Overseas Direct Investments by Indian Party - Online Reporting of Overseas Direct Investment in Form ODI

Reserve Bank of India (RBI) under new circular A.P. (DIR Series) Circular No.131 has included Overseas Direct Investments by Indian Party through Online Reporting of Overseas Direct Investment in Form ODI.

Accordance to the Circular Authorised Dealer Category - I (AD Category - I) banks is invited to A.P. (DIR Series) Circular No. 36 dated February 24, 2010, wherein ADs were advised about the operationalisation of the online reporting system of overseas direct investments (ODI) with effect from March 2, 2010. The system, inter alia enables online generation of the Unique Identification Number (UIN).

Under the online reporting system, AD Category – I banks could generate the UIN online under the automatic route. However, reporting of subsequent remittances under the automatic route as well as the approval route was to be done online in Part II of form ODI, only after receipt of the letter from the Reserve Bank confirming the UIN.

It has now been decided to communicate the UIN in respect of cases under the Automatic Route to the ADs/Indian Party through an auto generated e-mail to the email-id made available by the AD/Indian Party. Accordingly, with effect from June 01, 2012 (Friday), the auto generated e-mail, giving the details of UIN allotted to the JV / WOS under the automatic route, shall be treated as confirmation of allotment of UIN, and no separate letter shall be issued by the Reserve Bank to the Indian party and AD Category - I bank confirming the allotment of UIN.

It may also be noted that the subsequent remittances under the automatic route and remittances under the approval route are to be reported online in Part II of form ODI, only after receipt of the e-mail communication/confirmation conveying the UIN.

The applications in form ODI for overseas direct investment under the approval route would continue to be submitted to the Reserve Bank in physical form as hitherto, in addition to the online reporting of Part I of the Form as contemplated in A.P. (DIR Series) Circular No. 36 dated February 24, 2010.

Reserve Bank of India Opened External Commercial Borrowing Route for Civil Aviation Sector

Reserve Bank of India (RBI) has issued Circular on "External Commercial Borrowings (ECB) for Civil Aviation Sector". 

As per the extant guidelines, availing of ECB for working capital is not a permissible end-use. On a review of the policy related to ECB and keeping in view the announcement made in the Union Budget for the Year 2012-13, RBI has decided to allow ECB for working capital as a permissible end-use for the civil aviation sector, under the approval route, subject to the following conditions:

1. Airline companies registered under the Companies Act, 1956 and possessing scheduled operator permit license from DGCA for passenger transportation are eligible to avail of ECB for working capital;
   
2. ECB will be allowed to the airline companies based on the cash flow, foreign exchange earnings and its capability to service the debt;
   
3. The ECB for working capital should be raised within 12 months from the date of issue of the circular;
   
4. The ECB can be raised with a minimum average maturity period of three years; and
   
5. The overall ECB ceiling for the entire civil aviation sector would be USD one billion and the maximum permissible ECB that can be availed by an individual airline company will be USD 300 million. This limit can be utilized for working capital as well as refinancing of the outstanding working capital Rupee loan(s) availed of from the domestic banking system. Airline companies desirous of availing of such ECBs for refinancing their working capital Rupee loans may submit the necessary certification from the domestic lender/s regarding the outstanding Rupee loan/s.
   

ECB availed for working capital/refinancing of working capital as above will not be allowed to be rolled over.

The application for such ECB should be accompanied by a certificate from a chartered accountant confirming the requirement of the working capital loan and the projected foreign exchange cash flows/earnings which would be used for servicing the loan. Authorised Dealer should ensure that the foreign exchange for repayment of ECB is not accessed from Indian markets and the liability is extinguished only out of the foreign exchange earnings of the borrowing company.

The modifications to the ECB policy will come into force from the date of this circular. All other aspects of the ECB policy shall remain unchanged.

SEBI Formed Norms of Ownership and Governance for Stock Exchanges in India

The Securities and Exchange Board of India (SEBI) considered the Report of the Dr. Bimal Jalan Committee on “Review of Ownership and Governance of Market Infrastructure Institutions (MIIs) and while broadly accepting most of the recommendations of the Committee took the following main decisions:

Networth and Ownership Norms for MIIs:

1. The Stock Exchanges will have minimum  net worth of Rs.100 crores and the Existing Stock Exchanges will be given 3 years to achieve this networth of Rs.100 crores.  The minimum networth for the Clearing Corporation(CC) and the Depository will be Rs. 300 crores and Rs.100 crores respectively. All existing clearing corporations shall be mandated to build up to the prescribed networth of Rs. 300 crores over a period of three years from the date of notification/ circular.
2. (i) The Stock Exchanges will have diversified ownership and no single investor will be allowed to hold more than 5% except the Stock Exchange, Depository, Insurance Company, Banking Company or public financial institution which may hold upto 15%.

 (ii) 51% of the holding of the Stock Exchanges will be held by public.

(iii) In case of CCs at least 51% holding will be held by Stock Exchanges. No single stock exchange, however, will hold more than 51% in any CC. A Stock Exchange holding 51% in a CC cannot hold more than 15% in any other CC. To ensure diversified ownership for shareholders other than Stock Exchanges, the limit of 5% and 15% shall apply as in the case of Stock Exchanges. Any Stock Exchange currently holding more than 51% shall be given three years time to bring its holding to the prescribed limit.

(iv) In case of depositories minimum 51% holding will be held by sponsors and the existing list of sponsors will continue. No other entity will be allowed to hold more than 5% of equity share capital. A single Stock Exchange will, however, not hold more than 24%.

(v) The shareholding limits prescribed for each category of investors shall be inclusive of all exposure (both on and off balance sheet) of a shareholder to the MII that facilitates or permits equity or rights over equity at any future date. If any shareholder has exposure more than the prescribed limit of shareholding, such exposure shall have to be reduced to the permissible limit within a period which may extend upto three years from the date of getting approval from SEBI. The voting rights of no shareholder will, however, exceed the prescribed maximum shareholding limit at any point in time.

 Governance structure: 

1. Autonomy of Regulatory Departments in MII will be maintained in order to avoid conflicts of interest between regulatory and business functions of the MII -

 a.      Member

i)        The heads of departments of Member Regulation will directly report to an independent committee of the board of the Stock Exchange as well as to MD/CEO (dual reporting).

ii)      The long term goal would however be to set up an independent SRO at an appropriate time in future and provide the seed fund for the same.

  b.     Listing Regulation

 i)        In order to prevent a regulatory race to the bottom SEBI will prescribe the minimum listing standards to be followed by Exchanges.

ii)      The head of departments of Listing Regulation will directly report to an independent committee of the board of the Stock Exchange as well as to MD/CEO (dual reporting).

 c.      Trading Regulation

 The surveillance function will report to an independent committee of the Board of the Exchange as well as to the MD/CEO.

 All the independent committees will have a majority of Independent directors and will be headed by one of them.

 d.     Besides the above a Conflict Resolution Committee (CRC) will be formed by SEBI with majority External and Independent members to deal with all issues concerning conflicts of interest. Issues of conflicts will be referred by Exchanges or may be taken up suo motu by CRC. The independent committee of Exchanges responsible for regulatory functions shall have regular interaction with CRC.

 e.      Separation of Risk Management to independent Clearing Corporation

 Among the functions of the Exchange it is the Clearing Corporation (CC) or Clearing House that fully bears the risk of payment and delivery by providing a guaranteed settlement of all transactions on the Exchange. It has therefore been decided, inter alia, that the central role of the clearing function will be separated into an independent corporation with its own prescribed net worth:

 i)        Clearing and settlement must compulsorily be carried out through a recognized clearing corporation for which Regulations will be made by SEBI.

ii)      To ensure effective supervision of CCs through regulations of SEBI.

iii)    CC will constitute a risk committee comprising independent members which shall report to the Board of the CC as well as directly to SEBI on issues and matters so identified and prescribed.

iv)    An expert committee will be set up by SEBI to examine the viability of introducing a single clearing corporation or interoperability between different CCs.

 2. The Board of Stock Exchanges/ C.C. will not have any Trading Member/Clearing Member representative. However, an Advisory Committee shall be constituted by the Board, comprising of Trading Members/ Clearing Members, to take benefit of experience of such Members. All recommendations of the Advisory Committee shall be placed in the ensuing Board meeting for consideration and appropriate decision.

 3. The Public Interest Directors representation on Board of Stock Exchange will be 50%, and will be 2/3 of the Board strength on the Board of CC. The rest of the Board will constitute of shareholder Directors.

 4. Appointment of all Directors to the Board of Stock Exchanges/ CC will be subject to approval by SEBI. Appointment of MD/CEO of Depository will also be subject to approval by SEBI.

 5. The compensation structure for key management personnel are to be based on the principles of sound compensation practices issued by international fora like Financial Stability Board. The decisions in this regard are directed towards curbing incentives that result in excessive risk taking in the short term  –

 i)        A compensation committee consisting of majority Public Interest Directors and chaired by a PID will determine the compensation of Key Management Personnel.

ii)      The variable pay component will not exceed one-third of total pay.

iii)    Of the variable pay 50% of it will be paid on a deferred basis after three years

iv)    ESOPs and other equity linked options in the MII will not form part of the compensation for the identified key management personnel.

v)      The remuneration to key management personnel will be approved by SEBI. Also, the terms and conditions of the remuneration shall not be changed without the approval of SEBI.

vi)    The compensation policy may have ‘clawback’ arrangements.

  

Profits of MIIs:

1. To bolster the risk management capacity of C.C. the Stock Exchange will be mandated to transfer 25% of their profits to the Settlement Guarantee Fund of the CCs where their trades are settled.
2. In case of depository 25% of the profits will be transferred to Investor Protection Fund of the depositories.
3. The non-core activities of MIIs will have to be segregated to a separate legal entity and when a related business of an MII delivers a service to another MII it will provide equal and fair access to all.

Listing:

1. The Stock Exchanges may be permitted to list when they put in place the appropriate mechanisms for tackling conflicts of interest.
2. The Stock Exchanges will not be allowed to list on itself.
3. No Stock Exchange shall be permitted to list within three years from the date of approval by SEBI.
4. Depository may also be allowed to list but not the clearing corporation considering its risk bearing role.

B.    Process for exit of non-operational stock exchanges

 i)        The Board decided the process of de-recognition and exit of stock exchanges.  A stock exchange without any trading at its own platform or where the annual trading is less than ` 1000 crores may apply for voluntary de-recognition and exit.  If the stock exchange eligible  for voluntary de-recognition is not able to achieve a turnover of ` 1000 crores on continuous basis or does not apply for voluntary de-recognition and exit within a period of two years from the date of notification, SEBI shall proceed with  the compulsory de-recognition and exit of such stock exchange.

ii)      With regard to exit option to shareholders of exclusively listed companies, a mechanism of dissemination board at stock exchange is decided on the lines of bulletin board.

iii)    With regard to treatment of assets of the de-recognised stock exchanges, the Board decided that the stock exchanges may be permitted to exit subject to certain conditions such as payment of statutory dues to SEBI/Govt. contribution of certain percentage of assets of the exchange towards Investor Protection and Education Fund etc.

iv)    The trading members of the de-recognised stock exchange will continue to avail trading opportunity through its existing subsidiary company, which will function as a normal broking entity, at those Exchanges having nationwide trading terminals.

SEBI Takes Over Regulation of Private Equity and Hedge Funds Industry in India

In a significant move that expands the scope and powers of the scope and powers of the Securities and Exchange Board of India (SEBI) beyond the universe of listed companies, the market regulator cleared the framework of the rules governing Alternative Investment Funds (AIF).

With a view to extending the perimeter of regulation to unregulated funds and ensuring  systemic stability, increasing market efficiency, encouraging formation of new capital and providing investor the Board approved proposal to frame SEBI  (Alternative Investment Funds) Regulations, 2012. 

Earlier, SEBI had put a concept paper along with the draft AIF Regulations on SEBI website on August 1, 2011. Salient features of the AIF Regulations, as approved by the Board, include the following:

Scope of the Regulations and applicability to existing funds

a. AIFs whether operating as Private Equity Funds, Real Estate Funds, Hedge Funds, etc. must register with SEBI under the AIF Regulations.

b. SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”) shall be repealed. However, existing VCFs shall continue to be regulated by the VCF Regulations till the existing fund or scheme managed by the fund is wound up. Existing VCFs, however, shall not raise any fresh funds after notification of these Regulations except commitments already made by investors as on date of the notification. Such VCFs may also seek re-registration under AIF regulations subject to approval of 66.67% of their investors by value.

c. Existing funds not registered under the VCF Regulations will not be allowed to float any new scheme without registration under AIF Regulations. However, schemes floated by such funds before coming into force of AIF Regulations, shall be allowed to continue to be governed till maturity by the contractual terms, except that no rollover/ extension or raising of any fresh funds shall be allowed.

d. Existing funds not registered under the VCF Regulations which seek registration but are not able to comply with all provisions of AIF Regulations may seek exemption from the Board from strict compliance with the AIF Regulations.

Categories of funds

The Regulation seeks to cover all types of funds broadly under 3 categories. An application can be made to SEBI for registration as an AIF under one of the following 3 categories:-

i. Category I AIF – those AIFs with positive spillover effects on the economy,  for which certain incentives or concessions might  be considered by SEBI or Government of India or other regulators in India; and which shall include Venture Capital Funds, SME Funds, Social Venture Funds and Infrastructure Funds. These funds shall be close ended, shall not engage in leverage and shall follow investment restrictions as prescribed for each category. Investment restrictions for VCFs are similar to restrictions in the existing VCF Regulations. Depending upon the specific need of each type of funds, Category I funds shall be given concessions.

ii. Category II AIF – those AIFs for which no specific incentives or concessions are given by the government or any other Regulator; which shall not undertake leverage other than to meet day-to-day operational requirements as permitted in these Regulations; and which shall include Private Equity Funds, Debt Funds, Fund of Funds and such other funds that are not classified as category I or III.  These funds shall be close ended, shall not engage in leverage and have no other investment restrictions. This forms the residual category, funds which cannot be classified either as Category I or III will be classified as Category II.

iii. Category III AIF – those AIFs which Funds including hedge funds that are considered to have negative externalities such as exacerbating systemic risk through leverage or complex trading strategies. These funds can be open ended or close ended, may engage in leverage subject to limits as may be specified by the Board. Category III funds shall be regulated through issuance of directions regarding areas such as operational standards, conduct of business rules, prudential requirements, and restrictions on redemption, conflict of interest as may be specified by the Board.

Other salient features

  

• AIF Regulations will be applicable to all pooled investment vehicles other than Mutual Funds, CIS Schemes, Family Trusts, ESOP Trusts, Employee Welfare Trusts, holding companies, funds managed by Asset Reconstruction Companies, Securitisation Trust or any such pool of funds which is directly regulated by any other regulator in India. 
• The Alternative Investment Fund shall not accept from an investor an investment of value less than rupees one crore. Further, the AIF shall have a minimum corpus of Rs. 20 crore.
• The fund or any scheme of the fund shall not have more than 1000 investors.
• The manager or sponsor shall have a continuing interest in the AIF of not less than 2.5% of the initial corpus or Rs.5 crore whichever is lower and such interest shall not be through the waiver of management fees.
• Category I and II AIFs shall be close-ended and shall have a minimum tenure of 3 years. However, Category III AIF may either be close-ended or open-ended.
• Schemes may be launched under an AIF subject to filing of information memorandum with the Board along with applicable fees.
• Units of AIF may be listed on stock exchange subject to a minimum tradable lot of rupees one crore. However, AIF shall not raise funds through Stock Exchange mechanism.
• AIFs shall not be permitted to invest more than 25% of the investible funds in one Investee Company. Further, AIFs shall not invest in associate companies.
• All AIFs shall have QIB status as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
• The Regulations provide for transparency and disclosures and mechanism for avoidance of conflict of interest.
• AIFs shall provide, on an annual basis, the investors with financial information of portfolio companies as also material risks and how these are managed.
• SEBI shall have right to inspect or investigate the AIFs and to issue necessary directions.
• SEBI will take up with government to extend the tax pass through status to  AIFs.

The SEBI (Alternative Investment Fund) Regulations shall become effective from the date of their notification in the Gazette of Government of India.

SEBI laid Down Broad Guidelines on Algorithmic Trading

New Circular of Securities and Exchange Board of India (SEBI) laid down Guidelines on Algorithmic Trading.

SEBI has been observed that adoption of technology for the purpose of trading in financial instruments has been on a rise over the past few years. Stock brokers as well as their clients are now making increased usage of trading algorithm (hereinafter referred to as “algo”).

Based on recommendations of Technical Advisory Committee (TAC) and Secondary Market Advisory Committee (SMAC), SEBI decided to put in place the following broad guidelines for algorithmic trading in the securities market.

According to Circular, Algorithmic Trading means any order that is generated using automated execution logic shall be known as algorithmic trading.

Guidelines to the stock exchanges and the stock brokers

Stock exchanges shall ensure the following while permitting algorithmic trading:

(i) The stock exchange shall have arrangements, procedures and system capability to manage the load on their systems in such a manner so as to achieve consistent response time to all stock brokers. The stock exchange shall continuously study the performance of its systems and, if necessary, undertake system upgradation, including periodic upgradation of its surveillance system, in order to keep pace with the speed of trade and volume of data that may arise through algorithmic trading.

(ii) In order to ensure maintenance of orderly trading in the market, stock exchange shall put in place effective economic disincentives with regard to high daily order-to-trade ratio of algo orders of the stock broker. Further, the stock exchange shall put in place monitoring systems to identify and initiate measures to impede any possible instances of order flooding by algos.

(iii) The stock exchange shall ensure that all algorithmic orders are necessarily routed through broker servers located in India and the stock exchange has appropriate risk controls mechanism to address the risk emanating from algorithmic orders and trades. The minimum order-level risk controls shall
include the following:

a. Price check - The price quoted by the order shall not violate the price bands defined by the exchange for the security. For securities that do not have price bands, dummy filters shall be brought into effective use to serve as an early warning system to detect sudden surge in prices.

b. Quantity Limit check - The quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.

(iv) In the interest of orderly trading and market integrity, the stock exchange shall put in place a system to identify dysfunctional algos (i.e. algos leading to loop or runaway situation) and take suitable measures, including advising the member, to shut down such algos and remove any outstanding orders in the system that have emanated from such dysfunctional algos. Further, in exigency, the stock exchange should be in a position to shut down the broker’s terminal.

(v) Terminals of the stock broker that are disabled upon exhaustion of collaterals shall be enabled manually by the stock exchange in accordance with its risk management procedures.

(vi) The stock exchange may seek details of trading strategies used by the algo for such purposes viz. inquiry, surveillance, investigation, etc.

(vii) The stock exchange shall include a report on algorithmic trading on the stock exchange in the Monthly Development Report (MDR) submitted to SEBI inter-alia incorporating turnover details of algorithmic trading, algorithmic trading as percentage of total trading, number of stock brokers / clients using algorithmic trading, action taken in respect of dysfunctional algos, status of grievances, if any, received and processed, etc.

(viii) The stock exchange shall synchronize its system clock with the atomic clock before the start of market such that its clock has precision of atleast one microsecond and accuracy of atleast +/- one millisecond.

Stock exchange shall ensure that the stock broker shall provide the facility of algorithmic trading only upon the prior permission of the stock exchange. Stock exchange shall subject the systems of the stock broker to initial conformance tests to ensure that the checks mentioned below are in place and that the stock broker’s system facilitate orderly trading and integrity of the securities market.
Further, the stock exchange shall suitably schedule such conformance tests and thereafter, convey the outcome of the test to the stock broker. For stock brokers already providing algo trading, the stock exchange shall ensure that the risk controls specified in this circular are implemented by the stock broker.

Additionally, the annual system audit report for a stock broker, as submitted to the stock exchange, shall include a specific report ensuring that the checks are in place. Such system audit shall be conducted by Certified Information System Auditors (CISA) empanelled by stock exchanges. Further, the stock exchange shall subject the stock broker systems to more frequent system audits, if required.

The stock broker, desirous of placing orders generated using algos, shall satisfy the stock exchange with regard to the implementation of the following minimum levels of risk controls at its end -

(i) Price check – Algo orders shall not be released in breach of the price bands defined by the exchange for the security.

(ii) Quantity check – Algo orders shall not be released in breach of the quantity limit as defined by the exchange for the security.

(iii) Order Value check - Algo orders shall not be released in breach of the ‘value per order’ as defined by the stock exchanges.

(iv) Cumulative Open Order Value check – The individual client level cumulative open order value check, may be prescribed by the broker for the clients. Cumulative Open Order Value for a client is the total value of its unexecuted orders released from the stock broker system.

(v) Automated Execution check – An algo shall account for all executed, unexecuted and unconfirmed orders, placed by it before releasing further order(s). Further, the algo system shall have pre-defined parameters for an automatic stoppage in the event of algo execution leading to a loop or a
runaway situation.

(vi) All algorithmic orders are tagged with a unique identifier provided by the stock exchange in order to establish audit trail.

The other risk management checks already put in place by the exchange shall continue and the exchange may re-evaluate such checks if deemed necessary in view of algo trading.

The stock broker, desirous of placing orders generated using algos, shall submit to the respective stock exchange an undertaking that -

(i) The stock broker has proper procedures, systems and technical capability to carry out trading through the use of algorithms.

(ii) The stock broker has procedures and arrangements to safeguard algorithms from misuse or unauthorized access.

(iii) The stock broker has real-time monitoring systems to identify algorithms that may not behave as expected. Stock broker shall keep stock exchange informed of such incidents immediately.

(iv) The stock broker shall maintain logs of all trading activities to facilitate audit trail. The stock broker shall maintain record of control parameters, orders, trades and data points emanating from trades executed through algorithm trading.

(v) The stock broker shall inform the stock exchange on any modification or change to the approved algos or systems used for algos.

The stock exchange, if required, shall seek conformance of such modified algo or systems to the requirements specified in the circular.

Stock exchanges are directed to:

(i) take necessary steps and put in place necessary systems for implementation of the above within a period of one month from the date of this circular.

(ii) make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

(iii) bring the provisions of this circular to the notice of the stock brokers of the stock exchange and also to disseminate the same on the website.

(iv) For stock brokers that are currently executing orders through algos, a period of three months is provided to the stock exchanges within which the approval process shall be completed and minimum risk controls shall be established, if not already done.

(v) communicate to SEBI, the status of implementation of the provisions of this circular in the Monthly Development Report.

SEBI Tightens Reporting Norms for Investment Bankers

Securities and Exchange Board of India (SEBI) under new circular has tighten Regulatory Compliance and Periodic Reporting Bankers to an Issue (BTIs).

Bankers to an Issue (BTIs) are required to furnish periodical reports on quarterly and annual basis in electronic form in the prescribed format in terms of SEBI Circulars No. RBT(G I Series) Circular No. 1(95-96)) dated April 21, 1995, BTI Circular No. 3(1999-2000) dated July 09, 1999, and Cir No. MIRSD/DPS-2/BTI/Cir- 15/2008 dated May 06, 2008.

In order to strengthen the compliance mechanism and role of the Boards of BTIs, it has been decided to review the norms and format for periodic reporting. The revised format as given in the circular includes the status of regulatory compliance and investor grievances redressal. The Board of directors of BTI shall, henceforth, review the report and record its observations on (i) the deficiencies and non-compliances,

RBI Amended Overseas Direct Investments Route by Resident Individuals

Reserve Bank of India (RBI), amended the Notification No. FEMA 120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004, under circular and circular.

RBI proposed following following changes in ODI Investment Route:

Creation of charge on immovable / movable property and other financial assets

The existing regulations of the Notification do not envisage creation of charge on the immovable movable property and other financial assets (except shares of JV / WOS) of the Indian Party. It has been decided that proposals from the Indian party for creation of charge in the form of pledge / mortgage / hypothecation on the immovable / movable property and other financial assets of the Indian Party and their group companies may be considered by the Reserve Bank under the approval route within the overall limit fixed (presently 400%) for financial commitment subject to submission of a ‘No Objection’ by the Indian Party and their Group companies from their Indian lenders.

Appropriate reporting mechanism for capturing the financial commitment on account of creation of charge on such property / assets shall be introduced shortly.

Reckoning bank guarantee issued on behalf of JV / WOS for computation of Financial Commitment

Presently, the bank guarantee issued on behalf of JV / WOS is not reckoned for the purpose of computing the financial commitment of the Indian Party to its JV / WOS overseas.

It has been decided that the bank guarantee issued by a resident bank on behalf of an overseas JV / WOS of the Indian party, which is backed by a counter guarantee / collateral by the Indian party, shall be reckoned for computation of the financial commitment of the Indian Party and reported accordingly.

Appropriate reporting mechanism for capturing the financial commitment on account of issuance of bank guarantee shall be introduced shortly.

Issuance of personal guarantee by the direct / indirect individual promoters of the Indian Party

It has been decided that issuance of personal guarantee by the promoters of the Indian Party as presently allowed under the General Permission shall also be extended to the indirect resident individual promoters of the Indian Party with same stipulations as in the case of personal guarantee by the direct promoters.

Financial Commitment without equity contribution to JV / WOS

Presently, Regulation 6(4) of the Notification ibid prescribes that an Indian Party may extend a loan or a guarantee to or on behalf of the Joint Venture / Wholly Owned Subsidiary abroad, within the permissible financial commitment, provided that the Indian party has made investment by way of contribution to the equity capital of the Joint Venture.

Keeping in view the business requirement of the Indian party, particularly the legal requirement of the host country, it has now been decided that the proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route. AD banks may forward the proposals from their constituents after ensuring that the laws of the host country permit incorporation of a company without equity participation by the Indian party.

Submission of Annual Performance Report

Presently, Regulation 15(iii) of the Notification prescribes that Indian party needs to submit to the Reserve Bank through the designated Authorised Dealer bank every year an Annual Performance Report in Form ODI Part III in respect of each Joint Venture or Wholly Owned Subsidiary outside India, set up or acquired by the Indian party, after the finalization of the audited accounts of the Joint Venture / Wholly Owned Subsidiary outside India.

Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the Annual Performance Report (APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided:

1. The Statutory Auditors of the Indian party certifies that ‘The un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’ and
   
2. That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party.
   

Compulsorily Convertible Preference Shares (CCPS)

The extant provisions of Overseas Direct Investments envisage setting up / acquiring JV / WOS abroad by subscribing / contributing to the equity capital of the JV / WOS. Therefore, contribution to the preference share capital (whether convertible or non-convertible) of the JV / WOS abroad by the Indian party is treated as loan to them.

Keeping in view the nature of the Compulsorily Convertible Preference Shares (CCPS), it has been decided that Compulsorily Convertible Preference Shares shall be treated at par with equity shares and the Indian party is allowed to undertake financial commitment based on the exposure to JV by way of CCPS.

Acquiring qualification shares of an overseas company for holding the post of a Director 

 

In terms of Regulation 24(1)(a) of the Notification ibid, a person resident in India being an individual may acquire foreign securities as qualification shares issued by a company incorporated outside India for holding the post of a Director in the company provided that:

1. the number of shares so acquired shall be the minimum required to be held for holding the post of director and in any case shall not exceed 1 (one) per cent of the paid-up capital of the company, and
   
2. the consideration for acquisition of such shares does not exceed the ceiling as stipulated by RBI from time to time.
   

Since the necessity of having certain qualification shares by an individual to be appointed as a Director of the company is governed by the law of the host country, it has been decided to remove the existing cap of 1 (one) per cent on the ceiling for resident individuals to acquire qualification shares for holding the post of a Director in the overseas company. Accordingly, henceforth, remittance shall be allowed from resident individuals for acquiring the qualification shares for holding the post of a Director in the overseas company to the extent prescribed as per the law of the host country where the company is located. The limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.

Acquiring shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration

 

Presently, Regulation 20 of the Notification ibid prescribes that a Resident individual may apply to the Reserve Bank for permission to acquire shares in a foreign entity offered as consideration for professional services rendered to the foreign entity and the Reserve Bank may, after taking into account certain factors, grant permission subject to such terms and conditions as are considered necessary.

It has been decided to grant General Permission to the resident individuals to acquire shares of a foreign entity in part / full consideration of professional services rendered to the foreign company or in lieu of Director’s remuneration. The limit of acquiring such shares in terms of value shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.

Acquiring shares in a foreign company through ESOP Scheme

 

As per the extant Regulation 22(2) of the Notification ibid, General permission has been granted to a resident individual to purchase equity shares offered by a foreign company under its ESOP Schemes, if he is an employee, or, a Director of an Indian office or branch of a foreign company, or, of a subsidiary in India of a foreign company, or, an Indian company in which foreign equity holding, either direct or through a holding company/Special Purpose Vehicle (SPV), is not less than 51 per cent.

Accordingly, AD Category – I banks are permitted to allow remittances for purchase of shares by eligible persons under this provision irrespective of the method of operationalisation of the scheme i.e. where the shares under the scheme are offered directly by the issuing company or indirectly through a trust / a Special Purpose Vehicle (SPV) / step down subsidiary, provided:

1. the company issuing the shares effectively, directly or indirectly, holds in the Indian company, whose employees / directors are being offered shares, not less than 51 per cent of its equity,
   
2. the shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis, and
   
3. an Annual Return is submitted by the Indian company to the Reserve Bank through the AD Category – I bank giving details of remittances / beneficiaries, etc.
   

It has now been decided that resident employees or Directors may be permitted to accept shares offered under an ESOP Scheme globally, on uniform basis, in a foreign company irrespective of the percentage of the direct or indirect equity stake in the Indian company subject to:

1. the shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis, and
   
2. an Annual Return is submitted by the Indian company to the Reserve Bank through the AD Category – I bank giving details of remittances / beneficiaries, etc.

Reserve Bank of India Issued Guidelines on Fair Practices Code for NBFCs

The Reserve Bank of India (RBI) vide its circular dated September 28, 2006, issued guidelines on Fair Practices Code (FPC) for all NBFCs to be adopted by them while doing lending business. The guidelines inter alia, covered general principles on adequate disclosures on the terms and conditions of a loan and also adopting a non-coercive recovery method.

A review of the guidelines is made in view of the creation of a new category of NBFCs viz; NBFC-MFIs and also rapid growth in NBFCs’ lending against gold jewellery. The revised guidelines issued under Section 45 L of the Reserve Bank of India Act, 1934 (Act 2 of 1934) and of all the powers enabling it in this behalf, in supercession of the CC dated September 28, 2006, is enclosed in the annex. 

The Guidelines have also incorporated the instructions issued vide CC No. 95 dated May 24, 2007 on ‘Complaints about excessive interest charged by NBFCs’ and CC No. 139 dated April 24, 2009 on ‘Clarification regarding re-possession of vehicles financed by NBFCs’ for reference.

The NBFCs is required to make suitable amendments in their existing FPC. The FPC so modified should be put in place by all NBFCs with the approval of their Boards within one month from the date of issue of this circular and should be published and disseminated on the web-site of the company, if any, for the information of the public.

Vodafone Tax case: Official Copy of Reveiw Petition

In reference to follow blog on Vodafone Tax Case, where supreme court of India has rejected review petition of Union of India against last judgement, which was held in favour of the company. Please find official copy of the order of apex court.

Last blog on Vodafone Tax case.

Services of Mutual Fund Agents Exempt from Service Tax Net in India

After proposal by Finance Minister of India in its Annual Budget 2012-13, subject related to widening service tax exemption list in light of public interest, Department of Revenue, Ministry of Finance issued notification dated 17th March, 2012 has fully exempted " the “services rendered by a mutual fund agent or distributor to mutual fund or asset management company for distribution or marketing of mutual fund", from service tax net.

Present changes are in line of various series of reform undertake by the Regulator and Government in last one year. “The government, being satisfied it is necessary in public interest so to do, exempts the following taxable services from the whole of the service tax leviable thereon under section 66 B of the Finance Act,”

Vodafone Tax Case: Supreme Court of India Dismisses Government Review Petition

The Supreme Court on Tuesday 20th march, dismissed government's review plea in the Vodafone-Hutch tax case. The apex court had ruled in favour of Vodafone in Rs 11,000 crore tax case in January.

A bench of Chief Justice S.H. Kapadia, Justice K.S. Radhakrishnan and Justice Swatanter Kumar dismissed the government's plea after considering it in their chamber.

Vodafone won a five-year legal battle against the Indian tax authorities in January as the apex court dismissed a $2.2 billion tax demand raised over the British mobile phone giant's acquisition of Indian mobile assets in 2007.

The tax office last month filed a petition seeking a review of that judgment.

The tax demand was over Vodafone's $11 billion deal to buy Hutchison Whampoa Ltd's Indian mobile business.

Vodafone, the world's largest mobile operator by revenue and the biggest overseas corporate investor in India, had argued that the Indian authorities had no right to tax the transaction between two foreign entities.

Even if tax was due, the company had argued, it should be paid by the seller and not the buyer.

The union budget presented last week amended the income tax act retrospectively from 1962, giving the taxman powers to scrutinise offshore merger and acquisition deals. Finance Minister Pranab Mukherjee later assured investors that deals more than six years old will not be reopoened. This still leaves the sword hanging over the Vodafone case.

The government in its review petition had said that the apex court ruling had error in its findings that the offshore transaction which gave Vodafone holding company a 67% stake in Hutch-Essar was bona fide structured FDI in India.

The Centre said there was no investment or inflow of the funds into the country through such transactions. It said that the amount was admittedly paid outside India by VIH, a British Virgin Island company, to Hutchison Telecommunications International (Cayman) Holdings Ltd, a Cayman Island company, and was, therefore, not a case of FDI into India at all.

"We hold, that the Offshore Transaction herein is a bona fide structured FDI investment into India which fell outside India's territorial tax jurisdiction, hence not taxable. The said Offshore Transaction evidences participative investment and not a sham or tax avoidant preordained transaction," Chief Justice SH Kapadia had said writing the lead judgement in the case.

The government further said that the SC ruling has the effect of legitimising transactions through the tax havens and preventing the income-tax department from looking at the substance of such transactions.

By creating an interposed holding or operating company, the foreign investors would be able to avoid lengthy approval or registration process which would have far reaching consequences, the Centre said seeking recall of the order.

The apex court had on January 20 ruled that the income-tax authorities have no jurisdiction to tax Vodafone's $2.2-billion purchase of a majority stake in the Indian mobile unit of Hong Kong-based Hutchison Whampoa. 

Official copy of the decision is still awaited.

Indian Insurance Regulator Proposed Exposure Draft on Servicing of Orphan Policies

Insurance Regulatory and Development Authority (IRDA), insurance market watchdog has issued draft regulations for Orphan Policies.

Introduction: Insurance agents are the most important channel of intermediation in the insurance business in India. Recognizing the importance of the agents in the procurement and servicing of insurance policies, the Insurance Act has two specific provisions, namely Section 40(2A) and Section 44 which protect the long term interests of agents. In brief, under provisions of Section 40(2A), lapsed policies which require medical examination prior to revival can be assigned to another agent after giving due notice to the existing agent to revive such policies. In such cases, new agent is entitled to commission of only 50% of what the procuring agent would have been entitled had the policy continued to be in force. Under Section 44, except on grounds of fraud, an agent who has served an insurance company for a period of 5 years shall be entitled, subject to certain conditions, to renewal commission on such policies if he discontinues his agency. However, agents who have completed 10 years of service with a given insurance company and stops for any reason his/her agency business but does not join another company are entitled to renewal commission on all such policies which they had placed. The commission on policies covered under Section 44 is inheritable and entitled to be passed on to the legal heirs of that agent.

2.     In the evolving Indian insurance context, it is noticed that a large number of agents discontinue services with a given insurance company before completing the minimum service prescribed. During the period of their service with a company they would have placed some policies and on the discontinuance of an agent such policies are left “orphan” and the policyholder suffers from lack of proper assistance in the servicing of the policy. The insurance company also suffers because of the drop of persistency which might occur in such cases. Given this pattern, IRDA believes it is important and in the interest of such policy holders to provide for a system where they are not denied the benefit of having an agent to look after their policy service issues in the best interest of policyholders.

3.     In order to address this gap created by exit of insurance agents well before attaining qualifying criterion as stipulated in Section 44, the Authority proposes to issue the following guidelines:

Guidelines on Servicing of Orphan Policies

1.       ‘Orphan life insurance policies’ for the purpose of these Guidelines, means the policies initially effected by an insurance agent whose services were subsequently terminated or removed from the rolls of the insurer excluding those policies to which the effecting agent is entitled to renewal commission under provisions of Section 44 of the Insurance Act. The policies that are considered eligible under proviso to section 40(2A) of Insurance Act also do not fall under the purview of this definition.

2.        “Allottee Agent” for the purpose of these guidelines is an individual insurance agent who is on the rolls of the life insurance company to whom the orphan, lapsed life insurance policies are allotted for the purpose of conservation and rendering the policy services. 

3.       ‘A lapsed life insurance policy’ for the purpose of these guidelines is a policy on which premium that is due and remained unpaid even after six months from the date of first unpaid premium.

4.       Insurance companies are allowed to allot any of the lapsed and orphan life insurance policies to individual insurance agents whose license is in force for the purpose of conservation and rendering effective policy service to the policyholders. Only a life insurance policy that is in lapsed condition on the date of allotment is eligible for allotment.

5.       Single Premium Life Insurance policies or life insurance policies on which no further premiums are due for payment (Limited Premium Payment Policies after the expiry of Premium Paying Term) are not eligible for allotment under these guidelines. Life Insurance Products designed with specific marketing features, inter alia, say direct / online marketing where no commission outgo is projected under respective File and Use are also not eligible for allotment. 

6.       The Life Insurers shall notify the particulars of ‘Allottee agent’to the concerned policy holders.

7.       The ‘Allottee agents’ shall be provided a list of such allotted life insurance policies along with the addresses for policy servicing. While submitting the list, it shall be stipulated that the purpose of submitting the said list is for rendering required policy services and any details thereof shall neither be parted with to any third party / entity nor be used for any other business purposes. However there is no bar in an ‘Allottee agent’canvassing new policies to the policyholder after reviving the lapsed allotted policies.

8.       It shall be specified to the ‘Allottee agent’ that the objective of the allotment is the conservation/revival and further servicing of the policies. 

9.       Regulation 8 of IRDA (Licensing of Individual Agents) Regulations, 2000 (Code of Conduct) applies to the ‘Allottee agent’ in respect of all the allotted policies. It shall be disclosed upfront to the Allottee agent.

10.   While allotting the policies for servicing, the life insurers shall direct the Allottee agents that all policy services shall be rendered similar to how an insurance agent would render to those policies that were otherwise effected by him / her. 

11.   The insurers are allowed to pay the following remuneration to the Allottee agent towards policy service in respect of the policies allotted to him/her

a.       Equivalent to the commission rates mentioned in the respective File & Use.

b.      The remuneration referred in 11 (a) above is payable only on revival of a lapsed orphan policy on account of arrears premiums received on or after the date of allotment and also on subsequent renewal premiums paid under the policy.

c.       No upfront / advance payments are allowed on account of the policy allotments referred herein.

d.      The payment of remuneration shall cease with the exit of an Allottee agent by any means and such Allottee agent will not be eligible for the benefits accorded by 44 of the Insurance Act.

12.   The policies that are allotted for servicing shall not be counted for persistency of the Policy allotted agent.

13.   The allotment of lapsed policies shall be done judiciously by the life insurers keeping in view the ability / feasibility of the insurance agents to service the policies allotted.

14.   Insurers shall also take in to account the track record of the agent and complaints registered against an agent etc. while allotting the orphan policies.

15.   The Life Insurers shall take an undertaking from the agents regarding their willingness for the proposed allotment and their consent for rendering the required policy services.

16.   Where a lapsed policy allotted is not revived / reinstated within 3 months from the date of such allotment, life insurers shall have the discretion to undo the allotment by issuing a formal notice to the Allottee agent and re-allot to any other agent as per the norms prescribed herein.

17.   An allotted policy which was revived or reinstated but lapsed subsequently may also be allotted in accordance to the provisions of the within referred stipulations. 

18.   Allotting the lapsed policies by a life insurance company is only an option.

19.   The Insurers shall put in place procedures for capturing the details of the Policy allotted agents who are servicing the allotted policies, in order to ensure that the objectives of allotment are met.

Comments if any on the above exposure draft may be forwarded to the following before 31^st March, 2012.

Part II: Indian Budget 2012-2013

Following Part I of the India's Annual Budget 2012-2013, major points are as follow:

INCLUSION

Scheduled Castes and Tribal Sub Plans

• Allocation for Scheduled Castes Sub Plan at `37,113 crore in BE 2012-13 represents an increase of 18 per cent over BE 2011-12.
• Allocation for Tribal Sub Plan at `21,710 crore in BE 2012-13 represents an increase of 17.6 per cent.

Food Security

• National Food Security Bill, 2011 is before Parliamentary Standing Committee.
• A national information utility for computerisation of PDS is being created. To become operational by December, 2012.

Multi-sectoral Nutrition Augmentation Programme

• A multi-sectoral programme to address maternal and child malnutrition in selected 200 high burden districts is being rolled out during 2012-13.
• Allocation of `15,850 crore made for Integrated Child Development Service (ICDS) scheme, representing an increase of 58 per cent over BE 2011-12.
• `11,937 crore allocated for National Programme of Mid Day Meals in schools.
• An allocation of `750 crore proposed for Rajiv Gandhi Scheme for Empowerment of Adolescent Girls, SABLA.

Rural Development and Panchayati Raj

• Budgetary allocation for rural drinking water and sanitation increased from `11,000 crore to `14,000 crore representing an increase of over 27 per cent.
• Allocation for PMGSY increased by 20 per cent to Rs.24,000 crore to improve connectivity.
• Major initiative proposed to strengthen Panchayats through Rajiv Gandhi Panchayat Sashaktikaran Abhiyan.
• Backward Regions Grant Fund scheme to continue in twelfth plan with enhanced allocation of `12,040 crore in 2012-13, representing an increase of 22 per cent over the BE 2011-12.
• Rural Infrastructure Development Fund (RIDF)
• Allocation under RIDF enhanced to `20,000 crore. `5,000 crore earmarked exclusively for creating warehousing facilities.

EDUCATION

• For 2012-13, `25,555 crore provided for RTE-SSA representing an increase of 21.7 per cent over 2011-12.
• 6,000 schools proposed to be set up at block level as model schools in Twelfth Plan.
• `3,124 crore provided for Rashtriya Madhyamik Shiksha Abhiyan (RMSA) representing an increase of 29 per cent over BE 2011-12.
• To ensure better flow of credit to students, a Credit Guarantee Fund proposed to be set up.

HEALTH

• No new case of polio reported in last one year.
• Existing vaccine units to be modernised and new integrated vaccine unit to be set up in Chennai.
• Scope of ‘Accredited Social Health Activist’ – ‘ASHA’ is being enlarged. This will also enhance their remuneration.
• Allocation for NRHM proposed to be increased from `18,115 crore in 2011-12 to `20,822 crore in 2012-13.
• National Urban Health Mission is being launched.
• Pradhan Mantri Swasthya Suraksha Yojana being expanded to cover upgradation of 7 more Government medical colleges.

EMPLOYMENT AND SKILL DEVELOPMENT

• MGNREGS has had a positive impact on livelihood security.
• Need to bring about greater synergy between MGNREGA and agriculture and allied rural livelihoods.
• Allocation of `3915 crore made for National Rural Livelihood Mission representing an increase of 34 per cent.
• To ease access to bank credit, corpus for ‘Women’s SHG’s Development Fund’ enlarged.
• Proposal to establish Bharat Livelihoods Foundation of India through Aajeevika scheme.
• Allocation for Prime Minister’s Employment Generation Programme increased by 23 per cent to `1,276 crore in 2012-13.
• Skill Development Projects approved by National Skill Development Corporation expected to train 6.2 crore persons at the end of 10 years.
• `1,000 crore allocated for National Skill Development Fund in 2012-13.
• To improve the flow of institutional credit for skill development, a separate Credit Guarantee Fund to be set up.
• “Himayat” scheme introduced in J&K to provide skill training to 1 lakh youth in next 5 years. Entire cost to be borne by Centre.

SOCIAL SECURITY AND THE NEEDS OF WEAKER SECTIONS

• Allocation under NSAP raised by 37 per cent to `8,447 crore in 2012-13.
• In the ongoing Indira Gandhi National Widow Pension Scheme and Indira Gandhi National Disability Pension Scheme for BPL beneficiaries, pension amount to be raised from `200 to `300 per month.
• Lump sum grant on the death of primary breadwinner of a BPL family, in the age group 18-64 years, doubled to `20,000.
• To enhance access under SWAVALAMBAN scheme, LIC appointed as an Aggregator and all Public Sector Banks appointed as Points of Presence (PoP) and Aggregators.
• Special grant provided to various universities and academic instiutions.
• Security
• A provision of `1,93,407 crore made for Defence services including `79,579 crore for capital expenditure. Any further requirement to be met.
• `1,185 crore proposed to be allocated for construction of nearly 4,000 residential quarters for Central Armed Police Forces.
• `3,280 crore proposed to be allocated for construction of office building of Central Armed Police Forces.
• Scheme to create National Population Register likely to be completed within next 2 years.

GOVERNANCE

UID-Aadhaar

• Enrolment of 20 crore persons completed under UID mission. Adequate funds to be allocated to complete enrolment of another 40 crore persons.
• Black Money
• Proposal to lay a White Paper on Black Money in current session of Parliament. Public Procurement Legislation
• Bill regarding Public Procurement Legislation to be introduced in the Budget Session of the Parliament.
• Legislative measures for strengthening anti-corruption framework are at various stages of enactment.

PART B — TAX PROPOSALS

DIRECT TAXES

• Tax proposals for 2012-13 mark progress in the direction of movement towards DTC and GST.
• DTC rates proposed to be introduced for personal income tax.
• Exemption limit for the general category of individual taxpayers proposed to be enhanced from `1,80,000 to `2,00,000 giving tax relief of `2,000.
• Upper limit of 20 per cent tax slab proposed to be raised from `8 lakh to `10 lakh.
• Proposal to allow individual tax payers, a deduction of upto `10,000 for interest from savings bank accounts.
• Proposal to allow deduction of upto `5,000 for preventive health check up.
• Senior citizens not having income from business proposed to be exempted from payment of advance tax.
• To provide low cost funds to stressed infrastructure sectors, rate of withholding tax on interest payment on ECBs proposed to be reduced from 20 per cent to 5 per cent for 3 years for certain sectors.
• Restriction on Venture Capital Funds to invest only in 9 specified sectors proposed to be removed.
• Proposal to continue to allow repatriation of dividends from foreign subsidiaries of Indian companies at a lower tax rate of 15 per cent upto 31.3.2013.
• Investment link deduction of capital expenditure for certain businesses proposed to be provided at the enhanced rate of 150 per cent.
• New sectors to be added for the purposes of investment linked deduction.
• Proposal to extend weighted deduction of 200 per cent for R&D expenditure in an inhouse facility for a further period of 5 years beyond March 31, 2012.
• Proposal to provide weighted deduction of 150 per cent on expenditure incurred for
• agri-extension services.
• Proposal to extend the sunset date for setting up power sector undertakings by one year for claiming 100 per cent deduction of profits for 10 years.
• Turnover limit for compulsory tax audit of account and presumptive taxation of SMEs to be raised from `60 lakhs to `1 crore.
• Exemption from Capital Gains tax on sale of residential property, if sale consideration
• is used for subscription in equity of a manufacturing SME for purchase of new plant and machinery.
• Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill development in manufacturing sector.
• Reduction in securities transaction tax by 20 per cent on cash delivery transactions.
• Proposal to extend the levy of Alternate Minimum Tax to all persons, other than companies, claiming profit linked deductions.
• Proposal to introduce General Anti Avoidance Rule to counter aggressive tax avoidance scheme.
• Measures proposed to deter the generation and use of unaccounted money.
• A net revenue loss of `4,500 crore estimated as a result of Direct Tax proposals.

INDIRECT TAXES

Service Tax

• Sevice tax confronts challenges of its share being below its potential, complexity in tax law, and need to bring it closer to Central Excise Law for eventual transition to GST.
• Overwhelming response to the new concept of taxing services based on negative list.
• Proposal to tax all services except those in the negative list comprising of 17 heads.
• Exemption from service tax is proposed for some sectors.
• Service tax law to be shorter by nearly 40 per cent.
• Number of alignment made to harmonise Central Excise and Service Tax. A common simplified registration form and a common return comprising of one page are steps in this direction.
• Revision Application Authority and Settlement Commission being introduced in Service Tax for dispute resolution.
• Utilization of input tax credit permitted in number of services to reduce cascading of taxes.
• Place of Supply Rules for determining the location of service to be put in public domain for stakeholders’ comments.
• Study team to examine the possibility of common tax code for Central Excise and Service Tax.
• New scheme announced for simplification of refunds.
• Rules pertaining to point of taxation are being rationalised.
• To maintain a healthy fiscal situation proposal to raise service tax rate from 10 per cent to 12 per cent, with corresponding changes in rates for individual services.
• Proposals from service tax expected to yield additional revenue of `18,660 crore. Other proposals for Indirect Taxes
• Given the imperative for fiscal correction, standard rate of excise duty to be raised from 10 per cent to 12 per cent, merit rate from 5 per cent to 6 per cent and the lower merit rate from 1 per cent to 2 per cent with few exemptions.
• Excise duty on large cars also proposed to be enhanced.
• No change proposed in the peak rate of customs duty of 10 per cent on nonagricultural goods.
• To stimulate investment relief proposals for specific sectors - especially those under stress.

Agriculture and Related Sectors

• Basic customs duty reduced for certain agricultural equipment and their parts;
• Full exemption from basic customs duty for import of equipment for expansion or setting up of fertiliser projects upto March 31, 2015.
• Infrastructure
• Proposal for full exemption from basic customs duty and a concessional CVD of 1 per cent to steam coal till 31st March, 2014.
• Full exemption from basic duty provided to certain fuels for power generation.
• Mining
• Full exemption from basic customs duty to coal mining project imports.
• Basic custom duty proposed to be reduced for machinery and instruments needed for surveying and prospecting for minerals.
• Railways
• Basic custom duty proposed to be reduced for equipments required for installation of train protection and warning system and upgradation of track structure for high speed trains.
• Roads
• Full exemption from import duty on certain categories of specified equipment needed for road construction, tunnel boring machines and parts of their assembly.
• Civil Aviation
• Tax concessions proposed for parts of aircraft and testing equipment for third party maintenance, repair and overhaul of civilian aircraft.
• Manufacturing
• Relief proposed to be extended to sectors such as steel, textiles, branded readymade garments, low-cost medical devices, labour-intensive sectors producing items of mass consumption and matches produced by semi-mechanised units.
• Health and Nutrition
• Proposal to extend concessional basic customs duty of 5 per cent with full exemption from excise duty/CVD to 6 specified life saving drugs/vaccines.
• Basic customs duty and excise duty reduced on Soya products to address protein deficiency among women and children.
• Basic customs duty and excise duty reduced on Iodine.
• Basic customs duty reduced on Probiotics.
• Environment
• Concessions and exemptions proposed for encouraging the consumption of energy-saving devices, plant and equipment needed for solar thermal projects.
• Concession from basic customs duty and special CVD being extended to certain items imported for manufacture for hybrid or electric vehicle and battery packs for such vehicles.
• Proposal to increase basic customs duty on imports of gold and other precious metals.
• Additional resource mobilisation
• Proposals to increase excise duty on ‘demerit’ goods such as certain cigarettes, hand-rolled bidis, pan masala, gutkha, chewing tobacco, unmanufactured tobacco and zarda scented tobacco.
• Cess on crude petroleum oil produced in India revised to `4,500 per metric tonne.
• Basic customs duty proposed to be enhanced for certain categories of completely built units of large cars/MUVs/SUVs.
• Rationalization measures
• Excise duty rationalised for packaged cement, whether manufactured by minicement plants or others.
• Levy of excise duty of 1 per cent on branded precious metal jewellery to be extended to include unbranded jewellery. Operations simplified and measures taken to minimise impact on small artisans and goldsmiths.
• Branded Silver jewellery exempted from excise duty.
• Chassis for building of commercial vehicle bodies to be charged excise duty at an ad valorem rate instead of mixed rate.
• Import of foreign-going vessels to be exempted from CVD of 5 per cent retrospectively.
• Duty-free allowances increased for eligible passengers and for children of upto 10 years.
• Proposals relating to Customs and Central excise to result in net revenue gain of `27,280 crore.
• Indirect taxes estimated to result in net revenue gain of `45,940 crore.
• Net gain of `41,440 crore in the Budget due to various taxation proposals.

Part I: India's Annual Budget 2012-13

Finance minister Pranab Mukherjee presented India's budget on 16th March for the coming financial year.

Followings are major points of Indian Annual Budget 2012-2013:

APPROACH TO THE BUDGET

• For Indian economy, recovery was interrupted this year due to intensification of debt crises in Euro zone, political turmoil in Middle East, rise in crude oil price and earthquake in Japan.
• GDP is estimated to grow by 6.9 per cent in 2011-12, after having grown at 8.4 per cent in preceding two years.
• India however remains front runner in economic growth in any cross-country comparison.
• Monetary and fiscal policy response for better part of past 2 years aimed at taming domestic inflationary pressure.
• Growth moderated and fiscal balance deteriorated due to tight monetary policy and expanded outlays.
• Indicators suggest that economy is turning around as core sectors and manufacturing show signs of recovery.
• At this juncture, it is necessary to take hard decision to improve macroeconomic environment and strengthen domestic growth drivers.
• Twelfth Five Year Plan to be launched with the aim of “faster, sustainable and more inclusive growth”. Five objectives identified to be addressed effectively in ensuing fiscal year.
• If India can build on its economic strength, it can be a source of stability for world economy and a safe destination for restless global capital.

OVERVIEW OF THE ECONOMY

• GDP growth estimated at 6.9 per cent in real terms in 2011-12. Slowdown in comparison to preceding two years is primarily due to deceleration in industrial growth.
• Headline inflation expected to moderate further in next few months and remain stable thereafter.
• Steps taken to bridge gaps in distribution, storage and marketing systems have helped in more effective management of inflation.
• Developments in India’s external trade in the first half of current year have been encouraging. Diversification in export and import market achieved.
• Current account deficit at 3.6 per cent of GDP for 2011-12 and reduced net capital inflow in the 2nd and 3rd quarters put pressure on exchange rate.
• India’s GDP growth in 2012-13 expected to be 7.6 per cent +/- 0.25 per cent.
• Deterioration in fiscal balance in 2011-12 due to slippages in direct tax revenue and increased subsidies.

FRBM ACT

• Introduction of amendments to the FRBM Act as part of Finance Bill, 2012.
• Concept of “Effective Revenue Deficit” and “Medium Term Expenditure Framework” statement are two important features of amendment to FRBM Act in the direction of expenditure reforms.
• Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. This will help in reducing consumptive component of revenue deficit and create space for increased capital spending.
• “Medium-term Expenditure Framework” statement will set forth a three-year rolling target for expenditure indicators.
• Recommendations of the Expert Committees to streamline and reduce the number of centrally sponsored schemes and to address plan and non-plan classification to be kept in view while implementing Twelfth Plan.
• Central Plan Scheme Monitoring System to be expanded for better tracking and utilisation of funds.

SUBSIDIES

• Some subsidies, while being inevitable, may become undesirable if they compromise the macroeconomic fundamentals of economy.
• Subsidies related to administering the Food Security Act will be fully provided for.
• Endeavour to keep central subsidies under 2 per cent of GDP in 2012-13. Over next 3 year, to be further brought down to 1.75 per cent of GDP.
• Based on recommendation of task force headed by Shri Nandan Nilekani, a mobile-based Fertilizer Management System has been designed to provide endto- end information on movement of fertilisers and subsidies. Nation-wide roll out during 2012.
• All three public sector Oil Marketing Companies have launched LPG transparency portals to improve customer service and reduce leakage.
• Endeavour to scale up and roll out Aadhaar enabled payments for various government schemes in atleast 50 districts within next 6 months.

TAX REFORMS

• DTC Bill to be enacted at the earliest after expeditious examination of the report of the Parliamentary Standing Committee.
• Drafting of model legislation for the Centre and State GST in concert with States is under progress.
• GST network to be set up as a National Information Utility and to become operational by August 2012.

DISINVESTMENT POLICY

• Government has further evolved its approach to divestment of Central Public Sector Enterprises by allowing them a level playing field vis-à-vis the private sector in respect of practices like buy backs and listing at stock exchanges.
• For 2012-13, `30,000 crore to be raised through disinvestment. At least 51 per cent ownership and management control to remain with Government.

STRENGTHENING INVESTMENT ENVIRONMENT

Foreign Direct Investment

• Efforts to arrive at a broadbased consensus in consultation with the State Governments in respect of decision to allow FDI in multi-brand retail upto 51 per cent.

Advance Pricing Agreement

• Provision regarding implementation of Advance Pricing Agreement to be introduced in Finance Bill, 2012.

Financial Sector

• Rajiv Gandhi Equity Saving Scheme to allow for income tax deduction of 50 per cent to new retail investors, who invest upto `50,000 directly in equities and whose annual income is below `10 lakh to be introduced. The scheme will have a lock-in period of 3 years.

Capital Market

• Various steps proposed to be taken for deepening the reforms in the Capital markets, including simplifying process of IPOs, allowing QFIs to access Indian Bond Market etc.

Legislative Reforms

• Official amendment to “The Pension Fund Regulatory and Development Authority Bill, 2011”, “The Banking Laws (Amendment) Bill, 2011” and “The Insurance Law (Amendment) Bill, 2008” to be moved in this session.
• Various Bills proposed to be moved in the Budget session of the Parliament to take forward the process of financial sector legislative reforms. Capitalisation of Banks and Financial Holding Company.
• To protect the financial health of Public Sector Banks and Financial Institutions, `15,888 crore proposed to be provided for capitalisation. Possibility of creating a financial holding company to raise resources to meet the capital requirements of PSU Banks under examination.
• A central “Know Your Customer” depository to be developed in 2012-13 to avoid multiplicity of registration and data upkeep.

Priority Sector Lending

• Revised guidelines on priority sector lending to be issued after stakeholder consultation.

Financial Inclusion

• Out of 73,000 identified habitations that were to be covered under “Swabhimaan” campaign by March, 2012, about 70,000 habitations have been covered. Rest likely to be covered by March 31, 2012.
• As a next step, Ultra Small Branches are being set up at these habitations.
• In 2012-13, “Swabhimaan” campaign to be extended to more habitations. Regional Rural Banks
• Out of 82 RRBs in India, 81 have successfully migrated to Core Banking Solutions and have also joined the National Electronic Fund Transfer system.
• Proposal to extend the scheme of capitalisation of weak RRBs by another 2 years to enable States to contribute their share.

INFRASTRUCTURE AND INDUSTRIAL DEVELOPMENT

• During Twelfth Plan period, investment in infrastructure to go up to `50 lakh crore with half of this, expected from private sector.
• More sectors added as eligible sectors for Viability Gap Funding under the scheme “Support to PPP in infrastructure”.
• Government has approved guidelines for establishing joint venture companies by defence PSUs in PPP mode.
• First Infrastructure Debt Fund with an initial size of `8,000 crore launched earlier this month.
• Tax free bonds of `60,000 crore to be allowed for financing infrastructure projects in 2012-13.
• A harmonised master list of infrastructure sector approved by the Government.
• IIFCL has put in place a structure for credit enhancement and take-out finance for easing access of credit to infrastructure projects. 

National Manufacturing Policy

• National Manufacturing Policy announced with the objective of raising, within a decade, the share of manufacturing in GDP to 25 per cent and creating of 10 crore jobs. Power and Coal
• Coal India Limited advised to sign fuel supply agreements with power plants, having long-term PPAs with DISCOMs and getting commissioned on or before March 31, 2015.
• External Commercial Borrowings (ECB) to be allowed to part finance Rupee debt of existing power projects.

Transport: Roads and Civil Aviation

• Target of covering a length of 8,800 kilometre under NHDP next year.
• Allocation of the Road Transport and Highways Ministry enhanced by 14 per cent to `25,360 crore.
• ECB proposed to be allowed for capital expenditure on the maintenance and operations of toll systems for roads and highways, if they are part of original project.
• Direct import of Aviation Turbine Fuel permitted for Indian Carriers as actual users.
• ECB to be permitted for working capital requirement of airline industry for a period of one year, subject to a total ceiling of US $ 1 billion.
• Proposal to allow foreign airlines to participate upto 49 per cent in the equity of an air transport undertaking under active consideration of the government.

Delhi Mumbai Industrial Corridor

• In September 2011 central assistance of `18,500 crore spread over 5 years approved. US $ 4.5 billion as Japanese participation in the project. 

Housing Sector

• Various proposals to address the shortage of housing for low income groups in major cities and towns including allowing ECB for low cost housing projects and setting up of a credit guarantee trust fund etc.

Fertilisers

• Government has taken steps to finalise pricing and investment policies for urea to reduce India’s import dependence in urea.

Textiles

• Government has announced a financial package of `3,884 crore for waiver of loans of handloom weavers and their cooperative societies.
• Two more mega handloom clusters, one to cover Prakasam and Guntur districts in Andhra Pradesh and another for Godda and neighbouring districts in Jharkhand to be set up.
• Three Weaver’s Service Centres one each in Mizoram, Nagaland and Jharkhand to be set up for providing technical support to poor handloom weavers.
• `500 crore pilot scheme announced for promotion and application of Geo-textiles in the North Eastern Region.
• A powerloom mega cluster to be set up in Ichalkaranji in Maharashtra with a budget allocation of `70 crore.

Micro, Small and Medium Enterprises

• `5,000 crore India Opportunities Venture Fund to be set up with SIDBI.
• To enable greater access to finance by Small and Medium Enterprises (SME), two SME exchanges launched in Mumbai recently.
• Policy requiring Ministries and CPSEs to make a minimum of 20 per cent of their annual purchases from MSEs approved. Of this, 4 per cent earmarked for procurement from MSEs owned by SC/ST entrepreneurs.

AGRICULTURE

• Plan Outlay for Department of Agriculture and Co-operation increased by 18 per cent.
• Outlay for Rashtriya Krishi Vikas Yojana (RKVY) increased to `9,217 crore in 2012-13.
• Initiative of Bringing Green Revolution to Eastern India (BGREI) has resulted in increased production and productivity of paddy. Allocation for the scheme increased to `1,000 crore in 2012-13 from `400 crore in 2011-12.
• `300 crore to Vidarbha Intensified Irrigation Development Programme under RKVY.
• Remaining activities to be merged into following missions in Twelfth Plan:
• National Food Security Mission
• National Mission on Sustainable Agriculture including Micro Irrigation
• National Mission on Oilseeds and Oil Palm
• National Mission on Agricultural Extension and Technology
• National Horticultural Mission
• National Mission for Protein Supplement
• `2,242 crore project launched with World Bank assistance to improve productivity in the dairy sector. `500 crore provided to broaden scope of production of fish to coastal aquaculture.
• Agriculture Credit
• Target for agricultural credit raised by `1,00,000 crore to `5,75,000 crore in 2012-13.
• Interest subvention scheme for providing short term crop loans to farmers at 7 per cent interest per annum to be continued in 2012-13. Additional subvention of 3 per cent available for prompt paying farmers.
• Short term RRB credit refinance fund being set up to enhance the capacity of RRBs to disburse short term crop loans to small and marginal farmers.
• Kisan Credit Card (KCC) Scheme to be modified to make KCC a smart card which could be used at ATMs.
• Agricultural Research
• A sum of `200 crore set aside for incentivising research with rewards. 
• Irrigation
• Structural changes in Accelerated Irrigation Benefit Programme (AIBP) being made to maximise flow of benefit from investments in irrigation projects.
• Allocation for AIBP in 2012-13 stepped up by 13 per cent to `14,242 crore.
• Irrigation and Water Resource Finance Company being operationalised to mobilise large resources to fund irrigation projects.
• A flood management project approved by Ganga Flood Control Commission at a cost of `439 crore for Kandi sub-division of Murshidabad District.
• National Mission on Food Processing
• A new centrally sponsored scheme titled “National Mission on Food Processing” to be started in 2012-13 in co-operation with State Governments.
• Steps taken to create additional food grain storage capacity in the country.