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HomeIndia TakesROAD MINISTRY TO RELAX EXIT RULES FOR DEVELOPERS

ROAD MINISTRY TO RELAX EXIT RULES FOR DEVELOPERS

inNEW DELHI: The government will soon relax the rules so that road developers can sell their completed or stuck project, which will free them up to invest in other road projects that have found few takers in recent years. The current rules say developers have to hold at least 26 per cent stake in highway projects, tying them to projects executed by them.

 

The road ministry is moving a fresh Cabinet note which would allow them to completely exit from their projects two years from the commissioning. Moreover, the change proposed in the exit policy will be applicable for highway projects signed up before 2009 as well. The reworked proposal has been sent to the Cabinet and is likely to come for discussion soon.

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The highway ministry has proposed that the developers be allowed to divest their entire stake two years after the commissioning of the project, senior government official said. While the concession agreements signed after 2009 allow such exit, the senior official said, the cabinet note is to make it applicable for the old projects retrospectively.

 

The exit policy could help unlock capital in the road sector which has been witnessing a slump for the past five-six years. Private companies have refrained from bidding for road projects due to liquidity issues or excessive debt. Around 21 projects from 2012 to 2014 did not receive a single response. For the same period the National Highways Authority of India terminated 23 projects of 2,500 kms.

 

“A policy would help in bring investment flow into the sector, subject to the viability of the project on sale. Investors are expecting distressed projects to be available at attractive valuations,” Manish Agarwal, Leader – Capital Projects and Infrastructure, PwC India said.

 

NHAI has also received interest from companies including Piramal Enterprises, Tata Group and Reliance Infrastructure in taking over completed projects.

 

In an earlier letter to the road transport and highways ministry, NHAI had said that after convincing private equity funds such as SBI Macquarie, foreign pension funds to invest in completed road projects they not been able to move ahead because of restrictive exit rules, In August the highways ministry had floated a cabinet note to amend the exit policy to allow concessionaires to sell their entire stake at any stage in ongoing or completed projects.

 

The proposal was then turned down by the Planning Commission, Finance Ministry and the Prime Minister’s Office. The Highways ministry feels it has made a better case this time and the proposal should go through.

(Source: The Economic Times, November 20, 2014)

 

SEBI BOARD CLEARS BIG TICKET MARKET REFORMS

 

MUMBAI: The board of Securities and Exchange Board of India (Sebi) on Wednesday cleared big-bang market reforms, including a move to replace the two-decade-old insider-trading rules with the new prohibition of insider trading (PIT) regulations, and amending the existing delisting regulations.

 

Additionally, Sebi approved new reforms in consent mechanism under which it will give entities found violating securities laws the option of settling the matter before the issue of showcause notices and start of enforcement proceedings. This will be done by way of basic notices stating the probable action. The regulator, however, clarified this arrangement would be only for minor violations.

 

According to a press statement from the market regulator, the rules around insider trading have been strengthened by clearing new definitions of unpublished price-sensitive information (USPI), insider and connected persons.

 

An insider would now mean a person who is in possession of or has access to price-sensitive information.

 

The PIT regulations of 1992 defined a connected person on the basis of the position held by him; in the new regulations, the definition would include immediate relatives.

 

Sebi’s new PIT regulations are based on the recommendations of the N K Sodhi committee, which gave its report to the regulator in December last year.

 

The regulator said any price-sensitive information could not be communicated to anyone without legitimate purposes. However, there could be cetain defence, such as if a communication was in the ordinary course of business, or an acquisition was under the Takeover Code.

 

“Sebi would do well if these defences were reworded to provide clarity on coverage. Also, the regulator could consider whether to include additional defences based on the Sodhi committee’s recommendations,” said Vaneesa Abhishek, a Bombay High Court lawyer.

 

And, companies in possession of insider information around the year are required to declare their trade plans, made well in advance, to stock exchanges.

 

“The perpetual insiders like promoters and directors would be required to frame their future plans well in advance, disclose those to stock exchange and then strictly abide by such plans. This might lead to speculation in share prices, since the public would have an advance knowledge of their trading plans,” said Tejesh Chitlangi, Partner, IC Legal.

 

The idea of allowing settlement under consent mechanism for minor violations through issue of basic notices at an early stage is in line with the US practice of issuing ‘Wells’ notices.

 

“The Wells notice or the basic notice would only be sent in cases of minor violations. So, if an entity is willing to take the consent route, it might proceed much early; that would expedite the outcome. Sebi will be spared of preparing and sending detailed showcause notices in such cases which will save it time and resources,” said Chitlangi.

 

Legal experts also believe that Sebi should ensure companies make right disclosures to the public. “It will be interesting to see how notices for settlement are implemented and whether they lead to companies actually settling cases before formal showcause notices being issued. It is also possible under this mechanism that Sebi drops the case on the basis of submissions from noticees. A study in the US has indicated that the Secuties and Exchange Commission there dropped 20 per cent of the cases after issuing initial notices,” said Abhishek. Besides, the delisting timeline for companies has been reduced from 137 days to 76 days.

 

A delisting shall be considered successful only when the shareholding of the promoter, together with shares tendered by public shareholders, reaches 90 per cent of the total share capital. At least 25 per cent of the public shareholders need to be part of a reverse book-building process.

 

The Sebi board also converted the exiting listing agreement into listing regulations. “Regulation would consolidate and streamline the provisions of existing listing agreements, thereby ensuring better enforceability,” said the Sebi press release.

 

According to the press release, the market regulator is also reviewing the policy with respect to restricting a company categorised as a wilful defaulter, and its promoters and directors, from raising capital. A discussion paper in the regard would be issued. The promoter-to-public reclassification was also cleared by Sebi during the meeting. Sebi  would issue a discussion paper on this for public consultation.

(Source: Business Standard, November 20, 2014)

 

I-T DEPT LIKELY TO SUGGEST SC APPEAL ON VODAFONE & SHELL TRANSFER PRICING CASES

 

NEW DELHI: The income tax (I-T) department appears keen on challenging the Bombay High Court verdict on the Vodafone and Shell transfer pricing cases in the Supreme Court, “purely on the merits” of the case.

 

The judges had struck down I-T department’s orders in both the cases, upholding the companies’ pleas. Officials told Business Standard the Central Board of Direct Taxes (CBDT) was likely to recommend a Supreme Court petition in both the cases, also to get more clarity.

 

The procedure is that the assessing officer concerned will send a report to the chief commissioner of I-T in his circle, who will refer the matter to CBDT.  “The assessing officer will most likely suggest going for appeal. The board will take a final view after taking the opinion of the law ministry. When the law ministry had earlier given an opinion that such a transaction was taxable, how can it change its view now?” said an official, requesting anonymity.

 

Though there is no statutory requirement to take the finance minister’s approval before moving the supreme court in such cases, CBDT might do so, as these are high-profile cases involving not only big sums but the country’s reputation.

 

S P Singh, senior director at Deloitte, the professional services consultancy, hopes the government will decide otherwise. “The tax department might feel there are fundamental issues involved and they should go to the Supreme Court for clarity. But in view of the fact that the decision is based on sound legal and economic reasoning, it will be better not to file an appeal. This will provide tax clarity to investors and help invite foreign investment,” he said.

 

Government officials said the finance ministry might also consider amending the I-T Act in the next Budget, to address the issue. The amendments might be clarificatory in nature.

 

“This judgment is based on legal provisions prior to 2012 and the amendment made in 2012 covers capital account transactions such as issue of shares. As such, there is still ambiguity on reporting of issue of shares,” said Suresh Surana, founder of RSM Astute Consulting Group.

 

He said the judgment could be used to further the government’s commitment on reducing litigation, with a clarification that the issuance of shares to foreign associated enterprises shall not result in any transfer pricing adjustment.  Finance ministry officials said the decision would be taken on the case’s merits and the department would not hold back from filing the appeal merely because it might get bad publicity.

 

Earlier this month, CBDT had directed senior officers to ensure appeals were filed only on the merits of a case, not only on the tax effect involved. Though the volume involved in these cases is huge (an addition of about Rs 18,000 crore to taxable income of Shell and Rs 4,800 crore for Vodafone), the department’s argument is that only one high court has given this ruling and it would be better to get clarity from the apex court.

 

On Tuesday, the Bombay High Court had struck down the tax department’s demand on Shell India, about a month after it decided in favour of Vodafone in a similar case, involving transfer of shares between associated companies. It said cross-border share transactions can’t lead to income. The government contention was the companies undervalued the shares in question and got deemed capital gains.

 

Though the government had argued before the high court the facts of the Shell case were different from Vodafone’s, officials said if it was decided to appeal to the SC, it would do so for both cases, as these were similar.

 

“It’s too early to say about an appeal in the case of Shell, as we have not seen the order. The Vodafone order is under examination,” said a senior finance ministry official.  Officials said in both the cases, certain technical issues were not properly considered by the high court. A similar argument was given by the department in 2012, when it had amended the law with retrospective effect to tax indirect transfers by Vodafone, after the SC had decided in favour of the company. “We had a weak case and it could not be argued properly,” felt another tax official.

 

The government has 90 days to file an appeal before the apex court. The internal government processes usually take about two months. The Vodafone verdict had come on October 10.

(Source: Business Standard, November 20, 2014)

 

GUARD AGAINST RETAIL ASSET BUBBLE: RBI TO BANKS

 

MUMBAI: The Reserve Bank of India (RBI) has sounded early warning bells to banks, which are aggressively pushing retail credit. The central bank raised concern over the credit absorption capacity of the retail borrower and advised lenders proper monitoring.

 

SS Mundra, deputy governor of RBI, at an investor conference organised by Axis Capital on November 13, had said: “Many of the banks have been crowding in the retail space, trying to capitalise on demand for housing, two-wheelers and four-wheelers, white goods and so on. This, however, raises concerns on credit absorption level in the sector.”

 

“Going forward, the banks would need to put in place systems and processes to ensure adequate origination and monitoring standards and stand guard against formation of asset bubbles,” Mundra said.

 

According to latest data, retail loans grew by 13 per cent year-on-year till September 16, compared with 8.7 per cent growth in overall credit. During the corresponding period of the previous year, growth in retail credit stood at 17.9 per cent.

 

In retail, consumer durables grew by 48 per cent on the back of 38 per cent growth in the corresponding period of the previous year. Credit card spending went up by 17.4 per cent, compared with a mere 2.1 per cent in the year-ago period. Home loans grew 14.8 per cent, compared with 15 per cent in the year-ago period, while vehicle loans grew by 17.9 per cent as compared to 23.1 per cent.

 

Many large banks, mainly private sector ones, which went aggressive in retail credit, had burned their fingers during the 2008 financial crisis. Later, banks were cautious in extending retail credit but picked up momentum again in the last couple of years, as corporate credit demand remained sluggish.

 

The regulator also drew attention of investors towards the issue of capital in public sector banks, which has seen their capital position deplete due to rise in bad loans.

 

“Going ahead, the capital position of the banks, especially the public sector banks (PSBs), is likely to come under some strain, both in terms of quantity and quality,” Mundra said.

 

While the capital adequacy ratio (CAR) for banks under Basel-III norms in March 2014 stood at a comfortable 12.9 per cent, the ratio for the PSBs was lower at around 11.38 per cent. For private sector and foreign banks, CAR was in excess of 16 per cent.

 

“Notwithstanding the room available to the banks to meet the Basel-III timeline, the banks have to look to generate more internal capital. With the emphasis on fiscal consolidation by the government of India, the leeway earlier available to the PSBs to approach the government for additional capital will be limited and hence, one of the options for the government could be to reduce its stake in some of the PSBs,” he said.

 

Apart from supporting business growth, banks will need capital for higher provisioning requirements due to deterioration in asset quality, phased implementation of Basel-III capital norms. In addition, capital will be required to cover additional risk areas under the risk-based supervision framework and likelihood of higher credit demand going forward, RBI said.

 

The government has estimated Rs 2.4 lakh-crore as the equity infusion requirement for PSBs by 2019 to maintain its existing level of shareholding, which ranges from 56.26 per cent to 88.63 per cent.

 

On asset quality, Mundra said while the gross and net non-performing asset (NPA) numbers were not distressing, but if the restructured portfolio is added to the gross NPA (GNPA) numbers, it becomes a matter of concern.

(Source: Business Standard, November 20, 2014)

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