Tag Archives: LexCounsel Law Offices

ILN Today Post

Vodafone Triumphs – SC Holds Tax Authority Has No Jurisdiction Over Overseas Transaction

In a landmark judgment guaranteed to evoke sighs of relief from investors worldwide, the Supreme Court of India (“SC”), on January 20, 2012, set aside the Bombay High Court (“BHC”) judgment that the Indian tax authorities were correct in assessing Vodafone for Indian tax liability in its $11 billion acquisition of Hutchison’s 67% equity share in Cayman Islands in 2007. The Indian tax authorities had raised a tax demand of Rs. 110 billion (approximately US$ 2.185 billion) on Vodafone International Holding for the said acquisition.

While setting aside the BHC judgment, SC has also directed the Income Tax Department to refund the amount of Rs. 25 billion (approximately US$ 496.6 million) earlier deposited by Vodafone pursuant to an interim order of the SC in September, 2011, along with interest on the aforesaid amount at 4%.

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ILN Today Post

“Junk Foods” to be Kept Away From Schools

The DHC has on January 11, 2012 allowed 6 (six) months to the Food Safety and Standards Authority of India (“FSSAI”) to frame guidelines banning/regulating sale of “junk foods” and aerated drinks in and around educational institutions.

The directive came during the hearing of a Public Interest Litigation filed by a Non-Government Organization (NGO) in 2010 contending that “junk food” damages the health and mental growth of children. The NGO sought directions of the DHC to, inter alia, ban sale of “junk foods”, “fast foods” and carbonated beverages in and near schools campuses and to direct the Government to develop a comprehensive school canteen policy.

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Indian Courts Act Tough on Social Networking Sites

The future for Facebook, Google, YouTube and many other social networking sites in India may be full of difficulties if the Indian courts continue with their strict stance adopted thus far.

On a private complaint filed under various provisions of the Indian Penal Code, 1860, punishing obscene objects, literature and contents, a criminal (lower) court in Delhi has summoned representatives of some 21 (twenty one) social networking sites including the aforesaid global biggies along with Microsoft and Yahoo. Reportedly, a Delhi judge has also ordered the social networking sites to remove all “anti-religious” and “anti-social” contents by February 6, 2012. The social networking sites thereafter approached the Delhi High Court (“DHC”) inter alia seeking stay of criminal proceedings against them.

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FDI Policy clarifies position on Exit Options but PE Investors await RBI’s Verdict

International private equity and venture capital funds and investors (“PE Investors”) have been fairly active in India making innovative investments in growth stage and early stage entrepreneurial ventures. While the Indian growth story coupled with the liberalized foreign direct investment (“FDI”) policy has made India an attractive investment destination, PE Investors usually seek exit options such as buy back of shares and put options to ensure safe exit from the investee company owing to fluctuating capital markets.

Simply stated, put option is an obligation assumed by the promoters to acquire the PE Investor’s shares on exercise of such option at a pre-negotiated price which may be based on an internal rate of return of x%, compounded annually on the value of the aggregate amounts invested by PE Investor or the fair market value of the shares then held by PE Investor, whichever is higher. The divestment consideration payable to a foreign PE Investor however needs to be subject to the Reserve Bank of India’s (“RBI”) transfer pricing methodology.

Of late RBI has shown resistance to foreign PE Investors trying to exit through a pre-agreed put option route as RBI views it as a redeemable instrument and therefore an external commercial borrowing (“ECB”), which is permitted only in certain sectors.

According to the FDI norms, foreign investment is allowed only through equity shares, compulsory convertible preference shares or compulsory convertible debentures. RBI treats such securities as equity instruments with associated risk of capital and the price therefore cannot be pre-determined for the exit, i.e., the exit must take place at the prevailing fair market valuation.

Securities and Exchange Board of India (“SEBI”) treats options contract as a type of derivative contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at the end of a specified period and considers inclusion of such put options under a private shareholders’ agreement in violation of the Securities Contracts (Regulations) Act, 1956.

According to RBI, in terms of the Foreign Exchange Management Act, 1999 (“FEMA”), “only SEBI-registered foreign institutional investors and non-resident Indians are allowed to invest in exchange-traded derivative contracts where the underlying securities are equity shares of an Indian firm and no other class of foreign investor is allowed to enter into any derivative contract where the underlying security is an equity share of an Indian company.”

PE Investors on the other hand consider put option as a spot delivery contract which is an actual delivery of security and payment of a price thereof is either on the same day as the date of the contract or on the next day. It is also argued that a debt is redeemable by the company as opposed to a put option which is exercised by the PE Investors only against the promoters and not against the company. Such arguments have however not cut ice with RBI which has held to its position of treating put options akin to a debt and even issued notices in the past to several companies for violation of the ECB guidelines.

Section of the fourth edition of the consolidated Foreign Direct Investment Policy of India released by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, (“DIPP”) on September 30, 2011 (“New FDI Policy”) has made the matter worse. In terms of section of the New FDI Policy, only equity shares, fully, compulsorily and mandatorily convertible debentures, and fully, compulsorily and mandatorily convertible preference shares, would qualify as eligible instruments for FDI. Any instruments with in-built options of any type would not qualify as an eligible instrument of FDI and such instruments would have to comply with the ECB guidelines. As this would impact a host of options, including call options, put options, tag along and drag along rights, several representations were made especially from the private equity funds to DIPP to revoke section of the New FDI Policy. On October 31, 2011, DIPP issued a press release deleting section of the New FDI Policy.

Deletion of the above section however does not automatically bring relief to the PE Investors. In terms of the New FDI Policy, in case of any conflicting interpretation between the New FDI Policy and any relevant notification issued by RBI under the aegis of FEMA, the latter shall prevail. RBI is yet to clarify its stand on the above deletion in the New FDI Policy and its view on inclusion of put options under investment agreements. In other words, while the status quo existing prior to the New FDI Policy has been restored, it is not clear whether RBI will continue to treat such options in violation of the ECB guidelines. It can therefore be concluded that a substantial degree of uncertainty still remains on the enforceability and validity of these exit options and PE Investors have to carefully assess their reliance on such options as an exit mechanism in light of the risks of enforceability of such options.

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ILN Today Post

FDI in Retail – Permitted for Multi-Brand and Relaxed for Single-Brand

After years of deliberations, the (Indian) Union Cabinet has on November 24, 2011 resolved to permit foreign direct investment (“FDI”) in multi-brand retail sector in India. The Cabinet has also simultaneously relaxed the FDI limit for single-brand ventures from 51% to 100%.

Following the relaxation, the Parliament of India has witnessed objections by some of the political parties opposing the move. While the relaxation does not need approval of the Parliament, and can be made effective immediately, the Government may wish to take a short breather before formally notifying the policy. The details of policy relaxation discussed below are based on media reports, in absence of any formal notification by the Government in this regard till the time of release of this newsletter.

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The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (“DIPP”) had on September 30, 2011 released the fourth edition of the consolidated FDI Policy of India vide Circular 2 of 2011 (“New FDI Policy”).

Section of the New FDI Policy prescribed that only:

i.    equity shares;

ii.   fully, compulsorily and mandatorily convertible debentures; and

iii.  fully, compulsorily and mandatorily convertible preference shares,

in each case with no in-built options of any type, would qualify as eligible instruments for FDI. Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant external commercial borrowing (“ECB”) guidelines.

The impact of inclusion of section in the New FDI Policy has been discussed in detail in “LexAnalysis – FDI Policy of India” of October 5, 2011. In our analysis, we had mentioned that the inclusion of the aforesaid section in the New FDI Policy was not welcomed by corporates and investors. This was primarily because of the reason that the New FDI Policy did not define what constitutes “in-built options”. This led to confusion amongst the corporates and their advisors who could only surmise that the new section is related to the recent stance of the Reserve Bank of India on put option and pre-agreed buy back arrangements as futures or derivatives transactions. The new FDI Policy thus had an adverse impact on the investment agreements entered into by venture capital funds, private equity players and strategic investors. We had surmised that the Government would need to revisit this issue.

On October 31, 2011, the DIPP has issued a press release in terms of which section of the New FDI Policy has been deleted. This decision of the DIPP would be a great relief for corporates, especially venture capital funds, private equity players and other strategic investors.

LexCounsel, Law Offices
C-10, Gulmohar Park,
New Delhi – 110 049
Tel. +91.11.4166.2861
Fax. +91.11.4166.2862

Disclaimer:- The information provided here is not intended to solicit or establish any attorney-client relationship between LexCounsel and the reader(s).

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Guidelines by SC to Minimize Landlord – Tenant Disputes

SC has recently laid down the following illustrative guidelines and norms for model lease arrangements as a fair measure to reduce litigation between the landlords and the tenants:

(i) The tenant must enhance the rent according to the terms of the agreement or at least by ten percent, after every three years. If the rent is too low (in comparison to market rent), having been fixed almost 20 to 25 years back then the present market rate should be worked out either on the basis of valuation report or reliable estimates of building rentals in the surrounding areas, let out on rent recently.

(ii) Apart from the rental, property tax, water tax, maintenance charges, electricity charges for the actual consumption of the tenanted premises and for common area shall be payable by the tenant. In case there is enhancement in property tax, water tax or maintenance charges, electricity charges then the same shall also be borne by the tenant only.

(iii) The usual maintenance of the premises, except major repairs would be carried out by the tenant only and the same would not be reimbursable by the landlord.

(iv) The major repairs shall be carried out only after obtaining permission from the landlord in writing. The modalities with regard to adjustment of the amount spent thereon should be worked out between the parties.

(v) If present and prevalent market rent assessed and fixed between the parties is paid by the tenant then landlord shall not be entitled to bring any action for his eviction against such a tenant at least for a period of 5 years. Thus for a period of 5 years the tenant shall enjoy immunity from being evicted from the premises.

(vi) The parties shall be at liberty to get the rental fixed by the official valuer or by any other agency, having expertise in the subject.

(vii) The rent so fixed should be just, proper and adequate as per the location, type of construction, accessibility with the main road, parking space facilities available therein etc.

The impact of the judgment remains to be seen in cases where either the long term lease agreements do not specify the above aspects, or where they record an understanding of the parties contrary to the above guidelines. It would be interesting to see how the various courts of India apply this precedence to the eviction related cases being adjudicated by them.

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Restriction of Sale of Property on Power of Attorney

The Supreme Court of India (“SC”) in a landmark judgment delivered on Wednesday, October 12, 2011, held that the General Power of Attorney (“GPA”) method for sale of immovable property is not a valid form of transfer of property. SC opined that (i) a Power of Attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property; and (ii) property can be lawfully transferred only by way of registered sale deeds.

Reportedly, SC has held that there shall be no mutation of property in revenue and civil records on the basis of Power of Attorney. It is believed that sale of property through GPA result in investment of unaccounted money in real estate business. Property transactions through GPA were evolved, inter alia, to avoid (i) payments of stamp duty and registration charges on sale/conveyance deeds; and (ii) payment of capital gain tax on transfer of capital asset.

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