Regulatory Updates – Half-Yearly Report – September 30, 2015
A) VCFs like YourNest permitted to invest upto 25% vs 10% in offshore startups.
Guidelines on overseas investments for AIFs/VCFs circular dated October 1, 2015 (CIR/IMD/DF/7/2015) issued by SEBI as under:
Key changes with respect to overseas investment by VCFs
- VCFs are, from the date of this circular, permitted to invest in Offshore Venture Capital Undertakings which have an India connection upto 25% of the investible funds of the VCF;
- VCFs shall not invest in Joint venture/ Wholly Owned Subsidiary while making overseas investments;
- VCFs shall adhere to FEMA Regulations and other guidelines specified by RBI from time to time with respect to any structure which involves Foreign Direct Investment (FDI) under Overseas Direct Investment (ODI) route;
- VCFs shall comply with all requirements under RBI guidelines on opening of branches/subsidiaries/ Joint venture/ undertaking investment abroad by NBFCs, where more than 50% of the funds of the VCF has been contributed by a single NBFC; and
- The VCFs desirous of making investment in offshore venture capital undertaking shall submit their proposal for investment to SEBI for its prior approval.
B) Fund Tenure period to start from close date:
Guidelines on other issues/clarification circular dated October 1, 2015 (CIR/IMD/DF/7/2015) issued by SEBI as under:
Tenure of any scheme of the AIF shall be calculated from the date of final closing of the scheme (fund launched with effect from 1st October, 2015).
C) Startup Act in Works To Crank up Innovation: Govt plans to simplify rules to unleash entrepreneurial energies & create jobs:(ET, November 3, 2015)
The Narendra Modi government wants to provide a powerful launched for start-ups by drastically simplifying the rules and ensuring that innovators are able to take advantage of such an enabling environment, thus unleashing entrepreneurial energies and creating jobs.
At the heart of the initiative is distilling the cumbersome process of compliances under 22 different laws into a two-page Startup Act, a senior government official told. The Department of Industrial Policy and Promotion (DIPP) is looking to turn India into a startup haven.
On the Agenda of Startup Act:
- One simple Start Up Act replacing multiple laws.
- Focus on reducing compliances & speed up setting of businesses.
- Limit the law to “innovative” product/technology service
- Idea should push manufacturing and generate jobs.
D) New Bankruptcy Bill to Speed up Shutdown of Cost (ET, November 5, 2015):
The Bankruptcy Law reforms commission headed by former secretary TK Viswanathan has proposed insolvency resolution within 180 days and a new regulator oversee the process. It’s also laid down clear and speedy systems for early identification of financial distress and revival of companies.
E) Relatives excluded from definition of “Deposits”
MCA amended the Companies (Acceptance of Deposits) Rules, 2014 on 15th September, 2015 that:
- The definition of “deposit” has been amended to exclude any amount received from a relative of the director of the private company, provided such relative furnishes a declaration that such amount is not out of funds acquired by him by borrowing or accepting loans/deposit from others;
- The company shall disclose the details of money so accepted in the Board’s report.
F) Firms can claim Income-Tax deduction on expenses for IPR acquisition
The Supreme Court on 28th October 2015 (Mangalore Ganesh Beedi Works vs CIT) has held that a firm can claim deduction or depreciation in income tax on expenses incurred for acquisition of intellectual property, such as patent and trademarks rights, copyrights and know-how, as they are capital in nature.
Regulatory Updates – Annual Report – March 31, 2015
GAAR: Applicability deferred to FY 2017-18 onwards. Exits made before March 31, 2017 won’t attract GAAR. All investments made upto March 31, 2017 will be protected from applicability of GAAR by amendment to be made in Income tax rules (to be notified).
Permanent Establishment Safe Harbour- Fund management activity undertaken in India by an eligible fund manager on behalf of an eligible offshore fund will not trigger business income taxation for the offshore fund in India.
Qualifying criteria for an eligible fund include:
- Fund is a non-resident of India (activities of fund manager in India will not itself result in the offshore fund being regarded resident in India).
- Fund must be resident if a country with which India has a treaty (including information exchange treaty).
- Indian residents cannot own more than 5% of the corpus of the fund.
- Fund must be subject to investor protection regulations in home country jurisdiction.
- Fund must have minimum 25 unconnected members.
- No individual investor (including connected person) can hold 10% or more in the fund.
- Participation interest of 10 or less members along with their connected persons shall be less than 50% of the fund.
- Fund cannot invest more than 20% for its corpus in any entity.
- Fund cannot invest in any associate entity.
- Monthly average corpus of the fund cannot be lower than INR 100cr.
- Fund does not undertake any other business in India.
- Fund does not undertake any other activity in India, which can result into a business connection in India and
- Fund remunerates the fund managers on an arm’s length basis.
Key qualifying criteria for the eligible fund manager include:
- Fund manager cannot be connected person of the fund.
- Fund manager must be registered as a fund manager or investment advisors with SEBI under the regulations stipulated for portfolio manager, investment advisor or such other regulations as my be specified by SEBI.
- Fund manager is not entitled to more than 20% profits earned by the Fund.
Residency of Foreign Companies: Any foreign company with place of effective management in India (“POEM”) at any time during the year will qualify as Indian resident- may not be entitled to claim tax treaty. Currently, only 100% management and control in India triggers residency. POEM linked to key management and commercial decisions of an entity as a whole. Specific exemption for eligible Fund Managers covered in 4 above.
Global Depository Receipts: Definition modified to cover only GDRs with underlying listed Securities- tax planning opportunity curtailed.
Tax Pass-through for AIF 1 and 2:
- Eligible for pass through only for capital gains and interest income (but not for business income)-Fund will have to withhold tax @10%
- Income received by the Fund to be exempted from TDS by portfolio companies (notification to be issued)
- Capital loss cannot be passed on to the investors- Fund will have to carry it forward for set off in future years.
- Business income taxable at trust level-correspondingly distribution of such income exempt for investors.
- Fund will need to file tax return.
Indirect Transfer Taxation related relaxation:
- Substantial assets in India deemed at 50%
- Small shareholders holding 5% or less, directly or indirectly, excluded from the indirect transfer tax.
- Indirect transfer taxation restricted to proportion of assets in India v outside India (rules to be prescribed).
- Reporting obligation on Indian entity in case of taxable indirect transfer.
- Exemption for capital gains income earned by FIIs only- Interest income and short term capital gains on NCDs of FII may be subject to MAT.
- Creates a larger issue for investors other than FIIs- like PE and FDI investors- current debate whether MAT is exempt under the Treaty.
- Income from AOP exempt from MAT.
- Effective corporate tax rate (including BDT and DDT) increased for domestic companies due to increase in surcharge by 2%.
- Corporate tax rates to b reduced from existing 30% to 25% over 4 years starting from April, 2016 accompanied by the removal of many incentive provisions (no change in the current year.
Income Computation Disclosure Standards (ICDS): CBDT notified 10 ICDS on March 31, 2015, which is applicable from FY2015-16.
- Applicable to all assesses following mercantile system of accounting.
- Applicable to compute income chargeable under the head of ‘Profit and gains of business or profession’ or ‘Income from other sources’
- In case of a conflict between the provisions of the Income Tax Act and ICDS, provisions of the Act shall prevail.
- Substantial disclosure norms prescribed under each ICDS- manner of disclosure not yet prescribed.
Specified Domestic Transaction: Transfer pricing provisions to apply for transaction above INR 20crores as against INR 5crores.
Direct Tax Code (DTC): DTC is history.
3) Corporate Law
Changes introduced by Companies (Amendment) Act, 2015:
- Requirement of minimum paid up Share Capital by a company done away with
- Requirement of Common Seal non-mandatory
- Certificate of commencement of business no longer required to be obtained
- Penal provisions has been introduced for contravention related to Acceptance of deposit by Companies
- No person shall be entitled to inspect or obtain copies of the Board Resolutions filed with Registrar
- No dividend to be declared unless brought forwards losses and depreciation not provided on previous year are set off against profit of the company for the current year
- Auditor shall report an offence of fraud to Audit Committee or Board of Director and same shall be forwarded to Government.
- Loan/ guarantee/security provided by the holding company to its wholly owned subsidiary exempted from restrictions under Section 185 of Companies Act 2013, provided loans are utilized or its principal business activity
- Special resolution for approving the related party transaction has been done away with (Section 185). Now even a board resolution valid
- No resolutions required if the accounts of holding and subsidiary company are consolidated and place before shareholders in general meeting for approval
Exemption/Relaxations for private companies notified by Ministry of Corporate Affairs (MCA):
- Issuance of equity shares with differential voting rights without complying with stringent conditions, if provided in MOA and AOA
- Holding, subsidiary, associate, fellow subsidiary companies are not subjected to related party transactions. Member being a related party can vote for approval of such transaction
- Resolutions on providing loans (i) to directors/persons in whom the directors are interested OR (ii) to any person for purchase of its own shares not applicable to private companies, provided
- No other body corporate has invested in the share capital of such company
- Its borrowings from banks/FIs/anybody corporate is less than the lower of twice its paid up share capital or INR 50 crs
- It has not defaulted on repayment of such borrowings subsisting at the time of making the transaction
- Acceptance of deposits from its members without complying with specified conditions, provided the deposits accepted do not exceed aggregate of paid-up share capital and free reserves details of the deposits accepted are filed with the Registrar
- Time limit to offer Right Issue- can be less than 15 days, provided approved by 90% members.
- ESOPs can be issued subject to an ordinary resolution
- Possible for a director to participate in a meeting where the contract in which he is interested is discussed, after disclosure of his interest.
Regulatory Updates – Quarterly Report – December 31, 2014
- Indian company permitted to issue partly paid shares and warrants to the FDI Investors under Automatic Route.
- In case of unlisted companies, pricing methodology to determine fair value of shares in case of issue and transfers has been revised.
- Fair value should be determined as per internationally accepted pricing methodology (instead of DCF method prescribed earlier).
- Indian company permitted to issue equity shares, CCPS and CCDs with optionality clause to FDI Investors.
Subject to lock-in of 1 year or period as applicable to respective sector, whichever is higher; lock-in applicable from date of allotment.
CBDT clarification on Taxation of AIF
- In case Trust Deed either does not name the investors or does not specify their beneficial interest, entire income of the Trust liable to be taxed at MMR-practical difficulties for AIFs set up as Trust.
- In such cases, investors need to be taxed as the corresponding income has already been taxed at MMR at the Trust Level.
- Dividend Distribution Tax increased from 16.995% to 19.994% due to grossing up.
3) Company Law
Companies (Amendment) Bill, 2014-Passed by Lok Sabha
- The requirement of having minimum paid up share capital is omitted, for ease of doing business.
- Having a common seal of the company for authorisation and execution of documents is now optional.
- Ordinary resolution in place of special resolution for approval of related party transactions.
- Board resolution filed with the registrar would not be available for public inspection.
Draft Notification for exemption to Private Company
- Provisions related to equity shares with differential voting rights and related party transactions
- Reduced time limit for making Rights Offer
- Certain relaxations on Loan to Directors or persons in whom director is interested
- Issue of shares under ESOPs to require ordinary resolution instead of special resolution
Regulatory Updates – Half-Yearly Report – September 30, 2014
Foreign Direct Investment (FDI) in India – issue / transfer of shares or convertible debentures – revised pricing guidelines
The RBI has issued A. P. (DIR Series) Circular No. 4 dated 15 July 2014, whereby the extant pricing guidelines in respect of transfer / issue of shares and for exit from investment in equity shares with or without optionality clauses of listed / unlisted Indian companies have been reviewed so as to provide greater freedom and flexibility to the parties concerned under the FDI framework.
The new pricing guidelines shall be as under:
– In case of listed companies:
The issue and transfer of shares including compulsorily convertible preference shares and compulsorily convertible debentures shall be as per the SEBI guidelines;
The pricing guidelines for FDI instruments with optionality clauses shall continue to be in accordance with A.P. (DIR Series) Circular No. 86 dated 9 January 2014, i.e., the non-resident investor shall be eligible to exit at the market price prevailing on the recognised stock exchanges subject to lock-in period as stipulated, without any assured return.
– In case of unlisted companies
The issue and transfer of shares including compulsorily convertible preference shares and compulsorily convertible debentures with or without optionality clauses shall be at a price worked out as per any internationally accepted pricing methodology on arm’s length basis. Thus, the guiding principle will be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment / agreement and shall exit at a fair price computed as above at the time of exit subject to lock-in period requirement as applicable in terms of A.P. (DIR Series) Circular No. 86 dated 9 January 2014.
The changes in the existing pricing guidelines for FDI applicable to transfer / issue of shares and for exit from foreign direct investment with optionality clauses for the unlisted Indian companies are given in the Annex 1 and Annex 2 to the Circular respectively.
An Indian company taking on record in its books any transfer of its shares or convertible debenture by way of sale from a resident to a non-resident and a non-resident to a resident shall disclose in its balance sheet for the financial year, in which the transaction took place, the details of valuation of share or convertible debentures, the pricing methodology adopted for the same as well as the agency that has given / certified the valuation.
Regulatory Updates – Annual Report – March 31, 2014
- Regulatory: Guidelines on disclosures, reporting and clarifications under AIF Regulations (Circular dated June 19, 2014 CIR/IMD/DF/14/2014)
- Regulatory: SEBI’s draft proposals for crowd funding may restrict it to accredited investors, allow crowd fund AIFs
- Securities market regulator Securities & Exchange Board of India (SEBI) has come up with draft proposals which may provide a legal platform for crowd funding in India, an alternate funding route for startups in the country.
- SEBI’s norm will restrict itself to security-based crowd funding and steer clear of donation and rewards based funding as also peer to peer lending which falls under the purview of RBI. The regulator has categorised three types of crowd funding equity-based (EbC), debt-based (DbC) and fund-based (FbC).
- Some of the key proposals include restricting the crowd funding to accredited investors; capping crowd funding up to Rs.10 crore within a 12-month period including over subscription (which shall be restricted to 25 per cent of the intended fund raise); attract money from maximum of 200 individual investors (besides institutional investors); founders or promoters need to maintain a minimum of 5 per cent stake in the company for at least three years from the date of the issue besides allowing a new class of crowd fund AIF (alternate investment fund which currently covers angel, VC, PE and hedge funds in the country) who can pool in money from other investors to invest in a company, among others.
Corporate Laws: Companies Act, 2013
The Ministry of Corporate Affairs (MCA) has notified most of the sections and has largely operationalized the Companies Act 2013 (2013 Act). All of the notified sections of the new Companies Act 2013 are in force from 1 April 2014.
MCA vide notice dated 24th June, 2014 invited comments for the draft notification under section 462 of the Companies Act, 2013 to ease the operational activity for Private Companies.
Income-tax: Budget Speech 2014-15, The Finance Bill, 2014
- Promotion of entrepreneurship and start-up Companies remains a challenge. While there have been some efforts to encourage, one principal limitation has been availability of start-up capital by way of equity to be brought in by the promoters. In order to create a conducive eco-system for the venture capital in the MSME sector it is proposed to establish a INR 10,000 crore fund to act as a catalyst to attract private Capital by way of providing equity, quasi equity, soft loans and other risk capital for start-up companies.
- Income from sale of unlisted shares and units of non-equity oriented mutual fund, not held for more than 36 months to be taxable as Short Term Capital Gain; the earlier threshold was 12 months.
- REITs and Infrastructure Investment Trusts, to be formed as per regulations to be notified by SEBI, shall enjoy tax pass through status (except in respect of capital gains on disposal of assets). This facility is already extended to VCF like YourNest.
- Allowed manufacturing units with FDI, under the automatic route, to sell their products through retail, including e-commerce platforms, without any additional approval. It should enable VCFs with non-resident investors to invest in e-commerce companies with their own manufacturing unit & brand.
- Mutual funds, Securitization trusts, VCC / VCF are required to furnish a return of income if their total income exceeds the maximum amount not chargeable to tax. Accordingly, the requirement of filing prescribed statement (giving particulars of amount of income distributed to investors, the tax paid thereon, etc.) has been done away with in case of mutual funds and securitization trusts.
- Effective 1 October 2014, dividends distributed by domestic companies and mutual funds to be grossed up for the purpose of computing DDT.
- Income Tax: CBDT Clarification-additional income tax cannot be levied either on mutual fund redemption or at the time of allotment of bonus shares to the existing shareholders (vide circular No.6/2014 dated 11th February, 2014)
- Section 115R of the income-tax Act, 1961 (the Act) provides for levy of additional income-tax on distributed income to the unit holders. However, some field authorities are taking a view that mutual funds/specified companies are required to pay additional income tax under Section 115R(2) of the Act, not only on income distributed by way of dividend but also on payment made at the redemption /repurchase of units as well as the time of allotment of bonus units to existing investors.
- Further, the income so distributed by mutual fund or specified company in the hands of the recipient unit holder is specifically exempt from tax under Section 10(35) of the Act. Provision to section 10(35) of the Act stipulates that exemption of income under this section is not applicable to those cases where transfer of units takes place. The recipient of such income is liable to pay capital gains tax, if applicable, on transfer of such units as per the relevant provisions of the Act and shall not be subject to additional income-tax under section 115R of the Act. Similarly, bonus units at the time of issue would not be subjected to additional income tax under Section 115R of the Act since issue of bonus units is not akin to distribute of income by way of dividend. This may be inferred from provisions of Section 55 of the Act.
RBI permitted issue of non-convertible/ redeemable bonus preference shares or debentures to non-resident shareholders under the automatic route
Prior to issuance of this amendment, the companies required RBI approval for issue of bonus instruments to non-resident shareholders and RBI was considering the same on a case-to-case basis. However, RBI vide Circular dated 6 January 2014, has given a general permission to companies to issue of non-convertible/redeemable bonus preference shares or debentures (bonus instruments) to non-resident shareholders under the automatic route out of its general reserves under a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act, as applicable subject to no-objection from the Income Tax Authorities.
Regulatory Updates – Quarterly Report – December 31, 2013
Unlisted Indian Companies allowed to list and raise capital abroad
At present, unlisted companies incorporated in India are not allowed to directly list in overseas markets without prior or simultaneous listing in Indian markets. It has now been decided that unlisted companies be allowed to raise capital abroad without the requirement of prior or subsequent listing in India. The scheme will be implemented on a pilot basis for a period of two years from 11th October 2013.
The approval to list abroad is subject to certain conditions as prescribed in the notification, like the listing company to be fully compliant with FDI policy, comply with SEBI disclosure requirements etc. The Funds raised overseas to be remitted back to India within 15 days and such money shall be parked only in AD (Authorised Dealer) category banks recognized by RBI to be used domestically, if the same are not utilized abroad, as stipulated in the notification.
SEBI permit pre-emptive rights and put-call options in Shareholders Agreements
Recently, the SEBI has issued a notification wherein it has relaxed certain provisions under Securities Contracts (Regulation) Act, 1956 (‘SCRA’) to boost the interest of investors by allowing them to include preferential clauses like right of first refusal, tag-along, drag-along and call-put option in the share purchase agreements/ Articles of Association subject to certain conditions.
- RBI Notification permitting options
Regulatory Updates – Half-Yearly Report – September 30, 2014
1) The Securities and Exchange Board of India (‘SEBI’) updates regulation in relation to Alternative Investment Fund (“AIF”) and notifies regulation for “Angel Fund”.
With an aim to encourage entrepreneurship in the country by financing small start-ups, SEBI, vide its notification dated 16 September 2013, amended AIF Regulations to notify new norms for angel investors, who provide funding to companies at their initial stages. Such angel funds are to be a sub-category in Category I – Venture Capital Fund.
- This regulation has defined “Qualified Investors” for the purposes of an Angel Fund – In view of the high-risk investments of such funds, certain conditions have been imposed on investors as given below:
- Individual angel investor should have net tangible assets of atleast INR 2 crores (excluding value of his principal residence) and shall satisfy the one of the following conditions:
- has an experience of early stage investment; or
- has experience of a serial entrepreneur; or
- is a senior management professional with at least 10 years of experience
- Corporate angel investor shall be required to have net worth of INR 10 crores; and
- SEBI registered AIF / VCF
- Individual angel investor should have net tangible assets of atleast INR 2 crores (excluding value of his principal residence) and shall satisfy the one of the following conditions:
- The key characteristics of Angel Fund are defined as:
- Angel Fund shall have a corpus of atleast INR 10 crores (as against INR 20 crores for other AIFs);
- Minimum investment by an investor shall be INR 25 lakhs (may be accepted over a period of maximum 3 years) as against INR 1 crore for other AIFs;
- The continuing interest by sponsor / manager in the Angel Fund shall be not less than 2.5% of the corpus or INR 50 lakhs (as against existing limit of INR 5 crores), whichever is less;
- No scheme of Angel Fund shall have more than 49 angel investors;
- Manager of the Angel Fund is required to obtain an undertaking from every angel investor confirming his approval before making any investment in a venture capital undertaking (‘VCU’); and
- Units of Angel Fund cannot be listed on any recognized stock exchange.
(Note: YourNest Angel Fund is a SEBI registered Venture Capital Fund. It does not fall under the new regulations & notification announced by SEBI for an Angel Fund on dated 16 September 2013.)
2) Amendment to Securities Contracts (Regulation) Act, 1956 (‘SCRA’)
SEBI has issued a notification on 3 October 2013 wherein the SEBI has relaxed certain provisions under Securities Contracts (Regulation) Act, 1956 (‘SCRA’) to boost the interest of investors by allowing them to include preferential clauses like right of first refusal (‘ROFR’), tag-along, drag-along and call-put option in the share purchase agreements / Articles of Association subject to certain conditions.
3) Listing of SME
SEBI has notified on 9 October 2013 “SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013” to permit listing of Startups and Small and Medium Enterprises (‘SMEs’) in Institutional Trading Platform (‘ITP’) without making an Initial Public Offering (‘IPO’).. The move is aimed at providing easier exit options to informed investor (such as Angel Investors, Venture Capital Funds and Private Equities).
The key eligibility criteria’s for SMEs are given below:
- The company has not completed more than 10 years from incorporation;
- Revenue has not exceeded INR 100 cr in any previous financial year;
- Paid up capital of the company has not exceeded INR 25 cr in any of the previous financial years;
- No regulatory action has been taken against the company, its promoter or director by prescribed regulatory authorities within a period of 5 years prior to the date of application for listing
- The company shall satisfy any one of the following criteria:
- Investment of atleast INR 50 lakhs in equity shares of the company by AIF, VCF, other SEBI approved investors or specified angel investor;
- Company has received finance (no minimum threshold specified) from a scheduled bank for its project financing / working capital requirement atleast before 3 years and the same has been fully utilised;
- Investment of atleast INR 50 lakhs in equity shares of the company by registered Merchant Banker / Qualified Institutional Buyer which shall be locked in for 3 years from date of listing; and
- a specialised international multilateral agency or domestic agency or a public financial institution has invested in the equity capital of the company (no minimum threshold specified).
4) Unlisted Indian companies allowed to list and raise capital abroad
The Ministry of Finance (MoF) in its Press Release dated 27 September, 2013 dealing with listing of Unlisted Indian Companies on overseas exchanges decided that unlisted companies allowed on a pilot basis for 2 years to raise capital abroad without the requirement of prior or simultaneous listing in India.
Further notification and amendment issued on 11thOctober, 2013 by MoF & on 8th November, 2013 by RBI are as under:
- Unlisted companies shall list abroad only on exchanges in IOSCO or FATF compliant jurisdictions or those jurisdictions with which SEBI has signed bilateral agreements;
- The companies shall file a copy of the return, which they submit to the proposed exchange/ regulators, also to SEBI for the purpose of PMLA. They shall comply with SEBI’s disclosure requirements in addition to that of the primary exchange prior to the listing abroad;
- While raising resources abroad, the listing company shall be fully compliant with the FDI Policy in force;
- In case the funds raised are not utilised abroad, such companies shall remit the money back to India within 15 days and may be used domestically;
- The ADRs/ GDRs shall be issued subject to sectoral cap, entry route, minimum capitalisation norms, pricing norms, etc. as applicable as per FDI regulations notified by the Reserve Bank from time to time;
- The pricing of such ADRs/GDRs to be issued to a person resident outside India shall be determined in accordance with the captioned scheme as prescribed under paragraph 6 of Schedule 1 of Notification No. FEMA. 20 dated May 3, 2000, as amended from time to time;
- The number of underlying equity shares offered for issuance of ADRs/GDRs to be kept with the local custodian shall be determined upfront and ratio of ADRs/GDRs to equity shares shall be decided upfront based on applicable FDI pricing norms of equity shares of unlisted company;
- The unlisted Indian company shall comply with the instructions on downstream investment as notified by the Reserve Bank from time to time;
- The criteria of eligibility of unlisted company raising funds through ADRs/GDRs shall be as prescribed by Government of India;
- The capital raised abroad may be utilised for retiring outstanding overseas debt or for bona fide operations abroad including for acquisitions;
5) Insurance Companies allowed to invest in Category II AIFs
In March 2013, life and general insurance companies were allowed to invest in Category I AIFs, comprising infrastructure funds, SME funds, venture capital funds and social venture funds. The Insurance Regulatory and Development Authority (‘IRDA’), vide its circular dated 23 August 2013, has now expanded the permissible investment category to Category II AIFs subject to the condition that at least 51 per cent of the funds of such AIFs should be invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities. Insurers, however, are not permitted to invest in AIFs that have the nature of funds of funds and leverage funds.
The overall exposure to venture funds and AIFs put together should not exceed 3 per cent in the case of a life insurance company and 5 per cent in the case of a general insurance company. Exposure to a single AIF or venture fund should not be more than 10 per cent of the fund size (20% of the fund size in case of Infrastructure Funds).
B) Corporate Laws
The Companies Act, 2013, which seeks to replace the Companies Act, 1956 in consonance with changes in national and international economic environment, was notifies on August 30, 2013.
The Companies Act, 2013, has, inter alia, introduced enhanced corporate governance standards particularly in relation to the independent directors, audit, corporate social responsibility, mandatory valuation, private placement of securities, cross-border mergers (including merger of Indian companies into foreign companies) and class action suits.
The Companies Act, 2013 has introduced the concept of ‘One Person Company (OPC)’ and a “Small Company” that is a good step for Indian Start-ups. An idea or an Intellectual Property can be floated in an OPC with the benefits of limited liability and perpetual succession. Further, Small Company brings some ease in doing business during the early days of a venture.
- Angel Fund shall have a corpus of atleast INR 10 crores (as against INR 20 crores for other AIFs);
Regulatory Updates – Annual Report – March 31, 2013
SEBI (Investment Advisers) Regulations, 2013
The Securities and Exchange Board of India (“SEBI”) issued the SEBI (Investment Advisers) Regulations, 2013 vide notification dated 21 January, 2013. It is applicable on
- Every person providing investment advice to any person for consideration (including non-cash benefit) would be required to obtain registration under the Regulation.
- Investment advice inter-alia includes advice relating to investing in, purchasing, selling, financial planning or otherwise dealing in securities or investment products, through any means of communication (including oral) for the benefit of the client.
The exempted person from registration includes any fund manager, by whatever name called of a mutual fund, alternative investment fund or any other intermediary or entity registered with the Board.
Companies Bill, 2012
The Companies Bill, 2011 was laid before the Parliament in December 2011 and was then referred to the Parliament Standing Committee on Finance headed by Mr. Yashwant Sinha (‘the Committee’). Based on the recommendations of the Committee, the Companies Bill, 2011 was amended and introduced as the Companies Bill, 2012. The Companies Bill, 2012 was passed in the Lok Sabha on December 18, 2012. The Bill has 470 clauses and divided into 29 chapters.
It includes changes such as –
- Concept of “One person company” introduced [Clause 2(62)]
- One of the directors of the Company shall be a person stayed in India for 182 days or more [Clause 149]
- The maximum number of members in case of private company is increased from the existing 50 to 200.
- Concept of “Corporate Social Responsibility” introduced [Clause 135]
- Specific provisions for conversion of LLP into Company [Clause 366]
- Provisions for further issue of capital now applicable to both, private as well as public companies [Clause 62]. Accordingly, any shares will have to be offered to all shareholders on pro-rata basis (except in case of preferential issue through special resolution)
- Definition of listed company provided to mean a company which has any of its securities listed on any recognized stock exchange [Clause 2(52)].
- Indian company can be merged with foreign Company or vice-versa with prior approval of RBI [Clause 234]
- Concept of fast track merger introduced to facilitate merger of 2 or more “small companies” or between holding company and its wholly owned subsidiary [Clause 233]
- Majority shareholders may offer to purchase remaining shares from minority shareholders at a price determined by registered valuer in accordance with rules as may be prescribed (alternatively, minority shareholders may offer to sell) [Clause 236]
- Shares of public company are freely transferable. However, contract or arrangement between two or more persons in respect of transfer of securities (such as pre-emption rights and put / call options shall be an enforceable contract [Clause 58]
The Finance Bill 2013 (“the Bill”) was introduced as part of the Union Budget 2013 on February 28, 2013. The Bill received the assent of the President of India on 13 May 2013.
The key amendments to the Act by the Finance Act 2013, which would be relevant to the Fund and its investors are given below:
- Tax Residency Certificate (TRC) requirement – Section 90A of the Act has been amended to provide that a non-resident assessee, to whom a relevant treaty applies, can obtain the treaty benefits by furnishing the TRC issued by the respective foreign tax authorities.
- Pass through status granted to Category I Alternate Investment Funds (AIF) – The Finance Act, 2013 has extended the pass through status under section 10(23FB) to a Venture Capital Fund (VCF) or a Venture Capital Company (VCC) registered with SEBI as a sub-category of Category I AIF under the SEBI AIF Regulations.
- Distribution tax on buyback of shares by unlisted companies – A distribution tax on the buyback of shares by unlisted companies has been introduced effective from June 1, 2013.
- General Anti-avoidance Rule (GAAR) – GAAR to come in force from 1 April 2016 i.e. FY2015 – 16, AY 2016-17.
Other key announcement from the speech of the Finance Minister include
- Angel investors bring both experience and capital to new ventures. SEBI will prescribe requirements for angel investor pools by which they can be recognised as Category I AIF venture capital funds.
- Incubators play an important role in mentoring new businesses, which start as a small or medium business. The new Companies Bill obliges companies to spend 2 percent of average net profits under Corporate Social Responsibility (CSR). It was announced that the Ministry of Corporate Affairs will notify that funds provided to technology incubators located within academic institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure.
- Expending support to MSMEs through SIDBI and privileges for 3-years beyond scaling up shall enable MSMEs to prosper.
- Listing of MSMEs without IPO for informed investors shall create a market for the risk-capital starved sector.