TRANSACTION ADVISORS      MissiveVolume IV – July 2011
Topics                        Page No                                                                                     ...
Corporate LawFiling of Financial statements in XBRL mode [General Circular No.                Companies (Cost Accounting R...
section (1) of section 233B of the Act. The rules, among other matters,       financial instruments only in dematerialised...
mechanism for electronic voting which would involve                      SEBI   appointment of agencies like NSDL or CSDL....
underlying shares and therefore will have to exit through IDRs in                FEMAlosses. The SEBI circular has raised ...
Other Updates                                                                 (Scheme of Amalgamation and Transfer of Gene...
Regulatory News                                                                §   RBI has decided to place the data on Ov...
International Taxation                                                        Transfer PricingSignificant Decisions       ...
Recent Transactions that made Headlines  §   Tata Steel had sold its 26% stake in Australian coal miner      Riversdale to...
©Copyright AMinds Advisors Private Limited , All rights reserved                                                          ...
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Mergers & Acquisitions Newsletter - July 2011


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Attached Newsletter is an attempt to cover monthly issues relevant in the context of transactions - covers SEBI, Companies Act, Income Tax, Stamp duty and other regulatory changes

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Mergers & Acquisitions Newsletter - July 2011

  1. 1. TRANSACTION ADVISORS MissiveVolume IV – July 2011
  2. 2. Topics Page No Corporate Law 1Dear Patron SEBI 3 FEMA 4Here we are again with the Fourth successive issue of our monthly ‘Missive’. Regulatory Updates 5 Regulatory News 6FDI in India was up by 43% in April to USD 3.12 billion. India Inc raised $2 bn in April International Taxation 7through ECBs & FCCBs. Private equity investments in India touched US$ 6,141 million Transfer Pricing 7in value terms in the first six months of 2011, a rise of 52% over the corresponding Recent News in Transactions 8period in previous year. Above statistics are themselves evident of the fact that the that made headlinesIndian growth story is gaining momentum.Our ‘Impact analysis’ on the critical updates has been widely acclaimed, promptingus to cover more updates under the said analysis. At the same time, we would very “Positive thinking is notmuch appreciate your feedback which consistently helps us in improving andupgrading the contents. EXPECTING the Best to happen. It is aboutWe trust you will enjoy reading this Missive. ACCEPTING that whatever happens is always the BEST.”Thanks and regards,Akhil BansalEditor, Knowledge Management Team
  3. 3. Corporate LawFiling of Financial statements in XBRL mode [General Circular No. Companies (Cost Accounting Records) Rules, 2011 and Companies37/2011 dated June 7, 2011] (Cost Audit Report) Rules, 2011Superseding its earlier circulars, MCA has mandated the following The new rules will apply to every company, including a foreigncompanies to file their balance sheet and profit & loss account along company, engaged in the production, processing, manufacturing orwith the Directors and Auditors Report for the year 2010-11 onwards mining activities and which has:by using XBRL Taxonomy: ï Net worth exceeding Rs. 5 crores as on the last date of the ï All companies listed in India and their Indian subsidiaries; immediately preceding financial year; ï All companies having paid up capital of INR 5 crores and above; ï Turnover exceeding Rs. 20 crores from sale or supply of all and products or activities during the immediately preceding ï All companies having turnover of INR 100 crores and above. financial year, or ï Issued equity or debt securities that are listed or are in theHowever, banking, power, insurance and non-banking financial process of listing on any stock exchange, whether in or outsidecompanies are exempted from XBRL filing till further orders. India.Impact: XBRL is increasingly gaining importance from Indian MCA has also done away with a 46-year system of prescribing sector-regulators. SEBI is in the process of adopting XBRL. BSE and NSE have specific cost accounting record maintenance rules for 36 industrialalready offered a unified XBRL-enabled platform called ‘corpfiling segments. Instead, it has notified a common rule that outlines thesystem to electronically file their disclosures, giving instant access to broad principles which companies need to follow. However, thethe investors. XBRL taxonomy for the banks has been finalised; and practice of notifying such record continues for only 8 sectors wherefor insurance sector and NBFCs, taxonomy is going to be developed government control over pricing, production or distribution exists todayshortly. Now, the Ministry of Finance and other ministries are also (i.e medicines, fertiliser, sugar, industrial alcohol, electricity, petroleum,preparing for the transition and telecommunications) MCA has also issued The Companies (Cost Audit Report) Rules, 2011 which will apply to every company in respect of which an audit of the cost records has been ordered by the Central Government under sub- 1
  4. 4. section (1) of section 233B of the Act. The rules, among other matters, financial instruments only in dematerialised form. Rules proposed to beprovide the format of the cost audit report, time-limit for submission effective from October 1st, 2011.and penalties for default. Impact: Both shareholder and companies would need registration with NSDL or CSDL which would not only be a time consuming processGreen Initiatives in the Corporate Governance – Clarification but would also involve cost.regarding participation by shareholders or Directors in meetingsunder the Companies Act, 1956 through electronic mode [GeneralCircular 35/2011 dated June 6, 2011] Fast Track Exit mode for defunct companies under section 560 of the Companies Act, 1956 (General Circular No.36/2011 dated June 7th,MCA has clarified that it is not mandatory for companies to provide the 2011)facility of video conferencing to its directors for the meeting. At present a company that is desirous of getting its name struck off, hasAs far as shareholder’s meeting for FY 2011-12 is concerned, it is to apply to RoC in e-form 61. All pending statutory returns are requiredoptional for the company to provide such facility. Even thereafter, the to be filed alongwith. To make an easy exit route for the “defunctsame would be mandatory only for listed companies. companies”, the ministry has prescribed the new guidelines effective July 3rd, 2011. However, the defunct company is one which does not have any asset or liability and is not involved in any business activityDraft Rules for mandatory dematerialisation of share certificate by one year prior to making application to the RoC.Public Companies Impact: The FTE Guidelines is an improvement over the previous EasyMCA has issued Companies (Dematerialisation of Certificates) Rules, Exit Scheme (EES) and will provide an opportunity to the defunct2011 (Draft Rules) for public comments. Rules will be applicable to all companies to exit with minimal compliance.public companies and their subsidiaries which have raised money byissue of shares, debentures, by accepting public deposits, stock, bondor any other financial instruments from public, other than from Other Updatesdirectors of the company. Rules further provides that such companiesshall issue and keep share certificates, debenture certificates and ï Central Government has issued the Companies (Passing ofcertificates issued for receipt of deposits, stock, bond or any other Resolution by Postal Ballot) Rules, 2011 (New Rules), which will supersede the Principal Rules. The new Rules provide for the 2
  5. 5. mechanism for electronic voting which would involve SEBI appointment of agencies like NSDL or CSDL. This initiative is in furtherance of the Green Initiative in the Corporate Governance Shareholding of promoter / promoter group to be in dematerialized released by MCA in May 2011. The provision for electronic mode [Circular No. Cir/ISD/ 3/2011 dated June 17, 2011] mode of voting is expected to increase the members’ participation in decisions taken at meetings. Further, it will SEBI had asked the promoters of listed companies to convert their reduce both time and costs incurred by the Companies as well entire equity holding in the dematerialized form by September 2011, as its members on meetings. failing which it will ban trading of such shares in the normal segment of the market. The non-compliance would require trading of shares underï Government had amended the guidelines for declaring financial the ‘trade segment’. Under the ‘trade segment’, it is mandatory to take institution as Public Financial Institutions (PFI) under Section 4A delivery of shares and most companies prefer to get their equities of the Companies Act, 1956. Private companies, primarily traded under the ‘normal segment. engaged in infrastructure funding, have been permitted to attain the status of a PFI and, seek tax and other benefits. Impact: SEBI intends to encourage transparency in the dealings of Under the new norms notified by the Ministry of Corporate shares by promoters including pledge / usage as collateral, to Affairs, any company which has been in existence for more than moderate sharp and destabilizing price movements in shares of three years and earns more than 50% income from industrial companies and to encourage better price discovery. and infrastructural financing can opt to be a PFI [vide General Circular No: 34/2011 Dated- 02.06.2011] Redemption of Indian Depository Receipts (IDRs) into Underlyingï MCA had now made it mandatory for CAs, CSs to digitally sign Equity Shares [Circular CIR/CFD/DIL/3/2011 dated June 03, 2011] DIN applications [General Circular No 32/2011 dated May 31st, 2011] SEBI has provided restrictions on redemption of IDRs to their corresponding underlying shares. As per the circular, a conversion would be possible only if the trading volume over the last six months was less than 5% (annualized) of the total IDRs issued. Impact: This circular by SEBI is being seen as ‘change of rules’ midway by the existing IDR holders and FIIs putting them into disadvantageous position as they will not be able to acquire the 3
  6. 6. underlying shares and therefore will have to exit through IDRs in FEMAlosses. The SEBI circular has raised serious questions about the futureof the instrument. Repatriating foreign nationals permitted to retain India bank account [A.P. DIR Circular No. 70 dated June 9, 2011]SEBI circular relaxes norms on changing names by Listed Companies RBI has issued a circular permitting Authorized Dealer Category – I[Circular No. – CIR/MRD/DP/ 07 /2011, Dated- June 16, 2011]. banks [AD] to re-designate resident accounts of repatriating foreign nationals as Non-Resident (Ordinary) [NRO] accounts.In addition to the existing norm that at least 50% of its total revenue inthe preceding 1 year period should have been accounted for by the Impact: The re-designation of resident account into NRO account willnew activity suggested by the new name, SEBI had further provided enable foreign nationals to receive their bona fide dues such as refundrelaxation by saying that a company can change its name provided the of provident fund balance and income tax refund even after theyamount invested in new projects associated with the new name is at leave the country. Prior to this, foreign nationals had to close theirleast 50 per cent of its assets. resident accounts at the time of repatriation from India.Impact: Companies where the gestation period of the business isusually longer and the revenue stream often delayed found it difficult Issue of Equity Shares under the FDI scheme now allowed even underto comply with the earlier provision, will now benefit from the the government route [A.P. DIR Circular No. 74, dated June 30, 2011]additional criteria. FDI in activities not covered under the automatic route requires prior approval of the government. RBI had now allowed issues of equity and preference shares to overseas entities in such cases, against money payable for importing capital goods and pre-operative expenses. However, certain conditions require compliance. Impact: Permitting Companies to issue shares against non-cash considerations (primarily the start-up expenditure and capital expenditures) will enable the Companies to obtain financing easily and without undue hassles 4
  7. 7. Other Updates (Scheme of Amalgamation and Transfer of General Insurance Business) Regulations, 2011]. ï Extension of time limit for buyback of FCCBs - Earlier, RBI had permitted buyback of FCCBs at discounted rates by Indian ï Government had extended the DEPB scheme for 3 more companies. The facility has now been extended until March months i.e. till September 2011 2012, both under the automatic route as well as the approval route. The discount rates have been decreased from 15% to 8% ï India had inked DTAA with Mozambique for premature buyback under the automatic route and from 25% to 20% under the approval route. ï India has signed Protocol Amending DTAA with Singapore; to help in Effective Exchange of Information in Tax Matters ï Ministry of Finance has issued a press release that paves the way for setting up “Infrastructure Debt Funds” (IDFs) in order to accelerate and enhance the flow of long term debt in infrastructure projects. The proposal contemplates two organizational structures for IDFs. The first is a vehicle in the form of a mutual fund using the traditional trust structure. The second is a company structure that is established in the form of a NBFC.Regulatory Updates ï UK Bribery Act 2010 is scheduled to become effective July 1st, 2011. Under the Act, Indian companies with a demonstrable ï IRDA, the Insurance regulator, has notified the M&A corporate presence in the UK which are unable to demonstrate guidelines for general insurance companies thereby paving that they have implemented ‘adequate procedures’ to prevent way for consolidation in the sector. The regulator has retained corrupt practices within their organisations or through third with itself the power to vet the valuations arrived at by the parties on their behalf, can be exposed to unlimited fines, as companies involved in M&As. Besides IRDA, an acquirer would well as other collateral consequences, such as long-term need to have approvals from RBI and the finance ministry, in imprisonment for their directors. case it has FDI. It also needs to have clearance of SEBI & CCI. [The Insurance Regulatory and Development Authority (Irda) 5
  8. 8. Regulatory News § RBI has decided to place the data on Overseas Direct Investment in the public domain. The report will consist of the § Discussion Paper on FDI Equity Caps by DIPP - The discussion following fields, viz., the name of the Indian Company / Party, paper introduces the possibility of abolishing all sectoral caps name of the JV/WOS, name of the country where the for foreign equity shareholding below 49%. As per the paper, investment is made, major activity of the JV/WOS, financial from a legal point of view, it doesnt matter whether the equity commitment of the parent company in the JV/WOS comprising holding is 26% or 49% as in both cases, the investor will exercise equity, loan and guarantee issued in USD million. the same control. § SEBI had directed two Sahara group to immediately refund the § Central government is considering allowing 51% FDI in multi money collected through sales of optionally fully convertible brand retail sector with a rider that permission of the states debentures with annual interest of 15%, citing violation of would be a must to open stores. At present, India allows FDI regulatory norms. The group had moved the Supreme Court only in single-brand retail chains like Nike, Louis Vuitton with a against said order. cap of 51%. However, the development (i.e. the proposal for seeking permission from the states) could be a big dampener § The much-hyped Microfinance Institutions Bill, proposed to be for the global chains like Wal-Mart, Metro and Carrefour which introduced in Parliament, has gone into cold storage. Some have been waiting since long for India to open FDI in the multi- grounds on which the Bill has been put on hold are the caps on brand retail. interest margin and rate of interest, and the redundancy of a central law when the RBI is the sole regulator for nearly 92 per § Provident fund trusts may soon have to park funds with EPFO - cent of NBFC-MFIs Companies managing provident fund accumulations of their employees in-house may soon have to hand over the entire corpus to the Employees’ Provident Fund Organisation as the government looks for ways to ensure retirement savings of workers are protected. § SEBI has decided to reopen its probe into multi-crore IPO scam of 2003-2006 § CCI had penalised NSE for abusing dominant market position. 6
  9. 9. International Taxation Transfer PricingSignificant Decisions Significant Decisions ï Reimbursement of salary to seconded employees is fees for ï Arm Length Price of royalty payments cannot be “nil” merely included services as they are rendering managerial services because taxpayer continues to incur losses [ITAT Delhi] [AAR] ï Transactional Net Margin Method at enterprise Level Invalid ï Discounting Charges paid to a non-resident on discounting of [ITAT Mumbai] bills of exchange are not ‘interest’, liable for withholding [High Court Delhi] ï Even Loss/High-Profit Companies Can Be Compared for TP purposes [ITAT Mumbai] ï A relation between the business of a non-resident and activity carried on in India would result in a ‘business connection’ for ï “Cost only” reimbursement (without any mark-up) from AE is the purpose of deemed accrual of income in India as well as for not justifiable as no part of the income derived by the AE from considering the resident as agent of the non-resident [ITAT the activity of the Taxpayer is shared with the Taxpayer and the Mumbai] entire benefit of the activity is enjoyed by the AE [ITAT Mumbai] ï Taxpayer not eligible to claim short stay exemption under the ï Existence of actual cross border transaction and motive to shift DTAA as the salary was paid directly by the Indian subsidiary profits or evade taxes not necessary pre conditions for TP [High Court Madras] provisions to apply [ITAT Delhi] ï Once the TPO accepted arm’s length price of royalty payments, the AO could not examine the reasonableness of the said expenditure for disallowance [High Court Delhi] 7
  10. 10. Recent Transactions that made Headlines § Tata Steel had sold its 26% stake in Australian coal miner Riversdale to Rio Tinto (an Anglo-Australian giant) for USD 1.1 billion § Reliance Industries will acquire a controlling stake in two insurance companies—Bharti AXA Life Insurance Co. Ltd and Bharti AXA General Insurance Co. Ltd—from Bharti Enterprises Ltd. § France’s Schneider Electric SA proposes to buy 74% of privately held Indian inverter manufacturer Luminous Power Technologies Pvt. Ltd for around €215 million to boost revenue and market share in Asia’s third largest economy. § P&G said to be readying £38-Billion Bid for Rival Unilever § State-run power financier REC is planning to raise up to $1.75 billion through a combination of FCCBs and ECBs § Vedanta Plans to Invest Another 10,000 Cr in Jharsuguda Project 8
  11. 11. ©Copyright AMinds Advisors Private Limited , All rights reserved AMinds Advisors Private Limited specializes in the fields of Mergers & Acquisition, Valuations, Due Diligence, Pre-fund raising Structuring, Financial Re-structuring, Regulatory, Private Equity and other funding opportunities Our guiding philosophy is “To carry out every professional assignment effectively and efficiently, while upholding the virtues of independence and integrity, without compromising on the creativity and quality of work, so as to provide utmost satisfaction to our clients ” For any professional advice regarding alerts in this newsletter, we welcome your queries A-371, Defence Colony, New Delhi –110024 Tel: +91-11-4980-0000 Fax: 91-11-4980-0029 Email: TRANSACTION ADVISORSThis publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has been preparedfor the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon the information contained in thispublication without obtaining specific professional advise. Due care has been taken while compiling the information , however, no representation (express orimplied) is given as to the accuracy or completeness of the information contained in this publication