In this blog post, Mithun Pillai, a Management Trainee at a Textile Company in Mumbai and a student pursuing his  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the different categories of FDI in Indian Companies. 

“India has already marked its presence as one of the fastest growing economies in the world. It has been ranked among the top 3 attractive destinations for inbound investments. Since 1991, the regulatory environment in terms of foreign investment has been consistently eased to make it investor-friendly.”

-Make in India (Summary) [1]

In 2015, India emerged as the leading global destination for foreign investments, but the seeds were sown in the disillusionment, and subsequent breakdown of the then Prime Minister Chandrashekhar led government. Although the following PM P.V. Narasimha Rao-led government was hailed for pioneering the liberation of Indian economy through the nineties, one may be forgiven for thinking that was an exercise of choice. Because when the IMF agreed to lend India the emergency loan of USD 2.2 billion[4] against a security of our 67 tonnes of gold bullion, it was contingent on the condition that India opened up her economy to the global market forces that were.

In 2014, Prime Minister Narendra Modi launched the “Make in India” initiative with the objective to increase the skill level of workers/employees and job opportunities for the burgeoning youth population. Although the call to manufacture in India was partly to entice domestic entrepreneurs, it is more focussed on attracting foreign money and technology to expand the manufacturing sphere.

So what is FDI? Broadly and simplistically speaking Foreign Direct Investment is funnelling money/knowledge from a foreign economy/country into a domestic economy in exchange for controlling shares and long-term management objectives. It is primarily regulated by the Central bank of the economy and the government. This is in contrast to Foreign Portfolio investment which although dealing in shares has short-term profit motives and is regulated by the securities and bourse regulators.

Different Categories of FDI

Although there are no strictly defined classes of FDI, the below-mentioned are the popular ones based on different parameters for theoretical purposes. I shall explain them in some detail with practical examples in the Indian economic context:-

FDI based on requirement of approval

• Automatic route:-

FDI in sectors where approval from Foreign Investment Promotion Board (FIBP) is not required comes under the automatic route. Barring any special conditions to be fulfilled, RBI gives automatic approval within two weeks. Most sectors (especially the ones which have 100% investment is permitted) come under this route. These are high growth sectors like manufacturing, petroleum biotechnology, etc.

Eg:- Cairn India(Cain Energy + Vedanta PLC)

• Approval of government route:-

FDI in sectors which don’t come under automatic route (or automatic route is allowed only up to a limit above which approval is required) comes under this category. The approval is processed by FIBP and other sectoral regulators and normally takes around four to six weeks. Sectoral regulators include Telecom Regulatory Authority of India (TRAI) for the telecom sector, Insurance Regulatory Authority(IRDA) for insurance sector et al.

Eg:- Bajaj Allianz(Bajaj Finserv Limited + Allianz SE)

FDI based on entry structures

• Incorporation of a company:

FDI in companies (private and public) is most popular. Other corporate structures have to undergo a lot of scrutiny before being incorporated.

The foreign investor can register as the following types of company under the 2013 Companies Act:

1. Wholly Owned Subsidiary (WOS): A 100% ownership company by the foreign entity in India. Eg:- Facebook India Online Services Pvt Ltd
2. Subsidiary: A majority stake owned by the foreign investor. Eg:-Hindustan Unilever Ltd.
3. Joint Venture (JV): Collaboration with an Indian corporate entity in the minimum ratio 51:49 with the Indian entity having the majority share. The JV should be preferably a company although LLP/partnership is possible. Eg:- Arvind OG Pvt. Ltd.(Arvind Ltd. + OG Corporation)
4. Associate company: A minority stake owned by the foreign investor. Thus, a JV incorporated as a company will be an associate company. Eg:- Arvind OG Pvt. Ltd.(Arvind Ltd. + OG Corporation(Japan);74:26)

• Incorporation as an LLP:

Although LLP has less compliance requirement than companies, FDI in LLP has more regulations for FDI than a company. 100% FDI is permitted in LLP.

• Extension of the foreign entity:
  • Liaison office:- It acts as a connecting link between the foreign corporate office and the domestic body corporate. It’s not allowed to generate income. It can only gather data and help disseminate technical knowledge.
  • Branch office:- It is suited for foreign entities involved in manufacturing/trading. It is ideally involved in research, consultancy, aiding in technical help et al.
  • Project office:- It is like branch office except much more specific in function and time bound. It is set up to execute certain projects and after execution of the objective is usually wound up.
  • Trust:-…..[5] Only venture capital funds registered with SEBI are permitted for FDI as trusts. They usually require approval and have a lot of regulations. They are also subject to provisions of ‘Foreign Contribution Regulation Act.’

FDI based on investors target [2]

• Greenfield Investment:-

Here, FDI is made in new/nascent/upcoming facilities. They are the main area of interest for the host nation as it boosts expansion, economy, jobs and technological advances. A common criticism is the positive effects happen at the peril of local small industries losing market share as they have to compete against cheap products in bulk due to technology.

Eg:- Walmart opening retail stores in India.

• Merger and Acquisition:-

This is the most common type of FDI where the domestic company merges with the foreign body corporate to become a new corporate entity, usually a company. This across-the-border merger does not have long duration benefits of helping the domestic economy because the payment for owners of a domestic entity is made in stocks rather than cash.

Eg:-Vodafone-Hutchison-Essar

• Horizontal FDI:-

FDI in the same horizontal or business as the one in which the foreign investor operates back in its own country.

• Vertical FDI:-

FDI in the vertical segment of the business as the one in which foreign investor operates back in its own country. This is of two types based on the position of the domestic production of foreign entity in the vertical:

• Forward vertical FDI:- FDI into a body corporate which distributes foreign entity’s business product back in its home country.
• Backwards vertical FDI:- FDI into a body corporate which provides the raw material for foreign entity’s business back in its home.

Based on investors motive [2][3]

• Resource seeking FDI:-

Such an FDI is made where primary concerns are abundance/availability of a particular mineral and natural resources (oil, coal, etc.) or cheap labour. Such efficiencies of resource and scale in production is not found in the home country of a foreign entity which makes them seek business opportunities in countries having them in abundance (usually Middle East, Africa, South East Asia). The business here is generally involved in export of its products. Eg:- IT companies are investing in companies in India for its cheap wages/income.

• Market-seeking FDI:-

As the name suggests this FDI seeks entities in countries which have a sizeable target market for its products. It’s usually supplying companies which indulge in such investment to cater to overseas market(existing and/or upcoming). It’s generally seen that such FDI is usually done out of fear of losing markets than exploring new ones. Eg:- Amazon India

• Efficiency-seeking FDI:-

As the name suggests such an FDI seeks entities in countries which can help increase/integrate its already existing business back home and thus, taken over a common geographic area, help achieves increase efficiency and economy on a wider scale than before. Eg:- Samsung, manufacturing individual components in China/Taiwan and setting shop in India to easily import the components, assemble them and sell the smartphones as value added digital products.

• Strategic asset seeking FDI:-

When tactical market capture to sustain/defend their business and avoid loss of asset/market/resource to a competitor is the long term objective, then such an investment is said to be strategic in nature. Eg:- Builder/developers are buying a large plot of land as reserves even though there is no immediate plan to construct.

Thus, the motive or objective for investment must be clear to a foreign investor, or else they face risking precious money and time on wasteful expenditure. The Indian government has as of 2016 very generously opened up our economy for FDI which is evident by the global interest in our markets. Let’s hope it continues to remain as long as it can.

The post All About The Different Categories Of FDI In Indian Companies appeared first on iPleaders.

In this blog post, Seuj Bikash, an Advocate, presently practising in the Gauhati High Court who is also currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details the procedure of an online FDI. 

Introduction

For the growth of India’s economy, the role of a foreign investor is considered indispensable since it accelerates the economic growth of the nation by supplementing domestic capital, technology and skills. In our country FDI was introduced by the Foreign Exchange Management Act, 1991(FEMA) and the same is allowed by two routes, i.e., the Automatic Route and Government Approval Route. In the Automatic Route FDI is allowed without prior approval of the Government or the Reserve Bank of India (RBI).But prior approval of the Government is necessary for investing through the Government Approval Route of FDI. However, the prior approval of the Government is compulsory only for investing in limited economic sectors. The activities or items for which the foreign investors shall apply through the Government Approval Route include the following-

• Retail(Wholesale/Single-multi brand)
• Mining of Titanium
• Brownfield Pharmaceuticals
• Broadcasting and print media
• (v)Telecommunication services
• Private Security Agencies
• Satellite- establishment and operation
• Tea Plantation
• Defence
• Civil Aviation
• Financial Services

FIPB, the overseer of FDI under Government Approval Route

Prior approval of the Government is needed for FDI in all those economic activities which are not allowed under the Automatic Route and proposals for FDI in those activities are considered by the Foreign Investment Promotion Board or FIPB in the Department of Economic Affairs, Ministry of Finance. The FIPB is an inter-Ministerial body whose task is to oversee the Government Approval Route of FDI. It is the body responsible for the expeditious processing of FDI application filed by the foreign investors and making recommendations for approval of the Government on the basis of Extant Policy, Press Notes, RBI Notifications and other related guidelines formulated by the Department of Industrial Policy and Promotion, Government of India. The Consolidated FDI Policy passed by the Government of India with effect from 1^st October 2011(hereinafter referred to as the FDI Policy), in its Chapter-5, State .Rule No. 5.1 has provided for the constitution of the FIPB. According to the said Rule, the FIPB comprises of the Secretary to the Government, Department of Economic Affairs, Ministry of Finance as its Chairman and the members of the FIPB includes the following personnel-

• Secretary to Government, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry,
• Secretary to the Government, Department of Commerce, Ministry of Commerce & Industry,
• Secretary to Government, Economic Relations, Ministry of External Affairs and
• Secretary to Government, Ministry of Overseas Indian Affairs.

Rule 5.1.2 of the FDI Policy states that the FIPB would be able to co-opt other Secretaries to the Central Government and top officials of financial institutions, banks and professional experts of Industry and Commerce, as and when necessary. The Rule 5.2.1 of the FDI Policy dealing with “Levels of Approvals for Cases under Government Route” states that the Minister of Finance who is the in charge of FIPB would consider the recommendation of FIPB on proposals with total foreign equity inflow of and below Rs. 2000 crore. The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 2000 crore would be placed for consideration of Cabinet Committee on Economic Affairs (hereinafter referred to as CCEA) [Rule 5.2.2 of the FDI Policy]. The CCEA would also consider the proposals which may be referred to it by the FIPB/the Minister of Finance (in-charge of FIPB) [Rule 5.2.3 of the FDI Circular]. The Rule 5.3.1 of the FDI Circular mentions the cases in which no fresh prior approval of the Government, i.e.,., Minister in Charge of the FIPB/CCEA is required for bringing additional foreign investment into the same entity. Those cases are as follow-

(i) Entities the activities of which had earlier required prior approval of FIPB/CCFI (hereinafter referred to as Cabinet Committee on Foreign Investment)/CCEA and which had, accordingly, earlier obtained prior approval of FIPB/CCFI/CCEA for their initial foreign investment but subsequently such activities/sectors have been placed under automatic route;

(ii) Entities the activities of which had sectoral caps earlier and which had, accordingly, earlier obtained prior approval of FIPB/CCFI/CCEA for their initial foreign investment, but subsequently such caps were removed/increased and the activities placed under the automatic route; provided that such additional investment along with the initial /original investment does not exceed the sectoral caps;

(iii) Additional Foreign Investment into the same entity where prior approval of FIPB/CCFI/CCEA had been obtained earlier for the initial/original foreign investment due to requirements of Press Note 18/1988 or Press Note 1 of 2005 and prior approval of the Government under the FDI Policy is not required for any other reason/purpose.

(iv) Additional foreign investment into the same entity within an approved foreign equity percentage/or into a wholly owned subsidiary.

Online FDI

The FDI Policy specifically gives reference to the FIPB’s website, that is, (http://fipb.gov.in) for necessary guidelines with regard to the online filing of applications for FIPB’s /Government’s approval. In the present age of e-governance (electronic governance), the Government of India has taken very important step by introducing online FDI enabling the foreign investors to apply online for investment into different economic sectors under Government Approval Route. As a part of the present Government’s commitment to the principle of ‘MINIMUM GOVERNMENT AND MAXIMUM GOVERNANCE’, FIPB has transformed itself into e-FIPB. The new upgraded secure portal for e-filing(electronic filing) of FDI applications was launched on February 17, 2015, by the Finance Ministry. After the introduction of this new system, the companies seeking approval for FDI can now e-file a single copy of the application for record with the FIPB Secretariat instead of several copies being filed earlier. Before the introduction of this new website, i.e., http://fipb.gov.in the applications were filed online at www.fipbindia.com which had limited features and processing capabilities. The new system offers innovative features like e-communication, SMS/E-mail status updates, query modules and much more features resulting in a radical reduction of communication time both inter-ministerial and between the applicant foreign investor and Administrative Ministries State.This is a groundbreaking step aimed at the expediency of doing business in the country.

Procedures for an online FDI

As per the information available in the “e-FIPB Brochure” which can be found in the FIPB website (http://fipb.gov.in), the online filing of applications for FDI through the Government Approval Route requires that the desiring applicant should log on to the FIPB website, i.e., www.fipb.gov.in for submission of the online application. After such filing of the application, the Application is circulated to the other Administrative Ministers for their inputs or comments. A period of 2-3 weeks is required for thorough examination of the application. Continuous communication is kept with the Applicant on any query from the Administrative Ministry. The application Proposal is then discussed, and the decision is taken in FIPB meeting. The decision so taken is communicated to the applicant vide Press Release and approval/rejection letters. Thus, the process of online FDI has the following characteristics-

1. Global Reach: The system of online FDI enables the investors from foreign countries to apply from anywhere in the world.
2. E-communication: All communications between the applicant FIPB and the concerned ministries/departments of the Government are online.
3. Quicker communication: All the Correspondence including updates/decisions are communicated through SMS/emails.
4. Quicker processing: The processing of the applications is quicker because the whole procedure involved therein is online. FIPB transfers the filed applications online to the concerned ministries for processing. The queries are raised online eliminating physical delivery and loss of time due to postal delays.
5. Less Paperwork: The online procedure involves less paperwork. Only a single signed copy is needed (for records) instead of presenting multiple sets of the application.
6. SMS/email alert: Regular alerts are sent to the applicants related to the queries raised by the administrative ministries, the inclusion of the proposal in scheduled FIPB meeting and decisions taken therein.
7. Transparency and security: All transactions and correspondences are recorded online and are secure.
8. Query module: The online user can raise a query online which shall be replied by the relevant ministry.
9. Time saving: The E-correspondence between applicant and ministries and also between ministries themselves avoids delays adding to speed and efficiency which is a very important feature to attract a flow of FDI into the Country. In the whole process right from the filing of the online application to getting approval by the Government, there is not any need for the Applicant to physically visit any office.

Conclusion

From the launch of the Make in India Initiative in the month of September 2014, the Indian economy has received a boost as per different economic surveys. The ‘Make in India’, an ambitious programme of the present Government, seeks to promote manufacturing and attract FDI. After launching of the Make in India initiation,   the new upgraded website for online filing of FDI with several new features has also been introduced and this particular step of the Government undoubtedly signifies the Government’s firm resolution to encourage and facilitate FDI. ‘The FIPB Review2014’, a brochure available in the FIPB’s website, in its page no.69 provides a short summary of the add-on features in the new website of FIPB comparing the same with the former website for online filing of FDI applications. From this short summary in tabular format, it is revealed that the new website is really a very upgraded one capable of providing convenience to the online applicants. In the earlier(old) website, i.e., www.fipbindia.com separate forms for each applicant/category such as Indian, Foreigner, LLP, etc. were to be filled up by the applicant, but the new website provides only a single form for all the applicants and category. The earlier requirement to file 15-18 hard copies of proposals along with the e-filed application is now replaced with a single copy required for the purpose of keeping a record. Earlier there was not any instant messaging or regular SMS ,email/alert, status update facilities, etc. and physical communications were also required to be made by the applicant. But the latest facilities introduced by the new website of FIPB has removed all such lacunas in its earlier website for online filing. Even though there had been a user manual in the old website, yet there had always been queries regarding the filing. But, the user manual provided in the new website has been made more extensive and elaborated along with help/instruction on many entries. Furthermore, the history of any proposal concerned with the respective ministry can be searched online on the new website by just entering the name. The speedy approval of the proposals from the foreign investors promoted by the new website shall definitely attract foreign investment to the country’s various economic sectors.

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In this blog post, Ishan Sharma, a student who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the claw-back clauses concerning the employment sector. 

Introduction

A claw-back clause is nothing but a type of increment which is being levied in advance by the company to the employee for fulfilling certain targets of the company and getting the company benefiting from it. It is considered to be one of the most substantial reasons for motivating an employee at the time of their employment tenure so as to extract out their calibre for the efficient working of the company in which they are employed. However, there are several disadvantages that can result in an employee losing his job due to non-completion of targets which the employee had proposed to do. So much so, in the case of termination of employment, the employee has to repay the extra incentives or bonus which was given to them for such targeted work which they were unable to do.

In such type of clauses which are embedded in the employment agreements, the targeted work is given to an employee by the company to complete it in a certain period of time in lieu of which an extra increment is given to him as an advance which acts as a very powerful motivator as well as helps to keep up a healthy relationship between the employer and the employee.

Background

The concept of the claw-back clause was used to manage both risk and control future fraud. Claw-backs can be understood to be the contractual elements that stand between the drive for economic development and community development and the slippery slope of corporate welfare. They are highly controversial and are to be utilised as community-based guarantees for some expectation of performance.

Definition

A claw-back provision is a financial or other benefits which is given, but it is later taken back due to some unique circumstances. It can also be used to refer to any money or benefits that have been given out but need to be returned due to special circumstances or events, which are mentioned in a contract. In other words, it is provision under in law or contract that reverses a payment or distribution for specified reasons. Claw-backs are distinguished from repayments or refunds as they involve a penalty in addition to a repayment. But it can also include interest as a penalty on top of the agreed-upon claw-back percentage.

Objective of insertion of such clause

The objective of keeping or embedding such clauses in employment agreements is that the employers need to strike the right balance between protecting the company’s interests, adhering to regulatory requirements, attracting the best people and retaining their services and also to keep its employees stay focused in their obligation in a fair manner. But still there are certain objectives:

1. Completion or Non-Completion of the targeted work by the employee.
2. If the employee leaves during the period of probation or training before getting recruited by the company so as to repay all those expenses which the company has levied from his pocket to train him during probation period (Secure Recruitment).
3. In a case of termination of employment on the basis of misconduct, poor individual or business performance, low calibre, etc.
4. Failure of the condition precedent to the employer’s obligation to pay or a pre-vesting claw-back clause.
5. Helps in binding up a healthy relationship between the employer and the employee for an efficient working in the course of an employment period.
6. To return the monetary value of the incentives plus a penalty in case of any monetary loss to the company by the employee.
7. To reimburse the company for any gains from exercising options by the employee.
8. To reclaim a portion of any bonus if an investment worsens.
9. To encourage loyalty.
10. To incentivise in relation to future performance.
11. To reward past performance.

Mechanism

Suppose an employer hires an employee, gives him incentives and forms an agreement with him embedding a claw-back clause which states that in case the employee fails to complete specified targets, then he is required to reimburse the incentive which was given to him in advance and then the employee is entitled to forfeit the claimed incentive.

Also, many start-ups now add an equity claw-back clause where stock options and other benefits already paid to the employee need to be paid back to the company in case of a drop in performance or missing milestones. However, some investors may insist on this clause as a prerequisite for funding.

Implications

The employees’ bonuses are, in a claw-back scheme, tied specifically to the performance (or lack thereof) of their work the individual(s) may have created as part of his or her job expecting a high profit. If the work/job executed does indeed do well over a long period of time, and permanently improves the nature of the firm, the bonuses paid to the individual are allowed to be retained by the individual. However, if the work fails, then the firm has the inherent right to revoke, reclaim, or otherwise repossess some or all of the bonus amount(s).

Also, it is seen that investors have greater confidence in a firm’s financial statements after claw-back adoption, and that boards of director’s place greater weight on accounting numbers in executive bonuses after a claw-back is in place (i.e., pay for performance sensitivity increases).

But claw back of paid or vested amount would normally be difficult to implement because once a right has accrued and been paid, it is difficult to claim it back under Indian law. In addition to the difficulty of recovering such benefits from employees, there will also be

difficulties from a tax regulation perspective since an employee will not be able to recover paid income tax from the government directly. Further, for employees earning less than INR 10,000 the provisions of the Payment of Wages Act would be applicable which permits

deductions in only certain limited circumstances.[1]

The clause should also include a pro rata repayment structure – the amount to be repaid in what form and manner and to what an extent, i.e.,

(i) The basis for which the bonus has been awarded,

(ii) The circumstances in which it must be repaid, and

(iii) The manner in which it must be repaid.

Otherwise, the repayment provision will be unenforceable for lack of certainty.

Representing Guidelines/Notifications

In Guidelines on Compensation of Whole Time Directors / Chief Executive Officers / Risk takers and Control function staff, etc. issued by the RBI Dated January 13, 2012 has stated in their notification under 2.1.4   Malus / Claw-back heading states in the event of negative contributions to the bank and/or the relevant line of business in any year, the deferred compensation should be subjected to malus/claw-back arrangements. A malus arrangement permits the bank to prevent vesting of all or part of the amount of a deferred remuneration. Malus arrangement does not reverse vesting after it has already occurred. A claw-back, on the other hand, is a contractual agreement between the employee and the bank in which the employee agrees to return previously paid or vested remuneration to the bank under certain circumstances. Banks may put in place appropriate modalities to incorporate malus / claw-back mechanism in respect of variable pay, taking into account relevant statutory and regulatory stipulations as applicable.[2]

Transparency on such clause

The validity of such a clause would only prevail when there was a written agreement with the employee providing that if he or she left the company within a certain period of time, he or she would have to repay the money to the company. Generally, employers do have a written agreement in place with the employee, and the agreement may have a provision that only provides for a clawback if the employee leaves the company voluntarily.

The written agreement may also have a provision regarding how the bonus will be paid back. Having the agreement in writing is helpful as proof that the employee received and agreed to pay the bonus back.

Remedies

Unless the bonus arrangements are carefully drafted and the circumstances in which an employer can claw-back a bonus are objective and reasonable, the employer may find itself facing an action for breach of contract (including breach of the implied term of trust and confidence) or unlawful deduction of wages. Complaints of discrimination may follow if certain employees feel targeted and they believe this is only because of a protected characteristic.

Whether a claw-back will be permitted will mainly be down to the interpretation of the claw-back provision, but in no circumstance should the provision be drafted so as to restrict an employee’s freedom of leaving the employer or be so onerous so that it will be deemed to be a penalty.

Conclusion

So, this claw-back clause is an ultimate tool where it acts as a role of a powerful motivator for the employees and an insuring agent for the company to maintain an equilibrium in the company to serve justice in the equal ant manner for both the parties.

References:

[1]https://www.mayerbrown.com/files/uploads/Documents%5CGuide%20to%20Restrictive%20Covenants/MB_rest_cov_asia.pdf

[2] https://rbi.org.in/scripts/NotificationUser.aspx?Id=6938&Mode=0

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In this blog post, Shubham Aparijita, a student at Symbiosis Law School, Pune and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the pricing of shares issued to residents outside India. 

Introduction

Instruments that can be issued to a non-resident under the FDI route

A non-resident can subscribe to equity shares, or fully and mandatorily convertible preference shares and debentures. Optionality clause[1] in equity shares, fully, compulsorily and mandatorily convertible debentures and shares are also allowed. Optionality convertible or redeemable securities can be issued under the external commercial borrowings (ECB) policy, which is very restrictive.

The price of shares transferred from resident to a non-resident and vice versa should be determined as under:

1. Transfer of shares from a resident to a non-resident:
   • In the case of listed shares, at a price which is not less than the price at which a preferential allotment of shares would be made under SEBI guidelines.
   • In the case of unlisted shares at a price which is not less than the fair valuation as per any internationally accepted pricing methodology on arm’s length basis to be determined by a SEBI registered Category-I- Merchant Banker/Chartered Accountant.
2. Transfer of shares from a non-resident to a resident – The price should not be more than the minimum price at which the transfer of shares would have been made from a resident to a non-resident.

In any case, the price per share arrived at as per the above method should be certified by a SEBI registered Category-I-Merchant Banker / Chartered Accountant.

Pricing of shares issued

The price at which he can acquire shares of an Indian company is governed by the Foreign Exchange Management Act (FEMA[2])

A foreigner may purchase securities of an Indian company under the following headings:-

1. Transfer from a resident to a non-resident
2. Transfer from a non-resident to a resident
3. Transfer from non-resident to a non-resident.

• Transfer from a resident to a non-resident

A non-resident can purchase securities of an Indian company under a private arrangement. In such a case, as money is coming into India, the FDI Policy imposes a floor price. The minimum permissible price at which shares can be sold to a non-resident must be determined by Charter Accountant or SEBI Registered Category I merchant banker (in the case of an unlisted company) as per any intentionally accepted pricing methodology on arm’s length basis . In the case of a listed company, the floor price is computed by looking at the volume weighted average of historical market prices for 26 weeks.

• Transfer from non-resident to a resident:

In this case, a ceiling is applied by FDI policy. Transfer of existing shares by a non-resident to a resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to a no resident as:

Filing Requirement: Form FC-TRS is required to be submitted to the AD Category – I bank in case of a transfer from a resident to a non-resident or vice-versa, within 60 days from the date of the amount of consideration. The resident has the responsibility of submission of a form. The form is then submitted by the AD- a Category I Bank to the RBI. Pricing issues also emerge with respect to non-residents holding put options- they have the right to compel the Indian promoters to purchase their shares on exercise options. In case of put options, the price is determined on the basis of the type of security sold as:

• The price of equity shares must be capped on the basis of the specific method known as the return on the equity method.
• The price of any convertible instruments must be arrived at in accordance with any internationally accepted pricing methodology. A SEBI registers Category Merchant Banker, or a Chartered Accountant is responsible for providing a certificate for arriving at the price.

• Transfer from a non-resident to a non-resident

Price of shares purchased by a non-resident from another non-resident shareholder is not regulated under FDI policy, as the transaction does not involve inflow or outflow of foreign exchange

• Subscription to a company’s shares

As per the FDI Policy, shall not be less than:

• In case of a listed company, the price worked out in accordance with the SEBI guidelines, as applicable
• In the case of an unlisted company- fair valuation of shares done by a SEBI registered Category-I Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis.

However, where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, 1956, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.

Demat Accounts under PINS

If you want to buy shares as an NRI, you would need to open a Demat account under the Portfolio Investment Scheme (PINS). In this demat, you can buy shares with funds in your NRE account, and sale proceeds can be credited to NRE account for repatriation. If you choose to buy the shares on non-repatriable basis, then, the proceeds will be credited to the NRO account. You must maintain two separate demat accounts for repatriable and non-repatriable shares. Recently, the RBI also specified that an NRE must have a separate account linked to the PINS Demat account. It cannot be the NRO or NRE account through which other routine transactions are conducted. Once you become a resident again, you must close the PINS account.

PORTFOLIO INVESTMENT SCHEME

The Foreign Exchange Management Act 2000 defines the Portfolio Investment Scheme, permitting non-resident Indians and foreign institutional investors to buy and sell shares and convertible debentures of Indian companies, and units of domestic mutual funds at any of the Indian stock exchanges. Purchase of shares of any company from the secondary market is subject to a ceiling of 5% of the paid-up share capital and 5% of the paid-up value of each series of debentures.

FDI IN REAL ESTATE

NRIs can contribute, exchange, give and acquire enduring property. NRIs holding Indian identifications and people of Indian starting point (PIOs) appreciate equality of status. The RBI has conceded general authorization to individual occupant outside India holding Indian travel papers and PIOs to purchase private and business properties in India.

Both NRIs and PIOs can put resources into restricted organisations occupied with real estate development. The paid-up value of shares/convertible debentures obtained by NRI, on both repatriation and non-repatriation premise have a cutoff of five for every penny of the paid-up capital/paid-up estimation of every arrangement of debentures. The total paid-up estimation of shares/convertible debentures acquired by all NRIs can be raised to 24% of the paid-up capital of the organisation/paid-up value of arrangement of debentures.

Foreign Direct Investment is supported and allowed, subject to specific conditions, in the accompanying land segments in India. It incorporates lodging improvement, tourism, friendliness, doctor’s facilities, and resorts township advancement, advancement of business land, developed foundation, lodging and development activities, lodging and development ventures, building instructive organisations, building recreational offices, framework ventures at both regional and local level and Special Economic Zones.

FDI IN RETAIL SECTOR

FDI can supplement and supplement the Indian business and make it comprehensively aggressive, open up fare showcases and give access to worldwide quality merchandise and administrations. It can raise assets through mechanical up degree, ideal usage of human and normal assets, and in reverse and forward linkages.

There are promising fields like the nourishment preparing area in the nation. Remote retail mammoths will purchase prepared nourishment from the nation. Foreign direct investment(FDI) in retail space, particular products retailing like games merchandise, gadgets and stationery is likewise being pondered. The administration needs to walk a tightrope to guarantee a `level playing field’ for everybody.

On issue of shares to foreign investor:

Within 30 days from the date of issue of shares, a report in Form FC-GPR together with the following documents should be filed with the Regional Office of RBI:

• Certificate from the Company Secretary of the company accepting investment from person resident outside India certifying that:
  • All the requirements of the Companies Act, 1956 have been complied with;
  • Terms and conditions of the Government approval, if any, have been complied with;
  • The company is eligible to issue shares under these Regulations; and
  • The company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration;

Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the person resident outside India.

Conclusion

The estimating as to issue and exchange of shares to non-occupants were represented by the CCI rules. These have been supplanted with the reduced income strategy which depends on the future profit. However, RBI has made a refinement in evaluating as for the issue of offer on special premise when contrasted with the typical issue as the same would be secured by the RBI rules to be recommended.

The cost of shares issued to people inhabitant outside India under the FDI plan might be worked out on the premise of SEBI rules in the event of recorded organisations. In the case of unlisted organisations, valuation of shares must be done by a Chartered Accountant as per the rules issued by the past Controller of Capital Issues.

References: 

[1] (with a minimum lock-in of one year period before such option can be exercised)

[2] Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 Notification No. FEMA 20 /2000-RB dated 3rd May 2000

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In this blog post, Harmish H Patel, a second-year student at Hidayatullah National Law University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses and discusses syndicate loans. 

Introduction

Syndicate loan is a type of loan that is provided by a group of lenders collectively to a single borrower and is structured using similar terms and conditions, documentation, etc. administered by several commercial banks or by a common agent. Lenders collectively are known as the syndicate. Generally, the banks to the government bodies or corporation due to the huge loan amount provide this type of loan or amount lent is huge. Nowadays several investors like a hedge fund, mutual fund, insurance companies, etc. are also providing syndicate loans.

Parties to the Syndicate Loan

• The Lender: Generally, the lender is an entity, which forms a syndicate. This is in the form of banking institutions, which lends out money for the required purposes.
• The Borrower: The entity, which is in need of loan and initiates the process or initiator of the whole process, is a borrower.
• Lead Merchant Banker: The Lead Merchant Banker is a co-lender who constitutes a group of banks who have contributed a share towards percentage loans. Once this institution has contributed the share, co–founder’s agreement is signed.
• Agent: The Agent acts as a link between the lender and the borrower. He is the one who takes cares of the day-to-day operations or administration of the loan facility. Agent acts as the agent of lending parties or lenders and not borrowers.

There are also other parties, which consist of security trustee, co-arranger, decision-making panel, etc., but important parties are a lender, borrower and agent.

Types Of Syndicate Loans

There are mainly three types of Syndicate loans. These are:

1. Underwritten Deal
2. Best Effort Syndication
3. Club Deal

Underwritten Deal

Underwritten deal: An underwritten deal is a deal in which the arrangers syndicate the loan after guaranteeing the entire commitment. They are forced to draw in the difference, in case the arrangers cannot fully subscribe the loan, which they may later try to sell to investors. This is not difficult if market situations or credit’s fundamentals, improve. The arranger may be forced to sell at a discount or can even take a loss on the paper, if not. Or the arranger may just be left above its desired hold level of the credit. The question arises is why do arrangers underwrite loans? Providing an underwritten loan can be a competitive tool to win mandates. Secondly, the fees required for underwritten loan is high because the agent is on the hook if potential lenders blunder. Nowadays, flex-language is common, once underwriting a deal carried minimum risk it when the pricing was decided in stone prior to syndication.

There are several reasons for which arrangers underwrite loans. As said earlier, offering an underwritten loan can be a precious tool to win mandates. Underwritten loans usually require high fees because the agent is on the hook if potential lenders baulk.

The underwritten deal is one of the most widely available types of syndicated loans in Europe. Under this arrangement, the lead agent or underwriter guarantees and syndicates the entire loan. If the loan has not been fully subscribed, the lead agent can have the option to absorb the undersubscribed portion. Then, if the condition of the market is bullish, the same lead agent can sell to other investors the undersubscribed part of the loan that it has absorbed. However, if the market situation is bearish, the lead arranger may be compelled to sell any undersubscribed portion at a discount or simply consider the whole thing as a loss.

There are numerous reasons why a bank under certain circumstances may decide an underwriter. Due to this type of loan, a financial institution seems or looks more competitive. Next, a syndicated debt could mean huge surplus for the bank because the risks involved in this type of loan can be reached to higher service fees. Lastly, underwritten deals now have fluctuated interest rates. Thus the risks are no longer as high as debts with fixed rates.

Best Efforts Syndication

A best-efforts syndication is a syndicated loan in which the arranger group is assumed to underwrite less than or equal to the entire sum of the loan, leaving the credit to the vicissitudes of the market. If the loan is undersubscribed, the credit may not close—or may need significant adjustments to its interest rate or credit rating to clear the market. Generally, the risk takers and not normal investors used best efforts syndication. Since the late 1990s, however, the rapid acceptance of market-flex language has made best efforts loans the rule even for investment-grade transactions.

Club Deal

A “club deal” is a smaller loan (usually $25 million to $100 million, but as high as $150 million) that is been provided or lent to a group of relationship lenders. The arranger is generally a first among equals, and each lender gets a full cut, or nearly a full cut, of the fees. A club deal, in finance, is related to a leveraged buyout or other private equity investment that involves two or more private equity firms. It can also be treated as a consortium or syndicated investment.

In a club deal, the investor group of private equity firms pools its assets together and makes the acquisition collectively. The practice has allowed private equity to purchase larger and more expensive companies that each firm could acquire through its own private equity funds. By syndicating the equity ownership across a group of investment firms, each firm reduces its concentration and is able to maintain the diversification of its portfolio of investments.

Fees for Syndicated Loans

Generally, the cost of the loan is been determined on the basis of interest rates that are been charged by the bank. Bank levies various fees and charges incurred in providing credit facilities. It also includes the cost of the loan for a borrower. There are also other categories of charges, which the bank can take in the case of a syndicated loan.

When the loan is been taken from the foreign bank, it must be noted by these banks that the transactions taken should be according to the ECB regulations, which place a cap on the total cost of the loan. This cap is been treated or named as “all-in-cost” ceiling

Different fees that are charged are as follows:

• Arrangement Fee- It is the fee, which is paid to the bank for arranging syndication, which covers syndicating, structuring and negotiating the documentation.
• Underwriting Fee- It is the fee collected or accumulated by the underwriters for performing their services, which are known as underwriting services.
• Participation Fee- It is the fee paid to the bank for joining the process of syndication, and it is paid according to the part or commitment of loan given by the bank.

_{Types Of Loan Facilities Provided By Banks}

• _{Term Loan– It is a loan taken from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. Term loans almost always have the period of 10 years. Repayment in this system can be made at once at the end of the facility or in instalments. Once the borrower is paid a term loan back, it cannot be withdrawn.}
• _{Revolving Loan– It is the loan in which the borrower decides how often they want to withdraw and also decides the time intervals. The difference between a term loan and the revolving loan is that this facility allows the borrower to withdraw, re-pay or drawdown the loan during the term of its facility. If a revolving loan intends to refinance another revolving loan and withdrawn by the same borrower in the same currency which matures on the same date as the drawing of the second revolving loan, is known as a “rollover loan”.}
• _{Evergreen facility– A loan that can be extended up to or after pre-set periods. This loan facility can be renewed and increased for 5 years.}
• _{Backstopfacility– This loan is designed to be withdrawn only as a last resort. For example, institutions like when a corporation is on the verge of liquidation. It works as a backup when other funding sources have failed. There is also a swing line facility, which gives the borrowers the “same day money.”}
• _{General facility– Syndicated loan agreements can either be a term facility or may be the revolving facility or they may contain merger or a combination of both or several of each type.} 

Factors on which interest rate charged by the banks on Syndicated Loans

Interest Rate charged by the banks on Syndicated Loans depends on these factors:

1. Depends on upon the involvement Of Risk- Whether the borrower is PSU(Public Sector Undertaking), sovereign entity, Public company, Joint Venture or Private equity.
2. Depends on upon the industry and activity of the company.
3. Depends on upon the credit rating of the country on an international loan.
4. Depends on upon the credit rating of borrower or group.
5. Depends on upon the average lifespan of the loan.
6. Depends on upon the repayment been made under the “Bullet Down Payment.”

Thus, these are the factors on which the on which the interest rate charged by the banks on syndication loans is depended.

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In this blog post, Manoj Kumar Das, an Assistant Manager in the Materials and Contracts, Indian Oil Corporation Limited, Refineries Division and a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses and discusses on how to choose the right business structure. 

One of the first Things that comes to one’s mind when starting a business is: How to structure my business? This question shall pull up a plethora of variables into context. The owner has to weigh his options and pick up the right business structure. There is Liability, on one hand, Finances on the other and so on. Choosing the right business structure may often determine the difference between success and failure.

Here we come upon the four types of Legal structures that can be chosen:

• Proprietorship or Self-Proprietorship
• Partnership
• Limited Liability Partnership
• Company

Types Of Business Structures

Each structure has its own advantages and disadvantages. Depending upon his circumstances, a business owner shall decide upon the suitability of the structure. It may depend on his quantum of investment, taxation structure, amount of control & ownership the owner desires, the extent of liabilities and future financing options and so on.

In a sole proprietorship, the business is owned & controlled by a single person. All authority, responsibility and obligations of the business rest upon the sole owner. He gets all the profits, bears all the losses and is liable for all the debts incurred. The owner and the business are one entity. He owns all the assets & properties of the business. Hence it is suitable for a business which has a smaller size or limited investments or limited risks or smaller localised markets.

Also, it has other advantages as well. The legal formalities, setup costs and other administrative tangles are less. The business can be easily setup and the business strategy and function remains relatively confidential. Since the decisions are pivoted on a single person, they are taken much quicker, and this benefits the business. This flexibility also might add to the business’s success. The finances are controlled by a single entity, and this gives the owner a very strong stimulus to work. The owner can put effort to develop one on one relationship with his customers and can give personal attention to each one.

But on the flip side, one has to look at the cons too. All the debts are the liability of the owner. His properties & owned assets can be liquidated to fulfil the debt and obligations of the business. There can be a very high financial risk. Also, opportunities for raising capital for investments are very limited and same goes for the quantum of investment too. Not many investors will be willing to put their money on a business tied to decisions and control of a single entity. Loans or Investments from Friends & family are a general norm. For a business to succeed, it needs to have its own core competencies to surpass the competition. Hence, it is obvious for a business to acquire specialised talent or expertise in relevant fields, as it cannot be available in a single person. Also, hired expertise and skilled employees are costly to acquire and retain. This adds to the limitation of the proprietorship. Moreover, the limited scope of growth for employees in a small setup such as a proprietorship is also a turndown. The ownership & existence of the business is tied to a single person; further succession is an issue as the company ceases to exist after the death of the owner.

A partnership is a relationship between persons defined by an agreement to share the profits of a business carried on by the partners or any of them acting for all. The partners have unlimited liability. In contrast to a proprietorship different person with different skills, expertise and knowledge together form a partnership. This pooling of knowledge and decisions coupled with sharing of responsibilities and work gives an edge over proprietorship. Efficient distribution of work suited to each partner’s skill, expertise and interest can be achieved. In a partnership several partners contribute to the capital, hence financial resources are better. Also the losses, debts, liabilities and obligations are shared by the partners.

The confidentiality of decisions, strategy and functioning, is relatively weaker. The probability of disagreement or conflict of interest between partners is higher. This may lead to a quicker dissolution of the business than envisaged.

In a limited liability partnership (LLP) partners have limited liabilities. The limited liability partnership is a distinct legal or corporate entity separate from its partners, that is, it can acquire and hold property and execute a contract in its name. It creates a protective layer between a partner’s assets or properties and the business as each partner’s liability is limited to the extent of contribution towards the limited liability partnership. Liability of debt and obligations of the limited liability partnership lies on it and not on the partners. Also, a partner is not liable for the acts of other partners and thus is shielded from unauthorised or wrongful acts of another partner. Change in partners does not result in dissolution or termination of the business. It has lesser regulatory controls & compliances than that of a company’s. It is suitable for and small & medium sized business.

But the extent of opportunities for raising capital investment is still very less compared to a company.

A company is a legal entity that is created to conduct business, and it is distinct from its members or founders. It can own property, incur debts, raise capital, enter & execute contracts. The liability of members is limited to the amount contributed to the company as share. A change in membership doesn’t affect the existence of the company. The regulatory and administrative controls and formalities are more complex than other business structures.

Conclusion

We see that a range of diverse factors, conditions and situations decide the final choice of a business structure. If a business owner chooses to limit his liabilities, then Proprietorships & partnerships will be avoided and instead Limited Liability partnership or company shall be preferred as they offer limited liability. This assessment of liabilities, in turn, shall rest on the nature of business, type of market, size of business and capital investment required and other factors such as chances of litigation and lawsuits concerning the type of venture. For a business having high volumes, high debt, the large scale of operation, fluctuating markets business structure having limited liability will be preferred. Considering the taxation part, if the owner wants to ease his tax burden, he will prefer proprietorship wherein he has to declare only his personal income, and no tax on profits or dividend is applicable. If the type and scale of business require huge investments, then a company is preferable as generally investors prefer the same. Moreover, the owner has to consider the amount of control he wants to have in the business. For a greater administrative and financial control, he may opt for a proprietorship. Also, the workforce in an organisation plays an important role in its sustenance & success. In a company business structure, it is easier to incentivize employees by handing over equity.

We can conclude that decision to choose a particular business is very critical to the future goals of the business and paves a path for its further survival and performance. This decision is complicated and has to be dealt with considering the right balance of various factors defining and affecting the business.

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In this blog post, Mandvi Singh, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details the procedure of setting up a branch office in India by a Foreign Company. 

Introduction

Foreign companies, as they grow, seek to expand their business over the globe. The establishment of branch offices, herein referred to as BOs, achieves this strategic growth. This article explains the route to be taken by these foreign companies in establishing their branches and the compliance to be met in the process, focusing solely on the establishment of Branch Offices and not Liaison or Project Offices. Branch Offices help companies with an easier management of their businesses in the particular areas. A BO is an extension of the Parent Company.[1] Section 2(42) of the Companies Act, 2013, defines a foreign company as a company or a body corporate incorporated outside India and which has a place of business whether by itself or through an agent, in this country. This definition includes a Branch Office; all the provisions of the Act applying to the company will also apply to the BO.

India sets up several rules under the RBI (Reserve Bank of India) and FEMA, 1999. The establishment of a BO is regulated as per Section 6(6) of FEMA, 1999 read along with notification no FEMA 22/2000-RB dated May 3, 2000. Under Section 11 of the aforementioned Act, RBI issues directions to the authorised persons regarding the regulations to be followed when conducting foreign exchange business with the customers or constituents. The BOs that were established in the pre-FEMA period are now required to regularise their offices under FEMA through the RBI, as per the recent regulations.

Initial Procedure

 RBI Master Circular Jan 2016:

A BO can be established by a body incorporated outside India, including a firm or association of persons, involved in manufacturing or trading activities. The process of setting up is an easy one with minimal compliance requirements. The permission to set-up a BO has to be obtained by the RBI under the FEMA, 1999 provisions. RBI provides guidelines to be followed for establishing a BO; the former also reserves the right to reject an application on the non-fulfilment of the same. The Applications are to be made in form FNC and are considered by the RBI under two routes determined by the degree of Foreign Direct Investment (FDI):

• The Reserve Bank Route: taken when the principle business of the foreign company falls under sectors where 100% FDI is permissible.
• The Government Route: when the sectors do not permit 100% FDI investment. The RBI considers applications under this in consultation with the Ministry of Finance of India.

The RBI has a few other considerations:

• Track Record: For a BO a company will require a profit making track record in the in the immediately preceding five financial years in the home country.
• Net Worth: “a total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement Certified by a Certified Public Accountant or any Registered Accounts Practitioner”. The net worth has to be equal to or more than USD 100,000.

The application by the foreign company has to be made through a designated AD Category-I bank to the General Manager of the Foreign Exchange Department of RBI. Some prescribed documents have to be attached with the application. The RBI Master Circular of 2016 provides two of the documents that have to be attached:

“1. English version of the Certificate of Incorporation / Registration or Memorandum & Articles of    Association attested by Indian Embassy / Notary Public in the Country of Registration.

2. Latest Audited Balance Sheet of the applicant entity.”

Even if applications do not satisfy the criteria if an agent files them on behalf of a parent company, that parent company ought to satisfy the criteria. The AD-I Category bank involved in the process will conduct due diligence on the Applicant in the following areas- “background, antecedents of the promoter, nature and location of activity, sources of funds, etc.”, along with compliance of the Know Your Customer (KYC) norms.

The BO hence, once approved by the RBI, will be allotted a Unique Identification Number (UIN). Once the offices have been set up, the BO must also obtain a Permanent Account Number (PAN) from the Income Tax Authorities. This should be reported in the Annual Activity Certificate (AAC) that the BO is required to present at the end of each ear to show that the activities are undertaking in the permitted categories only.

Section 382 of the Companies Act, 2013, states that the company has to ‘conspicuously’ exhibit outside the office, the company’s name and the specify country it was incorporated in. The name must be in English Language and in the local language of the area where the office is set-up. If the members of the company have limited liability, then the same has to be specified with the name of the company outside the office and also mentioned in all the broachers, prospectus and any other circulars generated by the company. The Act also provides for the registration of the prospectus of the company with the registrar before it circulates and spreads any information about the issuance of securities by the company.

Funding of the BO by the Foreign Company:

Equity Share Capital: in the usual way Indian companies are financed.[2]

Preferred Share Capital: such convertible preference shares, compulsorily convertible into equity shares are regarded as Foreign Direct Investment (FDI).

Debentures and Borrowings: there can be redeemable, convertible or non-convertible. Companies can issue debentures, bonds and other debt securities. These also, when convertible into equity shares, are treated as FDI.

Activities:

These BOs represent the parent company and usually undertake the same activities as the latter. The profits from these are easily remittable from India, subject to the taxes applicable. They are permitted by the RBI to undertake the following activities, as listed in the Master Circular:

1. Export / Import of goods.
2. Rendering professional or consultancy services.
3. Carrying out research work, in areas in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or
5. Overseas group company.
6. Representing the parent company in India and acting as buying / selling agent in India.
7. Rendering services in information technology and development of software in India.
8. Rendering technical support to the products supplied by parent/group companies.
9. Foreign airline / shipping company.

A branch office is not allowed to undertake any Retail Trading Activities. Manufacturing or Processing activities, undertaken directly or indirectly, are also barred.

The RBI has given general permission to foreign companies to set up branch offices in Special Economic Zones (SEZs) subject to the following conditions:

1. such units are functioning in those sectors where 100 per cent FDI is permitted;
2. such units comply with part XI of the Companies Act,1956 (Section 592 to 602);
3. Such units function on a stand-alone basis.

Every Branch Office within thirty days of its establishment has to deliver certain documents to the Registrar as specified in Section 380 of the Companies Act, 2013.

Branch Office Rights:

• Immovable Property: the Branch Offices of Foreign Companies have the right to acquire immovable property in India for their use, to carry out the permitted activities and the various supplementary functions. This right is contingent in the case of the companies from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan and China and can be exercised only with prior approval of the RBI.

The permitted activities can also be carried out from leased property but the lease period is not allowed to be over five years.

• INR Current Accounts (Non-interest bearing): the BOs are required to approach their authorised dealers for opening such bank accounts.
• Remittance of Profits: the BOs are allowed to remit profits outside India subject to applicable taxes and on producing the required documents to the Authorized Dealer. The taxes are as provided as per Section 9 of the Income Tax Act, 1995.[3] The documents required are: (1) A certified copy of the audited Balance Sheet and certified Profit and Loss account of the relevant financial year. (2) A Chartered Accountant’s certificate is certifying that the profit has been earned from the permitted activities, not by the revaluation of the assets of the branch along with the manner of arriving at the remittance.
• Term Deposit Account: such an account can be sanctioned by the Authorized dealer for a branch office of a foreign company to the satisfaction of the bank that the term deposit is out of the temporary surplus funds. The BO must deliver an undertaking to the effect that the maturity proceeds of the term deposit will be utilised for their Indian office(s) within three months of maturity. This type of account is permitted for six months and is not available to shipping/airline companies.

Additional Activities/Additional BO:

Request to undertake any additional activities apart from the ones already sanctioned by the RBI must be made via an application through the designated AD-Category-I Bank to the Chief General Manager-in-charge of the Foreign Exchange Department of RBI.[4] The Application must justify the need for such additional activities and also be accompanied by the comments of the AD Category-I Bank.

The foreign company is allowed four BO’s, in the four zones of the country, without any hassles. Any offices over and above that have to be justified with an explanation. The company may identify a ‘Nodal Office’ in India from amongst the BOs, that will overlook the functioning and activities of all the other BOs in the country. To establish an additional BO, a fresh FNC application needs to be submitted to the RBI, duly signed by the authorised signatory of the foreign company from the home country. The documents that were submitted with the first FNC form need not be resubmitted except when there are certain changes that have occurred in them.

Post-Establishment Procedures

New entities setting up BOs shall submit a report containing information, as per the provided format, within five working days of the BO being functional, to the Director General of Police (DGP) of the states in all the branches of the foreign company.

The offices also have to file Annual Activity Certificates (AACs) from Chartered Accountants at the end of each financial year by 31^st March along with the audited balance sheet before 30^th September. If there is more than one BO, then the AAC has to be filed by the Nodal Office, on behalf of all the other offices. The AAC has to be scrutinised by the AD Category-I bank, and the same has to ensure that the activities of the office/offices are being carried out as per the guidelines of RBI.

Conclusion

Initially, the company begins to establish its operation in another country by establishing a Liaison/Project/Branch office. Among the three the Branch Office is the wisest choice if the purpose is not merely to regulate or establish in a country for a specific project. A Branch Office has the widest range of activities available for a Foreign company. Beginning with a single Branch Office, the company can spread across by establishing three more, across the country. With the expansion of operations, a few more may be set-up by referring to the applicable rules and regulations specified above.

BIBLIOGRAPHY:

1. Companies Act, 2013.
2. Income Tax Act, 1995.
3. Master Direction – Establishment of Liaison/ Branch/ Project Offices in India by Foreign Entities RBI/ FED/ 2015-16/6 FED Master Direction No. 10/ 2015-16
4. Master Circular on Establishment of Liaison / Branch / Project Offices in India by Foreign Entities RBI/2014-2015/11 Master Circular No.7/2014-15
5. Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016   Notification No. FEMA 22(R) /RB-2016
6. http://dipp.nic.in/English/policy/entry.htm

References:

[1] There are several structures – word doc

[2] There are several structures – word doc

[3] Income tax act

[4] 11ELB Circular

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In this blog post, Sandesara Neeli M., a Fourth Year B.L.S/LL.B student at Pravin Gandhi College of Law, the University of Mumbai and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details the business structure of Bandhan Bank. 

Introduction

Bandhan Bank is the first bank headquartered in the eastern part of India, post-independence. It is headquartered in Kolkata, West Bengal. Under the leadership of Mr Chandra Shekhar Gosh[1], this bank has proven how economic and social emancipation can go hand in hand. In most Indian languages the word Bandhan means ‘bond’ or ‘togetherness’. This word is so apt for this bank as it shows a serious bond of Mr Ghosh with the lower strata of the society. Inspired by this word in 2001, this ‘bond’ was born.[2]

Bandhan Bank Limited was incorporated on 23^rd December 2014 as a wholly owned subsidiary of Bandhan Financial Holdings Limited. This bank received approval from RBI to be established as a universal bank in April 2014 and later, in June 2015 received a green signal from the banking regulator. [3]

This bank under the Chairmanship of Dr Ashok Lahiri and Mr Ghosh as its chief executive officer and the managing director has received numerous accolades for its contribution towards the weaker sections of the society.

Some Important Data

Bandhan Bank has paved a way to provide services to the weaker section of the society who cannot have access to the formal banking system. From the time of its birth (i.e. in the year 2001), this bank has provided loans and small time finances to around 6.7 million women borrowers. Just in 15 years of its establishment, its network is spread across 2,022 branches in over 22 states and union territories and employs over 19,500 people. With providing a loan of Rs. 9,524 crores in such a short span of time, commendable are the word!

The following data is even more astonishing; it opened up with 501 branches and 51 ATMs just on day one! Its target for the fiscal year 2015-16 is to open up 12,000 branches and 150 ATMs across 27 states.

It provides its banking facilities to urban, semi-urban and rural population alike. Though it provides its services to all the sections of the society, it still focuses on uplifting the lower strata of the society i.e. those who are neglected by the formal banking systems. And endows them with better health, education and self-employment opportunities.[4]

Origination of Bandhan Bank

• April 2014: Bandhan gets in-principle nod for banking licence
• May 2014: Announces  appointment of Deloitte as advisor for formation of Bandhan bank
• August 2014: Announces appointment of Aon Hewitt  to design and implement a compensation strategy for  workforce
• September 2014: Announces the appointment of FIS as technology partner
• September 2014: Announces appointment of Ogilvy & Mather for brand building
• January 2015: Announces IFC & GIC SI will commit fresh equity investment of Rs 1,600 crore in Bandhan
• March 2015: Announces appointment of Madison Media for formulating an advertisement strategy[5]

After obtaining its banking license, Bandhan could foresee some obstacles such recruiting skilled workforce, setting up an efficient and the most recent information technology for core banking solution, stepping into new domains of brand building and treasury operations. Its major tasks in the initial days included branch-level lending and collection in groups.

A lot of renowned companies have been appointed to look after its various portfolios and accomplishing its strategies and objectives. These companies are- It has appointed Madison Media, which is very well-known for handling Bhartiya Janata Party’s advertising affairs, for an advertising campaign. Ogilvy & Mather is assigned brand-building, which will include another integral part of its business i.e. designing a logo and framing advertising strategies. FIS, a US-based banking and payment technology solution provider, is looking at implementing a cost effective and efficient information technology (IT) platform, a vital area for Bandhan. Aon Hewitt, a human resource consulting arm of London-based Aon Plc, will design a compensation programme for employees. Deloitte, Bandhan’s consultant for its banking licence application, has been roped in as a consultant for the banking foray.[6]

Business Structure

Bandhan has recruited a total staff of about 16,000 people. This staff includes a total of 3,500 people recruited from the top public and private sector banks.

As a microfinance institution, for the year 2014-2015, this bank provided a loan of about 9,500 crore rupees, 30% higher than the previous year. At the branch level, it has trained about 13,000 employees, in banking activities. At the outset, world-renowned financial institutions like International Financial Corporation (a wing of the World Bank) and GIC (Singapore’s Sovereign Wealth Fund) has infused a capital of about Rs. 1,600 crores.

Organizational Structure

• Organization or Strategic Business Unit
• Structure- Organizational and Strategic
• Resources- Financial and Human
• Delivery of products and services
• Market- Meeting of demand and supply
• External Relation[7]

The microfinance business models are designed to address the challenges which are faced by the traditional financial services in bringing the unprivileged section together and making them aware of the banking services which are affordable and has a sustainable cost.

A Joint Liability Group (JLG) which consists of 4 to 10 people is formed for the purpose of availing bank loans which is obtained by mutual security or singly. The JLG would offer joint undertaking after which they can avail loan facilities. These members are expected to be in the same kind of economic activity say for example crop production. The management is minimal or nil in these groups.

Apart from such farmers, there is a group of entrepreneurs which come from a homogenous economic and social background, who mutually save money for meeting emergency ends. Such groups are called as Self- Help Groups (SHGs) which may be registered or unregistered. These groups use peer pressure and collective use of their wisdom in order to meet their credit ends and repayment of loans. The system eliminates the use of the collateral and focuses on the solidarity lending, which is mainly used in the microfinance institution. For simplicity in maintaining books, the loan is provided on flat interest rates.

The concept of microfinance started in the late 1990s. after catering to a large part of the rural poor, now it has started emerging in the urban areas in order to cater the needs of the urban poor. Some microfinance institutions like Bandhan Bank, Ujjivan, Swadhar FinAccess also operate in urban areas. Banks find it difficult to provide loans in the absence of sufficient collateral and hence now they are changing into Non- banking Financial Institutions to widen their capital base.

These Banks provide loans with the interest rate of 25 to 35%; they justify this interest rate by charging high cost in the delivery of their loans to the untested customers. Because of this much foreign as well as the Indian banks are getting into the partnership with these microfinance institutions. The two main aims of this kind of partnership are to get as much as repayment of loans i.e. to minimise the default rate and to maximise their returns.[8]

Interest Rates provided by Bandhan Bank

The following table makes the interest rates very clear on various accounts and transactions-

Why does India need such Bandhan Banks?

Poverty is the main cause of concern for this country since time immemorial. A very large part of rural India is yet not free from the shackles of poverty. This evil is slowly seeping amongst the urban Indians too. A microfinance institution just like our Bandhan Bank caters to a large number of rural poor people by providing them facilities of loan and interests on various deposits.

Micro-finance institution is considered as one of the most effective tools in reducing poverty. This is effective in reducing the gap between the poor strata and the formal financial organisations. Not just in India but every country where poverty is rampant can resort to this kind of banking as it provides credit to micro-entrepreneurs, poor families and impoverished women. It has an additional responsibility of serving the economically marginalised class.[10]

Conclusion

As we have seen ahead how effective this stint has been in this country, we can foresee how a micro finance can improve the standard of living of poor people and help them achieve their aims. Keeping the standards and the parameters simple and using the cost effective methods to reach the lower strata can make all the difference which a society like India requires.

References:

[1] http://www.bandhanbank.com/about-bandhan-bank.aspx

[2] http://www.firstpost.com/business/bandhan-bank-is-born-chandra-shekhar-ghoshs-incredible-journey-from-a-sweet-shop-to-owning-a-bank-2301082.html

[3] http://www.bandhanbank.com/about-bandhan-bank.aspx

[4] http://www.bandhanbank.com/about-bandhan-bank.aspx

[5] http://www.business-standard.com/article/finance/bandhan-sets-september-deadline-for-bank-115040200806_1.html

[6] http://www.business-standard.com/article/finance/bandhan-sets-september-deadline-for-bank-

[7] http://www.sa-dhan.net/Adls/Microfinance/MIS/OrganisationalManagementPlaning.pdf

[8] http://www.iibf.org.in/documents/reseach-report/Report-24.pdf- Pg.No.106

[9] http://www.livemint.com/Industry/36eDjyGuOqFRiJtC0yetkL/Ten-things-you-need-to-know-about-Bandhan-Bank.html

[10] http://www.microfinanceinfo.com/micro-financial-institutions/

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In this blog post, Isha Singh,  a student pursuing her LL.B (5h year) Hons. from Rajiv Gandhi National University of Law, Patiala, Punjab and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details the advantages and the disadvantages of a syndicate loan. 

Syndicate Loans – Meaning & Concept

A syndicated loan is a credit lent out by a syndicate or a group of lenders and is structured or arranged by one or several commercial or investment banks called arrangers.[1] These are also amalgamated instruments that combine features of relationship lending and publicly-traded debt.

They permit risk-sharing among the potential financial institutions without disclosure and market burdening that bind issuers undergo. These credits account for an impressive international financing, roughly one-third, including bond, commercial paper and equity issues.[2]

Elements of a Syndicate Loan

Precisely, in the case of a Syndicate Loan, there is a lead banker or underwriter of the loan, known as the arranger, the agent or the lead lender. This lender may put up a relatively bigger share of the loan or may perform tasks such as dispersal of cash flows among other syndicate members and other administrative duties.

The prime motive of syndicate lending is to distribute the jeopardy of a borrower’s default across multiple lenders like banks, institutional investors such as hedge funds or pension funds. The reason why such an arrangement of syndicate lending is brought in place is that syndicate lending is larger than standard bank loans, and in those circumstances, even one borrower-default could devastate a single creditor. Syndicated loans are also used to fund large corporate takeovers with primarily debt funding.

These loans could be made on a best-effort basis, viz, if sufficient investors couldn’t be found, then the amount received by the Borrower would be lower than originally expected. These loans can also be split into dual trenches for banks who fund standard revolvers and institutional investors that fund fixed-rate term loans.[3]

Advantages of Syndicate Loans

Syndicate Loans offer an amalgamation of effort and the opportunity to create new banking contacts. Lenders also prefer syndications, as Fidler and Neymeyer explained, that “…they permit the lenders to make more loans while limiting individual exposures and spreading their risk within portfolios more widely…” They further explained,“…Moreover, administration of the loan is extremely efficient, with the agent managing much of the process on behalf of the participants…”[4]

Syndicated loans are centred on the creation of an alliance of smaller banking institutions that, because of this union, can meet the credit needs of the borrower. This creation is accelerated by appointment of an agent who manages the account. The arranger will then assemble a group of banks or a syndicate, after consultations with the borrower, with each bank lending portions of the required amount. The loan is sanctioned six to eight weeks after the mandate is awarded, and post the signing; the borrower is free to raise funds. The borrowers are required to pay upfront fees and some annual charges to the participating banks along with interest accruing from the initial drawing date. Along with giving the flexibility of choice and variety to the borrower, they also enable him to raise the loan cheaply than through a series of bilateral loans.[5]

Other Advantages

Also, economists and syndicate executives contend that there are other, less obvious advantages to going with a syndicated loan. These benefits include:

• Syndicated loan facilitates competition for business by insinuating other banks to supply market information to a business in hopes of gaining recognition.
• Borrowers enjoy flexibility in structure and pricing, such that they have a variety of options in structuring their syndicate loans, including multi-currency options, risk management techniques, and prepayment rights without penalty.
• Syndicated facilities bring to the businesses the best prices in aggregate and spare the companies their time and effort that could have gone waste in individual dealing with each bank.
• Syndicate Lending also increases feedback in the sense how the banks are willing to share viewpoints on contemporary issues about the business that they are otherwise unwilling to share with the borrowing business.
• They also clear visibility in the open market for the borrower. Bunn remarked that rating agencies viewed a multi-year syndicate lending as a much stronger support than several bilateral one-year credit arrangements.[6]

Disadvantages of A Syndicate Loans

• Negotiating with one bank can take several days, which is a time-consuming process.
• Managing multiple ban relationships is an ardent task and requires investment both regarding money and time.

References:

[1] https://www.lcdcomps.com/d/pdf/LoanMarketguide.pdf

[2] http://www.bis.org/publ/qtrpdf/r_qt0412g.pdf

[3] http://www.investopedia.com/terms/s/syndicatedloan.asp

[4] http://www.referenceforbusiness.com/small/Sm-Z/Syndicated-Loans.html

[5] http://www.referenceforbusiness.com/small/Sm-Z/Syndicated-Loans.html

[6] http://www.referenceforbusiness.com/small/Sm-Z/Syndicated-Loans.html

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In this blog post, Aditi Sampat, Advocate at Nabco Enterprises Pvt Ltd and a student of the Diploma in Entrepreneurship Administration and Business Laws by NUJS, provides an overview of State Government or Private SEZs notified or approved prior to the SEZ Act of 2005.

Introduction to Special Economic Zone

Special Economic Zone (SEZ), conceptually, is a geographical region which has economic laws different from the country’s applicable economic laws, the primary underlying objective being increasing economic growth through foreign investment.

In addition to India, SEZs have been established in several countries across the globe like China, Jordan, Poland, Philippines, Kazakhstan and Russia.

According to the estimates of the World Bank, in 2007 itself, there were 3000 projects involving SEZ in 120 countries across the world.

On a Global level, the following are basic objectives which have led to the establishment of SEZ:

1. Economic growth and development through exports and backwards integration.
2. Growth in Foreign Investment.
3. Development of Infrastructure.
4. Generation of Employment Opportunities.
5. Upgrading of managerial and technical skills.

The objectives mentioned above can be achieved through an effective SEZ policy laid down by the State which provides the following incentives –

1. Income Tax holidays.
2. Indirect Taxes and Duty Exemption.
3. Hassle Free Environment, that is, Corruption free Environment.
4. No Currency restrictions.
5. Norms for Foreign Investment to be relaxed.
6. Excellent Infrastructure facilities.

The Facilitation of International Trade has been recognised by all developing countries for the sustained growth of the economy as well as being a major contributor to the GDP of the nation. In the wake of the continuing commitment to liberalisation, the Government of India has adopted a multi-pronged approach to promoting and increase foreign investment in India, since the last decade. Several policy changes in the form of second generation reforms have been introduced by the Government of India to achieve the above objective.

Evolution of SEZ – Worldwide and in India

Worldwide:-

The Origination of SEZ dates back to 1896 when the first Industrial Park was set up in Manchester. ‘Free trade zones’ designed to promote free trade were first set up in Hongkong and thereafter spread worldwide post the second World War.

The first Export Processing Zone (EPZ) which was designed to liberalise both trade and investment environment started operating in Ireland in 1960. Many developing countries adopted the EPZ model, though the success of the same has been slow after the 1990s.

The Chinese Experience – SEZs made their debut in 1979-80 when China first embarked the SEZ experiment. More than Trade and Investment promotion, China’s primary objective was to open its closed economy and experiment with foreign investment by choosing the SEZ experiment as a dominant feature of its policy. The policy was first tested in a few SEZ “pilot areas” before being introduced elsewhere. Subsequently, countries of the Soviet Bloc experimented the SEZ concept mainly with a view to using Foreign Investment to solve the unemployment problem. As it turned out, China has been one of the countries where the concept of SEZ turned out to be very successful. The Chinese Government has continually increased the number of open zones which as of 2008 stand at 1500.

In the 1980s, Shenzen and Xiamen were the most important SEZs in China, and by the 1990s, seven coastal SEZs gained importance, which attracted 80% of the foreign investment flow into China.

Summarising, SEZs have acted as a major FDI booster in China, wherein the Foreign Investment has increased from $3.5 billion in 1990 to the current levels of $50 billion. The Free zones have absorbed nearly 25% of the country’s cumulative FDI. Domestic investment has been triggered as a result of the FDI into SEZ. China’s five major SEZs account for less than 1% of the country; however, the SEZs account for more than 7% of China’s GDP.

Noteworthy is the fact, that most of the FDI inflow in China has come from the neighbouring Chinese dominated countries of Taiwan and Hongkong. This is one advantage which China has and which cannot be replicated elsewhere. China has fine-tuned its SEZ policy to meet the foreign investor’s requirement which has been a major reason for its success. Chinese expats have invested in SEZs as these investments made good economic sense. On the same lines, if the SEZ policy of India offers a similar package to NRIs, will lead to more lucrative investment opportunities to invest in India.

In India:-

In India, SEZ is closely linked with India’s Export Policy. There have been several incentives to boost exports since the 1960s. Some noteworthy incentives are:

1. Export Processing Zone.
2. Export Oriented Units.
3. Software Technology Park Scheme.
4. Electronic Hardware Technology Park.
5. Export Promotion Capital Goods Scheme.
6. Advance Licensing and Deemed Exports Scheme.
7. Free Trade Zone.

The significant change happened in early 2000 when the Union Commerce and Industry Minister, the late Murasoli Maran, went to China to understand how China had become of the most investor-friendly countries. Particular to his trip was the visit to a SEZ in China. Subsequently, the Export-Import Policy of March 2000 announced the formation of SEZ in India.

The SEZ policy not only represents the incentives related to export but also it has changed the environment for exports as well as FDI, by offering a trouble free business friendly environment and world class infrastructure. Also, the policy also allows the Government to experiment with radical reform on a localised basis, given the country’s size and social disparities.

With the SEZs becoming the engines of growth, the Government encouraged and enabled the establishment of SEZs either by the State Governments themselves or by the private sector or jointly by the Private Sector and State Government.

In the meantime, considerable time and effort were spent by the Government to evolve an all-encompassing legislation to regulate SEZs which was called the Special Economic Zones Bill. It was introduced in the Parliament and passed subsequently leading to the Special Economic Zones Act 2005. The President’s assent was obtained on June 23, 2005, and the Act were notified in the Gazette on February 10, 2006. Post the notification of the Act, tremendous surge in interest to launch SEZ was seen as is evident from the fact that many industrial houses applied for the same to the Board of Approval.

State Government/ Private SEZ Approved/ Notified Prior To The SEZ Act, 2005

Prior to the passing of the Special Economic Zones Act 2005, the SEZ policy of 2000 laid down the framework for the setting up of SEZ with the objective to provide an internationally competitive and hassle free environment for exports. The policy laid down the formation of SEZ through investments by the State Governments, Private Sector or jointly. The policy also laid down that some of the existing Export Processing Zone would be converted to Special Economic Zone. Accordingly, the following seven EPZ were converted to SEZ –

1. Kandla, Kachchh, Gujarat.
2. Seepz, Maharashtra.
3. Cochin, Kerala.
4. Falta, West Bengal.
5. Madras, Tamil Nadu.
6. Vizag, Andhra Pradesh.
7. Noida, Uttar Pradesh.

The following is the list of SEZ which were established prior to the Special Economic Zones Act 2005 in addition to the above EPZ which have been converted to SEZ –

1. Surat SEZ.
2. Jaipur SEZ.
3. Indore SEZ.
4. Jodhpur SEZ.
5. WIPRO SEZ.
6. Manikanchan SEZ.
7. Mahindra City SEZ.
8. Nokia SEZ.

The recent past has witnessed an exponential growth in the investment, exports and employment in SEZ mentioned above which has led to the overall economic growth of the country.

However, post the Special Economic Zones Act 2005, most of the approvals for SEZ have been granted to the IT sector which comprises of 62% of the total formal approvals till date.

Recent Developments and Conclusion

Recently, Government of India has brought in the concept of Investment regions modelled along the lines of Pudong, Rotterdam to dot the map of India. To obtain maximum possible leverage from the proposed investment in infrastructure, the Government has planned the setting up of five or 6 such regions in India.

The proposal which is being debated has envisaged a single mega industry led cluster which will have planned network of high-quality roads, air and seaports and power plants connecting every industry along with development area measuring 250 to 300 kilometres. There is also a proposal to subsume the existing SEZs in such Investment Regions.

The establishment of the SEZ has undoubtedly increased exports and propelled International Trade. More significantly, it has led to a large amount of foreign investment coupled with infrastructure construction and commerce. Foreign companies have established their presence and exports have grown significantly. Along with Foreign investment, foreign advanced technology has been brought into the country which is a major factor in enhancing economic growth of the country. The enactment of the SEZ Act has led to the fulfilment of the economic reforms as the multiplier effect of economic activities triggered by SEZ have materialised. The true challenge now is whether India through its SEZ can leverage the cost advantage and knowledge base and break China’s monopoly as the preferred destination for doing business.

Sources:

1. https://www.pwc.in/publications/assets/sezinindia.pdf
2. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Special_Economic_Zones.pdf

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In this blog post, Perin Gandhi, an Advocate in Mumbai and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes private trusts. 

“A man was tricked and sent to old age home after the death of his wife by his son and daughter-in-law.”

Well, such headlines have often been a part of daily newspapers and also social networking sites. Such incidents make an individual think- Can I depend on my children? The basic thought which crosses an individual’s mind is that, after me who will take care of my family? How should I ensure that their expenses are met? The biggest mistake that an individual commit is not taking a proper step for its property management. India lacks in succession planning. Whatever the reason may be it affects the smooth and hassle free transfer of the property to their intended beneficiaries and sometimes the process leads to a long-running legal battle for acquisition of wealth. In India, maximum legal disputes happen for family property. At the time of property management, the concern could be the care for a spouse, minor children, old parents who would be unable to meet their living when sole bread earner of the family is not around and even for the Settler himself in his old age.

Most of the advice we get, point towards making a Will. However, Will has its limitations. A will in respect of estate can be contested and has to be probated. So in such a scenario the best available option is forming a Private Trust. A trust is formed depending on the needs of the family, and its main objective is to manage the property of the owner while he is alive and after his death for the benefit of his loved ones who were dependent on him and make them financially secure. Often Entrepreneurs also take the route of private trust to distinguish personal and business assets and protecting his personal assets in times of loss incurred or claims made by the clients and secure his family financially in case a legal battle is initiated against the business disrupting its operation.

Private Trust                                                                      

The Indian Trust Act, 1882, governs a Private Trust. Private trust is a vehicle through which property can be transferred from one person (owner) to another for the benefit of an individual or an ascertainable group of people. The person who forms a trust determines the trustee, beneficiaries and also the property that has to be transferred and the rules that would govern the rights and duties of the trustee is known as the Settler or Author of the trust. The person to whom the property is transferred is the trustee and for whose benefit the trust is formed is the beneficiary. For Example, ‘A’ forms a Private trust and transfers certain property to ‘B’ instructing him to use the said trust property at the time of ‘C’s marriage. A trust so formed can either be revocable or irrevocable depending upon the objective behind forming a trust.

Essential Elements of a Private Trust

• The Settler should be of a sound mind and should have attained the age of majority. However, a minor can also become a settler with the consent of the court. The trustee so appointed should be above 18 years of age and of a sound mind. As he has to manage the property of the trust, he must be the one who is eligible to enter into a contract.
• The property so involved in a trust must be in existence, and the settler must be legally competent to transfer the same to the trustee.
• The trustee is not bound to accept a trust. His acceptance should be conveyed either in writing or by his act. The beneficiaries for whom the trust is formed should be specified properly in the trust deed so as to avoid confusion while fulfilling the purpose of the trust.
• A private trust in respect of an immovable cannot be created orally. It can be executed either by a non-testamentary document or by a testamentary document such as a Will that has to be duly registered. Whereas in the case of movable property, trust can be created by giving oral direction or by a document which may or may not be registered. Whatever the author chooses the mode of execution, the purpose of forming a trust must be clearly conveyed to the trustee.
• A trust is an instrument of transferring not only the interest in the trust property but also its possession and ownership to the trustee so in such a case once a private trust is formed and the trust deed is executed, the author cannot have control over the trust property. However, the trustee who is in possession of the trust property must carefully deal with the property and work towards the benefit of the beneficiaries and should not use it for his purpose.
• The Private Trust so formed must be lawful and should not be fraudulent. If a part of the purpose of the trust is lawful and is the other part is unlawful then the trust so formed becomes void.

Once a trust is formed it can be dissolved or revoked depending upon the type of trust. In the case of an irrevocable trust, with the consent of the settlor or beneficiary, a trust can be terminated. However, in case the settlor dies, then the beneficiary may terminate the trust with the intervention of the court. The court may also pass an order of termination of private trust if it is of the opinion that the material purpose of the trust was not fulfilled or the beneficiaries cannot be located, or the trustees were trying to extend the time limit of the trust for their selfish needs. If a Private trust is formed through a Will, then it can be revoked only by the author of the trust during his lifetime. Once the author dies, the private trust cannot be terminated.

Terminating A Private Trust

• By the Settler: Settler can revoke the trust if a provision is made in the trust deed reserving the power for the settlor to revoke the trust at any point in time by way of a registered Deed of Revocation. Unless such provision is made, he cannot revoke the trust.

• By the Beneficiaries: Beneficiaries may at their wish relinquish their rights in the trust property by signing a document. By doing so, they give up all their rights to the trust property, and the trust deed gets dissolved transferring the property again to the settler. Beneficiaries also on attaining maturity and becoming legally competent to contract, may by their consent revoke the trust.
• Trust period: A trust may be formed for a certain period. It may be specified in the trust deed as to the duration of the existence of the trust. For example, A trust could exist till the beneficiary reaches a certain age say 21 years. On the beneficiary reaching that age, the trust gets dissolved.
• On fulfilment of purpose: A trust may be formed for the fulfilment of certain purpose. Once the purpose for which the trust was formed in the first place gets fulfilled, the existence of the trust comes to an end. For Example, a trust may be formed exclusively for the education or marriage of the beneficiaries. When the beneficiary completes his/her education or his/her marriage gets solemnised, the trust gets dissolved. However, the settler can dissolve the trust even before the fulfilment of purpose. If the trust was formed to pay off the dues of the creditor, the settler could dissolve the trust even if the dues are not cleared with the creditor. The important point to note in this case is that the settler can do so only if the creditor is unaware of the purpose of the trust. If the creditor is aware of the trust and its objective then without the permission of the creditor the settlor cannot revoke the trust.
• The occurrence of the event: A trustee has to work towards the benefit of the beneficiary and to do so he has to enter into transactions which benefit the trust. If there are repeated events of failure in the performance of certain transaction by the trustee which affects the purpose of the trust or the trust property was used for a purpose other than what it was intended for then in such a scenario the trust can be revoked by the settlor or beneficiary.
• Fulfilment becomes impossible: If the trust property gets destroyed or is not maintained in a way which makes it impossible to be used for the fulfilment of the purpose of the trust, then in such an event the trust can be dissolved. For example Due to an earthquake or any natural calamity, the trust property gets damaged and makes it impossible to fulfil the purpose of the trust. This leads to the dissolution of the private trust.
• Purpose become unlawful: When a trust which was lawful at the time of formation becomes unlawful over the course of time then in such an event the trust becomes void. A trust can become unlawful as per section 4 of the Indian Trust Act, 1882 for the following reasons:
  • forbidden by law, or
  • is of such a nature that, if permitted, it would defeat the provisions of any law,
  • is fraudulent,
  • involves or implies to the injury of any person or property of another,
  • the court regards it as immoral or opposed to public policy.

On the happening of any of the above events which make a trust unlawful, the trust can be dissolved.

Conclusion

A trust can be revoked/dissolved for any of the reason mentioned above by either the Settler or beneficiary or by the court, but it is to be noted that at the time of the dissolution of Private Trust, a ‘Trust Dissolution Deed’ must be entered into by the parties which have to be duly registered.

 References:

1. Indian Trust Act, 1882
2. http://thismatter.com/money/wills-estates-trusts/trust-modification-termination.htm
3. Section 3 and 4 of Indian Trust Act, 1882.
4. Section 77, 78 of Indian Trust Act, 1882.
5. http://www.fpgindia.org/2011/09/private-trust-why-should-you-consider-them.html

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In this blog post, Manisha Nayak,a Fourth-Year Student at Government Law College, Mumbai and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes and analyses the business and organisational structure of the Bombay Stock Exchange. 

The article deals with the business and organisational structure of Bombay Stock Exchange. The article provides an insight into the organisational setup whereby focussing on the day today working, practices and process dealing with the structural aspect of Bombay Stock Exchange. Further, the article provides a reference to business and organisational structure affecting the industry practice and market trends.

Introduction

Bombay Stock Exchange (“BSE”) was established in 1875[1] which have facilitated the development of the Indian economy by providing a platform to Companies for raising capital. Companies through BSE can raise capital by trading in the equity market, derivatives, debts, etc. There are approx. 5500 companies listed on BSE and with the total market capitalization of $ 1.64 trillion.[2] Apart from the aforementioned services, BSE also facilitates by providing depository and education services, the depository services provided by BSE, i.e., via Central Depository Services Ltd. is one of the most respected and trusted in the industry. Also, BSE is ranked among the top 10 of the stock exchanges worldwide.

Organisational Structure of Bombay Stock Exchange

The day to day was working, and operations of BSE is managed by the Board of Directors consisting of a Chairman, a Managing Director, Public Interest Directors and Shareholder Directors. The Board jointly formulated the policies of BSE and takes a decision relating to the trading of securities, i.e., equity, derivatives, etc. affecting the trading of capital markets in India via BSE. Mr Sudhakar Rao is currently serving as the Chairman of the Board of Directors, BSE.[3]

The board members are elected or appointed members who conferred with the powers, duties and responsibilities. Further, the management of BSE which oversee the working consists of a Managing Director and Chief Executive Officer, a Chief Business Officer, a Chief Regulatory Officer, a Chief Financial Officer, a Chief Information Officer and a Chief of Business Operations.The managing director of the management of BSE acts as the administrative head who oversee the working of all departments of BSE and all the requisite officers appointed are accountable to him. Further, the managing director being in the hierarchical head in the management is also responsible for delegation of work to other officers and is one of the key managerial personnel responsible for taking major and important decisions affecting the working of BSE. Though the chief business officer is responsible for the administrative, financial and current operating business of BSE, the chief regulatory officer head the department which is responsible for the secretarial operations whereby dealing with the regulatory compliances of BSE, the chief financial officer is responsible for the day to day financial operations of BSE, the chief information officer appointed to cater and facilitate the information to the investors, industry practitioners, academicians, etc.

Business Structure of Bombay Stock Exchange

The Bombay Stock Exchange is a securities ecosystem which provides a wide range of services starting from a trading platform to depository services, education, risk management, etc. BSE conducts its business in alliance with the leading global exchanges such as the Deutsche Borse and Singapore Exchange. Following are the business carried on by BSE and its subsidiaries, and equity stake of BSE in other entities:

1. The BSE exchange provides trading services to entities dealing ion equities, equity derivatives, currency derivatives, interest rate derivatives, mutual funds, a platform for small, medium enterprises, institutional trading platform, corporate debt, listing, foreign institutional investment auction services, etc.[4]
2. BSE Investments Ltd. provides strategic investment related services.
3. Indian Clearing Corporation Limited which is a subsidiary of BSE carries out the functions of the clearing, settlement, collateral management and risk management for various segments of BSE.[5]
4. Central Depository Services Indian Limited who is a Depository Participant (“DP”) and is promoted by BSE carries or facilitates in holding of securities in the electronic form.[6] The investor investing in the same can open a dematerialised account (“demat account”) whereby the investor can avail facilities of CDSL who being a DP acts as an agent facilitating the depositary services.
5. BSE Institute Limited is a subsidiary of BSE which carries out the function of imparting and facilitating the education relating to the primary market, secondary market, transactions, etc. through specially designed courses for students, practitioners, academicians, etc. providing them with an insight into the current industry practice and market trends in the capital markets in India.
6. Other services provided by the subsidiaries or wings of BSE involve the services relating to the marketplace technology providing the Information Technology related services, Asia Index Private Limited which is 50% Joint Venture (“JV”) with Standard & Poor Dow Jones Indices (“SPDJI”) carrying out the index business, the BSE corporate social responsibility (“CSR”) Integrated Foundation carrying out CSR activities and BSE Sammaan CSR Limited.

Other Committees of Bombay Stock Exchange

In compliance with the provisions of the Companies Act 2013 and under the SEBI (Listing Obligations and Disclosure Requirements) (“LODR”), Regulation 2015 as applicable mandates the constitution of the following committees:

1. Audit Committee[7]; BSE has appointed an audit committee consisting of four public interest directors and a shareholder director.
2. Stakeholder relationship/Share allotment committee[8]; BSE has appointed a stakeholders relationship committee consisting of Managing Director & Chief Executive Officer, a Public Interest Director and two Shareholder Directors.
3. Nomination and Remuneration Committee[9]; BSE has appointed a Nomination and Remuneration Committee consisting of three Public Interest Directors and two Shareholder Directors.
4. Corporate Social Responsibility Committee[10]; BSE has appointed a CSR Committee consisting of three Public Interest Directors and a Shareholder Director.
5. Public Interest Directors Committee[11]; BSE has appointed a Public Interest Directors Committee consisting of six Public Interest Directors.

References:

[1] Bombay Stock Exchange, “About BSE: Introduction”, BSE Ltd., available at http://www.bseindia.com/static/about/introduction.aspx?expandable=0.

[2] Ibid.

[3] Bombay Stock Exchange, “About BSE: Corporate Structure- Board of Directors”, BSE Ltd., available at http://www.bseindia.com/static/about/boardofdirectors.aspx?expandable=1#.

[4] Bombay Stock Exchange, “About BSE: Media / Corp. Comm – BSE Update”, BSE India Ltd., available at http://www.bseindia.com/downloads1/BSE_Update_August_2016.pdf.

[5] Indian Clearing Corporation Limited, “About us: Company Profile”, ICCL Ltd., available at http://www.icclindia.com/static/about/companyprofile.aspx#clearing.

[6] Central Depository Services India Limited, “About: Introduction”, CDSIL Ltd, available at https://www.cdslindia.com/aboutcdsl/introduction.html.

[7] Section 177 of Companies Act, 2013, Rule 6 & 7 of Companies (Meetings of Board and its Powers) Rules,2014 r/w Regulation 18 of SEBI LODR Regulations 2015.

[8] Section 178 of Companies Act, 2013.

[9] Regulation 19 of SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015.

[10] Section 135 of Companies Act, 2013.

[11] Companies Act 2013, Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations 2012 r/w SEBI circular dated 13.12.2012 on “Procedural norms on Recognitions, Ownership and Governance for Stock Exchanges and Clearing Corporations”.

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In this blog post, Anumeha Saxena, a student, currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the setting up of a Special Economic Zone in the form of free trade and warehousing. 

Defining Special Economic Zones

Essentially, a Special Economic Zone is a demarcated and duty-free geographical region which has economic regulation different from the country in which it is situated, sometimes even deemed as a foreign territory. The tax and business incentives extended in these regions are expected to promote rapid economic growth attracting both foreign investment as well as know-how.

The policy framework to provide internationally competitive platform for exports, the Government of India had introduced the SEZ Policy in April, 2000, which functioned from 2000 to 2006 through the   provisions of the Exim Policy/Foreign Trade Policy and fiscal incentives but did not garner sufficient confidence of the investors to commit substantial investment for development of infrastructure and setting up of units for export of goods and services. To create a stable policy with minimal regulation and an expeditious single-window clearance, the Special Economic Zones Act, 2005 was enacted laying down the policy framework, and the Rules notified to provide the supporting procedure. It is expected to generate an increase in exports and garner FDI capitalising on public-private partnership.

Significant incentives available include exemption from customs and excise duties for development of SEZs for authorised operations, exemption from income tax, minimum alternate tax, dividend distribution tax, central sales tax and service tax. Additionally, special additional duty is exempted on goods cleared from FTWZ and brought into the DTA. The notification provides that exemption is not available if such goods are exempt from payment of sales tax/VAT when sold in DTA.[1] Needless to mention, these also boost the employment in the region and increase the competitiveness of industries.

The Ministry of Commerce and Industry is the nodal authority that governs the setting up and administering of the SEZs. Inter alia, it covers the aspects of the constitution of authorities and bodies for regulating the SEZ and SEZ units, the permissible services and manufacturing activities in SEZs, criteria and procedure for setting up of SEZs and SEZ units, and obligations on their part.

A SEZ can be setup by either Central or State Government or both of them jointly, for manufacturing goods or rendering services or as a free trade and warehousing zone. While the definition of manufacturing and services have been provided in the Act, a discussion of the same is beyond the scope of this paper. It is the third kind of SEZs, those concerned with free trade and warehousing that form the subject of the paper. Simply put, these SEZ mean those wherein trading and warehousing and other activities related thereto are carried out.

A SEZ is also divided into processing and non-processing area. The processing area is that area in a SEZ where units can be located for the manufacture of goods or rendering of services. The Free Trade and Warehousing Zone can be set up only in the processing area of a multi-product SEZ. It is demarcated from a non-processing area by the Development Commissioner, where the non-processing area is one intended to provide support facilities to the SEZ processing area activities and may include commercial and social infrastructure. The entry and exit points of processing area and FTWZ are specified and have to be fully secured by taking such measures as approved by Board of Approval.[2]

Compliance for the establishment of SEZ includes following the multiple requirements laid down by different instructions issued by the Department of Commerce. Further, environmental clearance has to be obtained from the Ministry of Environment and Forest.

It is important to note that while SEZs can have a business, residential or recreational facilities located in the processing area to support the processing area activities, such activities require prior authorization of the Board of Approval. Only those authorised activities as approved by the BOA are eligible for exemptions. However, the exemption is not available for operation and maintenance of facilities in the non-processing area.[3]

As the Foreign Trade Policy for years 2015-20, the objective of the creation of such zones is to create the trade-related infrastructure to facilitate the import and export of goods and services with freedom to initiate trade transactions in free currency.

Defining Free Trade and Warehousing Zones

The Government had announced in the Foreign Trade Policy, 2004-09 its intent to establish Free Trade and Warehousing Zones to facilitate trade-related infrastructure to promote import and export of goods and services with freedom to carry out trade transactions in free currency. On June 23, 2005, the central legislature passed the Special Economic Zones Act, 2005 and on February 10, 2006, Government of India enacted the SEZ Rules, 2006.

Designated as foreign territory for carrying on business, the FTWZ are to facilitate trade. The Policy seeks to establish “world-class infrastructure for warehousing of various products, state-of-the-art equipment, transportation and handling facilities, commercial office space, water, power, communications and connectivity, with a one-stop clearance of import and export formality, to support the integrated Zones as ‘international trading hubs’. These Zones would be established in areas proximate to seaports, airports or dry ports so as to offer easy access by rail and road.”[4]

The zones are to provide world-class infrastructure for warehousing for numerous kinds of products, handling and transportation equipment, commercial office space, related utilities-telecom, power, water, etc., and further, one-stop clearance of import and export of goods.[5]  

The facilities are expected to include customised and categorised warehouses for different kinds of products-chemicals, foods, electronics, oil, etc., sophisticated freezer/cooler facilities, break bulk, containerized and dry cargo storage facilities, controlled humidity warehouses, enhanced transportation facilities, information systems for cargo tracking, office space and support facilities and amenities like medical facility, canteen services, business centres.[6]

Additionally, FTWZ fashion themselves to include administrative buildings and offices, ancillary building, canteen, services building, covered parking and roads. Security huts, container stacking area pavement, in-plant maintenance workshops, general high mast lighting are also included. Horticulture and landscaping, as well as boundary wall, water supply and sewerage mechanisms, are covered as well. Rainwater and stormwater drainage, effluents disposal systems, telecom cables, power supply systems are included as well.

When assessing the viability of an FTWZ, the BoA will look at whether it acts as a suitable logistics and distribution centre enabling trade facilitation and logistics operations, as well as free trade environment.[7]

There is certain procedure common to the establishment of all SEZ, whereas there are certain others which are specific to the establishment of FTWZ. Both have been highlighted below. 100 percent FDI is permitted in development and establishment of FTWZ and their infrastructural facilities. As it is deemed to be a foreign territory, all equipment and material sourced from the Domestic Tariff Area will be considered imports from FTWZ and vice versa. At the same time, all benefits available to SEZs shall apply to FTWZ. The FTWZ is under the direct administrative control of the Development Commissioner.

The benefits accruing to FTWZ include deferment of customs duty for product requiring longer storage time. Income tax and service tax exemptions for developers and users of the zone. Excise duty exemption for products sourced from domestic markets, including goods, spares, DG sets, packing materials, etc.

FTWZ provide infrastructure benefits in the form of single-product storage facilities that assist in meeting specific warehousing requirement for each product category. Further, they make available temporary storage facilities to enable users to meet short demand without incurring significant costs, e.g., leasing space for a year to meet 2-3 months demand. Shared equipment which augments the ability of users to save capital investments by leasing the equipment provided by the zone. Administrative benefits include the reduction in customs clearance time and better logistics and connectivity leading to improved delivery time. Support facilities such as banking, insurance along with efficient management services are also extended.

Procedure

A SEZ can be set up by the Central or State Government, the public or private sector including a foreign company or jointly in the form of a consortium. The steps involved in the establishment of a SEZ can be enumerated as follows: a developer intending to set up a SEZ must identify the category of SEZ he intends to apply for, the area for setting up the SEZ needs to be identified, and must not be less than the minimum area indicated in the law.

The proposals can be made by public sector undertakings, public limited companies or by joint ventures in technical collaboration with experienced infrastructure developers. Board of Approval considers These in Department of Commerce. On approval, developer issues a letter of permission for the development, operation and maintenance of FTWZ.

The proposal for the development of FTWZ is required to necessarily entail a minimum outlay of Rupees 100 crores for creation and development of infrastructure facilities, with a minimum built-up area of five lakh square metres.[8]

As per Rule 5(2), SEZs for Free Trade and Warehousing shall have an area of 40 hectares (even for special states) or more with a built up area of not less than one lakh square metres, provided that in a standalone Free Trade and Warehousing Zone, at least fifty percent of the area shall be earmarked for developing processing area. Additionally, a Free Trade and Warehousing Zone may also be set up as part of a Special Economic Zone for multi-product. Further, a SEZ for a specific sector, Free Trade and Warehousing Zone may be permitted with no minimum area requirement but subject to the condition that the maximum area of such Free Trade and Warehousing Zone shall not exceed twenty percent of the processing area. Paved and walled area and the container yard, do not form part of the built-up area, and the Free Trade and Warehousing Zone can be developed in phases.[9]

On identification of the area, an application for establishment of SEZ is made to the concerned State Government as per the format set out in Form A. If the land is owned by the developer or has already been leased for a period in excess of 20 years by the developer, details of same can also be filed along with the application. The application must necessarily contain a project report along with other particulars. The reports covers points such as: location of the SEZ along with the existing and proposed infrastructure, distance from nearest means of transport: rail, road, seaport and airport, financial details including proposed investment, mode of financing and viability of the project, details of foreign equity and repatriation of dividends, whether the SEZ intends to be multi-product or otherwise. This is subjected to the scrutiny of the Board to determine whether the criteria for setting up the SEZ are fulfilled.

The State Government, when recommending the proposal, commits to the provision of facilities and incentives such as exemption from state and local levies, exemption from electricity duty, single-window clearance under state laws, etc.[10]

It is also required to forward the proposal along with recommendation within 45 days from the date of receipt of a proposal to Board of Approval, addressed to Deputy Secretary (SEZ), Department of Commerce, who the applicant may also approach directly, which will be contingent on the applicant obtaining the concurrence of the State Government. However, in the latter scenario on receiving approval, the applicant is required to intimate the State Government within 6 months.

On being issued a letter of approval from the Department of Commerce, and clarification from the State Government or its authorised agency regarding the legal possession and irrevocable right, the Department notifies the area as a SEZ. To this end, the applicant is required to submit the details of operations proposed to be undertaken in the SEZ; without the authorization, the benefits shall not be extended to the applicant. A State Government intending to set up a SEZ can directly forward the application to the Board after identification of the area. The Central Government, on the other hand, can notify such a Zone, without any application being made to the Board or reference to the State Government.

The grant of approval by the BoA can be with or without modification or may lead to an altogether rejection. In the former case, the same is communicated to the person or State Government concerned, and if accepted, the same are communicated to the Central Government. If the proposal is accepted without modifications, then this is communicated to the Central Government. In each of these two cases, the Central Government then grants a Letter of Approval on terms and conditions approved by the Board of Approval to the developer i.e. any person or State Government. If the proposal stands rejected, then the applicant is given an opportunity to be heard before cancellation and the reasons for the same recorded and communicated to the Central Government which communicates to the State Government or person concerned. It may also accord in-principle approval pending land acquisition. Issuance of Letter of Approval by the Government of India is carried out in the format that is provided in Form B.

This letter is valid for 3 years within which time the applicant has to implement the proposal and start operations. However, the Board may grant a further extension for up to 2 years on a case-by-case basis.

After obtaining the Letter, the unit may take possession of the land/built-up space and execute a bond-cum-legal undertaking jointly with the Development Commissioner and Specified Officer as given in Form H of SEZ Rules and commence operations thereafter.

An entrepreneur holding letter of approval issued under sub-rule (1) of Rule 19 will be entitled to set up a unit in processing area of the SEZ or FTWZ provided that a proposal for setting up of a unit in a SEZ or FTWZ will be entertained only after processing area of SEZ or FTWZ has been demarcated under Rule 11.

Following guidelines issued by Department of Commerce will apply in cases where: the request for extension is filed before a LoA has expired and where steps for implementation of a proposal like acquisition/ purchase of land etc. have been taken.

The Letter of Approval may be extended for 1 more year beyond the original validity. While extending the in-principle LoAs, any approval provided for an area more than 5000 hectares may be capped at 5000 hectares to align all such approvals as per the Government decision in this regard. However, a standalone FTWZ cannot be granted a second extension. Further, with respect to specific product SEZs other than notable exceptions such as biotechnology and non-conventional sources of energy, conditions for grant of the first extension will be applicable. Additionally, the developer must have 60 percent land acquisition/ possession. In the case of multi-product SEZs, conditions for grant of extension are to be fulfilled. Further, the developer must have 50 percent land acquisition/ possession.[11]

To establish a SEZ unit, copies of project proposal are required to be submitted to the Development Commissioner who forwards the same to Approval Committee which consists of Development Commissioners, Officers from State and Central Government and also a representative of the Developer as a Special Invitee. A consolidated application form may be submitted for certain projects.

Proposals for setting up units in SEZs other than those necessitating an industrial licence may be approved by Development Commissioner within 15 days. In SEZs requiring an industrial licence, it may be approved by Development Commissioner after clearance of proposal by the Board and Department of Industrial Policy and Promotion within 45 days. This approval is valid for 5 years. The Approval Committee, however, is empowered to cancel approval granted to SEZ Unit. A challenge to the order of Approval Committee regarding the grant of approval to the SEZ Unit can be made before Board of Approval within 45 days of such intimation. The Development Commissioner can give possession of the relevant space in SEZ only post-issue of the Letter.[12]

Procurement of goods for the development of SEZ for authorised operations shall be approved by the Approval Committee at a zonal level on the basis of which goods can be procured without payment of customs and excise duty by the developer.

With respect of FTWZs, it is important to note that supplies to bonded warehouses and FTWZs by SEZ units where payment is received in foreign exchange are counted towards fulfilment of positive net foreign earnings. In such cases, receipt of foreign exchange is necessary. Sub-contracting of production or production process are not permitted in FTWZ as they are involved only in free trade or warehousing.[13]

In an FTWZ, the developer shall be permitted to import duty-free such building materials and equipment as required for development and infrastructure of the zone. This material as sourced from DTA are considered to be physical exports for the DTA suppliers. The scheme provides for duty-free import of all goods (except prohibited items, arms and ammunition, hazardous wastes and SCOMET items for warehousing). The same provisions govern Bond towards customs duty on import as that for other SEZs. These goods can be re-sold/re-invoiced or re-exported (which is permitted without any restrictions).[14] Selling of these goods in the DTA is also provided for under the provisions of the Policy. Packing or repacking minus processing and labelling as per customer or marketing requirements are allowed to be undertaken within the FTWZ.[15] Once developed, the developer is permitted to sale/lease/rent out warehouses/workshops/office space and other facilities in the FTWZ to traders/ exporters.

Post the establishment, the developer shall itself or through suitable special purpose arrangements, ensure a reliable mechanism for proper maintenance of common facilities and security of the FTWZ. When functioning, the maximum period for which the goods are allowed to be warehoused within the FTWZ is two years, after which they are to be necessarily re-exported or sold in the DTA. Further, after the expiry of this period, customs duties as applicable become automatically due unless goods are re-exported within such grace period as is allowed but cannot exceed three months.[16]

Units in FTWZs are required to be net foreign exchange earners. These earnings are calculated cumulatively for a very block of five years from the commencement of warehousing and trading operations as per the formula applicable to SEZ units.

References:

[1] Available at <http://www.kpmg.com/IN/en/services/Tax/FlashNews/Recent-developments-in-SEZ-and-EOU-schemes.pdf>, (Last visited on October 28, 2016). The Circular also provides that such an exemption is not available on goods cleared on the stock-transfer basis or for self-consumption.

[2] Rule 11(2), SEZ Act, 2005.

[3] Details of such activities which can be approved as authorised activities in non-processing areas are given in the Ministry of Commerce Industry Notification dated October 27, 2006. Activities which the definition of manufacturing as well as services has default approval are noted in the Ministry of Commerce & Industry Circular No. F.1/153/2007-SEZ dated August 22, 2008.

[4] Chapter 7A, Foreign Trade Policy, 2015-20.

[5] Free Trade and Warehousing Zones, available at < http://www.ilfsindia.com/downloads/bus_concept/ftwz.pdf>, (last visited on October 29, 2016).

[6] Id.

[7] Id.

[8] Chapter 7A, Foreign Trade Policy, 2015-2020.

[9] Rule 5, SEZ Rules, 2006.

[10] Rule 4(5), SEZ Rules, 2006.

[11] Instruction of the Department of Commerce, available at <http://www.epces.in/uploads/files/file/faq.pdf instruction 22>, (last visited on October 30, 2016).

[12] Special Economic Zones: Reinforcing Investors’ Interest, available at <http://www.mondaq.com/india/x/303448/Inward+Foreign+Investment/Special+Economic+Zones+Reinforcing+Investors+Interest>, (last visited on October 30, 2016).

[13] Rule 41(1) (g), SEZ Rules, 2006.

[14] However, export of SCOMET items is not allowed except with the permission of Inter-Ministerial Committee.

[15] Chapter 7A, Foreign Trade Policy, 2015-2020.

[16] Chapter 7A, Foreign Trade Policy, 2015-2020.

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In this blog post, Amala Haldar, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, describes the procedure for application for recognition of a start-up as a start-up under the Startup India Program.

The improvement of start-up environment was an agenda of the new Government for long. The major step in this regard was taken on 16^th January this year. This was the first time when the start-up industry had a direct talk with the Government.

Startups help a lot in the growth of the economy and also play a vital role in increasing the employment. The Government realised the importance and so, many steps were taken in this regard.

Startups are not only needed in urban areas but can also help a long way in rural areas. The steps taken for expansion in this regard include-

• Simplification of procedures
• Providing financial support to startups
• Any academic support

The Current State In India

According to the report of the Economic Survey, India currently has more than 19000 technology-enabled startups. Indian startups raised three and a half billion dollars in funding last years, and the number of active investors has also increased. In such a scenario the Government Pitching in with the schemes like Startup India would only provide mileage to the startup ecosystem.

What Is A Startup?

 A Startup as the name suggests is starting a business in motion. In common parlance, a startup is a young company funded by its founders. Usually, a startup is innovating and establishing new ideas that usually involve technology.

Eligibility For Startup India Program

 For applying any venture has to be eligible. The eligibility criteria are as follows:

• It must be an entity registered and incorporated as a Private Limited Company under the Companies Act 2013.
• A registered partnership firm under Indian Partnership Act 1932
• A Limited Liability Partnership under LLP Act 2008.
• Five years must not have elapsed from the date of incorporation.
• Annual turnover in any preceding financial year must not exceed 25 crores.
• The startup must be working toward innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
• Start up must aim to develop and commercialise-
• • A new product or service or process.
  • A significantly improved existing product or service or process that will create or add value to customers or workflow.
• The startup must not merely engage in-
  • Developing products, services or processes which do not have the potential for commercialising.
  • Undifferentiated products or services or processes.
  • Products or services with no or limited incremental value for customers or workflow.

• The startup must not be formed by splitting up or reconstruction of a business already in existence.
• The startup has obtained certification from inter-ministerial board set up by Department of Industrial Policy and Promotion. To validate the innovative nature of the business and,
  • Be supported by a recommendation in a format specified by Department of Industrial Policy and Promotion from an incubator established in a post-graduate college in India.
  • Be supported by an incubator which is funded by Government of India as part of any specified scheme to promote innovation.
  • Be supported by a recommendation in a format specified by Department of Industrial Policy and Promotion from an incubator recognised by Government of India.
  • Be funded by an incubation fund or Angel fund a private equity fund or accelerator or Angel Network duly registered with SEBI that endorses innovative nature of the business.
  • Be funded by Government of India as a part of any specified scheme to promote innovation.
  • Has a patent granted by Indian Patent and Trademark Office in areas affiliated with the nature of the business being promoted?

The Procedure For Application

 Once a venture is eligible for being a startup the procedure for application is very simple. The entire application is to be made online. The following information is to be provided during online application:

• Nature of entity or business
• Incorporation/ Registration Number
• PAN
• Details of Authorized Representative
• Details of Director/Partner
• Supporting Documents and Self-Certification.

The letter of recommendation is also to be uploaded along with other documents.

On opening the online application portal, the details of the Entity, the authorised representative and the partner or director is to be given.

After this comes the uploading of documents. Then upon hitting the submit button, an entity is successful.

On successful registration, a certificate is generated which can be verified. Upon registering as a Startup, one can be eligible for the benefits under the Startup India schemes if one fits the other criteria too.

What Happens When An Entity Becomes A Startup Under The Startup India Program? 

The startup India action plan has various proposals as to the enhancing the convenience of operation of various startups.

They are mentioned as under:

• Simplification of regulations: The rules and regulations of various labour and environmental laws are overwhelming to startups. The startup action plan aims at reducing the hindrances by introducing an app based self-clarification of the certificate. The entity would not be disturbed by random inspections for the first three years and would only be inspected if any complaint of violation of labour law is made.

• One access point: There would be a centralised access point for all startups for the frequent interchange of knowledge and financial help of entrepreneurs. It would be a kind of hub where entrepreneurs can talk about business models ask for government collaborations and organise mentorship programs.

• Mobile application: There is an online portal so that communication with Government becomes easier. The need for various compliances and licenses are laid down clearly in the portal and such information would leave no scope for ambiguity or confusion.

• Concern about intellectual property: As infringement of intellectual property increases so does the need for its protection. Thus the scheme for Intellectual Property Protection is introduced. This scheme shall help the process of trademark filing to be faster.

• Public procurement to be made easier: Usually, Government tenders require “prior experience” for participation. But this kind of criteria shall not be applicable for startups anymore. However, the standards of quality would remain the same.

• Provision of Funds: The Government would not invest directly but would provide finances to SEBI registered Venture funds.

• Tax: The Government is planning to encourage investment into Startups by giving tax exemptions on capital gains if they invest it in the fund created by the Government.

• Exemptions: The startup would enjoy a 3-year long tax exemption this would surely go a long way in benefitting the startups.

• Startup Fest: A unique initiative of the Government of improving startup ecosystem though fests. The fests would be held nationally as well as on a regional basis, and they would not only help in showcasing innovation and knowledge but also the proper interaction between leaders.

• Innovation Centers: For proper incubation, the Government has decided to have many centres of entrepreneurship at national institutes.

• Research Parks: The government will set up Research Parks in institutes with an investment of its own.

• Biotechnology: The government is also expecting startups at the biotechnology sector, and for the boosting of that, it is ready to undertake bio-incubators, seed funds and Equity Funding. A major step in this regard is the Bengaluru- Boston Gateway. This would encourage the exchange of knowledge between various institutes of Boston and Bengaluru.

• Various Programs: Various programs like the Innovation Core (for school kids), National Initiative for Developing and Harnessing Innovations and Uchhatar Avishkar Yojana shall be started. These programs would encourage invention and also provide funding for it at various levels including schools and colleges.

• Building Incubators: The building of world class incubators is also a step of the action plan which can be helpful. An investment of 10 crore rupees is to be made in 10 incubators which can be turned into world class.

• Atal Innovation Mission with Self-Employment and Talent Utilization Program: This scheme would encourage innovation through self-employment and talent utilisation wherein innovators would be mentored to be successful entrepreneurs. The mission would establish tinkering labs, strengthen incubation facilities and fund the growth of startups. It would promote entrepreneurship also through mentorship programs. Under the program innovation, awards would also be given to startups, and various steps shall be taken for awareness at the stage of innovation.

Conclusion

The boom in the startup industry has made the youth hopeful towards innovation and schemes like these are sure to go a long way in ensuring the growth continues. But for a technology-based startup to thrive it is not only enough to initiate the business it also has to have earnings, so only depending upon capitals from outsiders is not a solution. The help of investors and the government can only provide initial support, but the survival in the market is entire of the entrepreneur’s business model. Thus here’s wishing all the very best to Startups as we all know creating jobs is way better than getting one.

References:

• http://startupindia.gov.in/index.php
• https://yourstory.com/2016/01/startup-india-action-plan-eligible/
• The criteria for eligibility are provided as per the Government notifications.

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In this blog post, Kritika Sureka, a student pursuing BA LLB (3rd Year) at KIIT School of Law and a Diploma in Entrepreneurship Administration and Business Laws by NUJS, compares and contrasts between an unlimited company and a company limited by either shares or guarantee. 

What is a company?

The Companies Act does not define what a company is in terms of its features. According to section 2(20) of the Companies Act, 2013 any company which is incorporated under this act or under previous company law is said to be a company. But this definition under the act does not provide a clear meaning of company. For this purpose, we can see the definition given by Lord Justice Lindley who said that “a company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who shares the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted.”

The incorporation of companies can be either as limited liabilities companies or unlimited liabilities company. Further, they may be incorporated as public companies or private companies. Limited liabilities company may be divided further into three following heads:-

1. Companies limited by shares.
2. Companies limited by guarantee.
3. Companies limited by guarantee having share capital.

Companies limited by guarantee

A company which does not have share capital is a company limited by guarantee. The profits that are earned are again re – invested. This company has a separate status, or legal identity i.e. activities can be carried out in the name of the company, for example buying and selling the property, employment of people, borrowing money, defending legal suits. It also implies that protection is given to the members from being held liable in their personal capacity for debts arising in the business of the company.
A company limited by guarantee is the structure that is legally preferred for most non-profit organisations, charity societies, clubs and other similar organisations. Such companies are non-profit companies, as the profits are not distributed to the members but rather retained in the company or used for different purposes. Mostly the articles for these companies need to be drafted specifically for that organisation in particular, and this is a work which needs specialisation.

Why should one opt for a company limited by guarantee?

The reason why a non-profit organisation or a community project is established in the form of a company which is limited by guarantee is similar to the reason why a company limited by shares is established by a profit making business. When a charity or community project is in the form of a company limited by guarantee, then protection is given to the people who run the company so that they are not held personally liable for any debts.

1. Limited liability- if a community project, charity or non-profit project is not registered in the form of a limited company then the administrators who are running it, for example, the managing committee can be held liable in a personal capacity for debts which are unpaid. There can be a huge risk because some community groups can be organisations whose liabilities cannot be done away with easily. For instance, they can have premises on the leasehold or financial contracts for equipment. If there is a lack of income to meet these expenditures, then it can result in insolvency and the people running it may be in trouble for any unforeseen circumstances.
2. Members, not shareholders – unlike a company limited by shares, this company does not have shareholders a company limited by guarantee has one or more members.

Company limited by shares

Companies limited by shares are defined under section 2(22) of the companies act 2013. As per the companies limited by shares, the members have their liability limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. No member of a company limited by shares can be called upon to pay more than the nominal value of the shares held by him. If the shares of the shareholder are fully paid up, he has nothing more to pay. But in the case of partly paid share, the unpaid portion is payable at any time during the existence of the company on a call being made, whether the company is a going concern or is being wound up. These types of companies are quite common in the commercial, trading and industrial world. Such companies are characterised with an authorised share capital of a specific amount and liability of each member of such is limited to the unpaid amount of shares and premium, if any, held by him.

Why should one opt for a company limited by shares?

1. Liability is limited: the company shareholders will only be liable for any debt the company accrues according to their own level of investment and no more. This emerges as one of the biggest advantages of running a business in the form of a limited company. Even if a situation of financial difficulty arises in the company, the personal finances, as well as the personal assets of shareholders, are protected. Limited liability specifically becomes important in the case of companies who want to provide services of high value which can lead to claims and liabilities in the public sphere.
2. No taxation of profit – a shareholder in such a company is at an advantaged position because whatever accrues from the shares in the form of dividends is not taxable. Also, limited companies are only taxed on their profits and therefore they are not liable to pay higher tax rates which are usually placed on sole traders or partnerships.

3. Separate entity- the limited company is deemed to be a separate entity from its owners. Therefore the company has the advantage to existing beyond the life of its members.

4. Limited liability helps to boost professional status and reputation as it creates an impression that the business is grounded, dedicated and reliable.

5. A company limited by shares will help an individual to sell shares to other people to raise finance and protect the name of their business.

Unlimited company

As per section 2 (92) of the act, a company having no limitation on the liability of its members is an unlimited company. Section 3 (2 c) of companies act, 2013 allows a company to be formed as an unlimited company. Hence members or partners are required to meet the needs of the company in varied aspects or debts without any limit over their liability at the time of liquidation. They are liable to cover its debts fully. Therefore the personal property of members, partners and directors can be used for recovering the debts of the company. Directors are liable not to the creditors of the company rather only to the company and liquidators are appointed to ask the members to contribute their personal assets according to the requirement. Thus, only by the calls of the liquidator, members use their personal assets for discharging the company’s debts doing its winding up. In other words, the liability of an unlimited company is similar to that of partners, but unlike partners, no direct proceeding can be made over members. If may or may not have share capital.

Under section 18, a registered unlimited company may subsequently convert itself into a limited liability company, subjects to provisions such as any liabilities, debts, applications or contracts in regard to or entered into, by or on behalf of the unlimited liability companies before such conversions are not affected by such conversions. Also, it can re-register as a limited company through alterations in liability clause of a memorandum of association and article of association. Also, this re-registration will not affect any debt, liabilities or contracts or obligation of the company.

The most important feature of the unlimited company is that it can purchase its own shares without any restrictions. Accordingly, they can either purchase their own shares or can advance monies to someone else to purchase its shares.

Why should one opt for an unlimited company?

1. The biggest advantage of the unlimited company is that it can be registered with or without share capital.
2. It can increase or reduce its share capital without any restriction as the new Companies Act 2013 does not apply to it.
3. Unlike limited companies, section 67 is not applicable to these type of companies; they can purchase their own share.
4. No statutory meeting is required for this type of company.
5. For any alteration in its share capital, a special resolution needs to be passed.
6. If a person is a director of more than one company, then while calculating the maximum number of companies in which he can be a director, the unlimited company will be excluded.
7. The provision given in section 66 of the company’s act, with respect to reducing share capital will not apply to unlimited companies for two reasons.
8. Liability is unlimited
9. Liability of outsiders is not affected.
10. The provision given in section 66 of the company’s act, with respect to buying back securities, will not apply to unlimited companies for two reasons
11. There is no requirement of capital redemption (CRR)
12. Liability of outsiders is not affected.

Hence, every form of business structure has its own pros and cons that one can enjoy according to the nature of business, amount of capital and other factors. Similarly, under Company’s Act 2013, Indian companies enjoy some set of advantages while operating under different tires and cooperate sectors.

A close comparison between companies limited by shares, company limited by guarantee and unlimited company:

The post Comparing Companies Limited By Shares, Limited by Guarantees And Unlimited Companies appeared first on iPleaders.

In this blog post, Mayank Garg, a student pursuing his BBA LLB (3rd Year) at University of Petroleum and Energy Studies, Dehradun and a Diploma in Entrepreneurship Administration and Business Laws by NUJS, critically analyses the VPP scam commonly seen in the incorporation of a company. 

Introduction

Scams are in layman’s language is any intentional deceptive act or operation or schemes that are designed to con you or steal your personal data. Scammers use personal data either from public sources or any other means to commit identity fraud. The whole process goes in a silent manner as people who are scammed are too embarrassed to speak up about their experience and seek help.

The scam can take place in any form including e-mails, door-to-door sales person or by uninvited mail, etc. Scammer targets lots of people, often for small amounts of money and overseas is the chief area for all these activities.

Various types of scams were listed in the previous years from investment scams to property promoters who invite you to ‘exclusive’ property investment seminars with case studies to sell their schemes. New scams are always evolving, so it’s important to look out for warning signs.

Out of these scams, in the past scenario, there reported Door-to-Door scams i.e. a salesperson selling fake or worthless products and more precisely important cases have been registered of Postal or mail scams as well. Scammers get the information of an individual or corporation from public sources and use their personal information to earn profits by cheating or fraudulent means.

Value Payable Post (VPP Scam)

In this whole umbrella of Scam, there exists a VPP (Value Payable Post)[1] Scam. Various book publishing houses, as per the new rules of Ministry of Corporate Affairs (MCA), get the information from the official MCA website of the newly registered companies and send them various articles like books, journals, a copy of registration certificate, etc. asking a huge amount of money through VPP Post. All this are packed in such a manner that it looks like MCA have sent all this to the company’s employees. Stuff like books, which seems to informational but are of no use to the company directors like rules and regulations of Companies, copy of Registration certificate, which is available online and could be downloaded at a single click, are sent to the newly registered companies asking for a huge amount of money. Most of the people become the prey of this scam and pay the amount for the post. In addition to this, immediately after filling the application of Director Identification Number (DIN), the information of the applicant is provided on the site of MCA and using this information, scammers send a VPP Post containing the junk books or reading materials requesting a huge amount of money. After looking at the package, the receiver gets convinced that it has been sent by MCA and pay the amount for it.

Critical Analysis

Now the biggest question here arises, do we have sufficient laws to stop all these scams? Or are the organs of the government (i.e. Executive, Legislature and Judiciary) taking appropriate action or working properly to solve these issues?

If we consider the particular transaction under the ambit of Indian Contract Act, 1872, then the act defines the terms Fraud, Misrepresentation and also gives the conditions of the valid transactions under section 10[2] which validates the contract to be voidable in such situation. In addition to this, according to Indian Postal Act view, “ In particular and without prejudice to the generality of the foregoing power, such rules may direct that no postal article shall be so sent unless the sender declares that it is sent in execution of a bona fide order received by him.[3]” In addition to this, Indian Penal Code, under section 415 to section 420, describes the scope of cheating along with the punishment for the same. Hence, India has sufficient laws to cope up with the situation. With consideration of all these, coming to the question of implementation of existing laws, various government and non-government agencies, organisations, courts, consumer forums are set up to check the situation of fraud in such cases. But people still now dares to commit fraud in the economy which means that there are parameters on which the country is not focusing on or laws are not so strictly implemented so as to check the overall situation.

Now the chief question arises that whether such acts by the companies come under the ambit of scam or fraud or cheating?

Various persons will have multiple opinions on this question. According to me, this does not constitute a scam or fraud or cheating. This act is merely an offer to enter into a contract by way of a post like a salesman of the company going door-door for selling the product. In case of Value Payable Post, it necessary to note that the receiver has the option to reject the parcel and in addition to this, it is necessary for each and every person to note that Ministry of Corporate Affairs does not send any document or certificate by post because of their online policy and the same does not amounts to fraud as well by the companies.

Not Amounting To Fraud

“Fraud is such false assertion, active concealment, promise without the intention of performing it, any other deceptive act, or any act declared as fraudulent.”

In order to constitute fraud, such acts should have been done by the party to the contract, or by any other person with his connivance, or by his agent and with intent to deceive the other party thereto or his agent, or to induce him to enter into the contract. There is no duty upon parties to speak about facts likely to affect the other party’s consent to the contract, and mere silence does not amount to fraud, unless the circumstances of the case show that there is a duty to speak, or silence is, in itself equivalent to speech.

In this case, firstly there is no contract it is merely a proposal[4] by the company by virtue of value payable post to enter into a contract. It is clearly written on the packet the name of the company from where it has come, Ingredients in the packet and the amount payable. Now it becomes the duty of the receiver to acknowledge whether the products in the packet are useful to me or not. Talking about the company, it is there only to earn profits. If the information of the newly registered company or Director Identification Number or Registration of LLP is made available by the government itself, then the company is doing business by sending the articles to them. The elements of fraud include:

(1) the suggestion as a fact, of that which is not true, by one who does not believe it to be true; (2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.[5]

In Banque Financiere de la Cite SA v Westgate Insurance Co Ltd,[6] Slade J said:

“The general principle- there is no obligation to speak within the context of negotiations for. An ordinary commercial contract… is one of the foundations of our law of contract, and must have been the basis of many decisions over the years. There are countless cases in which one party to a contract has in the course of negotiations failed to disclose a fact known to him which.”

In this case, there is no concealment of fact as the packet itself discloses the name of the company from where it has come, and disclosure of all the articles present in the parcel and the party has no obligation to speak. A mere reason that it looks like a government parcel could be no argument to challenge the validity of the contract.

Silence as to facts, as the Explanation to the present section, lies down, is not per se fraud. Mere silence is not fraud unless there is a duty to speak, or unless it is equivalent to speech. There are two qualifications to this rule. First, the suppression of part of the known facts may make the statement of the rest, though literally true so far as it goes, misleading as an actual falsehood. In such a case, the statement is false in substance, and the willful suppression which makes it so, is fraudulent.[7] Secondly, a duty of disclosure of particular defects in goods sold, or the like, may be imposed by trade usage. In such a case, omission to mention a defect of that kind is equivalent to express assertion that it does not exist.[8]

Where a vendor did not disclose to the purchaser of property about a material defect in the title that the property agreed to be sold was the subject matter of a pending litigation and attachment, the non-disclosure was held to be a fraudulent act and the purchaser was entitled to rescind the contract and claim back the earnest money.[9] “Where the lessor, knowing that two days after executing a lease in favor of her husband, she would cease to be the lessor and the lessee also knew the same, she executed the lease for a period subsequent to her ceasing to be the lessor, the transferee is not bound by such lease which was the outcome of a fraud.”[10]

Where the vendor made an express recital in the sale deed about the non-existence of mortgage, it was an active misstatement; and the exception to s 19 was not applicable.[11]

The articles send by the companies to the newly registered incorporations, the applicant of Director Index Numbers or Registration of LLP, as the information of all these are given by the Ministry of Corporate Affairs on their official site, do not amounts to fraud as on the packet itself discloses each and every information. Nowhere, on the packet, has any reference of MCA been given on the packet or by the delivery man. The parcel has been sent from the MCA is the only presumption made by the entrepreneurs and it is very clear from the interpretation of statutes that the law does not take care of any personal presumption and in law no presumption can be made.

Anyone can make an offer to another, and this is merely an offer to the entrepreneur, and not a binding compulsion, whether to accept it or not. If they claim that the books are useless in future, then it is the decision of them only while accepting the parcel and no influence of anyone were on them so as to accept it. Hence, this act done by companies does not amount to scam and the decisions are taken by the consumer forum in favor of entrepreneurs must be reviewed as law must treat each and every citizen equally, and justice, equity and good conscience must be kept in mind while deciding the matter.

[1] VPP is the service designed to collect payment from the receiver of the package for articles sent to them in the post. According to Section 34 of Indian Post Office Act, 1898, which describes the transmission by post of value payable postal articles, it is concluded that postal articles sent in accordance with the provisions of this section, i.e. the sum of money specified in writing at the time of posting by the sender of a postal article shall be recoverable on the delivery thereof from the addressee, add that the sum, so recovered, shall be paid by the sender, may be described as “Value-Payable” Postal Articles.

References:

[2] Indian Contract Act, 1872.

[3] Section 35 (2) (b), Indian Post Office Act, 1898.

[4] When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.

[5] Section 17, Indian Contract Act, 1872.

[6] [1989] 2 All ER 952.

[7] Peek v Gurney [1861-73] All ER Rep 116.

[8] Jones v Bowden (1813) 4 Taunt 847.

[9] Jaswant Rai v Abnash Kaur (1974) ILR 1 Del 689.

[10] Hukum Chand v Hazra Begum AIR 1982 All 215.

[11] Ganpat Ranglal Mahajan v Mangilal Hiralal AIR 1962 MP 144.

The post VPP Scam Of Companies Incorporation – how fraudsters are cheating newly incorporated companies appeared first on iPleaders.

In this blog post, Shabad Sandhu, a student pursuing BA LLB at Rayat and Bahra University School Of Law, Mohali, critically analyses the Law of Injunctions and it’s various entities.

India observes the origin of Law of Injunction in English Jurisprudence of Equity; it is where we inherited the present administration of law. An injunction that is an authoritative warning or order is derived from French and Latin verb ‘injungere’ which means “To Join”.[1] Like our verb injoin, injungere means “To direct or impose by authoritative order or with an urgent admonition.” The Law of Injunction as we have adopted from England was in fact adopted by English People from Roman Law where it was known as interdict. The Injunction as a chancery remedy developed at the time of Henry. It is pertinent to note the historical background which manifests the origin of the power of Equity. The Jurisdiction to issue Injunctions is a remedy which is termed as the Strong arm of the courts which consolidates the position of Judiciary in dispensing justice between the litigant parties.

Now the Question that comes into our Mind is that what is an Injunction? As discussed above the dictionary meaning of Injunction is an authoritative warning or order, the statutory meaning of Injunctions can be analysed in various statutes such as under Crpc, CPC, and Specific Relief Act,1963 as follows:-

• Under Code of Criminal Procedure under section 133,142 and 144.
• Under Civil matters, the law relating to grant of Injunction is contained in Chapter VII of Part III of Specific Relief Act 1963 (sections 36-42).
• Under Code of Civil Procedure 1908, Order 39 Rule 125 deals with Injunctions.

It has been termed as a preventive relief which is granted at the discretion of the court by Injunction which may be temporary or perpetual. Section 37(1) of Specific Relief Act, deals with specific Injunctions which are such as are to continue until a specified time or until further orders of the court, they may be granted at any stage of the suit or proceedings and are regulated by Civil Procedure Code. For the purpose of clarity both have to be discussed separately.

Permanent Injunctions: (Sections 37(2) and 38)

Permanent Injunctions are also known as Perpetual Injunctions they can only be granted by a decree made at the hearing and upon the merits of the suit, the defendant is thereby perpetually enjoined from the assertion of a right, or from the commission of an act, which would be contrary to the rights of the Plaintiff.[2]

Section 37(2) is a general provision stating that a perpetual injunction can only be granted by a decree made at the hearing and upon merits of the case.

Suit for permanent injunction based on possession:

In this case, it was held that ordinarily, the court should not go into the question of title. However, when the parties led to evidence of title and sought a decision on the same day, the parties could not find fault with the court contending that the title of the deed is unnecessary.[3]

Circumstances for granting of perpetual injunction (section 38):

Section 38 contains the following rules for the grant of perpetual Injunction-

• Subject to the other provisions contained and referred to in Chapter VIII, Specific Relief Act,1963, a perpetual Injunction may be granted to the plaintiff to prevent the breach of an obligation existing in his favour, whether expressly or by implication.
• When any such obligation arises from contract, the court shall be guided by the rules and provisions for specific performance of Contracts, Contained in Chapter II
• When the defendant invades or threatens to invade the plaintiff’s right to, or enjoyment of property, the court may grant a perpetual injunction in following cases, namely:-
• Where the defendant is trustee of the property for the plaintiff
• Where there exists no standard for ascertaining the actual damage caused, or likely to be caused by the invasion
• Where the invasion is such, that compensation in money would not afford adequate relief
• where the injunction is necessary to prevent a multiplicity of judicial proceedings.

Section 38, the aforesaid section can be more enlightened by the following Illustrations:-

• a lets certain land to B, and B contracts not to dig sand or gravel there out. A may sue for an injunction to restrain B from digging in violation of his contract.
• A trustee threatens a breach of trust. His co-trustees if any, should and the beneficial owners may sue for an injunction to prevent the breach.
• The directors of a public company are about to pay a dividend out of capital or borrowed money. Any of the shareholders may sue for an injunction to restrain them.
• The directors of a fire and life insurance company are about to engage in marine insurances. Any of the shareholders may sue for an injunction to restrain them.
• A, an executor through misconduct or insolvency is bringing the property of the deceased into danger. The court may grant an injunction to restrain him from getting in the assets.
• The owner of two adjoining houses lets one to B and afterwards lets the other to C. A and C begin to make such alterations in the house let to C as will prevent the comfortable enjoyment of the house let to B, B may sue for an injunction to restrain them from so doing.
• A, B and C are partners, the partnership being determinable at will. A threatens to do an act tending to the destruction of the partnership property. B and C may, without seeking dissolution of the partnership sue for an injunction to restrain A from doing the act.
• A, a Hindu widow in possession of her deceased husband’s property commits destruction of the property without any cause sufficient to justify in her so doing. The heir-expectant may sue for an injunction to restrain her.

When injunction can be refused (section 41):[4]

It has been noted above that section 38 mentions the circumstances when an injunction can be granted. Section 41 supplements section 38 and states the circumstances when an injunction cannot be granted and is to be refused.

According to section 41, an injunction cannot be granted in following situations:-

• To restrain any person from prosecuting a judicial proceeding pending at the institution of the suit in which the injunction is sought unless such restraint is necessary to prevent a multiplicity of proceedings.
• To restrain any person from instituting or prosecuting any proceeding in a court not subordinate to that from which the injunction is sought.
• To restrain any person from applying to any legislative body
• To restrain any person from instituting or prosecuting any proceeding in a criminal matter.
• To prevent the breach of a contract the performance of which would not be specifically enforced.
• To prevent on the ground of nuisance an act of which it is not reasonably clear that it will be a nuisance
• To prevent a continuing breach in which the plaintiff has acquiesced
• When the conduct of the plaintiff or his agents has been such as to disentitle him to the assistance of the court
• When the plaintiff has no personal interest in the matter.

Temporary Injunctions [Section 37(1)]

Temporary Injunctions are such as are to continue until a specified time or until the further order of the court and they may be granted at any stage of a suit and are regulated by the code of civil procedure, 1908[5]

Temporary injunctions are to continue temporarily either until a specified time or until further order of the court. It is only provisional in nature and does not conclude a right or finally settle the matter. For instance, these may be an order to preserve the property until the final hearing of the case. The object may be to maintain status quo so that the alleged harm is avoided which could otherwise occur until the case is finally disposed of by the court on merits.[6]

To obtain temporary injunction the plaintiff has to prove that there is a prima facie case in his favour indicating the existence of a legal right asserted by him.[7] It has to be shown by him that the balance of convenience is in his favour so that mischief likely to be caused by the act of the defendant is prevented[8]

Order 39, Rule 1 Code Of Civil Procedure, 1908 contains the following provisions regarding the grant of temporary injunction.

Cases in which temporary injunction may be granted. Where in any suit it is proved by affidavit or otherwise:

• That any property in dispute in a suit is in danger of being wasted, damaged or alienated by any party to the suit, or wrongfully sold in execution of a decree
• That the defendant threatens or intends to remove or dispose of his property with a view to defrauding his creditors.
• That the defendant threatens to dispossess the plaintiff or otherwise cause injury to the plaintiff in relation to any property in dispute in the suit.

The court may by order grant a temporary injunction to restrain such act or make such order for the purpose of staying and preventing the wasting, damaging, alienation, sale removal of the property or dispossession of the plaintiff or otherwise causing injury to the plaintiff in relation to any property in dispute.

Objective of Temporary Injunction[9]

Preservation of property in dispute till legal rights and conflicting claims of the parties before the courts are adjudicated. The primary objective of a Temporary injunction is to maintain and preserve the existing state of things at the time of institution of proceedings and to prevent any change until the final determination of the suit. It is a relief granted to the party to prevent it from any injury

Prohibitory Injunction (section 38)

A Prohibitory Injunction prohibits or forbids the doing of some act and is governed by section 38. Such injunction may be granted to the Plaintiff to prevent the breach of an obligation existing in his favour. For instance A, B and C are members of an Undivided Hindu Family. A cuts timber growing on the family property and threatens to destroy a part of the family house and to sell some of the family utensils. B7 C may sue for an injunction to restrain A from doing the threatened act.

Mandatory Injunction (section 39)

According to section 39 when to prevent a breach of an obligation it is necessary to compel the performance of certain acts which the court is capable of enforcing, the court may in its discretion grant an injunction to prevent the breach complained of and also to compel the performance of requisite acts. When the injunction compels doing of some act, it is a mandatory injunction, but when the direction is not to do something, the injunction is prohibitory.

Conclusion

To conclude injunction means an order of Court by which an individual is required to perform, or is restrained from performing a particular act. The courts exercise their power to issue injunctions only when necessity exists. An injunction is generally issued only in cases where irreparable injury to the rights of an individual would result. It should be apparent to the court that some act has been performed, or is threatened, that it will produce irreparable injury to the party seeking the injunction. An injury is generally considered irreparable when an award of damages cannot adequately compensate it. Loss of profits alone is insufficient to establish irreparable injury. The potential destruction of property is sufficient. Injunctive relief is not a matter of right, but its denial is within the discretion of the court.

References:

[1] Article by Justice R. R. K. Trivedi Judge, Allahabad High Court

[2] Section 37(2)

[3] Sibakathulla v Amid Ayisha Nachiar, 2000 AIHC 163 (Mad.).

[4] Specific Relief Act by R.K. Bangia

[5] Section 37(1)

[6] Ram kishun v. Jamuna Prasad, (1951) 6 D.L.R. 22 (Pat.): Ismail v. Shamser, I.L.R. 41 Cal. 436

[7] Saunder v. smith, 3 M. & C. 426

[8] Begg Dunlop Co. v Satish 23 Cal. W.N. 677: Daily Gazette v. Karachi Municipality, AIR 1930 Sind. 287

[9] Civil Procedure Code by C.K. Takwani

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In this blog post, Abdul Shukoor KP, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, describes the impact and role of SEZs on the International Business Environment. 

Free Trade Zone: History & Growth

Throughout the history of mankind, different mechanisms have been adopted to facilitate trading, including the introduction of Free Trade Zones. While free zones today are quite different from those of the past, it is not a new concept. Dating as far back as the Western civilizations, it existed in the Phoenician city of Tyre and during 300 BC in the Greek Island of Delos, which consequently became one of the wealthiest islands in the world for nearly a century^[i].

The free trade zones were not considered to be mere exchange/trading points of finished goods; they were an industry-based economic activity. Ireland is of particular importance, as the first modern industrial free zone was established in Shannon, Ireland, in 1959. The Network Free Trade Zone came into existence through the law enacted (viz. Free Trade Zone Act) by the United States (US) Congress in 1934. India too had a rich history of free trade prior to the dawn of economic liberalization. The Kandla Port at Kutch is the first Free Trade Zone in the world, established on 1 January 1965. In the year 1978, India had four other free trade zones at Mumbai, Chennai, Noida and Falta. In the same year, China had gone through a major economic shift and had realized the importance of Free Trade Zones. However, the first Chinese Free Trade Zone became operational only in 1984 at Shenzhen. During the 70’s and 80’s, special economic zones flourished in Southeast Asia, Latin America and to some extent in Africa, Middle East and the rest of Asia.^[ii]

Since the mid-1980s, the number of newly established zones has grown rapidly in almost all regions, with dramatic growth in developing countries. For example, in 1986, the International Labour Organization’s (ILO’s) database of SEZs reported 176 zones in 47 countries; by 2006, this number rose to 3,500 zones in 130 countries (Boyenge 2007), although many of these zones are single companies licensed individually as free zones. SEZs are now estimated to account for more than US$200 billion in global exports and employ directly at least 40 million workers.[iii]

Definition of SEZs

Wei Ge has defined special economic zones as “characterized in general terms as a geographic area within the territory of a country where economic activities of certain kinds are promoted by a set of policy instruments that are not generally applicable to the rest of the countries.”^[iv]

Now the term Special Economy Zones (“SEZ”) covers a broad range of zones, such as free trade zones, export-processing zones, industrial parks, economic and technology development zones, high-tech zones, science and innovation parks, free ports, enterprise zones, and others.

The following are the main characteristics of Special Economic Zones (SEZ):

• Geographically demarked area with physical security.
• Administrated by single body/authority.
• Enjoying financial and procedural benefits
• Streamlined procedures
• Having separate custom area
• Governed by more liberal economic laws.

In recent times, buildings are being assigned as free zones, like those in Dubai.

Objectives of SEZs

SEZs are normally established with the aim of achieving one or more of the following objectives:

1. To enhance foreign investment, especially to attract foreign direct investment (FDI), thereby increasing GDP.
2. Increase shares in Global Export (international Business).
3. As experimental laboratories for the application of new policies and approaches- China’s large-scale SEZs are classic examples.
4. Generation of additional economic activity, or in support of wider economic reform strategy, which reduces anti-export bias while keeping protective barriers intact. The SEZs of China, The Republic of Korea, Mauritius, Taiwan, and China, follow this pattern.
5. Creation of employment opportunities and to serve as “pressure valves” to alleviate large-scale unemployment. SEZ programs of Tunisia and the Dominican Republic are frequently cited as examples of programs that have remained enclaves and have not catalyzed dramatic structural economic change, but remained robust, job-creating programs.
6. In support of a wider economic reform strategy. In this view, SEZs are a simple tool permitting a country to develop and diversify exports. Zones reduce anti-export bias while keeping protective barriers intact. The SEZs of China, The Republic of Korea, Mauritius, Taiwan, and China, follow this pattern.
7. Development of infrastructure facilities.
8. Exposure to technology and global market.

According Douglas Zhihua Zeng, SEZs confer two main types of benefits, which in part explain their popularity- “static” economic benefits such as employment generation, export growth, government revenues, and foreign exchange earnings; and the more “dynamic” economic benefits such as skills upgrading, technology transfer and innovation, economic diversification, productivity enhancement of local firms, etc.^[v]

Benefits and Incentives

In order to encourage participation in Special Economic Zones, companies have been provided with certain benefits and incentives, including the following:

• Tax benefits (Tax holidays, income tax exemptions etc.)
• Liberal Labour Regulations.
• Exemption from excise and customs duty on procurement of capital assets, consumable stores, raw-materials from domestic market.
• Exemption from sales tax, import duty, income tax, minimum alternative tax and dividend distribution tax.
• Streamlined procedures (online/single window).
• Liberal approach in foreign direct investments.
• Increased capital account convertibility.
• Relaxed export regulation.
• Profits could be repatriated fully.
• Reimbursement of central sales tax paid on domestic purchases.
• Non-applicability of related environmental laws.

Role of SEZs in International Business

One of the main objective of SEZ is to enhance exports, i.e. to have a prominent role in international business. A main factor in determining the success of SEZ is growth in the exports made by them. The purpose behind their establishment is to provide an internationally competitive environment to increase export, by making available goods and services free of tax and duties supported by convergent infrastructure.

In order to stimulate the exports, normally, related enactments were provisioned with the following:

• Long-term and stable policy framework with minimum regulatory regime.
• Expeditious and single window approval mechanism.
• Import and export movements of goods are based on self-declaration.
• No routine examination is made unless specific order from concerned authority.
• Packages of incentives to attract foreign and domestic investments for promoting exports-led-growth.
• Exemption from custom duty on goods imported into the SEZ by the developers to carry out their authorized operations.
• Exemption from customs duty on goods exported from the SEZ by the developer or SEZ units.
• Free Trade and Warehousing Zones, to create trade related infrastructure to facilitate import and export of goods and services and to create world-class infrastructure for warehousing with all amenities.
• Freedom to carry out trade transaction in free currency.
• “Deemed Export” Facilities in the SEZ.

SEZs & International Business: From an Indian Perspective

The establishment of SEZ in India was envisaged as an important strategic tool to expedite the growth of international trade. This manifests itself in the form of increased exports as a unit set-up to produce goods and services. Hence, the increased level of export has been critical to the success of SEZs.

With the leverage of economic liberalization and introduction of SEZs on a wide scale, India has witnessed unprecedented growth in its exports.

Although the period of 1999-2000 witnessed a big change in the government policies towards exports due to economic liberalization, its growth remained almost static during this period. Detailed export data from the period 2001 to 2016 is shown below:

The overall growth rate of export during the period 1966-2002 is estimated at 42.4 percent. After the SEZ Act came into place in 2005, a tremendous growth in exports has been observed. Moreover, SEZ in India has also made a remarkable progress in terms of export promotion between the periods 2005-06 and 2010-11. During 2001-2010, it has shown a 121% growth over the previous year. The same is still continuing as shown in the above table.

Despite all this growth, as per the Report of the Comptroller and Auditor General of India Report[vi], the actual exports are far behind in comparison to the projection of companies:

Conclusion

With operational success, the role of the special economic zones has expanded from trade to investment technology, Research and Development, service, and training. Free zones have become the center of activity in modern economy. SEZs have played a significant role in economic enrichment of developing countries, by improving international business. However, due to the economic slowdown prevailing globally, the export businesses especially are at stake. Some of the countries are facing turmoil and set back due to unstable SEZ business.

References:

[i] https://michael-castlemiller-rn3i.squarespace.com/…/WEPZA-Series-On-EPZs-and-Fre…

[ii]Reigstad Erlend, Special Economic Zones Policy: Review and Implications for India, NHH Bergen. (http://www.erlendreigstad.net/wp-content/reigstad_erlend_2007.pdf)

[iii]ILO database on export processing zones (Revised) Jean-Pierre Singa Boyenge April 2007

[iv]Special Economic Zones and Opening of the Chinese Economy: Some Lessons for Economic Liberalization (1991)

[v] Global Experiences with Special Economic Zones -With a Focus on China and Africa. For the year 2012-2013 (No. 21 to 2014)

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In this blog post, Ipshita Chatterjee, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, describes the process of setting up a SEZ. 

Introduction

Doing business in India was difficult because of the different policies and framework. Several controls and clearances that were required created a sense of tedious regime for foreign investors. This hitch had been present despite the globalisation, liberalisation policy of 1991. To remove these shortcomings of an unstable fiscal regime and to attract more FDI, the SEZ policy was announced. This policy aimed at a lucrative fiscal set up with minimum regulations and controls. This act not only simplified the procedures but also provided for single window clearances, easy documentation with self-certification at both the state and the central level. The Government’s motive was not just attracting investments but eyeing the development of infrastructure facilities, exports and creation of employment opportunities.

Procedure of setting up of SEZ

The first stage is approval mechanism.At this stage, the developer submits the proposal for approval, which is further forwarded by the State Government to the Board of Approval along with its recommendation within a time frame of 45 days. Any pvt/pub/joint sector or State Government or any of its agencies can set up a SEZ. Even foreign companies can set up a SEZ.

The said proposal is enclosed through an application which has full description of the promoter along with the project report pertaining to location, area, distance from nearest sea port/airport/road, etc., financial details like proposed investment and viability of the project. The zone can be either specific industry based or could be a multi-product zone.

The recommendations of the State Government are based on environmental restrictions and other necessary legal compliances. The commitment of the State Government is also highlighted in the recommendation, specifying the relaxations to be provided to such SEZ. An Inter-ministerial committee will consider the proposal along with the relaxations and commitment of State Government at Centre level. Once the proposal is approved, a permission letter would be issued.

SEZ can be also applied by an application sent directly to the Board of Approval. So in any case, the Board of Approval is the deciding authority. On its decision, the Central Government issues a letter to the developer, and after receiving documents related to the area by the developer, the Central Government notifies the area as a SEZ. Special attention is paid to whether the SEZ is sector specific or multi-product, located in special category states such as Meghalaya, Assam, Tripura ,Nagaland, Arunachal Pradesh, Mizoram, Manipur, Himachal Pradesh, Uttaranchal, Sikkim, J&K, Goa or Union territory and whether is for special sector like IT, Gems & jewellery, Bio-tech, Non-conventional energy, etc. Depending on these factors, the contiguous area (continuous running area in a common boundary) criteria is set up. The area requirement is specified in Rule 5 of the Special Economic Zones Rules. The minimum land area requirements were slashed down to half in various categories. This is also aimed at permitting optimum utilisation of land by the existing SEZs. The amendments permit the setting up of Multi-product SEZ with minimum land area requirements of 500 Hectare instead of 1000 Hectare. Similarly, a sector specific SEZ can be set-up with a minimum land area requirement of 50 Hectare, instead of 100 Hectare. The amendments for special category states have accordingly been reduced also.[1].Though minimum land area requirement for various categories was reduced, they had to conform to a minimum built up area requirement. Another important grading is the processing area and the non-processing area in a SEZ.

The above-mentioned demarcation of grading of processing and non-processing areas is done by the Development Commissioner. The processing area and Free Trade and Warehousing Zone shall have specified entry and exit points and be fully secured by taking such measures as approved by the Board of Approval. The non-processing area is the area, which is intended to provide support facilities to the SEZ processing area activities and may include commercial and social infrastructure.[2] The exemption on duty for goods and services produced in SEZ is not applicable for operations in the non-processing area. [Rule 27(2)]

The developer holding land on lease as per SEZ rules is supposed to assign the leaseholder right to the entrepreneur who holds a valid letter of approval. The leaseholder right will be valid only until the term of letter of approval. The developer can grant lease on both lands or built up space, which is required for the exclusive use of the Unit like for providing facilities such as canteen, public telephone booths, first-aid centres, crèches, etc. However, a developer cannot sell land in a SEZ as per rule 11(9).

Equity, Distribution of Developer and Benefits to Developer

In case, development is to be carried out by a separate entity like an SPV or company created for this purpose then, developer shall have at least a minimum holding of 26% equity in the entity that has proposed to create the infrastructural and business facilities in SEZ (Rule 5(4) of Special Economic Zones Rules,(2006). The developer gets 100% FDI that is allowed for residential and recreational facilities depending on a case to case basis. However, import, as well as domestically procured goods both, are duty-free. Service tax is exempt along with CST. Income tax benefit is also available to developers to be claimed for any block of 10 years in 15 years. The developer is allowed to transfer the infrastructural facilities for maintenance. Allocation of space and built up area to SEZ units is left to the developer. Not just the developer, but exemption u/s 88 Of IT Act is available to investments made by an individual.

Establishment of A Unit in SEZ

Applications are made to the development commissioner, and the developer is also sent a copy. On scrutiny by the Commissioner and the Approval Committee, if the proposal is approved, a letter of approval is issued for setting up the unit. This letter is valid for one year within which the unit has to commence its operations. The extension can be granted for a period not exceeding two years only on valid reasons approved and recorded in writing by the Development Commissioner. A letter shall be construed as a license for all purposes related to authorised operations and shall be valid for five years. Post 5 years, the Development Commissioner on request can extend the validity.

Conclusion

The Indian government provides a comprehensive guideline of how to apply for setting up SEZ through the Internet as well as the SEZ Act and Rules. FAQ s regarding the same has been issued from time to time clearing any doubts in the minds of stakeholders.

References:

[1] No. D.12/45/2009-SEZ Government of India Ministry of Commerce & Industry Department of Commerce (SEZ Division) New Delhi Dated the 13th September 2013.

[2] Section 6 of SEZ Act and Rule 11

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In this blog post, Nabarun Roy, Superintendent of Central Excise and Customs, Export Refund Section, Central Excise, Kolkata – I Commissionerate, Kolkata under the Dept. of Revenue, Ministry of Finance, Government of India, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the taxation structure of Special Economic Zones in Rajasthan. 

Introduction

The location of Rajasthan, with almost 40% of the Delhi-Mumbai Freight Corridor passing through it and its proximity to the Delhi International Airport and the ports of the western coast, marks it as a state with immense possibilities in the field of export-oriented initiatives. Hence, the given topic is extremely pertinent to the field of budding entrepreneurs seeking to establish their business. This topic at the same time emphasises on international trade.

The state has inherent potential in the fields of Gems & Jewelleries, woollen carpets, Handicrafts etc. and considering all these, it has been the earnest endeavour of the state government to lay special emphasis on the development of SEZs, by enabling infrastructure and providing tax benefits to promote exports. It may also mentioned here that the state already has six SEZs with an approximate investment of 170 Billion and located at Jaipur, Jodhpur, Kota, Udaipur, Banswara, Alwar, Bikaner etc., in the fields of Gems and jewellery, medical tourism, Textile & Garments, Services, R&D, Biotechnology, Information Technology, Development of renewable sources of energy like solar or wind, free trade & warehousing, agro based products, etc.

Present Tax Structure

Now, we are going to focus on the kind of tax exemptions available in the state of Rajasthan relating to the establishment of SEZs which is very important for consideration of a proposal for setting up of businesses by the entrepreneurs.

Various incentives and facilities are given by the Rajasthan Govt. in this respect are as follows:

1. Land conversion @Rs.100/- to developers in rural areas. This is an attractive incentive given to developers for initiating their projects in the rural areas at a very cheap rate for land conversion.
2. 100% exemption on stamp duty to developers and to units in RIICO SEZs. The stamp duty is a large deterrent factor as it involves a lot of money because of the duty to be paid to the government exchequer, exemption of which is an effective incentive for the developers.
3. 50% exemption on electricity duty for seven years. During the commencement of a business, a lot of money is spent in the form of electricity bills. If half of the bill is waived and that too for a period of 7 years, then it can be a very good start for the developers.
4. 100% exemption from work contract tax to units and developers for seven years. This is a very attractive opportunity for the developers, which helps in saving a huge amount of money and it helps in generating cash for the development of the project.
5. 100% exemption from entry tax on capital goods brought into local areas by the unit required for use as capital goods for setting up industry in SEZs. It is an equally useful point of saving for the developers.
6. 100% exemption from VAT onsale or purchase by a registered dealer being an industrial unit established in a SEZ for goods specified in the Certificate of Registration for the purpose of exclusive use in the manufacturing of goods for sale in the course of export out of the country. A full exemption of VAT in this respect should imply that the Rajasthan government is serious about developing the SEZs.
7. 100% exemption from luxury tax for seven years. A very good tax holiday period for the entrepreneurs.
8. 50% exemption from entertainment tax for seven years. All these exemptions, including this one, seek to address two issues. First, generation of much-needed cash for the management of the business in the initial years and second, relief from the hassles of payment of various taxes and litigations involved therein.

Thus, it is obvious that the Rajasthan government is able to provide quite a lucrative playing field to the developers as well as the budding entrepreneurs to invest and work in the SEZ area therein and avail the benefits available.

New SEZ Bill and Policies for SEZ

Apart from the above, new SEZ Act is also under consideration, and after its implementation, some more incentives will be available to the SEZs. The Rajasthan SEZ policy also states that the operations to be executed in the SEZ area are to governed by a joint venture of both public and private sector.

Following are the few policies of the Rajasthan SEZ formulated by the state government for the projects of Rajasthan Special Economic Zone:

1. There will not be any taxation on the developers of SEZ units as detailed above.
2. The central government will provide enough grants and equity to the SEZ projects.
3. One of the officers of the Rajasthan State Pollution Control Board will always be available in the Development Commissioner’s office to keep a check on the environment related issues.
4. Distribution of electricity and power will be sufficient to avoid any uncanny hindrance that may have a chance on the development of SEZ.
5. Sufficient water supply will be there for carrying out every work in the SEZ.
6. The state government will also provide a specific area for public utility services in the zone.
7. The Development Commissioner will permit registration of any SSI as well as IT units in the special economic zones.
8. SEZs are considered as an Industrial Administrative Divisions by the state government.
9. The SEZ policy also states that the zone will enjoy a single window clearance that is a smooth and hassle free clearance for everything at one go.
10. The SEZ developers or agency will enjoy the privilege of government land under Land Acquisition Act
11. Smooth connectivity of state and national highways will be provided by the PWD of the SEZ.
12. Clinics, police stations, academic institutions, etc. will be set up for the family of workers and for the inhabitants of the state
13. A high-power committee will review the development issues of the SEZ which will be formulated by the state government as per the SEZ policy.

Thus, it can be seen that the Special Economic Zone Policy of the Rajasthan State strictly follows a liberal regime in terms of taxation, foreign investment and other dealings.

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