Tax Updates
Clarification regarding the Most-Favoured-Nation (MFN) clause in the Protocol to India's DTAAs with certain countries
The protocol to India’s s Double Taxation Avoidance Agreements (DTAAs) with some of the countries is referred to as the Most-Favoured-Nation (MFN) clause. CBDT via circular 3/2022 dated February 03, 2022, has clarified that if after entering into DTAA with the first State, India enters into a DTAA with another OECD Member State, wherein India limits its source taxation rights about certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) to a rate lower or a scope more restricted than the scope provided for those items of income in the DTAA with the first State, such beneficial treatment should also be extended to the First State. The above action will make a major impact on the taxation of the above incomes and is expected to benefit the nation in long term.
Regulatory Updates
Amendment in SEBI (Alternative Investment Fund Regulations), 2012
Major flexibility has been provided by SEBI to Category III AIFs via notification no. SEBI/HO/IMD/IMD-I/DOF6/P/CIR/2022/0000000037 to calculate their investment concentration norm either taking NAV or investible funds as a base while investing in listed equity of an investee company, subject to some other conditions as prescribed.
Clarification on applicability of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 regulations in respect to Related party transactions
Based on the representations received from listed entities and industry bodies, it has been decided to provide the following clarifications and guidance for smooth implementation of the amended Regulation 23 of the LODR Regulations:
For a Related party transaction that has been approved by the audit committee and shareholders before April 01, 2022, there shall be no requirement to seek fresh approval from the shareholders.
Transparency, accountability, and shareholder empowerment are the bedrock of robust corporate governance. Listed entities, therefore, shall ensure to comply with the spirit of the law and endeavor to provide relevant and detailed information to enable and empower shareholders to take an informed decision;
It is reiterated that a Related Party Transaction for which the audit committee has granted omnibus approval, shall continue to be placed before the shareholders if it is material in terms of Regulation 23(1) of the LODR Regulations.
Further any related party transaction that has been approved by the audit committee before April 1, 2022, which continues beyond such date and becomes material as per the revised materiality the threshold shall be placed before the shareholders in the first General Meeting held after April 1, 2022.
Timelines for Rebalancing of Portfolios of Mutual Fund Schemes
To bring uniformity across Mutual Funds concerning timelines for a rebalancing of portfolio, SEBI via notification SEBI/HO/IMD/IMD-II DOF3/P/CIR/2022/39 has decided that in case of deviation from mandated asset allocation mentioned in the Scheme Information Document (SID) due to passive breaches, the rebalancing period across schemes shall be as follows:
Timelines for Rebalancing of Portfolios of Mutual Fund Schemes
To bring uniformity across Mutual Funds concerning timelines for the rebalancing of portfolios, SEBI via notification SEBI/HO/IMD/IMD-II DOF3/P/CIR/2022/39 has decided that in case of deviation from mandated asset allocation mentioned in the Scheme Information Document (SID) due to passive breaches, rebalancing period across schemes shall be as follows:
|
Category of Scheme |
Mandated Rebalancing Period |
|
Overnight fund |
NA |
|
All schemes other than Index Funds and Exchange Traded Funds |
Thirty business days |
In case, the above schemes are not rebalanced within the stipulated time, justification in writing shall be placed before the investment committee. Further, if the investment committee finds genuine hardships reported by schemes, the former can extend the timelines to 60 business days from the date of completion of the mandated rebalancing period.
RBI in talks to propose Digital Banks
In mid -November of 2021, RBI has proposed to grant license and regulate digital banks in the form of a discussion paper and seeks to get public remarks. The paperwork mainly talks about a two-stage approach, - a digital business bank license, to begin with, followed by a Digital (Universally) Bank license. Digital Banks will work as if a regular Bank functions. The Digital Bank will issue deposits, make loans and offer the full suite of services under the Banking Regulation Act, 1949 but will chiefly rely on the internet and other supporting channels.
Discontinuance of LIBOR as a Benchmark Rate
Reserve Bank of India vides its circular No. 19 dated December 08, 2021, has stated that LIBOR shall not be used as a benchmark rate, and accordingly FCY/ECB/TC shall refer to any widely accepted interbank rate or alternative reference rate. Further, for existing ECBs/ TCs which were previously linked to LIBOR the all-in-cost ceiling for such ECBs/ TCs has been revised upwards by 100 basis points to 550 bps and 350 bps, respectively, over the ARR. RBI has clarified there is no change in the all-in-cost benchmark and ceiling for INR ECBs/ TCs.
Mandatory to obtain a Legal Identifier Number (LEI) for cross border transactions
In an aim to improve the accuracy and reliability of financial data, RBI in its circular No, 2020 dated December 20, 2021, has directed resident entities to obtain a Legal Identifier Number (LEI). LEI is a 20-digit number that is required to do cross-border transactions. By mandatory rule, it will be easier to identify parties to the transactions.
The general permission for infusion of capital in overseas branches and subsidiaries and retention/ repatriation/ transfer of profits
As per the current practice, banks incorporated in India seek prior RBI approval for
- infusion of capital in their overseas branches and subsidiaries.
- retention of profits in, and transfer or repatriation of profits from these overseas centers
To provide greater operational flexibility, it has been decided that prior RBI
approval for the above capital infusion/ transfers (including retention/ repatriation of profits), shall not be required by banks that meet the regulatory capital requirements (Including capital buffers1). Instead, the banks shall seek the approval of their boards for the same.
Revision in UPI (unified interface payments) for subscribing to public issues of debt securities
Currently, Operational Circular no. SEBI/HO/DDHS/P/CIR/2021/613 dated August 10, 2021, provides an option to investors to apply in public issues of debt securities with the facility to block funds through the UPI mechanism for application values up to Rs.2 lakh
Based on discussions with market participants, SEBI via circular SEBI/HO/DDHS/P/CIR/2022/0028 dated March 08, 2022, has announced that to bring about uniformity in the requirements and for ease of investment for investors, it has been decided to increase the limit for investment through UPI mechanism to Rs. 5 lakhs.
Guidelines on accounting for Asset Management Companies (AMC)
As per the SEBI notification issued in January 2022, SEBI has amended Mutual Funds regulations which now mandates every AMC to prepare their financial statements according to the provisions of Indian Accounting Standards with effect from April 01, 2023.
AMCs have been given relaxation to not to mandatorily state their 3 years scheme-wise per unit statistics as per IND AS for the first two years after adopting IND AS the for the first time. Further, AMCs should necessarily show GAAP information not prepared in confirmation with IND AS and disclose the adjustments thereto.
The amendment is the status of provision for appointment of MD/CEO
Earlier in May 2018, SEBI in its board meeting directed its top 500 listed companies to mandatorily appoint two separate persons as chairperson and MD/CEO. However, after receiving representations from stakeholders due to ongoing pandemic situations, SEBI has decided to change this provision status from mandatory to voluntary.
Disclosure for credit ratings and provisions for Due diligence certificate
SEBI has prescribed disclosure of credit ratings and requirement of due diligence certificate specifically for unsecured debt securities under the provisions of SEBI (issue and listing of non -convertible securities) regulations, 2021
Audit committees for AMC
Taking into account the recommendation of the Mutual Fund Advisory Committee (MFAC) and the feedback received from the industry, SEBI via notification SEBI/HO/IMD/IMD-I DOF2/P/CIR/2022/17 has decided that the AMCs of mutual funds shall be required to constitute an Audit Committee.
Role: The Audit Committee of the AMC shall be responsible for oversight of the financial reporting process, audit process, company’s system of internal controls, compliance with laws and regulations, and other related processes, with specific reference to the operation of its Mutual Fund business. In this regard, the Audit Committee shall, inter-alia, have the following mandates:
- To review the financial reporting processes, the system of internal controls, and the audit processes for the Mutual Fund operations of the AMC.
- To ensure that the rectifications, if any, suggested by internal and external auditors, etc. are acted upon
Amendment in Payment and Settlement Systems Regulations, 2008
Reserve Bank of India has amended the Payment and Settlement Systems Regulations, 2008 via notification published on February 10th, 2022. Amendments in regulations now provide powers to prescribe returns and other documents that are required to be submitted by system participants. Further, the above documents prescribed shall be submitted from the registered office only.
Regulatory Updates–IFSC
SWIFT Operations
International Financial Services Centres Authority (“IFSCA”) vide its circular F. No.293/IFSCA/Banking Supervision/2021-22/2 dated 04th January 2022 has directed that the SWIFT operations shall be undertaken from the IBU, GIFT City, Gandhinagar by assigning the roles of maker and checker to suitable staff in IBU itself for ensuring the data confidentiality and data protection. BUs are directed to ensure compliance with the above on or before 31st March 2022.
Negotiated Large Trade facility on Stock Exchanges
Based on the representations received from various stakeholders, IFSCA vides its circular F. No. 286/IFSCA/PM(CMD-DMIIT)/20 dated March 11, 2022, has decided that:
- To facilitate connections of recognized stock exchanges in IFSC with international exchanges, the price limits on NLT facility mentioned in clause 2(b) of circular dated June 22, 2021, (i.e., orders placed shall be within +/-1% of the applicable Reference price) may be aligned with the international exchange for such derivatives products that are having a connection with any international exchange.
- In respect of other derivatives products, the price limits mentioned in clause 2(b) of the circular dated June 22, 2021, may be decided by the recognized stock exchanges ensuring that such limits are fair and reasonable.
Fee structure for Debenture Trustees in the IFSC
IFSCA vide its circular 534/IFSCA/CMD/DEBENTURE TRUSTEE/2021-22 dated February 25, 2022, has issued the fee structure for registration of debenture trustees in IFSC. The applicable fees are as follows:
- Application fee of USD 500.
- Registration fee of USD 2,500
International Financial Services Centres Authority (Operations of International Financial Services Centres Insurance Offices) Guidelines, 2021
The IFSCA on October 27, 2021, has issued the International Financial Services Centres Authority (Operations of International Financial Services Centres Insurance Offices) Guidelines, 2021. The main focus of these guidelines is to bring a framework to address the operational issues International Financial Services Centres Insurance Office (IIO) is facing in the IFSC.
The main issues addressed in the notification area:
- Manner of receipt of insurance premium and assumption of risk
- Settlement of claims in freely convertible foreign currency
- Intermediary or Insurance Intermediary
- Fee structures for applications
- Responsibility for Maintenance of Books of Accounts, Records, and Documents
Key relevant Amendments in the Finance Act, 2022
- Any income earned like royalty and interest by a non-resident through leasing of ships to units located in IFSC shall be exempted for taxation purposes.
- Capital gains to a non-resident on the sale of offshore derivative instruments or over-the-counter derivatives entered with an Offshore Banking Unit (OBU) in an IFSC shall be exempted from tax.
- Gift taxation shall not be levied to category AIF-I and AIF-II where shares are issued to the above fair market value by venture capital undertaking.
- Any income earned by a non-resident from his portfolio/securities that are managed by a specified portfolio manager in an account maintained with an OBU in the IFSC shall be exempted from taxation.
- It has been proposed to set up an International Arbitration Centre for timely settlement of disputes under international jurisprudence and promote foreign investors to freely invest without hesitation.
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