Refresh

Changing Regulatory

Landscape

Newsletter

July 2012

www.pwc.com/india

In this Issue

Sectoral Regulations 03 Financial Services

Telecommunications

Special Economic Zones

Education

Corporate Regulations 08 Exchange Control

Perspective 12

Glossary 14

3 PwC

Sectoral Regulations

Financial services

Investment by QFIs in Indian corporate debt

securities

RBI has recently permitted QFIs to invest in

debt securities in India on repatriation basis,

subject to an overall limit of 1 billion USD.

Under this scheme, QFIs can invest through

SEBI-registered QDPs in listed NCDs, listed

bonds of Indian companies, listed units of

mutual fund debt schemes and ‘to be listed’

corporate bonds. For this purpose, a QFI may

open a single non-interest bearing rupee

account for settlement of transactions relating to

purchase and sale of eligible securities and may

also open a demat account with a QDP.

Registration of Pension Funds for Private

Sector Guidelines, 2012

The PFRDA has recently issued guidelines for

registration of pension funds in the private

sector. The key eligibility criteria for an

applicant are as follows:

Sponsor must be a company in the financial

services sector regulated by any of the

financial services sector regulators in India

(i.e. RBI, SEBI, IRDA, and PFRDA).In case

the applicant is a JV company, at least one

of the shareholders/sponsors should falls

under the financial sector regulators.

Monthly AAUM should not be less than INR

8,000 crores in the preceding 12 months

ending with the month of application and

such AAUM should not be less than INR

2,000 crores. This criteria should be met by

any one of the sponsors in case the

application is made by a JV company.

4 PwC

Sponsor’s assets under management shall

not include investments in its own assets,

investment advisory services or any other

similar activity.

Sponsors must have a positive net worth

during the immediately preceding five years

with a net profit record of three years

immediately preceding the application.

Applicant should be a ‘fit and proper’

person.

An applicant can make an application and

obtain in-principle approval from PFRDA,

provided the applicant satisfies the criteria laid

down under the guidelines. The applicant can

then approach PFRDA for formal registration

within three months from the date of such in-

principle clearance. The registration certificate,

once granted, may be reviewed annually or

within such period as may be specified.

The Non-Banking Financial Company –Factors

(Reserve Bank) Directions, 2012:

A new category of NBFCs, factoring business,

has been introduced along with specific

directions to govern this activity.

Some of the key features of these directions are:

Registration with RBI as an NBFC-Factor

has been mandated.

Minimum NOF required for an NBFC-

Factor is 5 crores INR.

NBFC-Factors should satisfy the ‘75:75 asset

income pattern’, i.e. financial assets in the

factoring business should constitute at least

75 percent of its total assets and its income

derived from the factoring business should

not be less than 75 percent of its gross

income.

NBFC Prudential Norms would be equally

applicable.

Existing NBFCs satisfying the prescribed

asset income pattern may approach the RBI

along with their certificate of registration

and auditor’s certificate for change in

classification within six months from the

date of RBI notification.

NBFC-Factors intending to deal in forex

through export or import factoring are

required to make an application to the

Foreign Exchange Department of RBI for

permission to deal in forex and adhere to

the terms and conditions prescribed.

5 PwC

Telecommunications

Revised license fee

DoT has revised the annual license fee rate of

annual gross revenue for ISPs,

UASL/CMTS/Basic service licence category A,

B, C, ILD and NLD services.

Following is a tabular representation of license

fee rate applicable till 31 March 2013 and post 31

March 2013:

S. no. Type of license Annual license fee rate as a percentage of AGR

For the period from 1

July 2012 to 31 March

2013

For the year 2013-14

and onwards

1 ISP

ISP – Internet telephony

4

7

8

2 UASL/ CMTS/ Basic service

licence

Category A

Category B

Category C

9

8

7

8

3 ILD service licence 7 8

4 NLD service licence 7 8

Special Economic Zones

Important decisions taken by the BoA during

the 53rd meeting dated 6th July 2012

Despite imposition of MAT and DDT on SEZ

developers and units, and other bottlenecks,

SEZs are witnessing a renewed interest from

investors. As per media reports, a number of

foreign investors are evaluating investment

opportunities in these zones. During FY 2011-

12, total exports from SEZs grew by 15.4%

compared to exports in the previous financial

year.

With this as a background, recently several

noteworthy transactions have been approved by

the BoA, for example, in its last meeting, BOA

approved a developer/co-developer proposal for

setting up a power SEZ. BOA has also approved

SEZs in various sectors such as IT/ITES,

biotech, pharma, minerals and mineral-based

products.

Below is the summary of some important

decisions taken by the BoA during the 53rd

meeting:

6 PwC

Co-developer proposals

Sale of land in a SEZ is prohibited. Cases

where the lease agreement between the

developer and co-developer are

disproportionately high and where the lease

on expiry is renewable at the sole option of

the lessee, the BoA has observed that such

conditions in effect amount to sale of land

by the developer.

Similarly, the BoA is not approving co-

developer proposals wherein the lease

amount and the deposits are extremely low

and where such amounts cannot be

increased.

Extension of formal approval granted to the

developers

The letter of approval granted to a developer

is valid for a period of three years within

which one unit has to commence production

and the SEZ has to become operational. The

BoA has deferred extensions of in-principle

approvals in all such cases where it noted

that the developer has failed to acquire the

minimum land. It has sought information

from the development commissioner on the

following matters:

a. Reasons for not acquiring minimum

land even after four years

b. The status of progress made by the

developers on the ground towards

setting up the SEZ

c. The proposed schedule of completion of

the SEZ project

Addition of non-contiguous land parcel with

existing structure

The BoA has approved the addition of a

non-contiguous land parcel, which already

has an existing structure attached to the

SEZ, subject to the following conditions:

a. The developer would not claim any

indirect tax exemption on the building

already constructed prior to inclusion in

the SEZ area.

b. No duty exemption would be availed for

establishing contiguity.

c. The developer would be entitled to

claim income-tax deduction.

Change of name

The BoA had, vide instruction no. 21,

approved guidelines for a mere change in

name wherein there is no change in the

shareholding pattern of the original

developer. In the past, such cases were

being approved by the Department of

Commerce on file. However, of late, such

cases are being routed to the BoA for its

approval.

Change in shareholding

In case of change in the shareholding or the

dilution of equity, the BoA has added a new

condition which requires the developer to

immediately furnish to the CBDT the full

financial details relating to transfer of

equity.

Free trade and warehousing zone

A unit in a FTWZ is allowed to carry out

trading and warehousing activities and

certain value-added activities related

thereto as ‘authorised operations’. However,

activities that constitute manufacturing are

not permitted.

7 PwC

Education

AICTE (Establishment of Mechanism for

Grievance Redressal) Regulations, 2012

AICTE has recently released the regulations that

list various complaints of students that will be

considered as ‘grievance’. The regulations will be

applicable to all technical institutions approved

or recognised by AICTE under the AICTE Act,

1987.

For the redressal of students’ grievances, each

technical institution will appoint an

ombudsman. The regulations also mention the

procedure for redressal of grievances and the

consequences of noncompliance, which include

the withdrawal of recognition provided by

AICTE or any other penalty applicable as per the

AICTE (Grant of Approvals for Technical

Institutes) Regulations 2010 and amendments

thereto.

8 PwC

Corporate Regulations

Monetary policy

In line with expectations, the RBI has left

interest rates unchanged for the second time

since June. The monetary policy statement

clearly indicates that the RBI favours an easy

money environment despite inflation concerns.

The policy is expected to anchor inflation

expectations and maintain liquidity in order to

facilitate smooth flow of credit to productive

sectors and thereby support growth.

Key highlights

Inflation rate

Keeping in view the recent trend in food

inflation, trends in global commodity prices

and the likely demand scenario, the baseline

projection for the wholesale price index

(WPI) inflation for March 2012 has been

raised to 7% from 6.5%.

Growth rate

Given the deficient monsoon, weak

industrial activity and risk from global

situation, the growth projection for the

current year has been revised downwards

from 7.3% to 6.5%.

Bank rates

The repo rate, reverse repo rate and cash

reserve ratio (CRR) has remained

unchanged at 8%, 7% and 4.5% respectively.

The reasons for keeping the repo rate and

CRR unchanged are headline WPI inflation

remaining sticky at 7% and estimated

current growth rate being lower than the

trend rate of 7.5%.

Statutory liquidity ratio (SLR) has been

reduced to 23% from 24% in order to ensure

that liquidity pressures do not constrain the

flow of credit to productive sectors of the

economy.

9 PwC

Exchange Controls

Scheme for prepayment or buyback of FCCBs –

Approval route

RBI has permitted Indian companies to buyback

FCCBs, under the approval route, subject to

following key conditions:

The buyback value of the FCCBs shall be at a

minimum discount of 5% on the accreted

value.

In case the Indian company is planning to

borrow foreign currency for buying back the

FCCBs, all FEMA rules or regulations

relating to foreign currency borrowing must

be complied with.

The Indian company would need to submit

an ECB 2 return and a report providing

details of the buyback after the completion

of buyback.

The Indian company has the right to initiate

prepayment, subject to bondholders’

consent.

Bonds purchased from the holders must be

cancelled and cannot be reissued or resold;

The Indian company must open an escrow

account for buying back the FCCBs.

Entire process of buyback should be completed

by 31 March 2013.

10 PwC

Relaxation of ECB Norms for refinancing of

outstanding rupee loans availed by borrowers

in the manufacturing and infrastructure

sectors

Specified eligible borrowers in the

manufacturing and infrastructure sectors1 who

have earned foreign exchange during past three

financial years and are not on the

default/caution list of the RBI have been

permitted to avail ECB under the approval route

for refinancing outstanding rupee loans availed

from domestic banking system and utilised for

incurring capital expenditure and fresh rupee

capital expenditure, or both. The borrower

would need to comply with following key

conditions:

The entire amount should be drawn within

one month of obtaining the loan registration

number.

ECB liability (prinicipal + interest) should

be repaid only out of the foreign exchange

earnings.

The overall ceiling for all specified eligible

borrowers is 10 billion USD and the individual

corporate ceiling is 50% of the average annual

export earnings during past three financial

years.

The existing facility for repayment of rupee

loans availed for capital expenditure (as

tabulated below) by raising fresh ECBs will

continue to be available to companies in the

infrastructure sector1.

1 Infrastructure sector is defined to include power,

telecommunication, railways, road including bridges, sea port and airport, industrial parks, urban infrastructure (water supply, sanitation and sewage projects), mining, refining and exploration and cold storage or cold room facility, including for farm level pre- cooling, for preservation or storage of agricultural and allied produce, marine products and meat.

11 PwC

Sector

Utilisation of Fresh ECB proceeds

Refinancing of rupee loan (for

capital expenditure) availed

from domestic banking

system

Fresh capital expenditure

Power-sector

companies

Up to 40% At least 60%

Infrastructure-

sector

companies

(other than

power sector)

Up to 25% At least 75%

Resident foreign currency accounts

RBI has liberalized following aspects applicable

to RFC account-holders:

RFC account-holders were required to

surrender 50% of their forex earnings for

conversion to rupee balances. Going forward,

they would be able to credit 100% of their

forex earnings in their RFC accounts.

RFC accountholders were required to

purchase foreign exchange only after fully

utilising the available balances in the RFC

accounts. This condition has been withdrawn

12 PwC

Perspective India gets its first QFI investment

With a view to creating further depth in the

Indian capital markets as well as attracting

greater foreign investment, the Indian

government this year liberalised foreign

investment in the stock markets. It also opened

the Indian capital market for qualified foreign

investors (QFIs) to invest in. QFIs include only

individuals, groups or associations resident in a

foreign country that complies with the

requirements of the Financial Action Task Force

(FATF) and is a signatory to the International

Organisation of Securities Commissions’

(IOSCO) multilateral MoU. Foreign institutional

investors (FIIs) and foreign venture capital

investments do not come under the QFI

category.

The policy was not devoid of its share of checks

and balances though. Some of the key highlights

of the policy are mentioned below: QFIs

QFIs are not required to be registered with

the Securities and Exchange Board of India

(SEBI). However, they can invest only in

listed Indian equities through depository

participants (agents of depositories that

provide accounts for holding securities in

electronic format) duly registered with the

SEBI.

Depository participants (DPs), through

which investments will be made, have been

entrusted with the onus of ensuring tax and

regulatory compliances by QFIs. In

addition, DPs will also ensure compliance

with the 'know your customer' norms for

QFIs.

13 PwC

An individual QFI can invest up to 5% of the

paid-up capital of a listed company. Further,

total investment by QFIs in a listed

company cannot exceed 10% of its paid-up

capital. These investment limits will be over

and above the ceilings set for FIIs and non-

resident Indians under the portfolio

investment scheme for foreign investment

in India.

QFIs will also be allowed to acquire equity

shares by way of rights issues, bonus shares

or equity shares on account of stock splits,

amalgamations, demergers or other such

corporate activities. However, QFI

transactions, for all purposes, will be treated

on par with those of Indian non-

institutional investors with regard to

margins, voting rights, public issues, etc.

DPs will purchase equity at the instruction

of QFIs within five working days. If a DP

fails to execute the order within five working

days, the funds will be repatriated back to

the QFI's designated overseas bank. When

QFIs sell their stock holdings, the sale

proceeds (along with dividends, if any) will

be repatriated to their designated banks or

will be re-invested, within five working days.

Recently, India received its first investment via

the QFI route when Kotak Mahindra Bank

concluded a deal worth 5 million USD for a US-

based client. This puts an end to doubts that the

country's attempt to get investors to buy shares

directly will be a non-starter.

The government expects the QFI scheme to

attract investment worth about 30 billion USD

over the next 15 to 18 months. The scheme will

certainly help increase the depth of the Indian

market while combating volatility and

increasing foreign inflows into the country. Also,

it remains to be seen whether there will be a

gradual migration of FII investment into this

new route if the latter confers possibilities for

regulatory arbitrage.

- Pankaj Kwatra (Manager, Regulatory Services)

14 PwC

Glossary

AAUM Average assets under Management

AGR Annual Gross Revenue

AICTE All India Council for Technical Education

BoA Board of Approval

CBDT Central Board of Direct Taxes

CMTS Cellular Mobile Telephone Service

Crore 10 million

DC Development Commissioner

DDT Dividend Distribution Tax

DoT Department of Telecomm

ECB External Commercial Borrowing

FCCBs Foreign Currency Convertible Bonds

FEMA Foreign Exchange Management Act

FTWZ Free Trading Warehousing Zone

FY Financial Year

ILD International Long Distance

INR Indian Rupee

IRDA Insurance Regulatory and Development Authority

ISP Internet Service Provider

IT Information Technology

ITES Information Technology Enabled Services

JV Joint Venture

LoA Letter of Approval

MAT Minimum Alternate Tax

NCDs Non-Convertible Debentures

NBFCs Non Banking Financial Company

NLD National Long Distance

NOF Net Owned Fund

PFRDA Pension Fund Regulatory and Development Authority

QDPs Qualified Depository Participants

QFI Qualified Foreign Investor

RBI Reserve Bank of India

RFC Resident Foreign Currency

SEZ Special Economic Zone

SEBI Securities Exchange Board of India

UASL Unified Access Service Licensee

USD United States Dollar

Contacts Ahmedabad

President Plaza, 1st Floor Plot No 36

Opp Muktidham Derasar

Thaltej Cross Road, SG Highway

Ahmedabad, Gujarat 380054

Phone +91-79 3091 7000

Bangalore

6th Floor, Millenia Tower 'D'

1 & 2, Murphy Road, Ulsoor,

Bangalore 560 008

Phone +91-80 4079 7000

Bhubaneswar

IDCOL House, Sardar Patel Bhawan

Block III, Ground Floor, Unit 2

Bhubaneswar 751009

Phone +91-674 253 2279 / 2296

Chennai

PwC Center, 2nd Floor

32, Khader Nawaz Khan Road

Nungambakkam

Chennai 600 006

Phone +91-44 4228 5000

Hyderabad

#8-2-293/82/A/113A Road no. 36,

Jubilee Hills, Hyderabad 500 034,

Andhra Pradesh

Phone +91-40 6624 6600

Kolkata

South City Pinnacle, 4th Floor,

Plot – XI/1, Block EP, Sector V

Salt Lake Electronic Complex

Bidhan Nagar

Kolkata 700 091

Phone +91-33 4404 6000 / 44048225

Mumbai

PwC House, Plot No. 18A,

Guru Nanak Road - (Station Road),

Bandra (West), Mumbai - 400 050

Phone +91-22 6689 1000

Gurgaon

Building No. 10, Tower - C

17th & 18th Floor,

DLF Cyber City, Gurgaon

Haryana -122002

Phone : +91-124 3306 6000

Pune

GF-02, Tower C,

Panchshil Tech Park,

Don Bosco School Road,

Yerwada, Pune - 411 006

Phone +91-20 4100 4444

This report does not constitute professional advice. The information in this report has been obtained or derived from sources believed by

PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or

estimates contained in this report represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this report are advised to

seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this report.

PwCPL neither accepts or assumes any responsibility or liability to any reader of this report in respect of the information contained within it or for any decisions

readers may take or decide not to or fail to take.

© 2012 PricewaterhouseCoopers Private Limited. All rights reserved. “PwC”, a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited

company in India) or, as the context requires, other member firms of PwC International Limited, each of which is a separate and independent legal entity.

www.pwc.com/india