Term of the Day - deflation
A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. opposite of inflation.
Thursday, December 11, 2008
Advance tax versus TDS
Advance tax versus TDS
The tax deductible at source has to be excluded while computing the advance tax liability, even if the tax had not actually been deducted.
The Income-Tax Appellate Tribunal (ITAT), G-Bench, Delhi, in the DCIT vs Pride Foramer SAS (2008 24(II) ITCL 259) case has decided an interesting issue concerning tax deducted at source (TDS), advance tax and charging of interest under Section 234B of the Income-Tax Act, 1961.
The assessee before the assessing officer (AO) was a non-resident French company, which had engaged employees of an associate company for providing technical services in connection with offshore drilling in India.
Tax not deducted at source
The AO noticed that these employees drew salaries exceeding the exemption limit and, therefore, passed an order under Section 163(1), read with Section 143(3), treating the French company as agent of the technicians and made assessments on it on income from salary and perquisites received by these technicians.
Since no tax was deducted at source from the salaries paid and no advance tax was paid for such employees, the AO charged interest under Section 234B(1) of the Act also.
On appeal, the CIT(A) observed that the entire income of the foreign technicians was liable to TDS and, therefore, as per Section 209(1)(d) the tax payable for the purpose of advance tax was required to be reduced by the tax ‘deductible at source’.
Since the entire tax payable was deductible at source, there was no advance tax payable by the assessees and, hence, the AO was directed to delete the interest charged under Section 234B. Against this order of the CIT(A), the I-T Department went on appeal before the ITAT.
The Revenue’s contention before the ITAT was that the Section 191 was not overridden by Section 209 and, therefore, once the tax had not been deducted at source, the same was payable as advance tax.
Tribunal’s view
The Tribunal did not agree with this view of the Department. It held that Section 191 along with Section 190 falls in Part-A of Chapter XII, which relates to collection and recovery of tax.
Section 190 relates to deduction at source and advance payment, and provides that notwithstanding that regular assessment in respect of any income is to be made in a later assessment year, tax on such income shall be payable by deduction or collection at source or by advance payment, as the case may be, in accordance with the provisions of the chapter. Section 191 provides for another mode of collection of tax by way of direct payment.
Therefore, even if Section 191 is not overridden by Section 209, the amount payable by the assessee direct under Section 191 in cases where tax had not been deducted at source, is not the amount payable as advance tax.
The amount payable as advance tax has to be computed under Section 209, which is a specific provision for this purpose. Under clause (d) of sub-section (1) of Section 209, the tax deductible at source has to be excluded while computing the advance tax payable.
Had the legislature wanted that only the tax actually deducted at source or collected at source should be excluded, it would not have used the words ‘tax deductible at source’ or ‘collectible at source’.
‘Deductible at source’
The phrase ‘deductible at source’ has not been used casually or without any purpose. There is a reasoning for excluding the ‘tax deductible at source’ because in cases where tax has not been deducted at source by the person responsible, the said person is deemed to be assessee-in-default under Section 201 in respect of whole or any part of tax, which had not been deducted at source and he is also liable for payment of interest and penalty under the said section.
Since the ‘tax deductible at source’, in case not deducted, could be recovered with interest from the person responsible for deducting the same at source, the ‘tax deductible’ has been excluded from the advance tax liability of the assessee.
Section 191 contains only an alternative mode of recovery so that in case tax could not be recovered from the person responsible in case of default, it could be collected from the assessee, who is primarily responsible for paying the tax. The section does not say that the same is payable as advance tax. The tax deductible at source has to be excluded while computing the advance tax liability as provided in Section 209(1)(d), even if the tax had not actually been deducted. In the case before the ITAT, the entire income of the assessee was deductible at source.
Therefore, no advance tax was payable by the technician employees and, as a result, there would be no case for charging interest under Section 234B of the Act. Hence, the ITAT has held that the order of the CIT(A), directing the AO to delete the interest charged under Section 234B, is correct.
ITAT to decide on tax cases within three months
HC directs ITAT to decide on tax cases within three months
MUMBAI: Corporate taxpayers can now hope for speedy justice. The Bombay High Court has set aside an order of the Income Tax
Appellate Tribunal
(ITAT) on the ground that the tribunal took four months to deliver the order. Delivering the order, a division bench comprising Justice VC Daga and Justice S Radhakrishnan observed that justice delayed is justice denied, but justice withheld is even worse. Observing that often orders are passed four to 10 months after the tax cases have been heard, the court issued a guideline to the ITAT asking it not to take more than three months to give an order. The division bench also directed ITAT that its order should be self-containing and reasoned. HC gave this order on an appeal filed by Shivsagar Veg Restaurant. The appeal was based on the inordinate delay by ITAT in giving out the order. The taxpayer also alleged non-application of mind as the order did not furnish reasons in detail, did not discuss the issues raised by the taxpayer and did not cite the case laws. The HC said that since ITAT is the final authority on facts, the tribunal is required to appreciate the evidence, consider the reasons of the authorities below and assign its own reasons as to why it disagreed with the findings of the authority below. This would help the HC, where appeals are filed on questions of law, to have a clearer understanding of the issues that come up before it, the division bench said. “Merely because the tribunal happens to be an appellate authority, it does not get the right to brush aside reasons or the findings recorded by the first authority or the lower appellate authority. It has to examine the validity of the reasons and findings recorded,” the bench added. K Shivram, who appeared for Shivsagar Veg Restaurant told ET: “ITAT president Vimal Gandhi had issued detailed guidelines (on speedy clearance) to ITAT members sometime ago. However, those guidelines are not being followed by the ITAT members.”
Rent -a -Cab is Input Service
Whether Rent-a-cab service used for bringing employees to work in the factory for manufacture goods is eligible Input Service for the purpose of Cenvat Credit.
The answer is yes.
While referring the meaning of Input Service assigned to rule 2(l) of the Cenvat Credit Rules, 2004, honorable tribunal has held that:
"From the above definition, it is very clear that the input services besides being used in or in relation to the manufacture of final products and clearances of final products from the place of removal includes a plethora of other services such as service used in relation to setting up, modernization, renovation or repairs of factory, premises of provider of input service or an office relating to such factory or premises, advertisement or sales, activities of business, accounting, auditing, financing, recruitment, quality control, training and coaching etc. and therefore its scope is much larger than being used directly or indirectly in relation to manufacture. The decision cited by Revenue are therefore not relevant as those decisions have not considered the inclusive part of input service as defined under rule 2(l) of Cenvat Credit Rules and these decisions have only considered the term in or in relation to the manufacture. Since Rent-a-Cab service is used for bringing employees to work in the factory for manufacture of goods it has to be considered as being used indirectly in relation to the manufacture or as part of business activity for promoting the business as any facility given to the employees will result in greater efficiency and promotion of business."
The answer is yes.
While referring the meaning of Input Service assigned to rule 2(l) of the Cenvat Credit Rules, 2004, honorable tribunal has held that:
"From the above definition, it is very clear that the input services besides being used in or in relation to the manufacture of final products and clearances of final products from the place of removal includes a plethora of other services such as service used in relation to setting up, modernization, renovation or repairs of factory, premises of provider of input service or an office relating to such factory or premises, advertisement or sales, activities of business, accounting, auditing, financing, recruitment, quality control, training and coaching etc. and therefore its scope is much larger than being used directly or indirectly in relation to manufacture. The decision cited by Revenue are therefore not relevant as those decisions have not considered the inclusive part of input service as defined under rule 2(l) of Cenvat Credit Rules and these decisions have only considered the term in or in relation to the manufacture. Since Rent-a-Cab service is used for bringing employees to work in the factory for manufacture of goods it has to be considered as being used indirectly in relation to the manufacture or as part of business activity for promoting the business as any facility given to the employees will result in greater efficiency and promotion of business."
Refund of Service Tax paid in excess wrongly
Service Tax paid in excess wrongly - Can department refuse to refund the same?
Where it is found that that service tax has been paid in excess wrongly - department should refund the same on making an application for refund the same.
In the instant case, CESTAT has refused to allow the claim of refund on the ground that
"…..that since the assessee had not challenged the assessment order, the claim of refund cannot be entertained, so as to indirectly challenge the assessment order, without filing statutory appeal, against the assessment order. It was also found, that in the case in hand, the order is appelable and no appeal having been filed, the claim of refund has no merit, and the appeal was dismissed."
In this matter, Honorable High Court of Rajasthan held that:"At the outset, it may be observed, that under the scheme of things, starting from Section 73 onwards it is clear, that the assessee himself is to deposit service tax in form ST-3, there is no provision for assessment. Passing of assessment order is contemplated only in cases where the notice is issued under Section 73, and it is found, that service tax is not levied or paid, or has been short levied or short paid etc. In that view of the matter, the very basis/reasonings given by the learned Tribunal, simply have no legs to stand. Admittedly, the appeal under Section 85 lies against a specific order of the concerned authority in Form ST-4, which requires to disclose, designation and address of the officer passing the decision or order appealed against, and the date of decision or order, so also the date of communication of the decision or order appealed against to the appellant. Admittedly, when no order capable of being appealed against, had ever been passed, it cannot be said that the assessee could file appeal against the assessment order, and not having so filed appeal he cannot lay the claim of refund. Thus, the order of the Tribunal cannot sustain."
Where it is found that that service tax has been paid in excess wrongly - department should refund the same on making an application for refund the same.
In the instant case, CESTAT has refused to allow the claim of refund on the ground that
"…..that since the assessee had not challenged the assessment order, the claim of refund cannot be entertained, so as to indirectly challenge the assessment order, without filing statutory appeal, against the assessment order. It was also found, that in the case in hand, the order is appelable and no appeal having been filed, the claim of refund has no merit, and the appeal was dismissed."
In this matter, Honorable High Court of Rajasthan held that:"At the outset, it may be observed, that under the scheme of things, starting from Section 73 onwards it is clear, that the assessee himself is to deposit service tax in form ST-3, there is no provision for assessment. Passing of assessment order is contemplated only in cases where the notice is issued under Section 73, and it is found, that service tax is not levied or paid, or has been short levied or short paid etc. In that view of the matter, the very basis/reasonings given by the learned Tribunal, simply have no legs to stand. Admittedly, the appeal under Section 85 lies against a specific order of the concerned authority in Form ST-4, which requires to disclose, designation and address of the officer passing the decision or order appealed against, and the date of decision or order, so also the date of communication of the decision or order appealed against to the appellant. Admittedly, when no order capable of being appealed against, had ever been passed, it cannot be said that the assessee could file appeal against the assessment order, and not having so filed appeal he cannot lay the claim of refund. Thus, the order of the Tribunal cannot sustain."
Friday, November 28, 2008
Overseas securities
Overseas securities pricing gets easier
Publication:Economic Times Delhi;
Date:Nov 28, 2008;
Section:EFM;
Page Number:7
Our Bureau NEW DELHI THE government on Thursday loosened rules covering the pricing of securities issued overseas by Indian companies in a move which is seen helping corporates and underwriters in difficult stock market conditions. The finance ministry said it has changed the rules so that companies can price their overseas securities to reflect the most recent value of their shares in the local market: it will now be at least an average of the highest and lowest price of the share in the two weeks preceding the decision to raise capital abroad. Earlier, it was the average share price covering the preceding two months or six months, with the higher of the two prices being the floor price for the overseas issue. The new regulation covers shares issued by Indian companies in the US and Europe as well as convertible bonds denominated in a foreign currency. Overseas investors have pulled out a record $13.5 billion from Indian stocks so far this year, causing the benchmark Sensex index on the Bombay Stock Exchange to drop by 56%. This contrasts with the sharp rise in stock prices last year, when foreign investors bought a record $17.2 billion. Introducing more market-driven rules will help generate greater interest among underwriters, besides helping the companies, the head of the Indian unit of top European bank said. Underwriters pay the share issuer in advance and assume the risk of selling the securities to investors for a profit. Another rule which required share issuers to not count the 30 days preceding the decision to raise capital has been scrapped. Aimed mainly to prevent price manipulation in the domestic market, the rule is seen as not relevant in a bearish market
Publication:Economic Times Delhi;
Date:Nov 28, 2008;
Section:EFM;
Page Number:7
Our Bureau NEW DELHI THE government on Thursday loosened rules covering the pricing of securities issued overseas by Indian companies in a move which is seen helping corporates and underwriters in difficult stock market conditions. The finance ministry said it has changed the rules so that companies can price their overseas securities to reflect the most recent value of their shares in the local market: it will now be at least an average of the highest and lowest price of the share in the two weeks preceding the decision to raise capital abroad. Earlier, it was the average share price covering the preceding two months or six months, with the higher of the two prices being the floor price for the overseas issue. The new regulation covers shares issued by Indian companies in the US and Europe as well as convertible bonds denominated in a foreign currency. Overseas investors have pulled out a record $13.5 billion from Indian stocks so far this year, causing the benchmark Sensex index on the Bombay Stock Exchange to drop by 56%. This contrasts with the sharp rise in stock prices last year, when foreign investors bought a record $17.2 billion. Introducing more market-driven rules will help generate greater interest among underwriters, besides helping the companies, the head of the Indian unit of top European bank said. Underwriters pay the share issuer in advance and assume the risk of selling the securities to investors for a profit. Another rule which required share issuers to not count the 30 days preceding the decision to raise capital has been scrapped. Aimed mainly to prevent price manipulation in the domestic market, the rule is seen as not relevant in a bearish market
Solve issues on taxability of AEs
Solve issues on taxability of AEs
Vivek Mishra UNDERthe service tax law, the liability to pay service tax arises on collection of service charges. Therefore, accrual of income or recording of book entries were not relevant for service tax purposes. However, through the amendments introduced by the Finance Act, 2008, it has been provided that for transactions between associated enterprises (AEs), the liability to pay service tax will arise on accrual or collection basis, whichever is earlier. This amendment is apparently an anti-avoidance measure. It seeks to cover transactions between AEs wherein service tax has not been paid on the ground of non-receipt of payment even though the transaction has been recognised as revenue/expenditure in the statement of profit and loss account. The concept of AE has been borrowed from the transfer pricing provisions under the Income Tax Act. These provisions broadly provide that two entities would qualify as AEs if one entity is managed or controlled by the other or if the two entities are under common control or management. Further, the amendments to the service tax rules provide that in case of transactions between AEs, payment received for the taxable service would include any amount debited or credited to any account in the books of account of a person liable to pay service tax. This would have a significant impact on the cash flow of the AE providing the taxable services. Take this example. Company X and company Y are AEs. X provides taxable services to Y in June 2008 worth Rs 1 million and passes an entry debiting Y for this amount on July 1 2008. The amount is received by X on November 1 2008. Prior to this amendment, X would have been liable to pay tax on this amount by 5 December 2008. However, as a result of the amendment, X is liable to pay service tax on Rs 1 million by 5 August 2008, the due date for payment of service tax for July 2008. Further, this would set back the cash flow of X as it would need to deposit service tax on Rs 1 million without having collected such amount from Y. The amendment has ostensibly been introduced as an anti-avoidance measure. However, the amendment has created certain ambiguities in the operation of service tax provisions which should be clarified at the earliest to avoid unnecessary litigation. Some of these ambiguities are discussed below. 1. One of the conditions to qualify as export of services under the Export of Service Rules, 2005 is that payment for the service should have been received in convertible foreign currency. Now, in case of export of services between AE, the liability to pay service tax has been shifted from collections to accrual basis. At the time of such accrual, the service may not qualify as export as the payment for the service has not been received. Thus, the issue that arises is whether on such accrual the Indian entity would be required to pay service tax and subsequently on receipt of payment initiate refund proceeding to recover output service tax paid or whether such accrual would be treated as a receipt of convertible foreign currency for the purpose of export rules. 2. With regard to accrual entries made in relation to AE, would the Indian entity be required to pay service tax on the opening balance in the account of the AE as on 10 May 2008 or does this amendment apply only to accrual entries made post 10 May 2008. As per the Cenvat Credit Rules, 2004 credit of service tax paid on input services is available only if the value of input service and service tax has been paid. Given that in case of import of taxable service from an AE, service tax is payable on an accrual basis, an issue that arises is whether the Indian enterprise would be permitted to avail credit of service tax paid on such input service imported though the payment for the value of input service has not been made. Provisions permitting a service provider to adjust excess service tax deposited, where the service charges and service tax thereon is refunded to the service recipient, will not be applicable since there will be no refund of these amounts in case the tax is paid on accrual basis. So, the introduction of the deeming fiction in relation to AE has resulted in various anomalies which should be clarified at the earliest to avoid unnecessary litigation.
Vivek Mishra UNDERthe service tax law, the liability to pay service tax arises on collection of service charges. Therefore, accrual of income or recording of book entries were not relevant for service tax purposes. However, through the amendments introduced by the Finance Act, 2008, it has been provided that for transactions between associated enterprises (AEs), the liability to pay service tax will arise on accrual or collection basis, whichever is earlier. This amendment is apparently an anti-avoidance measure. It seeks to cover transactions between AEs wherein service tax has not been paid on the ground of non-receipt of payment even though the transaction has been recognised as revenue/expenditure in the statement of profit and loss account. The concept of AE has been borrowed from the transfer pricing provisions under the Income Tax Act. These provisions broadly provide that two entities would qualify as AEs if one entity is managed or controlled by the other or if the two entities are under common control or management. Further, the amendments to the service tax rules provide that in case of transactions between AEs, payment received for the taxable service would include any amount debited or credited to any account in the books of account of a person liable to pay service tax. This would have a significant impact on the cash flow of the AE providing the taxable services. Take this example. Company X and company Y are AEs. X provides taxable services to Y in June 2008 worth Rs 1 million and passes an entry debiting Y for this amount on July 1 2008. The amount is received by X on November 1 2008. Prior to this amendment, X would have been liable to pay tax on this amount by 5 December 2008. However, as a result of the amendment, X is liable to pay service tax on Rs 1 million by 5 August 2008, the due date for payment of service tax for July 2008. Further, this would set back the cash flow of X as it would need to deposit service tax on Rs 1 million without having collected such amount from Y. The amendment has ostensibly been introduced as an anti-avoidance measure. However, the amendment has created certain ambiguities in the operation of service tax provisions which should be clarified at the earliest to avoid unnecessary litigation. Some of these ambiguities are discussed below. 1. One of the conditions to qualify as export of services under the Export of Service Rules, 2005 is that payment for the service should have been received in convertible foreign currency. Now, in case of export of services between AE, the liability to pay service tax has been shifted from collections to accrual basis. At the time of such accrual, the service may not qualify as export as the payment for the service has not been received. Thus, the issue that arises is whether on such accrual the Indian entity would be required to pay service tax and subsequently on receipt of payment initiate refund proceeding to recover output service tax paid or whether such accrual would be treated as a receipt of convertible foreign currency for the purpose of export rules. 2. With regard to accrual entries made in relation to AE, would the Indian entity be required to pay service tax on the opening balance in the account of the AE as on 10 May 2008 or does this amendment apply only to accrual entries made post 10 May 2008. As per the Cenvat Credit Rules, 2004 credit of service tax paid on input services is available only if the value of input service and service tax has been paid. Given that in case of import of taxable service from an AE, service tax is payable on an accrual basis, an issue that arises is whether the Indian enterprise would be permitted to avail credit of service tax paid on such input service imported though the payment for the value of input service has not been made. Provisions permitting a service provider to adjust excess service tax deposited, where the service charges and service tax thereon is refunded to the service recipient, will not be applicable since there will be no refund of these amounts in case the tax is paid on accrual basis. So, the introduction of the deeming fiction in relation to AE has resulted in various anomalies which should be clarified at the earliest to avoid unnecessary litigation.
Thursday, November 27, 2008
norms for SEZs eased
Social infrastructure norms for SEZs eased
New Delhi: In a move that would help developers of special economic zones, particularly of IT/ITeS SEZs, enhance the commercial viability of projects, the government has allowed them to build more and larger housing facilities, offices and other required social infrastructure in the ‘non-processing area’ and avail tax benefits for it.
Half the total area of each SEZ comprises the non-processing area that houses only social amenities, while the other half is the processing area where industrial units are located.
The ceilings on housing and office space in the non-processing area of SEZs were imposed to prevent SEZs from becoming a pure-play realty business. But the curbs were affecting the commercial viability of SEZs, according to the commerce ministry.
The ministry had even mooted amendments to the rules saying developers should be permitted to build over and above the ceiling limits, but by forgoing the tax and duty exemptions for such extra constructions.
After several rounds of inter-ministerial deliberations and Empowered Group of Ministers (EGoM) meetings in August and October this year, the government has now decided that the Board of Approval (BoA) for SEZs can approve the construction of social amenities according to the enlarged overall ceilings in each category of social infrastructure. As per the new norms, developers would even be able to claim the duty drawback, and benefits of tax exemption or concessions, sources said.
However, there are some riders. Construction of social amenities as per the relaxed norms would be permitted only in a phased manner and would depend on the employment generation, increased focus on exports and building of infrastructure in the area housing industrial units.
Besides, the BoA will apply the new norms on a case-by-case basis, depending on the location of the zone and the projected number of employees. Earlier, due to the differences between the commerce and finance ministries on the easing of such norms, the government had asked Delhi Development Authority (DDA) for its expert opinion to help in arriving at a consensus.
As per the suggestions of the DDA, the overall ceilings in each category will be revised upwards in proportion with the available area of land and the floor area ratio as well as the norms prescribed by the local town planning authorities.
The ceiling on social amenities has been causing problems to SEZ developers. For instance, an IT/ITeS SEZ, with a minimum area of 10 hectares, could allocate only...
10,000 square metres (sq m) for housing and 1,000 sq m for office space. Since most IT/ITeS SEZ have around 15,000-20,000 employees, they would need much more floor area than these limits.
The scene was no different for sector specific (with a minimum area of 100 hectares) and multi-product SEZs (minimum area of 1,000 hectares). While sector specific SEZs could allocate only a maximum of 750,000 sq.m (or 7,500 units) of housing space and 50,000 sq m of office space, for multi-product SEZs it was 25 lakh sq m (or 25,000 units) for housing and 200,000 sq m for office space.
“If all the employees of SEZ were to be settled inside the zone, then the permitted floor area for housing and other facilities should be much higher. These ceilings on the number and size of social amenities are limiting factors. Many employees who cannot be accommodated inside the zone will settle outside, creating a burden on the existing housing and infrastructure facilities,” a representative of the Export Promotion Council for EOUs and SEZs Panel for SEZ Developers.
The commerce ministry had said the curbs on social amenities would prevent developers from fully using the permissible construction on the SEZ land as per individual state policies. More over, such restrictions would also result in higher prices of the available built up space, the ministry had said.
But the revenue department had objected to allowing developers to build social amenities (like entertainment and recreational facilities, shopping malls, hotels, business and residential complexes, hospitals and educational institutions) in excess of what is permitted. The department had said removal of these restrictions would lead to increased real estate development activities in SEZs, which are mainly meant for boosting exports and generating employment....
disclose info on processing fees
Banks must disclose info on processing fees: RBI
Mumbai, Nov. 26
The Reserve Bank of India has asked all banks/ financial institutions to ensure that all information relating to charges/fees for processing are always disclosed in the loan application forms.
Further, banks must inform ‘all-in-cost’ to the customer to enable him compare the rates charged with other sources of finance.
Under its guidelines on ‘Fair Practices Code for Lenders — Disclosing all information relating to processing fees / charges,’ the RBI said, loan application forms should include information about the fees/charges, if any, payable for processing; the amount of such fees refundable in the case of non-acceptance of application; pre-payment options and any other matter which affects the interest of the borrower, so that a meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower.
The RBI’s directive comes in the wake of it coming across some banks levying, in addition to a processing fee, certain charges which are not initially disclosed to the borrower.
Mumbai, Nov. 26
The Reserve Bank of India has asked all banks/ financial institutions to ensure that all information relating to charges/fees for processing are always disclosed in the loan application forms.
Further, banks must inform ‘all-in-cost’ to the customer to enable him compare the rates charged with other sources of finance.
Under its guidelines on ‘Fair Practices Code for Lenders — Disclosing all information relating to processing fees / charges,’ the RBI said, loan application forms should include information about the fees/charges, if any, payable for processing; the amount of such fees refundable in the case of non-acceptance of application; pre-payment options and any other matter which affects the interest of the borrower, so that a meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower.
The RBI’s directive comes in the wake of it coming across some banks levying, in addition to a processing fee, certain charges which are not initially disclosed to the borrower.
warrant conversion norm
RBI to ease warrant conversion norm
NEW DELHI: Companies looking to raise funds from foreign investors by way of convertible warrants may soon be allowed to issue shares against these
instruments at any time up to 18 months, under a relaxation of rules being considered by the Reserve Bank of India (RBI). Convertible warrants are loans that are subsequently exchanged for shares on pre-agreed terms. Like an option, a warrant gives its holder or buyer the choice to purchase a fixed quantity of shares of the issuing company at an agreed price at or before a future date. The central bank had, last December, made it mandatory for companies to issue shares within 180 days of receiving money from foreign investors. Its move was aimed at plugging a loophole in foreign exchange regulations which was being misused by mainly real estate companies. RBI’s decision, however, created confusion for companies that planned to issue convertible warrants. This is because the stock market
regulator Sebi’s guidelines allowed warrants to be converted into shares in 18 months. Some companies had requested the finance ministry to clarify the rules following the RBI order. The finance ministry has written to the central bank asking it to make an exception in the case of convertible warrants, a ministry official said, adding the central bank was expected to issue a clarification. “The matter requires clarification. In fact, the government or RBI should come out with separate guidelines dealing with the issue,” said Punit Shah, executive director, tax and regulatory services for PricewaterhouseCoopers’ financial services practice. Mr Shah said clear rules on the conversion of warrants into shares were absent under current foreign direct investment (FDI) regulations or under Foreign Exchange Management Act (FEMA) rules. The RBI move was primarily aimed at plugging a loophole in the FEMA regulations being misused by real estate firms to raise funds abroad when the government’s rules clearly barred real estate companies from raising foreign debt.
NEW DELHI: Companies looking to raise funds from foreign investors by way of convertible warrants may soon be allowed to issue shares against these
instruments at any time up to 18 months, under a relaxation of rules being considered by the Reserve Bank of India (RBI). Convertible warrants are loans that are subsequently exchanged for shares on pre-agreed terms. Like an option, a warrant gives its holder or buyer the choice to purchase a fixed quantity of shares of the issuing company at an agreed price at or before a future date. The central bank had, last December, made it mandatory for companies to issue shares within 180 days of receiving money from foreign investors. Its move was aimed at plugging a loophole in foreign exchange regulations which was being misused by mainly real estate companies. RBI’s decision, however, created confusion for companies that planned to issue convertible warrants. This is because the stock market
regulator Sebi’s guidelines allowed warrants to be converted into shares in 18 months. Some companies had requested the finance ministry to clarify the rules following the RBI order. The finance ministry has written to the central bank asking it to make an exception in the case of convertible warrants, a ministry official said, adding the central bank was expected to issue a clarification. “The matter requires clarification. In fact, the government or RBI should come out with separate guidelines dealing with the issue,” said Punit Shah, executive director, tax and regulatory services for PricewaterhouseCoopers’ financial services practice. Mr Shah said clear rules on the conversion of warrants into shares were absent under current foreign direct investment (FDI) regulations or under Foreign Exchange Management Act (FEMA) rules. The RBI move was primarily aimed at plugging a loophole in the FEMA regulations being misused by real estate firms to raise funds abroad when the government’s rules clearly barred real estate companies from raising foreign debt.
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