Business standard updates

MCA starts framing rules for new Companies Act

NSUNDARESHASUBRAMANIAN Mumbai, 18 October With the Cabinet clearing the modified Companies Bill, activity has gathered pace in the Ministry of Corporate Affairs (MCA). The ministry has appointed an advisory group to verify and oversee the rule-making process of the new Companies Act. “An expert group comprising seven to eight people has been formed. This group will verify the various rules under the Act and give suggestions,” said an official familiar with the development. Representatives of professional bodies such as the Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI), top securities lawyers and other company law experts are part of this group. The rule-making process is significant, as they will determine the manner in which the law is implemented, say experts. The Companies Bill, 2011, aimed to give a modern legislation for growth and regulation of corporate sector was approved by the Union cabinet earlier this month with certain modifications. The Bill which is expected to be tabled in the Parliament during the Winter session, redefines the role of auditor, makes companies answerable towards corporate social responsibility. It also contains new provisions governing inter-corporate loans and responsibility of directors and private placements. The Bill, which will become law after Parliament approval, provides the broader policy direction on these issues. The rules will determine the course through which these objectives are achieved. After verification by experts, the draft rules are also expected to be put up on the MCA website for public comments.

TCI converts legal case with Coal India akin to class action suit

SHINE JACOB & NSUNDERESHASUBRAMANIAN Kolkata/Mumbai, 18 October About 650,000 shareholders of state-owned miner Coal India will now have a stake in The Childrens Investment Fund’s legal battle against the central government, Coal India’s largest shareholder, and directors of the company. The Calcutta High Court has approved a request by the British hedge fund to make the case representative of all shareholders. The court has also directed The Childrens Investment Fund (TCI) to issue newspaper advertisements "explaining the nature and details of the lawsuit" to the shareholders. Institutional investors, including TCI, hold some 7.3 per cent in Coal India (CIL), while companies and retail investors hold 2.7 per cent. The Centre holds the 90 per cent. TCI has claimed ~2,12,250 crore from the government of India on behalf of CIL shareholders, as compensation for losses caused by its policy to price coal substantially below market prices. According to TCI, this is the cumulative loss to pre-tax profits since the IPO in November 2010. The loss is estimated for a period starting November 2010 to March 2013, for 861 million tonnes of coal sales under fuelsupply agreements, at a price differential of ~2,500 a tonne. TCI is also seeking interest on this sum at prevailing commercial rates of 18 per cent an annum. "The court has approved our request to make the case representative. It may eventually become a class action suit. The outcome of the case will benefit all shareholders," said a partner at Luthra and Luthra, the lawyers for TCI. The case names 26 defendants, including Coal India, government of India, all the firm’s subsidiaries, except CMPDI and the directors. According to court documents reviewed by Business Standard ,the case filed by TCI Cyprus Holding at Calcutta High Court is asking the compensation, citing that there is abreach of duty by the government of India and the board members of CIL which resulted in the loss. “The plaintiff is entitled to and claims such decree on behalf of defendant no.1 (CIL) at the rate of 18 per cent interest per annum,” it said. TCI has also argued that the loss in revenue resulted in loss on its portfolio at different price earnings ratio (PE). If the coal was sold at ~2,500 a tonne, post-tax profits for FY13 would be ~65,625 crore. At a PE ratio of 13.3 times, Coal India would have been valued at ~8,72,813 crore. TCIs investment would have been worth ~8,815 crore. If the PE was 15 times, the market cap would be ~9.84 lakh crore and TCIs holding would be worth ~9,942 crore. Current market prices of Coal India are roughly a fourth of this. Coal India shares gained 1.65 per cent to close at ~359.35. At this price CILs market cap stood at ~2.26 lakh crore. A top CIL official confirmed the development and said, “Since this is a representative suit on behalf of CIL shareholders, the court has directed them to publish the details in newspapers to let the public know about this. They have reached this inflated loss of revenue by citing reason of price differential per tonne compared to market prices and also the coal sale based on fuel supply agreement during this period.” While the date of hearing at the Calcutta High Court will be on December 12, the pending case at Delhi High Court will be heard on December 7. According to CIL, "the logic that TCI is giving is that as the CIL management cannot go against the government for losses suffered, TCI is doing it on behalf of all the shareholders." Though TCI owns only 1.01 per cent of the shares in CIL, it is the largest foreign investor in the Kolkata-based coal major. According to CIL, while TCI had first filed a complaint to the board of arbitrators based on bilateral investment treaty (BIT) between India and Cyprus in May 2012, even before the gestation period of six months it approached the court. In August, TCI had filed a writ petition in the Delhi High Court over the interference of the Centre in the functioning of CIL, instructing the firm to revise the price hike based on gross calorific value made in December 2011. The major difference that the fresh case filed at Calcutta High Court last on October 12 was the compensation factor. TCI had also raised the scrapping of the system of fuel supply agreements claiming that it will hurt the coal major’s profit. The British hedge fund has claimed ~2,12,250 crore from the government of India on behalf of Coal India shareholders Coal India

DIPP seeks views of corporate affairs ministry on Sony Pictures deal

SOUNAKMITRA New Delhi, 18 October The department of industrial policy and promotion (DIPP) has asked the Foreign Investment Promotion Board to seek the views of the Ministry of Corporate Affairs on the deal between Sony Pictures and Multi-Screen Media (MSM) as to whether its sealing undervalued the shares and rights of the minority shareholders. In June, MSM had sought approval from FIPB for transfer of 21.11 per cent holding of Atlas Equifin Pvt Ltd in MSM India to SPE Mauritius Investments Ltd, Mauritius. It also asked permission for transfer of 20.28 per cent stake of MSM India, held by Grandway Global Holdings Ltd, Mauritius to SPE Mauritius Investments Ltd, Mauritius. After the sale and transfer of shares to SPE Mauritius Entities, SPE Mauritius will hold 94.39 per cent in MSM India, increased from 62 per cent. Foreign holding in MSM India would increase from 87.99 per cent to 100 per cent. DIPP has also mentioned that an examination of fund flows revealed that funds were routed through Mauritiusbased Conduit Company through a multi-layered structure to avail the IndiaMauritius DTAA. “This is a clear case of treaty shopping,” according to DIPP documents, available with Business Standard . FIPB is likely to discuss the issue at its meeting on October 19, according to an FIPB document. MSM did not comment on the issue saying the concerned spokespersons were travelling. The ministry of corporate affairs declined comments on the issue. There were seven promoters, including Singapore-based investment banker Rakesh Agarwal, Shemaroo Films Managing Director Raman Maroo, World Media Group’s Sudesh Iyer, actor Jackie Shroff and businessman Sadanand Sule, together owned 32 per cent in the broadcaster via their consortium company Atlas Equifin (12.11 per cent) and Grandway Global Holdings (20.28 per cent), as widely reported earlier. Atlas Equifin was shown as the only resident shareholder, while Grandway was shown as the non-resident shareholder. Shares held by Grandway Global Holdings, Mauritius were transfer to SPE Mauritius Investments Ltd, Mauritius. DIPP also said that the “approval should be given once the company pays the due taxes on the transaction based on the facts and valuation of shares arrived at after examination.” The Department of Revenue (DoR) has also said that the taxation of dividend and future capital gains on alienation of shares by the investor shall be governed by India-Mauritius DTAA, on the principle of ‘resident based taxation’. During FY11, MSM’s revenue stood at $395.1 million, while its revenue stood at $592.5 million during FY12. The company’s Ebidta has also increased from 67 in FY11 to 139.9 in FY12, according to the company’s balance sheet. MSM runs eight channels —Sony TV, SET Max, SAB TV, Sony Pix, AXN, Animax and the recently launched music channel Mix and sports channel Six. In 2009, MSM failed to sell 32 per cent stake to the BK Modi Group due to differences over management rights and a lack of clarity on exit options. The deal was then valued at around $300 million. In 2010, a battle erupted among various stakeholders, with the minority shareholders filing a petition before the Company Law Board. The board had issued an interim order restraining MSM from raising the paid-up capital of the company. The shareholders had charged Sony Pictures Entertainment with mismanagement and oppression of minority shareholders. Shareholders Holding (in %) SPEMauritius Holdings 50.7 GrandwayGlobal Holdings 20.3 SPEMauritius Investments 20.0 Atlas Equifin 12.1 Emerging Markets Growth 3.1 Fund, Inc American Funds Insurance 0.9 Series, International Fund The NewEconomyFund 0.9 Capital International 0.6 Emerging Markets Fund American Dunds Insurance 0.2 Series, Global Growth Fund Source: FIPB/DIPP documents MSM SHAREHOLDING

No probe ordered into Walmart, say government officials

REUTERS New Delhi/Mumbai, 18 October The government has not ordered a probe into Walmart Stores over accusations the US retailer violated foreign ownership rules, officials said on Thursday in response to a media report. Walmart, which is expected to open its first Indian store after a change to ownership rules, said it had not been contacted on the subject by Indian authorities. The Financial Times said the commerce ministry last week asked the Reserve Bank of India (RBI) to investigate allegations that the worlds largest retailer had "clandestinely and illegally" invested in supermarkets in the country. The accusations were made by a Communist Party member of parliament in a letter to the prime minister. An ministry of commerce and industry official, who declined to be identified, said the ministry had forwarded the complaint on October 10 to the RBI for examination, but said the ministry had not asked for a formal probe into the matter. Pankaj Pachauri, spokesman for the office of Prime Minister Manmohan Singh, told Reuters :"Every letter that comes from an MP is routinely forwarded to the department concerned for examination. We did not order a probe. We got a letter from an MP and in due course we forwarded it to the department concerned." A Walmart spokeswoman in India, who declined to be named, said the company had not been contacted by the ministry or the central bank and was in full compliance with Indias foreign direct investment laws. "All procedures and processes have been duly followed and details filed with relevant Indian government authorities, including the Reserve Bank of India," the US-based retailer said in a statement. India recently allowed foreign retailers to own up to 51 percent in supermarkets, a decision made in the face of fierce political opposition. Previously, Walmart and other foreign players were only allowed to own wholesale operations. Walmart was the most vocal advocate for the rule change and is expected to open its first retail store within 18 months. First step to universal pension BS REPORTER New Delhi, 18 October The government is set to take the first step towards the universalisation of pension for the aged, widows and the physically challenged, as it mulls removing the distinction between those above and below the poverty line for selection of beneficiaries in the 12th Five-Year Plan. The proposal, with big financial implications, has been pushed by activists Aruna Roy and Baba Adhav, besides many organisations. Rural Development Minister Jairam Ramesh today said pensions would be given on the basis of some exclusion criteria on the socio-economic census that is on. Activist Nikhil Dey welcomed the news and said this was a great step forward. The schemes under the rural development ministry now provide apension of just ~200 a month, while states complement this with more. The 12th Plan would also for the first time give states some say in spending the funds of centrally-sponsored rural development programmes, according to their own priorities and needs. The Plan has allowed a small window of ~40,000 crore for such flexibility to the ministry, which overall is getting an allocation of ~490,000 crore. The window, called a rural flexi fund, would have a central share of 70 per cent (~28,000 crore), while the rest would be from the state’s share. Ramesh and Montek Singh Ahluwalia, deputy chairman of the Planning Commission, announced the fund today. MCX-SXmantra: Less speculation PALAKSHAH Mumbai, 18 October The soothing rooftop garden outside his corner office might have played a role in this, but Jignesh Shah, the 45-year-old founder of FT Group, is now in a mood to “collaborate”, even with rival stock exchanges with which he has fought many a battle in the past. In fact, Shah, who has built an empire of nine exchanges and related ventures in warehousing, information management and electronic payments with combined revenues of ~834 crore and estimated profits of ~264 crore, and is planning to do a soft launch of equities and debt trading on MCX-SX this Diwali, has set his sights higher: "My competition is not domestic. We want to benchmark ourselves to Chinese exchanges where retail participation is nearly two-thirds,” Shah says, in his first interview to media after getting clearance to start a stock exchange. The licence for MCX-SX came after nearly four years of fighting the Securities and Exchange Board of India. Shah says the FT Group is known to create new markets, which is what it will do through MCX-SX. Fortunately, he says, regulatory policies are conducive for this. Shah says he wants to “change the trading structure” to avoid the huge concentration of volume in the derivative segment that is keeping retail investors away from capital markets in India. The derivative market has a 92 per cent market share and the rest of the trading takes place in the cash equities segment. “There were more retail investors in the Indian stock market before derivative trading became big. Investors had clarity of downside risk, as they knew they can hold on and sell Though Shah doesn’t say this, the So, MCX-SX will follow deliverybased settlement system in equities. Under the system, a seller of stock futures or options will have to deliver shares to the counter-party when the contract expires. The pattern is followed by all leading derivative exchanges around the world and also BSE, but the latter has not been able to capitilise on it due to lack of marketing strategy. Market experts say physical settlement, as it is known, will double delivery-based volumes. In the commodities segment, MCX follows T+1 settlement and it plans to implement the same in the equity segment as well where settlement is done on a T+2 basis currently. Stress would also be on developing an active bond, interest rate futures and SME markets, which Shah says, will result in a 360 degree development of the capital market. In the US and Europe, the market share of equity market is around 30 per cent, whereas currency, bond and interest rate futures markets dominate the scenario. Both the NSE and the BSE have failed to develop the debt market in the past. In bonds, Shah says there should not be a market only for AAA-rated securities for which everyone wants to lend. The key will be to develop a market for other lower-rated bonds. Turn to TSI, Page 2 >Jignesh Shah says retail investors get unnerved by complicated derivative products MCX-SX: KEYSTRATEGY |Delivery-based settlement system for equity derivatives to reduce market volatility |Bring in T+1 settlement system in equities |Launch indices based on growth sectors than just market-cap to attract ETFs |Encourage investment culture by products based on fixed income and increase understanding of give and take delivery |Develop bond, interest rate futures and SME along with equities and currency segments Initial challenges |NSE has indicated to brokers that it is willing to do more to bring down cost |In such a scenario, attract higher membership. |Catch-up on providing a high speed trading platform Click: Article continued from…MCX-SXmantra: Less speculation MCX-SX mantra... On the SME segment, MCX-SX will not have an anonymous order matching system and will bank on a hub-and-spoke model. NSE, on the other hand, is looking to leverage partner London Stock Exchange’s expertise. LSE operates one of the largest platforms for the SME segment, known as AIM. Technology, of course, will play a key role. The FT group, which has five operational exchanges globally, says its servers run a minimum of 16 hours a day without interruption compared to equity exchanges in India where trading is conducted for six-and-ahalf hours. Shah says the world should wait for more such surprises from MCX-SX. “Before we came into the picture in the stock exchange space, sun-outage was an excepted norm. When we launched operations in currency derivatives, our technology ran smoothly during sun outage. Both the other exchanges caught up later,” he says, adding as a new entrant, MCX-SX will bring in the latest technology with less legacy costs, the benefit of which will be passed on to market participants. Though some observers say much of what Shah says is only playing to the gallery, the fact is he has walked the talk in the past. MCX has over 80 per cent share in commodities trading volumes, which are more than ~65,000 crore on an average daily basis. FT’s brokerage solutions software ODIN, the major revenue earner for the company, also has 80 per cent market share. Also, take spot power trading, where the Indian Energy Exchange (IEX), promoted by FT, enjoys 90 per cent market share. NSE- and NCDEX-promoted Power Exchange of India is a distant second. For example, IEXs initiatives had led to revival of many SME units in Punjab, which were shut down due to high power tariffs. But the launch of power trading on an exchange platform resulted in availability of cheap merchant power. Shah, however, knows it can’t be roses all the way for his dream of creating a market for the masses, which is why some of his experiments faltered. For example, the Safal National Exchange, a joint venture between the FT-MCX and National Dairy Development Board. The exchange was supposed to offer an online platfiorm for fruit and vegetables, but failed as traders and farmers just could not agree on the quality and price. Similarly, the Singapore exchange couldn’t live up to its potential in the initial years, necessitating a management shake-up, but has recovered since then. But Shah says he has never shied away from risk when it come to expanding the business and is willing to learn from some of his past mistakes. The baby in the equity market clearly can bank on his mentor.

Business standard updates

UIDAI targets 80% Aadhaar enrolmentin 51 districts by Dec

BS REPORTER New Delhi, 19 October The Unique Identification Authority of India (UIDAI) is targeting 80 per cent enrolment in the 51 districts covered by Aadhaar-based pilot projects by the end of this year. It plans to complete the enrolment by March-end. Tomorrow, Prime Minister Manmohan Singh would launch the Aadhaar-enabled service delivery system in Dudu, Rajasthan. Aadhaar-enabled applications would be used for pension and scholarship payments, as well as those under the Public Distribution System and the Mahatma Gandhi National Rural Employment Guarantee Scheme. It is expected with an increase in Aadhaar penetration, the system would also be extended to cover subsidy and entitlement payments. While disclosing the details of the function to be held at Dudu, UIDAI Chairman Nandan Nilekani said by 2014, at least one out of every two Indians would have Aadhaar numbers. He added tomorrow’s event would be attended by United Progressive Alliance chairperson Sonia Gandhi, Finance Minister P Chidambaram and Planning Commission Deputy Chairman Montek Singh Ahluwalia. At the event, the prime minister would hand over the 210 millionth Aadhaar number. Nilekani said the total enrolment for Aadhaar stood at 240 million, adding this would exceed 600 million by 2014. Though Aadhaar enrolment has exceeded 50 per cent in many states, the number is very low in states such as Bihar, Uttar Pradesh and Assam. Till September, these states had recorded no enrolment. UIDAI officials said according to a Cabinet decision, the authority had to cover 16 states, while other regions would be covered under the National Population Registry (NPR). A few of the lowpenetration states were those covered under the NPR, and enrolment in these was expected to pick up pace soon, they added. The Aadhaar-based service delivery had already proved useful in the pilot projects underway, they said. Through a pilot project in Tumkur district of Karnataka, Indian Overseas Bank opened 40,000 accounts within a short period. Overall, 1,50,000 bank accounts have been opened through this mode across the country. On September 1, a pilot was launched in the East Godavari District of Andhra Pradesh. The project covered 1,25,000 beneficiaries across 35,000 households and helped curb leakages in the Public Distribution System. A pilot project in Mysore helped deliver 50,000 liquefied petroleum gas cylinders through Aadhaar authentication. A project in Aurangabad, Maharashtra, is targeting pension payment under five special assistance schemes, while another project for the direct transfer of government money to Aadhaar-enabled bank accounts has been implemented in Mandai block, West Tripura District. PM to launch nationwide Aadhaar-based service system in Rajasthan today UIDAI Chairman Nandan Nilekani at the occasion of second anniversary of Aadhaar, in New Delhi on Friday PHOTO: PTI

Sebi duty bound to take action against Sahara: SC BS REPORTER New Delhi, 19 October Refusing to grant more time to the Sahara group of investment companies, the Supreme Court today allowed the Securities and Exchange Board of India (Sebi) to take action against the companies if they failed to provide details about some three crore investors from whom the companies raised ~24,000 crore. The court in its August 31 judgment had asked the two companies – Sahara India Real Estate Corporation and Sahara Housing Investment Corporation – to deposit with Sebi the amount collected and the original documents related to the investors. The Sahara group has been seeking more time to submit the documents in view of the massive data involved. Many investors are said to be untraceable and their money will go to the government. Sahara had failed to submit the data before the September 10 deadline, following which Sebi approached the court. When Sahara moved the court again today, a bench headed by Justice K S Radhakrishnan told the counsel that the case has been disposed of . Now the order should be implemented. If the firms default, their property could be attached and bank accounts frozen. Sahara earlier committed that it would submit all the documents by November end. It has already filed a review petition against the judgment, which had held that the optionally fully convertible debentures scheme through which the fund was raised was illegal. The court had appointed one of its retired judges, Justice B N Aggarwal, to supervise the implementation of the order. He has reportedly stated that Sahara has failed to hand over the documents to Sebi.

Updates on RTI

The Supreme Court in Girish Ramchandra Deshpande Vs. Cen. Information Commr. & Ors. has ruled that the details of a person's income tax returns and performance of an employee are "personal information" which cannot be divulged under the provisions of the Right to Information Act unless a larger public interest is involved.
The apex court added that under the transparency law, information pertaining to the performance of an employee or officer cannot be made public as it is a matter between the employee and the employer which falls under the expression of "personal information" and cannot be claimed as a right by others.
"The details disclosed by a person in his income tax returns are "personal information" which stand exempted from disclosure under clause (j) of Section 8(1) of the RTI Act, unless a larger public interest is involved and the Central Public Information Officer or the State Public Information Officer or the Appellate Authority is satisfied that a larger public interest justifies the disclosure of such information," a bench of justices KS Radhakrishnan and Dipak Misra said.
"The performance of an employee or officer in an organisation is primarily a matter between the employee and the employer and normally those aspects are governed by the service rules which fall under the -expression `personal information', the disclosure of which has no relationship to any public activity or public interest," it further said.
The court said the disclosure of such information would cause unwarranted invasion of privacy of that individual.
"Of course, in a given case, if the Central Public Information Officer or the State Public Information Officer of the Appellate Authority is satisfied that the larger public interest justifies the disclosure of such information, appropriate orders could be passed but the petitioner cannot claim those details as a matter of right,"
Copy and paste the following link to view Complete Judgment
http://agrawalandcompany.blogspot.in/2012/10/income-tax-returns-out-of-rti-ambit.html
Saket Agarwal, Advocate
Agarwal & Company Law Offices LLP., New Delhi, India
Advocates & Solicitors
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Tel: +91-11-2273 2540; +91-11-2273 2530
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Service tax updates

Dear friends,

In terms of sub-rules (1) and (2) of Rule 7 of the Service Tax Rules, 1994, the half yearly return for the period 1st April to 30th September 2012, is to be filed by 25th October, 2012. In the current financial year , an assessee would have had to give data with respect to specific services and the corresponding legal provisions for the period 1-4-2012 to 30-6-2012. The data for the period 1-7-2012 to 30-9-2012, would have been with respect to different services and the corresponding legal provisions. Combination of all these provisions into one return would have made the return complex for the assessees .
Therefore assessees have to provide data only for the period 1-4-2012 to 30-6-2012 in the first half yearly return which is due on 25-10-2012.
The data for the period from 1-7-2012 to 30-9-2012 should not be filed. Modifications will be made in the ACES so that any data filed for this period is rejected. Till such time as the modifications are made, ACES will not be accepting returns.
Data for the period 1-7-2012 to 30-9-2012 will have to be furnished in a return in a revised format. The revised format of the return and the last date for filing it will be indicated separately.

Please find below INSTRUCTION [F. NO. 137/22/2012-ST], DATED 28-9-2012 for your reference.

FILING OF ST-3 ONLY FOR THE PERIOD 1ST APRIL TO 30TH JUNE, 2012
INSTRUCTION [F. NO. 137/22/2012-ST], DATED 28-9-2012
In terms of sub-rules (1) and (2) of Rule 7 of the Service Tax Rules, 1994, the half yearly return for the period 1st April to 30th September 2012, is to be filed by 25th October, 2012. In the current financial year , an assessee would have had to give data with respect to specific services and the corresponding legal provisions for the period 1-4-2012 to 30-6-2012. The data for the period 1-7-2012 to 30-9-2012, would have been with respect to different services and the corresponding legal provisions. Combination of all these provisions into one return would have made the return complex for the assessees .
2. I am directed to inform you that it has been decided that assessees have to provide data only for the period 1-4-2012 to 30-6-2012 in the first half yearly return which is due on 25-10-2012. (The data for the period from 1-7-2012 to 30-9-2012 should not be filed. Modifications will be made in the ACES so that any data filed for this period is rejected. Till such time as the modifications are made, ACES will not be accepting returns) Accordingly notification 47/2012, dated 28-9-2012 has been issued today.
3. Data for the period 1-7-2012 to 30-9-2012 will have to be furnished in a return in a revised format. The revised format of the return and the last date for filing it will be indicated separately.
4. The above information may be communicated to departmental officers and assessees.


With regards,
Bipul Kumar
FEMA & Tax Advisory Services
Wisdom Management Consultancy Private Limited
--------------------------------------------------
Reg. Office: B-116, Joshi Colony, I.P. Extension, New Delhi-110092

Business standard updates 2-10-2012

Final guidelines on GAAR in 20 days

BS REPORTER New Delhi, 1 October The controversial guidelines on the tax General Anti-Avoidance Rules (GAAR) are likely be amended in 20 days, after considering today’s final recommendations by the Parthasarthi Shome panel on the subject. Another report by the panel, on indirect transfer of Indian assets by non-residents, also given today, would be released for public comments shortly. In its recommendations last month, the Shome panel had proposed deferring GAAR for three years, to April 2016. Through this year’s Finance Act, the government had proposed to introduce the anti-avoidance rules from April 2013. A deferment would need amendment to the Income Tax Act. “Stage-1, finalisation of our views on the report, will be completed in the next 10 days. Stage-2, the final GAAR rules, would take another 10 days because that would require vetting by the ministry of law. In stage-3, it will go to the cabinet if the Act has to be amended,” Finance Minister PChidambaram told reporters today. The rules were announced by the government to check tax avoidance by companies routing their investments into India through tax havens. Faced with widespread criticism, the government formed the Shome panel to address the concerns of investors. The panel, deviating majorly from draft guidelines issued by a finance ministry committee in June, had recommended abolition of capital gains tax on transfer of securities. While the Central Board of Direct Taxes had said GAAR would be invoked if “one of the main purposes” was to obtain tax benefit, the Shome panel said only arrangements with the main purpose of obtaining tax benefit should be covered under GAAR. And, that GAAR provisions not be invoked to examine the genuineness of residency of entities in nations with whom we’ve signed a tax avoidance treaty, such as Mauritius or Singapore. Asked about the panel’s report on retrospective taxation, Chidambaram said it would be put up on the ministry’s website for comments once they’d gone through it. The panel is likely to have proposed softening the blow of retrospective amendments on investors. The report might decide the fate of Vodafone’s ~12,000-crore tax case with the Indian government. The minister had earlier said a decision on sending a tax notice to the company would be taken after getting the Shome panel’s report on retrospective amendments and the department wouldn’t act rashly. Vodafone India’s non-executive chairman, Analjit Singh, after meeting finance ministry officials recently, had said the company was willing to discuss the matter with the government. The panel is likelyto have proposed softening the blowof retro amendments on investors Govt to seek public comments on Shome panel views on retrospective tax law amendments

Insurers set to get room to spread wings as investors

BS REPORTER New Delhi, 1 October Finance Minister P Chidambaram today announced arevival package for the life insurance sector. The steps include easing investment norms for insurance companies, faster product clearances and tax incentives to improve insurance penetration in the country. At present, insurance companies are required to put 75 per cent of their debt market investments in AAA-rated instruments. These do not include investments in government securities. The minister said the Insurance Regulatory Development Authority (Irda) would consider relaxing the stipulation, and provide the minimum requirement of 75 per cent in AAA instruments would apply to debt investments including government securities and other investments. “This is expected to release a space of 12.5 per cent for investments in less than AAA-rated debt instruments,” Chidambaram told reporters while announcing a 12-point action plan for the sector. Currently, there are not too many AAA instruments for life insurance companies to invest in. There has been no change in equity investment norms. To address the industry’s concerns on regulatory delays in product approval, guidelines will be issued by the end of November for mandating a 30-day norm for clearance of products. To speed up clearances, the insurance regulator will also introIn the last two years, the industry saw a severe FM announces 12-point action plan to revive sector WHAT’S IN THE 12-POINT PLAN | Automatic approval for products 15 days after intimation to the Irda | Norms to observe 30-day mandated period for product clearance | Norms to reduce arbitrage between ‘units’ and ‘traditional’ products | The Irda to accept banks’ KYC norms to cut ‘onboarding cost’ | Banks to act as brokers selling products of multiple insurers | All banking correspondents to sell micro insurance products | Non employeremployee groups to be allowed for group business | Master policyholder to be compensated in group business | Companies free to manage overall management expenses | Mentors for agents to be appointed on fixed-fee basis | Investments allowed in infra SPV floated by any company |Irda to relax condition of 75% investment in AAA instruments

RBI may askbanks to improve monetary transmission

NEELASRI BARMAN Mumbai, 1 October The Reserve Bank of India (RBI) might ask banks to improve monetary transmission by cutting lending rates in response to the reduction in cash reserve ratio (CRR) it had announced in September. It had cut CRR by 25 basis points to 4.5 per cent of banks Net Demand and Time Liabilities. CRR is the proportion of total deposits a bank has to keep with RBI as cash. RBI will hold pre-policy review meet with bankers on October 5. Its next policy meeting is scheduled for October 30. After the cut, India’s largest lender, State Bank of India, was the only one to cut its base rate (BR), by 25 bps to 9.75 per cent. Other banks say they need a repo rate cut (repo is the rate at which RBI lends to banks) to cut their BR. “The emphasis in the pre-policy (the next RBI review of monetary policy is at the end of this month) meeting will be on the way ahead for repo rate cuts. We need cues from RBI on these. The CRR cut doesn’t help much, as it creates only a minor reduction in interest costs,” said A D M Chavali, executive director, Indian Overseas Bank. RBI has cut the repo rate only once so far this financial year, by 50 bps to eight per cent. After the cut, some banks reduced their BR by 10-25 bps. The Street does expect RBI to cut the repo rate by another 50 bps but the timing is uncertain. Some bankers say a further cut in BR might be needed if there is excess liquidity in the system. “We need to see a downtrend in the 180-365 days’ deposit rate, which is currently high on RBI maintaining deficit system liquidity and a large supply of treasury bills in 91-364 days’ time buckets. We need to see either a rate cut or shift of system liquidity from deficit to surplus to get banks to cut the base rate. Till then, it would be a wait-and-watch stance,” said J Moses Harding, head of the asset liability committee and economic and market research, IndusInd Bank. Today’s borrowings by banks under the daily Liquidity Adjustment Facility was ~60,460 crore. With credit growth sluggish for the first six months of this financial year, a top official of a leading bank recently said RBI’s mandate of a 17 per cent rise in this parameter for 201213 might not be achieved. Economists do expect lending rates to get cut. “We expect lending rates to come off 25-50 bps, atop the 25-75 bps done. Unless lending rates come off, FY13 growth may find it difficult to clock our modest 5.6 per cent, let alone RBI’s 6.5 per cent,” said Indranil Sen Gupta, India economist, Bank of America Merrill Lynch, in a report released on Friday. Arguments to thicken in run-up to pre-policy review meeting on October 5 Credit growth *(April-September) ~crore % (over April) 2011 133,110 3.4 2012 137,840 3.0 *Till Sep 7 POLICYGROUNDWORK Source: RBI/banks Deposit growth *(April-September) ~crore % (over April) 2011 319,570 6.1 2012 411,940 7.0 *Till Sep 7 Banks’ reduction in base rate *Cutby 10-25 (bps) *in 2012; Following 25 bps CRR cut by RBI in September, only SBI has responded by cutting base rate by 25 bps Base rate of leading banks (%) CRR Repo RBI action in 2012 4.5 %Cutby 150 (bps) Cutby 50 (bps) 8.0 %SBI 9.75 ICICI Bank 9.75 HDFC Bank 9.80 PNB 10.5 BoB 10.5 Canara Bank 10.5 Bankof India 10.5 “We expect lending rates to come off 25-50 bps, atop the 25-75 bps done” INDRANILSEN GUPTA India economist, Bank of America Merrill Lynch

Srikrishna panel forunified financial regulator BS REPORTER New Delhi, 1 October A government-appointed panel today proposed a unified regulator for financial sector laws, including those for markets, insurance, commodities and pensions. It, however, proposed to keep banking out of the regulator’s purview. The Financial Sector Legislative Reforms Commission (FSLRC), formed in March 2011 to rewrite and harmonise financial sector laws, has proposed a regulatory structure that will alter the financial landscape. In an approach paper released today, the commission headed by former Supreme Court judge B N Srikrishna said there should be a central bank in charge of monetary policy and enforces the consumer protection law and micro-prudential law in banking and payments. The paper will form the basis of the panel’s final report, likely next year. For other financial sectors, the panel has proposed a unified financial regulatory agency to subsume the Securities and Exchange Board of India, Forward Markets Commission (FMC), Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority. “The unified agency would yield benefits in terms of economies of scope and scale in the financial system; it would reduce the identification of the regulatory agency with one sector; it would help address the difficulties of finding the appropriate talent in government agencies,” it said. This agency would also take over the work on organised financial trading from the Reserve Bank of India in the areas connected with the bond-currency-derivatives nexus and from FMC for commodity futures, thus unifying all organised financial trading, including equities, government bonds, currencies, commodity futures, corporate bonds. The Securities Appellate Tribunal will be subsumed in a Financial Sector Appellate Tribunal to hear appeals against RBI for its regulatory functions, the unified financial agency, decisions of the Financial Redressal Agency and some elements of the work of the resolution corporation. The other four regulators proposed by the commission are a Resolution Corporation to watch all financial firms that have made intense promises to households and intervene when the net worth of a firm is near zero; A Financial Redressal Agency to address consumer complaints against companies across the financial sector; an independent Debt Management Office and the Financial Stability Development Council. The paper said there was a need to separate the adjudication function from the mainstream activities of a regulator, so as to achieve a greater separation of powers. “This involves enshrining an appointment process for senior regulatory staff, fixed contractual terms, controlling the loss of independence that comes from the possibility of extension of term or promotion, removing the power of government to give directions, bringing transparency to board meetings,” it said. Approach paper proposes subsuming work of Sebi, Irda, FMC and PFRDA; suggests four new bodies PANEL’S PROPOSALS |A unified financial regulatory agency to subsume Sebi, Irda, PFRDA and FMC |A central bank in charge only of monetary policy, consumer protection law and micro-prudential law in banking and payments |Securities Appellate Tribunal be merged with Financial Sector Appellate Tribunal to hear appeals against RBI |Resolution Corporation watch financial firms that have made intense promises to households and intervene when the net worth of a firm is near zero |Financial Redressal Agency address consumer complaints against companies across the financial sector |Independent Debt Management Office and the Financial Stability Development Council The approach paperwill form the basis of the panel’s report, likelynext year October hope for new banking licences SANTOSH TIWARI New Delhi, 1 October The government expects a breakthrough in providing new banking licences, which is part of the renewed reform agenda, in October. “We are moving ahead in this direction. It will take two to three weeks,” said a senior finance ministry official. Despite the central bank issuing draft guidelines after consultations, the new banking licences are stuck because there is no final decision on if the process should be started without amending the Banking Laws Act. RBI wants the Banking Laws (Amendment) Bill to be first cleared by Parliament and then initiate the process of providing new licences. But many in the government, including chairman of the Prime Minister’s Economic Advisory Council C Rangarajan, are of the view that new licences can be issued according to current banking regulations and the law could be modified in due course. In the changed circumstances — with finance minister P Chidambaram at the helm of affairs and government’s resolve to push economic reforms — the chances of the idea moving ahead has increased, officials pointed out. They said that the differences between RBI and the Competition Commission of India (CCI) over powers to review mergers and acquisitions will also have to be resolved if the government decides to go ahead and take Parliament’s nod to the Banking Laws (Amendment) Bill in the winter session even though it is difficult to pass any Bill in the current political situation. The Bill to amend the Banking Regulations Act of 1949 was introduced in the Lok Sabha in March 2011. Among other proposals, it seeks to keep mergers and acquisitions in the sector under the purview of RBI, the sector regulator. In case there are no chances of an early passage of the Bill, RBI can consider issuing new bank licences without amendments in the Banking Regulations Act. RBI has until now stressed that it would be open to issuing new bank licences only when it is given more powers to regulate the sector. The amendment Bill gives RBI the power to supersede bank boards and inspect other arms of banks to avoid systemic risks. The Banking Laws (Amendment) Bill also seeks to allow private banks to raise the voting rights to 26 per cent from a maximum of 10 per cent, as recommended by the parliamentary standing committee. For buying more than five per cent of equity stake, approval of RBI will be mandatory. The parliamentary panel said that M&As should not be kept out of the CCI purview forever and should be considered as a special case. It also proposed an “expedient measure” to be revisited after both the Reserve Bank and the Competition Commission have gained some experience. Positive list in service tax could return VRISHTI BENIWAL New Delhi, 1 October A positive list for taxation of services might be back, though only for accounting purposes. With the introduction of the negative list from July 1, the finance ministry prescribed a new accounting code for tax payment for all services, replacing the earlier 119 codes. Instead of the earlier system of a separate code for each service, all service taxpayers now have to pay under asingle code. The revenue department later realised that because of a single code, it was not getting information on the sectorwise break-up of what was paid. The issue was raised by chief commissioners and directors-general of service tax at a meeting with Finance Minister P Chidambaram last month. They said it was impossible for them to track service tax payments by sector due to the single accounting code, and wanted the earlier codes to be restored in the negative list approach, too, said an official. “The finance minister is seized of the matter. Several options are being considered. One is to issue a circular to restore all the 119 codes, plus one more code for taxation of the remaining services, other than the negative list,” the official told Business Standard . Analysts said service-specific codes helped the revenue department capture the contribution of a particular category — for instance, insurance, advertising or ports. Now, when a taxpayer files returns, he does not have to mention the service for which the tax is being paid. “A unique accounting code for each service was a powerful tool for the government to track growth in various sectors and devise the audit and scrutiny strategy. In the new system, they may find it difficult to collate sectoral data,” said Pratik Jain, partner, KPMG.