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About bhumesh

Bhumesh Verma is Managing Partner of Corp Comm Legal, a Delhi-headquartered Law firm. He is a senior corporate lawyer and author. A law graduate from Campus Law Centre, Delhi University (1994), he started his career at Ajay Bahl & Co. (now part of AZB & Partners) and went on to become partner at some of the leading Indian law firms.

He was selected as a Chevening Scholar in 2000 by the UK government. During this scholarship, he studied at the College of Law at York and worked with a big London law firm.


Currently, he is ranked among Top 100 Indian Lawyers by Indian Business Law Journal (“IBLJ”).


He has advised clients from more than 50 countries on M&A, inbound and outbound FDI, incorporation of companies, regulatory approvals and compliances, joint ventures, financial and technical collaborations, private equity, venture capital, corporate and securities laws, commercial agreements, exchange control laws, structuring cross-border transactions and strategy on legal and business issues.


He is a keen reader, prolific speaker and writer. He has contributed to in-house journals of many international law firms on India law


He is guest faculty with law colleges and online legal education portals too and conduct workshops on corporate laws and drafting skills. 

ROAR

Doing Business in India…

Any foreign investor contemplating to do business in India on its own or with an Indian partner must have a well thought out entry strategy in terms of business vehicle. Foreign investors have the option of setting up a company, branch/liaison office or a limited liability partnership (LLP).

The most commonly used vehicle is a private limited company. Indian companies are regulated under the Companies Act, 2013. LLPs, which are a comparatively new phenomenon in India, are governed by the Limited Liability Partnership Act, 2008.

FOREIGN INVESTMENT POLICY

The Department for Promotion of Industry and Internal Trade (DIPP), a department under the Ministry of Commerce and Industry, Government of India issues the country’s foreign direct investment (FDI) policy. For matters seeking urgent attention and intervention by the government, press notes are issued.

Inflow and outflow aspects of foreign exchange are regulated by rules, regulations and circulars issued by the Reserve Bank of India (RBI), which acts as the Central / Federal Bank of India as well as forex market regulator. RBI sets the financial norms, e.g., the valuation of securities of Indian entities for issue and transfer, eligibility norms for foreign investors, etc.

Most investment sectors are under the automatic route (i.e. no prior approval is required for foreign investment); only a few sectors such as insurance, real estate, non-banking financial corporations are regulated, and prior approval may be required from the concerned Ministry / Department at a Central Government level. FDI into LLPs is also permitted, subject to certain conditions. Indian Government has been liberalising India’s FDI policy from time to time.

PROHIBITED SECTORS

FDI in India is currently not permitted in broadly the following sectors:

Lottery Business including Government /private lottery, online lotteries, etc;

Gambling and Betting including casinos etc.;

Chit funds;

Nidhi company (borrowing from members and lending to members only);

Trading in Transferable Development Rights (TDRs);

Real Estate Business or Construction of Farm Houses;

Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes;

Activities / sectors not open to private sector investment e.g. Atomic Energy.

Legal, accounting and architecture services

TAXATION

Personal and corporate Income tax in India is governed by a Central legislation, the Income tax Act, 1961, while most of the indirect taxes have been subsumed in the Goods and Services Tax (GST) introduced in 2017. Apart from these, India also has robust transfer pricing rules which apply to any related party transactions.

DISPUTE RESOLUTION

India follows the common law and has a single court system, i.e., the Courts administer both Central and State laws. The court system is three tiered, comprising the District courts, the High Courts (at State level) and the Supreme Court of India (at the Central level). In addition, there are subject specific tribunals too – e.g., National Company Law Tribunal (NCLT).

Considering the slow pace of litigation in India and a huge backlog of cases before Indian courts, parties to commercial relationships are increasingly relying on alternative modes of dispute resolution, such as arbitration.

An investor must be very careful about the choice of dispute resolution mechanism in any commercial transaction involving an Indian part as it can have very significant consequences. The investors must carefully discuss and examine the merits and demerits of different modes of dispute resolution, be it litigation before Indian / foreign courts or arbitration.

EMPLOYMENT LAWS

There are different Central and State laws on labour issues, and these vary at times depending on the Indian State where an investor has its operations. All appropriate registrations should be secured within prescribed deadlines and all HR records must be maintained as per mandated requirements.

The government has been introducing several reforms with respect to labour and employment laws to make these laws industry friendly and minimise the compliance burden for the private sector, particularly entities operating in the medium or small scale segment.

ANTI-TRUST REGULATION

Competition Act, 2002 governs the anti-trust issues in India. This legislation prohibits or regulates (a) anti-competitive agreements (b) abuse of a dominant position and (c) combinations.

Anti-competitive agreements are broadly defined as any agreement in respect of ‘production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India’. For example, certain kinds of tie-in arrangements or bid-rigging are presumed to cause an appreciable adverse effect on competition and are subject to the legislation.

MODES OF ENTRY

There are two major entry routes for foreign entities into India: equity and non-equity. Under the equity route, a foreign investor can form a joint venture with an Indian partner or set up a wholly owned subsidiaries (allowed in most industry and service segments).The non-equity route would mean exports and contractual agreements.

Incorporating a private or public company or One Person Company (OPC) as a subsidiary in India involves paperwork for approvals and other formalities. In addition to the basic procedures, depending upon the sector and nature of business activities, companies may need to register with the relevant sector regulators.

For incorporation of an Indian company, a set of applications (name approval, incorporation) have to be filed with concerned Registrar of Companies (ROC) with details of directors, proposed capital, registered office, etc. The most common route is to incorporate a private limited company with 2 shareholders and 2 directors (at least 1 director has to be resident Indian).

Choosing the right market entry strategy for India requires careful consideration of the needs, capacities and format of each particular business. Whether you choose to set up a subsidiary, a liaison office or a joint venture, there are several options available, each with different implications and advantages.

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Supreme Court upholds…

In an important judgement, the Supreme Court (SC) has upheld the constitutional validity of the Insolvency and Bankruptcy Code 2016 (IBC) under Article 14 of Constitution of India and dismissed that its provisions were discriminatory in nature.

IBC, enacted to eradicate the malice of massive NPAs ailing and crippling India’s banking sector was has been facing enormous challenges in its implementation, mostly from the promoters of delinquent companies. 

These promoters have been challenging IBC and the processes thereunder on one ground or the other, from time to time, as they have been quite used to render all the earlier modes of recoveries ineffective under the legal routes prior to IBC enactment. They challenged the IBC provisions by asserting that by barring promoters from bidding for their own companies, IBC forces the sale of the company to new bidders. This system, the promoters alleged, was against the fundamental rights of promoters.

Further, several operational creditors had also alleged IBC not making an intelligible differentia in classification of a financial creditor and operational creditor, thereby violating Article 14. Under IBC, the committee of creditors can only consist of financial creditors who assess and vote on resolution plans submitted by interested bidders.The operational creditors sought parity with secured creditors (e.g., banks and financial institutions) who have first claim over the money coming through the proceedings under IBC.

The SC dismissed both these arguments

A bench headed by Justice R F Nariman upheld the constitutional validity "in its entirety" and dismissed the pleas to give operational creditors' parity with financial creditors challenging the IBC. The SC also ruled that related parties in IBC should mean a person connected with the business. 

This decision has upheld Section 29A of IBC which bars promoters of a company facing insolvency proceedings from bidding to regain its control. 

The verdict would also be a set back for founders of delinquent companies like Essar Steel – the promoters had offered to clear all dues to regain control. This ruling is well in time before a decision by bankruptcy court on January 31. 

India needs to bring about a clean credit culture. Hope this verdict is a step towards that direction.  

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Tax authorities to catch…

Nowhere to run, nowhere to hide ….

Indian taxmen are getting smarter and the days when filing income-tax return (ITR) was an exception than the norm are all but gone.

ITR filing is mandatory for individuals having income above the exempted income limit. It was usual for some individuals to file ITR only in the years when there was substantial income difficult to hide or get away with and then ignore / forget in later years.

Central Board of Direct Taxes has a Non-filers Monitoring System (NMS) to track persons who carry high value transactions but do not file tax returns. 

Now, with more than adequate PAN linkage within the Indian financial system and through data analysis, the finance ministry has identified a good number of individuals who have carried-out high value transactions in financial year 2017-18 but have still not filed ITR for the same financial year in the Assessment Year 2018-19, going by the recent tweets from the Finance Ministry’s twitter handle. 

Finance Ministry has advised such non-filers to assess their tax liability for Assessment Year 2018-19 and file their ITR or submit an online response explaining non-filing within 21 (twenty one) days. If the online response / explanation offered by a non-filer is found to be satisfactory, it will be end of the matter and the query will be closed online. However, in cases where no ITR is filed nor a response is received from a non-filer, the tax department may initiation appropriate legal proceedings. 

For the last couple of years, the government has been making efforts to bring the non-filers into the ITR filing system with decent amount of success.

It is better to have a wider net of tax payers. Otherwise, those already under the tax net tend to shoulder more burden on them and end up with less net disposable income - whereas those outside go scot-free despite having more income at their disposal.

Historically, widening of tax payers base results in reduction of taxes as there are more people to collect revenue from.

One can hope the government efforts bear fruits and are not mere hype.

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Some relief to start-ups…

Facing sustained pressure from start-ups and venture capital funds over the so-called angel tax, the government has relaxed norms for seeking exemptions from the controversial levy.

The regime was too harsh, arbitrary and a lot of documentation was required, so not many start-ups would or could apply for exemptions. The manifested intent behind these measures was to curtail black money, bribing and money laundering. However, start-ups were even scared of applying, fearing opening of the proverbial pandora’s box of government questions and investigations. The system, therefore and quite expectedly actually never took off.

A couple of days back, facing flak from all quarters over the arbitrary notices being served in this regard, the government issued a notification. The existing mechanism to approve start-ups applying for tax exemption under the Income-Tax Act, 1961 has been done away with.

However, the government hasn’t given in completely to abolish the tax completely and has offered only partial relief. Under the new regime, start-ups seeking exemption need not approach the inter-ministerial board. This board was set up about 3 years back with members from different Ministries, Reserve Bank of India, SEBI, etc. but didn’t have much work to do.

Henceforth, applicants have to file their applications through the Department of Industrial Policy and Promotion (DIPP) website, which will forward them to Central Board of Direct Taxes (CBDT). CBDT has to directly examine these applications and respond within 45 days of receipt of such applications.

However, only the start-ups which are approved by DIPP are eligible for these exemptions.

The requirement of submitting a valuation report from a merchant banker specifying the fair market value of securities is also being done with. Earlier Angel investors were supposed to share their income documents for last 3 years – this stipulation is also being taken off.

Some norms pertaining eligibility of investors and start-ups have been tweaked a little bit and many continue to be the same. Therefore, the ecosystem is still sceptical about the success of the new norms and the response from the affected quarter is quite mixed.

However, any change with an intent to bring about clarity and certainty in the system and promote entrepreneurship is a welcome step. Only time will tell the success and glitches in the new system.

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End of Indian e-commerce…

India has been the favourite playground or battlefield, howsoever you may like to call it for e-commerce companies over the last few years. Amazon, Walmart and you name it, everyone has been eyeing a big slice of online business. We saw few Indian e-commerce promoters becoming billionaires and part of the folklore.

Now, however, it seems the Indian government has put a spanner in foreign investors’ plans in the sector and the party is over. The underlying idea may be to buy peace with the local brick and mortar traders’ lobby which had been complaining loss of business due to deep and predatory discounts offered by online e-commerce platforms.

Last month, the government issued a Press note clarifying / amending some provisions of the FDI policy in e-commerce segment barring online marketplaces with foreign investments from selling goods of the vendors and brands in which they have stakes and putting restrictions on exclusive partnership with brands or offering favourable services to selected vendors.

This has sent shockwaves in the e-commerce industry. Apparently, Flipkart and Amazon have more than half of their revenue through sales through group companies (a major chunk being electronics and apparels, which is likely to be impacted the most by the new guidelines).

The new norms are to be effective from February 1, 2019 so there is a big rush to clear the stocks lying with group companies. This is why one could see a flurry of discounts and sales in the last two weeks of January 2019.

It may take some time for e-commerce companies to tweak their business model and make alternate strategies. Some sanity may also settle in e-commerce discounts when the biggies struggle with the new guidelines.

This could be a boon to the Indian brick and mortar retailers. Even if a third of online retail sales were to be impacted due to the tighter e-commerce FDI policy, brick and mortar sales are to see an unprecedented upswing in their business. This amount could be anywhere in the range of Rs. 100 billion to 400 billion, depending on how much of the business Indian offline retailers can capture.  

Further, it may signal an end to the predatory discounting on part of e-tailers since the compliance ecosystem and expenditure may expand now on and we can expect a more level playing field for Indian offline retailers.

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New Delhi, Delhi, India

Call us : 9811336533

E-mail : bhumesh.verma@corpcommlegal.com

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