Business standard 2-5-2012

Companies askgovtto relax25% public shareholding deadline

SANTOSH TIWARI New Delhi, 1 May With the Securities and Exchange Board of India (Sebi) talking tough on enforcing the 25 per cent shareholding deadline, companies facing the heat have started turning to the finance ministry for an extension. Senior finance ministry officials confirmed the development but strongly declined the possibility of extension in the deadline at this juncture. “The decision is a carefully thought out one and it will improve participation in the market. We have told this to the companies which have approached us for relaxing the deadline,” said a senior ministry official. The companies know the government could relax the deadline. Hence, they are approaching the ministry, said another official. “The government fixed the deadline in consultation with Sebi under the Securities Contract Regulation Act (SCRA) provisions and, technically, it can relax the same,” he added. In June 2010, the government had amended the Securities Contract (Regulations) Act rules, by ordering all listed companies to have a minimum of 25 per cent public shareholding. It has set a deadline of June 2013 for all private sector companies and August 2013 for all PSUs to meet these norms. But, even after almost two years, very few companies have tried to comply with the norm. Sebi Chairman U K Sinha has publicly expressed the regulator’s disapproval of any relaxation in the deadline. In fact, in the case of public sector companies, he has written to Cabinet Secretary Ajit Kumar Seth for enforcing it. Among the top public sector companies in terms of promoter holdings, government holding in Coal India is 90 per cent, NTPC 84.5 per cent, MMTC 99.3 per cent, NMDC 90 per cent and Indian Oil 78.9 per cent. Currently, 181 companies from the private sector and 16 public sector undertakings (PSU) have promoter holdings of more than 75 per cent. These entities will have to sell shares worth a cumulative ~40,000 crore by August 2013 to meet the public shareholding norm. The companies have argued that in the current sluggish market situation, they will not get the right valuation if they tried to meet the requirement. Some market experts are also of the view that with a disinvestment target of ~30,000 crore, the additional supply of ~40,000 crore worth of equity would be difficult for the market to digest. The Chairman and Managing Director of Prime Database, Prithvi Haldea, however, doesn’t think this will be a problem. “Market conditions, quality of company coming into the market and price are the three important factors. The problem is not liquidity; it is the quality and price, which will play a crucial role,” he said. Haldea further said the government should show seriousness about strict implementation of the 25 per cent public shareholding norm. “For the companies and market to accept the government directive on 25 per cent public shareholding seriously, the government must announce a penalty for those not meeting the deadline,” he stressed. FinMin officials toe Sebi line, say it’s a carefully thought step to improve market participation Sebi Chairman UKSinha has publiclyexpressed the regulator’s disapproval of any relaxation in the deadline

Business standard updates 6-2-2012

Service taxnetmay widen

VRISHTI BENIWAL New Delhi, 5 February Get ready to pay tax on every service barring those in some 20 categories such as construction, health, entertainment, restaurants, non-AC rail fares, travel by the metro or public buses, etc. A key official says the way has been cleared to bring this proposal in the Budget, as the finance ministry has agreed to take states’ concerns on board. Services constitute more than 60 per cent of India’s GDP, but are projected to contribute just 8.7 per cent of the Centre’s gross tax revenue in the Budget estimates for 2011-12. That is because service tax is a relatively new area in India. There was no tax on tertiary activities before 1994, when only three services came under the net. Progressively, the net has widened to include over 125 services under its ambit, but that too is minuscule relative to their size in the economy. Analysts believe this step would alone increase service tax collections 20-25 per cent, which would help in narrowing the fiscal deficit. States’ opposition could have been amajor roadblock in introducing a list of categories of services that would be out of the tax net, technically called the negative list of services. States wanted the Centre to prepare the list in such a way that areas under their domain were not taxed by the Centre. States do not impose services tax, but certain categories that qualify as services are taxed by them under different heads. As such, businesses paying tax to states may not be subjected to service tax by the Centre. A finance ministry official said if levying service tax on items already taxed by states was creating hurdles in the way of a negative list, it would be better to keep them out of the tax net for the time being and tax them under the proposed goods and services tax. “The Centre will be able to tax such services after making suitable amendments to the Constitution, but till then those can be kept in the negative list,” said the official. In its meeting in Bhopal last month, the Empowered Committee of State Finance Ministers had given its approval for the introduction of a negative list for services from April 1, 2012. The nod, however, came with riders, with states telling the Centre not to venture into their territory by levying service tax in areas such as construction, entertainment, restaurants, transport, toll, betting and gambling. Most of these categories could be clubbed with a negative list floated by the Centre for discussion, except for, say, entertainment. Last year, the finance ministry had released its revised discussion paper on the concept of a negative list for services, which proposed to keep 22 categories out of the tax net, against 28 proposed earlier. States also proposed some services within the ambit of the Centre’s residuary powers but critical for socio-economic reasons, such as social welfare and public utilities, agriculture, education and health, be kept in the negative list. In fact, the official said a few areas may not be in the negative list, but the Centre may decide to impose zero tax on them. Govt to loan ~3,000 cr to financially strained rlys DISHAKANWAR & JYOTI MUKUL New Delhi, 5 February For the first time in around two decades, Indian Railways would be taking aloan from the Union government. The ministry of finance approved one of ~3,000 crore last week. The railways ministry actually wanted a higher loan; it was also seeking a waiver of the requirement to pay a dividend (of about ~1,200 crore). Senior officials told Business Standard the interest rate would be 8.5 per cent and the loan was expected to be repaid in two to three years. There is a stipulation that the money would be spent prudently for zones with earning potential and be used strictly for activities enhancing throughput of the railways, said a senior official. “The ministry of railways had demanded ~10,000 crore from the finance ministry,” he added. A retired Railway Board member said it was a role reversal from the 1950s, when they’d once extended a loan to the government. “This is the first time in at least two decades or so that the finance ministry will be giving a loan to the ministry of railways,” he said. Railway finances have been strained this year, due to an increase in expenditure on account of Pay Commission arrears and fuel prices. Ordinary working (non-Plan) expenses, such as those on operations and maintenance, are expected to rise by ~5,138 crore during 201112. Internal resource generation would be ~1,298 crore less than budgeted, leading to a reduction in the Plan expenditure. Plan outlay has been scaled down by around ~9,000 crore, to ~48,000 crore this financial year. Turn to Page 14 >RUN UP TO THE BUDGET 2012-13 The railways wanted much more; finance ministrysays repayment, with interest, within 3 years Budget likely to list tax-exempt items as finance ministry, states agree TAXPROGRESSION |Service tax was introduced in 199495, with only 3 services covered; the number is in excess of 125 now |The tax contributed ~410 crore to the Centre’s kitty in the first year |This financial year, the target is to collect ~82,000 crore from the tax |Till December, Rs 67,706 was collected, up 37.20% y-o-y |The number of assesses rose from 3,943 in FY’95 to 1.3 million in FY’10

NEWACCOUNTING NORMS Implementation likely to be deferred again JOE CMATHEW New Delhi, 5 February India has already deferred plans to implement a new set of accounting rules compatible with International Financial Reporting Standards (IFRS). This may take even longer than expected. Reasons: Lack of clarity on the new implementation schedule being planned by the ministry of corporate affairs (MCA) and the absence of such provisions in the pending Companies Bill, according to experts. According to the original schedule notified by MCA, the first phase of IFRS convergence should have been in place on April 1, 2011. The second phase was slated for April 1, 2013, and the third ayear later. The ministry, however, deferred the first phase, without giving any fresh deadlines for implementation. The accounting standard-setting body, Institute of Chartered Accountants of India (ICAI), had suggested April 1, 2013, as the next deadline. The MCA remains tight-lipped. The new standards, considered more reliable, consistent and uniform, are meant to enhance the credibility of businesses by incorporating more disclosures that lead to good corporate governance. The recognition of notional losses and gains was one aspect of the new system. “We have no clarity on this. MCA is yet to formulate its view,” says Jamil Khatri, global head (accounting advisory), KPMG. He recalls the ministry had earlier said implementation would happen once tax issues were sorted out. “These changes were expected through DTC (direct taxes code). Now that DTC is getting delayed and, apparently, no regulatory activities happening at the MCA level, you cannot say what will happen,” he adds. In fact, MCA is just one step away from implementing the new standards, as it has already notified 35 Indian Accounting Standards (Ind-AS) that are IFRS-compatible. Notifying Ind-AS in February 2011, the ministry had spoken about the subsequent notification of the implementation schedule. Corporate affairs minister Veerappa Moily had hinted the government finds no urgency in implementing the new standard when developed economies such as the US and Japan are yet to implement it. ORIGINALSCHEDULE Phase I: April 1, 2011 |Nifty 50, Sensex 30 firms, companies whose shares or other securities are listed on stock exchanges outside India and companies whether listed or not, having a net worth in excess of ~1,000 crore Phase II: April 1, 2013 |All companies having a net worth exceeding ~500 crore but less than ~1,000 crore Phase III: April 1, 2014 |All listed companies > LEGAL DIGEST Dud cheques in revival mode The Supreme Court last week ruled that cases of bounced cheque are independent of the revival bid of a sick company. Proceedings in bounced cheque cases under the Negotiable Instruments Act will continue even if there is a scheme to revive the sick company. The revival attempt under the Companies Act will not affect prosecution of charges under Section 138 of the Act. The charges cannot be compounded as in other cases under the Criminal Procedure Code (CrPC), the court stated in a large batch of appeals titled JIK Industries Ltd vs Amarlal. The Supreme Court dismissed appeals of the companies against the Bombay high court judgment which rejected their argument. The charges cannot be compounded as provided under Section 320 of the CrPC without the consent of the secured and unsecured creditors. Though Section 147 of the Negotiable Instruments Act provides for compounding, it does not provide for a special procedure. In its absence, the procedure under the CrPC should be followed. Therefore the consent of the creditors is essential, the court said. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> No VAT on Hotel Ashoka duty-free shops The Supreme Court last week set aside the assessment of VAT under the Karnataka Value Added Tax Act, on the sale of liquor and other imported goods at Bangalore International Airport by Hotel Ashoka, run by the India Tourism Development Corporation. At these duty free shops, the hotel sells several articles including liquor to foreigners and also to Indians, who are going abroad or coming to India by air. The hotel argued that though liquor, cigarettes, perfumes and food articles were sold at the duty free shops, no tax was payable by it as the goods which had been sold at the duty free shops were sold directly to the passengers and even the delivery of goods at the duty free shops was made before importing the goods or before the goods had crossed the customs frontiers of India. The revenue authorities argued that the sale would not be subject to tax under the Act only if it occasions in the course of import. But transactions of sale, as in this case had not taken place in the course of import and, therefore, they would not be exempted under the Central Sales Act, the tax authorities argued. The Supreme Court rejected the argument and allowed the appeal of the hotel. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Rule on compensation payment In motor vehicles accident compensation claims, the entire amount may be disbursed to the claimant if he or she is literate. It is not necessary to deposit it in a bank for the safety of the dependents as some tribunals do, the Supreme Court stated in the case, A V Padma vs R Venugopal. The tribunals often ask the insurance companies to deposit the compensation amount in long-term fixed deposits in the bank so that the money is not wasted and minors and women are not rendered penniless. But this should not be taken as a rigid rule. Such orders are useful to safeguard the interests of minors, illiterate persons and widows, but if the claimant is capable of handling the money, the entire compensation should be given to him or her. Arbitration appeal dismissed >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Arbitration appeal dismissed The Supreme Court last week dismissed the appeal of Yograj Infras Ltd against the ruling of the Madhya Pradesh high court in its dispute with Ssang Yong Engineering & Construction Co. The National Highway Authority of India (NHAI) awarded a ~750 crore contract for a road project to Ssang. It also entered into an agreement with Yograj for supply of adequate manpower, material, machinery and all other resources, including finance. In case of disputes, arbitration was to be conducted in English in Singapore in accordance with the Singapore International Arbitration Centre (SIAC) Rules. Disputes did arise, the contract was terminated and Yograj alleged fraud by Ssong. However, the high court quashed the criminal complaint. Yograj moved the Supreme Court seeking injunction against invoking bank guarantee, but its appeal was dismissed in view of the facts of the case. MJ ANTONY PHOTO: THINKSTOCK

Business standard updates 2-2-2012

Should you exiton delisting?

TANIAKISHORE JALEEL The stock market is witnessing a slew of delisting offers — Alfa Laval, Carol Info, Patni Computers, UTV Software — due to various reasons. For investors in these, it is often a tough call on whether or not they should go along. Sometimes, the price offered by the company is not lucrative enough to exit. However, if they do not exit, they run the risk of getting stuck with the stock if the company does not relist. Delisting means permanent removal of stocks of a listed company from the stock exchange. This can be done by promoters increasing their stake in the company, or when the company is merged or acquired by another one and so on. The process can take six to eight months. According to a recent report by ICICI Direct, there are many probables for delisting. These include Oracle Financial Services, Novartis, Honeywell Auto, Thomas Cook, Singer, Gillette, AstraZeneca Pharma, Blue Dart and 3M India. These companies have to take a call sooner or later on whether to reduce promoter holding or go for delisting. In most cases, the company/ies share prices tend to go up as soon as the market smells astock delist. Rising prices lure investors, who rush to take advantage of short-term gains. Some that have delisted in the past three years include Bhuruka Gases, Aztecsoft and Binani Cement. The share prices of these companies had risen sharply after the announcement. The stock of UTV Software Communications started rising in June, on speculation of delisting plans. By the time the plan was announced in late July, the share price had shot up 30 per cent since June. Many may have bought the stock from the time it started moving up, for short-term gains. But, experts advise against buying merely on delisting rumours. Pankaj Pandey of ICICI Direct suggests an alternative, “Choose fundamentally strong companies from the list of probable candidates and stay invested until they delist.” What & why? Tender the shares only if you get a good premium at the time of delisting. “You will have to see if there is enough left on the table for you as an investor. That is, if the delisting price will give you enough returns,” says Prashanth Prabhakaran, president-retail broking, IIFL. Adding, that one should not look at the delisting price in isolation. “You should look at the quality of the shares. It could be a wise decision to tender shares if you are uncertain about the company’s future,” he adds. Holding on to stocks for more than a year means no capital gains tax. If you do not tender your shares, you will continue to remain a shareholder and be eligible for benefits such as bonus, dividends and so on from the company. Since you are holding on to shares of an unlisted company now, you may find it difficult to sell these scrips. “You will have limited options. If you want to unload shares after the delisting, you can do so by tendering these to promoters within off-market transactions,” says Prabhakaran. Off-market transactions are those which do not take place on the stock exchanges, and are conducted through negotiations between the buyer and the seller. In the rare event of these firms relisting, you may get to trade these in the secondary market. Alternatively, you can take legal recourse like the shareholders of chocolate maker Cadbury India. In early 2003, Cadbury delisted, offering ~500 a share. The company managed to buy over 90 per cent of shares, the minimum required for delisting. It has been trying to buy out the remaining shareholders (2.4 per cent). However, the latter did not accept the price offered and have gone to court. The case is still going on. In the case of an unsuccessful delisting, while investors can quote any price, it is up to the company to accept or reject it. For buying the statutory minimum 90 per cent, a company has to fix the price in such amanner that it is acceptable to investors. Failing which, the delisting will not happen and the stock price can crash. In this case, Pandey says whether you should book losses and exit or not is a call to be taken on fundamentals and business prospects. It is best to tender your shares in a delisting programme, he advises. “Unless you are a big investor and have asubstantial say in the company; then, you can hold on to your shares,” he adds. Selling it later may be difficult. Some ideas on what one could do if the premium offered isn’t enough CALLING IT QUITS Probable delisting candidates Company Promoter Shareholding CMP shareholding (%) as on (~) Novartis India 76.4 Dec, ‘11 683.45 Thomas Cook(I) 77.1 Sep, ‘11 41.15 Singer India 78.9 Sep, ‘11 36.0 Gillette India 88.8 Sep, ‘11 1,914.5 Blue DartExp 81.0 Sep, ‘11 1,683.0 3M India 76.0 Sep, ‘11 3,452.0 CMP: Current market price Source: ICICI Direct

Corporate law reporter journal

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CCI CONSTITUTE​S AN EMINENT PERSONS ADVISORY GROUP (EPAG)

The Competition Commission of India (CCI) has constituted an Eminent Persons Advisory Group (EPAG). This will serve as a group of ‘wise persons’ to give broad inputs and advice on larger issues impacting markets and competition, good international practices, improved advocacy etc. to the Commission. EPAG will have interaction/meetings with the Commission two to three times in a year. The group has been constituted in a manner that CCI could benefit from the advice of eminent persons representing a wide arena from the Corporate Sector, Academics, NGOs, Regulatory Authorities, Reserve Bank of India, CAG etc. The following eminent persons have consented to be Member of the EPAG:
1. Shri N.R. Narayana Murthy- Former Chairman, Infosys
2. Shri V.N. Kaul- Former CAG
3. Dr. Rakesh Mohan- Ex Dy. Governor, RBI
4. Ms Kiran Mazumdar Shaw – CMD, Biocon
5. Dr. Bakul H. Dholakia- Former Director, IIM Ahmadabad
6. Dr. S.L. Rao – Ex chairman, CERC and Ex-Director General, National council of Applied Economic Research
7. Shri N.L. Mitra- Former Vice-Chancellor, NLSIU, Bangalore
8. Ms Rohini Nilekani – NGO activist, Bangalore
First meeting of the Group is tentatively planned in July, 2012. --

Dangerous phthalates - New Norms in European Union

The situation is equally holding same position in India and we do not have any corresponding law for the use and limit of phthalates . The most common use is primary packing material of food articles which we use frequently without knowing. Surprisingly our new law Food Safety Standards Act is also silent. 

On March 5, 2012 the European Chemicals Agency (ECHA) announced the most commonly found "substances of very high concern" (SVHCs) in goods that are commonly bought by EU consumers. SVHCs are substances deemed to be dangerous and are found on a list – known in Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) parlance as the Candidate List.

Dangerous phthalates

Several obligations flow from the use of SVHCs in goods (articles) which are placed on the EU market. The ECHA's announcement demonstrates that of all dangerous substances, four phthalates are the most commonly used and therefore present in goods. The four phthalates, added to the Candidate List due to their toxicity to reproduction, have been named as bis(2-ethylexyl) phthalate (DEHP), benzyl butyl phthalate (BBP), dibutyl phthalate (DBP) and diisobutyl phthalate (DIBP).

These phthalates are commonly found in, among others, batteries and accumulators, fabrics, textiles and apparel, machinery, mechanical appliances and electrical/electronic products, as well as in different types of plastic, rubber and wood products.

DEHP is found, for example, in accessories such as cables, adapters, storage media, picture frames, computer mice, keyboards and headsets, as well as in accessories stitched onto textiles (eg, buttons, reflectors, fasteners and labels). It is also found in wallets, umbrellas and car mats, among a long list of other products. DBP is found in several of the above products, as well as shoes with plastic parts, bags, belts and household goods such as lamps and microwave dishes. DIBP is also found in outdoor seating furniture and wire insulation in electrical products. Finally, BBP is found in, among others, plastic blister packaging, plastic foil, power cords of electrical appliances and PVC packaging material.

The second most common notification is for hexabromocyclododecane (HBCDD), a brominated flame retardant deemed to be persistent, bioaccumulative and toxic. The substance is commonly found in products used in the construction and building sectors, such as plastic panels for the thermal insulation of buildings. Companies have also notified its use in polystyrene foam used for packaging and in the plastic housing of electronic appliances.

Registration and notification obligations

The list of SVHCs published by the ECHA is said to be the first of its kind, and is based on information provided by companies to the ECHA in notification and registration dossiers. EU producers and importers of foreign goods must register any chemical substances contained in their goods if certain conditions are met. They must also notify any SVHCs in their products if certain conditions are met.

Both the phthalates and HBCDD have been added to the European Union's so-called 'Authorisation List' (Annex XIV of the REACH Regulation). They are being phased out from use in the European Union. European companies that wish to continue using them for applications where there are no alternatives must apply for specific authorisations or the substances will eventually be banned: the four phthalates from February 21 2015 and HBCDD from August 21 2015.

The ECHA has highlighted a concern that products containing SVHCs, particularly imports into the European Union, may not be notified as required. It has stated that it is providing the information on SVHCs in order to enhance knowledge of the use and presence of hazardous substances in consumer products. However, the initiative is also intended to remind producers and importers of their legal obligations, under certain conditions, to notify the ECHA when their products contain substances on the Candidate List.

From April to December 2011, the ECHA received only 203 notifications. According to the ECHA, this is a new obligation for producers and importers, which may yet be unaware of their responsibility to notify. Consequently, the information does not provide a full picture of substances of very high concern in products on the EU market. Companies are thus encouraged to check whether they have implemented their legal obligations in this regard.

In December 2011, 20 new SVHCs were added to the Candidate List. Therefore, companies should be aware that the deadline to notify the ECHA of the presence in products of any such SVHCs is June 2012.

The ECHA has also taken the opportunity of its March 5, 2012 announcement to remind EU consumers that they have the right to know when substances on the Candidate List are present in products that they want to buy. Any consumer has the right to ask the supplier (including retailers) this question, and to receive an answer within 45 days.

FIRMS MAY SHIFT TO DTAA COUNTRIES

Finance Minister Pranab Mukherjee’s amendments to the Finance Bill 2012-13, have ensured companies operating their businesses through countries with which India has double taxation avoidance agreements (DTAAs) would continue to enjoy a liberal capital gains tax framework for at least another year without much difficulty. 

However, once the General Anti Avoidance Rule (GAAR) is implemented, these would be subject to tax provisions in India. While moving the amendments to the Bill, Mukherjee announced the GAAR would be applicable from April 1, 2013, and clarificatory amendments proposed in the Bill would not over-ride the DTAA provisions. 

Tax experts said as a result of the amendments, companies operating from countries with which India didn’t have DTAAs, would try to shift to countries with which India had such agreements, including Mauritius. “If the GAAR doesn’t come for one year, the old Mauritius circular is not withdrawn, and the Supreme Court ruling in Azadi Bachao matter is available to taxpayers, investment through Mauritius would continue to enjoy treaty benefits,” said Rahul Garg, executive director, Pricewaterhouse Coopers. “And, the situation that existed earlier would continue to be available, in respect of the investment from other treaty countries,” he added. 

The finance minister had said the provision in the Finance Bill which sought to retrospectively clarify the provisions of the Income Tax Act relating to capital gains on the sale of assets located in India through indirect transfers abroad, had been intensely debated, both in the country, as well as abroad. “I would like to confirm clarificatory amendments do not override the provisions of the double taxation avoidance agreements India has with 82 countries. It would impact those cases in which transactions have been routed through low-tax or no-tax countries, with which India does not have a DTAA,” he said. Since the implementation of the GAAR has been postponed by a year, during this period, companies operating from regions India has DTAAs with would continue to enjoy low or no capital gains tax, as applicable in the country. – http://www.business-standard.com/