Samagrata – February, 2023
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Open in new tab Comments on SEBI consultation paper on CG norms in HVDLEs
– Team Corplaw | corplaw@vinodkothari.com
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Read our write ups on the said consultation paper:
Samagrata – January, 2023
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Simplifying the KYC process and business identifier
Anita Baid, Vice President | finserv@vinodkothari.com
Backdrop
The regulations for conducting customer identification and due diligence by financial sector entities have been laid down by RBI and SEBI, in accordance with the provisions of Prevention of Money Laundering Act and Rules. Under the current regime, the KYC process extends from physical KYC to digital and video-based KYC as well. The physical process of collecting KYC documents and verifying the same involves a lot of paperwork. On the other hand, the Digital KYC Process is a facility that allows lenders to undertake the KYC of customers via an authenticated application, specifically developed for this purpose, hence making it a paperless process. The Digital KYC process, however, also requires physical interaction. Video-based KYC is both paperless and without any physical intervention.
Read more →Budget 2023 and Gift IFSC: Making Things Happen
Anirudh Grover, Executive | finserv@vinodkothari.com
Background and Existing Framework
The International Financial Services Centre (“IFSC”) situated in the GIFT city is deemed to be a quasi-foreign territory from the lens of Foreign Exchange Management Act, 1999 however a domestic area under the tax regime. The objective of setting up specified territory lies in the benefits an IFSC jurisdiction provides in the form of free flow of foreign transactions and investor confidence; this setting up is commonly termed as onshoring the offshore.
In order to materialize the underlying objective, a specific regulatory framework has been designed which includes the incorporation of the following major entities:
- Finance Companies: The concept of Finance Companies are pari materia to the concept of non-banking financial companies, the unified regulator IFSCA has issued regulations specifically dealing with the concept of Finance Companies. The detailed write up of which can be found in our write up.
- Fund Management Entities (‘FMEs’): FMEs are entities which act as pooling vehicles for various kinds of investors, this concept of FME’s is equivalent to the concept of Alternative Investment Fund. A designated regulatory framework has been specially established by the unified regulatory for governing the framework of FMEs in IFSC, the details of which can be captured from our write up
- Banking Units: As far as Banking Units are concerned, the IFSCA has outlined a framework through which Indian banks or foreign banks can set up their shop in the form of branches in IFSC GIFT City. The IFSCA (Banking) Regulations, 2020 are the principal regulations governing the Banking Units established in the IFSC GIFT City. My colleague has already covered the regulatory overview on this aspect in our write up.
Apart from these entities there are other entities as well which are running their businesses from IFSC GIFT City which includes Fintech Entities, Capital Market Intermediaries and Insurance Intermediaries. The Union Budget of 2022 paved the way for bringing fundamental changes in the IFSC jurisdiction which resulted in the establishment of a regulatory framework namely IFSCA (Setting up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022. By virtue of these regulations now Foreign Universities have been allowed to set up their base in IFSC. Further the Union Budget 2022 also laid the ground for establishment of an Arbitration Centre which would allow disputes to be resolved in record time.
Albeit these announcements came out to be a key in evincing interest in the IFSC jurisdiction however it is perceived that there are certain pivotal areas of law which require further modifications/clarifications which is expected to be a part of the Union Budget of 2023.
Read more →National financial information repository: One more or one for all?
– Lovish Jain, Executive | lovish@vinodkothari.com
Some days ago, Mr. Vinod Kothari had commented on a LinkedIn post :
“Do we realise how many places does a lender (NBFC, Bank) register information about a loan? There are 4 credit information companies (such as CIBIL) where the credit data, including performance history, is uploaded. If the exposure is Rs 5 crores or above, in the aggregate over the banking system, information goes on CRILC too.
RBI has recently written to NBFCs reminding them of the obligation to register details with NeSL, an information utility under IBC, irrespective of whether the provisions of Code apply (for example in case of individuals), or whether the lender in question is at all contemplating resorting to IBC as a remedy (for example, consumer loans).
If the loan is a secured loan, the details need to be filed with CERSAI. If the secured loan borrower is a company, details need to be filed with RoC too. If the security interest is on immovable property, one needs to file particulars with land registry. If the security interest is on motor vehicles, the hypothecation is registered with Vahan portal too.
Read more →A shocker for the bond markets: Withholding tax to apply on listed bonds, without grandfathering
Team Financial Services | finserv@vinodkothari.com
Section 193 of the Income Tax Act[1] provides for TDS payment in case of interest on securities. Currently listed debentures are exempt from TDS without any limit. The exemption comes way of clause (ix) of the proviso to sec. 193.
The said clause is now sought to be deleted. The deletion, if affirmed by the statute, will be effective from 1st April, 2023, thereby meaning that any interest paid by companies on listed bonds will now be subject to tax.
The amendment has a retroactive effect, as it applies even to bonds that may have already been issued. If the issuer and the investor have both entered into a securities transaction on the strength of the law then existing, and the bondholder suddenly comes under the purview of deduction of tax at source, this will be like acquiring a security with no safe harbor. It is notable that certainty of tax treatment for capital market transactions is an essential mainstay for the healthy growth of capital markets.
Read more →Corporate law changes: small steps towards procedural simplification
– Anushka Vohra, Manager | corplaw@vinodkothari.com
The Budget 2023, proposes certain amendments, partly towards ease of doing business, and partly for certain rationalization measures.
The major amendments proposed are as follows:
- CSR expense not to result into GST set off
We had in our previous article, dealt with the question whether,GST paid, while acquiring goods or services for CSR activities would give rise to an input tax credit. Section 17(5)(h) of the CGST Act excludes “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples” for the purpose of availing ITC on payment of GST. The term ‘gift’ is not defined anywhere in the CGST Act. However, in layman’s language, gift means a thing given willingly to someone without payment.
While, there isn’t any explicit clarification to say whether input tax credit will be available or not, we relied on certain judicial pronouncements, some of which confirmed the availability of ITC benefit, and some denied it.
The Budget 2023, proposes that section 17(5) of the CGST Act shall be amended to the effect that input tax credit shall not be available in respect of goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013.
Hence, in case of the company being subjected to the obligation of spending on CSR, the GST benefit will be denied to the company. The expression is clearly related to the obligation under CSR in terms of sec. 135 – therefore, this denial of ITC benefit will be applicable only in case of the company.
The effective date of the amendment will be 1st April, 2023. Hence, once the Budget proposals are passed, any acquisition of goods or services for CSR purposes will be denied the benefit of GST set off.
Read more →Meeting priority sector lending shortfalls: One more option
Aanchal Kaur Nagpal, Manager | finserv@vinodkothari.com
Background
All scheduled commercial banks (including Regional Rural Banks and Small Finance Banks) are required to undertake priority sector lending. RBI mandates PSL to account for at least 40% of a bank’s Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off‐Balance Sheet Exposure whichever is higher, in accordance with the RBI PSL guidelines[1].
The intent behind prescribing PSL limits for banks is to enable certain sections of the society, though fairly credit-worthy but unable to obtain credit from the formal financial/ banking system, to access adequate credit. These sectors do not seem to be economically lucrative but are indispensable for the overall development and growth of India’s economy.
Read more →Finance Bill 2023 amends section 56(2)(viib): How will it impact the startups?
– Abhirup Ghosh, Partner | finserv@vinodkothari.com
Background
The Finance Bill 2023 has proposed amendments to section 56(2)(viib) of the Income Tax Act, which deals with tax on closely held companies for issuance of shares to residents at a premium where the shares are issued at a value higher than the fair market value. The objective of the change is to expand the scope of the section and bring shares issued to non-residents into the reach of the section. This proposal will particularly hit start-ups, which mostly issue equity shares and compulsorily convertible preference shares (CCPS) to their investors, and in most of the start-ups, at valuations which are far higher than the fair values at the time of issuance.
Before we discuss the impact of the section, let us first understand the scope of the section at length.
Also, it is important to note that the focus of this article is to examine the potential impact of the amendment on startups, since, the majority of the foreign investments into closely held companies flow into the startups, therefore, this section will mostly affect the startup segment.
Read more →