Regulating Offshore Derivative Instruments

Over the last few years, SEBI has been adopting various strategies to regulate the use of offshore derivative instruments (ODIs) such as participatory notes that enable foreign investors to participate in the Indian markets without actually owning the underlying securities. The strategies include restricting the use of ODIs, and also requiring the application of know-your-client norms (KYC) by foreign institutional investors (FIIs) who issue the ODIs against underlying Indian securities they hold.

In this background, Tejesh Chitlangi and Sandeep Parekh have an interesting column in the Financial Express that examines some of the key issues involved in regulating ODIs. Although SEBI’s approach has intensified over the years, there are a number of issues in concept and practice that still need to be addressed, as they note. Matters get complicated further because ODIs are issued outside India thereby testing the extraterritorial reach of SEBI’s powers of regulation and enforcement.

4th Annual NLSIR Symposium: India’s Taxation Regime: Perspectives on the Proposed Changes

(The following announcement comes from the National Law School of India Review)

The Annual NLSIR Symposium has earned the reputation of being a unique forum for the consideration of contemporary legal developments having attracted leading practitioners such as Mr. Nishith Desai, Ms. Bijal Ajinkya, Mr. Sandeep Bhagat, Mr. Stephen York, Mr. Padam Khincha, Mr. Gourab Banerji, Mr. Arvind Datar, TP Ostwal and renowned academics including Mr. Sandeep Parekh, Professor, IIM-A amongst others.

This year, the NLSIR Symposium is themed on “INDIA’S TAXATION REGIME: PERSPECTIVES ON THE PROPOSED CHANGES”. The first of the four sessions will deal with the implications of the anti-avoidance measures incorporated in the Direct Taxes Code Bill. The DTC introduces one of the most sweeping GAARs - treating tax avoidance almost on par with tax evasion. Whether the distinction between tax avoidance and tax evasion will continue to be retained after the coming into force of GAAR – and if so, how it will apply in practice – is an open question which the Symposium seeks to address as also the structuring of business transactions in light of GAARs and its impact on DTAAs. The second session aims at addressing taxation of e-commerce. Tax treatment of such transaction, i.e. whether source based or residence based taxation is to be followed assumes crucial importance. It also seeks to reflect upon issues involving taxation of software transactions and whether taxation should be in the nature of sales tax or service tax. The third session focuses on some of the contentious issues in indirect taxation today. The first is the hotly debated GST. Another controversial issue which this Session addresses is in reference to the interpretation and implications of Part XIII of the Indian Constitution and Art. 301’s interpretation and interplay with the rest of the provisions in Part XIII which has given rise to significant controversy over the years. The fourth and the final session addresses the future of India’s Tax regime. With provisions such as taxing FIIs through the capital gains, the new Branch Profit Tax etc., it is clear that the government is seeking to cast a wide net to pull in revenue from multiple fronts through DTC and such changes are sought to be analyzed in this session.

This years' Symposium is scheduled on the 16th and 17th of April 2011, and will be held at the International Training Center, National Law School of India University, Bangalore. The banquet will be at the Chancery Pavilion. The line-up of speakers includes partners of India's top law firms such as AMSS, AZB, SNR and Khaitan, senior advocates and judges.

Those interested in attending the Symposium can visit the NLSIR website (http://www.nlsir.in/) for further details. Please register on the website (http://www.nlsir.in/symposium.html) or e-mail us (mail.nlsir@gmail.com). All registered delegates will be awarded a certificate of participation.

We look forward to seeing you at the Symposium!

- NLSIR

Changes to FDI Policy – Part V: Sectoral Rules

In this final post in the series, we look at the one change introduced by the Consolidated FDI Policy, Circular No. 1 of 2011 to the sectoral requirements in the agricultural sector, and also briefly touch upon some areas that have been overlooked in the current round of policy review (but yet are under active consideration).

Earlier, FDI under the automatic route up to 100% was available for “floriculture, horticulture, development of seeds, animal husbandry, pisciculture, aquaculture and cultivation of vegetables & mushrooms under controlled conditions and services related to agro and allied sectors” (para. 5.2.1 of the FDI Circular). The relaxation now made is to allow 100% FDI for development and production of seeds and planting material without the requirement to do so “under controlled conditions”. The other stipulations continue to operate, as elaborated in this report.

As far as a few other sectors and types of entities are concerned, although some movement has been made in relation to the following matters, there is no definitive policy pronouncement forthcoming from the Government:

- multi-brand retail trading, which is a hot-button issue, where Government has been holding consultations after having issued a discussion paper;

- FDI in limited liability partnerships (LLP), in whose case too there is already a discussion paper (although the LLP as an entity appears to be undergoing some turmoil lately due to imposition of minimum-alternate tax in Budget 2011, as discussed here); and

- enhancement of FDI limit in the insurance sector from 26% to 49%.

Investors keen on taking a stake in these sectors will have to await further policy pronouncements.

Regulating use of Internet can stifle

SEBI’s move to regulate the usage of e-mail, internet and electronic means of communication by employees of market intermediaries, and to make the compliance officer liable, was commented upon recently by Umakanth here.

However, well-intentioned, SEBI’s move is not implementable, poses serious issues for the office of the compliance officer, and can have the unintended consequence of stifling sharing of knowledge. For example, if this blog-post is received in the inbox of any employee of the market intermediary, he would be committing an illegal act, if he were to forward that e-mail without getting his compliance officer to verify what I have said.

In a recent column, I have commented on issues posed by this development here.