Data, Privacy: What’s on the Cards

The Data Lawyer and Aureus Law Partners wish you a very happy 2019 (and we sincerely hope that in the new year, no one infringes your privacy, steals your data or leaves you with a lack of choice!). 

In this post, we take stock of some imminent developments within the realm of data privacy in India, and its potential impact on individuals and businesses alike. Needless to say, what’s on the horizon is mostly tied to what transpired in the last year.  

Aadhaar and Other Laws Amendment Bill

On December 17, 2018, the Cabinet approved certain amendments to the Prevention of Money Laundering Act, 2002 (the “PMLA”), the Telegraph Act, 1885, and the Aadhaar (Targeted Delivery of Financial and other Subsidies, benefits and services) Act, 2016 (the “Aadhaar Act”) that are intended to pave the way for use of Aadhaar details for obtaining new mobile numbers or opening bank accounts when customers opt for its use ‘voluntarily’. We had written about the possible outcomes of this here: https://thedata.lawyer/2018/12/18/what-the-proposed-pmla-amendments-might-mean/.

The Bill was introduced in Parliament in this week. The Bill proposes a regime for allowing every client, beneficial owner, or person (such terminology depending on whether the necessary identification is in relation to telecom or PMLA requirements) who is sought to be identified, the voluntary choice of one of the following modes of identity verification:

  1. authentication under the Aadhaar Act if the party doing the verification is a banking company (under the PMLA regime), and by all persons licensed to ‘establish, maintain, or work a telegraph’ (read: telcos and ISPs); or
  2. offline verification under the Aadhaar Act (whether the offline verification will be paper-based or paperless mechanisms is not currently known and will be “through such offline modes as may be specified by regulations” says the Bill); or
  3. use of passport issued under Section 4 of the Passports Act, 1967; or
  4. use of any other officially valid document (“OVD”) or modes of identification as may be notified by the Central Government.

Simply put, the Bill allows Aadhaar e-KYC, Aadhaar offline KYC and other forms of KYC through passport or other OVDs, depending on the individual’s choice. 

Note that there are several additional steps that need to occur before we see the result of these amendments: these include the issuance of specific regulations that would, presumably, set out the details of how each of these various forms of identity verification are to take place. Here are a few additional points about the changes proposed in the Bill that one needs to keep in mind:

  • While the proposed changes to the PMLA currently contemplate the use of Aadhaar eKYC only by banking companies, the Bill also states that the Central Government may permit other types of entities that to use Aadhaar eKYC is they meet the standards or privacy and security set out under the Aadhaar Act. This leaves significant opportunity for regulatory widening of the permissibility of Aadhaar eKYC by – you guessed it – ‘fintech’ companies
  • Several industry bodies and associations have made representations to regulators in the past months, urging the adoption of ‘paperless’ processes for non-Aadhaar-authentication-based (read: non-Aadhaar-eKYC) identification processes; whether these have been accepted, and if so, to what extent, would only be apparent once the updated regulations are published and made available.
  • The Bill states emphatically that no person may be denied services for not having an Aadhaar number. But it keeps a window open for mandatory authentication of an Aadhaar number holder for the provision of any ‘service’ if such authentication is required by a law made by Parliament. Possibly, the ‘service’ in question is one for which the expenditure is incurred from, or the receipt thereform forms part of, the Consolidated Fund of India, as described in Section 7 of the Aadhaar Act.
  • Other noteworthy changes proposed by the Bill relate to granting of teeth to the UIDAI by allowing it to appoint officers and employees to discharge its functions, issue directions to any entity in the ‘Aadhaar ecosystem’, and also impose hefty fines ranging from one crore to additional penalties of upto ten lakh per day of an unremedied contravention. This is important, because one of the grounds on which the compulsory use of Aadhaar eKYC was challenged is that private players were allowed to gather demographic data without much oversight over their use, retention, or processing of such data. These changes may result in greater compliance by entities within the ‘Aadhaar ecosystem’; but note that the proposed changes in the Bill do not include specific provisions under which an Aadhaar number holder could file a complaint against an erring ‘Aadhaar ecosystem’ member: inquiries under the new Section 33A(l) of the Aadhaar Act may only be initiated upon a complaint made by the UIDAI. 

Watch this space for timely updates on the Bill’s journey through Parliament. 

Review Petition against the Aadhaar Judgment

Even as the Government and the regulators showed sluggishness in reacting to the Supreme Court’s Aadhaar judgment (in the matter of Justice K.S. Puttaswamy (Retd.) v. Union of India & Others), we hear that a petitioner by the name of Imtiyaz Ali Palsaniya has made some quick moves to file a review petition against this judgment, contending that various grounds urged in applications filed in the matter had not been considered by the Hon’ble Court in its judgment. The petition purportedly sets out eight grounds for reviewof the judgment, of which the following is of interest to us:

“The absence in the judgment of any direction by the Hon’ble Court for deletion of Aadhaar data which already is in the possession of private companies, entities, schools, colleges, work places, banks, post offices, telecommunication service providers, etc. The petitioner contends that such a direction ought to have flowed as a consequence of the Supreme Court Bench’s reading down of Section 57 of the Aadhaar Act. While the contention appears logical, it remains to be seen whether it garners the apex court’s interest. If it does, it is hoped that the directions if any issued, are not impractical to comply with.”

The Information Technology Intermediaries Guidelines (Amendment) Rules

On December 24, 2018, the Ministry of Electronics & Information Technology (“MeitY”) issued a draft of “The Information Technology [Intermediaries Guidelines (Amendment) Rules] 2018” inviting public comments on certain measures to regulate social media, which had Indian social media buzzing for several hours. 
Among others, the draft Rules state: 

“When required by lawful order, the intermediary shall, within 72 hours of communication, provide such information or assistance as asked for by any government agency or assistance concerning security of the State or cyber security; or investigation or detection or prosecution or prevention of offence(s); protective or cyber security and matters connected with or incidental thereto. Any such request can be made in writing or through electronic means stating clearly the purpose of seeking such information or any such assistance. The intermediary shall enable tracing out of such originator of information on its platform as may be required by government agencies who are legally authorised.”

Since a previoushome ministry notification authorising 10 intelligence and security agencies to intercept data on computers, mobile devices, and servers caused uproar, the Government gave a longer reaction time to stakeholders on this one.  

While the Government’s efforts to reign in the internet and social media – much in contrast to the fundamental premises on which these are designed – are nothing new, one wonders what would happen to intermediaries if they are ever called upon to handover information or assistance of a nature that they are ill-equipped to even store, let alone handover. Even a law-abiding intermediary would be hard-pressed to think of all the types of information that might fall under a description as vague as “information concerning cyber security…matters connected with or incidental thereto”. It is hoped that stakeholders take due notice of such draft rules and regulations and make known their difficulty in complying with them. 

And in parting, let’s mention the Draft Personal Data Protection Bill, which generated much discussion and debate, but has not been presented before Parliament in the current session. With general elections around the corner, and a veritable sea of representations and suggestions having been made to MeitY in response to its invitation of comments from the public, the date of the Bill’s passing into law, as well as its final form, remain matters of speculation. 2019 promises to be an interesting year for privacy and data protection!

Here’s how you can reach the authors:
Bhavin Patel (bhavin.patel@aureuslaw.com)
Hemant Krishna (hemant.krishna@aureuslaw.com)

Liquidated Damages – Implications under the Goods & Services Tax Laws

Liquidated damages (“LD”) mean a fixed or pre-determined sum that is required to be paid upon breach of a contract, which may arise due to non-fulfilment of the obligations, delay in fulfilling the obligations or abandonment or termination etc. Hence, LD damages are directly connected to the actual injury and losses incurred by a party due to failure or delay in performance of obligations under the contract by either party. These LD clauses/ obligations are prevalent in construction contracts where the provisions relating to timely and milestone performance of the project are incorporated. For instance, EPC onshore/ offshore sub-contracts have milestone-based implementation, hence any delay in execution / completion of the same causes huge losses to the project owners. LDs cover this contingency.

Commercially, the LDs are considered to be a measure of compensation for a pre-determined loss arising out of breach of contract. However, in a recent matter of In re Maharashtra State Power Generation Company Limited dated May 18, 2018, the Authority for Advance Ruling, Maharashtra (“Authority”) under GST ruled that the amount of LD deducted from the payments made to the contractor/ vendors would amount to supply of service by the project owner / Taxpayer. The said ruling along with the factual background is discussed hereunder:

Factual Background

The Taxpayer approached the Authority under Section 97 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) seeking an advance ruling on levy of GST on the amount of LD deducted from the contract price agreed with the contractors/ vendors. The main issue for this ruling was as to: (i) whether the LD would be treated as ‘sale’; and (ii) whether this would be liable to GST as separate from the contract value/ price. The Taxpayer relied upon the ruling in GSTR 2003/11 issued by the Australian Tax Office under the Australian Goods and Services Tax Act, 1999, wherein the deduction from the contract price was held to be towards deficiency in the provision of services, and therefore the same would not attract GST. Also, reliance was placed in the matter of Commissioner of C. Ex., Chandigarh-I v. H.F.C.L. (Wireless Division) reported as 2015 (11) TMI 893 – CESTAT- New Delhi, wherein it was held that if a taxpayer is liable to pay a lesser amount than the generically agreed price as a result of a clause stipulating variation in the price, on account of liability to ‘liquidated damages’ on account of delay in delivery of manufactured goods then such resultant price would be the ‘transaction value’. Further, the Taxpayer submitted before the Authority that the provision of such a clause in the contract is to ensure that the completion of the project does not get delayed.

Observations of Authority

The Authority observed that contract price and LD are two distinct aspects of the contract, and deduction of LD from the contract price merely facilitates the settlement of accounts. The Taxpayer contended that LD helps in mitigating the impact of higher costs in form of interest during construction and administrative charges. Taxpayer further contended that it was never its intention to get supplies/ project delayed nor did the contractors want to make delay and thereby causing it to tolerate. Therefore, LD could not be termed as service provided to the contractor. However, the Authority observed that the provision of LD in the contract is squarely covered by the clause (e) of the Para 5 of the Schedule II annexed to the CGST Act. The said entry provides that ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’, shall be treated as supply of services. The Authority ruled that the amount of LD deducted from the payments made to the contractor/ vendors is income in the hands of the Taxpayer and would amount to supply of service by the Taxpayer. Accordingly, the Authority held this would be classified under Heading 9997, and GST at the rate of 18 percent would be levied on the amount of LD deducted from the contract price.

Conclusion

While the said ruling is binding on the Taxpayer and the Revenue in respect of the particular issue in question, the same may have a persuasive precedential value. Also, it may have a bearing on how the clauses relating to LD is negotiated in contracts in the future.

Aureus’ New Office – Defence Colony

Over the past 5 years, Aureus Law Partner's Delhi office was working out of Chittaranjan Park in New Delhi - fondly called '1778' by us. 1778 gave us our first office, from where we launched, and how!  We expanded to Mumbai, to Dehradun/Haldwani, Kolkata and recently to Bhopal. Our team size grew, progress was heady, but we treaded cautiously, 'slow and steady' was the mantra.  1778 was a little out of the way, a little further off from the courts than is usual, and needed a visitor to enter the heart of what is known as Delhi's "Mini Calcutta".  We did feel that we should move to a location closer to the courts as our litigation practice steadily grows. Also, access was to perhaps be an issue going forward on account of development of Delhi Metro stations leading to traffic congestions at various key points of entry and exit to CR Park. 

We shortlisted Defence Colony -  a veritable "Wall St." for lawyers of Delhi, as it were. D-306, Defence Colony has now been finalised as Aureus' new home, and the move from CR Park stands completed. 

The location is perfect to catch up for a meeting while you wait for a hearing in the Supreme Court or the Delhi High Court. Along with various senior counsels in close proximity, D-306 offers the required comfort to be able to prepare, visit and conduct an effective briefing as well as hearings, without spending inordinate time on travel. 

Do give us a call and feel free to visit us at D-306, Third Floor, Defence Colony.  Coffee, conversation and an eclectic company of colleagues await you. 

Our other details remain the same. 

Run Up to the Budget 2018-19

Economic Survey of India 2017-18:

Policy Reforms in Zeitgeist of Stigmatized Capitalism

Economic Surveys have sometimes been seen as portends of the Budget that follows. It is often used to engage in a sort of crystal ball gazing and guess work to predict the Budget proposals. However, a more useful manner of looking at these is that the Economic Surveys provide a much needed context to the Budget.

Economic Survey 2018-191 in much the same manner is not only a report card of the Government for the year past, but also provides a context in which the Budget proposals would arrive. In the following paragraphs, we have attempted to flesh out those areas that we perceive may see an amount of thrust in the Budget proposals. Not just that, we believe that the following paragraphs will supply you, the reader, with a certain amount of clarity vis-a-vis the "Why" of the Budget proposal, providing, as it were, the context within which the Finance Minister would stand to deliver his speech. Between these lines, there could be technical monsters that present themselves - for instance, certain tax proposals may be a necessary concomitant of what the Government may seek to achieve via the Budget in the context of the economic scorecard of the country. These have, in some places, been sought to be presented as separate highlights within this page.

Our reading of the Survey indicates that while at an overall level, there are no immediate causes for alarm, nonetheless, the Government has a tight rope walk ahead of it, in balancing the need for economic growth with the deficit levels. This nuance appears in paragraph 1.29, and therefore, in the very first chapter, where the Economic Survey notes:

"It is that zeitgeist (or Maahaul) of stigmatized capitalism—an accumulated legacy inherited by the government—that made policy reforms so difficult and makes the recent progress in addressing the Twin Balance Sheet challenge noteworthy."

In any event, based on High frequency indicators2 in its outlook for 2017-18, the Economic Survey suggests that a robust recovery is taking hold. However, the level of indicators remain below potential.

The CSO3 has forecast the real GDP4 at 6.5 percent. However, the Economic Survey pegs this the expectation of GDP growth in 2017-18 at 6.75 percent. The Current Account Deficit remains well below the 3 percent of GDP threshold beyond which vulnerability emerges, and foreign exchange reserves are at US$432 billion (spot and forward) at end December 2017 (well above prudent norms, as the Survey notes).

On GST

GST revenue collections are robust. The Survey predicts the GST revenue growth as compared to the Annual revenues of indirect taxes in 2016-17 at 12 percent.

GST Revenue Collection (in lakh crores)

Particulars of collection
agency and tax
2016-17
(Annual)
Nature of Tax
(in GST
regime)
2017-18
(Estimated Annual
Steady State
revenues)
States 4.4 SGST 2.5
Center 5.3 CGST 2.5
Excise 1.4 IGST 4.9
Service 2.5 Cesses 0.9
CVD / SAD 1.4 Not applicable
Total 10.9
Estimated Growth of GST 12%

With the rate of growth in GST being 12 percent (on an estimate basis), and the nominal GDP growth of 10.5 percent projected in the Survey, the buoyancy of GST amounts to 1.14. This is a major change from the historic buoyancy of indirect tax that has been at around 0.9 percent.

GST as an information mining tool

"The GST has been widely heralded for many things, especially its potential to create one Indian market, expand the tax base, and foster cooperative federalism. Yet almost unnoticed is its one enormous benefit: it will create a vast repository of information, which will enlarge and surely alter our understanding of India’s economy."5 With this statement the Survey establishes GST as a game changer in the information that it acts as a tool to gather. Some exciting new findings arising out of GST data mining are highlighted here:

  • the assumption that the B2C firms (i.e. the smaller firms) would opt for composition has been proved wrong as such firms nonetheless purchase from large enterprises
  • distribution of GST base among the states appears closely related to their Gross State Domestic Product allaying fears that the shift to GST would undermine major producing states' tax collections
  • there is a strong correlation between export performance and states' standard of living
  • Internal trade of India is a whopping 60 percent of the GDP, which beats the estimates by 10 percent
  • India's formal non-farm payroll is substantially greater than believed - social security measures hint at 31 percent of the non-agricultural work force as formal sector payroll, but GST data suggests formal sector payroll of 53 percent

Other Determinants of Growth

Personal income tax collections have been pegged at 2.3 percent for the FY 2017-18 at the back of measures such as demonetization and GST.  The other two significant aspects that have been highlighted by the Survey are:

  • Exports (hailed, as it were, as the biggest source of upside potential) and
  • Implementation of the Insolvency and Bankruptcy process

Based on the above, inter alia, the Survey pegs the growth rate between 7 and 7.5 percent.6

Timely Justice - A Measure of Ease of Doing Business

It has been widely acknowledged, and stated extremely succinctly by Amrit Amirapu that "Justice Delayed is Development Denied".7  Especially taken note of are tax cases - with the average pendency of 6 years per case, the situation has been rather politely deemed to be acute! Per illustrative data quoted by the Survey, the value of government projects in six infrastructure ministries that are currently stayed by court injunctions, as well as the average duration of their stays has been tabulated as given below:

Stayed Projects - Stock (6 ministries as on October 31, 2017)

Ministry Stayed Projects Total Value
(Rs. Crores)
Duration of Stay
(Years)
Shipping 2 2,620 5.9
Power 11 23,913 3
Road 30 11,216 3
Petroleum 2 342 0.9
Mines 12 106 3
Railways 12 13,882 3
Total 52 52,081 4.3

The total legal expenditure of the Corporate India between 2015-16 was close to 20 thousand crores. Other damning statistics relate to tax cases where the Survey notes that the success rate of the Department at all three levels of appeal - Appellate Tribunals, High Courts, and Supreme Court - and for both direct and indirect tax litigation is under 30 percent. "The Department unambiguously loses 65 percent of its cases. Over a period of time, the success rate of the Department has only been declining, while that of the assessee has been increasing".

From a Policy perspective, the Survey suggests the following measures:

  • Expanding judicial capacity in the lower courts and reducing existing burden on the higher courts via additional capacity to deal with economic and commercial cases at the lower levels, reducing the original side jurisdiction from the High Courts and lesser exercise of discretionary jurisdiction by the higher courts
  • Tax department should limit its appeal - recognizing the bureaucratic risk aversion, the survey suggests the constitution of an independent panel to decide on further appeals
  • Increasing state expenditure on judiciary
  • Creation of more subject matter and stage specific benches
  • Reduction of reliance on injunctions and stays and stricter timelines for decision on these
  • Better court case management and court automation on the lines of Crown Court Management Services of the UK

Deep Dive - Selected Highlights of the Survey

Fiscal Developments during the year

The Survey notes that there are 3 distinct patterns on revenue front till November 2017.

  • the gross tax collections are reasonably on track
  • non tax revenues have visibly underperformed
  • non-debt capital receipts, mainly proceedings from disinvestments are doing well

%age Growth in Items of Receipt (April to November)

  2014-15 2015-16 2016-17 2017-18
Gross tax revenue 6.5 20.8 21.5 16.5
Net tax revenue 4.3 12.5 33.6 12.6
Non tax revenue 20.5 34.9 1.0 -29.7
Total revenue receipts 7.8 17.8 24.8 1.1
Non-debt capital receipts -17.3 180.3 57.1 89.9
Non-debt receipts 7.3 20 25.8 4.6

In contrast to revenue, the expenditure had been robust - which in the present context of the data, appeared to be a euphemism for "tearaway". In any event, the rationale provided by the Survey appears to be sound inasmuch as that:

  • due to advancing of the budget cycle the spending agencies planned in advance and could implement their expenditure plans effectively, and before time, as it were and
  • front loading of certain expenditure as a pat of prudent expenditure management

In any event, this had led to a certain amount of pressure on the revenue and fiscal deficit on a year on year basis - note the inordinately high percentages for 2017-18 in the table below.

Deficit Indicators (%age of BE)

  2015-16 2016-17 2017-18
Revenue Deficit 87.5 98.6 152.2
Fiscal Deficit 87 85.8 112

Renegotiation of PPAs8 by certain states

One of the key objectives of the Electricity Act, 2003 is promotion of competition in the electricity sector. Section 63 of the Act specifies that (notwithstanding anything contained in section 62), the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government. A tariff order shall, unless amended or revoked, continue to be in force for such period as may be specified in the tariff order. The revised tariff policy was published in January, 2016.

With the recent rounds of auctions, very low tariffs came to be discovered. Auction for wind based power held by SECI 9 held in February 2017 realised a tariff of INR 3.46/unit. The lowest feed in tariff for wind on the other hand is at INR 4.16/unit. Second wind auction led to a tariff of INR 2.64/unit - which while welcome in some ways, led to renegotiations of PPAs already signed from certain discoms. Per CRISIL, such renegotiations have the potential of risk to investment worth INR 48000 crores. The Survey takes note of this risk and suggests that "affordable financing holds the key for financing sustainable energy projects". The Survey notes that risk mitigating instruments such as payment guarantee fund or a foreign exchange fund available to developers could be a way forward. Renewable energy has already been placed under the priority sector lending and the bank loan for solar roof-top systems is to be treated as a part of home loan/home improvement loan with subsequent tax benefits. Currently, the levelized tariff is approaching grid parity. The Survey advocates a case for revisiting the subsidies and incentives being given to the renewable energy sector.

Logistics - Challenges and Suggested Plan

With GST, the next big step has to be logistics, given the avowed objective of a single market economy. However, there is much to be desired in this sector. Amongst the challenges are multiple policy making bodies, unfavourable modal mix, and general apathy towards logistics, that plagues the industry. If the benefits of GST are to be harnessed, logistics would have to play a key part therein. The Survey suggests certain key action plans

  • Formulation of National Integrated Logistics Policy to bring in greater transparency and enhance efficiency in logistics operations
  • Develop integrated IT Platform as a single window for all logistics related matters and act as a Logistics marketplace
  • Usher in ease of documentation, faster clearance, digitization.
  • Bring down logistics cost to less than 10% of GDP by 2022
  • Faster clearances for setting up of logistics infrastructure like Multi-modal logistic parks (MMLPs), Container Freight Station (CFS), Air Freight Station (AFS) & Inland Container Depot (ICD).
  • Introduce professional standards and certification for service providers
  • Promote introduction of high-end technologies like high-tech scanning equipment, RFID, GPS, EDI, online Track & Trace systems in the entire logistics network.
  • Improve Logistics skilling in the country and increase jobs in Logistics sector to 40 million by 2022

Hybrid Annuity Model in Infrastructure Development

While addressing Industry and Infrastructure sector, the Survey takes a special note of the Hybrid Annuity Model. This model, mooted for road construction, is a combination of EPC (Engineering, Procurement and Construction) model and BOT - Annuity (Build, Operate, Transfer) model. Under the EPC model, the private players construct the road and have no role in the road’s ownership, toll collection or maintenance. National Highways Authority of India (NHAI) pays private players for the construction of the road. The Government with full ownership of the road, takes care of toll collection and maintenance of the road.

Under the BOT model

  • private players have an active role in road construction, operation and maintenance of the road for a specified number of years as per agreement. After the completion of the years of operation, the private players transfer the asset back to the Government.
  • the private players arrange all the finances for the project, while collecting toll revenue (BOT toll model) or annuity fee (BOT annuity model) from the Government, as agreed.

In the BOT annuity model, the toll revenue risk is taken by the Government. The Government pays private player a pre-fixed annuity for construction and maintenance of roads.

Hybrid Annuity Model combines EPC (40 per cent) and BOT-Annuity (60 per cent) Models. On behalf of the Government, NHAI releases 40 per cent of the total project cost, in five tranches linked to milestones. The balance 60 per cent is arranged by the developer. The developer usually invests not more than 20-25 per cent of the project cost, while the remaining is raised as debt.

In BOT toll model, the private players did not show their willingness to invest, since they had to fully arrange for the entire finances, either through equity contribution or debt. NPA-riddled banks were reluctant to lend to these projects. Since there was no compensation structure such as annuity, the developers had to take entire risk in low traffic projects. The essence of Hybrid Annuity Model arose due to requirement of better financial mechanism where the risk would be spread between developers and the Government.

Issue of vacant housing

The Survey takes a special note of the issue of vacant housing. Of the total residential stock. the Survey finds that 12.38 percent are vacant. The Survey states that "India’s housing requirements are complex but till now policies have been mostly focused on building more homes and on home ownership. The above data suggests that we need to take a more holistic approach that takes into account rentals and vacancy rates. In turn, this needs policy-makers to pay more attention to contract enforcement, property rights and spatial distribution of housing supply vs. demand." However, with a strong stress on this issue, the possibility of tax proposals impacting vacant housing could be expected.

In Conclusion

Amongst the various issues discussed in the Economic Survey, the aspects analysed by us are essentially areas of concern that may potentially impact both policy making and law in relation to taxation as well as other sectors.  One of the factors stressed upon in the Economic Survey is effective enforcement of contracts, through a more effective judicial process; this will significantly contribute to the ‘ease of doing business’. 

From this analysis of the Economic survey, the key policy measures in the near to medium term could be in the road, logistics, judicial and energy sectors. 

We believe it relevant to mention that this is the first in the many exercises to be undertaken by us with respect to the analysis of the upcoming Budget. We would be happy to have you, our readers, researching and reflecting on our analysis to engage with us about your thoughts and perceptions to encourage fluid dialogue.

With special thanks to Siddharth Sharma and Shivangi Nanda. 

Team Aureus

#IndiaBudget2018Aureus

Footnotes


Amendments in FDI Policy – January, 2018

Viineet V. Srivastav & Astha Srivastava

The following amendments have been introduced by Department of Industrial Policy and Promotion (DIPP) in the Foreign Direct Investment (FDI) regime on January 10, 2018:

100% FDI in single brand retail

The prevailing FDI policy allowed 49% FDI through the automatic route and beyond 49% and upto 100% through the Government approval route in single brand retail trade (SBRT) sector, the said limit has been increased to 100% through automatic route.

Single brand retailing entities would be allowed to begin incremental sourcing of goods from India for global operations during the first 5 years from the first day of the opening of the first store against the mandatory sourcing requirement of 30 percent purchases from India. After completion of the said 5 year period, the entities would be required to meet the mandatory sourcing requirement of 30 percent purchases from India.

A non-resident trading entity or entities, whether owner of the brand or otherwise, would be permitted to undertake SBRT in the country for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking SBRT and the brand owner.

Civil Aviation

Foreign airlines have been permitted to invest upto 49% in Air India under approval route, subject to the following conditions:

FDI in Air India including that of foreign airline(s) shall not exceed 49% either directly or indirectly

Substantial ownership and control of Air India would continue to vest in Indian Nationals.

Construction Development

It has been clarified that since real-estate broking service does not amount to real estate business, therefore the same would be eligible for 100% FDI through automatic route.

Power Exchanges

 While the existing FDI policy provided for 49% FDI through automatic route in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010, however, Foreign Portfolio Investors (FPI) / Foreign Institutional Investors (FII) purchases were restricted to the secondary market only. Accordingly, the Government has allowed FPIs/FIIs to invest in Power Exchanges in the primary market as well.

Other Approval Requirements under FDI Policy

Issue of shares against non-cash considerations like pre-incorporation expenses, import of machinery etc. would be permitted under automatic route in case of sectors under automatic route.

FDI in an Indian company engaged only in the activity of investing in other Indian companies or LLPs and in Core Investing Companies would be aligned with the FDI provisions in the “Other Financial Services” category. Accordingly, if the said investor companies in India are regulated by any financial sector regulator, then foreign investment upto 100% under automatic route would be allowed and if they are not regulated by any Financial Sector Regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100% would be allowed under approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government.

Competent Authority for examining FDI proposals from countries of concern

The competent authority for dealing with FDI proposals will be the Department of Industrial Policy and Promotion (DIPP) for investments in automatic route sectors requiring approval only on the matter of investment being from Countries of Concern. The competent authority would be concerned Administartine Department/ Ministry in the case of investments made in sectors requiring government approval and also requiring security clearance with respect to Countries of Concern.

 Pharmaceuticals

With respect to the Pharmaceuticals industry, it has been decided to change the definition of medical devices under the existing policy. Further, the existing policy provided that medical devices with respect to FDI policy would be defined with reference to the Drugs and Cosmetics Act and since the definition in the FDI policy is complete in itself, it has been decided to do away with this reference to the Drugs and Cosmetics Act.

Prohibition of restrictive conditions regarding audit firms:

In cases where the foreign investor specifies a particular auditor/ auditing firm having international network for the Indian investee company, then audit of such company would take place in the form of a joint audit in which one of the auditors should not be from the same network.

A New Corporate Adjudicatory Forum – The National Company Law Tribunal

The Ministry of Corporate Affairs has constituted the National Company Law Tribunal (“NCLT”) vide notification S.O. 1935(E) with effect from 1st June 2016. 

As per the above referenced notification the NCLT shall be initially functioning with eleven Benches – two at New Delhi and one each at Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. The principal bench of NCLT shall be at New Delhi.

The NCLT is intended to provide a consolidated and single forum to adjudicate upon all corporate matters and disputes. The Company Law Board stands dissolved from the date of the from 1st June 2016, and all matters pending before the CLB shall stand transferred to NCLT.

In fact, subject to further notifications, once the NCLT is fully functional it shall also replace:

  • Board of Industrial and Financial Reconstruction; and
  • Appellate Authority for Industrial and Financial Reconstruction.

Further, the jurisdiction and powers relating to reduction of share capital winding up, restructuring, compromise or arrangement (merger/demerger), and other such provisions, currently vested in the High Courts shall also be conferred in favour of the NCLT. 

At present only certain provisions of the Companies Act, 2013 relating to powers of the NCLT have been notified, which include the power to:

  • entertain any claims of prejudicial or oppressive conduct of an enterprise and pass any order that may deem fit in such cases;
  • investigate into of the ownership of the company and pass any order against a Company incorporated by providing false information by fraud, misrepresentation or suppression of material fact;
  • grant approval for alteration of Articles of a Company (provided that such alteration should change its nature from public to private);
  • provide approval for issuance of redeemable preference shares by a Company;
  • call annual general meeting, meetings of members in specified cases;
  • remove the auditor suo moto or on application made by the Central Government;
  • remove directors in accordance with the provisions contained therein;
  • investigate into of the ownership of the company;
  • freeze the assets or impose restrictions on the securities held by a Company pending an inquiry and/or investigation; and
  • entertain a petition in the event a Company fails to redeem the debentures or pay interest on them.

In addition to the above, shareholders and creditors can now file class action suits against the company for breaching the provisions of the Act. In so far as enforcement is concerned, NCLT also may ask for assistance from the Chief Metropolitan Magistrate to enforce its decree against the company or persons connected with the order. An appeal at the first instance against the order of the NCLT shall lie before the National Company Law Appellate Tribunal, and a second appeal may be filed before the Supreme Court.

The Draft Insolvency and Bankruptcy Code, has also conferred NCLT with wide powers in relation to matters concerning revival and rehabilitation of sick companies, and liquidation process of companies. However, the said statute is yet to be notified and made effective.

The Government is notifying the provisions relating to NCLT in a phased manner. As highlighted earlier, a number of the Companies Act, 2013 provisions related to mergers, amalgamations and restructuring are yet to be notified.  In addition a number of rules and regulations will also need to be notified to make it completely operational.