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A long journey to reforms

Source :
Business Standard
Author : Mukesh Butani, Managing Partner, BMR Legal
Dated: Aug 17, 2015

Chaos in Parliament threw a spanner in the government's efforts to revive the economy and kick-start reforms

A washed out Parliament session is crescendo to the political reality the country has had to put up with, ironically on the eve of Independence Day. After an effective winter session last year, ideological differences (on direction of reforms) have thrown a spanner into the government's endeavors to reinvigorate growth in the midst of subdued recovery.

Amongst significant legislations, the goods and services tax (GST) Bill and the land Bill were expected to cross the line. Whilst a majority of legislative reforms are still languishing in the upper House, a non-partisan debate could have set the pace for reforms and send correct signals to world at large. Uncertainty continues on the GST Bill, even after the Cabinet was reported to have approved a majority of amendments recommended by the Parliament select committee. The unfinished agenda leaves the industry anxious hoping for clarity on rollout, including announcement of definitive rates of federal and state GST levies. Judging from the development, the April 2016 target for implementation appears rather ambitious; not to forget, businesses have very little time to gear up to face an important policy change.

On the macro-economic front, though currency markets have been variable, subdued inflation and stable softening of crude oil affords extra elbowroom to the Reserve Bank of India RBI to cut bank rates. For financial sector reforms, draft Indian Financial Code (IFC) has set the tone for futuristic regulatory reforms; the proposal to set up monetary policy committee may usher in a new era of monetary policy and rate controls, wherein the RBI may no longer carry its veto, though may still maintain de facto autonomy on rate determination. I hope that the differences between the government and the central bank is buried and the regulator eventually yields to an improved credible structure before the draft bill finds its way to the Parliament in the winter session.

Meanwhile, the executive took a few important steps with progress on black money legislation, as the roll out of one time compliance window should help garner incremental tax revenues. Besides, the practice of Department of Revenue to regularly issue FAQs will help clarify the law and encourage compliance. Having said that, I still believe that maintaining confidentiality (of disclosures) is key to success and the government should reiterate its commitment. From a FDI policy standpoint, the Department of Industrial Policy & Promotion (DIPP) has pulled off a winner by announcing composite caps for FDI and permitting foreign portfolio investment upto 49 per cent under automatic route. The move is likely to facilitate enhanced access to foreign capital especially for sector which hitherto couldn't optimally leverage permitted FDI limits due to artificial distinction between investments under portfolio and strategic categories. Having said that, I expected greater clarity on e-commerce related FDI.

On tax policy front, the roadmap for reduction of corporate tax rate to 25 per cent (promise of 2015 Budget) is something that North block should consider in advance of the 2016 Budget. Reduced corporate tax rate shall bring parity with effective tax collection trends. The recent trend of spike in tax collections, particularly Indirect tax is encouraging and affords an opportunity to consider rate reduction.

For a large part of this fiscal, North block was pre-occupied to resolve Minimum Alternate Tax(MAT) controversy following the prospective effect of Finance Act 2015 amendments. Although recommendations of the government constituted Justice Shah Panel seem to suggest resolution on public disclosure of report is awaited by institutional investors.

India's concurrence to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information is a significant step towards embracing best practices in line with G20's initiative for curbing tax evasion. The new system of Common Reporting Standards, once implemented, is likely to have the widest sweep and shall oblige treaty partner countries to share periodically bulk of taxpayers' information, including details of beneficial ownership.

Whilst marginal policy reforms can still be anticipated between two sessions of the Parliament, from a tax reforms standpoint, an exercise for 2016 budget should commence with all stake holder consultations. Expectations from business are high for next year's budget, GST legislation with definitive range of tax rates; articulation of India's position on rapidly evolving "Base Erosion and Profit Shifting" work of the OECD; introducing tax arbitration in the tax treaty framework; wider set of administrative reforms to discourage unnecessary tax disputes, and an overhaul of tax dispute resolution framework should top the Budget '16 agenda.

Assisted by Sumit Singhania
The writer is managing partner, BMR Legal. The views are personal

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Market-driven pricing needed in M&As

Source :
The Hindu Business Line
Author : Mukesh Butani, Managing Partner, BMR Legal
Dated: Aug 06, 2015

Dismantling a major barrier to foreign investment will be beneficial

Restrictive entry and exit pricing norms have long vexed foreign investors contemplating equity and equity-linked investments in private enterprises in India. The winds of change promised by the recent legislative actions of the Union Government may, finally, usher in a new era for foreign investments in India.

Over the years, the Reserve Bank of India’s pricing norms have eased considerably, moving from requiring a specific regulatory nod to the ‘automatic’ route. The pricing, however, had to conform with the guidelines prescribed by the erstwhile Controller of Capital Issues and subsequently, from May 2010 onwards, with the discounted cash flow method.

Thereafter, in January 2014, the RBI permitted foreign investors to exit under put and call ‘optionality’ clauses attached to equity shares and compulsorily convertible securities at a price not exceeding that arrived at (i) on a return on equity basis for equity shares, and (ii) in accordance with any internationally accepted pricing methodology for compulsorily convertible securities.

Fortunately, in the RBI’s bi-monthly Monetary Policy Statement issued on April 1, 2014 (and many may have doubted it, given that it was also, co-incidentally, All Fools’ Day) all pricing guidelines with regard to foreign direct investment were withdrawn. From July 2014, pricing of foreign investments and exits only needs to conform to an ‘internationally accepted pricing methodology’ on arm’s length basis.

Paradigm shift

The Budget Statement of 2015 introduced a paradigm shift by amending the Foreign Exchange Management Act, 1999, to limit the RBI’s powers to prescribe rules with respect to permissible capital account transactions to only those involving debt instruments. The Ministry of Finance is, instead, allowed to prescribe rules with respect to the classes of permissible capital account transactions (not involving debt instruments), the limit up to which foreign exchange shall be admissible for such transactions, and the conditions which may be placed on such transactions. Further, what would constitute ‘debt instruments’ is also to be determined by the Union Government.

While the Union Government is yet to prescribe rules in furtherance to the announcement, it is expected that norms would only continue to become more liberal and market-driven. That said, one questions whether it would be opportune to completely step away from policing entry and exit pricing and instead allow market forces and commercial prudence to guide transactions. The pricing norms as they currently stand, effectively, allow for parties to freely choose and apply any internationally accepted (read commercially suitable) pricing methodology to transactions, albeit subject to (i) an entry floor and an exit cap determined in accordance with such pricing methodology and (ii) no ‘assured returns’ for the foreign investor.

Easing business

One would expect that the next logical step would be to completely withdraw the requirement of an entry floor and an exit cap. Such a step would also be in consonance with the government’s stated intent of being among the top 30 countries in the ‘World Bank’s ease of doing business index’. India has, over the past few years, slid to 142 out of 189 nations in this index.

Given that the current pricing norms already allow parties the freedom to apply varied methodologies to suit the specifics of a transaction, this should not be a challenging move. The benefits of being perceived to have finally dismantled a significant barrier to foreign investment may be quite meaningful. Fittingly, there is urgent need for the Union Government to press ahead and issue simple, cogent, and market-driven rules at the earliest. That said, as always, the devil lies in the detail and the manner in which the new guidelines address existing issues will be key: for example, while re-defining ‘debt’, the new rules must unambiguously distinguish what would be included and excluded from the scope of ‘debt’, and must especially provide clarity on the treatment of mezzanine/hybrid instruments.

Also, the guidelines should address whether some form of ‘downside protection’, at a discount to the sovereign yield curve (as indicated in the RBI’s Bi-Monthly Monetary Policy Statement of February 2015) or otherwise, will be permitted or would continue to be prohibited as an ‘assured return’. Additionally, the new guidelines must lucidly tackle how existing investment structures and instruments would be permitted to transition.

The writer is Managing Partner, BMR Legal. With assistance from Roshan Thomas

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