Beware April 1 - Foreign Investors And Local Companies

April 1, 2019 will usher in higher corporate governance standards for Indian listed companies and higher taxes for foreign investors coming to India via Mauritius and Singapore. The first is on account of changes to SEBI’s listing regulations and prevention of insider trading regulations. The second is a result of revisions in treaties with Mauritius and Singapore which give India a right to impose tax on capital gains.

Domestic businesses and foreign investors will have to gear up for a slew of changes...

Listing Regulations Up The Governance Ante

Several recommendations made by the Uday Kotak-led corporate governance committee and adopted by the Securities Exchange Board of India come into effect on Apr. 1.

Board Composition
The top 1,000 listed companies will be required to have at least six directors on their board as against three prescribed by the Companies Act, 2013. The top 500 will need to have at least one woman as an independent director.

The maximum number of listed boards that a director can sit on is capped at eight. Of these eight, independent directorships cannot exceed seven.

Independent Directors
Listed companies will be required to give detailed reasons to the stock exchanges if an independent director resigns before completion of term. The independent director will also need to confirm there are no other material reasons, besides the ones disclosed, that prompted the resignation.

Boards will have to start evaluating independent directors for their performance as well as ensure they fulfil the independence criteria. This will need to be disclosed in the Corporate Governance Report.

Enhanced Role of Committees
Audit committees will need to review the utilisation of loans/advances/investment made by a holding company to a subsidiary if they exceed Rs 100 crore or 10 percent of the asset size of the subsidiary. This will also apply to loans/advances/investments existing as on Apr. 1, 2019.

The definition of senior management has been widened to include all members of the management one level below the Chief Executive Officer/Managing Director/Whole-Time Director etc, as well as the company secretary and Chief Financial Officer. Any compensation paid to senior management will now need to be recommended by the Nomination and Remuneration Committee.

The role and scope of the Stakeholders Relationship Committee will get expanded - to include resolution of security holder grievances, reviewing measures taken for effective exercise of voting rights by shareholders, reducing the quantum of unclaimed dividends etc.

Monitoring of Group Entities
The definition of material subsidiary will stand widened- it will now mean a subsidiary whose income or networth exceeds 10 percent (currently 20 percent) of the consolidated income or networth of the listed entity and its subsidiaries in the immediately preceding accounting year.

Significant transactions and arrangements entered into by all the unlisted subsidiaries will come under the purview of the listed company’s board. So far, this applied to only material unlisted subsidiaries.

At least one independent director will need to be appointed on board of all unlisted material subsidiaries, including foreign ones.

Related Party Transactions
A new definition of related party will come into play - promoters or promoter group entities that hold 20 percent or more in the listed company will qualify as related parties.

Shareholders’ approval – majority of the minority- will be required for royalty or brand payments to related parties if such payments exceed two percent of the listed entity’s consolidated turnover.

Related or interested parties will be allowed to cast a negative vote on proposals that require shareholder approval.

Also Read: Corporate Governance: On April 1, New Rules Of The Game For India Inc.

Insider Trading Regulations: Enhanced Board Duties

SEBI had amended the insider trading regulations in January this year with the changes effective April 1. The definition of unpublished price sensitive information has been narrowed allowing listed companies to share such information for board-determined legitimate purposes, but only if the disclosure is in the best interest of the company.

So far, UPSI included information relating to:

Financial results
Dividends
Change in capital structure
Mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions
Changes in key managerial personnel
Material events in accordance with the listing agreement

Come April, ‘material events in accordance with the listing agreement’ will cease to be included in the definition of UPSI. Experts have lauded this change in definition.

Boards will be able to share UPSI for legitimate purposes, determined by them. Experts say, this new board responsibility is open to multiple legal and practical considerations, namely what should this policy be based on, how should information access work across different classes of key investors like promoters, institutional shareholders, private equity investors etc.

The amended regulations also say that if entities trade in securities while in possession of UPSI, it’ll be assumed they’ve traded on the basis of it. But some reliefs by way of additional defences will also be available. Block trades between insiders who have the same UPSI, transactions undertaken due to a regulatory obligation, exercise of stock option at a pre-determined price...will be acceptable defences against insider trading.

Also coming into force are new requirements that will apply to intermediaries such as auditors, accountancy firms, law firms, analysts, consultants etc. They’ll have to put in place internal controls to check insider trading. Internal controls will include - ensuring employees with UPSI are identified as designated employees and appropriate restrictions are placed on on communication of UPSI.

Revised Tax Treaties: End Of Concessional Regime

On Apr. 1, over three decades after the treaties were signed, the concessional tax regime for investors coming to India via Singapore and Mauritius will cease to exist. In 2016, India’s double taxation avoidance treaties with Singapore and Mauritius were amended. The amendments gave India the right to tax capital gains arising on Indian equity shares sold by a Singapore or Mauritian resident. Specifically

Investments prior to Apr. 1, 2017 were grandfathered i.e. equity shares acquired before Apr. 1, 2017 were granted capital gains tax exemption as long as they met the criteria set out in the Limitation of Benefits (LOB) clause in the respective treaties.
For equity shares acquired on or after Apr. 1, 2017 and sold before Apr. 1, 2019, the amended treaties imposed a concessional capital gains tax rate - 50 percent of the prevailing rate in India.
Investments on or after April 1, 2019 will be taxable at the full capital gains tax rate applicable.

Since the amendments in the Singapore and Mauritius treaties, investors have preferred to come to India either directly or through jurisdictions like Netherlands, Maulik Doshi, partner at tax firm SKP Group pointed out.

This bears out in the foreign direct Investment via Mauritius. In 2016-17, it stood at Rs 1,05,587 crore, dropping to Rs 1,02,492 crore in 2017-18. Between April-December 2018, it’s just Rs 42,638 crores.