News Flashes

Simplification of Foreign Investment Procedures

23rd October 2004: In order to create the surroundings in India more eye-catching for foreign investors, Government has decided to make simpler the procedure by placing the following under the General Permission route (i.e. RFI route) instead of the existing Government approval route (i.e. FIPB route) for speedy and streamlined investment approvals:

 (a)    Transfer of shares from resident to non-resident (including transfer of subscribers’ shares to non-resident) other than in financial service sector provided the investment is covered under automatic route, does not attract the provisions of Sebi’s (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, falls within the sectoral cap and also complies with prescribed pricing guidelines.

 (b)   Conversion of ECB/Loan into equity provided the activity of the company is covered under automatic route; the foreign equity after such conversion falls within the sectoral cap and also complies with prescribed pricing guidelines.

 (c)    Cases of increase in foreign equity participation by fresh issue of shares as well as conversion of preference shares into equity capital, provided such increase falls within the sectoral cap in the relevant sectors, are within the automatic route and also complies with prescribed pricing guidelines.

 In respect of the procedural simplifications given at para. 1 above, the onus of complying with the sectoral cap/limits prescribed under the FDI policy as well as other guidelines/regulations would rest with the buyer and seller/issuer.

 The Reserve Bank of India is bringing out necessary notification/circular under FEMA giving details of the simplification of procedures.


28th August 2004: On Wednesday, the Supreme Court turned down Swedish Match’s appeal against a Sebi order calling for an open offer to the shareholders of its Indian subsidiary, Wimco, along with interest payment. Post this ruling from the apex court, the company will now have to shell out at Rs 35 as open offer price plus it has to pay Rs 20 as interest (calculated at the rate of 15%) — per share to its shareholders.

Wimco closed at Rs 33.9 on the BSE after touching a high of Rs 37.5 in intra-day trading. The apex court, however, has waived the penalty, which could have been slapped by Sebi on Wimco for adjudication of the violation. In another order on Colour Chem (Clariant), which challenged the Sebi and Securities Appellate Tribunal (SAT) order on fixing the eligibility criteria for paying interests while making the open offer, the apex court has ruled in favour of the company.

            As per the order, the company will have to pay interests to only those shareholders who were holding the shares prior to the company violating the Sebi rule on takeovers. Moreover, the company will now have to pay the interest rate only at a reduced rate of 10% instead of the originally stipulated 15%. Through the three entities named Haravon Investments, Seed Trading and Swedish Match Singapore, Swedish Match possess a 74% stake in the company.

            In ’02, Sebi had directed Wimco’s Swedish parent to make an open offer to domestic shareholders of the company after issuing a show-cause notice for violating takeover code regulations when it acquired 21.89% of the Indian company in September ’00. Sebi also directed the company to pay 15% interest from January 27, ’01 till the actual payment is made to the investors. Thereafter, the SAT had dismissed the appeal of Swedish Match against the Sebi order. The tribunal said that companies couldn’t take cover from conducting an open offer under Regulations 12 of the takeover code, which deals with control. Swedish Match had appealed against the Sebi decision saying that under Regulation 12 of the takeover code there is no change in control after its acquisition of shares of its Indian subsidiary. Swedish Match had acquired 21.89% of Wimco’s equity, from AVP Trading and Plash Foods belonging to the Jatia group.

Finance Minister P Chidambaram to scrutinize the Shourie’s Centaur deal

21st August 2004: Due to the growing quarrel over the sale of Centaur Hotel at Juhu in Mumbai may put former disinvestment minister Arun Shourie in the dock, as finance minister P Chidambaram is prima facie convinced that the deal should be looked into.

While replying to a calling attention motion in Rajya Sabha on Thursday, the finance minister expressed reservation over the manner of divestment, especially since there was only one bidder for the prime property. The valuation of the hotel, too, leaves several questions unanswered. The deal will be looked into once the Comptroller & Auditor General (CAG) submits a report on the sale, which was executed during the NDA regime.

            Mr. Chidambaram is not convinced by the explanations offered by the NDA leaders, including Mr. Shourie, as several extensions were granted to the buyer to pay up his dues. Moreover, the final valuation of the property was put at Rs 134 crore, while the asset valuation report had given a “reinstatement valuation” of Rs 246 crore and “depreciation valuation” of Rs 214 crore. Apart from the Left parties, even the Shiv Sena — an ally of the BJP — had criticised the decision, building up the pressure for a full-fledged probe.

Mr. Chidambaram is of the view that the valuation methodology adopted by the disinvestment department does not seem to be entirely above board. The Supreme Court judgment in the Balco valuation case is specific to that company and cannot be considered the most appropriate method for all public sector units sold under the “strategic sale” route. The disinvestment department is now part of the finance ministry, which is headed by Mr. Chidambaram.

The finance minister in his comprehensive reply to the calling attention motion said, “So, I would only conclude by saying that as at present advised, I would wait for the report of the CAG and take further steps in the matter based on the report of the CAG, especially to address so discomforting aspects which I have mentioned.” While making it clear that he was not against privatisation per se, the finance minister highlighted several “aspects” of the sale process which led to doubts.


10th August 2004: Taxation of business process outsourcing (BPO) units is back on the outline. A new CBDT draft circular seeks to tax the income of a foreign company with a BPO arm here, which qualifies as a permanent establishment (PE). The amount to be taxed is the BPO’s arm’s length income, that is, the BPO’s income had it been a separate enterprise, dealing independently with its head office. The finance ministry has invited public comments for this draft circular after withdrawing the controversial BPO circular issued on January 2, ’04. The earlier circular differentiated between ‘core’ and ‘incidental’ services for tax purposes.

Government officials pointed out that BPO units enjoying tax holidays under Section 10 A and 10 B of the Income-Tax Act — graded tax holiday on export profits of STP, SEZ, EHTP units — will continue to get tax benefit as long as the arms’ length principle is adhered to. According to Samir Gandhi, tax partner, Deloitte Haskins and Sells, the draft circular is in line with the working hypothesis suggested by the OECD on the attribution of income by a PE.

The activities of BPO units in India range from procurement of orders for sale of goods, provision of services or answering queries on services like software maintenance, debt collection, credit cards, etc. The draft circular makes it clear that the foreign company will be liable to tax in India only if the IT-enabled BPO unit constitutes its PE under the Double Taxation Avoidance Agreements (DTAA) entered into by India with different countries. A PE is formed if the foreign company carries on business in India through a branch or a sales office or through a dependent agent.

The draft circular says, “The profits to be attributed to the PE are those that the PE would have made if instead of dealing with the head office, it had been dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market. This corresponds to the arms’ length price.” So, in determining the profits attributable to an IT-enabled BPO unit constituting a PE, it will be necessary to determine the price of the services rendered by the PE to the head office or the head office to the PE on the basis of arms’ length price.

            Samir Gandhi said, “The draft circular lays emphasis on application of the transfer pricing principle, which is in accordance with international norms of zero profit approach. This means that as long as the attribution of income to the PE is on an arms’ length basis, no further income is to be attributed in the hands of the foreign company.”

            Transfer price is generally described as the price charged by one multinational company to an associated enterprise (AE) for an international transaction relating to supply of goods or services. The law mandates that any income accruing from an international transaction between associated enterprises should be calculated with regard to the arm’s length price. The intention is to prevent shifting out of profits by manipulating prices charged or paid on a transaction.


4th August 2004: After the completion of age 55 the senior citizens who have taken voluntary retirement will be eligible to invest their funds in the 9% Senior Citizens Saving Scheme. The government yesterday lowered the minimum age for subscription to the scheme by 5 years (i.e. from 60 years to 55 years). This is for those who have retired under a voluntary or a special voluntary scheme, subject to specified conditions. This will benefit the salaried class who chooses for voluntary retirement. The minimum age limit for investment in the scheme will be 60 years for others not falling in this category.

This scheme will not be eligible for NRIs and HUFs to invest. Initially, the scheme will be available through post offices but may be offered through banks at a later date. Senior citizens will be offered a 9% annual return (taxable), which is 1% higher than the 8% return offered on other small saving instruments. Under the new scheme, senior citizens will be allowed to deposit a maximum of Rs 15 lakh for a minimum of 5 years, extendible by three more years. Interest will be paid at quarterly rests on a non-cumulative basis.

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