Minimum Alternative Tax (‘MAT’), inspired by similar levies in the western countries, where the objective for introduction of MAT was to increase the revenue base, was first introduced in the Finance Act, 1987 by virtue of section 115J. Apparently, the levy discriminated between corporate vis-à-vis other entities – partnerships, sole proprietorships, etc and the same is held1 to be constitutional valid and not in violation of Article 14 and 19 under the Constitution of India. The MAT provisions subsequently traveled from section 115J to section 115JA and finally to the existing section 115JB.

Pragmatically, the intent for insertion of MAT in India was to levy tax on the “zero-tax” companies which made profits and distributed dividends but have little or negligible taxable income by virtue of various incentives/ deductions which have been claimed. The intent was reiterated in Memorandum to the Finance Bill, 1996, CBDT Circular No 762 dated February 18, 1998 and Finance Minster’s speech on Finance Act 2000. However, subsequently, contentions based on intent have not been accepted by the Department and it has been held that the provisions of MAT are applicable even in cases where the company has not declared dividend [DCIT vs Samsons Distilleries Pvt Ltd (2009-TIOL-217-ITAT-BANG) and DCW Ltd vs DCIT (ITA No. 4175/Mum/2005)].

Respite to some extent was provided to MAT paying companies by Finance Act, 2005. A tax credit mechanism under section 115JAA was introduced to allow tax credit in respect of MAT paid. MAT liability in excess of the normal tax liability was allowed to be taken as credit in subsequent years under section 115JAA. Currently, such credit can be carried forward and availed for 10 subsequent years.

Key issues and controversies involved

The calculation and methodology for computing MAT which seemed to be simplistic in nature, has been under scanner for legal interpretations. All unresolved controversies related to a number of issues on interpretation of sections 115J and 115JA should prevail for section 115JB as well, since section 115JB is pari material with the earlier provisions. Though numerous issues need to be addressed under MAT provisions, few significant areas of concern are enumerated below:

1. Is it mandatory to furnish Form 29B when the company is not liable to MAT?

MAT liability can be ascertained only after comparing normal tax liability with book profits. Accordingly, provisions of section 115JB(4) provides for obtaining a report from an accountant and Rule 40B and Form 29B provides a format for that. Therefore, it is possible to argue that the report in 29B should be obtained in all cases, irrespective of whether the company is liable to MAT.

Section 115JB (4), to the contrary, inter-alia uses the words “Every Company to which this section applies” – implying report to be obtained only where there is MAT liability. Further, the Act does not stipulate any penalty for not obtaining this report. Section 139(9) also does not consider the tax return to be defective if Form 29B is not obtained.

Hence, there is no explicit downside in cases where a company is not liable under MAT. However, given the legal issues involved in computing the Book Profits under MAT, on a prudent basis, a company should consider safeguarding its risk to the extent possible by getting the MAT computation vetted by a Chartered Accountant.

2. Profits/ gains not routed through Profit and Loss Account. Is it required to include such profits/ gains in Book Profits and offer the same for MAT?

Relying on the Apex Court judgement in the case of Apollo Tyres Limited (255 ITR 0273), judicial authorities have undisputedly held that the AO does not have the power to recast the book profits as arrived in the financial statements except as provided in section 115J if the following conditions are satisfied:

The accounts are prepared in accordance with Companies Act and the same has been audited by the statutory auditor, and his report indicates that the accounts are in accordance with the Companies Act.

The auditor’s report is adopted by the members in the General meeting.

The same is filed with and accepted by the Registrar of Companies.

Companies have therefore taken stand that amounts carried to capital reserves directly (which have not been credited to the profit and loss account) would not be capable of being added back to the book profits for MAT purposes – when the said accounts are duly audited by the statutory auditor, adopted by the members in the AGM and the same is filed with the Registrar. The position has also been blessed judicially in the following cases:

CIT vs Vijayshree Finance and Investment Co, Pvt Ltd2 (Madras High Court)
DCIT vs Indian Syntans Investments (P) Ltd3 (Chennai ITAT)
ACIT vs Vijay Furniture Manufacturing Co. Pvt. Ltd4 (Bombay ITAT)

In this regard, the most important aspect to be noted is the fact that none of the rulings mentioned above have objected to such a treatment in the books of accounts of the assessee, ie whether the tax payers have satisfied the provisions of Accounting Standard 10 and 13. In fact, the Bombay ITAT in the case of Vijay Furniture did not comment on the issue of treatment in books even though the same was the main point of contention of the Revenue authorities.

Pertinently, Bombay HC, in the case of CIT vs Veekaylal Investments Co (P) Ltd 166
CTR 965, have held that capital gains not routed through Profit and Loss account should form part of Book Profits for the purposes of MAT. The same was also re-iterated by Delhi ITAT in the case of Vishwanath Fin Cap (2007-TIOL-241-ITAT-DEL). The ITAT held that, “since the accounts were not prepared by the assessee in accordance with Part II and III of Schedule VI of Companies Act read with mandatory Accounting Standard 13, the AO was competent to re-cast the profit and loss account and re-compute the book profit for the purpose of Section 115JB of the Act.”

Therefore, whether the position adopted by companies would sail at Supreme Court level, even in cases where there is no qualification in the auditor’s report (given the fact that accounting standard interpretation is a matter of professional judgement), remains an unanswered question.

3. How should unabsorbed depreciation and brought forward losses be set off -
Clause (iii) of Explanation to Section 115JB?

The Authority of Advance Ruling (‘AAR’) in the case of Rashtriya Ispat Nigam Limited [2006] 285 ITR 1 has discussed the issues associated with clause (iii) of Explanation to Section 115JB in detail. However, the ruling has not been followed by a number of assessees, specifically in light of the Apex Court judgement in the case of Apollo Tyres, HCL Comnet Systems & Service Ltd (305 ITR 409) and the Tribunal decisions in the case of Sumi Motherson Innovative Engineering Ltd (ITA No 2323/Del/2006) and KFA Corporation Ltd vs JCIT (ITA No 5147/Mum/2002). The challenge is basically on account of the following issues which remain unanswered till date:

(a) Whether comparison of unabsorbed depreciation and depreciation should be made on a year-on-year basis or cumulative basis?

Illustration:

FY	Business Loss (A)	Unabsorbed depreciation (B)	Total	Lower of A or B
1999-2000	18	04	22	04
2000-2001	25	16	41	16
2001-2002	0	11	11	0
Total	43	{31}	74	{20}

As evident from above, if cumulative basis is followed, the amount of brought forward losses and unabsorbed depreciation will be same as the amount brought forward as per the “books of accounts”. Therefore, the same appears to be closer to the language of clause (iii).

(b) How to compute the amount the amount of losses and unabsorbed depreciation to be carried forward, ie whether the tax payer has an option to adjust the losses and unabsorbed depreciation on a pick and choose basis?

Illustration:

Continuing the above illustration, it is further assumed that the Book profits before adjustment under clause (iii) of Explanation to Sec 115JB is -

FY 2002–2003 – INR 6
FY 2003–2004 – INR 32

Though there can be many scenarios which merits consideration in this regard, two possible scenarios are discussed below:

Scenario I

Scenario II

Scenario I is in line with the advance ruling in the case of Rashtriya Ispat Nigam Limited. However, in the absence of specific suggestion/ prohibition under the Companies Act, or the Accounting Standards, or section 115JB, a tax payer may also be justified in adopting Scenario II.

(c) Whether losses cancelled in the process of corporate re-structuring exercise would still be available for set-off as brought forward losses?

Unabsorbed loss/ depreciation cancelled by book entry against reserves, share premium, etc would not answer the test of having been brought forward as per “books of accounts” in subsequent year. This has also been confirmed by Mumbai ITAT in the case of KFA Corporation Ltd. Therefore, it may be difficult to claim the losses cancelled in the process of corporate re-structuring exercise.

(d) Whether in case of amalgamation the amalgamated company can set-off unabsorbed losses of the amalgamating company?

A view can possibly be adopted that the losses which are brought forward in the books of accounts as on the first day of a accounting year should only be eligible for set-off and therefore, the amalgamated company may not be eligible for such set-offs (unless the amalgamation is effective from the first day of financial year).

However, Bangalore ITAT in the case of VST Tillers & Tractors Ltd vs CIT (2009-TIOL-26-ITAT-BANG) has held that the losses of amalgamating company are available for set-off to the amalgamated company, more so as the amalgamation scheme itself provided for such set-off.

Therefore, if the tax payer incorporates suitable provisions in the merger petition to the Court and pray that the losses of amalgamating company should for all tax assessment proceedings be deemed to have been incurred and recorded by the amalgamated company, the possibility of claiming the losses is greater.

4. Whether MAT credit can be carried forward and utilized by the successor company in case of amalgamation/ merger?

Unlike section 72A, section 115JB or section 115JAA does not contain any specific provision for amalgamations/ merger. Literal interpretation of the provisions of Section 115JAA(1) suggests that the tax credit would be allowed only to the company which had paid such taxes.

SRF Limited vs Garware Plastics and Polyesters Limited [1995] 2 Comp LJ 222 has held that benefits under section 43B would be available to the transferee upon merger. However, given that the Court has just made passing remarks and has not analyzed the allowability of benefits (under Section 43B) in detail, it may not be appropriate to rely on the same. Further, the Apex Court judgement in the case of CIT vs T Veerabhadra Rao [1985] 155 ITR 152, in connection with the right of the transferee company upon merger to recover debts, may also not be of much help.

Therefore, reliance to some extent can be placed on the Bangalore ITAT in the case of VST Tillers & Tractors Ltd and the merger petition can be appropriately drafted, however, in the absence of a specific provision in the Act, it may really be a challenge for the amalgamated company to avail such benefits.

Author: Amit Jain

Contact: +91-22-67477400
amit@nehasinghi.com

Date: December 22, 2011

Economic double taxation takes place when the same income is taxed in the hands of more than one person. Juridical double taxation takes place when the same income is taxed in the hands of the same person in more than one jurisdiction. Economic double taxation is typically resolved through bilateral negotiations whereas juridical double taxation is addressed in treaties, typically, through the tax credits article.

Tax credit in India is generally governed by the provisions of a bilateral Double Taxation Avoidance Agreement (‘DTAA’ or ‘the Treaty’) concluded between India and the other contracting state. Further, where there is no DTAA, section 91 of the Indian Income-tax Act, 1961 (‘the Act’) grants unilateral relief in respect of income which has suffered tax both in India and in a country with which no DTAA exists (ie doubly taxed income)1.

We will examine below the different types of tax credit mechanisms under the DTAAs and some key issues/ concepts in relation to tax credit mechanism that merit consideration.

1. Methods for availing tax credits under the DTAAs

Broadly, a DTAA would seek to eliminate juridical double taxation through either of the following two alternative mechanisms:

Exemption method
Credit method

1.1 Exemption method

Under the Exemption method, the State of Residence (‘State R’) does not tax the income, which according to DTAA may be taxed in the State of Source (‘State S’).

1.2 Credit method

Under the Credit method, State R includes income from State S in the taxable total income of the tax payer and calculates its tax on the basis of such taxpayer’s total income (including income from State S). It then allows a deduction from its own taxes for taxes paid in State S.
The Credit method can be applied with several variations –

Ordinary credit method,
Underlying Tax Credit method, and
Tax Sparing credit.

1.2.1 Ordinary credit method

Ordinary credit method refers to allowance of credit, from the tax payable in India, to the extent of tax attributable to the income that has been taxed in State S. The restriction may also be on grant of credit only in respect of income that is taxed in the overseas jurisdiction, ie credit would be granted qua each item of income and only if the same item of income has suffered tax in the overseas jurisdiction. This can be explained with the help of the following illustration:

A Ltd, resident of India – State R, has earned a total income of INR 100,000. Of its total income, INR 20,000 is derived from State S. State R imposes a tax of 35 percent on income of INR 100,000 or more and a tax of 30 percent on income below INR 100,000. State S imposes a tax of 40 percent. In this case, the credit would be computed as follows:

* Under the Ordinary Credit method, the maximum credit is restricted to INR 7,000 (ie 35 percent which is the tax rate in State R on the income earned in State S).

DTAAs executed by India usually follow the ‘Ordinary Credit method’ for elimination of double taxation, for the taxes paid by an Indian resident, either directly or by way of deduction, in the foreign country (State S).

1.2.2 Underlying Tax Credit (‘UTC’) method

UTC is a method to provide relief from the doubly taxed income. UTC refers to the credit that may be given, in a Contracting State (State R), for the tax paid on the underlying profits out of which the dividend is paid by a company in the Other Contracting State (State S).

DTAAs entered into by India (like DTAAs with Mauritius, Singapore) provide for UTC in situations where an Indian company is a shareholder in a foreign company.

1.2.3 Tax Sparing credit

Some of the DTAAs contain “tax sparing” clauses, whereby, tax incentives offered by the particular foreign country (State S) are deemed to have been paid as a foreign tax for the purpose of computing the foreign tax credit granted. Essentially, tax sparing consists of granting a tax credit in a Contracting State (State R) for the amount of tax that would have been payable in the Other Contracting State ie, State S had there been no reduction or exemption under the tax regime of State S.

Few DTAAs with India contain tax sparing provisions, for eg, DTAAs executed with China, Qatar, Singapore (on certain select income streams), Kenya, Philippines, Bangladesh, Korea, Malaysia and Nepal provides tax sparing benefits.

3. Key issues/ concepts in relation to tax credit mechanism

3.1 In cases where tax has been withheld in State S on gross basis, should Ordinary tax credit be claimed on net income basis?

The Ordinary credit method provides for “maximum deduction rule” ie, the deduction cannot exceed the tax liability on the foreign income in State R.

In this regard, paragraph 63 of the commentary of the OECD Model convention states that “The maximum deduction is normally computed as the tax on net income, ie on the income from State E (or S) less allowable deductions (specified or proportional) connected with such income (cf paragraph 40 above).” Further, similar analogy can also be drawn from Rajasthan High Court decision in the case of CIT vs RN Jhangi 185 ITR 586 and CIT vs Dr KL Parikh, though in the context of section 91.

Therefore, Ordinary tax credit is required to be computed on net income basis. Hence, if
State S provides for taxation of income on gross basis, the tax credit in many cases would be lower than the tax effectively paid in State S.

3.2 Can tax credit be claimed against the Minimum Alternative Tax (‘MAT’) payable in India?

Typically, the Ordinary credit method permits credit of tax on the doubly taxed income against Indian tax payable, irrespective of whether the same has been computed as per normal provisions of the Act or MAT. Further, neither the Act nor the Treaty has any specific provision to allow or to restrict the claim of tax credit against MAT.

Therefore, a view could be adopted that tax credit can be availed against MAT. However, the credit should be restricted to the MAT liability. Further, the tax credit in such scenario can be computed based on the following steps (given that the Act or the DTAAs do not specify any method):

Step I – Computation of income subject to tax both in State S and State R

Book Profit in accordance with section 115JB x Turnover/ receipts from State S
Total turnover of the company

Step II – Computation of maximum credit that can be availed

MAT * Income subject to tax both in State S and State R (as per Step I above)
Book Profits in accordance with section 115JB

3.3 Should tax credit be claimed from income-tax including surcharge and cess?

Bangalore Tribunal in the case of Infosys Technologies Ltd vs JCIT 108 TTJ 282 in connection with India-Canada tax treaty has held that,

” … it is made clear that while computing tax on the doubly taxed income, such tax should also included surcharge, as that is also part of tax levied under the provision of the Act.”

Therefore, a view could be adopted that tax credit can be claimed from income- tax (including surcharge and cess).

3.4 Can tax credit be claimed for dividend distribution tax paid under section 115O?

As per the provisions of section 115O of the Act, any amount declared, distributed or paid by way of dividend is subject to Dividend distribution tax (‘DDT’). DDT is neither a withholding tax on dividend income nor a tax on the profits of the company from which dividend is declared.

Under the DTAAs, tax credit is typically available for tax on income (ie income-tax) and/ or for tax on the profits of the company from which dividend is declared (ie UTC). Therefore, tax credit on DDT is per se not available under the DTAAs.

However, credit for DDT can be availed if State R considers DDT as income-tax or underlying tax as per its domestic law. For example, tax credit for 50 percent of the DDT paid in India can be availed, subject to fulfillment of certain conditions, as per the domestic tax laws of Korea. Such credit is also permissible under the domestic tax laws of UK as per certain specific clarifications issued by the Inland Revenue Department of UK.

3.5 How tax credit should be computed under section 91 of the Act when there is income from several overseas countries and loss in India?

The issue is explained with the help of the following illustration:

Company A is a tax resident of India. It carries on business in India, and also in Country X and Country Y, with which India does not have tax treaties. For financial year 2003-04, the amount of net income earned from all businesses, and tax paid in each of the foreign countries is as follows:

Doubly taxed income from Country X” is Rs 100 (consequent to which a relief of Rs 20 would be available under section 91) and “doubly taxed income in Country Y” is Rs 100 (consequent to which a relief of Rs 10 would be available under section 91) thus resulting a total relief of Rs 30 under section 91.

Doubly taxed income from Country X” is Rs 100 (consequent to which a relief of Rs 20 would be available under section 91) and “doubly taxed income in Country Y” is Rs 50 (consequent to which a relief of Rs 5 would be available under section 91) thus resulting a total relief of Rs 25 under section 91.

Doubly taxed income in Country X” is Rs 50 (consequent to which a relief of Rs 10 would be available under section 91) and “doubly taxed income in Country Y” is Rs 100 (consequent to which a relief of Rs 10 would be available under section 91) thus resulting in a credit of Rs 20 under section 91.

Doubly taxed income in Country X” is Rs 75 (consequent to which a relief of Rs 15 is available under section 91) and “doubly taxed income in Country Y” is Rs 75 (consequent to which a relief of Rs 7.5 is available under section 91) thus resulting in a relief of Rs 22.5 under section 91.

It is interesting to note here that the US IRC attempts to address this eventuality by a combination of regulations, which limit the overall FTC while at the same time clearly focusing on safeguarding any erosion to the tax on US soured income.

3.6 What exchange rate should be considered for the purpose of calculation of the quantum of foreign taxes that are available for FTC?

There is no express provision in the Act on this issue nor is there any judicial precedent or a revenue clarification. The US regulations as well as the treatise by “Klaus Vogel on Double Taxations Conventions”6 suggest that the foreign taxes (as expressed in the foreign currency) have to be converted into the local currency by applying the exchange rate as prevailing on the date on which such foreign taxes are paid.

There could be several situations that may arise in this regard in the Indian context. For example, an Indian resident derives business income of USD 100 in State S (the exchange rate prevailing at this time was 1 USD = Rs 45) and a tax of USD 15 has been paid in State S (the exchange rate prevailing at this time was 1 USD = Rs 46). The business income was realized during the year itself and the exchange rate prevailing at the time of realization was 1 USD = Rs 44. Hence, an issue arises on whether the foreign taxes which are eligible for credit in India have to converted into Indian currency by applying the exchange rate of 1 USD = Rs 44 (prevailing on the date of realization of income in foreign currency) or 1 USD = Rs 45 (prevailing on the date of earning of the income in State S) or 1 USD = Rs 46 (prevailing on the date of payment of tax in State S).
Therefore, the application of this principle to the Indian context is not without doubt.

Author: Amit Jain

Contact: +91-22-67477400
amit@nehasinghi.com

Date: December 22, 2011

[1]Where there is a DTAA, as per the provisions of the Indian income-tax law, relief has to be granted only under such DTAA – CIT v Carew & Co Ltd (1979) 120 ITR 540 (SC).

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Author: Arihant Bhansali

Contact: +91-33-40083385
neha@nehasinghi.com
Date: July 21, 2011

eXtensible Business Reporting Language

Introduction

XBRL stands for Extensible Business Reporting Language. It is a new global standard of Financial and Business Reporting with an Open Technology. It is used for electronic sharing and communication of business and financial data. It facilitates preparation, analysis and communication of business information. It offers significant cost savings, greater efficiency, accuracy and reliability in use of financial data.

XBRL and XML

The concept of XBRL is developed and derived from XML (eXtensible Markup Language) by international non-profit consortium of companies, organizations and government agencies. XBRL is a flexible version of XML. It provides a standard set of XML tags for exchanging accounting information and financial statements between companies and analysts. It is free of license fees.

XBRL consists of core language of XML elements and attributes. It allows and helps software vendors and programmers to adopt this language for preparation and distribution process. It also helps to enhance, exchange and comparison of business reporting information. The scope of XBRL extends to financial statements, financial information, non financial information, general ledger transaction and regulatory findings, such as annual and quarterly reports.

XBRL with Computers

The computes recognize the data in XBRL document, select it, analyze it, store it, exchange it with other computers and present it automatically in a variety of ways for users. XBRL greatly increases the speed of handling of financial data, reduces the chance of error and permits automatic checking of information.

XBRL in Organizations

All types of organizations can use XBRL. As XBRL is extensible and flexible, it can be adapted to fulfill different requirements. By using XBRL, company and other producers of financial data and business reports can automate the processes of data collection.

Companies can use XBRL to save costs and simplifies their processes for collecting and reporting financial information. XBRL can handle data in different languages and accounting standards. It can flexibly be adapted to meet different requirements and uses. Data can be transformed into XBRL by suitable mapping tools or it can be generated in XBRL by appropriate software.

XBRL Tags

In XBRL information is broken down into unique items of data. These data items are then assigned mark-up tags that make them computer-readable. For example, the tag <Liabilities>100</Liabilities> enables a computer to understand that the item is liabilities, and it has a value of 100.

As XBRL tags are formed in a universally-accepted way, they can be read and processed by any computer that has XBRL software. XBRL tags are defined and organized using categorization schemes called taxonomies.XBRL doesnot treat financial information as a block of text or numeric items, instead it attaches a unique electronically readable tag for each individual financial term.

Taxonomies

Different countries use different accounting standards. Reporting under each standard reflects differing definitions. The XBRL language uses different dictionaries, known as ‘taxonomies’, to define the specific tags used for each standard. Taxonomies are the computer-readable ‘dictionaries’ of XBRL. The taxonomies provide definitions for XBRL tags, they provide information about the tags, and they organize the tags so that they have a meaningful structure.

Taxonomy is made up schema and linkbases. Schema is the set of all the concepts with their XBRL attributes and documentation. All the attributes that required for the XBRL software to understand the meaning of a concept have to be defined. The linkbases provide the relationship amongst the various concepts. While building the taxonomy three broad reporting categories have been considered, taking into account the different reporting requirements. These are:-

1.      Commercial and Industrial

2.      Banking Companies

3.      Non-Banking Finance companies

Ways to create Financial Statements In XBRL

• XBRL-aware accounting software products are becoming available which will support the export of data in XBRL form. These tools allow users to map charts of accounts and other structures to XBRL tags.
• Statements can be mapped into XBRL using XBRL software tools designed for this purpose
• Data from accounting databases can be extracted in XBRL format. It is not strictly necessary for an accounting software vendor to use XBRL; third party products can achieve the transformation of the data to XBRL.
• Applications can transform data in particular formats into XBRL. The route which an individual company may take will depend on its requirements and the accounting software and systems it currently uses, among other factors.

Banks Submitting Returns to RBI in XBRL

A set of returns for monitoring capital adequacy and other statutory returns have been implemented using XBRL under RBI Act 1934. Rationalises the number of returns to be submitted by banks, thus reduces reporting burden on banks.With the introduction of XBRL, RBI could bring down number of returns from 291 to 225(vide RBI Press Release dated 14 August 2008 and 17 December 2008.)

Benefit to a company

• Increases the utility of financial statement information.
• The need to re-key financial data for analytical and other purposes can be eliminated.
• Companies can automate data collection.
• Reports can be produced with minimum efforts.
• Removes time-consumption, error-prone processes as well as performs accuracy checks on software.

XBRL in MCA

Circular No. 09/2011.It has been decided by the Ministry of Corporate Affairs to mandate certain class of companies to file balance sheets and profit and loss account for the year 2010-11 onwards by using XBRL taxonomy. The Financial Statements required to be filed in XBRL format would be based upon the Taxonomy on XBRL developed for the existing Schedule VI, as per the existing, (non converged) Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006.

Income tax Department accepts Income Tax Returns in xml format. The data submitted in pdf formats is capable of getting exported to xml.

According to General Circular No. 37/2011 dt. 7-6-2011 XBRL filing is mandatory in a phased manner based on existing Schedule VI. For the companies having balance sheet date on or after 31/03/2011 the last date of filing will be 30^th November or 60 days from the date whichever is later.

Coverage in Phase I

The following class of companies has to file the Financial Statements in XBRL Form only from the year 2010-2011:-

(i)All companies listed in India and their subsidiaries, including overseas subsidiaries;

(ii)All companies having a paid up capital of Rs. 5 Crore and above or a Turnover of Rs. 100 crore or above.

Exemptions:-

• Unlisted Companies
• Overseas Subsidiaries of Listed Companies
• Power Companies
• Insurance Companies
• NBFCs

Conclusion

XBRL is set to become the standard way of recording, storing and transmitting business financial information. It is capable of use throughout the world, whatever the language of the country concerned, for a wide variety of business purposes. It will deliver major cost savings and gains in efficiency, improving processes in companies, governments and other organizations.

With this XBRL Mandate, analysis of the use of the taxonomies and ability to easily modify them will become critical in evolving the reporting regulations. Companies and finance professionals would need to submit financial data on XBRL format to MCA and MCA would need to verify the data to ensure compliance with structural and reporting guidelines and analyze them quickly and reliably to ensure quality, accuracy and consistency.

Author: Sweta Agarwal

Contact: +91 9883116576

sweta@nehasinghi.com

Date: 06 July 2011

• Where FDI-linked performance related condition is attached (minimum capitalization, lock-in period);
• Sectors which are prohibited;
• Sectors which are restricted with caps; and
• Sectors which are under the FIPB approval route.

-LLPs having foreign investment would not be eligible to make any downstream investment.
-Indian companies having foreign investments would be eligible to make downstream investment in LLPs, only if the Indian company as well as LLP are operating in 100% automatic route sector and there are no FDI linked performance related conditions.
-Contribution in the capital of the LLP should be through inward remittance or by debit to NRE/FCNR account of the designated partner
-Investment by FIIs and FVCI in LLP is not permitted, even LLP would not be eligible to raise External Commercial Borrowing.
-In case LLP has a body corporate as a partner, companies registered under the Companies Act can only become partner in LLP.
-The definition of “persons resident in India” as contained in FEMA would be applicable instead of that given in the LLP Act.
-Conversion of a company into LLP would be allowed with prior FIPB approval
- The partners would be responsible for compliance and would be held liable for all penalties for any contravention
As the proposal has been approved by the CCEA, the Department of Policy & Promotion will introduce the policy changes in the form of a Press Note.

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Author: Neha Singhi

Contact: +91-33-40083385
neha@nehasinghi.com
Date: February 8, 2011

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Author: Sweta Agarwal

Contact: +91-33-40083385
neha@nehasinghi.com
Date: February 1, 2011

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Author: Neha Singhi
Contact: +91-33-40083385
neha@nehasinghi.com
Date: January 16, 2009

A striking and commendable move by DIPP: to come out with consolidated and comprehensive FDI Regulatory Framework. Foreign Direct Investments by non-resident in resident entities through transfer or issue of security to person resident outside India is a ‘Capital account transaction’ and Government of India and Reserve bank of India regulate this under the FEMA 1999 and its various regulations. Keeping in view the current requirements, the Government comes up from time to time with new regulation, amends/changes in existing one through order/allied rules, Press Notes, etc. The current FDI law is spread over FCRA, FEMA, various circulars, guidelines and press notes; the DIPP has issued about 177 Press Notes, covering various aspects of FDI policy, including cross border investment, policy liberalisation, policy rationalisation and foreign technology collaborations, Industrial Policy. Hence there was a need for consolidation of the FDI policy to make it more transparent, predictable, understandable, simple and clear; thus reducing the regulatory burden and promoting foreign direct investment.

At the very onset, the press note clarifies that it does not make any change in the existing law and any matters not covered in the press note will be continued to be dealt in the manner as under the existing laws. Thus the FDI law is kept intact, and this Press note is an attempt to consolidate the various Acts, Regulations, Press Notes, Press Releases, Clarifications, etc issued and enacted over the past years.

The draft consolidated document released on 24th December 2009 is open for comments until January 31, 2010 and a final document will be released by April 1st 2010. The Government proposes to issue Press Note on FDI Regulatory Framework twice a year in April and October which would be the current regulatory framework on that date; hence incorporating and reflecting all the changes in the regulations during the intervening period of six months. The new system of continuous consolidation and updation is primarily evinced as a measure of investor and investment friendliness.

This Press Note when comes into force will have the effect of rescinding all previous Press Notes on FDI issued by DIPP, and any action taken under the rescinded Press Notes shall in so far as it is not inconsistent with this Press Note be deemed to have been taken under the corresponding provisions of this Press Note.

FDI Regulations: Brief

FDI plays a important role in the accelerated economic growth of a country, and so it does for India which is now fast integrating with the global economy. Over the past years FDI regime has been directed more and more towards liberalisation, allowing free FDI flow in India. The article makes an attempt to capture some of the salient features of the current FDI Regime in a consolidated manner as also reflected in the new draft press note.

Eligibility of Sources of foreign investment

The eligibility criteria for various sources of foreign capital in Indian companies is stated below:

Eligibility of Resident entities and Instruments

The resident entities which are eligible to receive foreign investment may be classified as follows:

Investments can be made by non-residents in the shares/convertible debentures/preference shares of an Indian company, through two routes; the Automatic Route and the Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. Under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required.

Investment would be subject to the ‘Previous/existing venture/tie-up condition’. Foreign investment include all types of foreign investments i.e. FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB), convertible debentures and preference shares.

Direct and Indirect Foreign Investment

Any non-resident investment in an Indian company is direct foreign investment. An Indian company would have indirect foreign investment if the Indian investing company is owned and controlled by non-residents. An Indian company is said to be ‘Owned and Controlled’ by ‘non-resident entities’, if more than 50% of the equity interest in it is beneficially owned by non-residents or if non-residents have the power to appoint a majority of its directors.

The entire investment of Indian company owned and controlled by non residents is considered indirect foreign investment (as demonstrated through Illustration 1), except where the investment is made in a wholly owned subsidiary(WOS) of the Indian company, then the downstream investment in the WOS of such Indian company would be a mirror image of the holding company(as demonstrated through Illustration 2); i.e. if non resident investment in the Indian company is 75%, then the indirect foreign investment in the WOS of Indian company would be 75%.

Any indirect foreign investment would be required to follow the same norms as a direct foreign investment such as entry route, conditionalities and sectoral caps. For the purpose of computation of indirect foreign investment, Foreign Investment in Indian company shall include all types of foreign investments i.e. FDI, investment by FIIs(holding as on March 31), NRIs, ADRs, GDRs, Foreign Currency Convertible Bonds (FCCB) and convertible preference shares, convertible Currency Debentures.

Remittance and Repatriation

The AD Category I bank can allow remittance of sale proceeds/remittance on winding up/Liquidation of Companies of a security (net of applicable taxes) to the seller of shares resident outside India, provided-

• the security has been held on repatriation basis
• the sale of security has been made in accordance with the prescribed guidelines and
• NOC / tax clearance certificate from the Income Tax Department has been produced

Dividends are freely repatriable without any restrictions, subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000, as amended from time to time.

Author: Neha Singhi

Contact: +91-33-40083385

neha@nehasinghi.com

Date: January 15, 2010

“Citizens never support a weak company and birds do not build nests on a tree that does not bear fruits” Minister Salman Khurshid quoted Arthshastra while introducing Corporate Governance Voluntary Guidelines 2009 (CGV Guidelines). These guidelines being recommendatory in nature, focus on fairness, transparency, accountability and responsibility by Indian Incorps. CGV Guidelines are set of standard practices which may be voluntarily adopted by the public companies, and big private companies. In the present article we have tried to capture significant policies of the CGV Guidelines and their implications.

The CGV Guidelines suggest guidelines with reference to the below:

An incorporated company has perpetual succession and separate legal identity; but it needs people to run it. The key driver of a company is its management, which includes its Board of Directors (BoD) and key Managerial personnel. A company is run by its management but there are several stakeholders in a company, such stakeholders[1] whose interest is directly or indirectly affected by the performance of company. The stakeholders are dormant and the day to day functions of a company are discharged by its management. The immense powers in the hand of management come along with greater responsibilities, however regrettably constant lapses have been found on the part of management in discharge of their duties and functions. Though there are various statutes and guidelines which govern the management of the company and its functioning, but undoubtedly there are some gray areas yet. Besides advocating transparency and increased disclosures in Annual Report, company’s website, and stock exchange website if company is listed, the guidelines have brought in clarity into certain standard corporate practices such as tenure of Independent Director, remuneration etc. The suggestive guidelines are a further step to strengthen the Corporate Governance framework for Indian Incorps.

Board of Directors

The Board should consist of a balanced combination of Executive Directors and Non-Executive Directors, so as to take a proper and reasoned decision. The Directors are appointed in a company in a General meeting as per the provisions of the Act, however the policies and terms of appointment of a Director vary from company to company and from director to director. The guidelines suggest formal letters of appointment to Non-Executive Directors and Independent Directors, clearly stating the term of the appointment, fiduciary duties, liabilities and remuneration of the appointed Director. The Non-Executive Directors and Independent Directors should be recommended by nomination committee, comprising of majority of Independent Directors including its Chairman. The nomination committee should clearly set out the guidelines  for evaluating the skill, knowledge, experience and effectiveness of individual directors. The Independent Directors should provide a certificate of independence at the time of appointment and thereafter annually. Further to ensure independent approach of Independent Directors, the maximum tenure for Independent Director in a company should not be more than six years, and a period of three years should elapse before such an individual is inducted again in the same company in any capacity. No individual may be allowed to have more than three tenures as Independent Director in a company and the maximum number of pubic companies in which an individual may serve as an Non-Executive Directors/Independent Directors should be restricted to seven. Independent Directors should be allowed to have the option and freedom to meet company management periodically to enable them to study and analyze various information and data provided by the company management.

A Chairman of a company presides over the Board meetings, he has a casting vote in decisions of the Board, whereas Chief Executive Officer(CEO) is incharge of day to day functioning and the management of affairs of the company. Both the positions are senior and helps to provide a check within the top level management. However in a number of Indian companies, the position of Chairman and CEO is enjoyed by the same individual, resulting in unfettered decision making power with a single individual. Thus the guidelines suggest separation of offices of Chairman & CEO, and a clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/CEO such as to promote balance of power .

Remuneration of Directors and senior managerial personnel is an arena which in most vulnerable to  conflict of interest between management and stakeholders. Though there are legal provisions set to govern managerial remuneration, there is a more discipline required through these guidelines which suggest to clearly lay down and disclose Remuneration Policy for the members of the Board and Key Executives. The companies should pay either a fixed contractual remuneration to its Non-Executive Directors, or an appropriate percent of the net profits of the company. The structure of compensation to Non-Executive Directors may have a fixed and variable component based on attendance in Board and Committee meetings. Whereas the Independent Directors should be paid adequate sitting fees(not stock options) which may depend upon the twin criteria of Net Worth and Turnover of companies. The company should form a Remuneration Committee for determining the remuneration of executive directors and executive chairman including compensation payments. The Remuneration committee should consist of at least three members, majority being non executive directors with at least one being an Independent Director. Further no director is to be involved in deciding his or her own remuneration. The committee should also determine principles, criteria and the basis of remuneration policy of the company and any deviation from such policy, should be brought to the notice of shareholders with justification/reasons.

Responsibilities of the Board

1. Generally the Non-executive Directors and Independent Directors do not take active part in the day-day functioning of the company and may not be aware of the technical and operational details. The companies should have a proper induction program for Directors, also providing adequate training to familiarise them with the operational aspect of the company.
2. The Board should ensure that there are systems, procedures and resources available to ensure that every Director is supplied, in a timely manner, with precise and concise information in a form and of a quality appropriate to effectively enable/discharge his duties. The Directors should be given substantial time to study the data and contribute effectively to Board discussions.
3. The Board, its Audit Committee and its executive management should collectively identify the risks impacting the company’s business and document their process of risk identification, risk minimization, risk optimization as a part of a risk management policy; and should make disclosure in the Directors’ Report..
4. A formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
5. The Board should place systems to ensure Compliance with Laws, to safeguard shareholders’ investment and the company’s assets. It should review of the effectiveness of the company’s system of internal controls and should report to shareholders.

Audit Committee of Board

Section 292A requires every company with a paid up capital not less than five crores to have a Audit Committee to ensure compliance of internal control systems. Listing agreement has also provision for Audit Committee, which is applicable to listed companies. Now, the guidelines also suggest that the companies should have at least a three-member Audit Committee, with Independent Directors constituting the majority. The Chairman of such Committee should be an Independent Director. All the members of audit committee should have knowledge of financial management, audit or accounts. The Audit Committee should have the responsibility to -

• monitor the integrity of the financial statements of the company;
• review the company’s internal financial controls, internal audit function and risk management systems;
• make recommendations in relation to the appointment, reappointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor;
• review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process.
• monitor and approve all Related Party Transactions including any modification/amendment in any such transaction.

Auditors

The Statutory Auditors of a company verifies and states that the financial statements of the company reflect a true and fair view of the state of affairs of the company. The Auditor acts as a watchdog and protect the interest of the stakeholders. The CGV Guidelines suggest appointment of Auditors should be referred by the Audit Committee. Every company should obtain a certificate of independence from the auditor certifying his/its independence and arm’s length relationship with the client company.

Since the havoc created by Satyam episode in December 2008, where the leading audit firm failed to check deep irregularities in the financial statements of a giant IT company leading to fraud of billions of rupees of a publicly listed company, there has been constant attempts to make and implement a rule for rotation of Auditors. The CGV Guidelines suggest that a policy of rotation of auditors should be adopted where a Audit partner should be rotated once every three years, whereas an Audit firm may be rotated once every five years. A cooling off period of three or five years should elapse before a partner or audit firm respectively, can resume the same audit assignment.

Further to strengthen the independence and credibility of the internal audit process, an internal auditor should be appointed, not being an employee of the Company.

Secretarial Audit

Good corporate governance practices enhance companies’ value and stakeholders’ trust; hence it is essential to ensure transparent, ethical and responsible governance of the company. A company can ensure standard corporate governance practices through Secretarial Audit by an Independent Professional.

Institution of mechanism for Whistle Blowing

The term whistleblower derives from the practice of English (policemen), who would blow their whistles when they noticed the commission of a crime. The whistle would alert other law enforcement officers and the general public of danger. In corporate parlance, whistle blowing is a mechanism for employees to raises a concern about wrongdoing occurring in an organization or body of people, such as suspected fraud or violation of the company’s code of conduct or ethics policy. The guidelines suggest to set up whistle blowing mechanism to track frauds or non-violation occurring in the company. However it is also essential to have adequate safeguards against victimization of employees who avail the mechanism.

Conclusion

“Good corporate governance practices are a sine qua non for sustainable business that aims at generating long term value to all its shareholders and other stakeholders”. It is strong fundamentals and ethical behavior in a company that can help it overcome huge crisis. Compliance with good governance practices should not be regarded as regulatory requirement but rather as an opportunity and value proposition for organisations. Investors all around the world notice companies with clean governance, and this appreciation leads to higher valuation of such organisation. The CGV Guidelines is a benchmark for the corporate governance practices in the Indian Incorps, and hopefully the corporate world will make the best use of it.

Author: Neha Singhi

Contact: +91-33-40083385

neha@nehasinghi.com

Date: January 8, 2010