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Rationalization and Liberalization of ECB Policy by the Reserve Bank of India

07 May, 2018 | Legal

The Reserve Bank of India (RBI) after receiving suggestions from the corporates and other entities on relaxing the existing External Commercial Borrowings (ECB) framework has decided, in consultation with the Government of India, to further rationalize and liberalize the ECB guidelines. The following amendments have been made with effect from 27th April, 2018:

(i) Rationalization of all-in-cost for ECB under all tracks and Rupee Denominated Bonds (RDBs):

RBI has stipulated a uniform all-in cost ceiling of 450 basis points over 6 month USD LIBOR (or applicable benchmark for respective currency) for Track I and Track II. For Track III and RDBs all-in cost will be the prevailing yield of the Government securities subject to the maturity period.

(ii) Revisiting ECB Liability to Equity Ratio provisions:

For ECB raised from direct foreign equity holders under the automatic route, the ECB Liability to Equity Ratio has been increased from 4:1 to 7:1. However, this ratio will not be applicable if the total of all ECBs raised by an entity is up to USD 5 million or equivalent.

(iii) Expansion of Eligible Borrowers’ list for the purpose of ECB:

The following has been added to the list of eligible borrowers:

  •  Housing Finance Companies (HFC) regulated by National Housing Bank (NHB) under all the three Tracks;
  • Port Trusts constituted under Major Port Trust Act, 1963 or Indian Ports Act, 1908 to avail ECBs under all Tracks;
  • Companies engaged in the business of maintenance, repair and overhaul and freight forwarding for ECBs denominated in INR only.

(iv) Rationalisation of end-use provisions for ECBs:

A positive end-use list was being prescribed for Track I and specified category of borrowers and a negative end-use list for Track II and III. It has now been decided to have only a negative list will be prescribed for all Tracks. The negative list for all Tracks would include the following:

a) Investment in real estate or purchase of land except when used for affordable housing as defined in Harmonised Master List of Infrastructure Sub-sectors notified by Government of India, construction
and development of SEZ and industrial parks/integrated townships.

b) Investment in capital market.

c) Equity investment.

Additionally, for Track I and III, the following negative end users will also apply except when raised from Direct and Indirect equity holders or from a Group company, and provided the loan is for a minimum average maturity of 5 years:

d) Working capital purposes.

e) General corporate purposes.

f) Repayment of Rupee loans.

Finally, for all Tracks, the following negative end use will also apply:

On-lending to entities for the above activities from (a) to (f).


Supreme Court Says Foreign Law Firms Cannot Practice Full-Time In India

15 Mar, 2018 | Legal

The Supreme Court today ruled that foreign law firms cannot practice in India, but allowed international lawyers to “fly in and fly out” to provide legal advice to their clients in India. The Apex Court also held that the foreign lawyers can appear in International Commercial Arbitration (ICA) subject to relevant institutional framework and rules. The Court through this judgment, partially upheld the 2012 judgment of the Madras High Court holding that foreign lawyers could visit India for a temporary period for the purpose of giving legal advice.

While hearing the matter, Justice Adarsh Kumar Goel opined that, “Fly in and fly out would cover a casual visit and not amount to practice.” This implies that foreign lawyers may fly in and out to advise on international law aspects in cases where they are involved, but they cannot practice full-time. Along with this, the judges also observed that foreign lawyers could not be barred from coming to India for conducting arbitration proceedings in disputes involving international commercial arbitration but they would be subject to the code of conduct applicable to the legal profession in India. The court has additionally added that, the Bar Council of India has the powers to frame rules and regulate the conduct of foreign lawyers in this regard and rules may be framed keeping these directions in mind. This ruling directly affects the current position of foreign law firms operating in India.

The written copy of the judgement is still to be released.

Cabinet Approves The Arbitration And Conciliation (Amendment) Bill, 2018

10 Mar, 2018 | Legal

In an attempt to make the Indian arbitration stronger and more regularized, the Cabinet has approved the Arbitration and Conciliation (Amendment) Bill, 2018 for introduction in the Parliament. The Bill proposes to make the arbitration process user-friendly, cost-effective and to expedite speedy disposal.

One of the main objectives of the Bill is to facilitate speedy appointment of arbitrators through arbitral institutions designated by the Supreme Court or the High Court. Accordingly, the parties may directly approach the designated arbitral institutions for International Commercial Arbitration.

Salient Features

* The Bill provides to establish an independent body namely the Arbitration Council of India (“ACI”) which intends to make India a pivot of “independent and autonomous regime for institutionalized arbitration.” The ACI will grade arbitral institutions and accredit arbitrators by laying norms to promote and encourage arbitrations, conciliation, mediation and other dispute resolution mechanisms. The ACI is also required to maintain an electronic depository of all arbitral awards.

* It exclude International arbitration from all bounds of timelines and stipulates that the time limit for arbitral award in other arbitrations shall be 12 months from the completion of the pleadings by the parties.

* The arbitrator and the arbitral institutions are required to keep confidentiality of all the arbitral proceedings except the award. Further, an Arbitrator is also protected from suits or other legal proceedings for any action or omission done by him/her in good faith during the course of arbitration.

The Bill addresses problems like systemic delays, high costs, confidentiality issue, ineffective resolution and ensures quick enforcement of contracts along with minimizing hurdles of delay. It also aims at catalyzing cross-border business environment and to make India an attractive destination for the arbitration of international commercial disputes.

Supreme Court Directs to Constitute Expert Committee Against Defaulting Accounting Firms

02 Mar, 2018 | Legal

The Supreme Court of India has recently observed that Multi-National Accounting Firms (MAFs) are engaging in fraudulent ways while conducting business, totally against the prescribed code of conduct of accounting standards. In order to stop such prima facie violations of law, the center has been directed by the Supreme Court to constitute an Expert Committee to look into the irregularities. The matter was brought to the Apex Court through a Public Interest Litigation (PIL) highlighting the question of whether the MAFs having arrangement with Indian Chartered Accountancy Firms (ICAF’s) are operating in violation of law in force in a secretive manner to evade legal requisites.

The PIL was filed against the alleged malpractices of PricewaterhouseCoopers, which has been accused of violating various provisions of the Foreign Direct Investment (FDI) Policy, Reserve Bank of India (RBI) Act, the Foreign Exchange Management Act (FEMA) and the Code of Professional Conduct under the Chartered Accountants Act, 1949 (CA Act) by infusing foreign money in violation of the FDI norms, engaging in illegal accounting insurance policies and acquiring another auditing firm irregularly.

The Court considered various statutory provisions and inter alia noted that there have been violations under FEMA which lays down that no person resident outside India can make investment by way of contribution to the capital of a firm or a proprietary concern or any association of persons in India without permission of the RBI. Violations of provisions of the Companies Act were also observed, including payments of the insurance premium by three firms of PwC for benefit of other member firms, which is illegal. Further, Code of Conduct of the Chartered Accountants has also been said to be violated as the Code prohibit fee sharing and advertisements. MAFs violate the Code by using International brands and mixing other services with CA services. The court also opined that MAFs seem to be complying with these codes only “in form and not in substances” to defy the laid law.

After analyzing the malpractices being carried out, the Supreme Court held that accounting firms “could not be left to self-regulate themselves” and their regulatory aspect must therefore be looked into by experts in the Government. In wake of such resolution, the Apex Court directed the Central Government to constitute a three-member Committee for the better enforcement of the laws being violated, to consider the need for an appropriate new legislation and mechanism for oversight of profession of the auditors and the Enforcement Directorate and the Institute of Chartered Accountant of India (ICAI) has been directed to examine related issues for effective enforcement of the provisions of the FDI policy and the FEMA Regulations.

Such directions are bound to have repercussions on various players involved in the Accounting business with more stringent and stricter laws coming into effect in the near foreseeable future.

New definitions under the Companies Amendment Act, 2017

10 Jan, 2018 | Legal

With the rising concerns over misuse of black money in financing illegal activities and with an objective to tackle the issue of benami properties, the recently enacted Companies Amendment Act, 2017 (Amendment Act) has introduced new definitions of terms beneficial interest, significant beneficial owner and significant influence.

The definition of Beneficial Interest has been inserted through an amendment brought in Section 89 of the Companies Act, 2013:
Beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—
(i) exercise or cause to be exercised any or all of the rights attached to such share; or
(ii) receive or participate in any dividend or other distribution in respect of such share.

Another addition that has been made is with respect to associate company wherein the definition of ‘significant influence’ has been added. As per the new definition, Significant Influence means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement.

Further, Significant Beneficial Owner has been defined as every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as, over the company.
The law now prescribes that significant beneficial owner shall make a declaration to the company, specifying the nature of his interest and other particulars.

Cabinet approves 100% FDI in single brand retail via automatic route

03 Jan, 2018 | Legal

The Union Cabinet has approved a proposal to allow 100 percent Foreign Direct Investment (“FDI”) through automatic route in single brand retail. Currently, FDI up to 49 per cent is permitted under automatic route in single brand retail but beyond that limit, government’s approval is required. This move will envisage a more investor friendly environment to foreign players and will further boost and attract more FDI to boost economic growth.

After opening of 100 per cent FDI in single brand retail in 2014 (through government’s approval), many global players have already entered the Indian market. The approval through automatic route will further quicken the FDI clearance process and many foreign players may now enter the Indian market due to less clearance process.

It is also expected that the government will ease the FDI norms in the aviation and the construction sectors. A formal notification in this regard is expected today.

Companies (Amendment) Bill, 2017 passed by the Government

03 Dec, 2017 | Legal

The Companies (Amendment) Bill, 2017 (“the Bill”) has been passed by both the houses to become the law of the land. The amendments proposed in the Bill are broadly aimed at addressing difficulties faced by stakeholders in implementing of the Companies Act, 2013 (“the Act”). The Bill intends to strengthen corporate governance standards, initiate strict action against defaulting companies and help improve ease of doing business.

The Bill provides for stringent penalties in case of non-filing of balance sheet and annual return every year, which will act as deterrent to shell companies. Moreover, certain classes of profitable companies are required to shell out at least 2% of their three-year annual average net profit towards corporate social responsibility (CSR) activities. In case of non-expenditure, such entities are required to provide reasons for it to the ministry.

The Bill has been formulated: to align disclosure requirements in the prospectus with the regulations to be made by SEBI; for maintenance of register of significant beneficial owners and filing of returns in this regard to the ROC and; removal of requirement for annual ratification of appointment or continuance of auditor.

Other amendments make the offence of contravention of provisions relating to deposits a non-compoundable offence, requirement by the companies to attach the financial statement of associate companies and stringent additional fees of Rs 100 per day in case of delay in filing of annual return and financial statement etc. The bill provides for more than 40 amendments which will help in simplifying procedures, make compliance easy and take stringent actions against defaulting companies.

Bombay High Court upholds constitutional validity of RERA

28 Nov, 2017 | Legal

The Bombay High Court has upheld the constitutional validity of the recently enacted Real Estate (Regulation & Development) Act, 2016 (“RERA/Act”).
Several builders had challenged the legal validity of the Act and its various provisions in the High Courts of Bombay, Nagpur, Aurangabad, Bangalore, Jabalpur. Subsequently, the Government of India filed a transfer petition in the Supreme Court to club all the cases to be heard by the Apex Court, however, the Supreme Court directed the High Court of Bombay to hear the cases and further stayed all proceedings in other High Courts until High Court of Bombay pronounces it’s judgment.
The main legal challenge from builders to RERA was against Section 3 of the Act, which required registration of not just new but even ongoing construction projects that were yet to get completion certificates. The builders contended that they were arbitrarily being made retrospectively liable for delays and default on schedules set in the past. The builders also sought quashing of certain provisions, one which requires builders to deposit 70% of funds paid by buyers. The hon’ble High Court rejected these contentions and held that the provisions were regulatory or compensatory, not penal and therefore stand valid.
The High Court also upheld the validity of Section 7 and Section 8 which deals with the revocation of registration. The hon’ble court opined that the provisions were meant to push timely completion and that revocation does not necessarily take away the project from the developer. Similarly, Section 18 that makes builders liable to refund with interest to a buyer in case of revocation of registration, was also declared constitutionally valid.
While the court dismissed most of the builders’ pleadings, it allowed two pleas by them. The court allowed the RERA authority to grant extension of time, more than the statutory prescribed extension limit of one year, for project completion to developers in exceptional cases. The additional time, the court said is meant to be granted in compelling circumstances on a case-by-case basis. The court also struck down a provision that provided for appointment of bureaucrats as members of an appellate tribunal. In the constitution of a tribunal, majority members must be judges or judicial officers, the court added.
Following this ruling, home buyers in several states like Telangana, UP, Haryana, Maharashtra, Karnataka, Andhra Pradesh and Madhya Pradesh will be able to challenge the rules that had been diluted by the state governments to keep most delayed and “ongoing projects” out of RERA’s ambit.

FDI equity inflows in India grows by 17 percent

27 Nov, 2017 | Legal

In the wake of Standard & Poor’s (S&P) recent rating of the Indian economy, the Department of Industrial Policy and Promotion (“DIPP”) noted a 17 percent surge in Foreign Direct Investment (FDI) equity during April-September this fiscal. As per the DIPP’s ‘Make in India’ twitter handle, India’s FDI equity was reported to be USD 25.35 billion in the current fiscal year (FY 2017-18), up from USD 21.62 billion in the last year.
Further, it was reported that between April 2000 and September 2017, the total FDI inflow including equity inflows, reinvested earnings and other capital was USD 518.10 Billion.

Maharashtra brings clarity in RERA

26 Nov, 2017 | Legal

The Real Estate (Regulation and Development) Act, 2016 (“Act”) is a beneficial legislation enacted to balance the interest of all the stakeholders in the real estate sector. Under the Act, state governments have been mandated to frame rules for their respective states to regulate the real estate sector. A number of underlying complications with regard to the implementation of the Act have been identified since its inception. One of such ambiguity is the implications of section 15 of the Real Estate (Regulation and Development) Act, 2016.

Section 15 (1) of the said Act states as follows:
“The promoter shall not transfer or assign his majority rights and liabilities in respect of a real estate project to a third party without obtaining prior written consent from two-third allottees, except the promoter, and without the prior written approval of the Authority”

This provision raised an ambiguity as to whether change in internal shareholding, merger and acquisition of the promoter’s organization, enforcement of security by financial lender would amount to transfer or assignment of majority rights and liabilities of the promoter in respect of the real estate project thereby requiring the promoter to obtain 2/3rd consent of the allottees and consent of the Regulatory Authority. In this regard, the Maharashtra government has recently provided much needed clarity on the implication of section 15 of the Act under its Circulate No. 11/2017 (“Circular”).

Under the Circular, the Regulatory Authority has, to the satisfaction of all the stakeholders, clarified the following:
1. Internal shareholding: Changes in internal shareholding of promoter’s organization shall not require 2/3rd consent of allottees and the Regulatory Authority, provided such changes doesn’t affect the obligations and liabilities with respect to the allottees and the rights and liabilities of the promoter’s organization.

2. Conversion: Any conversion of the promoter entity from (i) partnership firm to LLP or private limited company, (ii) private limited company or unlisted company to a LLP or otherwise, (iii) proprietorship change by succession to legal heirs, would not require 2/3rd consent of allottees and the Regulatory Authority.

3. Merger / amalgamation: Amalgamation or merger voluntarily initiated by the promoter and wherein the registered project is transferred and vested with the amalgamating company shall be regarded as transfer and the promoter would require to seek 2/3rd consent of allottees and the Regulatory Authority. However, if the amalgamation or merger or de-merger of the companies is not regarded as transfer under Section 47 of the Income Tax Act, 1961 or where 75% of the shareholders remain same in the resultant company, such amalgamation or merger or de-merger shall not fall within the restriction stipulated under said Act.

4. Enforcement of security by lenders: In cases where financial institutions / creditors take over the real estate project by operation of law or by way of enforcing the security or mortgage, the promoter and/or the financial institutions / creditors are not required to seek consent as stipulated in section 15 of the Act. However, the promoter is required to inform the Regulatory Authority in writing within 7 days of being aware of the impending or potential transfer arising out of enforcement of security or mortgage.

It would be interesting to see how do other States react to this Circular and whether they would also follow the same or similar provisions as envisaged in the Circular.