Service Tax on Job Working Activity
November 27, 2008
For the purpose of "Business Auxiliary Service" the definition of section 65(19)(v) of Finance Act, 1994 (Service Tax) provides that an activity of "production or processing of goods for, or on behalf of, the client" is a taxable activity. However an activity which is amounting to manufacture within the meaning of section 2(f) of Central Excise Act, 1944 is excluded from the scope of service tax under "Business Auxiliary Service"
There is a wide confusion over applicability and taxability of job working activity because, there is wide gap in different interpretation of provisions of the provisions of service tax relating to Job working activity under Business Auxiliary Service.
It happens in generally that a principle who buys excise duty paid material (goods) and send the same to job worker for further processing. Many times the activity undertaken by the job worker is not amounting to manufacture.
In the present case the job worker was engaged in the following FBE Coating activities:
The process of FBE coating undertaken by the appellant is as under:
(a) Duty paid bars received from the customers, are cleaned in Short Blasting Machine using steel shot of abrasives.
(b) Bars are heated to around 220 to 240 C in induction heater.
(c) Epoxy powder is sprayed over the heated bars by Electrostatic Spray guns housed inside the Coating Booth.
(d) Epoxy powder on contact with hot bars melts and fuses with the shot blasted heated bar surface making a strong corrosion protection bond with bars.
(e) Bars are then cooled in a free flowing water quench tunnel.
(f) Thereafter Coated Bars are inspected to check quality of Coating and then dispatched back to the respective customers.
The FBE coated bars are returned to their customers and used in civil construction job like construction of dams, bridges, canals, channels, pipelines etc. The said coating is essentially carried out on the bars for the purpose of protecting them from corrosion.
After hearing the arguments and analyzing the provisions in details with reference to amendments made in the provisions with effect from June 2005, honorable CESTAT held that:
"…..In the present case, the appellant is a company having expertise in the FBE coating and are professional in the fields. Their services are being used by the main contractors in furtherance of providing their service to the State Road Development Corporation Ltd. As such, the said main contractors instead of themselves doing the job of epoxy coating are getting the same done from the appellants by utilizing their services.
….Having discussed the various issues in the preceding paragraphs, we hold that the appellants are liable to pay service tax in respect of the activity undertaken by them during the relevant period."
However, having the facts of the case, CESTAT gave the following reliefs to the appellant:
1 Benefit of Cenvat credit as per Cenvat Credit Rules, 2004 allowed on inputs and input services.
2 Penalty is waived by invoking the provisions of section 80
Thursday, November 27, 2008
PARTNERSHIP
INCORPORATION OF LIMITED LIABILITY PARTNERSHIP
INTRODUCTION:
Sec.2 (d) of the Limited Liability Partnership Bill 2008 ('Bill' for short) includes the limited liability partnership registered under the Limited Liability Partnership Act in the definition of a body corporate. Chapter III of the bill provides for the incorporation of the limited liability partnership.
INCORPORATION DOCUMENT:
Sec. 11(1) provides that for incorporation of a limited liability partnership, two or more persons associated for carrying on a lawful business with a view to profit shall subscribe their names to an incorporation document. The incorporation document shall-
Be in a form as may be prescribed;
· State the name of the limited liability partnership;
· State the proposed business of the limited liability partnership;
· State the address of the registered office of the limited liability partnership;
· State the name and address of each of the persons who are to be partners of the limited liability partnership of incorporation;
· State the name and address of the persons who are to be designated partners of the limited liability partnership on incorporation;
· Contain such other information concerning the proposed limited liability partnership as may be prescribed.
Besides there shall be filed along with the incorporation document, a statement in the prescribed form, made by either an advocate or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is engaged in the formation of the limited liability partnership and by any one who subscribed his name to the incorporation document, that all requirements of this Act and the rules made there under have been complied with, in respect of incorporation and matters precedent and incidental thereto. The incorporation document is similar that of the document prescribed for the companies to be registered under the Companies Act, 1956. The Companies Act provides that the Memorandum and Articles of the Association shall be accompanied along with the incorporation document. Even though the bill provides for the limited liability partnership agreement, the same is not made compulsory to file along with the incorporation document. The partnership agreement is necessarily to be filed along with the incorporation document. The Government has to consider this aspect while giving shape this bill as an act.
NAME OF LIMITED LIABILITY PARTNERSHIP:
Every limited liability partnership shall have either the words 'limited liability partnership' or the acronym 'LLP' as the last words of its name. No limited liability partnership shall be registered by a name which, in the opinion of the Central Government is-
Undesirable; or
· Identical or too nearly resembles to that of any other partnership firm or limited liability partnership or body corporate or a registered trade mark, or a trade mark which is subject of an application for registration, of any other person under the Trade Marks Act, 1999.
As like in the Companies Act, the name is to be reserved for limited liability partnership. A person may apply in such form and manner and accompanied by such fee as may be prescribed to the Registrar for the reservation of a name set out in the application as-
The name of a proposed limited liability partnership; or
· The name to which a limited liability partnership proposes to change its name.
Upon receipt of an application and on payment of prescribed fee, the Registrar may, if he is satisfied, subject to the rules prescribed by the Central Government in the matter, that the name to be reserved is not one which may be rejected on any ground reserve the name for a period of three months from the date of intimation by the Registrar.
REGISTERED OFFICE:
Every limited liability partnership shall have a registered office to which all communications and notices may be addressed and where they shall be received. A document may be served on a limited liability partnership or a partner or designated partner thereof by sending it by post under a certificate of posting or by registered post or by any other manner, as may be prescribed, at the registered office and any other address specifically declared by the limited liability partnership for the purpose in such form and manner as may be prescribed.
DESIGNATED PARTNERS:
Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India. In case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners. If the incorporation document specifies who are to be designated partners, such person shall be designated partners on incorporation, or states that each of the partners from time to time of limited liability partnership is to be designated partner, every partner shall be a designated partner.
An individual shall not become a designated partner unless he has given his prior consent to act as such to the limited liability partnership in such form and manner as may be prescribed. His consent shall be filed with the Registrar by the limited liability partnership in such form and manner as may be prescribed within thirty days of his appointment. An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed.
INCORPORATION:
The incorporation document shall be filed in such manner and with such fees, as may be prescribed with the Registrar or the State in which the registered office of the limited liability partnership is to be situated. The incorporation document may also be filed electronically. The Registrar under the Companies Act shall be Registrar for this purpose.
When all the requirements have been complied with the Registrar shall retain the incorporation document and register the incorporation document and give a certificate that the limited liability partnership is incorporated by the name specified therein. The Registrar may accept the statement filed along with the incorporation document as sufficient evidence that the requirements have been complied with. The certificate shall be signed by the Registrar and authenticated by his official seal. The certificate shall be conclusive evidence that the limited liability partnership is incorporated by the name specified therein.
EFFECT OF REGISTRATION:
On registration, a limited liability partnership shall by its name, be capable of-
Suing and being sued;
· Acquiring, owning, holding and developing or disposing of property, whether moveable or immovable, tangible or intangible;
· Having a common seal, if it decides to have one; and
· Doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.
CONCLUSION:
The process of incorporation of a limited liability partnership is the simplified one and the professionals may play a vital role in this work. The professionals are to be careful in making the statement which is to be attached with the incorporation document since the bill provides for punishment. The bill provides that if a person makes a statement which he knows to be false or does not believe to be true shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than ten thousand rupees but which may extend to five lakh rupees.
INTRODUCTION:
Sec.2 (d) of the Limited Liability Partnership Bill 2008 ('Bill' for short) includes the limited liability partnership registered under the Limited Liability Partnership Act in the definition of a body corporate. Chapter III of the bill provides for the incorporation of the limited liability partnership.
INCORPORATION DOCUMENT:
Sec. 11(1) provides that for incorporation of a limited liability partnership, two or more persons associated for carrying on a lawful business with a view to profit shall subscribe their names to an incorporation document. The incorporation document shall-
Be in a form as may be prescribed;
· State the name of the limited liability partnership;
· State the proposed business of the limited liability partnership;
· State the address of the registered office of the limited liability partnership;
· State the name and address of each of the persons who are to be partners of the limited liability partnership of incorporation;
· State the name and address of the persons who are to be designated partners of the limited liability partnership on incorporation;
· Contain such other information concerning the proposed limited liability partnership as may be prescribed.
Besides there shall be filed along with the incorporation document, a statement in the prescribed form, made by either an advocate or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is engaged in the formation of the limited liability partnership and by any one who subscribed his name to the incorporation document, that all requirements of this Act and the rules made there under have been complied with, in respect of incorporation and matters precedent and incidental thereto. The incorporation document is similar that of the document prescribed for the companies to be registered under the Companies Act, 1956. The Companies Act provides that the Memorandum and Articles of the Association shall be accompanied along with the incorporation document. Even though the bill provides for the limited liability partnership agreement, the same is not made compulsory to file along with the incorporation document. The partnership agreement is necessarily to be filed along with the incorporation document. The Government has to consider this aspect while giving shape this bill as an act.
NAME OF LIMITED LIABILITY PARTNERSHIP:
Every limited liability partnership shall have either the words 'limited liability partnership' or the acronym 'LLP' as the last words of its name. No limited liability partnership shall be registered by a name which, in the opinion of the Central Government is-
Undesirable; or
· Identical or too nearly resembles to that of any other partnership firm or limited liability partnership or body corporate or a registered trade mark, or a trade mark which is subject of an application for registration, of any other person under the Trade Marks Act, 1999.
As like in the Companies Act, the name is to be reserved for limited liability partnership. A person may apply in such form and manner and accompanied by such fee as may be prescribed to the Registrar for the reservation of a name set out in the application as-
The name of a proposed limited liability partnership; or
· The name to which a limited liability partnership proposes to change its name.
Upon receipt of an application and on payment of prescribed fee, the Registrar may, if he is satisfied, subject to the rules prescribed by the Central Government in the matter, that the name to be reserved is not one which may be rejected on any ground reserve the name for a period of three months from the date of intimation by the Registrar.
REGISTERED OFFICE:
Every limited liability partnership shall have a registered office to which all communications and notices may be addressed and where they shall be received. A document may be served on a limited liability partnership or a partner or designated partner thereof by sending it by post under a certificate of posting or by registered post or by any other manner, as may be prescribed, at the registered office and any other address specifically declared by the limited liability partnership for the purpose in such form and manner as may be prescribed.
DESIGNATED PARTNERS:
Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India. In case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners. If the incorporation document specifies who are to be designated partners, such person shall be designated partners on incorporation, or states that each of the partners from time to time of limited liability partnership is to be designated partner, every partner shall be a designated partner.
An individual shall not become a designated partner unless he has given his prior consent to act as such to the limited liability partnership in such form and manner as may be prescribed. His consent shall be filed with the Registrar by the limited liability partnership in such form and manner as may be prescribed within thirty days of his appointment. An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed.
INCORPORATION:
The incorporation document shall be filed in such manner and with such fees, as may be prescribed with the Registrar or the State in which the registered office of the limited liability partnership is to be situated. The incorporation document may also be filed electronically. The Registrar under the Companies Act shall be Registrar for this purpose.
When all the requirements have been complied with the Registrar shall retain the incorporation document and register the incorporation document and give a certificate that the limited liability partnership is incorporated by the name specified therein. The Registrar may accept the statement filed along with the incorporation document as sufficient evidence that the requirements have been complied with. The certificate shall be signed by the Registrar and authenticated by his official seal. The certificate shall be conclusive evidence that the limited liability partnership is incorporated by the name specified therein.
EFFECT OF REGISTRATION:
On registration, a limited liability partnership shall by its name, be capable of-
Suing and being sued;
· Acquiring, owning, holding and developing or disposing of property, whether moveable or immovable, tangible or intangible;
· Having a common seal, if it decides to have one; and
· Doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.
CONCLUSION:
The process of incorporation of a limited liability partnership is the simplified one and the professionals may play a vital role in this work. The professionals are to be careful in making the statement which is to be attached with the incorporation document since the bill provides for punishment. The bill provides that if a person makes a statement which he knows to be false or does not believe to be true shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than ten thousand rupees but which may extend to five lakh rupees.
replacement cost
Term of the Day - replacement cost
The amount it would cost to replace an asset at current prices. If the cost of replacing an asset in its current physical condition is lower than the cost of replacing the asset so as to obtain the level of services enjoyed when the asset was bought, then the asset is in poor condition and the firm would probably not want to replace it.
The amount it would cost to replace an asset at current prices. If the cost of replacing an asset in its current physical condition is lower than the cost of replacing the asset so as to obtain the level of services enjoyed when the asset was bought, then the asset is in poor condition and the firm would probably not want to replace it.
Wednesday, November 26, 2008
Hypothetical tax not an income
Hypothetical tax not an income accruing in India
In a recent judgment involving a foreign national, the Mumbai Income Tax Tribunal has held that hypothetical tax paid by an employer on behalf of the taxpayer is not an income accruing in India and can be claimed as a deduction by the employee from the gross salary.
The assessee, Roy Marshall, was an employee of British Airways. In the computation of total income in the tax return, the assessee deducted hypothetical tax withheld by his employer from gross salary. According to the contract agreement, the company had to bear additional tax burden arising out of his services in India and the assessee would bear only that part of the tax which he would have required to pay in his home country.
During the year, the assessee’s salary income was Rs 77 lakh and the company reimbursed Rs 35 lakh towards tax liability. Total income of the assessee thus became Rs 1.12 crore and with the maximum marginal rate of 44.8 per cent, the total tax liability came to Rs 50 lakh. The company had paid Rs 35 lakh, so the balance tax liability of Rs 15 lakh was borne by the assessee.
Though the taxpayer had paid his total tax dues in India, the income-tax assessing officer held that the hypothetical tax (Rs 35 lakh) should also form a part of the salary income. This became a bone of contention as the assessee may take a hit in his home country. According to the provisions of the Double Taxation Avoidance Agreement, the person may have taken a credit of Rs 15 lakh Indian taxes paid on an income of Rs 77 lakh in his home country tax return. However, if he would have to show that his salary income was Rs 1.12 crore in India, there could have been additional tax burden on him in his home country.
The tribunal relied on the judgment on a similar case of Jaydev H Raja, wherein it was held that the hypothetical tax does not form a part of the salary income taxable in India and the appellant was justified in reducing the same from his taxable salary.
It was held by the tribunal that income arising in India in the hands of the taxpayer is the actual salary plus the incremental tax liability arising on account of the Indian assignment. The amount of hypothetical tax withheld from the salary of the taxpayer is not an income accruing to him in India.
The ruling further held that as long as tax is paid on the income accruing in India, it is not relevant if the taxpayer takes credit of Indian taxes in his home country tax return.
Accordingly, the tribunal held that no deduction was actually claimed by the assessee on account of hypo tax as otherwise misconceived by the revenue authorities and deleted the addition made on this count.
In a recent judgment involving a foreign national, the Mumbai Income Tax Tribunal has held that hypothetical tax paid by an employer on behalf of the taxpayer is not an income accruing in India and can be claimed as a deduction by the employee from the gross salary.
The assessee, Roy Marshall, was an employee of British Airways. In the computation of total income in the tax return, the assessee deducted hypothetical tax withheld by his employer from gross salary. According to the contract agreement, the company had to bear additional tax burden arising out of his services in India and the assessee would bear only that part of the tax which he would have required to pay in his home country.
During the year, the assessee’s salary income was Rs 77 lakh and the company reimbursed Rs 35 lakh towards tax liability. Total income of the assessee thus became Rs 1.12 crore and with the maximum marginal rate of 44.8 per cent, the total tax liability came to Rs 50 lakh. The company had paid Rs 35 lakh, so the balance tax liability of Rs 15 lakh was borne by the assessee.
Though the taxpayer had paid his total tax dues in India, the income-tax assessing officer held that the hypothetical tax (Rs 35 lakh) should also form a part of the salary income. This became a bone of contention as the assessee may take a hit in his home country. According to the provisions of the Double Taxation Avoidance Agreement, the person may have taken a credit of Rs 15 lakh Indian taxes paid on an income of Rs 77 lakh in his home country tax return. However, if he would have to show that his salary income was Rs 1.12 crore in India, there could have been additional tax burden on him in his home country.
The tribunal relied on the judgment on a similar case of Jaydev H Raja, wherein it was held that the hypothetical tax does not form a part of the salary income taxable in India and the appellant was justified in reducing the same from his taxable salary.
It was held by the tribunal that income arising in India in the hands of the taxpayer is the actual salary plus the incremental tax liability arising on account of the Indian assignment. The amount of hypothetical tax withheld from the salary of the taxpayer is not an income accruing to him in India.
The ruling further held that as long as tax is paid on the income accruing in India, it is not relevant if the taxpayer takes credit of Indian taxes in his home country tax return.
Accordingly, the tribunal held that no deduction was actually claimed by the assessee on account of hypo tax as otherwise misconceived by the revenue authorities and deleted the addition made on this count.
cat among the pigeons
Setting the cat among the pigeons
Shardul S Shroff & Akila Agrawal / New Delhi November 24, 2008, 0:45 IST
The change in the creeping acquisition limits allows unscrupulous promoters to make a killing at the expense of small shareholders.
Sebi has, pursuant to its notification dated October 30, 2008, made amendments to the creeping acquisition limits available to promoters of listed companies. Until recently a person holding 15 per cent to 55 per cent stake in a listed company could acquire additional shares or voting rights up to 5 per cent per financial year without having to make a mandatory open offer. Any acquisition of further shares beyond 55 per cent required the acquirer to make an open offer. Pursuant to the recent amendment, Sebi has provided an opportunity to promoters holding more than 55 per cent but less than 75 per cent, to acquire a further 5 per cent stake in the company without making an open offer to the public shareholders. The 75 per cent will be read as 90 per cent for those companies which have a minimum public shareholding limit of 10 per cent pursuant to the first proviso of Regulation 11(2) which is applicable to the entire sub-regulation. This opportunity of acquiring 5 per cent is not available on an incremental basis every financial year but is a one-shot opportunity to further consolidate 5 per cent stake in the company. The amendment also specifies that the 5 per cent increase in shareholding by the promoter beyond 55 per cent shall be only through open market purchases, which surprisingly does not include a bulk deal. Moreover, acquisitions through a block deal or through preferential allotment have been expressly ruled out.
The statements made by the finance minister in the press indicate that the objective of this amendment is to boost the sagging stock market. However, the amendment itself does not prima facie appear to be a short-term measure as there is no specific time period up to which this window of creeping acquisition is available. If the stated purpose of an amendment is to cure a short-term ill, it is only reasonable to expect such an amendment to have an upfront time limitation which is preferable to any surprise move withdrawing the creeping facility.
Moreover, whilst one does appreciate Sebi’s move to boost the stock market during such turbulent times, it is open to debate whether the end justifies the method adopted by Sebi given the objectives of the Takeover Regulations. Any move to enable an existing controlling shareholder to further consolidate its shares should be balanced with the interests of ordinary investors. In the past, creeping acquisitions were originally introduced in the Takeover Regulations in 1997 on the recommendations of the Bhagwati Committee Report to enable persons in control of the company to consolidate their holdings or to build defences against takeover threats, provided it does not unduly affect the interests of shareholders. Prior to the recent amendment, there was a reasonable balance between the interests of the controlling shareholders in a competitive market and those of the small investor as one would assume that on reaching 51 per cent and above, a person can reasonably be assured of control over the company without having to worry about undue takeover threats. At the same time, if the promoter was interested in amassing further voting rights upto the maximum limit permitted under the listing agreement or even 100 per cent pursuant to a delisting offer, he had to provide relevant exit opportunities i.e. a fixed price offer under the Takeover Regulations with complete disclosures on all future plans relating to the target company followed by a delisting offer where the price is determined by the minority shareholders.
By permitting further acquisition of 5 per cent beyond 55 per cent, albeit through a narrow window of open market purchases sans bulk deals, Sebi has now rocked the delicate balance of the Takeover Regulations. Today, a controlling shareholder who holds beyond 55 per cent and is intending to delist the securities of the target company can buy 5 per cent in a depressed market and thereafter make a delisting offer. A delisting offer is deemed successful only if the public shareholding falls below the required minimum. Consequent to the 5 per cent acquisition, it is easier for the controlling shareholder to ensure success of the delisting offer. To further illustrate, an 85 per cent promoter holder can acquire 5 per cent through open market purchases and delist the securities as he needs just one share to be tendered for the offer to be successful. The promoter could always relist the securities after a period of two years and make huge gains as hopefully the bulls will be back in business in a couple of years.
Another change made by Sebi pursuant to the October 30, 2008 amendment is to permit an increase in shareholding or voting rights of the acquirer pursuant to a buyback without having to make an open offer or obtain specific exemption of Sebi, provided the promoter in question holds shares between 55 per cent to 75 per cent/90 per cent as the case may be. This change is welcome given the fact that one need not approach Sebi for an exemption, as has been the practice, for increase in shareholding pursuant to a buyback offer. However, it is necessary to point out that whilst the press release expressly states that the buyback exemption is permitted for 5 per cent per annum, the notification simply states 5 per cent with no reference to ‘per financial year’ which raises questions on the exact intent of Sebi. An even more welcome change would be to expressly exempt any increase in voting rights due to a buyback offer from the purview of Regulations 10,11 and 12 by way of an amendment to Regulation 3 of the Takeover Regulations.
The recent amendments to the Takeover Regulations seem to be a reactive approach to a volatile stock market rather than a strategic change in the policy. If the intention was only to bolster the stock market that could have been achieved by simply increasing the creeping acquisition limits permitted under Section 11(1) to 7.5 per cent or 10 per cent (up to 55 per cent) without having to tamper with fundamental provisions of the Takeover Regulations having a bearing on investor protection issues.
Shardul S Shroff & Akila Agrawal / New Delhi November 24, 2008, 0:45 IST
The change in the creeping acquisition limits allows unscrupulous promoters to make a killing at the expense of small shareholders.
Sebi has, pursuant to its notification dated October 30, 2008, made amendments to the creeping acquisition limits available to promoters of listed companies. Until recently a person holding 15 per cent to 55 per cent stake in a listed company could acquire additional shares or voting rights up to 5 per cent per financial year without having to make a mandatory open offer. Any acquisition of further shares beyond 55 per cent required the acquirer to make an open offer. Pursuant to the recent amendment, Sebi has provided an opportunity to promoters holding more than 55 per cent but less than 75 per cent, to acquire a further 5 per cent stake in the company without making an open offer to the public shareholders. The 75 per cent will be read as 90 per cent for those companies which have a minimum public shareholding limit of 10 per cent pursuant to the first proviso of Regulation 11(2) which is applicable to the entire sub-regulation. This opportunity of acquiring 5 per cent is not available on an incremental basis every financial year but is a one-shot opportunity to further consolidate 5 per cent stake in the company. The amendment also specifies that the 5 per cent increase in shareholding by the promoter beyond 55 per cent shall be only through open market purchases, which surprisingly does not include a bulk deal. Moreover, acquisitions through a block deal or through preferential allotment have been expressly ruled out.
The statements made by the finance minister in the press indicate that the objective of this amendment is to boost the sagging stock market. However, the amendment itself does not prima facie appear to be a short-term measure as there is no specific time period up to which this window of creeping acquisition is available. If the stated purpose of an amendment is to cure a short-term ill, it is only reasonable to expect such an amendment to have an upfront time limitation which is preferable to any surprise move withdrawing the creeping facility.
Moreover, whilst one does appreciate Sebi’s move to boost the stock market during such turbulent times, it is open to debate whether the end justifies the method adopted by Sebi given the objectives of the Takeover Regulations. Any move to enable an existing controlling shareholder to further consolidate its shares should be balanced with the interests of ordinary investors. In the past, creeping acquisitions were originally introduced in the Takeover Regulations in 1997 on the recommendations of the Bhagwati Committee Report to enable persons in control of the company to consolidate their holdings or to build defences against takeover threats, provided it does not unduly affect the interests of shareholders. Prior to the recent amendment, there was a reasonable balance between the interests of the controlling shareholders in a competitive market and those of the small investor as one would assume that on reaching 51 per cent and above, a person can reasonably be assured of control over the company without having to worry about undue takeover threats. At the same time, if the promoter was interested in amassing further voting rights upto the maximum limit permitted under the listing agreement or even 100 per cent pursuant to a delisting offer, he had to provide relevant exit opportunities i.e. a fixed price offer under the Takeover Regulations with complete disclosures on all future plans relating to the target company followed by a delisting offer where the price is determined by the minority shareholders.
By permitting further acquisition of 5 per cent beyond 55 per cent, albeit through a narrow window of open market purchases sans bulk deals, Sebi has now rocked the delicate balance of the Takeover Regulations. Today, a controlling shareholder who holds beyond 55 per cent and is intending to delist the securities of the target company can buy 5 per cent in a depressed market and thereafter make a delisting offer. A delisting offer is deemed successful only if the public shareholding falls below the required minimum. Consequent to the 5 per cent acquisition, it is easier for the controlling shareholder to ensure success of the delisting offer. To further illustrate, an 85 per cent promoter holder can acquire 5 per cent through open market purchases and delist the securities as he needs just one share to be tendered for the offer to be successful. The promoter could always relist the securities after a period of two years and make huge gains as hopefully the bulls will be back in business in a couple of years.
Another change made by Sebi pursuant to the October 30, 2008 amendment is to permit an increase in shareholding or voting rights of the acquirer pursuant to a buyback without having to make an open offer or obtain specific exemption of Sebi, provided the promoter in question holds shares between 55 per cent to 75 per cent/90 per cent as the case may be. This change is welcome given the fact that one need not approach Sebi for an exemption, as has been the practice, for increase in shareholding pursuant to a buyback offer. However, it is necessary to point out that whilst the press release expressly states that the buyback exemption is permitted for 5 per cent per annum, the notification simply states 5 per cent with no reference to ‘per financial year’ which raises questions on the exact intent of Sebi. An even more welcome change would be to expressly exempt any increase in voting rights due to a buyback offer from the purview of Regulations 10,11 and 12 by way of an amendment to Regulation 3 of the Takeover Regulations.
The recent amendments to the Takeover Regulations seem to be a reactive approach to a volatile stock market rather than a strategic change in the policy. If the intention was only to bolster the stock market that could have been achieved by simply increasing the creeping acquisition limits permitted under Section 11(1) to 7.5 per cent or 10 per cent (up to 55 per cent) without having to tamper with fundamental provisions of the Takeover Regulations having a bearing on investor protection issues.
Commercial paper’s back
Commercial paper’s back after Oct break
24 Nov 2008, 0000 hrs IST, Gayatri Nayak, ET Bureau
MUMBAI: With more liquidity released into the system on account of lower cash reserves (CRR), banks’ treasury desks have become more active and
investments have come into focus again. Besides buying government bonds, banks, for the first time, after the liquidity crunch in October, have invested over Rs 7,000 crore in commercial papers (CPs), mutual funds (MFs), bonds and stocks. Ever since the central bank has adopted an accommodative stance by reducing CRR — the portion of cash banks need to compulsorily park with the Reserve Bank of India — in early-October, non-statutory liquidity ratio investments, which are generally guided by commercial consideration, have risen by over Rs 7,000 crore since early-October, from Rs 91,120 crore as on October 10 to Rs 98,170 crore a fortnight back. Since the beginning of 2008-09 until mid-July, banks were actually offloading CPs, corporate bonds, MF schemes and stocks to generate liquidity. Though they have gradually hiked their exposure in these assets since mid-July, investments rose sharply only in the latest two fortnights, particularly in CPs and MF schemes. While they picked up CPs worth Rs 6,034 crore, their MF investments rose by Rs 7,535 crore in the latest fortnights. Data suggests that banks are totally shunning corporate bonds and are going slow on stocks. Though there is no clear cut explanation for this trend, a section of the market says that banks have promised to pick up CPs from cash-starved MFs in order to provide them an additional window of liquidity support. MFs are among the biggest subscribers to CPs that are issued by corporates and NBFCs for a tenure ranging from seven days to up to a year at the prevailing market rates. These are tradable and a bulk of the investments, which are believed to be secondary market purchases by banks. While primary issuances are said to have slowed in the past few weeks. On the other hand, banks, flush with funds after the central bank cut the CRR by about 300 basis points until November 7, 2008 as they now have to park less with the central bank, are now said to be investing their surplus funds in liquid MF schemes, waiting for attractive lending opportunities. Bank investments in government bonds (25% of the deposits mobilised) need to be mandatorily parked with the central bank as SLR, which had dipped to around Rs 10,000 crore a fortnight between August 1 and October 10, have gone up to nearly Rs 45,000 crore a fortnight between October 10 and November 7, 2008.
24 Nov 2008, 0000 hrs IST, Gayatri Nayak, ET Bureau
MUMBAI: With more liquidity released into the system on account of lower cash reserves (CRR), banks’ treasury desks have become more active and
investments have come into focus again. Besides buying government bonds, banks, for the first time, after the liquidity crunch in October, have invested over Rs 7,000 crore in commercial papers (CPs), mutual funds (MFs), bonds and stocks. Ever since the central bank has adopted an accommodative stance by reducing CRR — the portion of cash banks need to compulsorily park with the Reserve Bank of India — in early-October, non-statutory liquidity ratio investments, which are generally guided by commercial consideration, have risen by over Rs 7,000 crore since early-October, from Rs 91,120 crore as on October 10 to Rs 98,170 crore a fortnight back. Since the beginning of 2008-09 until mid-July, banks were actually offloading CPs, corporate bonds, MF schemes and stocks to generate liquidity. Though they have gradually hiked their exposure in these assets since mid-July, investments rose sharply only in the latest two fortnights, particularly in CPs and MF schemes. While they picked up CPs worth Rs 6,034 crore, their MF investments rose by Rs 7,535 crore in the latest fortnights. Data suggests that banks are totally shunning corporate bonds and are going slow on stocks. Though there is no clear cut explanation for this trend, a section of the market says that banks have promised to pick up CPs from cash-starved MFs in order to provide them an additional window of liquidity support. MFs are among the biggest subscribers to CPs that are issued by corporates and NBFCs for a tenure ranging from seven days to up to a year at the prevailing market rates. These are tradable and a bulk of the investments, which are believed to be secondary market purchases by banks. While primary issuances are said to have slowed in the past few weeks. On the other hand, banks, flush with funds after the central bank cut the CRR by about 300 basis points until November 7, 2008 as they now have to park less with the central bank, are now said to be investing their surplus funds in liquid MF schemes, waiting for attractive lending opportunities. Bank investments in government bonds (25% of the deposits mobilised) need to be mandatorily parked with the central bank as SLR, which had dipped to around Rs 10,000 crore a fortnight between August 1 and October 10, have gone up to nearly Rs 45,000 crore a fortnight between October 10 and November 7, 2008.
risk premium
Term of the Day
Investing: (1) Difference between a risk-free return (such as from government bonds) and the total return from a risky investment (such as equity stock). (2) Additional return or rate of interest (above the market interest rate) an investor requires for investing in a proposition or venture. Also called price of risk.
Investing: (1) Difference between a risk-free return (such as from government bonds) and the total return from a risky investment (such as equity stock). (2) Additional return or rate of interest (above the market interest rate) an investor requires for investing in a proposition or venture. Also called price of risk.
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