CORPORATE LAW NEWSLETTER: JULY 2024

Welcome back to our July 2024 edition of the Corporate Law Newsletter. We are thrilled to bring you varied news and insights, encompassing regulatory advancements to keep you up to date. From recent updates to court decisions, we have got all the news you need to stay ahead in the corporate legal landscape. So, sit back, enjoy your favorite beverage, and dive into the latest developments in India's corporate legal landscape.

Recent Updates:

• The Centre will refund Goods and Services Tax (GST) compensation cess on imported goods to businesses in special economic zones (SEZs) and their developers, effective from 2017, following a recent GST Council decision. The Central Board of Indirect Tax and Customs also directed the refund of 5% GST on food packages intended for the public distribution system (PDS), potentially totaling about ₹6,500 crore.
• The Central Government, by deleting the requirement of a minimum three year service as additional secretary / post on similar lines, has made it easier for individuals to be appointed as chairman / members of the Telecom Regulatory Authority of India (TRAI). This change is expected to allow more telecom professionals from various backgrounds to apply, addressing critical vacancies in TRAI’s leadership.
• The Securities and Exchange Board of India (SEBI) is concerned about the lack of communication from many Portfolio Management Service (PMS) firms. Despite having 438 registered PMS firms managing assets worth ₹7.5 lakh crore, many of these firms are unresponsive to SEBI’s queries. SEBI may cancel or demand the surrender of inactive licenses to prevent potential misuse.
• The Ministry of Corporate Affairs (MCA) has intensified enforcement actions, with various Registrars of Companies (RoCs) issuing 321 orders in the 3rd quarter of 2024, targeting lapses under the Companies Act, 2013. These lapses, amongst other things, include penalizing non-filing of financial statements, untimely filing of annual returns, absence of independent directors, and not reporting significant beneficial owners.
• Some technology firms and unicorns which had raised offshore funds from international investors and venture capital funds are now facing scrutiny from the Enforcement Directorate (ED) for violating the provisions of the Foreign Exchange Management Act (FEMA). The ED has issued notices to four companies for these transactions, which date back to 2014-16. The 'gift' structure allowed Indian promoters to control overseas holding firms, without remitting money abroad. However, the ED views these as Overseas Direct Investments (ODI), which are not allowed for companies with Indian subsidiaries, raising complications of round-tripping and non-compliance with FEMA.
• A government panel has suggested significantly increasing the turnover threshold for companies required to maintain and audit cost accounts of inputs used in manufacturing goods or providing services. The current threshold has been pegged at Rs. 25,00,00,000/- (Rupees Twenty Five Crore Only) for regulated sector companies and at Rs. 35,00,00,000/- (Rupees Thirty Five Crore Only) for unregulated sector companies. It has been proposed to increase this threshold to Rs. 75,00,00,000/- (Rupees Seventy Five Crore Only).
• WazirX was the victim of a major cyberattack, losing over $230 million, suspected to be orchestrated by the North Korean-linked Lazarus group. The breach involved a compromised multi-sig wallet, prompting a pause in withdrawals. This incident underscores the need for robust security in centralized crypto exchanges.
• The government's plan to transfer regulation of nutraceuticals from the Food Safety and Standards Authority of India (FSSAI) to the drug regulatory authority has met with opposition from pharma lobby groups and industry experts. They argue that this move, which includes products like supplements and functional foods, should be postponed until further discussions occur. The nutraceuticals market in India, projected to grow to $18 billion by 2025, currently aligns with global safety standards. Critics fear that changing oversight could reduce the market size by 70% and advocate for maintaining the current FSSAI regulations, which are consistent with international practices.
• India is set to establish a regulatory framework to boost e-commerce exports by September 2024. Currently, India's e-commerce exports are about $5 billion, significantly lower than China's $300 billion. The framework aims to create e-commerce export hubs near airports and ports. These hubs will offer warehousing, customs clearance, returns processing, and more. The potential for India's e-commerce exports is projected to reach $50-100 billion in the coming years, contributing to the broader goal of $1 trillion in merchandise exports by 2030.
• Company registrations in India rebounded in June with a 12% increase from a year earlier, after a slowdown in the first two months of the fiscal year, according to the corporate affairs ministry. The number of limited liability partnerships (LLPs) incorporated surged by 73% in June. Overall, 15,375 companies and 6,362 LLPs were registered in June, driven by strong economic outlook, market bullishness, eased foreign direct investment rules, and improved business conditions.

MCA Updates:

• On July 15, 2024, MCA amended the Companies (Significant Beneficial Owners) Rules, 2018, as well as the Companies (Management and Administration) Rules, 2014. The amendments include the revised forms MGT-6 and BEN-2.
• MCA issued the Specified Companies (Furnishing of Information about Payment to Micro and Small Enterprise Suppliers) Amendment Order, 2024. It mandates companies with pending payments to micro or small enterprises for over 45 days to furnish this information using the new MSME Form-I, as per section 9 of the Micro, Small and Medium Enterprises Development Act, 2006.
• On July 16, 2024, the MCA issued the Companies (Appointment and Qualification of Directors) (Amendment) Rules, 2024. The amendment states that individuals who wish to update their mobile number or email address, can do so by filing e-form DIR-3 KYC, with a payment of Rs. 500/- (Rupees Five Hundred Only). These rules came into effect from August 01, 2024.
• On July 16, 2024, MCA issued the Nidhi (Amendment) Rules, 2024, effective immediately. The amendment stipulates that a company cannot use "Nidhi Limited" in its name unless declared accordingly under section 406(1) of the Companies Act, 2013.

Reserve Bank of India (RBI) Updates:

• RBI, vide notification dated July 03, 2024, has permitted all Authorised Dealer (AD) Category – I banks and Category – II entities to facilitate remittances, either through online or physical submission of Form A2, and has removed any previous limits to the amount being remitted vide ‘online’ Form A2.
• As per the notification dated July 03, 2024, Authorised Dealers (ADs) are now required to obtain Form A2, either in digital or physical form, for all cross-border remittances, irrespective of the value of the transaction. This notification also supersedes previously issued circulars dated September 12, 2002, December 23, 2003, and May 07, 2012, which:

· had permitted ADs to release foreign exchange for any current account transaction, up to a maximum of USD 25,000 / its equivalent;

· stipulated that ADs need not obtain any additional documents; and

· stated that payment is to be made through demand draft / cheque drawn on applicant’s bank account.

• RBI, vide notification dated July 10, 2024, enabled Authorised Persons to conduct remittances under the Liberalised Remittance Scheme to International Financial Services Centres (IFSCs), for:

· availing financial services / financial products, as per the IFSC Authority Act, 2019, within IFSCs; and

· all capital or current account transactions, in any foreign jurisdiction apart from IFSCs, through a Foreign Currency Account (FCA) held in IFSCs.

Resident Individuals can open a FCA in IFSCs for the aforementioned purposes.

• On July 15, 2024, RBI issued the Master Directions on Fraud Risk Management in Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs), applicable to all NBFCs (including HFCs), having an asset size of Rs. 500,00,00,000/- (Rupees Five Hundred Crore Only), and above. They key highlights of this circular are as follows:

· board of directors of an NBFC to mandatorily approve a policy on fraud risk management, with a prescription of roles and responsibilities of board / board committees / senior management of the said NBFC;

· review of the aforesaid policy by the board at least once in three years;

· constitution of a special committee for monitoring and following up on fraud related cases;

· constitution of a framework for early warning signals, for detecting frauds; and

· legal audit of title documents pertaining to large value loan accounts.

• RBI, through its circular dated July 24, 2024, revamped the regulatory framework for domestic money transfers by regulated entities, making the Know Your Customer (KYC) requirements more stringent, in the following manner:

· remitting banks (RBs) to obtain and preserve record of the name and address of the beneficiary;

· RBs / business correspondents (BCs) to register the remitter on the basis of a verified mobile number and a self-certified “officially valid document”, as per the 2016 KYC master direction;

· validation of every remitter transaction by an additional factor of authentication (AFA);

· RBs and BCs to transact cash deposits as per the provisions of the Income Tax Act, 1961, and the relevant rules;

· remitter details to be mentioned by RB in the Immediate Payment Service (IMPS) / National Electronic Fund Transfer (NEFT) transaction message; and

· inclusion of an identifier in the transaction message, to identify the fund transfer as a cash based remittance.

• On July 24, 2024, the RBI issued the Master Direction – Overseas Investment, which complies the instructions on overseas investment by persons resident in India. This master direction is to be read with the Foreign Exchange Management (Overseas Investment) Rules, 2022, and the Foreign Exchange Management (Overseas Investment) Regulations, 2022.

Securities Exchange Board of India (SEBI) Updates:

• SEBI issued a circular on July 03, 2024, through which, it prescribes reduction in the denomination of debt securities and non-convertible redeemable preference shares (NCRPSs). This circular enables the issuance of debt securities and NCRPSs on private placement basis at a face value of Rs. 10,000/- (Rupees Ten Thousand Only), subject to:

· the entity / individual issuing the debt securities and NCRPSs appointing at least one merchant banker; and

· such debt security / NCRPSs to be interest / dividend bearing security paying coupon / dividend at regular intervals, having fixed maturity and no structured obligations.

This circular amends Chapter V of the Master Circular for issue and listing of non-convertible securities, securitised debt instruments, security receipts, municipal debt securities and commercial paper, dated May 22, 2024.

• SEBI, on July 08, 2024, issued a circular on the ease of doing business – streamlining of prudential norm for passive schemes regarding exposure to securities of group companies of the sponsor of mutual funds. The key changes brought about by this circular are as follows:

· cap on investment – no mutual fund scheme shall undertake any investment exceeding 25% of its net assets, in the listed securities of a sponsor’s group companies, apart from investments by equity-oriented exchange traded funds (ETFs) and index funds, which can make investment in constituent stocks up to a maximum of 35% of net asset value of the scheme;

 · list of indices tracked by passive funds / acting as a primary benchmark for actively managed funds having collective assets under management of Rs. 20,000/- crore (Rupees Twenty Thousand Crore Only) and above, shall be determined on a half yearly basis, on March 31st and September 30th respectively, and shall be updated by the association of mutual funds and published on its website by April 15th and October 15th respectively; and

· passive schemes based on indices other than those mentioned in this circular, should be rebalanced, within 30 business days from the issuance of this circular, and if not rebalanced, an explanation in writing is to be submitted to the investment committee of the asset management company. If the rebalancing still does not take place, fund houses shall be barred from rolling out any new scheme till such portfolio is rebalanced.

• SEBI, on July 09, 2024, issued a circular on the information to be filed by schemes of alternative investment funds (AIF) availing dissolution period / additional liquidation period and conditions for in-specie distribution of assets of AIFs. As per this circular:

 · schemes approaching dissolution have to file an information memorandum, and submit it to SEBI before expiry of liquidation period / additional liquidation period, along with a due diligence report;

 · schemes intending to avail additional / fresh liquidation period, shall submit a request to SEBI; and

 · schemes desiring to carry out an in-specie distribution of their unliquidated investments, can do so after obtaining approval of at least 75% of investors by investment value in the AIF scheme.

• On July 09, 2024, SEBI issued the master circular on surveillance of securities market, which consolidates all previous circulars issued in this regard. This master circular elaborates on:

 · the trading rules and shareholding in dematerialized mode;

 · monitoring of unauthenticated news circulated by SEBI registered marketing intermediaries; and

 · disclosure reporting under the SEBI (Prohibition of Insider Trading) Regulations, 2015.

Technology, Media, and Telecommunications Updates:

• The Telecom Regulatory Authority of India (TRAI), vide press release dated July 08, 2024, issued the Telecommunication (Broadcasting and Cable) Services Interconnection (Addressable Systems) (Sixth Amendment) Regulations, 2024, Telecommunication (Broadcasting and Cable) Services (Eighth) (Addressable Systems) Tariff (Fourth Amendment) Order, 2024, Telecommunication (Broadcasting and Cable) Services Standards of Quality of Service and Consumer Protection (Addressable Systems) (Fourth Amendment) Regulations, 2024, and recommendations on ‘listing of channels in electronic programme guide and upgradation of DD free dish platform to an addressable system’. The key highlights of these guidelines are:

 · allowing distribution platforms to offer a maximum of 45% discount (as against the earlier ceiling of 15%), on the total prices of a-la-carte channels;

 · eliminating the distinction between high definition and standard definition channels for levy of carriage fee;

 · removal of ceiling for charge of services such as installation, activation, visiting, relocation and temporary suspension of the platform service channel; and

 · introduction of financial disincentives for violating the provisions of these guidelines.

•  TRAI, vide press release dated July 11, 2024, released the consultation paper on the framework for service authorisations to be granted under the Telecommunications Act, 2023. The Telecommunications Act, 2023, provides that those intending to provide telecommunication services shall obtain an authorization from the government. Comments and counter-comments on this consultation paper were invited by August 01, 2024, and August 08, 2024, respectively.
• On July 25, 2024, TRAI released the Registration of Consumer Organisations (Amendment) Regulations, 2024, through which, it prescribed new eligibility criteria for consumer organizations seeking registration with TRAI, along with the introduction of a new registration form to make application for registration of consumer organisations.

Tax Updates:

• Several AIFs have been served with notices, asking them to explain why their schemes are not registered under the Goods and Services Tax (GST) regime. While GST is usually borne by the supplier of services, in cases dealing with ‘reverse charge’, the onus to pay GST is upon the recipient of services. Thereby, if an AIF incurs expenditure for services which come under the ambit of ‘reverse charge’, it might have to pay GST.
• The Ministry of Finance, pursuant to the recommendations of the GST Council in its 53rd meeting, has notified Form GSTR-1A, enabling taxpayers to modify the outward supply / sales return form. However, this form is to be filed before filing Form GSTR-3B, for the relevant tax period. This new form GSTR-1A, while ensuring that the tax liability is accurately auto populated in Form GSTR-3B, thereby lessening the likelihood of an error, also simplifies compliances.
• For provision of corporate guarantee by a related recipient to a banking company or a financial institution, valuation of supply shall be made at the rate of 1% of the amount guaranteed or the actual consideration, whichever is higher for the purposes of levying goods and services tax. This shall come into force retrospectively, from October 26, 2023.
• Angel tax, a tax levied on capital raised by issuing shares of an unlisted company to a resident Indian, where the share price of issued shares is more than the company’s fair market value, has now been abolished.
• The Finance Bill 2024, has made the following major amendments to various aspects of the Indian tax regime:

· long term capital gains on all financial and non-financial assets to be taxed at 12.5% without indexation benefits;

· exemption for listed equity shares and equity-oriented mutual funds will now be increased to Rs. 1,25,000/- (Rupees One Lakh Twenty Five Thousand) per year; and

· short term capital gains on listed equity shares and equity-oriented mutual funds will be taxed at 20%.

The above 3 amendments shall be effective from July 23, 2024.

With effect from October 01, 2024:

· securities transaction tax shall be levied at a rate of 0.02% and 0.1% on futures and options of securities, respectively;

· 20% tax deducted at source on the re-purchase of mutual funds is withdrawn; and

· income received from the buyback of shares shall be taxed in the hands of the person receiving the income, eliminating the exemption given to receivers who are shareholders of the company, whose shares are being bought back.

• The Finance Bill 2024 proposes to introduce a new Vivad Se Vishwas Scheme, 2024, which seeks to settle tax related disputes pending as on July 22, 2024. This shall be similar to a previous such scheme introduced in the year 2020. The proposed 2024 scheme can be availed with respect to the following scenarios:

 · tax related appeals / writ petitions / special leave petitions pending before the appellate authorities / High Court(s) / Supreme Court;

· objections filed before the Dispute Resolution Panel (DRP), on which no directions have been issued;

· no assessment orders have been passed despite directions issued by the DRP; and

· revision applications filed before the jurisdictional commissioner.

Intellectual Property Update:

• On July 01, 2024, The Ministry of Commerce and Industry published the draft Trade Marks (Holding Inquiry and Appeal) Rules, 2024. The key highlights of these rules are as follows:

 · filing of a complaint through electronic means, for contravention of Section 107 of the Trade Marks Act, 1999 (penalty for falsely representing a trademark as registered);

·  issuing a show cause notice via electronic means to the accused person, with a response time of not less than seven days;

· completion of proceedings within three months of issuance of the aforesaid show cause notice; and

· provision for filing an appeal by a person aggrieved by the authority’s order, and resolution of the same within 60 days from the date of receipt of the appeal.

 Objections / Suggestions if any, to the above rules, were to be submitted by July 31, 2024.

Upcoming Nuggets

• Vide press release dated July 02, 2024, RBI has issued the draft Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2024, and the draft Export and Import of Goods and Services Directions (“Guidelines”). These Guidelines, amongst other things:

 · seeks to streamline procedures that need to be adhered to by exporters and importers;

· empowers AD banks to provide faster services to their foreign exchange customers;

· lays down the conditions for refund of advance payments if export obligations are not met;

· mandates prior approval from AD banks for exports on deferred payment or exports involving turnkey projects; and

· calls for caution listing by the AD banks of those exporters who fail to realise full export value within the specified time frame.

Comments / feedback on the above draft Guidelines can be submitted until September 01, 2024.

• Vide press release dated July 31, 2024, RBI has released the draft framework on alternative authentication mechanisms for digital payment transactions, which shall be applicable to all payment system providers and payment system participants, in accordance with the provisions of the Payment and Settlement Systems Act, 2007. This draft framework:

· prescribes usage of AFA to validate the process of payment and verify the credentials of customer making the said payment;

· directs issuers to obtain explicit consent of customers before enabling any new AFA;

· directs issuers to have a system to alert customers in near real-time for all eligible digital payment transactions; and

· exempts small value card transactions (up to Rs. 5,000/- (Rupees Five Thousand Only) per transaction), in contactless mode, from the AFA requirement.

Comments / feedback on the above draft framework can be submitted on or before September 15, 2024.

 From the Docket:

In the case of Lily Packers Private Limited vs Vaishnavi Vijay Umak and others, the Delhi High Court ruled that disputes regarding lock-in periods in employment contracts are arbitrable under the Arbitration and Conciliation Act, 1996. The Petitioner alleged that the Respondent violated the lock-in period clause by going on leave and not returning. The High Court upheld the clause, noting it was entered into voluntarily and did not violate constitutional rights. It aimed to protect the Petitioner’s confidential information.

• In the matter of Ganesh Green Bharat Limited (GGBL), the Registrar of Companies, Gujarat, Dadra & Nagar Haveli, has imposed a penalty of Rs. 1,02,47,548/- (Rupees One Crore Two Lakh Forty Seven Thousand Five Hundred and Forty Eight Only), on GGBL and Rs. 4,00,000/- (Rupees Four Lakh Only) on its director for failing to contribute towards Corporate Social Responsibility (CSR) funds during the financial years 2021-22 and 2022-23.

DISCLAIMER

The content provided in this newsletter is intended for general awareness and should not be considered as legal advice. Readers are advised to consult with a qualified legal professional regarding any specific issues mentioned herein. If you have any questions about any of these developments or would like to see something different next month, reach out to us at knowledge@sarthaklaw.com.

We will be back next month with another update. Thank you for reading!