2023 – Page 24 – Vinod Kothari Consultants

Residual income from REITs and InvITs now covered under section 56 of Income-tax Act.

February 1, 2023/0 Comments/in Budgetary Publications, Financial Services /by Kaushal Shah

– Kaushal Shah, Executive | kaushal@vinodkothari.com

Background

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are two of the most important investments in the real estate and infrastructure sectors. REITs provide investors with a way to invest in real estate without having to own physical assets, while InvITs allow investors to invest in infrastructure projects without taking on the risk associated with owning physical assets. Both REITs and InvITs offer investors an opportunity for diversification, income generation, and capital appreciation and also provide them with the option of liquidity. As per recent trends, they are becoming increasingly popular among both institutional and retail investors looking to diversify their portfolios.

One of the key aspects which make REITs & InvITs is the tax transparency they provide owing to their structure. The ‘pass-through’ status means that the income generated would be taxed in the hands of the unit holders, and that the business trust will not be liable to pay any tax on the same.

As per the extant provisions the taxation of REITs as a business trust shall be as per the following:

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Measures for promoting MSMEs: credit guarantees and timely payments

February 1, 2023/0 Comments/in Budgetary Publications, Financial Services /by Abhirup Ghosh

The MSME segment represents 30%[1] of the Gross Domestic Product of the country and is a key to India’s vision to become a USD 5 trillion economy. As a result, this has always been a focus area so far as macro-economic policy-making is considered.

During the present year’s budget, the FM highlighted that one of the key areas where the Government has worked on is ease of access to finance.

Access to finance has always been a problem for the MSMEs in the country, and the reasons for this are many, including lack of standardisation of business processes, lack of credit history, lack of formal collateral, etc. To plug the demand and supply gap in MSME financing, the Government of India has over the years launched several schemes to directly or indirectly channelise institutional finance to this segment.

Of the several initiatives taken by the Government, the one which has gained the most popularity is the Credit Guarantee Scheme for Micro & Small Enterprises. To operationalise this, the GOI and SIDBI together formed the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). The CGTMSE primarily extends guarantee in case of collateral-free loans and loans with insufficient collateral to micro and small enterprises.

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Financial Regulators to have a consultative approach

February 1, 2023/0 Comments/in Budgetary Publications, Financial Services /by Timothy Lopes

– Timothy Lopes, Manager | finserv@vinodkothari.com

The need for a consultative approach

In a post on LinkedIn, Vinod Kothari stated: “Let us face it – the business world is increasingly governed by regulations, and not rule of law. Parliamentary law in most cases is skeletal, laying what may evasively be termed as the essential principles. Most substantive rules that define, delimit or deny business freedom are made by the regulators. In the world of finance and capital markets, the regulators are SEBI, RBI, IRDA, PFRDA, etc.

This note is to make a case that significant regulatory actions, involving change of the rules that govern business, must necessarily be first proposed for public comments. A sudden change in rules can cause great difficulty as the regulated would keep searching for the rationale behind the regulatory action. Quite often, regulators come back and say: we have our own observations. But how does one justify the results of regulatory experience not being shared with the regulated? How does one conclude that the observations of the regulator are unbiased, not myopic, or that the proposed rule-making by the regulator is based on a wrong premise or flawed understanding, or that a proposed rule will not do a damage? There are occasions when a regulatory action may have to be taken without the benefit of prior discussion, but this is exceptional. Perhaps, such an action is justified when the regulator has to act abruptly, or the balance of convenience lies in immediate implementation. But for such exceptional cases, one is not able to make a case for a change in rules that takes people by surprise.

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India’s “green growth”: is the green skin-deep?

February 1, 2023/0 Comments/in Budgetary Publications, Corporate Laws, Sustainability, Sustainability /by Staff

– Payal Agarwal, Deputy Manager | corplaw@vinodkothari.com

Talking about green growth may seem like rhetoric. From policy-makers to economists, from corporate governance experts to environmentalists, everyone seems to be having “green growth” on the top of the agenda.

The Economic Survey dedicated a full chapter to climate change and related issues. The Budget also has green growth as one of the seven saptarishis, to guide the FM’s plans for our financial future.

Need of the hour

India has been taking small steps towards reaching its commitment to the net-zero emissions goal by 2070, as compared to a majority of countries committing to reach the net-zero targets by 2050. While the country contributes to a very low percentage of global emissions (only 4% of the cumulative global emissions from the period 1850-2019^[1]), the global nature of the problem of climate change is what makes the country equally vulnerable to the problem, if not more. Further, given its long coastline, monsoon-dependent agriculture, and large agrarian economy, India is considered to be one of the most vulnerable countries to the climate change issue^[2].

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Market-linked debentures: Is it the end of the market for them?

February 1, 2023/5 Comments/in Budgetary Publications, Capital Markets, Financial Services, Taxation /by Aanchal Kaur Nagpal

– Aanchal Kaur Nagpal, Manager | finserv@vinodkothari.com

Tax proposal to tax gains on MLDs as short-term capital gains

The Budget proposes that the capital gains on market linked debentures (MLDs) will be taxed as short term capital gain.

Presently, MLDs are mostly listed, and as listed securities they have 2 advantages:

First , there are exempt from withholding tax. This is one of the carve-outs in sec. 193
Secondly, the holding period for capital gain purposes is 12 months, as opposed to 36 months in case of normal capital assets. This comes from sec. 2 (42A) of the Act. Therefore, if a listed security is held for at least 12 months, and transferred or redeemed thereafter, the gain will be taxed as long term capital gain, with a rate as low as 10%.

Market linked debentures is a concept that prevails world-over, with different names such as equity-linked bonds, index-linked bonds, etc. However, in India, the issuance of MLDs was being exploited as a regulatory and tax arbitrage device.

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Securitisation of stressed loans: Opportunities and structures

January 31, 2023/0 Comments/in Financial Services, RBI, Securitisation /by Timothy Lopes

Comments on RBI’s Discussion Paper on Securitisation of Stressed Assets Framework (SSAF) dated January 25, 2023

Timothy Lopes, Manager | Vinod Kothari Consultants Pvt. Ltd.

finserv@vinodkothari.com

Background

At present, in India, there exists a framework for securitisation of standard assets only. in September, 2021 the RBI issued the ‘Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021’ (‘SSA Directions’)^[1], which deals with standard asset securitisation. Under the SSA Directions, the definition of standard assets does not include non-performing loans, i.e., only those assets with a delinquency up to 89 days, would qualify for securitisation under the SSA directions.

For assets that turn non-performing, i.e., 89+ days-past-due (‘DPD’), including those that retain the classification as the borrower has not been able to clear all his past arrears, the same can, at present, be sold under the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (‘TLE Directions’)^[2], which has a framework for sale of stressed assets (which includes non-performing assets). Technically, there is a process of “securitisation” of non-performing loans (‘NPLs’), by issuing “security receipts” (‘SRs’) against the same; however, the framework for issue and investing in SRs is quite different, and is normally not captured as a part of securitisation in the industry parlance^[3].

Assets sold through the TLE route require a complete arm’s length sale, without any credit support from the seller and there is typically no tranching. This results in substantial haircuts on these stressed loan pools. Further, most of the NPLs that face a problem in the current scenario are retail loans or re-performing loans (see discussion on re-performing loans later). These retail pools are not normally sold under the ARC route since ARCs lack the capability in this specific asset class and are more suited towards wholesale transactions.

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External Commercial Borrowings

January 30, 2023/3 Comments/in Corporate Laws, FEMA /by Vinita Nair Dedhia

– Vinita Nair, Senior Partner | corplaw@vinodkothari.com

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Tweezing out for dormancy: RBI intends to intensify regulatory audits of NBFCs

January 27, 2023/0 Comments/in Financial Services, NBFCs, RBI /by Anita Baid

By CS Anita Baid, Vice President, Vinod Kothari Consultants P. Ltd.

As per reports available on public domain^[1], the RBI intends to intensify regulatory audits of non-banking finance companies, to find dormancy, non-compliance, non clarity of business models, or other risks that the regulator may wish to check. The intent seems to be weed out the truant ones out of the crowd of over 9000 NBFCs that exist. It is a fact that in the recent years, the RBI has been granting lesser new registrations, and canceling more of existing registrations, causing the number to come down. It is also important to note that if the number of NBFCs looks overwhelming, it is not because so many companies are into real operation: it is because the regulations currently define a company investing its owned capital into financial investments, with absolutely no access to either public funds or customer interface, as an NBFC, by imputing the public interest that actually does not exist. The number would have been a lot lesser had the regulator had the realisation that if there are no public funds, no customer interface and investment of owned funds being done, there is no reason for the regulator to interfere, as the intent of the country’s Central Bank cannot be to regulate investment activity that one does with one’s own money.

While this issue remains to be advocated for a potential reform, in the meantime, it is important for NBFCs to brace up for the RBI’s inquisitorial interest.

This article is intended to help NBFCs to be better prepared for such regulatory interface.

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