GST loom on guarantee services, by Nidhi Bothra

Related party transactions always follow the presumption of not being at arm’s length and therefore tax provisions prescribe that the transactions should be undertaken at market value and be based on usual commercial terms, as if done with a third party. Transactions with related parties are always subject to scrutiny and are required to demonstrate that the transactions are driven by commercial understanding. The GST regime also prescribes for Read more

Directions on IT Framework for the NBFC Sector – RBI keen on implementing several operational requirements, by Anita Baid

In the era of technology, Information Technology (IT) aids plenty of resources to enhance the credit system of the country. Over the years, the Non-Banking Finance Company (NBFC) sector has grown in size and complexity. As the NBFC industry matures and achieves scale, its Information Technology /Information Security (IT/IS) framework, Business continuity planning (BCP), Disaster Recovery (DR) Management, IT audit, etc. Read more

Reporting Requirements of SFT for NBFC’s

The government has been scrambling since the demonetisation drive began to stay a step ahead of black money hoarders and to keep a check on transactions made by the companies. Many companies including NBFC’s are facing the wrath of the government’s policies moves in the recent times To add to it, the reporting of Statement of Financial Transaction under Section 285BA[1] of Income Tax Act 1961 has added more to their compliance requirements. Read more

Action Plan for NPA Ordinance -Sequel 2, by Vallari Dubey, 24th May, 2017

Complementing the Ordinance on Non-Performing Assets (NPA)[1] which originally brought a whole new breeze in the resolution space in India, RBI has come up with a press release as a further to the first step in crystallizing the concept as laid down in the Ordinance.  RBI has brought a lot of changes for the purpose of implementation of the NPA Ordinance. The Sequel two in the Ordinance story has been released in form of a press release by RBI dated 22nd May 2017, laying down the Action Plan to implement the NPA Ordinance[2].

Points of Action as Tendered

The Action Plan brings forth the relevant steps needed to be taken to arrange for resolution of stressed assets in the Banking Industry. Accordingly, the RBI proposes to set in the following important issues:

Modifications in and re-emphasizing the JLF Mechanism[3]

(i) It has been clarified that a corrective action plan could include flexible restructuring, Strategic Debt Restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A).

(ii) Amongst the changes being made for the aforementioned proposal, a quantum of changes has been in the JLF Mechanism. In line with the same, a latest notification by RBI has modified the existing quantitative criteria required under JLF mechanism to approve a resolution plan. By virtue of which, following changes have been effected:

Consent required for approval of proposal under JLF
Particulars Before RBI Notification w.e.f RBI Notification
By value 75% 60%
By number 50% 50%

(iii) Such banks who did not give their consent on the proposal approved by the JLF have to either exit by complying with the substitution rules within the stipulated time or adhere to the decision of the JLF.

(iv) Participating banks have been mandated to implement the decision of JLF without any additional conditionality to avoid any kind of red-tapism and fulfill the purpose of Corrective Action Plan under the said mechanism.

(v) The Boards of banks were advised to empower their executives to implement JLF decisions without further reference to them, which is again to avoid any unwanted delay in implementation of the proposal.

Oversight Committee

The Apex Bank proposes to revamp the existing Oversight Committee (OC) which currently comprises of two members only. Where the original committee was formed by the Indian Banks Association (IBA) in consultation with RBI, the reconstituted OC shall be under the direct guidance of RBI and is expected to consist of more members. A larger body shall be able to help dealing with the volume of cases referred to OC, which seems to be beyond those under S4A as required currently.

Resolution Framework under IBC

The most crucial part of the Action Plan is supposedly formulating a formal framework, which was the sole intent behind the original NPA Ordinance. The framework is expected to establish a seamless mechanism to deliberate and take actions to refer cases for resolution under IBC. A committee shall be formed to devise and advise requisite plan and strategy for the matter which shall consist of Independent Board Members.

Rating Assignments

Additionally, RBI through this release of action plan, schemes out the suggestion to include the option of rating assignments. RBI believes that credit rating agencies ought to play an important role in the scheme of things. Rating assignments may help preventing rating-shopping or any conflict of interest that may arise otherwise and also exploring for the possibility for the payment to be made for from a fund to be created out of contribution from the banks and the Reserve Bank.

Unconditional Coordination and Cooperation from Stakeholders

The Reserve Bank notes that the proper exercise of the enhanced empowerment would require coordination with and cooperation from several stakeholders including banks, ARCs, rating agencies, IBBI and PE firms, to which end the Reserve Bank would be holding meetings in the near future with these stakeholders.

Why taking prompt steps is important?

Both the original ordinance and the action plan focuses on the term “stressed assets”. It is very much settled that the problem of bad loans in the country is on its worst. If not now then there probably is no later in this scenario.

Making the law in form of an ordinance and taking prompt steps in its implementation are all evidence of how keen and active the Government has become in clearing the balance sheets of the banks and wiping off stressed assets in the nation.

What numbers say?

A latest report issued by McKinsey & Co. titled, “Mastering new realities – A blueprint to transform Indian banking”, May 2017[4], drills down the case and presents an appalling picture.

According to the numbers presented in the report (See Picture 1), the quantum of distressed loan in the country crossed INR 10 lakh Crores in December 2016.

It further highlights the problem for the public-sector banks (PSBs), where stressed assets have surpassed their net worth. Evidently, current provision levels in the bank are seem to be insufficient to beat the odds, with a gap of nearly INR 600,000 crores between the level of stressed assets and the provisions made. It is believed that as these stressed assets continue to turn bad, the entire equity base of the banks could be at risk.


Source: Mckinsey&Co. Report

Going by the statistics of the report and the comments made thereunder, it is being suggested that if the situation as discussed above, prevails over a period of time from now, the results shall absolutely be disastrous.

This raises fear and makes us realize that we surely have come a long way as far our economy is concerned, but issues as bad as stressed assets in the banking sector may eat up all the hard work along the way for no good reason.

It is indeed direly crucial for the Government to do whatever it takes to pull back the country out of bad loans’ pit fall.





The author can be contacted at:

FAQs on impact of GST on financial services, by Financial Services Division, 24th May, 2017

  1. What is the meaning of financial services?

Financial services have no meaning ascribed to it under the GST regime. However, for the purpose of this write up, by financial services, we mean any supply of goods or services by a person to another person, meant for the purpose of extending credit support. This includes, but is not limited to the following: Read more

Section 94B: Thin capitalization rules may impede operations of NBFCs, by Nidhi Bothra & Kanishka Jain, 24th May, 2017

Genesis of the thin capitalization rules

The genesis of the thin capitalization rules lies in the distinction between tax treatment of debt and equity.  A company typically finances its projects either through equity and debt or mixture of both, equity being costly in terms of cost and ownership is less attractive than the debt financing where interest is a deductible expense. Debt is not only less expensive to service, it also reduces tax liabilities and enhances return on equity.

Tax deductibility of interest prompts many companies to classify large part of their capital as debt and then claim interest as expense. This is particularly done in the light of cross border transactions whereby profit is shifted to lower tax jurisdiction and the money is then remitted in the form of loan. The interest on the loans is then claimed as expense, thus lowering the tax burden on the company. The problem existed in many countries and MNCs in particular were found to use this mechanism to lower taxes. Thin capitalization rules were necessary in consideration of the solvency risks highly leveraged entities posed.

To prevent tax avoidance by excessive leveraging thin capitalization rules were deemed necessary. There is no benchmark rule for thin capitalization. In China debt to equity of 5:1 is acceptable, on the other hand,in the USA, debt to equity exceeding 1.5:1 is considered thinning of capital.

The matter was taken up at the G-20 summit and in a bid and ode to the G20 initiative, the Organization for Economic Co-operation and development (OECD) in its Base Erosion and Profit Shifting plan [1](BEPS) had taken up the issue of base erosion and profit shifting by comprehending on the problem of using excessive interest as a device to reduce taxable profits.

To this end, the Finance Minister had proposed the section 94B in the Income Tax Act, 1961 (“IT Act”) vide Budget 2017, applicable from the previous year 2017-18 i.e. Assessment year 2018-19 onwards. The new section corresponds to the BEPS Action 4 titled “Limiting Base Erosion Involving Interest Deductions and Other Financial Payments”. The provisions of the section and its effect on NBFCs has been discussed in this article.

Analysis of the Section 94B

Section in brief

The section provides for the restriction of interest payment made by the Indian company or a permanent establishment of the foreign company in India to its Associated Enterprise (“AE”) abroad. Interest payment shall be restricted to 30% of the earnings before interest, taxes, depreciation and amortization or interest paid to the AE, whichever is less. The disallowed potion will be allowed to be carried forward for the period of 8 years. Further, the provisions of the section would be applicable only if interest payment exceeds Rs. 1 crore.

We can understand this through a following example-

Suppose EBITDA of an Indian company is Rs 200 crores. The total interest payment is Rs 65 crores i.e. Rs.45 crores to Non AE and Rs.20 crores to AE. The disallowance shall be calculated as follows:

Lower of:

  • 65 – 30% of 200 i.e. 60 which equals Rs 5, or
  • Rs 20 payable to AE

Therefore the disallowed portion of Interest would be Rs 5 crores, which could be carried for 8 years.

Applicability of the Section

As per the provisions of the section 94B, the section would apply if:

  1. Borrower is either an Indian company or a permanent establishment of a foreign company in India.
  2. Lender is a company located abroad and is an AE within the meaning given to it under section 92A of the IT Act.
  3. The expense is deductible under the head PGBP.
  4. The expense is nature of interest, discount or other similar finance charges and includes debt in the form of loan, financial instrument, finance lease, financial derivative or any other arrangement giving rise to the above mentioned expense.

It is also pertinent to note that if the borrowing is not from an associated enterprise directly, but the lender in turn as borrowed from as associated enterprise of the borrower entity and has in turn on-lent, such debt shall also be deemed to be from an associated enterprise for the purpose of this section.

Meaning of Associated Enterprise

Section 92A of the Income Tax Act, 1961 provide for the meaning of an associated enterprise.

Section 92A (1) — The term associated enterprise in relation to another enterprise, means an enterprise –

  • which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
  • in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

(2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,—

(a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or

(b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or

(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or

(d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or

(e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or

(f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or

(g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or

(h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or

(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or

(j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or

(k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or

(l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or

(m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

The definition of associated enterprise is not limited to holding and subsidiary relationship. The meaning of associated enterprise, in essence, considers all such scenarios where an enterprise in substance is a) controlled, b) managed, c) policy making and decisions are influenced either by way of voting power, control over business, financial influence or control by another enterprise directly or indirectly.

Exceptions to the section

The thin capitalization rules in this section do not apply to banking and insurance companies. NBFCs however have not been added to the exclusion list.

Impact on NBFCs

It appears that the NBFCs would be greatly affected by the provisions of the section and the same has been summarized below:

  1. The section applies to NBFCs. This means that the interest expenses of the NBFCs will be subject to disallowance from income tax perspective if the threshold limits prescribed in the section are breached.
  2. Interest expense happens to be one of the major cost component of NBFCs as they simply take money from the investors and provide funds to the earn interest income. Therefore there will be a greater tax outflow in case the NBFC is funded by an AE and exceeds the threshold limit.
  3. Specifically so, in case the parent happens to be FOCC, then apart from the whole transfer pricing provisions and rules i.e. transaction at arm’s length price etc, the provisions of this section will apply, which will add to the cost burden of the NBFCs. Usually equity investment is limited to the regulatory requirements and the funding is by way of debt. Also the definition of associated enterprise is so expansive that there is likelihood that apart from holding companies other group entities may also get included in the definition of associated enterprise.
  4. Further, the section also has a proviso which states that so much interest as paid by the Indian company which had been implicitly or explicitly guaranteed by the AE would also be disallowed.
  5. Likewise for core investment companies having funds from associated enterprises will find it difficult to survive.
  6. The purpose of leveraging is to reduce tax burden, increase the return on equity and maintain cost of funds facilitating viability of business. The disallowance of the interest expenses pursuant to this section shall force companies to create a sort of balance between debt and equity such that the disallowance can be negated, which in turn will have an impact on the cost of funds as well.


In a way forward, it seems that it will have a huge impact on the following three sectors:

  • Start-ups– Start-ups are funded by the foreign companies who have stake in the companies and looking at the definition of AE which is very wide, it seems that the start-ups will face huge problems. Further, the star-ups procure funding on the guarantee given by the AE having stakes and the guarantee being covered under the ambit of the provisions will also affect the operations of the start-ups.
  • Infrastructure companies– Given the large funding requirement of the Infrastructure companies, these are largely funded by the AE and the provision is likely to impede operations of the Infrastructure companies.
  • NBFCs– Many of the big NBFCs have funding in form of debt from the AE and the provisions of the section will definitely affect the operations of the NBFCs. This now poses questions on cost of funds, spreads earned and viability of entities and also forces NBFCs to look at alternate funding options.

While there is parity intended between banks and NBFCs on the regulatory aspects, NBFCs missing from the exclusion list for applicability of the section, certainly has negative impact on the fund costs and ability to do business.


The authors can be contacted at:;

RBI cracks whip on Joint Lenders’ Forum, by Abhirup Ghosh


The Reserve Bank of India, on 5th March, 2017, came out with a notification[1] (Notification) to tweak the norms for constitution and operation of Joint Lender’s Forum (JLF) which was originally introduced in February, 2014.

To do recap, the original framework requires formation of joint lenders’ forum upon an account becoming SMA-2 to devise a corrective action plan (CAP) to revive it. Under the CAP, the lenders have three options – first, rectification of the account without changing any terms of the financial arrangement, second, restructuring of the account which involves change in the terms and conditions of the financial arrangement and lastly, if the other two fails, then the lenders may decide to initiate recovery proceedings against the borrower. Read more

Is the two-section ordinance key to India’s bulging NPA crisis?

By Vinod Kothari, (
The much-awaited ordinance, expected to make a tangible impact on India’s crisis of piling non-performing assets (NPA), was signed into law by the President on 5 May 2017. The Ordinance, consisting of barely two sections, makes amendments to the regulatory framework of banking in India, the Banking Regulation Act. After reading the law, one is forced to ask if this is what was holding up the resolution of NPA crisis in the country. Did it actually have to take all this time?

Read more

FAQs on section 269ST of the Income-tax Act, Kanishka Jain

Amid the brunt of the De-monetization, which was relatively fresh in the minds of the common people, Budget 2017 spelt out a loud message. The message was very clear; the government wanted the economy to be digitally equipped with no or very less cash transaction. While it seems impossible for the government to have an absolute cash free economy, but the tremors of the change can be felt. Read more