Corporate & Commercial Monthly Newsletter | September 2021 – Corporate/Commercial Law


India:

Corporate & Commercial Monthly Newsletter | September 2021


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SEBI marks lien on demat account

As per the new mechanism, upon finalization of the entitlement,
only accepted quantity of shares will be debited from the demat
account of the shareholders. This revised mechanism will be
applicable to all the tender offers for which public announcement
will be made on or after October 15, 2021. SEBI has decided that a
lien shall be marked against the shares of the shareholders
participating in the following offers:

  • Tender offers made after open offers; Buy back offers; and
    Delisting of securities

Under the existing mechanism, the shares tendered by
shareholders are required to be directly transferred to the account
maintained by the clearing corporation. Such transfer involves
systematic risk, substantial time, and cost. As per the new
framework, only accepted quantity of shares shall be debited from
the account holder’s demat account and the lien marked against
unaccepted shares shall be released. SEBI said that lien will be
marked in the depository system by the depositories in the
beneficial owner’s demat account for the shares offered in
tender offers.

The details of shares marked as lien in clients’ demat
account will be provided by respective depositories to clearing
corporations (CC). Further, details regarding
shareholder’s entitlement for tender offer process will be
provided to CCs by issue/registrar and share transfer agent
handling respective tender offer.

The new mechanism will reduce the systemic risk and risks
associated with the movement of securities from the demat account
of shareholders to clearing corporation account and vice-versa and
make the process more investor friendly, in addition to saving time
and reducing the cost involved.

RBI modifies current norms on round-tripping

Some of the largest Indian companies, start-ups and
multinationals with an India presence have put their outbound
investment, fundraising, and restructuring plans on hold as the RBI
looks to introduce fresh regulations around
’roundtripping’. Round-tripping refers to money that leaves
the country though various channels and makes its way back into the
country, often as foreign investment. This mostly involves black
money and is allegedly used for stock price manipulation.

RBI aims to tweak the existing regulations and has come up with
draft rules around round-tripping. With a view to liberalize
regulatory framework and promote ease of doing business, it has
been decided to rationalize the existing provisions governing
overseas investment. According to the draft rules, any entity
making an any investment outside India, in turn, invests in India
will be treated as round-tripping if the purpose is to escape tax.
This is as the same rationale used by the tax department under
General Anti-Avoidance Rule.

White goods get PLI push

Government issued a corrigendum in relation to the PLI Scheme
for white goods. The Department for Promotion of Industry and
Internal Trade (DPIIT) offered specific
relaxations as part of its revised guidelines to turn India into an
integral part of the global supply chain initiative. Incentives
worth INR 6283 crore will be provided over 5 years for
manufacturing of white goods.

Salient aspects

  • The scheme will offer an incentive of 4-6% on incremental sales
    of goods manufactured in India to companies engaged in
    manufacturing of ACs and LED Lights

  • Inclusion of more LED components such as resistors, fusers, LED
    transformers, among others, in the target segments and eligible
    products

  • Pre-qualification criteria can be met based on audited
    financials for FY2020-21; however, for applicants meeting the
    pre-qualification criteria, the computation of net incremental sale
    of eligible product shall be done based on net sales turnover of
    eligible products in the base year of FY21, whichever is
    higher

  • If a company availing benefits under scheme, fails to meet the
    committed investment and exits midway, the bank guarantee will also
    be invoked and the company will have to refund the incentives
    taken, including the interest

Online gaming industry to be kept under 18% GST

According to a report launched by EY – All India Gaming
Federation, the Indian online gaming sector reached USD1.027
billion (approximately INR 7500 crore) in 2020. The report
recommended setting the Goods and Services Tax
(GST) rate for this sector at 18% and sought
clarity on tax applicability on platform fee.

In India, the classification of whether a game comprises a
‘game of skill’ or a ‘game of chance’ has wide
consequences for legal implications. Among other aspects, a game of
chance attracts a higher GST compared to a game of skill. Online
games operate either on the ‘rake fee’ model wherein the
gaming platform charges for facilitating games or
‘freemium’ model wherein the gameplay is free but
additional features may require users to purchase specific items
for a monetary price.

Key mechanisms for rational levy of GST

  • GST on rake fee value: This suggests a levy of
    GST only on the rake fee which is the consideration received by the
    gaming platform. It is presently being followed across the industry
    and aligned with existing GST mechanism to levy tax on
    consideration only.

  • Deemed credit model: This has only two data
    metrics to be considered, stake and pay – outs. This mechanism
    makes it easier for the government to verify and audit entities.
    However, businesses would be required to undertake a change in
    their ERP systems to compute GS

  • GST on entire stake value at a nominal rate of
    1.8%:
    This is simpler to calculate as it has only one data
    metric to be tracked by business for stake value. However, the
    mechanism would be discriminatory for industry players having low
    rake since GST outflow would be high whereas margins are lower.
    This method is also prone to manipulation where ‘platform fee
    only’ players without any prize – winning model may offer
    nominal winnings to lower tax outflow. The report recommends 18%
    GST to be levied to mitigate any risks of misclassification of the
    online gaming industry as betting or gambling. The tax rate should
    not exceed 20% as it could result in the gaming operators as well
    as consumers entering the grey market.

India is the fifth largest market globally for online gaming, a
billiondollar industry that could double to USD 2 billion (INR
14500 crore) by 2023. Strengthening the GST mechanism will put this
sector at par with global practices.

Trading in US stocks: NSE IFSC to break a new path

On August 9, 2021, NSE International Financial Services Centre
(NSE IFSC) announced that it is now possible for
Indian investors to trade in select US stocks. NSE IFSC, a wholly
owned subsidiary of the National Stock Exchange of India Ltd
(NSE), proposed to make the offering in the form
of unsponsored depository receipts. These receipts are issued
without approval of the issuer of underlying permissible
securities. They simplify investment as Rupee is not required to be
converted to Dollar.

Salient aspects

  • Liberalised Remittance Scheme (LRS): Indian
    retail investors will now be allowed to freely transact under the
    LRS as directed by RBI. Each financial year, LRS permits certain
    current or capital account transaction up to USD 2,50,000. This
    scheme excludes corporates, partnership firms, HUF, and
    trusts.

  • Regulatory Sandbox: The International
    Financial Services Centres Authority (IFSCA), a
    unified regulator promoting ease of doing business in IFSC, will
    facilitate the trading, clearing, settlement and holding of US
    stocks under the Regulatory Sandbox, wherein certain regulatory
    relaxations may be permitted for testing of new products or
    services and containing their risks. Regulatory Sandbox refers to
    such live testing of new products or services in a controlled/test
    regulatory environment.

  • Operational details:

    • You can trade through NSE IFSC platform

    • Once you have zeroed in on an international brokerage account,
      you can register online by filling basic information

    • When your account is ready, you can start adding funds, which
      you will later invest in US stocks

    • Before you start trading, please ensure that documentation
      concerning LRS has been considered

    • Exchange rates are crucial especially when you are planning to
      invest in US stocks – ask your brokerage firm if it has a tie-up
      with any bank and could help you secure a low rate; if not, your
      bank can directly transfer money to your brokerage account

    • Depository Receipts will be held by the investors in their own
      Demat accounts opened in the GIFT City, which will also entitle
      them to receive corporate action benefits pertaining to the
      underlying stock

The model offered by NSE IFSC provides an additional investment
opportunity to the Indian investors. The everincreasing
connectivity of the global financial markets makes this move a step
further towards portfolio diversification for Indian investors, in
an environment where companies predominantly aim at diversification
of fund-raising operations.

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