CII Global Regulatory Update, September 2013


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“Global Regulatory Update”, a compilation of global and domestic news, opinions on regulatory issues, CII initiatives and representations on regulatory issues.

The Update is aimed at keeping CII membership apprised of developments in the international and domestic corporate governance and regulatory landscape.

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CII Global Regulatory Update, September 2013

  1. 1. Regulatory GLOBAL UPDATE 4 NATIONAL UPDATE ARTICLES GLOBAL UPDATE 11Inside September 2013, Volume 3, Issue 10 114 1616 Confederation of Indian Industry
  2. 2. DISCLAIMERCLAUSE This Regulatory Update has been compiled with a view to update readers and CII membership of changes on the covered topics in the Corporate Governance & Regulatory Affairs domain in the international as well as the domestic front. The compilation must not be taken as an exhaustive coverage of announcements and news nor should it be used as professional advice. Although, every endeavour has been made to provide exhaustive information, no claim would be entertained in the event any information/data/details/text is found to be inaccurate, incomplete, at variance with official data/information/details released through other sources prior or subsequent to release of the issue. This is only a compilationandnotareproductionofannouncements/articles/items.CIIdoesnotsubscribetotheviewsexpressedinthe items. These reflect the author’spersonal views and in the event of any violationof IPR by the subscribers,CII would not be held responsible in any manner. Further, no part of this Update may be reproduced, copied or used without the prior permissionofCII.
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  4. 4. 3 DOMESTIC UPDATES National Updates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Appointments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 GLOBAL UPDATES International Updates . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLES Competition Law Update. . . . . . . . . . . . . . . . . . . . . . . . . . . 18 CII's Recent Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 REPORTING AND COMPLIANCE Hedging the financials from. . . . . . . . . . . . . . . . . . . . . . . . . 16 foreign exchange fluctuations Contents
  5. 5. GLOBAL REGULATORY UPDATE 4 DOMESTIC UPDATES NATIONAL By : Notification of selective sections of the Companies Act 2013 The Companies Act 2013 received Presidential assent on 29 August 2013. While the entire law comprising 29 chapters - containing 470 sections and VII Schedules - has been enacted, currently 99 sections have been notified. Section 1 (Short title, extent, commencement and application) of theActwasnotifiedon30August2013 while 98 sections were notified on 12thSeptember,2013. Someoftheimportantonesinclude (i) Definitionofsubsidiary2(87) (ii) Loanstodirectors(185) (iii) Prohibitionofinsidertrading (iv) Sections for Constitution of NationalCompanyLawTribunal (v) Offencestobenon-cognizable (vi) Punishmentforfraud (vii) Powertoremovedifficulty During the CII National Conference on Companies Act, 2013, CII had brought up that while the sections of the new Act had been notified, the corresponding sections of the old Act wereyettoberepealed. To clear this discrepancy, MCA has vide Circular No.16 dated 18-09-2013, clarified that with effect from 12-09- 2013, the relevant provisions of the Companies Act, 1956, which correspond to provisions of 98 Sections of the Companies Act, 2013 brought into force on 12.09.2013, Clarification on applicability of notified sections vis-à-vis old Companies Act cease to have effect from that date (12-09-2013). MCA has also issued Companies (Removal of Difficulties) Order, 2013 dated20thSeptember,2013 [F.No. l/l 5/20 I 3-CL-V] to clarify that matters, proceedings or cases before the Company Law Board shall continue with the Board until transfer totheTribunalu/s434. The Companies Act, 2013 relies heavily on subordinate legislation for the implementation of various provisions of the Act. Currently, the Ministry of Corporate Affairs has developed draft Companies (Removal of Difficulties) Order, 2013 MCA hosts draft Rules under the Companies Act 2013 for public consultation
  6. 6. 5 Rulesfor24chaptersandpostedthem on the Ministry's website for comments from stakeholders. The first tranche of Rules cover the following16chapters: ChapterI-Preliminary Chapter II - Incorporation of Company andMattersIncidentalThereto ChapterVI-RegistrationofCharges Chapter VIII - Declaration and PaymentofDividend ChapterIX-AccountsofCompanies ChapterX-AuditandAuditors Chapter XI - Appointment and QualificationofDirectors Chapter XII - Meeting of Board and its Powers Chapter XVI - Prevention of OppressionandMismanagement Chapter XVIII - Removal of Name of Companies from the Register of Companies C h a p t e r X I X - R e v i v a l a n d RehabilitationofSickCompanies C h a p t e r X X I I - C o m p a n i e s IncorporatedOutsideIndia Chapter XXIII - Government Companies Chapter XXIV - Registration Offices andFees ChapterXXVI-Nidhi ChapterXXIX-Miscellaneous The Ministry has provided a 30 day windowtill8October2013forindustry and other stakeholders to respond to thedraftrules. The second tranche covers 9 chapters which were hosted on 20 September 2013. A similar 30 day window has also been provided for these Rules for industry and other stakeholders to submittheirviews. ChapterIII-ProspectusAndAllotment OfSecurities Chapter IV - Share Capital And Debentures Chapter VII - Management and Administration Chapter XIII - Appointment And Remuneration Of Managerial Personnel Chapter XV - Compromises, ArrangementAndAmalgamations ChapterXVII -RegisteredValuers Chapter XXI - PART I. - Companies authorizedtoregisterunderthisAct Chapter XXVIII: (Rules in respect of C l a u s e 4 4 2 : M e d i a t i o n A n d ConciliationPanel) National Company Law Appellate TribunalRules,2013. The remaining rules are slated to be placed for public consultation at the endofthismonth. CII is in the process of building up industry's viewpoints on the draft Rules. Based on a considered and consensual view emerging out of various deliberations, CII would be submittingitsdetailedinputson the drafts with an objective of making the process conducive to business environment. Members are requested to write in with their views on the draft Rules urgently to Committee for Reforming the Regulatory Environment for Doing Business in India submits its report The Committee for Reforming the Regulatory Environment for Doing Business in India submitted its report to the Ministry of Corporate Affairs in September 2013. The Committee was set up in August 2012. The proximate cause of the establishment of the Committee was the Word Bank's Doing Business Report which ranked India amongst the countries ranked at the bottom of various sub-indices. The Committee was tasked to look into various parameters which affect the regulatory environment for doing business in India and make appropriaterecommendations. The Report of the Committee has been crystallized in six thematic chapters covering the dispute resolution, architecture of the regulatory space, measures to boost efficacy of regulatory process, improving business environment for micro, small and medium enterprises, addressing issues at the state level and revisiting the report of the World Bank Review Panel on Doing Business Report.
  7. 7. GLOBAL REGULATORY UPDATE 6 The Recommendations are classified in various headings, namely, (a) legal reforms (b) regulatory architecture (c) boosting efficacy of regulatory process (d) enabling MSMEs, and (e) addressing state level issues. They include: LegalReforms 1) Reviewoflawsandregulations 2) Encouraging arbitration to resolve contractualdisputes RegulatoryArchitecture 3) Carving out clear mandate for a newregulatoryauthority 4) Appointments in and supervision ofregulatoryauthorities 5) A u t o n o m y o f r e g u l a t o r y authorities 6) Self evaluation by regulatory organizations Boosting Efficacy of Regulatory Process 7) Ensuring effective consultation throughatwo-stageprocess 8) Allocating priority to systemic issues 9) P u t t i n g i n p l a c e c o n s e n t mechanism for matters of low significance 10)Draftingregulation 11) Systemofadvanceruling 12) Setting up regulatory review authority 13) R e v i e w i n g t h e p r o p o s e d regulations 14)Regulatory Impact Assessment (RIA) EnablingMSMEs 15) Setting up a overarching body to enable policy and process coordinationforMSMEs 16) Singlewindowmechanism 17) Timebounddecisionmaking AddressingStateLevelIssues 18) Information facilitation through nodalpoint 19) Incentivising regulatory reforms amongststates 20) Building in appellate process by design Indian Institution of Corporate Affairs (IICA) and BSE Ltd. have signed an MoU to work collaboratively to develop a Corporate Social Responsibility (CSR) index, take up capacity building on CSR, conduct e d u c a t i o n a n d a w a r e n e s s programmes, and other activities to facilitate a more effective corporate participation in CSR areas. In the new Companies Act, 2013 it has been mandated for eligible companies to spend 2% of their profits on CSR activities. The proposed IICA-BSE CSR Index shall assess impact and performance of companies listed at BSE in CSR Indian Institute of Corporate Affairs Signs MoU with BSE to Collaborate on Developing India's First CSR Index activities.TheIndexwouldalsolookat theperformanceofcompaniesintheir mandatory CSR spend as per the new Companies Act, 2013 as one of the important and objective criteria. The information provided in the public domain on CSR activities by these listed companies and which is also assured,shallhavemorepreferencein the various evaluation parameters of the Index. Performance of the companies in CSR areas would be c o m b i n e d w i t h t h e m a r k e t performance of companies for selection of companies. The Index would be sector neutral. Companies eligible to be included in the Index for further evaluation shall ensure basic compliance as per proposed CSR regulations. RBI has issued circular dated 13 September 2013 for revising the FDI policy for definition for control and sector specific conditions. The definitionof'control'shallbe: 'Control' shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. The Governments of Himachal Pradesh and Karnataka have also given consent to implement the FDI Notification or revision of FDI Limits in FEMA
  8. 8. 7 policy on Multi Brand Retail Trading in Himachal Pradesh and Karnataka respectively. As such, the list of States/Union Territories which have conveyed their concurrence stands modified. Also in order to bring u n i f o r m i t y i n t h e s e c t o r a l classification position for FDI as notified under the Consolidated FDI Policy Circular with the FEMA Regulations, the policy on FDI caps and routes for various sectors has since been reviewed. These deal with change in the definition of control, notification of MBRT clarifications dealing with back-end infrastructure, sourcing from MSMEs and cities in which retail outlets may be set up and revision of routes and sectoral caps in sectors like telecom, courier services, ARCs, commodity exchanges, CICs, powerexchangesetc. With a view to having a broad-based representation of all classes of shareholders on the Board of Directors of the Exchange to strengthen corporate governance, the Commission has decided the following:- (i) The representation of the Anchor investor on the Board of the Exchange shall not be more than t h e p r o p o r t i o n o f t h e i r shareholding, which will be a maximum of 26% at the end of the fifth year of the Exchange's operation. Forward Markets Commission issues Guidelines for constitution of the Board of Directors, Nomination of Independent Directors and appointment of Chief Executives at the Nationwide Multi Commodity Exchanges (ii) The representation of the class of Shareholders at 3(b) and 3(c) above shall not be less than one- half of the total number of Shareholder Directors. Further, any of these shareholders shall not have more than one representativeontheBoard. (iii) The representation of other classes of shareholders on the Board shall be as per their eligibility for appointment on the Board. The RBI by its circular dated August 19, 2013 has permitted Foreign Institutional Investors ('FII') to invest in Asset Reconstruction Companies ('ARC') and has increased the cap on foreign direct investment from 49% to 74%.The ARC investment will be subject to the sponsor'sholding not exceeding50% and the FII's holding not exceeding 10%of the total paid-up capitaloftheARC. The circular has enhanced the FII investment limits in Security Receipts ('SR')from 49% to 74% of the paid up valueofeachtrancheofschemeofthe Foreign Investment in Asset Reconstruction Companies SR. The earlier individual limit for investment by a single FII in each trancheofSRhasbeenremoved. TheRBIbyitscirculardatedAugust20, 2013 has liberalised the policy for investment in Portfolio Investment Scheme ('PIS') for Non-resident Indians ('NRI') to attract inflow of foreign currency. The earlier requirement for banks to maintain a unique code for each branch, which made the process cumbersome has been dispensed with. The designated branch of the bank is now permitted to grant a one-time permission to the NRI applicant for the purchase and sale of shares or convertible debenturesofanIndiancompany.The said shares or debentures acquired by the NRI under the scheme cannot be pledged for giving loan to a third party without prior permission of the RBI or investintherealestatesector. The RBI with a view to improving transparency in the securities market has by its circular dated August 26, Portfolio Investment Scheme for NRIs relaxed Reporting of OTC transactions in Securitized Debt Instruments
  9. 9. GLOBAL REGULATORY UPDATE 8 the stages of construction of the housing project. These include the exposure of the banks in case of disputes between parties, borrowers being exposed to a lower credit rating o n d e l a y e d p a y m e n t s b y developers/builders on behalf of individualborrowers. In order to avoid the aforementioned risks banks have been asked to not make upfront disbursal in cases of i n c o m p l e t e / u n d e r - construction/green field housing projects. The RBI by its Circular dated September 4, 2013 has decided to increase the permissibility for exporters to cancel and rebook forward contracts involving Rupee as one of the currencies, from 25 percent to 50 percent of the contracts booked in a financial year for hedging their contracted export exposures. Also, the importers which were earlier not permitted are now allowed to hedge their current and capital account transactions to the extent of 25 percent of the contracts booked in a financialyear. These changes have been made keeping in mind the evolving market conditions and with a view to providing operational flexibility to exporters and importers to hedge theirforeignexchangerisk. The RBI by its Circular dated September10,2013modifieditsearlier Exporter and Importers allowed tohedge their foreign exchange risk Overseas Direct Investment Regulation modified-Corporate Guarantee can be furnished by entity having indirect holding circular pertaining to overseas direct investment. The Indian party issuing a corporate guarantee on behalf of the second generation or subsequent levelstepdownoperatingsubsidiaries will be considered under the Approval Route, provided the Indian party indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued. The dispensation of the "direct" holding of 51% now permits companiestofurnishguaranteeseven without directly holding a 51% stake in the company on behalf of which it is issuingtheguarantee. The RBI has by its circular dated September 4, 2013 decided to allow eligible borrowers to avail of external commercial borrowings ('ECB')from their foreign equity holders ('Lender')to be utilized for general corporatepurposessubjectto: i. the Lender holding directly a minimum paid-up equity of 25% of theborrower; ii. the a vailment of ECB shall be according to the extant ECB guidelines; iii. Repayment of the principal has to commence only after completion ofatleast7years.Noprepayment willbeallowedbeforematurity. The RBI by its Circular dated September 5, 2013 has decided to increase the borrowing limit for authorised dealers from Head Office/ branch or correspondent outside ECBs can now be utilized for General Corporate Purposes Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) (Fourth Amendment) Regulations, 2013 2013 made the reporting of over the counter ('OTC') transactions in securitized debt instruments within 15 days of its trade on the Fixed Income Money Market and Derivatives AssociationofIndiamandatory. The RBI has by its circular dated 30 August 2013 prohibited Urban Co- operative Banks ('UCBs') from making donations to trusts having charitable or benevolent objects in which the directors or their relatives of such UCBs are interested."Interest" has been defined to mean the director or his relative is either a trustee or a beneficiary or is working in a way which is likely to influence the independenceofthedirectors. The RBI by its circular dated September 3, 2013 has highlighted the risks involved in the innovative housingloan schemes (popularly known as 80:20, 75:25 Schemes) introduced by certain banks in association with developers/builders that provide up front disbursal of loans without linking the disbursals to Restriction on donations to Trusts and Institutions where Directors, their relatives hold position or are interested Innovative Housing Loan Products risky
  10. 10. 9 India. This has been increased from 50% to 100% or such other limit as may bedecidedbyRBIfromtimetotime. The RBI by its circular dated September 5, 2013 has decided to permit AD Category- I bank to issue bank guarantee on behalf of a non- resident acquiring shares or convertible debentures of an Indian company through open offers / delisting/exit offers, provided that the guarantee is covered by a counter guarantee given by a bank of an internationalrepute. The RBI by its Circular dated September 6, 2013 has decided to permit an increase which now allows any person resident in India to take outside India or who had previously gone out of India on a temporary visit, to bring into India (other than to and from Nepal and Bhutan) currency notes upto Rs. 10,000 from the earlier Rs7,500. The RBI by its Circular dated September 6, 2013 has decided to allow Non-resident Indians to acquire shares of a listed Indian Company on the recognised stock exchanges through a registered broker under the FDI Scheme provided thatthe non- resident investor has already acquired and continues to hold the control in Issue of Bank Guarantee on behalf of person resident outside India for FDI transactions ExportandImportofCurrency Purchase of shares on the recognised stock exchanges in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations accordance with the SEBI Takeover Regulations,2011. The other conditions that are required to be complied with include those relating to pricing, manner of payment of consideration and compliance with other aspects of the FDIpolicysuchassectoralcaps. With a view to providing greater flexibility to AD Category - I banks in seekingaccesstooverseasfundsfrom its head office, overseas branches or correspondents, the RBI by its circular dated September 10, 2013 has enhanced its borrowing limit to 100% of its unimpaired Tier I capital as at the close of the previous quarter or USD 10 million, whichever is higher, subject tocertaincompliancesincluding: (i) The bank having a board approved policy on overseas borrowings which shall contain the risk management practices that the bank would adhere to while borrowing abroad in foreigncurrency; (ii) The bank to maintain a CRAR of 12%. (iii) The borrowings to have a minimummaturityof3years. Furthertheborrowingbankmayenter into a swap transaction with RBI in respect of the borrowings raised in pursuance of the issuance of the circular. SEBI by its circular dated September 13, 2013 has extended the investment Enhancement of limit for Overseas Foreign Currency Borrowings by AD FIIs/QFIs investment in Government Debt in line with Corporate Debt investment principle which is currently in place for FIIs/QFIs investing in corporate debt to FIIs investing in government debt as well. Now FIIs/QFIs can invest without purchasing debt limits till the over all investment reaches 90% after which the auction mechanism shall be initiated for allocation of there maininglimits. The SEBI has provided a framework for registration and regulation of angel funds provided under Category I- Venture Capital Funds by notifying amendments to SEBI (Alternative Investment Funds) Regulations, 2012 ('AIF Regulations') on 16September, 2013. Angel funds have now been included in the definition of 'Venture Capital Funds' ('VCF'). For an individual angel investor to qualify as a VCF it has to have at least 10 years of investment or entrepreneurial or management experience and net tangible assets of at least Rs. 2 crore. While, corporate angel investors are required to have Rs. 10 crore net worth of a registered AIF/VCF. Amendments to SEBI (Alternative Investment Funds) Regulations, 2012
  11. 11. GLOBAL REGULATORY UPDATE 10 Angel funds are allowed to make investment only in investee companies that: are incorporated in India and are not more than 3 years old; and have a turnover of not more than Rs. 25 Crores; and are unlisted; and are not promoted, sponsored or related to an industrial group whose group turnover is in excess of Rs. 300 Cr; and has no family connection with the investors proposing to invest in the company. The investment limit by the angel fund in the company is floored by Rs. 50 lakh and capped at Rs. 5 Crore with a lock-in period of 3 years. After taking into account the h a r m o n i s e d m a s t e r l i s t o f infrastructure sub-sectors, the RBI by its Circular dated 18 September, 2013 has expanded the definition of the infrastructure sector for raising funds through external commercial Expansion of definition of 'infrastructure' under ECB borrowings ('ECBs'). The widened definition provides: the energy sector to now include electricity generation, transmission, distribution and oil pipelines; communications to include mobile telephony services or companies providing cellular services, fixed network telecom and telecom towers; water and sanitation to includeirrigationandwatertreatment plants; social and commercial infrastructure to now include hospitals and hotel and convention centresetc. APPOINTMENTS l l l l Mr. Raghuram Rajan appointed as RBIGovernor Essar Steel India appoints Mr. Firdose Vandrevala as ExecutiveViceChairman Mr. Anjan Lahiri appointed CEO of Sasken Mr. D.K. Sarraf appointed ONGC chairman l l l l Mr. Vijay Gopalan appointed Air AsiaIndiaCFO E s s a r E n e r g y a p p o i n t s Mr.SushilMarooasCEO Mr. R.S. Gujral given additional charge of the post of Secretary, DepartmentofDisinvestment Mr. Sudhir Chaturvedi joins NIIT TechasCOO l l l Mr. Joe King Appointed as Head of AudiIndia Jones Lang LaSalle Appoints Mr. Juggy Marwaha as MD south India Operations WNS appoints Mr. Sanjay Puria asCFO
  12. 12. 11 By : GLOBAL INTERNATIONAL UPDATES Recommendation 7.4 states that "a listed entity should disclose whether, and if so how, it has r e g a r d t o e c o n o m i c , environmental and social sustainability risks". The Consultation Paper states that t h i s R e c o m m e n d a t i o n i s intended to address "the increasing attention being given by the investment community to environmental and social issues and the investment risks they raise". At present, there is no proposal to mandate this reporting, and the ASX Council considers that it would be premature to expect listed entities in Australia to adopt mandatory integrated reporting until the international framework for such reporting is better developed than it currently is. 1. ASX corporate governance principles propose environmental risk disclosure obligations The Australian Stock Exchange Corporate Governance Council has recommended that entities listed on the Australian Stock Exchange (ASX) disclose environmental and social sustainability risks to investors. The proposed amendments to include environmental risk disclosure are embodied in the revisionofPrinciple7. Principle 7, titled "Recognise and manage risk", recommends that "a listed entity should establish a s o u n d r i s k m a n a g e m e n t framework and periodically review the effectiveness of that framework". The consultation paper notes that, amongst other things, the framework needs to adequately address issues such as relevance, materiality, timeframe, exclusion of commercially sensitive information and the compliance burden, before listed entities across the board can be reasonably expected to adopt integratedreporting. The Draft is available for commentuntilNovember152013. The Association of British Insurers (ABI) has issued a report o n i m p r o v i n g c o r p o r a t e 2. Association of British Insurers publishes paper on improving corporate governance and shareholder engagement
  13. 13. GLOBAL REGULATORY UPDATE 12 governance and shareholder engagement. The paper reviews t h e e x i s t i n g r o l e s a n d responsibilities in corporate governance and shareholder e n g a g e m e n t a n d m a k e s recommendations on how these could be enhanced, with reference to the UK Corporate GovernanceCode. T h e r e p o r t m a k e s recommendationsfor: Improving corporate governance reporting; Encouraging companies to review the time-commitment requirements of different non- executiverolesandhowdifferent non-executive roles may best be structured; Empowering non-executive directors, with measures to ensuretheyreceivetherightlevel of information to enhance their ability to support and challenge theExecutiveDirectors; EnsuringNon-ExecutiveDirectors receive early and full information on potential M&A transactions, including where appropriate independentadvice; Maintaining the UK's leadership p o s i t i o n i n s h a r e h o l d e r engagement, by opening ABI collective engagement to non- members and launching an Investor Exchange mechanism; and Improving mutual understanding by encouraging companies to develop a transparent investor relations programme that includes the schedule of corporate governance-related meetings l l l l l l 3. Ireland Central Bank proposes changes to Corporate Governance Code for Credit Institutions and Insurance Undertakings The Central Bank has published a consultation paper in which it proposes the introduction of a number of changes to the Corporate Governance Code for Credit Institutions and Insurance Undertakings. The Code applies on a statutory basis to all credit institutions and insurance undertakings which are licensed or authorised by the Bank (including reinsurers but excluding captives which are governed by a separate CorporateGovernanceCode). The significant proposed amendments include provision relating to risk committees to require that the committee be composed of a majority of non- executive directors; introduce a new requirement for all institutions to appoint a Chief Risk Officer (CRO); issues surrounding the implementation of the current requirement for High Impact institutions to hold eleven board meetings per year; a l l o w t h e C h a i r m a n o f subsidiaries of groups which are designated as Medium-High, Medium-Low or Low Impact institutions, to hold more than one Chairman position in another credit institution or insurance undertaking provided that the institution resides within the same group and the Chairman has sufficient time available to fulfill the role; amend the current prohibition on the CEO holding more than one CEO position in another credit institution or insurance undertaking at any one time; amend the provision concerning Annual Compliance Statements to permit institutions with a non-calendar year financial reporting period to change the submission basis of the annual compliance statement to that of the institution's financial year; board diversity requirements; etc. The consultation runs until 1 October2013. T h e C o m m i s s i o n e r o f Competition has announced a new whistleblowing program developed by the Competition Bureau's Criminal Matters Branch. The Criminal Cartel Whistleblowing Initiative will encouragemembersofthepublic to provide information to the Competition Bureau regarding possible violations of sections 45 to 49 of the Competition Act, i.e., the criminal cartel provisions which prohibit, among other 4. Canada Competition Bureau Introduces Criminal Cartel Whistleblowing Initiative
  14. 14. 13 t h i n g s , a g r e e m e n t s o r a r r a n g e m e n t s a m o n g competitors to fix prices, allocate markets, restrict output or rig bids. T h e U n f a i r C o m p e t i t i o n Prevention and Trade Secret ProtectionActprotectsIPrightsby preventing unfair competition and the misappropriation of trade secrets. Recent amendments to theactidentifyadditionalactivities t h a t a r e d e e m e d u n f a i r competition and reward those whoapprisetheauthoritiesofsuch behaviour, among other things. The amendments will become effective on January 31 2014. The existing act lists nine specific unlawful activities that support a potential unfair competition claim. The recent amendment has added a 10th anti-competitive activity under Article 2(1)(x), as follows: "an act of infringing a person's 5. Korea adds to the list of activities deemed as unfair competition right to profit by using that person's product, which was the result of considerable effort and investment, without authorization for one's business through a method that contravenes fair commercial trade practice or competitionorder." The European Union and the Swiss Confederation have signed a Cooperation Agreement in Competition Matters. The agreement provides for broad possibilities of the Swiss competition authority and the E u r o p e a n C o m m i s s i o n t o e x c h a n g e p r o t e c t e d o r confidential information they have obtained in their investigations, even without the consent of the investigatedcompanies T h e r e p o r t ' s G l o b a l Competitiveness Index (GCI) places Switzerland at the top of the ranking for the fifth year running. Singapore and Finland remain in second and third positions respectively. Germany moves up two places (4th) and the United States reverses a four-year downward trend, climbing two places to fifth. Hong Kong SAR (7th)andJapan(9th)alsoclosethe gap on the most competitive economies, while Sweden (6th), the Netherlands (8th) and the United Kingdom (10th) fall. The United States continues to be a world leader in bringing innovative products and services to market. Its rise in the ranking is down to a 6. EU Swiss Bilateral Cooperation Agreement In Competition Matters 7. WEF Global Competitiveness Report 2013-2014. perceived improvement in the country's financial market as well as greater confidence in its public institutions. However, serious concerns persist over its macroeconomic stability, which ranks117outof148economies. Of the five BRICS, the People's Republic of China (29th) continues to lead the group, followed by South Africa (53rd), Brazil (56th) India (60th) and Russia (64th). Among the BRICS, only Russia improves its ranking, climbing three places, while Brazil drops eightplaces. The Securities and Exchange Commission said Tuesday that foreign private issuers who prepare their financial statements in accordance with International Financial Reporting Standards do nothavetosubmitinteractivedata files until the SEC decides on a suitableXBRLtaxonomy. More AIM companies are set to become subject to the provisions oftheUKTakeoverCodeattheend of September 2013 as a result of changespublishedearlierthisyear. The Code will now also apply to Jersey and Guernsey companies whose shares are admitted to tradingonaUKmultilateraltrading facility (MTF), e.g. AIM, regardless of where the company is managed andcontrolled. This means that Jersey and Guernsey companies whose shares are admitted to trading on 8. SEC Changes IFRS XBRL Rules for Foreign Private Issuers 9. Changes to the UK Takeover Code
  15. 15. GLOBAL REGULATORY UPDATE 14 AIM and which are not currently subject to the Code because they are centrally managed and controlled outside the United Kingdom, the Channel Islands and the Isle of Man, will now have certainty that the Code applies to them and that they are subject to the jurisdiction of the Takeover Panel with effect from 30 September2013. Global credit rating agency Moody cautioned that India is among the countries that are most vulnerable to capital outflows as it relies heavily on external funding. In its report - 10.India's vulnerability to cash outflows 'How US Monetary Tightening Affects Asian Markets' the agency have highlighted the impact of the US Fed agency announcements on the bond yields in the Indian market. To counter the effect the RBI Governor has said India needs to build a "bullet-proof national balance sheet" to deal with the fallout on the economy from US Fed's tapering of stimulus. The Japanese Minister Hakubun Shimomura, on the sidelines of the World Economic Forum meeting at Dalian in China has shown interest in funding and sharing technology in a bullet train project in Karnataka. Also, Karnataka State officials said Malaysia's Q1 Group has expressed interest in investing in e-retail, IT and education sectors in Karnataka while Spanish firm Acciona in waste water treatment, renewable energy projects and wind energy. 11. Investor interest in infra, technology and renewable sectors 12.U.S. bans import of generic drugs from Ranbaxy's Indian plant 13.Cooper Tire & Rubber deal with Apollo Tyres comes to a standstill The $2.5 billion deal between Cooper Tire & Rubber and Apollo Tyres has come to a standstill by the decision of the arbitrator to block the sale of Cooper's Texas plants to Apollo on the ground that the consent of the workers at the two plants was not obtained. The biggest ever takeover of the US company by an Indian group was brought to notice by the United Steel Workers, the union which objected to the takeover. The arbitrator, James Oldham, ruled that on the basis of the 'successor ship clause' a consent of the workers of both the factories had to be taken in case of any change of control. As this was not taken, the deal could not go ahead. After the decision of the arbitrator, both the companies have agreed to enter into discussions with the union of United Steel Workers. The basic concern of United Steel Workers was the amount of debt which was going to be placed on Cooper as a result of the merger. Hence,itwillbeinterestingtoseehow the parties will finally settle the matter. The two companies had announced the $35 per share all-cash deal in June which would create the world'sseventh-biggesttyremakerby revenues.
  16. 16. 15 W: New Delhi E-177 Lower Ground Floor East of Kailash New Delhi 110065 E: T: +91 11 26215601 / 02 F: +91 11 26215603 Kolkata 10 Old Post Office Street Ground Floor Kolkata 700001 E: T: +91 33 22308909 F: +91 33 22487823 Hyderabad Chamber#103 Ground Floor 6-3-252/A/10 Sana Apartments, Erramanzil Hyderabad 500082 E: T: +91 40 39935766 Winner: Best Newcomers: India Business Law Journal Awards 2012 Mumbai 24 M. C. C. Lane Fort Mumbai 400023 E: T: +91 22 22834130 / 01 F: +91 22 22834102 India member firm of: CONTACT Krishnayan Sen / Dipankar Bandyopadhyay
  17. 17. 16 GLOBAL REGULATORY UPDATE By Mr. Koosai Lehery, Director, Accounting Advisory Services, KPMG, India The Rupee has depreciated significantly against major foreign currencies (US Dollar, Euro, GBP etc) over the last few months on account of the significant current account deficit and reduced inflows from foreign institutional investors into emerging markets, including India. This has adversely impacted several companies, especially those that are i m p o r t d e p e n d e n t o r h a v e borrowings in foreign currencies. Conversely, the volatility also affects exporters in terms of volatile performance results. An entity may opt to address such volatility by entering into derivative transactions tohedgetheirexposures. An entity can manage its exposure to variability in cash flows arising from exchange rate movements using a forward contract that fixes the amount to be paid or received on settlement.Similarly,foreigncurrency debt, raised via foreign currency convertible bonds or external commercial bonds often creates dual risk, relating to variable interest rates aswellasforeignexchangerisk,which are commonly hedged using cross currencyswaps. The current accounting for forward exchange contracts entered in order to hedge recognised assets or liabilities is governed by AS 11 "The effects of changes in foreign exchange rates" In accordance with the guidance in AS 11, the premium or discount arising at the time of inception of the forward contract is Hedging the financials from foreign exchange fluctuations Hedging the financials from foreign exchange fluctuations
  18. 18. 17 required to be amortized as expense or income over the life of the contract and exchange differences on such contracts should be recognised in the profit or loss account in the reporting period during which there is change in theexchangerates. However, in relation to forward contracts not covered by AS 11 (i.e. contracts to hedge forecasted purchase or sale of transactions) and all other derivative contracts entered into by an entity, the guidance issued by the Institute of Chartered Accountants of India requires companiestoreflectintheirprofitand loss statement, all the mark-to-market losses at each reporting date, on the basis of prudence. No mark-to-market gainswhatsoevercanberecognised. Hence, even if an entity is economically hedging its forecasted transactions, such asymmetrical accounting may result in a distorted picture of the entity's risk management strategy, unless it opts to adopt principles of hedge accounting enunciated in AS 30 "Financial instruments: recognition and measurement". This is not yet a mandatory accounting standard, however, it may be adopted voluntarily to the extent that it does not conflict with the guidance contained in any notified accounting standards. This standard allows an entity to either, measure hedged a s s e t s , l i a b i l i t i e s a n d f i r m commitments on a basis different from that otherwise stipulated in the accounting standards ("fair value hedge accounting model") or to defer the recognition of gains or losses on derivatives until the underlying hedged transaction affects earnings, for example until the forecasted sales or purchases occur ("cash flow hedge a c c o u n t i n g m o d e l " o r " n e t investment hedging") in the profit or loss, thus aligning the measurement and reporting relating to the hedged items, such as a loan or foreign currency exposure and the hedging instrument, such as the forward contractsorcross-currencyswaps. Hedge accounting can be used not only for aligning measurement and reporting, but also for a more appropriate presentation. Thus, while companies that do not follow hedge accounting are required to reflect foreign exchange gains and losses as a separate component in the profit and loss, hedge accounting may enable presentation of gains and losses on hedging derivatives along with the underlyingtransactions. It should be noted that hedge accountingispermittedonlywhenthe criteria prescribed in AS 30 are met. These include formal designation and written documentation, as well as, testing the hedge effectiveness at inception and on an ongoing basis. Its implementation can sometimes present challenges in terms of determining the hedging relationship, identifying upfront the methods for testing hedge effectiveness. Some of the commonly used methods for testing effectiveness include the dollar offset method, hypothetical derivative method, regression analysis amongst others. The hedge is assessed to evaluate if it would be highly effective on an ongoing basis throughout the hedge relationship. A hedge is highly effective if the ratio of changes in the fair value or expected cash flows of the hedging instrument and the changes in the fair value or expected cash flows of the hedged item attributable to the hedged risk falls within the range of 80 - 125 percent, as tested at the reporting date. Ineffectiveness in hedging relationships can arise if the key terms of the hedged item and hedging instruments do not match, for example, the notional and principal amounts for derivative and hedged item may be different, or, if there are timing differences in the maturity datesorcurrencies. Therefore, whilst hedge accounting can enable a fairer representation of an entity's market risk profile in its financial statements, it should be remembered that adopting hedge accounting brings its own share of challenges. However, careful evaluation of the requirements at i n c e p t i o n , e m b e d d i n g t h e requirements into the entity's financial reporting framework and training of employees can lead to a smoother transition to hedge accounting. The benefits of hedge accounting far outweigh the efforts required. Mr. Koosai Lehery Director Accounting Advisory Services KPMG, India Authored by:
  19. 19. GLOBAL REGULATORY UPDATE 18 Competition Law Update Competition Law Update By Ms. Shweta Shroff Chopra, Partner, Competition Law Practice, Amarchand & Mangaldas & Suresh A. Shroff & Co. 1. AbuseofDominance 1.1CCI finds no prima facie case of abuse of dominance by builders/developers in the real estatesector Following its order in the DLF Cases, the Competition Commission of India (CCI) has received a large number of complaints pertaining to unfair and discriminatoryclauses in the apartment buyer agreements, i.e.,theagreementsforsale. Recently, the CCI has dismissed five complaints against different builders/developers based in different places, namely, Hyderabad, Pune, Delhi National Capital Region and Bhiwadi (Rajasthan) on the basis that the builder/developer was not dominant in the relevant market. It should be noted that assessment of dominance of builder/developer in these cases is in sharp contrast to the CCI’s approach in the DLF cases, where the DLF’s dominance was assessed in respect of high-end residential accommodations in Gurgaon. Interestingly, in Case no. 31/2013 (AchyutP.Raov.M/sDesignarch Infrastructure Private Limited), the CCI has held that e-homes (residential accommodations with pre-fitted hi-tech gadgets such as wifi, finger print security system and parkings, etc.) in Delhi NCR cannot be treated differently in comparison to o t h e r r e s i d e n t i a l apartments/flats and therefore, they are part of the same product market. Accordingly, the CCI in this case has defined therelevantmarketinrespectof residential flats/apartments in DelhiNCR. Further, in relation to the tall claims made by companies in respect of their market position (for example, claims of being a leading/major/dominant market p l a y e r ) i n t h e i r p u b l i c documents, the CCI has stated t h a t “ s e l f a c c l a i m s b y enterprises in their own documents like red herring prospectus cannot be taken as evidence of dominance per se”. (CaseNo.34/2013(CasaParadiso Owner’s Welfare Association v. M/s Santharam Enterprises Limited)) These cases appear to suggest a retreat from the position taken by the CCI in the DLF cases. It acutely shows that it was perhaps not wise to have prosecuted the DLF cases under the Competition Act 2002, if the intent of the CCI had been to r e f o r m t h e c o m m o n malpractices in the real estate sector, which are followed irrespectiveofdominanceofthe builder/developer. 1.2 CCI finds no prima facie case of abuse of dominance by Central Bureau of Narcotics andNarcoticsControlBureau Recently, the CCI has dismissed a complaint filed against the Central Bureau of Narcotics (CBN)and Narcotics Control Bureau (NCB) for alleged violations of the Competition Act. It has been alleged that CBN and NCB, the regulatory authorities monitoring the import and export of poppy seeds under
  20. 20. 19 the EXIM Policy 2009-14, have violated the Competition Act by permitting import of huge quantities of poppy seeds under Special Import Licence scheme to the detriment of domestic cultivators. As per the Government of India’s regulations, all contracts for import of poppy seeds are required to be compulsorily registered with the NCB. Further, import of opium seeds are permissible only from those countries which legally cultivate opium poppy and which can produce the quantityofseedssoughttobe imported. The informant was aggrieved by the fact that, as a result of the import of opium poppy seeds, the prices of poppy produced by the domestic cultivators have decreased by almost 50%. Further over the time, several restrictions have been imposed on the Indian cultivators such that they are now prohibited from growing opium in an unrestricted manner. As a result of the government policies, the demand for opium is much higher than the production and the deficit is met through theimports. After considering the records produced before it, the CCI observed that CBN and NCB are government appointed agencies who are responsible for ensuring that illegally cultivated poppy seeds are not available in India. Accordingly, CBN and NCB cannot be said to be enterprises within Section 2(h) of the Competition Act. Further, the CCI has noted that import of poppy seeds is governed by the EXIM Policy of the Ministry of Commerce and the prices of poppy seeds are not fixed by either CBN or NCB. On this basis, the CCI has observed that a prima facie case of violation of the Competition Act has not been made out against CBN and NCB. 1.3 CCI gives clean chit to Odisha MiningCorporationLimited In a significant decision on i m p o s i t i o n o f u n f a i r conditions and pricing by a dominant enterprise, the CCI recently passed an order exonerating Odisha Mining Corporation Limited (OMC) of a n y b r e a c h o f t h e Competition Act in the context of the conditions and the prices imposed by OMC through the Price Setting Tenders (PSTs). Whilst noting thatOMCwasdominantinthe market for friable chrome ore in Orissa, the CCI found that it had not abused its position of dominance. In relation to the alleged unfair conditions imposed by OMC in the PSTs, the CCI found that the relevant clauses of the PSTs protected OMC’s legitimate commercial interests, as these clauses allowed OMC to explore alternative price discovery systems, especially in situations where in OMC’s view, the PST did not reflect the fair market value of chrome ore. Interestingly, the CCI noted that OMC was free to adopt measures in order to protectits legitimatebusiness interests. In relation to the alleged unfair pricing, the CCI held that chrome ore being a non- renewable natural resource, its pricing and supply cannot be determined by the market forces. Accordingly, while noting that assessing the correct economic value of chrome ore was a difficult task, the CCI observed that prices charged by OMC were not unreasonable on the basis of the ferro chrome prices in the international market. The CCI observed that the prices charged by OMC did not yield supra-competitive profits, as had that been the case, it would have retained Tata Steel, who chose to exit the business of chrome ore sales (despite OMC being the only other Indian player), in the business.
  21. 21. GLOBAL REGULATORY UPDATE 20 2.MergerControl 2.1 CCI approves the proposed scheme of consolidation of CIE group’s automotives Forgings Business with Mahindragroup On 21 August 2013, the CCI c l e a r e d t h e p r o p o s e d consolidation of the auto- components business of CIE g r o u p c o m p a n i e s a n d Mahindra group companies stating that the proposed transaction was not likely to cause an AAEC in India. The p r o p o s e d t r a n s a c t i o n involved consolidation of the European automotives forgings business of the CIE Group Companies with the f o r g i n g s , c o m p o s i t e s , castings, gears, stampings, and magnetics businesses of Mahindra Group Companies into one entity, i.e., Mahindra CIE Automotive Limited (Mahindra CIE) through a series of inter-connected share acquisitions, open offers and two schemes of amalgamation. Prior to the proposed transaction, CIE Group Companies were operational in European Union, Canada, Mexico, United States of America, Brazil, Russia and China; and Mahindra Group Companies were primarily operational in India and European Union. Therefore, the proposed transaction was aimed to confer Mahindra CIE with a global foot print with c o m p l e m e n t a r i t y i n geographies. W h i l e g r a n t i n g a n unconditional approval to the proposed transaction, the CCI noted that the proposed transaction did not involve the merger of two existing players in the market, as CIE did not have any presence in the Indian auto-components sector and that the existing t e c h n o l o g i e s u s e d b y Mahindra Group Companies would continue to be used even after completion of the proposedtransaction. 2.2 CCI clears the proposed acquisition of certain specific businesses of Royal Bank of ScotlandbyRatnakarBank Through its order dated 10 September 2013, the CCI has approved the proposed acquisition by Ratnakar Bank Limited (Ratnakar Bank) of the credit cards, mortgage 1 portfolio and business 2 banking segments of Royal Bank of Scotland (RBS) in furtherance of the Master S a l e a n d P u r c h a s e Agreement. While Ratnakar Bank had no presence in the credit cards business prior to the proposed transaction, the p r o p o s e d t r a n s a c t i o n contemplated RBS’ exit from the credit cards, mortgage portfolio and business bankingsegments. W h i l e g r a n t i n g a n unconditional approval to the proposed transaction, the CCI has observed that given the 1 Mortgageportfoliobusinessincludeshousingloansandloansagainstproperty. 2 Business banking segment includes the high end products and services that are offered to smallandmediumsizedenterprises. fact that the banking sector in India was thriving with a large number of banks and that both Ratnakar Bank and RBS had relatively small number of branches operating in India, the proposed transaction was not likely to cause an AAEC in India. 2.3 CCI clears proposal for acquisition of Hexaware TechnologiesLimited On 19 September 2013, the CCI unconditionally approved the proposed acquisition in Hexaware Technologies Limited (Hexaware) by HT Global IT Solutions Holdings Limited,a companybelonging to the Baring Asia Private Equitygroup(BaringAsia)of: (i) 4 1 . 4 8 % e q u i t y s h a r e s (including unlisted American D e p o s i t o r y R e c e i p t s equivalent to 7.01% of the equity share capital) pursuant t o a s h a r e p u r c h a s e agreement;and (ii) an additional 26% equity shares pursuant to the mandatory open offer under t h e S E B I ( S u b s t a n t i a l Acquisition of Shares and Takeovers)Regulations,2011.
  22. 22. 21 The CCI noted neither Baring Asia nor any companies belonging to the Baring Private Equity Asia Group has any investments in any company engaged in the same sector as Hexaware (i.e. providing IT and IT enabled services in domains such as human resources and business analytics in the banking and financial, insurance,healthcare,manufacturing, transportation and logistics sectors) in India. On this basis, the CCI observed that the proposed transaction was unlikely to cause an AAECinIndiaasitdidnotcontemplate a combination of two existing players in the Indian IT and IT enabled services industry. 3.1 Delhi High Court holds that the CCI is not required to serve a notice to the affected parties before directing a furtherinvestigation Through its order dated 2 September 2013, the High Court of Delhi dismissed a writ petition filed by South Asia LPG Company Private Limited stating that while passing an order directing further investigation into a matter under Section 26(7) of the CompetitionAct,theCCIisnot required to serve a notice to 3. Procedure the informant or the opposite party. To substantiate its order, the Court has relied on the decisionoftheSupremeCourt in Competition Commission of India v. Steel Authority of India Limited (2010) 10 SCC 74, where it was held that no notice is required to be given to the affected parties before the CCI forms an opinion as to whether or not a prima facie case exists on the basis of the records produced before it. The Court has observed that, “if the law does not mandate issue of notice to the affected party before directing investigation to be made by the Director General, there would be no reason to imply such a notice before directing further investigation in exercise of the powers c o n f e r r e d u p o n t h e Commission under sub section (7) of the said Section.” Further, the Court hasalsoobservedthatthereis no difference between the directions for investigation and directions for further investigation insofar as the a f f e c t e d p a r t i e s a r e concerned, since any further investigation is merely a c o n t i n u a t i o n o f t h e investigation carried out by theDirectorGeneral. Additionally, in relation to the petitioner’s claims of alleged violations of the principles of natural justice, the Court has categorically stated that the principles of audi alteram partem would not apply as an order directing a further investigation cannot be said to be an order prejudicially affecting the person against w h o m i n f o r m a t i o n i s provided or a reference is made. The Court appears to have based its findings on the fact that an order of further investigation neither entails any civil consequences nor doesitimpairanylegalrightof anysuchperson. Ms. Shweta Shroff Chopra Partner - Competition Law Practice Amarchand & Mangaldas & Suresh A. Shroff & Co. Advocates and Solicitors 216, Amarchand Towers, Okhla Industrial Estate Phase III, New Delhi 110020 Email - Mobile - +91 98100 98335
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  27. 27. 1426 ADVERTISEMENT FOR CII'S GLOBAL REGULATORY UPDATE ThisupdatewouldbecirculatedtothemembershipofCII;directmembershipofover7000organisationsfromtheprivate as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from around 400nationalandregionalsectoralassociations. WeinviteyoutogetassociatedwithCIIGlobalRegulatoryUpdatebywayofcreatingyourownspaceintheupdate: CATEGORY Members Non-Members BackCoverPage(Inside) `50,000 55,000 FullPage `30,000 `35,000 HalfPage `20,000 `25,000 Section Sponsorship Also available; you may contact the undersigned. e.g xyz (Company name) presents “Global Udate” Benefits include an advertisement, write up about the contributor and its logo) ` For further queries: Prabhat Negi Corporate Governance & Regulatory Affairs Department Confederation of Indian Industry The Mantosh Sondhi Centre 23 Institutional Area, Lodi Road, New Delhi - 110 003 Tel: 011-41506492 Fax: 011-24615693 Email:
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  30. 30. Confederation of Indian Industry The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultativeprocesses. CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded over 118 years ago, India's premier business association has over 7100 members, from the private as well as public sectors, including SMEs and MNCs,andanindirectmembershipofover90,000enterprisesfromaround257nationalandregional sectoralindustrybodies. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus-buildingandnetworkingonkeyissues. Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment ofwomen,andwater,tonameafew. The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge economy, and broad- basingdevelopmenttohelpdeliverthefruitsofprogresstoall. With 63 offices, including 10 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart organizationsin90countries,CIIservesasareferencepointforIndianindustryandtheinternational businesscommunity. Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi – 110 003 (India) T: 91 11 45771000 / 24629994-7 F: 91 11 24626149 E: W: Reach us via our Membership Helpline: 00-91-11-435 46244 / 00-91-99104 46244 CII Helpline Toll free No: 1800-103-1244