LEGAL
UPDATE: INDIA
Issue 15 ... May-June 1997-98
Published by:
Nishith Desai Associates 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.
The committee chaired by Mr S. S. Tarapore (retired director of the Reserve Bank of India) recently submitted its report on Capital Account Convertibility on June 3, 1997. The terms of reference of this committee were to:
In its report, the committee has recommended a phased implementation of CAC over a three year period: Phase 1 (1997-98), Phase 2 (1998-99) and Phase 3 (1999-2000). India had already taken the first steps towards CAC in August 1994, by formally accepting the obligations under Article VIII of the Articles of Agreement of the International Monetary Fund (IMF).
The recommendations of this committee, for a phased liberalisation of controls on capital outflows and inflows over the three year period include:
One could almost call this a year in which policy makers have got adventurous. The slack season credit policy for the first half of the financial year 1997-98 announced by Mr C. Rangarajan the governor of RBI is another prime example of positive steps being taken towards liberalisation.
RBI's credit policy is based on four underlying objectives: maintaining price stability, expanding lendable resources of banks, improving the credit delivery system and integrating various markets.
Its salient features are:
A draft Companies Bill, 1997 has been released by the expert committee set up to review the antiquated Companies Act, 1957. This draft bill currently under the re-view of the Department of Company Affairs will be presented in the monsoon session of the Parliament.
The proposed law introduces various hybrid concepts which are a compromise between the existing norms and the extreme demands of the industry which is calling out for minimum control in a liberalised environment. The concept of buy-back proposal for shares and the introduction of non-voting shares are typical examples of this hybrid concept.
The buy-back provision enshrined in the bill says: A company shall have the right to buy-back its own shares or other specified securities from out of its free reserves, securities premium account or the proceeds of a prior issue made specifically for the purpose of buy-back.
At the same time, strict solvency rules have been laid out, which specify a debt-equity ratio of at least 2:1 on completion of the buy-back. Under the provisions of the bill, a company need not seek the consent of its creditors vis- a -vis the buy-back proposal. However, a contract to the contrary may exist in a loan agreement between the parties, thus leaving the option to individual companies to seek creditors consent.
On the non-voting shares front, the new provisions not only permit issue of such shares but give a free hand to companies to issue a range of non-voting shares. The draft Companies Bill, 1997 also enables alteration of shareholder's rights in respect of any special class of shares even after they have been issued by a company. Theoretically with the agreement of at least three-fourths of the concerned shareholders, a company can simply convert the voting shares into non-voting shares or vice-versa. However, these changes can be challenged by the dissenting holders of the affected shares before the Company Law Tribunal.
The government has laid down new guidelines for foreign investments in Non-Banking Finance Companies (NBFCs). The Foreign Investment Promotion Board (FIPB) shall consider all proposals for such investments.
Foreign investment is permitted in the spheres of merchant banking, underwriting, portfolio management services, investment advisory services, financial consultancy, stock broking, asset management, venture capital, custodial services and factoring. In addition foreign investments can be made in credit reference agencies, credit rating agencies, leasing finance and housing finance companies.
The minimum capitalization requirements have also been clearly laid out. For foreign equity less than 75%, the capitalisation has to be brought upfront. For foreign equity more than 75 per cent (which is restricted to US $ 50 million only), US $ 7.5 million can be brought in upfront and the remaining over a period of 24 months.
NBFCs wholly owned by foreigners would operate as holding companies and specific activities could be undertaken by down-line subsidiaries having a minimum 25 per cent domestic equity. It has been clarified that domestic equity of 10 per cent has to be brought upfront and the balance over a period of 24 months.
India no longer follows the classical system of taxation for dividend income. Dividend is tax free in the hands of the shareholders, however the corporate entities have to pay an additional ten per cent tax on the distributable component.
This amendment however, does not apply in respect of payout's to unit holders by mutual funds. A controversy arose as The Unit Trust of India Act, 1964 (UTI Act) deems UTI to be a company and the income distributed by it as dividend for the purpose of levy of tax. UTI is the largest mutual fund in the country.
The Ministry of Finance has subsequently amended Section 32(3) of the UTI Act. It now defines payouts made by UTI as `income' and not `dividend'. As the position has been clarified, both UTI and other mutual funds can claim exemption from payment of income tax under Section 10(23)(d) of the Income Tax Act. Income distributed by them will be exempt in the hands of the unit holders up to a maximum limit of Rs 15,000 under the provisions of Section 80-L of the Income Tax Act.
The Attorney-general and the Solicitor-general of India have recently given their legal opinions, on the request by GIC Mutual Fund in respest of fulfilment its promise to pay to the investors 'target returns' as stated in the offer document.
The Solicitor-general opined that there was a contract between the trustees of the fund and the investors by which the trustees are bound and obliged to pay the target returns, and they cannot avoid their contractual obligations by unilaterally varying the scheme. He further stated that investors being beneficiaries of a trust, the trustees may be personally liable, and in a court of law they cannot plead that the fall in values in the stock market resulted in unexpected low Net Asset Values and hence, they cannot pay the assured returns.
The Solicitor-general was of the view that apart from damages under the contractual claim, investors can also pursue an action in tort for negligent misrepresentation against the mutual fund trustees. He pointed out that 'minimum returns' are not anticipation of future results but, were statement of facts on which the investors were entitled to rely.
In fact, the Solicitor-general further commented that the asset management company of a mutual fund may also be liable as an expert body which was to be in charge of the day-to-day management of the fund.
Thus, the comments of the Solicitor-general could have far reaching implications for the entire mutual fund industry, especially the public sector organizations in particular.
Keeping in line with the opinion given by the Solicitor-general, the Securities and Exchange Board of India has recently demanded that Canara Bank, the sponsor of the public sector Canbank Mutual Fund, should make arrangements to ensure that the promise of 'assured returns' to the unitholders is fulfilled, and has written to the Finance Ministry and the Reserve Bank of India to support its stand.
The Union Cabinet on April 29, 1997 cleared the Broadcast Bill and amendments to the Prasar Bharti Bill. The Broadcast Bill places a cap of 49 per cent on foreign equity participation in companies seeking a broadcasting license.
The 49 per cent stake of foreign equity can be brought only in media companies incorporated in the country. A stake higher than this limit, will change the nature of the company to a foreign company which would not be allowed to function from India.
The Bill also restricts cross-holding to a maximum of 20 per cent for businesses within the media sector.
Licenses are now compulsory for operating in the radio and television segment of the media. Partnership firms where all the parties are not Indian would not be eligible for a license. A `Broadcast Authority' which is to be set up, will be responsible for the issuance of licence and would be in charge of regulating entry into the media. This Authority will comprise of representatives from the Information and Broadcasting (I&B) Ministry , the Department of Telecom and other media experts. It will be an autonomous body but will operate within the purview of the I&B Ministry.
The Prasar Bharti Bill provides for setting up an autonomous Prasar Bharti Corporation to supervise the functioning of the government controlled All India Radio and Doordharshan.
Prime Minister I.K. Gujral has indicated a determination to reverse the restrictive policies adopted by India's civil aviation minister Mr C.M. Ibrahim. The existing civil aviation policy guidelines restrict foreign airlines from setting up a joint-venture with an Indian partner for carrying on airline business in India. These guidelines have put the brakes on the much talked about Tata-Singapore Airlines project. During his recent visit to Nepal, the PM voiced his dissatisfaction with the existing aviation policy and reiterated the need for an open sky policy as a move towards modernisation of the Indian airline industry and towards more openess in the policy matters.
New policy initiatives have been cleared by the cabinet committee on infrastructure. Surface transport minister, Mr T.G. Venkatraman accordingly announced a new set of incentives to spur private investments in the highway sector. These include: income tax concessions on profits from real estate income, customs duty exemption on equipment import, government grants up to 40 per cent of the capital cost (this outright grant is in addition to the existing provision of up to 30 per cent equity participation by the government) and tax holiday benefits increased from twelve years to twenty years. Under the new policy initiative, the government has also fixed the ceilings for toll rates to be levied on the users of new four-laned highways. However, the surface transport ministry has been authorised by the government to fix higher rates for expressways, major bridges, new bypasses, tunnels et al, based upon the bids received from investors. There is additional good ! ! ! news for foreign investors. At present, the government is permitting external commercial borrowings to the extent of 35 per cent of the project cost. In addition, it has now permitted up to 74 per cent direct foreign investment in equity through automatic route.
Published by:
Nishith Desai Associates International Legal Research Center,
201-A Milton, Juhu Tara Road, Juhu Beach, Mumbai 400 049, INDIA.