Simply put, Press Note 2(2009 series) dt. 13th February 2009, lays down guidelines for calculation of total foreign investment that is direct and indirect foreign investment in Indian Companies.
According to the Note, Foreign Investment in Indian companies includes all kinds of Foreign Investments that is FDI, FIIs, NRI, ADRs, GDRs, FCCB and convertible preference shares, convertible currency debentures regardless of whether the investment has been made under schedule 1,2,3 and 6 of FEMA(Transfer or Issue of Security by Persons Resident Outside India) Regulations.
An Investing Company is defined as an Indian company making equity/ preference/ CCD investment in another Indian Company.
While calculating Direct Foreign Investment, all investment directly by a non-resident entity into the Indian counted has to be counted as foreign investment.
The interesting provision in the PN relates to Indirect Foreign Investment. It states that foreign investment through investing Indian company would not be considered for calculation of indirect foreign investment in case of Indian companies, which are owned and controlled by resident Indian citizens &/or controlled by resident Indian citizens.
What is an Indian Company?
According to 5.2-1 of the Press Note, owned by resident Indian citizens & Indian companies means companies which are owned and controlled by Resident Indian citizens, if more than 50% of the equity interest in it is beneficially owned by resident Indian citizens and Indian companies, which are owned and controlled ultimately by resident Indian citizens.
Thus, 50%+ ownership and control makes it owned and controlled by resident Indians. Examples galore. In the Telecom Sector, which we will discuss later, Sunil Mittal promoted Bharti Telecom with 64% Indian stake and control in the hands of Mittal clan is an Indian company.
Controlled by resident Indian citizens and Indian companies, which are owned & controlled by resident Indian citizens, means if the resident Indian citizens have the power to appoint majority of its Directors.
The PN stipulates that if this afore discussed condition in 5.2-1 is not satisfied, then the entire investment by the investing company into the subsidiary Indian company, would be treated as Foreign Investment. The is a proviso to this. The exception would be a case wherein the indirect foreign investment in only 100% owned subsidiaries of operating-cum-investing/ investing companies, will be limited to foreign investment in the operating-cum-investing/ investing company. The clarification to the Note states that the exception is made since downstream investment of a 100% owned subsidiary of the holding company is akin to investment made by Holding Co. & the downstream investment should be a mirror image of the Holding Company.
As to when an Indian company is deemed to be owned by non-resident entities, it shall hold true when greater then 50% of equity interest in it is beneficially owned by non-residents. & it shall be controlled by non-resident entities if the non-residents have the power to appoint the majority of its Directors.
Illustration to the PN further clarify the situation:
If entity A is investing through entity B: If the entity B has a 49% foreign investment from entity A and then B invests in entity C, then such an investment in C through B, shall not be treated as indirect foreign investment by Entity A through entity B.
Singapore Telecom’s Investment in Bharti Airtel: Singapore Telecom has invested over 15.58% directly in Bharti Airtel and another 14.4% via Sunil Mittal promoted Bharti Telecom. Singapore Telcom has a 32% investment in Bharti Telecom, which in turn has a 45% ownership in Bharti Aitrtel. Thus, 32% of 45% works out to be 14.4% investment in Bharti Airtel by Singapore Telecom via Bharti Telecom. As for the 15.58% investment, it was treated as FDI both prior to and after the Press Note 2(2009 series) dt. 13th February 2009. However, the treatment of 14.4% works out differently, as we will see below. A backdrop of the Bharti-MTN deal in this contxt would be relevant. Prior to the Press Note 2(2009 series) dt. 13th February 2009, the M&A was not possible since it would have breached the FDI norms. There is as is well known, a 74% cap in the telecom sector.
Calculation of Singapore Telecom’s stake before Press Note 2(2009 series) dt. 13th February 2009: The investment of both 15.58% and 14.4% via Sunil Mittal promoted Bharti telecom totaling 29.98% would be the total FDI by Singapore Telecom in Bharti Airtel.
This is because, Prior to Press Note 2(2009 series) dt. 13th February 2009, the position was as follows. An investment by a non-resident, was to be treated as a direct foreign investment.
An investment by resident Indian, can be a resident or non-resident investment.
An Indian investing company having foreign investment in it was to be treated as Indirect Foreign Investment. It could be a cascading investment that is through multi-layered structure. As for the method of calculation, it could be either through the Proportionate Method as used in the Telecom and Broadcasting Sectors; or as in case of Insurance as per the rules outlined in the IRDA Regulation and for all other Sectors, the rule was that for investment in an investing company would not be set-off against the sectoral cap where foreign equity in investing company does not exceed 49% and Management of investing company is with Indian owners. It specifically laid down for FIPB approval by Investing Companies for Downstream Investment.
Calculation of Singapore Telecom’s stake after Press Note 2(2009 series) dt. 13th February 2009: As discussed in the foregoing discussions, indirect stakes via an Indian owned & controlled company would not be treated as FDI. Thus, while post PN2(2009 series), though 15.58% direct investment would be FDI; however, the 14.4% via Sunil Mittal promoted Bharti, an Indian company shall not be treated as an FDI. Thus, FDI by Singapore Telecom would only be 15.58% and not 29.98%, as calculated earlier.
Due to this change in Government Policy in indirect holdings, similar investments are anticipated to flow in the Aviation, Telecom, Retail, Insurance and Media. Thus, Press Note 2(2009 series) dt. 13th February 2009, redefines all written rules relating to FDI and makes it easier to overwhelm the sectoral caps.
In the following blog, we talk in multiple languages (English, French and German) about competition and strategy from an inter-disciplinary perspective by taking inputs from business strategy, law and economics. I am particularly interested in ICT, telecommunications, Industry 4.0 and the impact of convergence in ICT with other sectors such as pharmaceuticals and energy.
Saturday, August 29, 2009
Friday, August 28, 2009
From Partnerships to Limited Liability Partnerships
Introduction
Traditionally, the law firms in India had been partnerships. Thus, as the firm grew, the ability to add members to the senior positions was seriously circumscribed with the maximum cap on partnership being 20. Likewise, there was a movement elsewhere round the globe, but for different reasons. In countries like US & UK, where in the accounting industry strong lobby and an even stronger demand for forming an entity that drew the features of a company, while simultaneously not being subject to public scrutiny like a corporation. So, emerged the concept of LLPs or Limited Liability Partnerships.
In India, based on the recommendations made by the Gupta Committee and the JJ Irani Committee recommendations, Limited Liability Partnership Bill was introduced in the Parliament in 2005. According to Entry 44 List I of the VII Schedule of the Constitution, Corporate Laws are in the Union List which means that the Centre is empowered to make laws on the subject.
LLPs: Finest features of Corporation and Partnerships incorporated
Simply put, a Limited Liability Partnership or LLP is a partnership with the two significant features of a Company viz limited liability and perpetual existence. Thus, unlike in a Partnership wherein the Partnership has to re-formed with the death of any of its partners or any of its member leaving the partnership or going bankrupt or insane, a LLP is insulated from such vagaries. Concurrently, it carries the benefit of a Partnership that is it is not subject to public scrutiny such as inspection of accounts. LLP also has the tax benefits like a normal partnership. Infact in Indian, the Finance Minister while delivering his budget 2009 speech, specially made a mention that the LLPs would get the same tax-benefits as partnerships. Unlike a Corporation, wherein the shareholders elect a Board of Directors to manage the affairs of the company and there is separation of ownership and management, the partners in a LLP have a right to manage it directly and there is no separation of ownership from management. Unlike a partnership, where the liability of the members may be joint and several, in case of an LLP, one partner is not responsible for the acts of negligence or default on the part of the other partner. With these basic common features, LLPs have their specific structural variants based on the jurisdiction in which they are incorporated.
An Emerging Concept
The concept is a recent and emerging one. In US the concept has been recognized and been in vogue since the early 90’s. Delaware’s model of LLP is the most commonly used for obvious tax benefits. UK enacted the LLP Legislation in the year 2000, the Ontario province in Canada in 1998 and Singapore as recently as 2005. The approach in UK is liberalised wherein all kinds of entities can register as LLPs whereas as per the provisions of New York State Law, only certain kinds of entities can register as LLPs. Once the Act was incorporated all the accountants and major law firms jumped on to the bandwagon to benefit from the legislation. Today all the top accounting firms and over 60% of the Top 50 Law Firms in UK are LLPs.
German Partnerschaftsgesellschaft
Passed on 10th June 1994, Gesetz zur Schaffung von Partnerschaftsgesellschaften , the Acty came into force on 1st July 1995. It enables Partnerschaftsgesellschaft or Part G, an association of non-commercial Professionals to be registered at the local ‘Amtsgericht’. It is the German equivalent of a LLP. The basic features of a Partnerschaftsgesellschaft are that it can own property, act under the Partner’s name and can sue or be sued. Important advantages like it is not subject to any corporate or business tax and if the Partnerschaftsgesellschaft has taken the mandatory professional liability insurance, then in case a particular partner misconduct causes damage to a third party, then only that particular partner is liable, make this form of association attractive. However, in case of partnership’s debt, all the members of the Partnerschaftsgesellschaft are jointly and severally liable. As for taxation, the respective partners have to file their individual income-tax returns.
Special General Partnerships in China
In China there is concept similar to LLP. Known as Special General Partnership, it was introduced in the Partnership Law of the People’s Republic of China vide Amendment dt 27th August 2006. Effective June 1st 2007, Special Partnership is a kind of ‘limited partnership’, which must have at least one general partner and the remaining partners are limited partners. The limited partner bears unlimited joint and several liabilities for the debts of the limited partnership, whereas the liability of the limited partners is limited to the extent of capital contribution they have made to the partnership. In case of bankruptcy, the General Partner is subject to unlimited joint and several liability for the debts of the partnership. According to the Act, professional service institutions such as law firms, that provide clients with paid services based on their professional knowledge and special skills, can incorporate a Special General Partnership Enterprise. As for taxation, there is no taxation at partnership enterprise level. All profits of the partnership firm are “passed-through” and the partners have to pay their respective income-tax. Even the Foreign Enterprises or individuals too, are authorized to set-up their Special Partnerships, however the same being foreign-invested are subject to separate regulations issued by the State Council.
Limited Liability Partnership in UK
A very simple and straightforward Act, with just 19 Sections, The Limited Liability Partnership Act 2000, introduced LLPs in UK. It is referred to as a body Corporate in the Act, an LLP can be incorporated by registration as per the procedure laid down in Section 2 & 3 of the Act. Section 6 of the Act states that the Partners are the Agents of the LLP which means that the LLP is liable to the same extent as the erring member of the LLP, where a member is liable to any person(other than another member of the limited liability partnership) as a result of a wrongful act or omission in the course of his business of the LLP or with his authority. However, if the member does something in his individual capacity or does something for which he is authorized to do so as a member of the LLP, then the LLP is not liable for any such act or omission on the part of the member. Section 10 of the Act deals with Income Tax and Chargeable gains. Referring to the Incomes and Corporation Taxes Act, 1988, the Section lays down, the treatment is similar as in case of a partnership.
Limited Liability Partnerships in India
The Indian LLP Act borrows copiously from the UK LLP Act 2000 and Singapore LLP Act 2005. Under the Indian Act, any two or more persons with a view to conduct a lawful business as a profitable venture may form an LLP. It is a body corporate and legal entity with an existence separate from its members. The Act does not restrict LLP to Professional Services alone.
To be designated as an LLP, it has to be registered with the Registrar of Companies(as appointed under the Companies Act, 1956), according to the provisions laid down in the LLP Act.
The Act envisages appointment of atleast two Partners as “Designated Partners” who shall be accountable for all regulatory and legal compliances. Amongst these two, atleast one of them must be a resident of India. In case all the members are body corporate, or the LLP is a mix of individuals and bodies corporate, then the nominees of such body corporate can act as designated partners. To be eligible as ‘Designated Partners’, they have to fulfill certain conditions laid down in the Act and on fulfillment of the same, the Designated Partner are required to obtain a “Designated Partner’s Identification Number”(DPIN). The concept and role pf DPIN is similar to the DIN (“Director’s Identification Number”) in case of Corporations.
As for the all important issue of taxation, the Minister of Finance, clearly mentioned that the Partners will file their returns as per the provisions of the Income Tax, 1961.
As for the mutual right and liabilities of the parties in a LLP, they may enter into a specific agreement detailing the same. In the absence of any such agreement, the same shall be defined as per the provisions laid down in Schedule I to the Act.
Traditionally, the law firms in India had been partnerships. Thus, as the firm grew, the ability to add members to the senior positions was seriously circumscribed with the maximum cap on partnership being 20. Likewise, there was a movement elsewhere round the globe, but for different reasons. In countries like US & UK, where in the accounting industry strong lobby and an even stronger demand for forming an entity that drew the features of a company, while simultaneously not being subject to public scrutiny like a corporation. So, emerged the concept of LLPs or Limited Liability Partnerships.
In India, based on the recommendations made by the Gupta Committee and the JJ Irani Committee recommendations, Limited Liability Partnership Bill was introduced in the Parliament in 2005. According to Entry 44 List I of the VII Schedule of the Constitution, Corporate Laws are in the Union List which means that the Centre is empowered to make laws on the subject.
LLPs: Finest features of Corporation and Partnerships incorporated
Simply put, a Limited Liability Partnership or LLP is a partnership with the two significant features of a Company viz limited liability and perpetual existence. Thus, unlike in a Partnership wherein the Partnership has to re-formed with the death of any of its partners or any of its member leaving the partnership or going bankrupt or insane, a LLP is insulated from such vagaries. Concurrently, it carries the benefit of a Partnership that is it is not subject to public scrutiny such as inspection of accounts. LLP also has the tax benefits like a normal partnership. Infact in Indian, the Finance Minister while delivering his budget 2009 speech, specially made a mention that the LLPs would get the same tax-benefits as partnerships. Unlike a Corporation, wherein the shareholders elect a Board of Directors to manage the affairs of the company and there is separation of ownership and management, the partners in a LLP have a right to manage it directly and there is no separation of ownership from management. Unlike a partnership, where the liability of the members may be joint and several, in case of an LLP, one partner is not responsible for the acts of negligence or default on the part of the other partner. With these basic common features, LLPs have their specific structural variants based on the jurisdiction in which they are incorporated.
An Emerging Concept
The concept is a recent and emerging one. In US the concept has been recognized and been in vogue since the early 90’s. Delaware’s model of LLP is the most commonly used for obvious tax benefits. UK enacted the LLP Legislation in the year 2000, the Ontario province in Canada in 1998 and Singapore as recently as 2005. The approach in UK is liberalised wherein all kinds of entities can register as LLPs whereas as per the provisions of New York State Law, only certain kinds of entities can register as LLPs. Once the Act was incorporated all the accountants and major law firms jumped on to the bandwagon to benefit from the legislation. Today all the top accounting firms and over 60% of the Top 50 Law Firms in UK are LLPs.
German Partnerschaftsgesellschaft
Passed on 10th June 1994, Gesetz zur Schaffung von Partnerschaftsgesellschaften , the Acty came into force on 1st July 1995. It enables Partnerschaftsgesellschaft or Part G, an association of non-commercial Professionals to be registered at the local ‘Amtsgericht’. It is the German equivalent of a LLP. The basic features of a Partnerschaftsgesellschaft are that it can own property, act under the Partner’s name and can sue or be sued. Important advantages like it is not subject to any corporate or business tax and if the Partnerschaftsgesellschaft has taken the mandatory professional liability insurance, then in case a particular partner misconduct causes damage to a third party, then only that particular partner is liable, make this form of association attractive. However, in case of partnership’s debt, all the members of the Partnerschaftsgesellschaft are jointly and severally liable. As for taxation, the respective partners have to file their individual income-tax returns.
Special General Partnerships in China
In China there is concept similar to LLP. Known as Special General Partnership, it was introduced in the Partnership Law of the People’s Republic of China vide Amendment dt 27th August 2006. Effective June 1st 2007, Special Partnership is a kind of ‘limited partnership’, which must have at least one general partner and the remaining partners are limited partners. The limited partner bears unlimited joint and several liabilities for the debts of the limited partnership, whereas the liability of the limited partners is limited to the extent of capital contribution they have made to the partnership. In case of bankruptcy, the General Partner is subject to unlimited joint and several liability for the debts of the partnership. According to the Act, professional service institutions such as law firms, that provide clients with paid services based on their professional knowledge and special skills, can incorporate a Special General Partnership Enterprise. As for taxation, there is no taxation at partnership enterprise level. All profits of the partnership firm are “passed-through” and the partners have to pay their respective income-tax. Even the Foreign Enterprises or individuals too, are authorized to set-up their Special Partnerships, however the same being foreign-invested are subject to separate regulations issued by the State Council.
Limited Liability Partnership in UK
A very simple and straightforward Act, with just 19 Sections, The Limited Liability Partnership Act 2000, introduced LLPs in UK. It is referred to as a body Corporate in the Act, an LLP can be incorporated by registration as per the procedure laid down in Section 2 & 3 of the Act. Section 6 of the Act states that the Partners are the Agents of the LLP which means that the LLP is liable to the same extent as the erring member of the LLP, where a member is liable to any person(other than another member of the limited liability partnership) as a result of a wrongful act or omission in the course of his business of the LLP or with his authority. However, if the member does something in his individual capacity or does something for which he is authorized to do so as a member of the LLP, then the LLP is not liable for any such act or omission on the part of the member. Section 10 of the Act deals with Income Tax and Chargeable gains. Referring to the Incomes and Corporation Taxes Act, 1988, the Section lays down, the treatment is similar as in case of a partnership.
Limited Liability Partnerships in India
The Indian LLP Act borrows copiously from the UK LLP Act 2000 and Singapore LLP Act 2005. Under the Indian Act, any two or more persons with a view to conduct a lawful business as a profitable venture may form an LLP. It is a body corporate and legal entity with an existence separate from its members. The Act does not restrict LLP to Professional Services alone.
To be designated as an LLP, it has to be registered with the Registrar of Companies(as appointed under the Companies Act, 1956), according to the provisions laid down in the LLP Act.
The Act envisages appointment of atleast two Partners as “Designated Partners” who shall be accountable for all regulatory and legal compliances. Amongst these two, atleast one of them must be a resident of India. In case all the members are body corporate, or the LLP is a mix of individuals and bodies corporate, then the nominees of such body corporate can act as designated partners. To be eligible as ‘Designated Partners’, they have to fulfill certain conditions laid down in the Act and on fulfillment of the same, the Designated Partner are required to obtain a “Designated Partner’s Identification Number”(DPIN). The concept and role pf DPIN is similar to the DIN (“Director’s Identification Number”) in case of Corporations.
As for the all important issue of taxation, the Minister of Finance, clearly mentioned that the Partners will file their returns as per the provisions of the Income Tax, 1961.
As for the mutual right and liabilities of the parties in a LLP, they may enter into a specific agreement detailing the same. In the absence of any such agreement, the same shall be defined as per the provisions laid down in Schedule I to the Act.
Thursday, August 27, 2009
Indo-US Nuclear Pact
Business Opportunity & facilitation by the Indo-US Agreement to tap the same
With a population of over 1.2 billion and still growing, India has an insatiable demand for power. In a decade’s time, India’s demand for commercial energy is expected to increase by over 2.5 times. With an annually demand for electricity increasing at the rate of 6 to 8%, India’s current sources of energy production have fallen way short of the demand. In this unmet demand lies tremendous opportunity. Though India has over 25% of the world’s high quality thorium deposits, which are presently used as an alternative fuel for the nuclear reactor, they are insufficient to meet the ever-increasing demand. Moreover, due to shortage of Uranium fuel, India has not been able to proceed at an accelerated pace with its nuclear programme. India’s annual uranium production is only 200 metric tones, which is dwarfed in front of its colossal demand of over 500 metric tones. Thus, there is a huge 300 metric ton demand-supply gap waiting to be met. India’s two military reactors viz CIRUS and DHRUVA require only 10% of this Uranium; the remaining 90% of demand viz 450 metric tones are used by the civilian reactors every year. The present reactors, thus, operate way short of their capability. With an ambitious aim to generate over a quarter if its electricity from nuclear power, the 123 Agreement and the subsequent “End Use Monitoring Past”, can prove to be a great help in meeting this huge demand. Thus, there lies tremendous business opportunity in this big US $100 billion market. US firms like GE which contributed to the construction of India’s first plant at Tarapur in Maharashtra by designing two BWR reactors way back in 1969 at 150 Mwe each have tremendous brand equity in this huge energy-hungry market. This has opened great opportunities for American companies to look at the Indian market and accordingly the American Council on Global Nuclear Competitiveness proactively supported the Agreement.
India, the world’s largest democracy’s defence expenditure for the year 2009-2010 has been slated to be Rs 1.41 trillion. India is amongst the top ten countries in the world in terms of defence expenditure and amongst the top three in import of defence-related hardware. It is expected that Indian Government would procure over $ 100 billion of defence equipment over the next decade. Moreover, the recent Government policy according to which International Supplier must source atleast 30% of invoice value of orders locally, presents great opportunity not just for International Supplier, but some great strategic JV in the defence sector. The role of Indian and International Law firms becomes significant in this context. The “end-use monitoring agreement” in the Indo-US Agreement for instance facilitates U.S. companies competing for major contracts such Indian Government’s expected purchase of 126 fighter jets at an estimated $ 11 billion.
Positive fallout of the Indo-US Agreement is that with US ending its nuclear embargo that goes way back when India conducted nuclear tests at Pokhran coming to an end, it ensured elimination of parallel nuclear trade ban adopted by the 45 member Nuclear Suppliers Group in 1992. This immediately opened remarkable trade opportunities between India and the NSG member States.
Legal & Regulatory Hurdles for US Companies & Significant Deals
As for general hurdles facing all the Foreign Direct Investors, FDI in Atomic Energy is prohibited which means there cannot be establishment of nuclear power plants using FDI. However, there can be manufacture of nuclear equipment and construction plants using FDI.
The Agreement notwithstanding, legal and regulatory hiccups continue to exist that act to greater disadvantage of US companies when compared with suppliers from other countries. The U.S. Department of Energy for instance is yet to provide American copanies with licences to engage in sensitive technical discussions with Indian companies about their product and technology. This is more because of internal policy differences within the US Government. Thus, before U.S. regulators seek assurances of nonproliferation from India, which basically means that an assurance on the Indian part that U.S. technologies won’t be transferred to any parties other then the original importer, including sub-contractor.
Though the Indian Government has allotted two “Greenfield sites” in Andhra Pradesh and Gujarat for the construction of nuclear power plants using American expertise, but the project might take a while before its on the wheels. In the meanwhile, Government-run French & Russian companies are making great strides in the Indian market. Being state-controlled companies, the French & Russian companies do not face the same export licensing requirements as an American company and in case of any tragedy or disaster, can invoke sovereign liability protection. The French nuclear major Areva SA for instance has submitted and looking forward to building two nuclear reactors in Western Maharashtra and is in the process of forging strategic alliances with local Indian construction and engineering companies. And the reason is not too far to seek. The U.S. Companies being private-run can not invoke soveriegn liability protection. Accordingly the American companies expect the Indian Government to sign the Convention on Supplementary Compensation for Nuclear Damage(CSC), which has actually so far been ratified by only three countries and therefore, not come into force. On the same lines, a legislation limiting the liability of private companies supplying nuclear energy is expected.
National Security Concerns
Interesting viewpoints have emerged on both sides of the table whether signing nuclear pact and subsequent “End Use Monitoring Pact” was tantamount to laying India’s security interest to International Scrutiny. If on the one side are the business communities on both sides gung ho about the deal, then on the other are genuine strategic concerns that are too strong to be ignored. Major discontent emerges from the fact that under the programme, full co-operation in the Civilian Nuclear Energy has been denied to India. This can be seen from the fact that US has expressed its reluctance to co-operate in areas relating to spent-fuel processing and uranium enrichment related to full nuclear cycle. Section 123a(7) of the Atomic Energy Act, clearly prohibits the re-processing of nuclear fuel provided by the US. As for the Hyde Act, since it is silent on the issue, a reading of the two clearly leads to a position wherein US in state of denial with regard to any support system for re-processing the spent fuel. Moreover, as per the Agreement, India is not to join as a technology developer, instead it will be a recipient State in the programme. Needless to emphasize, limits the role that India can play in the development of technology. Furthermore, Section 104 of the Hyde Act and Section 129 of the Atomic Energy Act state that in case India resumes nuclear testing, US must halt all nuclear exports to India and can also recall the ones already made as per Section 123a(4).
Section 104(d)(4) of the Hyde Act further calls for the President of US to ensure that any technology transferred to India, will not aid her nuclear development programme. It bans cooperation with India except for a multinational facility involved in an IAEA programme or national facility involved in the development of new proliferation-resistant fuel cycle techniques. The safeguard that India will never use any of the technology transferred for developing her nuclear programme is desired in perpetuity. As per Section 104(b)(2) of the Hyde Act, it requires IAEA safeguards “in perpetuity” to all the facilities that India declares as civilian in its Separation Plan and these would include the eight indigenous reactors that were already in operation before the commencement of the deal.
Section 102(13) of the Act specifies that US should not facilitate or encourage nuclear exports to India by any other state if such exports are halted by the US and Section 103(a)(6) further lays down that Us can get the Nuclear Suppliers Group to stop exports if the US terminates its exports to the country.
Interestingly, as for a full-fledged commitment to supply uninterrupted fuel for nuclear plants, there is a deafening silence on the issue. The AEA is silent on this very important aspect and the 123 Act being only a legal framework for cooperation either does not talk about the same. Infact Section 103(b)(10) lays down that any nuclear fuel reserve provided to India for use in safeguard civilian nuclear facilities should be commensurate with reasonable reactor operating requirements. Simply put, we will be on a dripper and will have ‘just-enough’ fuel to meet our requirements.
India, the world’s largest democracy’s defence expenditure for the year 2009-2010 has been slated to be Rs 1.41 trillion. India is amongst the top ten countries in the world in terms of defence expenditure and amongst the top three in import of defence-related hardware. It is expected that Indian Government would procure over $ 100 billion of defence equipment over the next decade. Moreover, the recent Government policy according to which International Supplier must source atleast 30% of invoice value of orders locally, presents great opportunity not just for International Supplier, but some great strategic JV in the defence sector. The role of Indian and International Law firms becomes significant in this context. The “end-use monitoring agreement” in the Indo-US Agreement for instance facilitates U.S. companies competing for major contracts such Indian Government’s expected purchase of 126 fighter jets at an estimated $ 11 billion.
Positive fallout of the Indo-US Agreement is that with US ending its nuclear embargo that goes way back when India conducted nuclear tests at Pokhran coming to an end, it ensured elimination of parallel nuclear trade ban adopted by the 45 member Nuclear Suppliers Group in 1992. This immediately opened remarkable trade opportunities between India and the NSG member States.
Legal & Regulatory Hurdles for US Companies & Significant Deals
As for general hurdles facing all the Foreign Direct Investors, FDI in Atomic Energy is prohibited which means there cannot be establishment of nuclear power plants using FDI. However, there can be manufacture of nuclear equipment and construction plants using FDI.
The Agreement notwithstanding, legal and regulatory hiccups continue to exist that act to greater disadvantage of US companies when compared with suppliers from other countries. The U.S. Department of Energy for instance is yet to provide American copanies with licences to engage in sensitive technical discussions with Indian companies about their product and technology. This is more because of internal policy differences within the US Government. Thus, before U.S. regulators seek assurances of nonproliferation from India, which basically means that an assurance on the Indian part that U.S. technologies won’t be transferred to any parties other then the original importer, including sub-contractor.
Though the Indian Government has allotted two “Greenfield sites” in Andhra Pradesh and Gujarat for the construction of nuclear power plants using American expertise, but the project might take a while before its on the wheels. In the meanwhile, Government-run French & Russian companies are making great strides in the Indian market. Being state-controlled companies, the French & Russian companies do not face the same export licensing requirements as an American company and in case of any tragedy or disaster, can invoke sovereign liability protection. The French nuclear major Areva SA for instance has submitted and looking forward to building two nuclear reactors in Western Maharashtra and is in the process of forging strategic alliances with local Indian construction and engineering companies. And the reason is not too far to seek. The U.S. Companies being private-run can not invoke soveriegn liability protection. Accordingly the American companies expect the Indian Government to sign the Convention on Supplementary Compensation for Nuclear Damage(CSC), which has actually so far been ratified by only three countries and therefore, not come into force. On the same lines, a legislation limiting the liability of private companies supplying nuclear energy is expected.
National Security Concerns
Interesting viewpoints have emerged on both sides of the table whether signing nuclear pact and subsequent “End Use Monitoring Pact” was tantamount to laying India’s security interest to International Scrutiny. If on the one side are the business communities on both sides gung ho about the deal, then on the other are genuine strategic concerns that are too strong to be ignored. Major discontent emerges from the fact that under the programme, full co-operation in the Civilian Nuclear Energy has been denied to India. This can be seen from the fact that US has expressed its reluctance to co-operate in areas relating to spent-fuel processing and uranium enrichment related to full nuclear cycle. Section 123a(7) of the Atomic Energy Act, clearly prohibits the re-processing of nuclear fuel provided by the US. As for the Hyde Act, since it is silent on the issue, a reading of the two clearly leads to a position wherein US in state of denial with regard to any support system for re-processing the spent fuel. Moreover, as per the Agreement, India is not to join as a technology developer, instead it will be a recipient State in the programme. Needless to emphasize, limits the role that India can play in the development of technology. Furthermore, Section 104 of the Hyde Act and Section 129 of the Atomic Energy Act state that in case India resumes nuclear testing, US must halt all nuclear exports to India and can also recall the ones already made as per Section 123a(4).
Section 104(d)(4) of the Hyde Act further calls for the President of US to ensure that any technology transferred to India, will not aid her nuclear development programme. It bans cooperation with India except for a multinational facility involved in an IAEA programme or national facility involved in the development of new proliferation-resistant fuel cycle techniques. The safeguard that India will never use any of the technology transferred for developing her nuclear programme is desired in perpetuity. As per Section 104(b)(2) of the Hyde Act, it requires IAEA safeguards “in perpetuity” to all the facilities that India declares as civilian in its Separation Plan and these would include the eight indigenous reactors that were already in operation before the commencement of the deal.
Section 102(13) of the Act specifies that US should not facilitate or encourage nuclear exports to India by any other state if such exports are halted by the US and Section 103(a)(6) further lays down that Us can get the Nuclear Suppliers Group to stop exports if the US terminates its exports to the country.
Interestingly, as for a full-fledged commitment to supply uninterrupted fuel for nuclear plants, there is a deafening silence on the issue. The AEA is silent on this very important aspect and the 123 Act being only a legal framework for cooperation either does not talk about the same. Infact Section 103(b)(10) lays down that any nuclear fuel reserve provided to India for use in safeguard civilian nuclear facilities should be commensurate with reasonable reactor operating requirements. Simply put, we will be on a dripper and will have ‘just-enough’ fuel to meet our requirements.
Wednesday, August 26, 2009
New Service Rules effective 1st September 2009
Legal Services in the Tax Web
Introduction
Traditionally believed to be a party of the trinity of noble professions, law was far beyond the shadows of Service Tax. The Finance Minister Pranab Mukherjee trampled this chimera in his Budget Speech for the year 2009-2010 by inserting Clause (zzzzm) in Sub-section 105 Section 65 of the Finance Act, 1994.
The wings of the noble profession were curtailed by bringing her within the ambit of Service Tax, an indirect tax levied by the Central Government; vide Entry 97 of Schedule VII of the Constitution of India through Chapter V of the Finance Act, 1994. According to the proposal of Budget 2009-2010, come 1st September 2009 and four additional services viz Legal Advice & Consultancy, Transport by Railway, Inland Waterways and Cosmetic Surgery will be brought within the Service-Tax net.
Legal Services in the Tax-web
The taxable services are defined under section 65 of the said Act. Section 66 is a charging section of the Act. The relevant provision clause (zzzzm) in Sub-section 105 Section 65, Finance Act, 1994, bringing Legal Advice & Consultancy within the domain of Service-tax reads:
“to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner: Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.
Explanation- For the purposes of this sub-clause, “business entity” includes an association of persons, body of individuals, company or firm, but does not include an individual.”
Business Entity in Tax-Net
A perusal of the provision leaves many questions unanswered then it answers. As is clear, Legal Services will be taxed if they are provided by one Business Entity to another. Thus, if either the Service Provider or the receiver of the legal services is an individual, the services are not be taxed. Explanation to the provision seeks to define what a ‘Business Entity’ is for the purposes of this tax. It includes as per the explanation, an association of persons, body of individuals, company or firm. Thus Law Firms or the more recent Limited Liability Partnerships (LLPs) providing Legal Advice to another business entity such as a company, firm or LLP, will be within the tax-net.
By discriminating between the Individual and Business Entity, the provision has brought about a seething discrimination between the individual Legal Service Provider and Law Firms. One practical implication of this could be that in order to elude the tax-net, law firms instead of billing as business entity, may bill in individual name to individual clients.
Secondly, litigation has been kept away from the shadow of tax-net. As the provision reads that any appearance which may be before any Court of Law, Tribunal or Authority shall be out of the tax-net. However, what the provision does not specify is if the meeting and briefs to a Senior Counsel in the chambers or a meeting in the Office would be subject to tax.
Interestingly, by referring to advice and consultancy in law, the proviso ensures that not only the law firms providing legal advice and consultancy are brought within the tax-net, but also those with a non-legal aura, but providing legal services are taxed.
Unanswered Questions
From a chastely legal perspective many questions remain unanswered. One such intriguing question is the treatment of legal service provided by an Indian Law Firm to a an offshore business entity. Rule 3 of Export of Service Rules, 2005 notified under Notification No.9/2005- S.T., dated 03-03-2005 that came into effect on 15-03-2005 lays down the criteria for treating a taxable service as an Export of taxable service. Clause (1) of Rule 3 makes a reference to particular taxable services specified in clause (105) of Section 65 of the Finance Act, 1994. Clause (2) of the Rule states when such services are deemed to be Export of Taxable Service. Rule 4 elucidates the position by stating that any service, which is taxable under Section 65(105), may be exported without payment of Service Tax. According to Rule 3(2), for a Service to be held as export of Taxable Service and therefore exempt from Tax-net, following conditions have to be specified:
The Service is provided from India;
The Service is used by the Business Entity Outside India and
Payment for such service has been received by the Service Provider in convertible Foreign Exchange.
For the sake of clarity and to avoid any legal commotion in the Courts, it would be prudent, if the Clause (zzzzm) in Sub-section 105 Section 65 of the Finance Act, 1994 be explicitly alluded to in Rule 3. This is particularly important in the light of the intention to tax a service in the first place. CBEC Circular No.56 dt. 25-04-03, emphatically acknowledged that Service-tax is a destination-based Consumption Tax and is required to be paid at a place where the Services are consumed. Thus, for a Service which is provided by an Indian Law Firm and consumed on a foreign land, can definitely not said to be consumed on the Indian territory and therefore, should be manifestly discharged from the Service tax.
According to estimates, the Indian Legal Advice and Consultancy market is worth Rs 500 crore and the Government anticipates to garner about Rupees 50 crore, that is service tax levied @ 10%, as per the new rates, by brining the services within the tax-net. Apparently, the resolved fondness for bringing Legal Advice and Consultancy in the tax-net is to bring the Foreign Law Firms providing legal services in Indian territory within its domain.
Services provided from outside the limits of Indian territorial waters can now be taxed in the light of Section 66A of the Finance Act, 1994 w.e.f. 18-04-2006 and Taxation of Services(Provided from Outside India & Received in India Rules, 2006 w.e.f. 19-04-06. Section 66A is a charging Section to levy tax on Services received from Outside India.
Conclusion
As the ambit of Service-tax is increased to bring newer services in it, legal services seem to be the latest addition including three other services. Though the merits of inclusion are beyond the scope of discussion of the present article, it would nonetheless be advisable to issue more clarifications particularly in relation to the concerns raised in the present article, lest there be uncalled for litigation for the latter is still away from the tax-net!!
Introduction
Traditionally believed to be a party of the trinity of noble professions, law was far beyond the shadows of Service Tax. The Finance Minister Pranab Mukherjee trampled this chimera in his Budget Speech for the year 2009-2010 by inserting Clause (zzzzm) in Sub-section 105 Section 65 of the Finance Act, 1994.
The wings of the noble profession were curtailed by bringing her within the ambit of Service Tax, an indirect tax levied by the Central Government; vide Entry 97 of Schedule VII of the Constitution of India through Chapter V of the Finance Act, 1994. According to the proposal of Budget 2009-2010, come 1st September 2009 and four additional services viz Legal Advice & Consultancy, Transport by Railway, Inland Waterways and Cosmetic Surgery will be brought within the Service-Tax net.
Legal Services in the Tax-web
The taxable services are defined under section 65 of the said Act. Section 66 is a charging section of the Act. The relevant provision clause (zzzzm) in Sub-section 105 Section 65, Finance Act, 1994, bringing Legal Advice & Consultancy within the domain of Service-tax reads:
“to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner: Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.
Explanation- For the purposes of this sub-clause, “business entity” includes an association of persons, body of individuals, company or firm, but does not include an individual.”
Business Entity in Tax-Net
A perusal of the provision leaves many questions unanswered then it answers. As is clear, Legal Services will be taxed if they are provided by one Business Entity to another. Thus, if either the Service Provider or the receiver of the legal services is an individual, the services are not be taxed. Explanation to the provision seeks to define what a ‘Business Entity’ is for the purposes of this tax. It includes as per the explanation, an association of persons, body of individuals, company or firm. Thus Law Firms or the more recent Limited Liability Partnerships (LLPs) providing Legal Advice to another business entity such as a company, firm or LLP, will be within the tax-net.
By discriminating between the Individual and Business Entity, the provision has brought about a seething discrimination between the individual Legal Service Provider and Law Firms. One practical implication of this could be that in order to elude the tax-net, law firms instead of billing as business entity, may bill in individual name to individual clients.
Secondly, litigation has been kept away from the shadow of tax-net. As the provision reads that any appearance which may be before any Court of Law, Tribunal or Authority shall be out of the tax-net. However, what the provision does not specify is if the meeting and briefs to a Senior Counsel in the chambers or a meeting in the Office would be subject to tax.
Interestingly, by referring to advice and consultancy in law, the proviso ensures that not only the law firms providing legal advice and consultancy are brought within the tax-net, but also those with a non-legal aura, but providing legal services are taxed.
Unanswered Questions
From a chastely legal perspective many questions remain unanswered. One such intriguing question is the treatment of legal service provided by an Indian Law Firm to a an offshore business entity. Rule 3 of Export of Service Rules, 2005 notified under Notification No.9/2005- S.T., dated 03-03-2005 that came into effect on 15-03-2005 lays down the criteria for treating a taxable service as an Export of taxable service. Clause (1) of Rule 3 makes a reference to particular taxable services specified in clause (105) of Section 65 of the Finance Act, 1994. Clause (2) of the Rule states when such services are deemed to be Export of Taxable Service. Rule 4 elucidates the position by stating that any service, which is taxable under Section 65(105), may be exported without payment of Service Tax. According to Rule 3(2), for a Service to be held as export of Taxable Service and therefore exempt from Tax-net, following conditions have to be specified:
The Service is provided from India;
The Service is used by the Business Entity Outside India and
Payment for such service has been received by the Service Provider in convertible Foreign Exchange.
For the sake of clarity and to avoid any legal commotion in the Courts, it would be prudent, if the Clause (zzzzm) in Sub-section 105 Section 65 of the Finance Act, 1994 be explicitly alluded to in Rule 3. This is particularly important in the light of the intention to tax a service in the first place. CBEC Circular No.56 dt. 25-04-03, emphatically acknowledged that Service-tax is a destination-based Consumption Tax and is required to be paid at a place where the Services are consumed. Thus, for a Service which is provided by an Indian Law Firm and consumed on a foreign land, can definitely not said to be consumed on the Indian territory and therefore, should be manifestly discharged from the Service tax.
According to estimates, the Indian Legal Advice and Consultancy market is worth Rs 500 crore and the Government anticipates to garner about Rupees 50 crore, that is service tax levied @ 10%, as per the new rates, by brining the services within the tax-net. Apparently, the resolved fondness for bringing Legal Advice and Consultancy in the tax-net is to bring the Foreign Law Firms providing legal services in Indian territory within its domain.
Services provided from outside the limits of Indian territorial waters can now be taxed in the light of Section 66A of the Finance Act, 1994 w.e.f. 18-04-2006 and Taxation of Services(Provided from Outside India & Received in India Rules, 2006 w.e.f. 19-04-06. Section 66A is a charging Section to levy tax on Services received from Outside India.
Conclusion
As the ambit of Service-tax is increased to bring newer services in it, legal services seem to be the latest addition including three other services. Though the merits of inclusion are beyond the scope of discussion of the present article, it would nonetheless be advisable to issue more clarifications particularly in relation to the concerns raised in the present article, lest there be uncalled for litigation for the latter is still away from the tax-net!!
SICA
In the Shadows of SICA
In India, SICA, Sick Industrial Companies (Special Provisions) Act, 1985 is the relevant Act relating to revival and rehabilitation of ‘sick Industrial companies’. Enacted in 1985, the Act is applicable to the whole of India. For a company to come within the purview of SICA, it must meet the following criteria viz (i) it should be a company engaged in any scheduled industry (i.e. any industry specified in the First Schedule to Industries (Development and Regulation) Act, 1951) and (ii) it should be sick.
Section 3(1)(o) defines a “sick industrial company” as an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. Thus, the concept of ‘sickness’ is that at the end of a given financial year, the company should have accumulated losses equal to or exceeding its entire net worth. A ‘potentially sick industrial company’ is one wherein accumulated losses of an industrial company at the end of any financial year, have resulted in erosion of fifty percent or more of its peak net worth during the immediately preceding four financial years. An interesting inquiry is what is the concept of ‘net worth’ within the meaning of the Act. According to section 3(1)(ga), inserted by the Sick Industrial Companies (Special Provisions) Amendment Act, 1993, “net worth” means the sum total of the paid-up capital and free reserves. And for the purpose of the clause, “free reserve” have been referred to include all reserves credited out of the profits and share premium account but does not include reserves credited out of re-evaluation of assets, write back of depreciation provisions and amalgamations.
Schedule Industry basically includes metallurgical industries, telecommunication, transportation, chemicals and textiles but does not include financial and software related industries. The concept of Scheduled Industries and the use/ abuse of the same in the License Raj has been discussed at by the world renowned economist Arvind Panagariya in his book, India: the emerging giant.
A company may be sick or potentially sick. Once a company becomes sick, the board of directors should make a reference to Board for Industrial and Financial Reconstruction (“BIFR”). Once “BIFR” initiates an enquiry, “automatic stay” immediately comes into force. One practical implication of ‘automatic stay’ is that any payment to be made to creditors is stayed. It has often been seen that companies have abused the provisions of SICA to come within the purview of sickness to abuse provisions like ‘automatic stay’. Another criticism levied on SICA is that sickness is related to the concept of erosion of net wealth and not the ‘inability to pay debts’. Thus, the stage if referral has been a subject matter of criticism. It is often seen that the net wealth is eroded to such an extent that it is too late to try resuscitating life into the dying firm. Accordingly, statistics relating to SICA are not all that promising since in a great majority of cases winding up was recommended.
Once the matter has been referred to BIFR, it may direct any “operating agency” to prepare a scheme for the rehabilitation of the company. An “operating agency” has been defined u/s 3(1)(i) as any public financial institution, State level institution, Scheduled bank or any other person as may be specified by general or special order as its agency by the Board.
Normally either of three courses are resorted to under the scheme: Financial reconstruction of the company, proper management of the company and amalgamation of the company with another company. Winding-up though in the scheme of things is usually seen as a last resort, when it becomes clear beyond all hope that the sick company has no chances of revival.
Chapter XIX of the Companies Bill, 2008 talks about revival and rehabilitation of Sick Companies and proposes to introduce laudatory changes in the way ‘sickness’ is determined at present. Basic highlights of the proposed amendment are that the criteria of ‘sickness’ to be related to inability to pay debts due to secured creditors representing 50% or more of the outstanding debt. Unlike present wherein the application for sickness is to be filed by the Board of the company, under the proposed Bill, the application may be filed either by the creditor of the company. Furthermore, whether a company can be revived or wound up, should be decided by requisite majority of creditors. Interestingly, the provision of automatic stay of proceedings, which had been a thorny issue for years, too has been proposed to be done away with.
The Winding up of a company are dealt with in Part VII of the Companies Act, 1956. Winding up may be carried out on an application before the High Court by both Secured as well as unsecured creditors. Thus, whereas a company may be declared sick, only on a an application by its Board; winding up proceedings may be initiated on an application by its creditors or by its members.
An indicative list of grounds have been provided under the Act to request winding up of a company. Important reason amongst others include inability of a company to pay debts. Presumption for inability to pay debts may also be made by the Court for instance in case a company is unable to pay to its creditor for three weeks after he raises a demand for Rs 500 and more. As in the case of SICA, even in case of winding up, an ‘automatic stay’ comes into operation for staying of proceedings against the company. As for the procedure for winding up, prior to an order of winding up being passed by the court an application has to be made to the concerned Court for requesting for initiating proceedings against the Company.
Members may request for winding up of the operations by declaring that the company has gone insolvent. Alternatively, Creditors may also declare a company has gone insolvent and request for winding up of the same. In such a case, power to appoint liquidators rests primarily with the creditors. In both these methods of voluntary winding up of a company, automatic stay per se does not arise. An application has to specifically made to the concerned Court for exercise of power to stay proceedings against the Company.
While making payments, on winding-up its operations, a company prioritizes in the following order. The workmen are the first to get their dues, followed by the secured creditors; revenues, taxes etc. due from the company and then other salaries and dues of the employees. Unsecured creditors are next in the list and finally, if any surplus are left, the shareholders get to share and distribute the same amongst themselves.
Chapter V of the Companies Act, 1956 deals with Arbitration, Compromises, Arrangements and Reconstructions. Section 391 to 394 of the Companies Act, 1956 are the relevant provisions for entering into compromise and settlement with creditors and amalgamation or merger with other companies. Section 396 empowers Central Government to provide for amalgamation of companies in national interest. Satyam is an a noteworthy case in this context, wherein the Government even went on to amend the provisions of the Takeover Code to smoothen the bumpy road to acquisition.
In India, SICA, Sick Industrial Companies (Special Provisions) Act, 1985 is the relevant Act relating to revival and rehabilitation of ‘sick Industrial companies’. Enacted in 1985, the Act is applicable to the whole of India. For a company to come within the purview of SICA, it must meet the following criteria viz (i) it should be a company engaged in any scheduled industry (i.e. any industry specified in the First Schedule to Industries (Development and Regulation) Act, 1951) and (ii) it should be sick.
Section 3(1)(o) defines a “sick industrial company” as an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. Thus, the concept of ‘sickness’ is that at the end of a given financial year, the company should have accumulated losses equal to or exceeding its entire net worth. A ‘potentially sick industrial company’ is one wherein accumulated losses of an industrial company at the end of any financial year, have resulted in erosion of fifty percent or more of its peak net worth during the immediately preceding four financial years. An interesting inquiry is what is the concept of ‘net worth’ within the meaning of the Act. According to section 3(1)(ga), inserted by the Sick Industrial Companies (Special Provisions) Amendment Act, 1993, “net worth” means the sum total of the paid-up capital and free reserves. And for the purpose of the clause, “free reserve” have been referred to include all reserves credited out of the profits and share premium account but does not include reserves credited out of re-evaluation of assets, write back of depreciation provisions and amalgamations.
Schedule Industry basically includes metallurgical industries, telecommunication, transportation, chemicals and textiles but does not include financial and software related industries. The concept of Scheduled Industries and the use/ abuse of the same in the License Raj has been discussed at by the world renowned economist Arvind Panagariya in his book, India: the emerging giant.
A company may be sick or potentially sick. Once a company becomes sick, the board of directors should make a reference to Board for Industrial and Financial Reconstruction (“BIFR”). Once “BIFR” initiates an enquiry, “automatic stay” immediately comes into force. One practical implication of ‘automatic stay’ is that any payment to be made to creditors is stayed. It has often been seen that companies have abused the provisions of SICA to come within the purview of sickness to abuse provisions like ‘automatic stay’. Another criticism levied on SICA is that sickness is related to the concept of erosion of net wealth and not the ‘inability to pay debts’. Thus, the stage if referral has been a subject matter of criticism. It is often seen that the net wealth is eroded to such an extent that it is too late to try resuscitating life into the dying firm. Accordingly, statistics relating to SICA are not all that promising since in a great majority of cases winding up was recommended.
Once the matter has been referred to BIFR, it may direct any “operating agency” to prepare a scheme for the rehabilitation of the company. An “operating agency” has been defined u/s 3(1)(i) as any public financial institution, State level institution, Scheduled bank or any other person as may be specified by general or special order as its agency by the Board.
Normally either of three courses are resorted to under the scheme: Financial reconstruction of the company, proper management of the company and amalgamation of the company with another company. Winding-up though in the scheme of things is usually seen as a last resort, when it becomes clear beyond all hope that the sick company has no chances of revival.
Chapter XIX of the Companies Bill, 2008 talks about revival and rehabilitation of Sick Companies and proposes to introduce laudatory changes in the way ‘sickness’ is determined at present. Basic highlights of the proposed amendment are that the criteria of ‘sickness’ to be related to inability to pay debts due to secured creditors representing 50% or more of the outstanding debt. Unlike present wherein the application for sickness is to be filed by the Board of the company, under the proposed Bill, the application may be filed either by the creditor of the company. Furthermore, whether a company can be revived or wound up, should be decided by requisite majority of creditors. Interestingly, the provision of automatic stay of proceedings, which had been a thorny issue for years, too has been proposed to be done away with.
The Winding up of a company are dealt with in Part VII of the Companies Act, 1956. Winding up may be carried out on an application before the High Court by both Secured as well as unsecured creditors. Thus, whereas a company may be declared sick, only on a an application by its Board; winding up proceedings may be initiated on an application by its creditors or by its members.
An indicative list of grounds have been provided under the Act to request winding up of a company. Important reason amongst others include inability of a company to pay debts. Presumption for inability to pay debts may also be made by the Court for instance in case a company is unable to pay to its creditor for three weeks after he raises a demand for Rs 500 and more. As in the case of SICA, even in case of winding up, an ‘automatic stay’ comes into operation for staying of proceedings against the company. As for the procedure for winding up, prior to an order of winding up being passed by the court an application has to be made to the concerned Court for requesting for initiating proceedings against the Company.
Members may request for winding up of the operations by declaring that the company has gone insolvent. Alternatively, Creditors may also declare a company has gone insolvent and request for winding up of the same. In such a case, power to appoint liquidators rests primarily with the creditors. In both these methods of voluntary winding up of a company, automatic stay per se does not arise. An application has to specifically made to the concerned Court for exercise of power to stay proceedings against the Company.
While making payments, on winding-up its operations, a company prioritizes in the following order. The workmen are the first to get their dues, followed by the secured creditors; revenues, taxes etc. due from the company and then other salaries and dues of the employees. Unsecured creditors are next in the list and finally, if any surplus are left, the shareholders get to share and distribute the same amongst themselves.
Chapter V of the Companies Act, 1956 deals with Arbitration, Compromises, Arrangements and Reconstructions. Section 391 to 394 of the Companies Act, 1956 are the relevant provisions for entering into compromise and settlement with creditors and amalgamation or merger with other companies. Section 396 empowers Central Government to provide for amalgamation of companies in national interest. Satyam is an a noteworthy case in this context, wherein the Government even went on to amend the provisions of the Takeover Code to smoothen the bumpy road to acquisition.
Monday, August 24, 2009
Capital Gains
Cetrus Paribus, change is the only constant factor in life. Welcome to the world of investing and there could not have been a truer Guru-Mantra to smile happily towards an ever inflating bank balance. The proposed Direct Taxes Code apparently seems to disagree with the magical tenor of reshuffling of portfolio assets. The proposed Capital Gains tax will not be levied on investors who hold on to a particular portfolio and do not shake their kitty of investments. Simply put, according to the proposed Code, the Capital Gains tax will not be levied on investors who gain from appreciation in value of unsold assets. However, if the investors gains by reshuffling his portfolio and selling his assets, then any gains so made from the selling of such tax shall be subject to Capital Gains tax. And this definitely does not augur well with a dynamic investment climate.
Income Tax
In life there are only two certainties, death and taxes. Just as the levying of taxes has been a certainty since time the beginning of time, the instrument of levy had an equal element of ambiguity. More so, in the Indian context. The Income Tax Act, 1961 which was meant to simplify and decode the abstruse process of taxation, compounds the predicament what with it being subject to the amendments by the Finance Bill every year. So, while the Finance Minister rises in the Lok Sabha to deliver the Bill every year, every heart of an earning honest hand pounds to see where will the delivered speech lead him. All this is set to change, what with a major wind blowing in the direction of change. Welcome to the proposed Direct Taxes Code Bill, 2009 which is to come into effect beginning 2011 and there will be an element of firmness not just about taxes, but also how they shall be levied and the method by which they will be levied.
In the following articles, I look forward to discussing what the present provisions of the IT Act, 1961 articulate and how the proposed Bill seeks to revolutionize the present approach. Wishing the readers an unambiguous guide to the convoluted world of taxation!! Please do drop in your comments to make it a vibrant, enriched and wholesome discourse.. : )
In the following articles, I look forward to discussing what the present provisions of the IT Act, 1961 articulate and how the proposed Bill seeks to revolutionize the present approach. Wishing the readers an unambiguous guide to the convoluted world of taxation!! Please do drop in your comments to make it a vibrant, enriched and wholesome discourse.. : )
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