Business standard news updates 25-4-2013

US may soon get a leash on Indian financial institutions

NSUNDARESHA SUBRAMANIAN New Delhi, 24 April Imagine this: Having moved to the US on awork visa, you have become a taxpayer there. But you have not closed your savings account with State Bank of India and a demat account with its subsidiary. Both you and your bank/ broker would soon be required to report this to the Internal Revenue Service ( IRS), the US tax authority. The Securities and Exchange Board of India ( Sebi) is giving finishing touches to a draft inter- governmental agreement ( IGA), to be signed between India and the US under the Foreign Account Tax Compliance Act ( FATCA). The three- year- old US law seeks to improve tax compliance involving foreign financial assets and offshore accounts. Under FATCA, US taxpayers with specified foreign financial assets exceeding certain thresholds must report those to IRS. FATCA also requires foreign financial institutions ( FFIs), such as banks, fund houses and brokers, to report directly to IRS information about financial accounts held by US taxpayers, or foreign entities in which US taxpayers hold a substantial ownership interest. These provisions will become applicable to Indian financial institutions once the Indian government signs IGA with Washington under the Act. The law is expected to come into force in January 2014. While the Reserve Bank of India ( RBI) was earlier asked to prepare the draft IGA, Sebi has now sought feedback from market participants on the key changes required to be made in the draft. These suggestions will be forwarded to the Centre for incorporation in IGA. Since the issue is of “ vital importance” and, once implemented, will have “ impact on the securities market”, Sebi has sought specific suggestions from market participants on changes needed in the “ text of the Model- 1A of IGA”, those suggested in the due diligence procedures for a reporting entity and any exempted entity and product that needs to be incorporated in IGA. Sebi has also called for a meeting of key intermediaries next week to discuss and iron out issues. Ameet Patel, partner, SKP & Co, a Mumbai- based consultant, said: “ FATCA will affect anyone who has a relationship with US taxpayers, particularly non- resident indians. There is little awareness among intermediaries. But, once the law is enforced, banks, mutual funds and portfolio management services will have to first register themselves with IRS and then start reporting the numbers periodically.” Under FATCA, withholding agents must withhold tax on certain payments to FFIs that do not agree to report certain information to IRS about their US accounts or accounts of certain foreign entities with substantial US owners. An FFI may agree to report certain information about its account holders by registering to be FATCA- compliant. An FFI registered to be FATCA- compliant and issued a global intermediary identification number (GIIN) will appear on a published FFI list. Withholding agents may rely on an FFI’s claim of FATCA status based on checking the payee’s GIIN against the published FFI list. This list is scheduled to be published monthly, beginning December 2013.

BS REPORTER New Delhi, 24 April The tension between the government and the Opposition in Parliament notwithstanding, Finance Minister P Chidambaram today sought the Opposition’s cooperation to clear various reform Bills, including those on land acquisition and insurance, as well as a constitutional amendment for the Goods and Services Tax ( GST). At the India Summit organised by The Economist here, Chidambaram said he wasn’t in the race for the prime minister’s post and given a choice, he would like to either work for the Congress party or travel. He added the United Progressive Alliance ( UPA) government would complete its second term. “We have listed the things we intend to do. We want the land Bill passed; we want the insurance Bill passed with FDI ( foreign direct investment) at 49 per cent. I sincerely seek the cooperation of the principal opposition party and other political parties,” he said. Chidambaram also sought the cooperation of various parties to push the GST Bill in Parliament. He said the chances the legislation would be passed during the UPA’s remaining term stood at 70 per cent. “GST is possible, but only if the central government and all the state governments, which are now ruled by eight- nine different political parties, are together,” the finance minister said. After the constitution amendment Bill is cleared, the central government would table amodel GST Bill in Parliament, while states would table their respective Bills in their assemblies. Chidambaram said as finance minister during the UPA government’s first term, he was able to build a consensus on valueadded tax. “ I am trying to forge a similar consensus on GST... Now, we have reached a stage where the empowered council ( of state finance ministers) has authorised us to draft a constitution amendment Bill, (and) a normal Bill for introducing GST,” he said. The finance minister also listed other targeted reforms. “ We want a regulator for the coal sector and the road sector in place; we want a rail tariff authority in place,” he said. “We will continue to take small, significant steps. We will also take forward some big ideas. India’s economy will continue to reform,” he said. Amid the government staring at a high current account deficit ( CAD), the finance minister emphasised the importance of foreign investors. “ CAD is indeed high...( it) is more worrying than the fiscal deficit. In 2012- 13, CAD is expected to be $90- 94 billion. The satisfying aspect of this is we have financed it completely, without drawing down our reserves. There have been copious inflows,” he said. “We need to open our economy more. We have to give more space for FDI,” he said, adding FDI caps could be removed if it was found these were no longer useful. He hoped CAD would be about five per cent in 2012- 13. “Going forward, we will bring it down... The way to do that is to boost exports... If we can conserve oil consumption 10 per cent, we can save $ 17 billion. And, if we can control our passion for gold, we can save many more billion dollars. It’s a difficult act, but I am confident with the steps we are taking to encourage inward inflows, we will be able to bring it down,” he said. He assured investors that this financial year, the fiscal deficit would be below 4.8 per cent. “As we remove investment bottlenecks, you will find growth picking up. In 2013- 14, growth would be 6.1- 6.7 per cent,” he said. He expressed confidence it would rise to seven per cent in 2015- 16, without fuelling inflationary expectations. He added the economy had the potential to grow eight per cent a year, something Prime Minister’s Economic Advisory Council Chairman, C Rangarajan, had said yesterday. Chidambaram also said there was a need to take immediate action to increase penetration and coverage of the non life insurance in the country at a function by Dena Bank. FM P Chidambaram at the India Summit conference organised by The Economist, in New Delhi on Wednesday PHOTO: PTI ‘FSAs for power firms likely in 2 weeks’ Power projects scheduled to be completed by March 2015 could have operational fuel supply agreements ( FSAs) in place within two weeks, PlanCom Deputy Chairman Montek Singh Ahluwalia said during The Economist India Summit. PTI

Sebi plans rules for foreign brokers Will mull bringing under own ambit all financial products from abroad sought to be sold to Indians SACHIN P MAMPATTA Mumbai, 24 April The Securities and Exchange Board of India ( Sebi) will introduce rules for wealth management and foreign broking firms, which intend to sell financial products to Indian citizens. The fresh set of regulations, to be in addition to those from the Reserve Bank of India ( RBI), are being considered to bring the products these companies sell under Sebi’s ambit. The move comes less than six months after four Indian brokers settled charges by the US Securities and Exchange Commission ( SEC), for soliciting business from American clients without registration. The four brokers paid almost ₹ 10 crore as part of the consent order The proposal for the new rules was discussed in Sebi’s previous board meeting, which listed initiatives for the new financial year. Among other things, Sebi will ‘ examine the introduction of a regulatory framework for foreign intermediaries soliciting business from investors in India,’ according to the agenda for the meet, which took place on March 8. Sebi did not respond to an email query on the matter. PR Ramesh, senior consultant at law firm Economic Laws Practice, said there were numerous instances where foreign entities and wealth managers discreetly distribute foreign financial products within India. “This gap is sought to be plugged by Sebi through his proposal and this is a welcome step,” he said. Currently, banks are required to seek prior RBI approval for marketing any schemes for soliciting foreign currency deposits or for acting as agents of foreign mutual funds or any other financial services company. Wealth managers said the regulator’s decision to strengthen rules could be because of the rampant mis- selling of foreign structured products, though most such instances have been hushed up. Indian investments abroad are significant, with remittances of a little over $ 1 billion (₹ 5,400 crore) abroad in the financial year ending March 2012, according to RBI data. Of this, $ 239.5 million ( nearly ₹ 1,300 crore) was for investment in equity and debt. Gautam Mehra, executive director at PricewaterhouseCoopers, said the move could also be part of a‘ quid pro quo’ on the part of Sebi after the SEC ruling against the Indian brokers. “A lot of regulators follow a principle of reciprocity. A regulator who allows products from one jurisdiction to be sold in his domain can expect the foreign regulator to extend the same courtesy,” he said. The four broking firms involved in the SEC issue were Ambit Capital, Edelweiss Financial Services, JM Financial Institutional Securities and Motilal Oswal Securities. In their respective settlements, the firms agreed to be censured, while neither admitting nor denying the SEC’s charges. Ambit agreed to pay disgorgement and prejudgment interest totaling $30,910 (₹ 17 lakh), Edelweiss $568,347 (₹ 3 crore). JM Financial $443,545 (₹ 2.4 crore) and Motilal Oswal $ 821,594 (₹ 4.4 crore). SEBI SEEKS TO REGULATE FOREIGN HAND WHAT IS THE SIGNIFICANCE OF THE MOVE? |Move comes less than six months after US SEC passed adverse orders against Indian brokers |Four firms — Ambit Capital, Edelweiss Financial Services, JM Financial, and Motilal Oswal Securities — paid $ 1.8 million (around ₹ 10 crore) combined to settle charges |SEC is also investigating other firms, according to a statement in November WHAT S GOING TO CHANGE? |Sebi to introduce regulatory framework for

Business standard news updates 24-4-2013

RBI to tweak KYC norms to tighten banking system, says Chakrabarty To extend thematic review to 34 banks; rules out breach of anti- money laundering norms

BS REPORTER Mumbai, 23 April The Reserve Bank of India ( RBI) has said it might tweak the knowyourcustomer ( KYC) norms in order to strengthen the banking system. RBI has also decided to undertake a thematic review in 34 banks. Speaking on the sidelines of the Sustainability Conference organised by YES Bank in Mumbai, RBI’s Deputy Governor K C Chakrabarty said that the regulatory issues around KYC and other business norms were being looked at and, if necessary, RBI will order corrective measures. “At a transactional level, there are some aberrations which ( will) always take place and there is a need to look into those issues,” said Chakrabarty. Last month, online portal Cobrapost had alleged that employees of ICICI Bank, HDFC Bank and Axis Bank were offering services to convert clients’ black money into white, without the knowledge of the regulator and other bodies. Chakrabarty added RBI had found no evidence of money laundering, as alleged by Cobrapost. “ There is no evidence. There was no transaction.” Chakrabarty also said the investigation report won’t be made public. “RBI supervisory investigation is an issue between supervisor and supervised entity,” he said. “ That is not for public discussion”. He reiterated the banking system in India was sound. Chakrabarty, however, admitted to aberrations in the system. He refused to answer the question ona monetary penalty for alleged violations by the three banks. “If need be, monetary penalty would be imposed,” the deputy governor said. During his speech at the conference, Chakrabarty said, “The problem is not that of technique or skill, it is a problem of attitude... It is a problem of the corporate philosophy, which needs to be changed and this has to be addressed at the board level, at the enterprise level.” He added banks, especially private ones, needed to aggressively go after education loans. “Ninety- six per cent of education loans are given by public sector banks and banks need to finance aggressively for educating students to promote sustainability,” said Chakrabarty. RBI is serious about social and environmental sustainability, Chakrabarty said, pointing to the priority sector guidelines. “Even where we have given directions, the performance is abysmal, especially by the elite banks,” he added. BS REPORTER Kolkata, 23 April HDFC Bank today said it was yet to find a transaction which had breached the country’s anti- money laundering rules. The country’s second largest private sector lender is investigating allegations that it was one of three banks to be operating a money laundering racket. Cobrapost, an online magazine, had secretly taped as many as 25 employees seemingly offering money laundering as a product to undercover journalists. While the bank is doing an internal audit in some of its branches, it has also appointed Deloitte Touche Tohmatsu India to conduct an independent enquiry. The Reserve Bank of India has also examined transactions in some of HDFC Bank’s branches. “The issue is being reviewed and investigated from multiple quarters. Clearly, all the investigations have shown that there have been no instances of transactions actually taking place. Our belief is that the existing processes seem to have worked in not allowing these transactions to happen,” said Paresh Sukthankar, executive director of HDFC Bank. He clarified the investigation process was not over, as the bank was examining “ lakhs of transactions” across 20- 25 branches in the past year. “ We want to be as thorough with our examinations as possible. We expect it to be over in the next few weeks,” he said. The bank would strengthen its internal controls if it found any weaknesses. The 25 employees on videotape remain suspended. Money laundering: HDFC Bank says probe into Cobrapost exposé yet to find irregularities Reserve Bank of India Deputy Governor K C Chakrabarty

SBI launches prepaid card for blue- collar workers BS REPORTER Mumbai, 23 April The State Bank of India ( SBI) has launched a prepaid card — State Bank Smart Payout Card —targeted at contract labourers or blue- collar workers who do not have a bank account. The card is also suitable for employees of small and medium enterprises whose monthly salary is not more than ₹ 10,000. The minimum amount that can be loaded on the card at a time is ₹ 100 and the maximum, ₹ 10,000. The limit for a single transaction is ₹ 10,000, and it has a monthly limit of ₹ 25,000, the bank said. The card, to be available at all SBI branches, can be used for cash withdrawal at any ATM of SBI and its associate banks free and at other banks’ ATMs for a nominal fee. It can also be used at pointofsales ( POS) terminals at merchant establishments and on websites accepting Visa cards for e- commerce transactions. It can also be used as an add- on card for existing account holders on the Visa network. SBI already has 75,000 POS terminals and plans to double this number in a year. There is no minimum balance requirement and there will be no interest payment on the amount loaded into the card. Being a prepaid card, it can be issued to someone who does not have a regular bank account, provided there is valid photo proof, identity proof and introduction by a know- yourcustomer (KYC)- compliant person. RK Saraf, deputy managing director ( corporate strategy and new business) at SBI, said liberalised KYC norms as approved by the Reserve Bank of India would be applicable for beneficiaries. “ Special permission has been given to us for this,” he added. Only one card will be issued per person. However, against afully KYC- compliant account, amaximum of three cards can be issued. This does not include a current account. For companies, one card per employee can be issued. The card issuance charge is ₹ 102 and the reloading charge is ₹ 10. However, there will be no charge if reloaded through corporate internet banking, the SBI said. Bosch is the first company to get the card. SBI Deputy Managing Director ( corporate strategy and new business) R K Saraf at the State Bank Smart Payout Card press conference, in Mumbai on Tuesday PHOTO: SURYAKANT NIWATE operations in three months BS REPORTER Mumbai, 23 April The Securities and Exchange Board of India (Sebi) has asked Saradha Realty to wind up operations within three months. It also barred the company, as well as its managing director Sudipta Sen, from the capital markets till all the company’s investors were refunded their money. “Saradha Realty India Ltd and its Managing Director, Sudipta Sen, to wind up its existing collective investment schemes and refund the money collected by it under the schemes with returns that are due to the investors, according to the terms of offer, within a period of three months from the date of this order,” the order said. After the refund is over, the company would have to file a winding- up and repayment report to Sebi. Today’s order comes exactly three years after Sebi had first learnt of the Saradha scam. In a letter dated April 23, 2010, the Director, Economic Offences Investigation Cell, West Bengal, had informed the regulator that Saradha Realty India was collecting money from the public, especially in rural areas of West Bengal. The letter was accompanied by a brochure detailing the mode of mobilisation of funds. Saradha group had raised money through collective investment schemes that promised returns to investors through various modes, including realty. After the tip- off, Sebi had sent many letters, asking the company to clarify the issues raised. These letters included those dated June 3, 2010; July 14, 2010; August 13, 2010; October 12, 2010 and November 3, 2010. Today’s Sebi order said, “ The notice, however, did not furnish the desired information, in terms of the notice issued to it. It was noted that the notice had furnished voluminous and irrelevant information.” Saradha tried to delay the proceedings and mislead the regulator by sending a“ large number of boxes/ cartons filled with irrelevant documents as a tactic to delay the proceedings”, the order stated. If Saradha fails to comply with Sebi’s directive on the refund, the regulator would consider initiating prosecution and adjudication proceedings. It might also take other steps such as filing a reference to various government agencies for apparent offences of fraud, cheating, criminal breach of trust and misappropriation of public funds, the order said. Today, Sen, along with other company officials, were arrested from a hotel in Sonmarg, Kashmir. Earlier report on TSI Page 1 NCHIT FUND FIASCO N Sebi tells Saradha Realty to wind up April 23, 2010 Director Economic Offences Investigation Cell, Government of West Bengal, tips off Sebi on Saradha Realty India 2010 Sebi writes to Saradha, asking for its version on the issues raised 2011 Trinamool MP Somen Mitra wrote to the Prime Minister, demanding urgent measures against the proliferation of the chit fund business in West Bengal, mentions Saradha April 1, 2013 Saradha denies running collective investment scheme April 10 Sudipta Sen leaves Kolkata April 23 Police catches him in Jammu & Kashmir. Sebi passes order asking him to wind up operations HOW THE LAW CAUGHT UP WITH SARADHA REALTY SUPRATIM DEY Guwahati, 23 April The Saradha fraud in West Bengal is reverberating in neighbouring Assam as well, with depositors, as well the company’s former agents and employees, holding protest demonstrations here against Saradha Realty India and its sister concerns. Today, the authorities sealed a Saradha office at the Lalganesh area here, after protestors ransacked the office. Protests were also staged by employees at a Saradha Group biscuit factory in Dhubri, lower Assam. “Fraud and cheating cases have been lodged against the company in Assam. The management executives who were earlier based in Assam have suddenly vanished. We are looking for them. A lookout notice has been issued against Sudipto Sen ( chairman and managing director of the company) in West Bengal. We are also trying to trace him,” said a police official. Today, Deven Deka, a former employee of the Saradha Group- owned Bengali daily Sakalbela, levelled charges against state cabinet minister Himanta Biswa Sarma, former director general of police Sankar Baruah and social activist Sadananda Gogoi. He alleged these people had connived with Saradha Group and helped it carry out fraud activities, as well as its vanishing act. The allegations were made at a press conference called by Deka. In October 2010, Sarma had inaugurated the Saradha Group biscuit factory in Dubri. Earlier, Sakalbela journalists and other employees staged protests here, following the closure of the daily. Saradha Group- owned English daily Seven Sisters Post which was published from Guwahati, also stopped operations. Journalists and other employees of both the newspapers have complained of not receiving salaries for three consecutive months. For full report, visit www. business- standard. com Now, Saradha shockwaves rock Assam

against Saradha Group

BS REPORTER Mumbai, 23 April The Securities and Exchange Board of India ( Sebi) has initiated aprobe into the activities of the beleaguered Saradha Group in West Bengal, which had collected crores of rupees promising higher- than- average returns before shutting down. Sebi will investigate whether Saradha’s fund- raising business was within the Collective Investment Scheme ( CIS) regulations, said a senior Sebi official. “Sebi has already initiated an inquiry following certain complaints against Saradha Group. Since the matter is under investigation, we cannot comment any further,” said the official. The capital market regulator’s probe comes in the wake of repayment defaults by Saradha Group, which resulted in a few deposit- holders and agents killing themselves. The company’s weakening finances had forced it to shut down the newspapers and television channels, which it had either launched or acquired since 2010- 11. According to reports, at least ₹ 20,000 crore of deposit holders’ money is at risk after the sudden closure. Sebi has received complaints that Saradha had raised money without necessary approvals. While Sebi regulates CIS, chit funds come under state governments’ ambit. A CIS is defined as any scheme or arrangement made or offered by any company under which the contributions or payments made by the investors are pooled and utilised with a view to receiving profits, income or property, and is managed on behalf of the investors. Schemes including chit funds, Nidhi companies and schemes offered by co- operative societies do not constitute CIS. Sebi has been seeking more powers to nail offenders who collect money without seeking approval. The regulator has sought amendment to the Sebi Act as it has faced difficulties while recovering money from illegal CIS. Terming unauthorised CIS as the ‘grey market’ of the financial space, Sebi Chairman U K Sinha had recently said the rise in volumes in such activity was worrisome. “The audacity and frequency with which it ( illegitimate money collection) is happening is worrying and something all of us must take note of,” he had said. Sebi launches probe SARADHA MESS TSI P3 > >West Bengal’s ‘ chit fund’- fuelled media boom MANOJIT SAHA & SOMASROY CHAKRABORTY Mumbai/ Kolkata, 23 April The West Bengal government seems to have ignored the alarm bells sounded by the central bank and other lenders in the state on the mushrooming of chit funds such as the underscanner Saradha group. In the state level bankers’ committee (SLBC) meetings as early as in December last year, bankers raised the issue of these chit funds. The message was conveyed to the representative of the government, both verbally and formally. According to bankers, there could be at least 80 such entities in the state, which are collecting deposits from the public. Saradha is in the news due to the scale of its operations and the resulting impact when it failed to repay its depositors following a run on it. The group’s chairman and managing director, Sudipta Sen, was on the run for days; he was nabbed today from Sonmarg in Jammu, with two other company officials. It has turned out to be the biggest crisis yet for the Mamata Banerjee government. Turn to TSI, Page 2 > Bengal govt ignored RBI alert in Dec Subbarao had even publicly said all states had been warned to act, that it was solely their responsibility THE STORY SO FAR |Sebi has received complaints that Saradha had raised money without approvals |Sebi will investigate whether Saradha’s fund- raising business was within the CIS regulations |Sebi regulates CIS, while chit funds come under state governments’ ambit

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Revised Draft Training Guide for Comments. - (12-04-2013

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I-T dept to 'name and shame' habitual tax evaders

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Business standard news updates and legal digest 8-4-2013

Company responsible for fraud by agent

A principal cannot escape his liability for a fraud perpetrated by his agent— the principal can be held liable and the money recovered from him. Narendra Kawde, on behalf of a Maharashtra State Commission bench, pronounced this judgment on January 28. Jayant Prabhakar Aradhye had opened two recurring deposit accounts at the Solapur post office. The accounts were opened through Sunita Pradip Ghate, an agent of the post office. The agent had been authorised to collect money from account holders on a monthly basis and deposit the sum in the accounts of the account holders concerned. Aradhye had opened a recurring account on July 25, 2003. When the deposits matured in July 2008, the proceeds weren’t paid by the postal authorities. Following this, he filed a complaint before the Solapur district forum. The postal department contested the complaint, saying the agent had misappropriated the amount collected by her. The account holders didn’t realise this because the agent had made entries in their savings bank passbooks by forging the signatures of postal department officials and misusing rubber stamps to which she had access. Since the passbook entries appeared to be in order, account holders didn’t suspect something was amiss. The agent’s fraud was detected during the maturity of the recurring deposits, when deposit holders claimed the maturity value. An investigation followed and it was found the agent had tampered with the passbooks of several customers. The investigation revealed the funds of 472 recurring deposit account holders had been misappropriated--- the sum amounted to ₹ 19,67,490. The postal department filed a criminal case against the agent under various provisions of the Indian Penal Code. This case was pending and the postal authorities had been unable to recover the misappropriated funds from the agent. The department, therefore, pleaded it was unable to pay the maturity value to account holders. The district forum, however, said this wasn’t avalid reason to deprive the account holders of their funds. The post office was directed to pay ₹ 2,40,000 per deposit, nine per cent interest from the date of maturity till the actual payment, and costs of ₹ 1,000. In an appeal before the Maharashtra State Commission, postal authorities challenged the order. It said the agent, Sunita Ghate, was appointed by the Solapur collector to carry out various tasks, under the provisions of the Mahila Pradhan Kshetriya Bachat Yojana. The department argued it was not, in any way, responsible for misappropriation by the agent. The commission said though the district collector appointed agents to boost small savings under the scheme, it was the postal department’s responsibility to implement the Mahila Pradhan Kshetriya Bachat Yojana. Passbook entries showed apost office employee had made the entries and used the rubber stamp on these. The department had merely filed a criminal complaint against the agent; it didn’t adduce any evidence to disprove the genuineness of the signatures or postal rubber stamp in the passbook, the commission said. It concluded mere filing of a police complaint, without taking any step to recover the alleged misappropriated amount, would not absolve postal authorities from releasing the maturity proceeds to account holders. The commission added the funds deposited were to be held by postal authorities, who were obliged to render services to account holders on a day- to- day basis. Therefore, they couldn’t shirk their responsibility to hold the funds and release the proceeds on maturity. Account holders couldn’t be made to suffer for the act of omission or commission of the postal department and its agents, it said, adding the postal department was vicariously liable for the acts of its agents. The state commission upheld the order of the district forum, holding the post office liable to pay the maturity proceeds to Aradhye, and dismissed the appeal. Impact: Consumers whose money is lost due to similar circumstances can pin down the principal and recover their funds. The writer is a consumer activist Account holders cannot be made to suffer for an act of omission by agents CONSUMER IS KING JEHANGIR GAI A principal cannot escape his liability for a fraud perpetrated by his agent— the principal can be held liable and the money recovered from him

LEGAL DIGEST Escorts arbitration appeal dismissed The Supreme Court has dismissed the appeal of Escorts Ltd, ruling that the arbitration award made in the US against it was final and binding. Universal Tractor Holding LLC and Escorts Agri Machinery Inc, a subsidiary of Escorts Ltd, were holding shares in Beever Creek Holdings. There was an agreement by which Universal sold its shareholding in Beever to Escorts Agri. The latter defaulted in payment leading to a suit in North Carolina. It was later referred to arbitration, which went against Escorts Agri. Escorts companies had merged, and the Indian company objected to the execution of the award in India. The Delhi High Court rejected the objection, against which the firm moved the Supreme Court. It rejected that argument of Escorts that Universal ought to have proceeded for confirmation of the award under the US law and then come to India for execution. The judgment pointed out that the requirement of “ double exequatur”, as pleaded, has been dispensed with in the New York Convention and the Indian Arbitration and Conciliation Act. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Guidelines on compensation In road accident claims under the Motor Vehicles Act, the statutory schedule for calculating compensation need not be scrupulously followed by tribunals and courts, the Supreme Court stated in the judgment, Reshma Kumari vs Madan Mohan. There were differing views among Supreme Court judges for over a decade about the second schedule of the Act. Some judgements held the view that the table for calculating damages was “unworkable”. Some other decisions maintained that the schedule was a good guide for computing compensation. Despite this raging controversy, Parliament had failed to make amendments in the law for two decades. In view of the differences, this case was referred to a larger bench for a final view. In this judgment, the three- judge bench analysed earlier judgments of the Supreme Court and laid down a set of guidelines for arriving at a fair figure for damages under various situations, like when the accident was caused by negligence (Section 166) and when ‘ no- fault liability’ is invoked ( Section 163- A). The court asked all forums below to follow the new guidelines and those laid down in its 2009 judgment in Sarla Verma vs Delhi Transport Corporation, setting to rest the contrary views. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Bharat Petroleum evicted The Supreme Court last week ordered eviction of public sector Bharat Petroleum Corporation, which was paying ₹ 400 a month to its Mumbai landlord since 1955, and allowed the landlord to take criminal action against the firm for inducting rank outsiders in collusion with its dealer. The oil giant argued that it had a right to renew the lease under the Burmah Shell ( Acquisition of Undertakings in India) Act, 1976. It further argued that under the lease deed also, it had a right to get renewal of the lease for 30 years. Dismissing its appeal with costs, the judgment emphasised that the company could not claim any further renewal even under the Act beyond 2005. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Insurer to pay for loss of eye The Supreme Court last week set aside the rulings of the National Consumer Commission and the Chhattisgarh state consumer commission and awarded ₹ 7 lakh with interest to a person who had lost sight in one eye when he fell down while playing. In this case, Sandeep Chourasia vs New India Assurance Co, the company argued that the insured person had no eyesight from his birth. When this was disputed, a medical team conducted investigation which stated that the “ loss of vision could have been caused by fall while playing”. The commissions did not rely on the expert evidence and rejected the claim. On appeal, the Supreme Court stated that the commissions committed “ serious error” by not accepting the medical report. It ruled that the insurance policy, called Janata Gramin Vyaktigat Durghatana, covered the accident of this nature. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Temporary hands get paid The Supreme Court has ordered compensatory payment to workers of Bajaj Auto Ltd who had alleged that they were kept on temporary basis for several years denying permanent status. They alleged unfair labour practices under the Maharashtra law. According to them, they were engaged in 1990; yet they were offered employment only for seven months each year and after the expiry of the period, their services used to be terminated. This was violation of the Model Standing Orders in the Industrial Employment ( Standing Orders) Act. The company contested and stated that they were engaged to meet targets, on temporary basis, with the consent of the trade union. The industrial court stated that the employees had clearly been continued for years but were not granted the status or privilege of permanency. It asked the management to pay sums calculated by the court. The appeal of the company was dismissed by the Bombay High Court with adverse remarks against it. In its final appeal, the Supreme Court modified the order of the industrial court and reduced the payment. MJ ANTONY THINKSTOCK Need clear platform to publish disclosures The ongoing discussion on disclosure of material information by issuers of securities in India just got a new facet. The United States Securities and Exchange Commission (SEC) has issued a public report embracing social media and networking sites. such as Facebook and Twitter, as acceptable means of disseminating information, making it clear usage of such networks would need to be compliant with regulations barring selective disclosure. The Securities and Exchange Board of India ( SEBI), too, is grappling with how to regulate selective disclosure of information in the Indian market — most of this concern is centered on the primary market for new issuance of securities. Increasingly, SEBI is getting concerned about selective disclosure to large and institutional investors in securities offerings —for example, in the form of research reports and marketing presentations —while rest of the investors have to rely on disclosures in the official offer documents for securities offerings. As a concept, disclosure of information in India is covered by multiple regulations. Regulations governing issuance of securities also lightly govern issuance of research reports published around the time of securities offerings. Observation letters issued by SEBI upon review of draft offer documents generally state that marketing material should not contain information extraneous to the contents of the offer documents. However, this is an area light on clarity, considering the depth and detail in which international developments in this space came under the scanner when Eliot Spitzer took Wall Street by storm with his prosecution of securities research and marketing practices in the US. Even less clear is the area of disclosure of price- sensitive material information about companies that are already listed. The listing agreement ( between the listed companies and the stock exchanges) regulates this area. Material developments and decisions taken by boards of listed companies are required to be intimated to stock exchanges for dissemination to the market. SEBI has historically made numerous interventions by issuing directions under Sections 11 and 11B of the SEBI Act to listed companies that made disclosures or failed to make disclosures about developments in their businesses not to access markets until further orders. Most of these interventions have been based on the charge of fraudulent and unfair practices in the securities market, aimed at artificially moving and manipulating market price of the securities of the issuer. However, what remains elusive is clarity on what should be disclosed, when it should be disclosed, and what means maybe adopted for disclosures. Currently, statements to stock exchanges are the only means envisaged. Of course, information published in the annual report along with the financial statements would also be regarded as having been disclosed, but whether an interview from a CEO to a widely read newspaper, also published on the issuer’s website, would constitute an official publication, would not beget a confident and assured response either way. If stock exchanges are the primary platform, imagine the information flow exchanges would have to contend with, if every issuer were to play safe and send everything they wanted in the public domain to the exchanges. Indeed, there is abuse of this platform, too. Listed companies are known to send their version of litigation to stock exchanges, giving the market aone- sided picture of developments, with counter- parties having no say in presenting their side to the public, defeating the very objective of this dissemination platform. There is yet another dimension. Regulations governing insider trading prohibit disclosure of “ unpublished” price- sensitive information by insiders in listed companies to third parties. The term “ published” is defined as publication by the listed company, but these regulations, too, do not get into the medium of publication. This leaves open the legality of conducting due diligence into a listed company before taking it over, and even if one were desirous of making a public disclosure, there would need to be an assurance that a publication on the company’s website, or a publication of an interview in a widely read newspaper, would indeed render the information to be “ published”. The regulator’s firm and clear official view on these issues is not known to the market. Routinely, every time a newspaper reports a development, regardless of its accuracy, stock exchanges routinely ask the listed company to confirm the news. If the news cannot be confirmed for sheer lack of certainty, the company would reply that nothing that warrants disclosure has occurred. The braver ones deny outright. And, indeed, weeks later, when the news becomes truly accurate and certain, the official disclosure comes out. The development from the Securities and Exchange Commission is that it has now said it would embrace disclosures made on social media as effective publication, so long as the company is able to demonstrate that the publication of the information was “ reasonably designed to provide broad, non- exclusionary distribution of information to the public”. The Securities and Exchange Commission has simply asked for advance intimation to the market that acertain platform would be used for dissemination, say the official Facebook page. It is high time India had regulatory clarity on the medium for publication and disclosure of information. (The author is a partner of JSA, Advocates &Solicitors. The views expressed herein are his own.) somasekhar@ jsalaw. com The Securities and Exchange Board of India is grappling with how to regulate selective disclosure of information in the Indian market — most of this concern is centered on the primary market for new issuance of securities BS FILE PHOTO WITHOUT CONTEMPT SOMASEKHAR SUNDARESAN R& D issues in transfer pricing clarified Transfer Pricing ( TP) Provisions were introduced in India by the Finance Act, 2001. The TP Provisions were introduced with an intent to protect India’s right to collect a fair share of tax in respect of cross- border transactions. In simpler terms, TP provisions were introduced to ensure that an international transaction between two associated enterprises is made at arm’s length price, so that both the countries involved get a proper share of profits in their respective jurisdiction. Considerable time has elapsed since these provisions were introduced, but it appears that they are still at a nascent stage. Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ( OECD) recognises that “ transfer pricing is not an exact science; it will not always be possible to determine the single correct arm’s length price ….. Also the choice of methodology for establishing arm’s length transfer pricing will not often be unambiguously clear. In a difficult transfer pricing situation, because of the complexity of the facts to be evaluated, even the best intentioned taxpayer can make an honest mistake. Moreover, even the best- intentioned tax examiner may draw the wrong conclusion from the facts.” In an area of uncertainty, tax authorities tend to take a view which is favourable to the revenue department. As a result, for the last many years, transfer pricing adjustments have been made in India which go to astronomical figures and the taxpayers have to face serious consequences. It is, therefore, essential that to the extent possible individual judgment should be curtailed so that taxpayers may not suffer and cordial relations prevail between government and foreign enterprises. However, no proficient effort has been made by the government so far to address the contentious issues faced by taxpayers. Of late, the Central Board of Direct Taxes ( CBDT) has come out with two circulars on transfer pricing. The gist of the circulars is given below: Application of profit split method ( PSM) – Circular No. 02/ 2013 dated March 26, 2013 Since there is no correlation between cost incurred on research and development ( R& D) activities and return on an intangible developed through R& D activities, the use of transfer pricing methods ( like the transactional net margin method) that seek to estimate the value of intangible based on cost of intangible development ( R& D cost), plus a return, is generally discouraged. In a case where the transfer pricing officer ( TPO) is of the view that PSM cannot be applied to determine the arm’s length price of international transactions involving intangibles due to nonavailability of information and reliable data, he must record reasons for non- applicability of PSM before considering TNMM or comparable uncontrolled price method ( CUP) as most appropriate method, depending upon facts and circumstances of the case. TPO may consider TNMM or CUP method as appropriate method by selecting comparables engaged in development of intangibles in the same line of business and make upward adjustments taking into account transfer of intangibles without additional remuneration, location savings and location- specific advantages. Contract R& D services with insignificant risk - Circular No. 03/ 2013 dated 26.03.2013 There is divergence of views among field officers and taxpayers regarding the functional profile of development centres engaged in contract R& D services for the purposes of transfer pricing audit. Taxpayers insist that they are contract R& D service providers with insignificant risk. TPOs treat them as full or significant risk- bearing entities. CBDT has clarified that a development centre in India may be treated as a contract R& D service provider with insignificant risk if the prescribed conditions are cumulatively complied with. The circular also lists the required conditions to be followed. The point to be appreciated is that the government has started looking into the problems which these circulars have depicted. Hopefully, some more clarifications will come out that will address the contentious TP issues. It will not be out of place to mention that the ambiguous provisions relating to transfer pricing coupled with enormous authority and discretion vested in transfer pricing officers have led to an unbearable situation for taxpayers. The figures will speak for themselves. In FY 2011- 12, it has been reported that adjustments have been made to the tune of ₹ 44,5OO crore. It is also common knowledge that the institution of dispute resolution panel, which was specifically created to address the TP issues, has only added to the woes of taxpayers. Therefore, it is strongly felt that CBDT should issue more clarifications on disputed and debatable issues, so that tax litigation is reduced to a reasonable level. This will certainly prove to be a positive step in attracting foreign investment to India. The article has been co- authored by Alok Gupta e- mail: hp. agrawal@ sskmin. com a. gupta@ sskmin. com THINKSTOCK FOREIGN ENTERPRISE HP AGRAWAL Cyprus debt funds halt remittances from India SACHIN P MAMPATTA Mumbai, 7 April Cyprus- registered funds that invest in Indian debt instruments are refraining from taking their redeemed investments back to the island nation. Fears over safety of their money, following the economic turmoil in Cyprus, which prompted the nation to impose haircuts on bank accounts, raise taxes and introduce capital controls, are forcing funds to stop remittances to that country. These funds are private equity entities and institutions. “There is some uncertainty over the safety of the money sent to the country. People are adopting a wait and- watch approach,” said Pranay Bhatia, partner, Economic Laws Practice. Cyprus, in accordance with the conditions set by the International Monetary Fund and European Union for a € 10- billion bailout package, had agreed to impose a tax on bank deposits in the country. This means that some of the country’s depositors would have lost a portion of their money. The nation also increased the tax ( special defence contribution) on interest on deposits paid to Cyprus tax residents from 15 per cent to 30 per cent. So, while interest income coming into Cyprus from India would only be taxed at 10 per cent, once it is deposited in Cyprus, any additional interest generated on such a deposit from within Cyprus faces higher taxes. Also, corporate tax in Cyprus had been raised from 10 per cent to 12.5 per cent. Capital controls or restrictions on money flows have also been imposed. All these have prompted these foreign funds to keep their money in India for the moment. Suresh V Swamy, executive director, tax & regulatory services at PricewaterhouseCoopers, said: “ Funds based out of Cyprus are cautious in remitting money to the country. Their preference is to park money in their rupee accounts to the extent they are able to reinvest in India, until some clarity emerges on the situation in Cyprus.” This aversion to Cyprus is in stark contrast to the situation when foreign funds with a focus on debt investments would base their operations out of Cyprus to take advantage of a treaty with India, which entitles them to a lower rate of tax on interest income. The lower withholding tax on such income at 10 per cent compared to 15 per cent in Singapore and 40 per cent in Mauritius was a reason for the nation’s popularity. Now, as Cyrpus’ popularity among foreign investors wanes, some entities are looking to route their redeemed money through other taxfriendly nations for foreign funds. DEBT DEBACLE Why did debt funds come through Cyprus? [1]Lower withholding tax on interest income makes this an attractive jurisdiction for debtoriented funds What has changed? [1]Financial crises in the country means that bank accounts take a hair cut [1]Country has also raised various domestic taxes Whats happening now? [1]Investors are not sending money back to their base in Cyprus [1]New investors are shying away from setting up establishment in the country