allotted both
DIN and DPIN, his DPIN will stand cancelled. Further, all existing DIN
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6. and DPIN holders, who have not furnished their PAN, are required to FEMA
furnish the same by filing DIN–4 by 30th September, 2011.
Redemption of Foreign Currency Convertible Bonds (FCCBs) [AP (DIR
Impact: The Ministry’s decision to issue single identification number Series) Circular No. 01 dated 4th July, 2011]
to an individual for both the purpose helps to avoid duplicity and
gives ease to the stakeholders. To facilitate refinancing of FCCBs by Indian companies who may be
facing difficulty in meeting the redemption obligations, RBI has decided
to consider applications for refinancing of FCCBs by Indian companies.
Blocking of DIN consequent to non-filing of Statement of Affairs (SOA) Restructuring of FCCBs involving change in the existing conversion price
[General Circular No.56 /2011, Dated 28th July 2011] is not permissible. Moreover, companies will not be allowed to
refinance FCCBs before six months to the maturity date of the
MCA has observed that companies are not filing SOA in time in terms of outstanding FCCBs.
section 454 of the Cos Act, delaying the process of liquidation and has,
therefore, decided to give the companies and the directors of such Impact: RBI move comes at a time when several companies are facing
companies (where winding up orders have been passed by the Hon’ble the redemption pressure as stock prices have fallen much below their
Court), one month notice to file SOA before action for blocking their pre-determined conversion price. Approximately, FCCBs worth of $5.5
DIN is initiated. billion (issued by over 80 companies) are set to mature in next 12
months, amounting to around one third of outstanding FCCBs
RBI revises share issue norms for FDI scheme
RBI has allowed domestic companies to issue shares against import of
capital goods and machineries (including second-hand machineries),
making it easier for them to expand. However, companies will have to
get prior approval of government to trade equities for imports. The
government approval would be subject to pricing guidelines of RBI and
appropriate tax clearance.
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7. Impact: The Government had permitted trading in equity or Other Regulatory Updates
preference shares for settlement of capital import bills to help the
domestic industry to access latest machinery without paying cash.
§ RBI has issued Master Circulars on July 1st, 2011 on a number
subjects (including FEMA). These Master Circulars are updated till
June 30th 2011.
Regularization of Liaison / Branch offices of foreign entities
established during the pre – FEMA period [AP (DIR Series) Circular No.
§ India has entered into Social Security Agreement with the French
02 dated 15th July, 2011]
Republic
RBI has noticed that certain BOs / LOs established by the foreign NGOs,
§ India had signed DTAA with Lithunia
Non Profit Organizations, news agencies and other foreign entities are
continuing to function in India, without RBI’s approval, after the FEMA
§ India-Malaysia FTA is effective from 1 July, 2011
came into force. These BOs / LOs are required to approach the RBI
within a period of 90 days from the date of issue of this circular for
regularization of establishment of such offices in India § Union Cabinet had approved the proposal for enactment of a new
legislation, Benami Transactions (Prohibition) Bill, 2011, to replace
Impact: Circular does not specify about protection from any penal the existing Benami Transactions (Prohibition) Act, 1988 and for its
proceeding in cases of foreign entities making voluntary application to introduction in Parliament. As per the new law, a benami property
the RBI under the Circular. A further clarification by the RBI on these shall also be liable for confiscation by the Adjudicating Authority
points is important from the perspective of the scheme. after the person concerned has been given due opportunity of
being heard.
§ Govt. had released the draft of National Land Acquisition and
Rehabilitation and Resettlement Bill, 2011
§ Public Comments and Stakeholders’ Views have been invited on
the Draft Micro Finance Institutions (Development & Regulation)
Bill, 2011
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8. § MCA has released the Draft of ‘National Competition Policy for Regulatory News
India’, Draft Circular on ‘Providing Gifts to shareholders during
AGM of the Company’ and Draft ‘Public Companies (Terms of § Use of Trade Mark after termination of relationship is illegal [Delhi
Issue of debenture and of raising of loans with option to convert HC]
such debentures or loans in to shares) Rules, 2011’ for comments
§ EPFO to seek legal view on nationwide implementation of HC order
§ RBI has released Draft Guidelines on Equity Investments by not allowing splitting of wages for calculation of PF
scheduled commercial banks in subsidiaries and other companies
§ SC had directed Sahara to approach SAT against SEBI order
§ MCA has proposed that investment companies be barred from directing to return the money collected from investors in OFCD
having more than two tiers of subsidiaries to ensure transparency scheme
in flow of funds and transactions
§ BSE hopes to kick-start SME exchange Sept onwards
§ SEBI had approved uniform customer identification process for
investors in different segments
§ Mutual funds may face SEBI fury over casual voting
§ SEBI wants to put in place standard guidelines for the due diligence
process carried out by merchant bankers for public issues
§ SEBI will impose a penalty on trading members for modifying client
codes for non-institutional trades
§ In a bid to make foreign companies engaged in online and direct-
to-home business practices in India accountable, MCA intends to
make enrolment of all such companies with RoC mandatory in the
Companies Bill to be introduced in Parliament
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9. International Taxation therefore, the notices issued by the tax authority for initiating
proceedings to access the gains/ withholding taxes are valid
Significant Decisions [Mumbai HC]
§ Payment made for online banner advertisement on the portal of a § Payment for use of disk space is not royalty (ITAT Mumbai)
foreign company not taxable as royalty [ITAT Mumbai]
§ Maintenance of separate books of account for STP units is not a
§ Payment made under non-compete agreement is capital prerequisite to avail deduction under section 10A (Bangalore ITAT)
expenditure and not result into acquisition of any intangible asset
and could not be eligible for depreciation allowance and could not
be claimed as deferred revenue expenditure [ITAT Delhi] Key legislation Updates
§ Colourable Device and Gains Taxable in USA Parent’s Hands, Sale of § CBDT has prescribed the guidelines to be followed by an Assessing
shares of foreign company taxable if object is to acquire the Indian Officer for granting permission to transfer or create a charge on
asset [Bombay HC] the assets of the taxpayer as contemplated under section 281 of
the IT Act. The said circular prescribes the form for filing the
§ Provisions of section 79 are not applicable to company originally application, clarifies applicability of the said provisions in case of
registered as a private company and then became a public taxpayers with no outstanding demand and provides guidelines for
company by virtue of the provisions of s 3(iv)(c) of the Companies disposal of the applications by the AOs along with time lines to be
Act [ITAT Mumbai] followed. [Circular No 4/2010]
§ Marketing and reservation charges are not Royalty or FIS and they Impact: Going forward, Acquirers in transactions involving acquisition
are in the nature of business income and since the assessee does /creation of charge in respect of the specified assets are likely to insist
not have a PE in India, the same are not taxable in India [ITAT on the Seller /Transferor obtaining the requisite permission under
Mumbai] section 281 of the Act to ensure clear title /charge in respect of the
assets and hence section 281 clearances is likely to become a
§ In case of indirect transfer of shares of an Indian Company (i.e by prerequisite in such transactions.
sale of shares of Mauritius company which was an intermediary),
court held that the tax authority had a prima-facie case for
considering the gains as taxable in hands of the Company and
7

10. Transfer Pricing excluded from their net profit and the full data of the comparables
should also be provided to the assessee [ITAT Ahemdabad]
Significant Decisions
§ Pygmies Not Comparable With Giants [ITAT Hyderabad]
§ CUP method not suitable to benchmark royalty payment in the
absence of comparable uncontrolled transactions [ITAT Pune] § Domestic segment cannot be regarded as a comparable for the
export segment [ITAT Pune]
§ Loss making companies cannot be rejected as comparables
simplicitor on ground of losses but can be excluded on other
comparability aspects [ITAT Delhi]
§ Arm’s length price in case of interest on extended credit period
granted to an Associated Enterprise shall be determined on the
basis of USD LIBOR and not on any other currency denominated
loan rate [ITAT Mumbai]
§ Determining the characterisation of an entity before the selection
of most appropriate method is critical [ITAT Mumbai]
§ Operating profit of different STP units rendering identical services
to related parties should not be considered on a stand-alone basis
for computing Arm’s Length Price [ITAT Delhi]
§ Transactions between Indian Subsidiary and Permanent
Establishments (PE) of foreign AEs in India covered under the
Indian Transfer Pricing Regulations [ITAT Delhi]
§ As other income of the assessee is excluded from the net profit,
the other income of comparable companies should also be
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11. Recent Transactions that made Headlines
§ Haier to buy Panasonic’s Sanyo white goods units in Japan, South
East Asia for about $130 Million
§ PVR Ltd has bought out JP Morgan Mauritius Holdings and India
Advantage Fund from a group firm, PVR Pictures for an undisclosed
amount
§ Foster’s rejects $10 bn SABMiller bid on account of significant
undervaluation
§ Religare Capital Markets, Investment banking arm of Religare
Enterprise, acquires South Africa’s Noah Financial
§ Cabinet Committee on Economic Affairs (CCEA) approved the USD
7.2 billion deal between Reliance Industries and British Petroleum
for sale of 30% stake in 21 of RIL’s oil and gas blocks
§ Reliance Industries has announced a joint venture with UXA
Resources for uranium exploration and drilling in Australia. RIL
Australia (RILA) will hold 49% in the licences and will contribute as
much to exploration funding.
§ Vodafone pays over USD 400 mn more to buy Essar’s 33 per cent
stake
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TRANSACTION ADVISORS
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