LEGAL UPDATE: INDIA
Issue 13 ... January - February 1997
Published by:
Nishith Desai International Legal Research Center,
201-A Milton, Juhu Tara Road, Juhu Beach, Mumbai 400 049, INDIA.
E-mail: desai.nishith@gems.vsnl.net.in
The contents of the "Legal Update: India" should not be construed as legal opinion or professional advice. Since the sources are varied, at times it is difficult to verify the correctness of the information mentioned herein.

Content

Priority list expanded

The Union Cabinet has cleared a new list of industries where joint ventures with up to 74% foreign equity will be cleared on an automatic basis. The list includes manufacturing and infrastructure sectors, including electric generation and transmission. Mining (oil and gasfield) services, except exploration and production services and services incidental to mining, viz. drilling, shafting, reclamation of mines, and surveys/mapping are also included in the list. The list also includes construction and maintenance of roads, railbeds, bridges, tunnels, pipelines ropeways, ports, harbors and runways, hydroelectric projects, power plants, and industrial plants.

In addition, 16 more industries have been added to the list of 36 industries in which foreign equity up to 51% is cleared on an automatic basis. Mining of iron ore, manufacture of cotton textiles, wool, silk, man-made fibre textiles, rubber plastic, petroleum and coal products, land transport (support services) have been added to the list. The mines ministry has however, not approved of 51% automatic approval in the case of mining of iron and metal ore, and therefore, the foreign equity limit will remain at 50%. Business services, including, technical testing and analysis services, market research, R&D services (excluding basic research setting up of R&D / academic institutions which would award degrees / diplomas / certificates), health and medical services have been included in the list of industries in which foreign equity up to 51% will be cleared on an automatic basis.

Lists of industries in which 74% foreign equity and 51% foreign equity will be approved on an automatic basis

Long term gains escape tax

On December 31, 1996, the President of India promulgated an ordinance amending the Income-Tax Act, 1961 (ITA).

Accordingly, all monies earned on or after October 1, 1996, from the transfer of long-term capital asset will be exempt from tax under section 54EA of the ITA, if such income is invested in fresh issues of shares made by public companies for the purpose of funding infrastructure projects. This move is to support the need for infrastructure development.

Infrastructure for this purpose includes, roads, bridges, airports, ports, sanitation and sewerage projects, water supply and irrigation projects, and railway system. It will also include power, basic telephone services, and exploration or extraction of oil and natural gas.

Thus, for an investor, the capital gains received on the transfer of long term capital asset will be exempt from tax if the entire amount of the proceeds (net consideration) is invested in certain specified assets. The list of these assets which earlier included bonds, preference shares redeemable after a period of 3 years, and debentures will now include fresh issue of shares made by public companies. There will also be a lock-in period of three years on investments made as above.

Public companies in which the investors (intending to claim the tax exemption detailed above) invest will have to apply to the Central Board of Direct Taxes (CBDT) for its approval. The tax exemption will be available to investors only if the company invests 60% or more of the capital so raised in infrastructure projects. Furthermore, at least 25% of the total amount raised must be invested in infrastructure facilities within a period of one year from the date of the CBDT approval and the balance 35% (of the aforementioned 60%) has to be invested in infrastructure facilities within 3 years of the CBDT approval.

Tax on dividends likely to go

The Ministry of Finance (MoF) is contemplating on levying an additional tax on distributable profits (dividends) of corporates and discontinuing with the current withholding tax on dividends paid to shareholders.

While the profits of a corporate entity will continue to attract tax at the current rate of 40% along with an additional levy of surcharge, a further tax at a much lower rate will be imposed on the distributable component.

Private company can hold AGM abroad

Marquip Worldwide Systems India (P) Ltd., an Indian private software company having 100% foreign shareholders, arranged its annual general meeting (AGM) in the US even though its registered office was at Madras, India.

The Registrar of Companies (RoC) Madras initiated criminal proceedings against the company, but the company filed a criminal miscellaneous petition in the Madras High Court and obtained a stay order. The company relied on clause (b) of the second proviso to section 166(2) of the Companies Act, 1956 which provides that a private company, which is not a subsidiary of a public company, may by resolution agreed to by all its members, fix the time as well as the place for its AGM.

The company had passed a special resolution (in an extraordinary meeting held in August 1995), enabling it to hold its AGM in the US where all its shareholders were present.

Proposal for issue of non-voting shares dropped

The Ministry of Finance (MoF) has discarded the idea of allowing companies, the flexibility of issuing non-voting shares up to 25% of their issued capital.

Earlier, the Finance Minister had in his Budget speech decided to allow Indian companies to issue non-voting shares. This had a negative impact on the stock exchanges and in particular, Foreign Institutional Investors (FIIs) as they feared that the implementation of such a proposal would allow Indian promoters having a small share holding to have control over the company.

Proposed amendments to the Companies Act

The proposed amendments to the Companies Act, 1956 (Act) were passed by the upper house of Parliament. A summary of some the proposed amendments are mentioned below:
  • The amendment to section 17 of the Act will allow a company to alter its object clause of the Memorandum of Association without the approval of Company Law Board (CLB). Prior to this, it was necessary to obtain the CLB's approval and this was a very lengthy, time consuming, and cumbersome process.

  • Companies can issue preference shares redeemable after a period of 20 years. Earlier, a company was allowed to issue redeemable preference shares only up to a period of 10 years. This will enable companies undertaking infrastructure projects to raise funds of a higher maturity period.

  • Mutual funds and venture capital funds will be permitted to vote in respect of their holdings in companies. Previously, only public trustees were allowed to vote in respect of such holdings.

  • Companies will henceforth be permitted to use computer floppies/diskettes to file documents with the Registrar of Companies.

Mega merger of ICICI & SCICI: Stamp Duty

The two Indian financial power houses, namely, the Industrial Credit and Investment Corporation of India (ICICI) and the Shipping Credit and Investment Corporation of India (SCICI) have decided to merge, resulting in a combined asset base worth Rs. 330 billion (over US$ 9 billion).

A share swap ratio of 2:5 (two shares of ICICI in lieu of five shares of SCICI) has been arrived at in the merger.

The issue of concern in the merger is the amount of stamp duty that will become payable. In July 1996, the Maharashtra State government announced its budget wherein it pegged the stamp duty at 10% of the value of the immovable property and 3% of the value of the movables of the transferor company (in this case SCICI). This decision of the government has drawn a lot of flak from corporates, legal, and financial experts who found the duty too steep. The government is therefore, planning to review the existing stamp duty rules.

If the state government reviews its decision on the stamp duty payable in mergers, ICICI will have to pay stamp duty at either, 0.5% of the value of the shares allotted by the transferee (i.e. ICICI) or 1% of the gross value of immovable property (of SCICI's), whichever is higher.

Also, in February 1996, the Bombay High Court ruled that mergers will attract stamp duty at the rate of 3% of the value of the shares transferred by the transferor as on the date of merger. The companies against whom such a ruling was passed appealed to the Supreme Court, before which the matter is still pending. If legal experts are to be believed, ICICI will have to pay stamp duty in accordance with the High Court's ruling.

Budget: proposed changes to Depositories Act

The Ministry of Finance (MoF) is all set to include a number of amendments to the Depositories Act, 1996 (Act) in the coming Budget to plug the existing loop holes. The MoF has already circulated the draft cabinet note for opinion.

The amendments include among others, restricting foreign participation in a depository to 20% and allowing the scrips of only listed companies to be held in the dematerialized form.

Provisions for including the scrips and units of all nationalized banks and financial institutions in the depository system are also being included as an amendment. This, if implemented, will allow the definition of the term 'shares' to include 'units' issued by mutual funds and also provide for the dematerialisation of shares issued by nationalized banks and financial institutions. This is necessary since at present, there are no provisions for automatic transfer of units. While bringing into force the Depositories law, certain other Acts, for example, the Companies Act, 1956 was amended to allow for the book-entry system for recording transfers. Incidentally, other Acts specifically drafted for certain nationalized banks like, the State Bank of India and the Industrial Development Bank of India were not amended.

Thus, even after the Depositories Act, 1996 came into force, these Acts continue to provide for manual transfer of shares. This lacunae in the Act was first noticed by the National Securities Depository Limited.

The government also plans to extend the benefit of stamp duty exemption available for transfer within a depository to all units of mutual funds. At present, the Act allows for exemption only of 'shares of a company'.

Provisions for allowing companies to appeal to the Company Law Board (CLB) for disallowing illegitimate transfer of securities are also being included as an amendment to the Act.

Norms relaxed for setting up JVs, WOS abroad

The Reserve Bank of India (RBI) has revised the existing norms for investments in joint ventures (JVs) and wholly owned subsidiaries (WOS) abroad. Accordingly, corporates having foreign exchange earnings, other than export earnings, will now be permitted to invest abroad under the fast track approval scheme. Also, the five year period (within which companies investing abroad are to bring into India the entire amount invested abroad) will commence from the date on which the investment is made and not from the date of the approval. The scheme for fast track approval will henceforth be open to companies whose subsidiaries or parents have export earnings even though such companies themselves do not have any export earnings.

RBI to okay ECBs up to US$ 3 mn

The government has delegated the sanctioning of external commercial borrowings (ECBs) by corporates up to US$ 3 million for a period of 3 years to the Reserve Bank of India. This will smoothen the approval process considerably.

Insurance

The Union Cabinet has approved the Bill for giving statutory authority to the interim Insurance Regulatory Authority of India (IRAI). This is seen as a sure step toward opening up the insurance sector to private and foreign companies. The Bill is based on the regulatory mechanism prevailing in many developing and emerging economies which have opened up their insurance sector in recent years. It provides the framework for regulating and licensing both private and public insurance bodies including the General Insurance Corporation of India (GIC) and the Life Insurance Corporation of India (LIC).

The powers of the controller of insurance under the Insurance Act has already been shifted to the IRAI chairman.

The government is keen on creating a legal framework for a liberalizing the insurance sector even though there is resistance from the United Front itself. The Finance Minister, Mr. P. Chidambaram has once again reiterated his views on privatization of the sector, in keeping with his commitments expressed during the Budget for 1996-97. The Left parties that are currently opposing the insurance privatization are finding themselves in a difficult situation as they helped to draft the common minimum program. The common minimum program slates out the different policies to be pursued by the government and the privatization of the insurance sector forms a part of it.

Media

In its notification, dated December 19, 1996, under the Indian Telegraph Act, 1885 and Indian Telegraphy and Wireless Act, 1933, the Government has made it mandatory for all persons receiving television signals from satellites above 4800 MHz to obtain a license from the Department of Telecommunications (DoT).

As a result of the notification, a license would be required to establish, maintain, work, possess, or deal in any antenna, including dish antenna, satellite decoder and associated front-end converter capable of receiving signals in frequency bands above 4800 MHz.

more details on recent media developments

Telecom

Licenses for basic services made assignable

The telecom commission is now permitting the Department of Telecommunication (DoT) to make licenses for basic services assignable. The DoT is seeking the approval of the committee of secretaries and the cabinet secretary before making any changes to the license agreement.

The new assignablity clause will require the DoT's consent if a license is to be made assignable. The law ministry had earlier advised the DoT against allowing companies to make the license assignable, as companies who did not participate in the bidding process could approach the court on the plea that they would also have bid for the basic services if the tender document contained the assignablity clause.

Foreign cos. can invest in more than 49% in telecom cos

The Cabinet Committee on Foreign Investment, Government of India, has issued guidelines allowing foreign equity routed through an Indian holding company to be treated as domestic equity. Foreign equity participation in service-infrastructure areas have a foreign investment ceiling. The foreign equity component in a telecom operating company is currently restricted to 49%. The operating company holds the license to operate basic or cellular services.

As a result of the guidelines, the Indian operating company can have direct foreign equity participation of up to 49%, with the remaining 51% being held by the Indian holding company. Resident Indians must however, have a majority stake (i.e. 51% or more) and management control of the Indian holding company.

India-Germany Treaty

On November 29, 1996, the Government of India notified the avoidance of double taxation agreement entered into between the Government of India and the Government of the Federal Republic of Germany (treaty).

Article 10 of the treaty deals with taxation of dividend. The rate of dividend is reduced from 20% under the Indian, Income-Tax Act, 1961(ITA) to 10% under the treaty if the person earning the dividend does not have a permanent establishment in India. Similarly, interest arising in India will be taxed at the reduced rate of 10% as against 20% under the ITA.

RBI and MoF on Internet
Reserve Bank of India (RBI) - HomePage: http://www.reservebank.com
Ministry of Finance's (MoF's) - HomePage: http://www.nic.in/finmin
MoF E-mail: finmin@finance.delhi.nic.in
Finance minister E-mail: fm@finance.delhi.nic.in
Finance Secretary E-mail: finsecy@finance.delhi.nic.in
Chief economic adviser E-mail: cea@finance.delhi.nic.in
Revenue secretary E-mail: rsecym@finance.delhi.nic.in
Expenditure secretary E-mail: esecy@finance.delhi.nic.in

Please note that there has been no October-December 1996 issue of the Legal Update: India

Edited by: Deanne D'Souza

Published by:
Nishith Desai International Legal Research Center,
201-A Milton, Juhu Tara Road, Juhu Beach, Mumbai 400 049, INDIA.
The contents of the "Legal Update: India" should not be construed as legal opinion or professional advice. Since the sources are varied, at times it is difficult to verify the correctness of the information mentioned herein.