Contribution to disaster relief is now an eligible CSR activity

Munmi Phukon, Principal Manager
Vinod Kothari & Company
munmi@vinodkothari.com

Introduction

The Ministry of Corporate Affairs, on 30th May, 2019 issued a Notification amending Schedule VII of the Companies Act, 2013 (Act) which seeks to include disaster management, including relief, rehabilitation and reconstruction activities under CSR activities. The amendment is very crucial considering the recent history of natural disaster the country had witnessed and this was always an expectation of the corporate sector from the Government.

Provisions of law

The Act through Section 135 puts a social obligation on certain class of companies on the basis their turnover and net profits to spend 2% of the average net profits of past 3 years in the activities mentioned in the Schedule. However, the contribution to any disaster management/ relief activities was not specifically covered in the Schedule except for Prime Minister’s National Relief Fund. This was an insufficiency of law due to which the companies were, in a way, forced to restrict themselves to the PM’s Fund despite of their wish to contribute in other funds or to decline the benefit which the society deserves in such circumstances.

The two- fold benefit

Seemingly, the amendment has come out with a relief to the corporates as well as to the society at large. Therefore, the benefit is said to be a two- fold benefit which, in one hand, will ensure welfare of the society and the environment in need and in the other, it will help the corporates deployment of the minimum allocated CSR fund in needy areas in a more effective way.

Comments on draft Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations

Safe in sandbox: India provides cocoon to fintech start-ups

-Kanakprabha Jethani

kanak@vinodkothari.com, finserv@vinodkothari.com

Published on April 22, 2019 | Updated as on August 26, 2019

Background

April 2019 marks the introduction of a structured proposal[1] on regulatory sandboxes (“Proposal”). ‘Sandboxes’ is a new term and has created a hustle in the market. What are these? What is the hustle all about? The following article gives a brief introduction to this new concept. With the rapidly evolving entities based on financial technology (Fintech) having innovative and complex technical model, the regulators have also been preparing themselves to respond and adapt with changing times. To harness such innovative business concepts, several developed countries and emerging economies have recognised the concept of ‘regulatory sandboxes’. Regulatory sandboxes or RS is a framework which allows an innovative startup involved in financial technologies to undergo live testing in a controlled environment where the regulator may or may not permit certain regulatory relaxations for the purpose of testing. The objective of proposing RS is to allow new and innovative projects to conduct live testing and enable learning by doing approach. The objective behind the framework is to facilitate development of potentially beneficial but risky innovations while ensuring the safety of end users and stability of the marketplace at large. Symbolically, RSs’ are a cocoon in which the startups stay for some time undergoing testing and growing simultaneously, and where it is determined whether they should be launched in the market. In furtherance to the recommendation of an inter-regulatory Working Group (WG) vide its Report on FinTech and Digital Banking1 , the Reserve Bank of India has released the draft ‘Enabling Framework for Regulatory Sandbox’ on April 18, 20192 . The final guidelines shall be released based on the comments of the stakeholders on the aforesaid draft.

Benefits and Limitations

Benefits:

  • Regulator can obtain a first-hand view of benefits and risks involved in the project and make future policies accordingly.
  • Product can be tested without an expensive launch and any shortcoming thereto can be rectified at initial stages.
  • Improvement in pace of innovation, financial inclusion and reach.
  • Firms working closely with RS’s garner a greater degree of legitimacy with investors and customers alike.

Limitations:

  • Applicant may tend to lose flexibility and time while undergoing testing.
  • Even after a successful testing, the applicant will require all the statutory approvals before its launch in the market.
  • They require time and skill of the regulator for assessing the complex innovation, which the regulator might not possess.
  • It demands additional manpower and resources on part of regulator so as to define RS plans and conduct proper assessment.

Emergence of concept of RS

The concept of RS emerged soon after the Global Financial Crisis (GFC) in 2007-08. It steadily gained prominence and in 2012, Project Catalyst introduced by US Consumer Financial Protection Bureau (CFPB) finally gave rise to the sandbox concept. In 2015, UK Government Office for Science exhibited the benefits of “close collaboration between regulator, institutions and FinTech companies from clinical environment or real people” through its FinTech Future report. In 2016, UK Financial Conduct Authority launched its regulatory sandbox. Emergence of RS in India In February 2018, RBI launched report of working group on FinTech and digital banking. It recommended Institute for Development and Research in Banking Technology (IDRBT) as the entity whose expertise could run RS in India in cooperation with RBI. After immense deliberations and research, RBI announced its detailed proposal on RS in April 2019. Some of the provisions of the proposal are described hereunder.

Who can apply?

A FinTech firm which fulfills criteria of a startup prescribed by the government can apply for an entry to RS. Few cohorts are to be run whereby there will be a limited number of entities in each cohort testing their products during a stipulated period. The RS must be based on thematic cohorts focusing on financial inclusion, payments and lending, digital KYC etc. Generally , 10-12 companies form part of each cohort which are selected by RBI through a selection process detailed in “Fit and Proper Criteria for Selection of Participants in RS”. Once approval is granted by RBI, the applicant becomes entity responsible for operating in RS. Focus of RBI while selecting the applicants for RS will be on following products/services or technologies:

Innovative Products/Services

  • Retail payments
  • Money transfer services
  • Marketplace lending
  • Digital KYC
  • Financial advisory services
  • Wealth management services
  • Digital identification services
  • Smart contracts
  • Financial inclusion products
  • Cyber security products Innovative Technology
  • Mobile technology applications (payments, digital identity, etc.)
  • Data Analytics
  • Application Program Interface (APIs) services
  • Applications under block chain technologies
  • Artificial Intelligence and Machine Learning applications

Who cannot apply?

Following product/services/technology shall not be considered for entry in RS:

  • Credit registry
  • Credit information
  • Crypto currency/Crypto assets services
  • Trading/investing/settling in crypto assets
  • Initial Coin Offerings, etc.
  • Chain marketing services
  • Any product/services which have been banned by the regulators/Government of India

For how long does a company stay in the cocoon?

A cohort generally operates for a period of 6 months. However, the period can be extended on application of the entity. Also, RBI may, at its discretion discontinue testing of certain entities which fails to achieve its intended purpose. RS operates in following stages:

S.No. Stage Time period Purpose
1 Preliminary screening 4 weeks The applicant is made aware of objectives and principles of RS.
2 Test design 3 weeks FinTech Unit finalises the test design of the entity.
3 Application assessment 3 weeks Vetting of test design and modification.
4 Testing 12 weeks Monitoring and generation of evidence to assess the testing.
5 Evaluation 4 weeks Viability of the project is confirmed by RBI

 

An alternative to RS

An alternative approach used in developing countries is known as the “test and learn” approach. It is a custom-made solution created by negotiations and dialogue between regulator and innovator for testing the innovation. M-PESA in Kenya emerged after the ‘test-and-learn’ approach was applied in 2005. The basic difference between RS and test-and-learn approach is that a RS is more transparent, standardized and published process. Also, various private, proprietary or industry led sandboxes are being operated in various countries on a commercial or non-commercial basis. They conduct testing and experimentation off the market and without involvement of any regulator. Asean Financial Innovation Network (AFIN) is an example of industry led sandbox.

Globalization in RS

A noteworthy RS in the Global context has been the UK’s Financial Conduct Authority (FCA) which has accepted 89 firms since its launch in 2016. It was one of the early propagators to lead the efforts for GFIN and a global regulatory sandbox. Global Financial Innovation Network (GFIN) is a network of 11 financial regulators mostly of developed countries and related organizations. The objective of GFIN is to establish a network of regulators, to frame joint policy and enable regulator collaboration as well as facilitate cross border testing for projects with an international market in view.

Final framework for RS

RBI introduced final framework[2] for the RS on August 13, 2019 which is almost on the same lines as the Proposal as mentioned above. However the RBI has relaxed the minimum capital requirement to Rs 25 lakhs in place of Rs. 50 lakhs as required under the draft framework with a view to expand the scope of eligible entities.

Conclusion

Regulatory sandboxes were introduced with a motive to enhance the outreach and quality of FinTech services in the market and promote evolution of FinTech sector. Despite certain limitations, which can be overcome by using transparent procedures, developing well-defined principles and prescribing clear entry and exit criteria, the proposal is a promising one. It strives to strike a balance between financial stability and consumer protection along with beneficial innovation. It Is also likely to develop a market which supports a regulated environment for learning by doing in the scenario of emerging technologies.

[1] https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=46843

[2] https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=938

 

Press Release: Central Bank of Nigeria appoints Vinod Kothari Consultants for review and drafting of law on securitisation

The Central Bank of Nigeria (CBN), apex banking authority of the Nigeria, has appointed Vinod Kothari Consultants Pvt. Ltd. (VKC) for review and drafting their domestic law to govern securitisation transactions. The initiative by the apex authority is a part of their Financial System Strategy 2020.

VKC is expected to facilitate enactment of the legislation and regulatory framework for deployment of Asset Backed Securities in banking and capital markets in Nigeria.

VKC has more than two decades of experience in structured finance in and outside India. Vinod Kothari, Director of the firm, is internationally recognised as a trainer, consultant and author on structured finance. In the past, VKC was appointed by the regulatory authorities of Sri Lanka and South Africa to assist them in drafting their law on securitisation.

Vinod Kothari quoted:

Nigeria is rich in natural resources, and is, therefore, a potential issue of future flows based securities. Additionally, the country is an emerging economic force, and therefore, needs to have world-class infrastructure of financial laws in place. In light of this, it is so heartening to get a chance to contribute to the development of securitisation in Nigeria.

Update 07.02.2019- Guidelines on Reporting and Monitoring of Frauds in HFCs

Guidelines on Reporting and Monitoring of Frauds in Housing Finance Companies

 

To facilitate the reporting and monitoring system relating to fraudulent transactions reported by HFCs, NHB issued “Guidelines on Monitoring of Frauds in Housing Finance Companies, 2018” (“Guidelines”) effective from February 05, 2019. The Guidelines shall apply to all Housing Finance Companies registered with the NHB.

Key responsibilities of HFCs

  1. Place a reporting system for recording frauds without any delay
  2. Fix staff accountability in respect of delays in reporting of fraud cases to the NHB.
  3. Adhere to the timeframe fixed for reporting frauds
  4. Nominate an official of the rank of General Manager or equivalent who will be responsible for submitting all the returns and reports to the NHB
  5. Take precautions to ensure that the cases reported by them are duly received by the NHB.
  6. Disclose the amount related to fraud, reported in the company for the year in their balance sheets.
  7. Quarterly Review of Fraud:
  • Information relating to frauds for the quarters ending March, June, September and December shall be placed before the Board of Directors during the quarter following the quarter to which it pertains.
  • Audit Committee of the Board of HFCs shall review and monitor the frauds involving an amount of Rs. 50 lakh and above
  1. Annual Review: HFCs should conduct an annual review of the frauds and place a note before the Board of Directors for information
  2. Make provisions, in case of accounts classified as ‘fraud’, to the full extent irrespective of the value of security.

Classification of fraud

In order to have uniformity in reporting, frauds have been classified as follows:

Fraud only when fraudulent intention is suspected / proved

 

Deemed to be treated as fraud (irrespective of the fraudulent intention)
a)      Negligence

b)      Cases of cash shortages of less than Rs. 10,000/-

c)      Irregularities in foreign exchange transactions

a)      Misappropriation and criminal breach of trust

b)      Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property

c)      Unauthorized credit facilities extended for reward or for illegal gratification.

d)      Cheating and forgery

e)      Cases of cash shortages more than Rs. 10,000/-

f)       Cases of cash shortages more than Rs. 5000/- if detected by management / auditor/inspecting officer and not reported on the occurrence by the persons handling cash.

g)      Any other type of fraud not coming under the specific heads as above

 

Reporting of Frauds

Reporting of fraud shall be done by referring to the following heads of frauds:

  1. Frauds involving – 1 lakh and above
  2. Frauds committed by unscrupulous borrowers
  3. Frauds involving t 1 crore and above
  4. Cases of attempted fraud

Following forms have been introduced for the purpose of reporting frauds:

 

FMR-1: Report on Actual or Suspected Frauds in HFCs

FMR-2: Report on Frauds Outstanding

FMR-3: Progress Report on Frauds of Rs. 1 lakhs and above

Read more

Update 01.02.2019- Key Changes in the Indian Stamp Act

Key changes

  • Definition of bonds will not include debentures;
  • Definition of debenture inserted which includes usance bills, commercial papers, certificate of deposits and other short terms instruments of original or initial maturity of one year or as provided by RBI.
    • Definition under Act, 2013 categorically excludes instruments covered under Chapter III-D of RBI Act, 1939.
  • Definition of instrument now includes a document, electronic or otherwise, created for transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded;
  • Definition of security also includes usance bills, commercial papers, certificate of deposits and other short terms instruments of original or initial maturity of one year or as provided by RBI.
  • Section 9A & 9B provides for levy of stamp-duty on following types of transactions:
Nature of transaction Stamp duty to be collected by Stamp duty to be collected from When On
Sale of securities through a stock exchange Stock exchange or clearing corporation Buyer At the time of settlement of transactions Market value of such securities
Transfer of securities by a depository, otherwise than on the basis of any transaction on stock exchange Depository Transferor/ Seller At the time of transfer Consideration amount
Issue of securities Depository Issuer At the time of creation or any change in records of a depository.

 

 

Market value of securities specified in allotment list
Issue of securities otherwise than on stock exchange or depository Issuer On each issue total market value of the securities
Sale or transfer or reissue of securities for consideration is made otherwise than

through a stock exchange or depository

seller or transferor or issuer on each such sale or transfer or reissue Consideration specified in such instrument

 

  • Rate shall be as provided in Schedule I. Accordingly, amendments have been made in Section 29 of the Act providing the details of the person who shall pay the duty.
  • Market value has been defined as well as explained under proviso to Section 21 as under:
Nature of security Market Value will be
Security traded in a stock exchange Trading price
Security transferred by depository but not traded in the stock exchange Consideration mentioned in the instrument.
Security dealt otherwise than in the stock exchange or depository Consideration mentioned in the instrument
Options in any security Premium paid by buyer
Repo on corporate bonds Interest paid by the borrower
Swap Only first leg of cash flow

 

  • The stock exchange or the authorised clearing corporation and the depository shall submit to the Government details of the transactions in the manner to be prescribed in the rules.
    • Failure to submit or submission of false document or declaration will be punishable with fine of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. [Section 62A (2)]
  • The amounts collected on behalf of State Government to be transferred to such State Government determined as under within 3 weeks of the end of each month:
Particulars State Government eligible to receive stamp duty
Where buyer is located in India Where the residence of buyer is located
Where buyer is located outside India Where the registered office of the trading member or broker of such buyer is located.

 

In case no such trading member or broker, where the registered office of participant is located.

Issue of securities by issuer otherwise than through a stock exchange or depository, Place where its registered office is located

 

  • Section 62A (1) provides fine payable in case of failure to collect duty or failure to transfer duty to the State Government within 15 days of expiry of the 3 weeks’ time specified above, which shall not be less than one lakh rupees, but which may extend up to one per cent. of the collection or transfer so defaulted.

Major changes in Schedule I

  • Duty on debentures (Article 27)
    • Central Government has the power to levy stamp duty on issue of debentures pursuant to Entry 91 of List I (Union List).
    • Article 27 has been amended to provide ad-valorem rate of duty on issue of debentures (0.005%) and on transfer and re-issue of debenture (0.0001%).
    • The exemption in case of issue of debentures by an incorporated company or body corporate in terms of a registered mortgage-deed stands omitted.
  • Duty on security other than debentures (Article 56A)
    • equity shares, preference shares, warrants.
    • Issue will be subject to stamp duty of 0.005%;
    • Transfer on delivery basis will be subject to 0.15%;
    • Transfer on non-delivery will be subject to 0.003%
    • Rate for derivatives also specified.

Our detailed article may be read here.

Update 01.02.2019- Highlights of Interim Budget, 2019

Taxation

Tax Rates

For Individuals For Corporates
Income tax slab/ rate remains the same

 

Turnover less than 250 cr to be taxed @ 25%

 

  Turnover more than 250 cr to be taxed @ 30%

 

Income from house property

  • Deduction amount of Rs 2 lakhs remain same in case of interest on housing loan, however the same will be available for two self-occupied properties in aggregate. (Section 24)
  • Benefit of notional rent to be nil is proposed to be extended to second self-occupied property, earlier this benefit was allowed to only one self-occupied property. (Section 23)
  • Extension of two years from the date of receipt of completion certificate is proposed in place of one year for considering the annual letting value as nil for building or land appurtenant thereto held as stock in trade. (Section 23)

Capital Gains

  • Individuals and HUFs having capital gains upto Rs 2 cr from transfer of a residential house may claim tax relief in respect of gains invested in the purchase or construction of upto 2 residential houses. (Section 54)

Income from Salaries

  • An increase in standard deduction of Rs 50,000 from Rs 40,000 or salary whichever is less is allowed as deduction. (Section 16)

Deductions

  • The affordable housing scheme has been extended for one more year i.e. the housing projects approved till 31st March, 2020 may avail the benefit. Deduction of 100% of the profit and gains derived from such business shall be available to those housing projects approved on or after 1st June, 2016 to 31st March, 2020 subject to fulfilment of specified conditions.

Tax Deducted at source

  • Threshold limit for deduction of TDS on interest income paid by banking company, co-operative banking society or post office cooperative is increased from Rs 10,000 to Rs 40,000. (Section 194A)
  • Threshold limit for tax deduction at source on rent is increased from Rs 1,80,000 to Rs 2,40,000. (Section 194- I)

Rebate for individuals

  • A full tax rebate to individual taxpayers having taxable annual income upto Rs 5 lakhs which was earlier restricted to Rs 3.5 lakhs. A deduction of 100% of income tax on the total income or Rs 12,500 whichever is less is allowed under this section. (Section 87A)

Customs Duty

  • To rationalize customs duties and procedures government has abolished duties on 36 capital goods.

Tax Administration

  • Returns, tax payments, assessment procedures etc are all being done electronically. The Government aims to process all returns in twenty-four hours and issue refunds immediately.
  • All verifications and assessments of returns selected for scrutiny proposed to be done electronically through anonymised back office, manned by tax experts and officials, thereby aiming elimination of personal interface between taxpayers and tax officers.

MSMEs

  • 59 minutes loan portal to enable easy access to credit for MSMEs.
    • The Finance Minister said that all GST-registered MSMEs will get 2% interest rebate on incremental loan of Rs. 1 crore.
  • Mandatory 25% procurement from MSMEs by CPSEs
    • Out of the 25% procurement mandated from MSMEs, 3% shall be reserved for women entrepreneurs
  • Mandatory registration of vendors on GeM

Agricultural Sector

  • Facility of extension of Kisan Credit Card scheme (KCC) to Animal Husbandry and Fisheries farmers.
  • Provide the benefit of 2% interest subvention to the farmers pursuing the activities of animal husbandry and fisheries, who availing loan through KCC, including an additional 3% interest subvention in case of timely repayment of loans.
  • For farmers affected by natural calamity, and who are provided funds via the National Disaster Relief Fund (NDRF), an interest subvention of 2%, topped with 3% will be given for the entire loan restructuring period.
  • Government is launching a historic programme namely “Pradhan Mantri KIsan SAmman Nidhi (PM-KISAN)”. Under this programme, vulnerable landholding farmer families, having cultivable land upto 2 hectares, will be provided direct income support at the rate of Rs. 6,000 per year.

Labour Sector

  • Employee contribution in pension scheme has been kept intact and the government contribution has been increased from INR 3,500 per month to INR 7,000 per month and the maximum ceiling of the pay has been increased from INR 10,000 per month to INR 21,000 per month.
  • In the event of death of a labour during service, the amount to be paid by EPFO has been enhanced from INR 2,50,000 lakh to INR  6,00,000 lakh.
  • The ceiling of payment of gratuity has been enhanced from INR 10,00,000 to INR 20,00,000.
  • The ceiling of ESI’s eligibility cover has been increased from INR 15,000 pm to INR 21,000 pm.
  • The Interim Budget has provisioned for a monthly pension of INR 3,000, with a contribution of INR only 100 per month, for workers in the unorganized sector to those 60 years of age and having monthly income upto INR 15,000.
  • The interim budget provides for establishment of National Programme on ‘Artificial Intelligence’ in order to take the benefits of Artificial Intelligence and related technologies to the people.

Prevention of Money Laundering Laws

  • Time period of attachment under section 8(3)(a) extends by a total of 275 days. The period of attachment by the Adjudicating Authority has changed to 365 days from the current period of 90 days.

To refer the amendments in stamp duty, refer our article here.

You can read our detailed analysis on the Interim Budget 2019 here.