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KANTH AND ASSOCIATESAttorneys and International Legal Consultants

K & ANewsletter

NEWS ALERTS

TAX

India and Liechtenstein signed Tax Information Exchange Agreement

Agreement for Exchange of Information between India and Gibraltar

India and Liechtenstein have signed a Tax Information Exchange Agreement (TIEA) on 28.03.2013 at Bern, Switzerland. The TIEA is based on international standard of transparency and exchange of information. Information must be foreseeable relevant to the administration and enforcement of the domestic laws of the Contracting Parties concerning taxes covered by the agreement. There is a specific provision that the requested Party shall use its information gathering measures to obtain the requested information even though that Party may not need such information for its own tax purposes. There is a specific provision for providing banking and ownership information. It provides for the representatives of the competent authority of the requesting Party to enter the territory of the requested Party to interview individuals and examine records. The Agreement has specific provisions for protecting the confidentiality of the information obtained under the TIEA. Information is to be treated as secret and can be disclosed to only specified person or authorities, which are tax authorities or its oversight body. However, the information may be used for other purposes with the express consent of the Competent Authority of the supplying State. The Agreement shall enter into force one month from the date of the notification. On entering into force, information can be exchanged if it

stpertains to taxable periods beginning on or after 1 April, 2013. The Agreement provides for the exchange of documents or information created in or derived from

sta date preceding 1 April, 2013, that are foreseeably relevant to a request relating to tax years beginning on

stor after 1 April, 2013.

The Agreement between the Government of the Republic of India and the Government of Gibraltar for the exchange of information with respect to taxes

stsigned at London on the 01 February, 2013 shall come th

into force on the 11 day of March, 2013, being the date of later of the notifications after completion of the procedures as required by the respective laws for the entry into force of the said Agreement.

CONTENTS

— Article 5

— News AlertsTax 1Corporate, Capital Market & Foreign Trade 2

33

Legislations / Notifications 3Judgments 4

EmploymentImmigration

SEBI (Alternative Investment Fund) Regulations, 2012By Mr. K. Ravi Ranjan, Senior Associate, K&A

Thus, the Central Government in view of the aforesaid and in exercise of powers conferred by section 90 of the Income Tax Act, 1961, vide notification dated 01.04.2013, has notified that all the provisions of the Agreement between the Government of the Republic of India and the Government of Gibraltar shall be given

theffect to in the Union of India with effect from 11 day of March, 2013, that is, the date of entry into force of the said Agreement.

The Double Taxation Avoidance Agreement (DTAA) and the Protocol between the Republic of India and Malta for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on

thincome is in force since 8 February, 1995. Both India and Malta have re-negotiated the Agreement to bring in line with international standards, change in domestic laws and changed economic scenario. India and Malta,

thon 08 April, 2013, has signed a new DTAA at Valetta, Malta. Once the DTAA enters into force, it will stimulate the flow of capital, technology and personnel between both the countries and will further strengthen the economic relationship. It also provides tax stability and reduces any obstacles in providing mutual cooperation between India and Malta.

The Second Protocol amending the Agreement between the Government of the Republic of India and the Government of United Arab Emirates for the avoidance of double taxation and the prevention of fiscal evasion

India-Malta inks new DTAA

Protocol amending DTAA between India and United Arab Emirates


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with respect to taxes on income and capital signed on th

the 16 day of April, 2012 shall come into force on the th12 day of March, 2013, being the date of later of the

notifications after completion of the procedures as required by the respective laws for the entry into force of the said Agreement.

Thus, the Central Government in view of the aforesaid and in exercise of powers conferred by section 90 of the Income Tax Act, 1961, vide notification dated 12.04.2013, has notified that all the provisions of the said Second Protocol between the Government of the Republic of India and the Government of Gibraltar shall be given effect to in the Union of India with effect from

th12 day of March, 2013.

The Securities Exchange of India (SEBI), vide its Circular dated 28.03.2013, notified the Securities and Exchange Board of India {KYC (Know Your Client) Registration Agency} Amendment Regulations, 2013 have with effect from March 22, 2013 whereby the requirement for sending original KYC documents of the clients to the KYC Registration Agencies has been removed. The aforesaid circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 and Regulation 17 of the SEBI (KYC (Know Your Client) Registration Agency) Regulations, 2011 to protect the interests of investors in securities and to promote the development of and to regulate the securities markets.

The Securities Exchange of India (SEBI), in exercise of the powers conferred under section 30 of the Securities and Exchange Board of India Act, 1992, vide notification dated 26.03.2013, made Regulations to amend the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. These regulations may be called the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2013. They shall come into force on the date of their publication in the Official Gazette.

CORPORATE, CAPITAL MARKET & FOREIGN TRADE

Amendment to SEBI {(KYC) Registration Agency} Regulations, 2011

Amendment to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

According to the new regulations, one of the primary amendment which has been inserted is that any person, who together with persons acting in concert with him, holds shares or voting rights entitling them to five per cent or more of the shares or voting rights in a target company, shall disclose the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below five per cent, if there has been change in such holdings from the last disclosure made; and such change exceeds two per cent of total shareholding or voting rights in the target company, in such form as may be specified.

The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India has issued Circular 1 of 2013 - Consolidated FDI Policy Document which will take effect from 05.04.2013. Some of the changes introduced by the said Policy are provided herein below.

The said Circular incorporated changes with regard to inflows in multi brand retail and allowing Pakistan nationals and companies to invest in the country. It has also introduced policy changes in sectors like single brand retail, asset reconstruction companies (ARCs), power exchanges, civil aviation, broadcasting and non-banking financial companies. The Central Government, last year, had permitted 51 per cent foreign direct investment (FDI) in multi-brand retail sector. The Government had also allowed foreign airlines to pick 49 per cent stake in the cash-strapped domestic carriers. Similarly, it has raised FDI cap to 74 per cent in various services of the broadcasting sector. The foreign investment ceiling in ARCs has also been increased to 74 per cent from 49 per cent. Further, it has incorporated the changes made with regard to FDI from Pakistan. Now, a Pakistani citizen or an entity can invest in the country under the government approval route. The Government has permitted foreign investment of up to 49 per cent in the power trading exchanges in the country. The Policy has also listed as many as eight mandatory conditions and one optional clause with regard to conversion of a company with FDI into a Limited Liability Partnership firm.

The Securities Exchange of India (SEBI) has issued a circular dated April 17, 2013 stating that, pursuant to

Consolidated FDI Policy - Circular 1 of 2013

Redress of investor grievances through SEBI Complaints Redress System




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the provisions of Section 15C of SEBI Act, 1992, all listed companies are called upon to redress the grievances of investors and inform them within 30 days of the receipt of the complaints. SEBI has further directed that the companies which are yet to obtain SEBI Complaints Redress System (SCORES) user ID and password are required to send their details in the prescribed format to SEBI and at [email protected] and obtain the SCORES user ID and password. In case of failure to obtain the SCORES user ID and password within 30 days of issue of this circular, the same would not only be deemed as non-redressal of investor grievances but also indicate willful avoidance of the same. It has further been directed that the failure by the companies to file Action Taken Reports under SCORES within 30 days of date of receipt of the grievance may also attract the provisions of Sec 15A(a) of the SEBI Act, 1992. The said circular shall come into force with immediate effect.

The subscribers of the retirement fund body, Employees Provident Fund Organization (EPFO) will be able to apply online for transfer and withdrawal of their

stprovident fund with effect from 01 July, 2013. The EPFO has decided to set up a central clearance house which will be operational from July 1. This will enable subscribers to apply online for settlement of the withdrawal and transfer of funds claims. This central clearance facility will expedite the process and will enable the subscribers to track online the status of their applications for transfer and withdrawals. Under the new online system for transfer and withdrawal claims, the onus of verifying the details of the PF account from previous employers would be on the EPFO. At present, employees have to get their applications verified from their employers for settlement of claims.

India has started visa-on-arrival facility for senior citizens of Pakistan at the Attari Integrated Check Post

stfrom 01 April, 2013. The facility, which was supposed to start on January 15 as part of the new liberalized visa pact between India and Pakistan, was suspended following the killing of two Indian soldiers along the LoC and subsequent heightened tensions in bilateral

EMPLOYMENT

IMMIGRATION

Online PF transfer, withdrawals from July 1: EPFO

India starts visa on arrival for Pakistan senior citizens



relations. However, no decision has been taken on the stalled group tourist visa facility which the two countries, had earlier agreed to operationalize the group tourist visa facility to be offered to each other's citizens.

The Government has extended the Visa on Arrival facility for tourists at five more international airports across the country, besides the four existing metro cities. It has been decided at the third Inter-Ministerial Coordination Committee meeting to extend facility of tourist Visa on Arrival at Goa, Trivandrum, Bangalore, Hyderabad and Kochi airports. Currently the Visa on Arrival facility is operational at four international airports in Delhi, Mumbai, Kolkata and Chennai. The Government has permitted the Visa on Arrival facility for citizens of 11 countries which include Japan, Singapore, Finland, Luxembourg, New Zealand, Cambodia, Laos, Vietnam, Philippines, Myanmar and Indonesia.

The President has given his assent to the anti-rape bill i.e. Criminal Law (Amendment) Bill, 2013, bringing into force the new legislation which provides for stringent punishment for rapists and repeat offenders and makes provisions of strict punishment for offences like stalking, voyeurism, disrobing and acid attacks. The Bill passed by both the Houses of the Parliament has now become the Criminal Law (Amendment) Act replacing the Ordinance.

The new law provides for even capital punishment for rapist if the act causes death for victim or leaves her in a permanent vegetative state. Repeat offenders may also get capital punishment under the new law that has amended various sections of the Indian Penal Code, the Code of Criminal Procedure and the Indian Evidence Act. The law keeps rape as a gender-specific crime where only a man can be booked for committing such offence. It, however, keeps the age of consent at 18. It further states that an offender can be sentenced to rigorous imprisonment for a term which shall not be less than 20 years, but which may extend to life, or imprisonment for the remainder of the convict's natural life and with a fine. It defines stalking and voyeurism as

Visa on Arrival facility at five more international airports in India

New anti rape law comes into force

LEGISLATIONS / NOTIFICATIONS


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non-bailable offences if repeated for a second time. It prescribes a punishment ranging from 10 years to life imprisonment if someone traffics a minor and a jail term of 14 years which may be extended to life imprisonment if the offender is involved in trafficking more than one minor. For acid attack that caused harm to the victim, the offender will get a jail term of minimum 10 years which can be extended to life term. Offender can attract a penalty of five to seven years if he is involved in acid attack.

The Competition Commission of India (CCI), in exercise of the powers conferred by section 64 of the Competition Act, 2002, has amended the Combination Regulations with a view to further simplify the filing requirements. These regulations may be called the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2013 and the same shall come into force on the date of their publication in the Official Gazette. The provisions of the Competition Act, 2002 relating to regulation of combinations have been in

stforce with effect from 1 June, 2011 and were subsequently amended on 23.2.2013.

Some of the major changes in the Combination Regulations are - the Regulations now do not require a notice to be filed for acquisition of shares or voting rights of companies if the acquisition is less than five percent of the shares or voting rights of the company in a financial year, where the acquirer already holds more than twenty five percent but less than fifty percent of the shares or voting rights of the company. The provision for giving notice is now dispensed for mergers/amalgamations involving two enterprises where one of the enterprises has more than 50% shares or voting rights of the other enterprise. Similarly, the requirement of giving notice is also dispensed for merger or amalgamation of enterprises in which more than 50% shares or voting rights in each of such enterprises are held by enterprise(s) within the same group.

The Supreme Court, in a landmark judgment of Novartis AG Vs Union of India, has held that the improvements

Amendments to the Combination Regulations: CCI

Improvements enhancing therapeutic efficacy of a medicine are only patentable: SC

JUDGMENTS

enhancing therapeutic efficacy of a medicine are only patentable. The Court further stated that just increased bioavailability alone may not necessarily lead to an enhancement of therapeutic efficacy. Whether or not an increase in bioavailability leads to an enhancement of therapeutic efficacy in any given case must be specifically claimed and established by research data.

In the present case, Novartis approached the Apex Court for granting of a patent for its anti-cancer drug Gleevec. It was argued on behalf of Novartis that certain properties of the new form of the drug, including greater solubility, better stability under heat, is counted as improved efficacy. However the Hon'ble Supreme Court did not agree and stated that if improved efficacy meant therapeutic efficacy, patent applicants must prove so based on research conducted both in the laboratory and in trials on animals. The Court was of the view that no material has been offered to indicate that the beta crystalline form of Imatinib Mesylate will produce an enhanced or superior efficacy (therapeutic) on molecular basis than what could be achieved with Imatinib free base in vivo animal model. Thus, the Court was of the view that in whichever way section 3(d) of the Patents Act, 1970 may be viewed, whether as setting up the standards of “patentability” or as an extension of the definition of “invention”, it must be held that on the basis of the materials brought before this Court, the subject product, that is, the beta crystalline form of Imatinib Mesylate, fails the test of section 3(d) of the Patents Act, 1970.

The Apex Court further clarified that it has held that the subject product in this case does not qualify the test of Section 3(d) of the Act but that is not to say that Section 3(d) bars patent protection for all incremental inventions of chemical and pharmaceutical substances. It will be a grave mistake to read this judgment to mean that section 3(d) was amended with the intent to undo the fundamental change brought in the patent regime by deletion of section 5 from the Patents Act, 1970. That is not said in this judgment.

It has been further clarified by the Hon'ble Supreme Court that in case of chemicals and especially pharmaceuticals if the product for which patent protection is claimed is a new form of a known substance with known efficacy, then the subject product must pass, in addition to clauses (j)and (ja) of section 2(1), the test of enhanced efficacy as provided in section 3(d) read with its explanation.


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Online advertisements not liable to tax: ITAT

In a decision in determining the taxability of online advertisements, a Calcutta Income Tax Appellate Tribunal held that the payment to websites such as Google, Yahoo, etc. for online advertisement are not liable to tax in India. According to the Order passed by the Tribunal, the Websites' presence in a location cannot be construed as fixed place constituting a permanent establishment. Under the rules governing cross-border taxation, having the presence of a permanent establishment in a location is an ideal condition for any tax regime to claim tax. The Tribunal observed that the web server located in the tax jurisdiction can be construed as a permanent establishment however in this case the servers are outside India and therefore the tax claim based on having a permanent establishment in India could not be made. The Tribunal further observed that the search engines presence in a location, other than the location of its effective place of management, is only on the internet or by way of a website, which is not a form of physical presence.

In April, 2013, Milestone Religare Investment Advisors Pvt. Ltd (“Milestone Religare”) sold its Rs. 420 crore fund to Quadria Capital, a new fund house without Securities Exchange Board of India (“SEBI”)'s approval. It is to be noted that Milestone Religare is an equal joint venture private equity firm between financial services major Religare Enterprises Ltd and Milestone Capital Advisors Ltd (“Milestone Capital”). While Milestone Capital Advisors is registered as a venture capital fund with SEBI, Quadria Capital's name does not appear on the list of either venture capital funds or as an Alternate Investment Fund under the new SEBI (Alternative Investment Fund) Regulation, 2012 (“AIF Regulations”). The aforesaid has raised a concern about the loopholes present in the AIF Regulations.

It would therefore be relevant to discuss about the AIF Regulations which have been in question on account of the aforesaid transaction. An Alternative Investment Fund (“AIF”) has been defined as a fund established or incorporated in India, in the form of a trust or a

ARTICLE

SEBI (Alternative Investment Fund) Regulations, 2012

By Mr. K. Ravi Ranjan, Senior Associate, K&A

company or a limited liability partnership or a body corporate which is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and it is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999. Thus, AIFs are private investment funds that pool assets from a group of investors and have a defined target for that pool. SEBI's intention (as stated in the concept paper) is to accurately regulate non-retail investment funds. The AIF Regulations repealed the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 (the “VCF Regulations”).

One of the objectives of the AIF Regulations is to remove confusion on the kind of businesses or securities, the fund can invest into. The AIF Regulations apply to all AIFs whether operating as Private Equity Funds, Real Estate Funds, Hedge Funds, etc. and they must register with SEBI under the AIF Regulations. The new regulations modify the old regulation scheme where investment was based on contract. Such venture capital funds registered under the VCF Regulations shall continue to be governed by the VCF Regulations till they are wound up or till the maturity of the contract. The existing VCFs are not allowed to increase the targeted corpus of the fund or scheme as it stands on the day of Notification of the AIF Regulations. Further, there is a provision for transitioning from the old regime to the new if two thirds of the investors by value, vote in favour of a new regime registration. Existing funds not registered under the VCF Regulations will not be allowed to float any new scheme without registration under AIF Regulations. However, schemes floated by such funds before coming into force of AIF Regulations, shall be allowed to continue to be governed till maturity by the contractual terms, except that no rollover/ extension or raising of any fresh funds shall be allowed. Existing funds not registered under the VCF Regulations which seek registration but are not able to comply with all provisions of AIF Regulations may seek exemption from SEBI from strict compliance with the AIF Regulations. The AIF Regulations only refer to funds where investors money is pooled therefore money managed under portfolio management services for listed equity doesn't fall under this regulation.

Scope and Applicability of AIF Regulations, 2012

Salient Features of the AIF Regulations

Under the AIF Regulations, SEBI has created three types of pools, divided as Category I, II or III. The first category is a pool which invests in socially beneficial companies like welfare companies, venture capital companies etc and includes specific sector investments and focuses on the unlisted category of enterprises,. These would then be given targeted benefits like tax exemptions. Category II focuses on unlisted enterprises but doesn't limit the fund to a defined sector. This is akin to many sector-agnostic PE funds that are likely to fall in this category, thus making category II funds as funds which can invest anywhere in any combination but are prohibited from raising debt (except temporarily in limited quantity). The third category caters to any other kind of fund—hence, a fund that invests primarily in listed equity will qualify for this category, thus it can invest anywhere it wants and also can raise debt. This category can be termed as domestic hedge funds that take leverage as part of their strategy and use a mix of assets and derivatives to achieve returns. Since the third category can pose systemic risk, additional reporting and other regulatory burdens have been imposed on them.

The AIF Regulations impose restrictions on pooling of money. The AIFs cannot make public offer to invite investments and can only raise finance by way of private placement. The regulations permit the listing of most funds after they have raised money, but offers are expected to be made privately and the minimum lot size of trading must be Rs. 1 Crore per person. Listing with such large lot sizes ensures both liquidity and protection of the small investor at the same time making this is a great compromise thought up by SEBI. There is also a requirement of Rs. 20 Crore (in each scheme) for the fund to register.

Managers of the pool are also expected to shell out 2.5% of the size of the pool or Rs. 5 Crores whichever is lower in the form of investment in the AIF and such interest shall not be on the basis of waiver of management fee. The commitment money is further double in the case of Category III pools which would further discourage misselling on the basis of wrongful information. SEBI has also vide the AIF Regulations, emphasized on transparency in operations and sharing information through disclosure norms on various operational risk management issues, portfolio details and investee company financials, among other things thus ensuring a level of disclosure, particularly of any conflict of


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interest that the fund manager may have towards the investors, by dedicating an entire chapter towards General Obligations and Responsibilities and Transparency. There is a need to be transparent about the fund manager's background and experience, the fees being charged by the manager, the tenure and strategy of the fund and conflict of interest situations. The regulation also provide for AIFs to ensure transparency and disclosure of information to investors, these are welcome additions to the old regulations previously in place. There are further restrictions which promote transparency and reasonableness like the maximum percentage of capital of one company a fund can hold and restrictions on related party transactions. There are provisions of investor protection like valuation on a periodic basis, addressing of investor complaints and record keeping which have been introduced.

From the perspective of the AIFs, the cost of compliance would increase manifold on account of the various reporting conditions which also include commercial matters which were previously only subject to negotiations between the parties. Additionally, the schemes can only operate in a single category under which has registered. The regulations also provide for appointment for custodian. Further, Debt Funds in Category II are defined to mean funds that invest primarily in debt or debt securities of listed or unlisted investee companies. However, regulation 17(a) states that category II AIF shall invest primarily in unlisted investee companies, which does not appear to be in consonance with what is stated in the preceding statement. Another related aspect which is also required to be dealt with is foreign investment in such AIF. It also appears from the news reports that SEBI has requested the government for permitting of foreign direct investment and downstream investment in AIFs. From the perspective of SEBI and the investors, an important aspect which is missing, appears to be the acquisition of one fund or funds by another fund and other aspects related to such transactions. Also missing is the acquisition of existing fund under the VCF Regulations by an AIF. It is clearly evident that the deal between such funds may not come under the scanner of SEBI as per the extant AIF Regulations. This appears to have been utilized by Milestone Capital and Quadria Capital in undertaking the deal.

Areas of concern


K & ANewsletter



Conclusion

Notwithstanding the limitations which have arisen on account of the initial stages of the concept, the AIF Regulations have clearly specified registration of such funds and clear demarcation of the funds in the areas in which such funds shall operate. This leads to greater certainty and clarity from a monitoring perspective. The funds can also be registered as a trust, company, limited liability partnership or any other body corporate formed for the purpose which gives flexibility to the AIF. Further, irrespective of the increase in the compliance costs due to the additional compliances required to be undertaken, such compliance would lead to better management and transparency of the funds and instill confidence in the investors.

References

1. http://www.livemint.com/Money/PqALH4rAhBC1dg5L PjNDBN/Sebi-to-review-AIF-norms-to-plug-dealmaking-loopholes.html (Accessed on April 27, 2013)

2. http://articles.economictimes.indiatimes.com/2013-01-02/news/36111554_1_alternative-investment-funds-aifs-fdi-policy (Accessed on April 27, 2013)

3. http://www.sebi.gov.in/cms/sebi_data/pdffiles/23767_t.pdf (Accessed on April 27, 2013)

4. http://www.livemint.com/2012/06/10181919/New-Sebi-rules-for-pooled-inve.html (Accessed on April 27, 2013)

5. https://dl.dropbox.com/u/5973996/Yogesh/11%20Jun/G-Money%20lead.pdf (Accessed on April 27, 2013)

6. http://articles.economictimes.indiatimes.com/2013-01-02/news/36111554_1_alternative-investment-funds-aifs-fdi-policy (Accessed on April 27, 2013)

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Attorneys and International Legal Consultantsconferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 and Regulation 17 of the SEBI (KYC (Know Your Client)