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Draft E-commerce Policy: The dawn of a new beginning

Data is the basic building block of everything we are trying to do in this age of Industry 4.0. Data is a valuable resource for any individual, corporation or the Government. Data can be used for analytical, statistical, business, security purposes among various other things. Keeping ‘data’ central to the idea of governing the e-Commerce industry in India the Department for Promotion of Industry and Internal Trade on February 23, 2019, published the ‘Draft e-Commerce Policy’ (“Draft Policy”).

The overall objective of the Draft Policy is to prepare and enable stakeholders to fully benefit from the opportunities that would arise from progressive digitalization of the domestic digital economy. The Draft Policy focuses on data protection, the State’s paternalistic attitude towards the use of the citizen’s data and cross border transactions. The Draft Policy intends to regulate some things beyond e-commerce i.e. it proposes to regulate technologies like AI, IoT, Cloud computing and Cloud-as-a-Service etc. On a holistic level, it is understood that these technologies empower e-commerce industry currently and are integral to its growth and therefore the Government intends to bring these technologies under the purview of the Draft Policy. The Draft Policy is a mix of visionary thought process, advanced technological solutions, putting in place digital infrastructure to support India’s digital economy etc.

DATA

The Draft Policy resonates the idea and intent of the legislature that is formulated under the Data Protection Bill, 2018 as far as the rights over data of an individual is concerned. The collective idea of the Draft Policy is to streamline the protection of personal data and empowerment of the users/consumers with respect to the data they generate and own. Though the question to be assessed here is whether this is the real intent of the Draft Policy?

The Draft Policy recognises the rights of an individual over its data by stating that “An Individual owns the right to his data” and therefore the use of an individual’s personal data shall be made only upon seeking his/her express consent. It further states that the data of a group is a collective data and therefore a collective property of that particular group; it extends this rationale to state that “Thus, the data that is generated in India belongs to Indians, as do the derivatives there from”. But the Draft Policy ends up categorising data of Indians as a collective resource and therefore a “national resource”.

The abovementioned intent of the Draft Policy is fair and strives to achieve the greater good of the country, but at what stake? If personal data belongs to an individual then this objective appears that the State wants to interfere with the personal rights of a person. The Draft Policy clearly states that “All such data stored abroad shall not be made available to other business entities outside India, for any purpose, even with the customer’s consent”, what follows this point in the Draft Policy, restricts sharing of data with any third party in a foreign country even if the individual has consented to such sharing of the data.

The intent behind such restriction is that currently, India lacks stringent laws regarding cross-border flow of data. If there are no strict restrictions on cross-border flow of data Indian stakeholders will merely be engaged in back end processing of data for the EU / US based e-commerce entities without having the ability to create any high-value digital products. While the Government considers data as a national resource and compares it with coal, telecom spectrums etc. it ignores the fact that the inherent nature of personal data is that it belongs to an individual and not to the State, unlike coal.

The obvious reason as to why the State is taking such a stance is to eliminate issues related to consent asymmetry. But is this paternalistic attitude warranted?

If the Government is worried about foreign countries using our national resource i.e. data to their advantage it should put in place stringent data privacy and protection laws in India taking inferences from other countries.

DATA INFRASTRUCTURE

The Draft Policy takes forward the digital India initiative and intends put in place secure and digital infrastructure and encourage the development of data –storage facilities/ infrastructure including data centres, server farms, towers, tower stations, equipment, optical wires, signal transceivers, antenna etc.

The Government will add the above-mentioned infrastructure facilities in the  ‘Harmonized Master List’. This will enable regulation of the listed infrastructure in a more streamlined manner. Whereas the infrastructure will be put in place by various implementing agencies, while financing agencies may identify these as infrastructure that they may intend to support. This will facilitate achieving last mile connectivity across urban and rural India.

The Government by developing such data/digital infrastructure wishes to support India’s fast-growing digital economy and create employment.

EASE OF REGULATION

Given the interdisciplinary nature of e-commerce, it is important for the Government to tackle various regulatory challenges. The Draft Policy suggests formulating a Standing Group of Secretaries on e-Commerce (SGoS), which shall be an important body for tackling various legal issues emerging from various statutes such and Information Technology Act, 2000 and rules thereunder, the Competition Act, 2002 and the Consumer Protection Act, 1986.

Additionally, the Draft Policy states that “All e-Commerce websites and application available for downloading in India must have a registered business entity in India as the importer on record or the entity through which all sales in India are transacted”.

SIGNIFICANT HIGHLIGHTS OF THE DRAFT POLICY

  • The Government intends to continue charging custom tariffs on any digital goods being traded electronically (imposing custom duties on electronic transmissions). Whereas the Government is strict on its stance of not accepting the permanent moratorium on custom tariffs for goods (including digital goods) traded electronically as proposed by the WTO.
  • The Draft Policy states that there should technological standards put in place for emerging technologies like IoT, AI etc.
  • The Draft Policy introduces a term, namely ‘Infant Industry’ under which small scale entities facing entry barriers to enter the market will be integrated with market keeping data as a central to this integration. This will also help strengthen platforms like ‘e-lala’ and ‘Tribes India’.
  • The Government intends to establish technology wings in each Government department.
  • The Government intends to streamline the process of importing goods in India and harmonise the functions of various administrative bodies involved in the process of import of goods in India.
  • A body of industry stakeholders will be created that shall identify ‘rogue websites’. These rogue websites will be added to ‘Infringing Website List’ (IWL). IWL will enable the ISPs to remove or disable these websites. It will also enable payment gateways to curtail the flow of payments to or from such rogue websites. Search engines will be able to efficiently remove such rogue websites identified in the IWL.
  • There shall be no trade mark infringement and customers at large shall not be deceived by using deceptively similar trademarks. In case an e-Commerce entity receives a complaint about a counterfeit/fake product which is manufactured with intent to deceive the customers. The e-Commerce entity shall convey such misuse of the trademark within 12 hours from receiving the complaint to the trade mark owner. Whereas in case any prohibited goods/products have been sold on any e-commerce platform the entity operating such e-Commerce platform shall delist such products within 24 hours from receiving such complaint.
  • Any non-compliant e-Commerce entity will be not be given access to operate in India.
  • All e-Commerce sites/apps available to Indian consumers shall display prices in INR and must have MRPs on all packaged products, physical products and invoices generated.
  • In the view of misuse of ‘gifting’ route, as an interim measure, all such parcels shall be banned, with exception of life-saving drugs.
  • Details of sellers shall be available for all the products sold online.
  • Sellers shall provide undertaking regarding genuineness of any product sold online.
  • In case of a counterfeit product is sold to a consumer, the primary onus to resolve such an issue will be of the seller but the intermediaries shall return the money paid to them by the customer and the marketplace shall seize to host such products on their platforms.
  • The intermediaries shall curtail piracy on their platforms.
  • An integrated system that connects Customs, RBI and India Post to be developed to better track imports.
  • The Draft Policy also intends to simplify the processes involved in export of goods by doing away with redundant requirements such as the need to procure Bank Realisation Certification

Once the final e-Commerce policy is enacted what will be interesting to see is whether Government opts for ease of governance or ease of doing business.

Overall this Draft Policy is a positive step towards making India one of the most prominent digital economies in the world, especially considering the strict stance the Government has taken during the WTO negotiations by not accepting the permanent moratorium on waiving custom duties on digital goods sold through electronic transmission. The Government intends to boost the local and home grown e-Commerce business entities and to provide a level playing field for MSMEs by retaining the rights to impose tariffs on electronic transmission through e-Commerce. Certain issues regarding data/personal data of an individual still needs a deep intellectual thinking, integrated with a practical approach from the Government before implementing a sector-wide policy, especially keeping in mind that at the end of the day personal data belongs to an individual and the use of such personal data shall be the decision of the respective individuals and not of the State.

Author: Manas Ingle, Associate, NovoJuris Legal

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Synopsis of Amendments made to the Companies Act, 2013 in the year 2019 and allied Action Points

The Ministry of Corporate Affairs (the MCA) in the month of January & February 2019 has issued the following amendments notification under the Companies Act 2013 (the Act):

(a) Changes in Companies (Significant Beneficial Owners) Rules 2018 to identify individuals/entities having significant control over the affairs of a company

(b) Companies (Incorporation) Rules, 2014 mandating all the companies incorporated prior to 31 December 2017 to upload all their particulars of various compliances including details of registered office in Form INC 22A Active.

(c) Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019, mandating all the companies who receives goods or services from MSME and the payment for which is not made within 45 days from the date of acceptance or the date of deemed acceptance of goods or services from MSME to report such transactions in MSME Form I.

(d) Changes in Companies (Acceptance of Deposits) Rules, 2014 mandating all companies to file a return of deposits in Form DPT 3 with the MCA, furnishing information about filing the transactions that have not been considered as a deposit or both under the Companies (Acceptance of Deposits) Rules 2014 (Deposit Rules).

The action points under these notifications are as below:

Sl. No Particulars Summary of Notification Form to be filed Due date
1. The Companies (Significant Beneficial Owners) Amendment Rules 2019[1] Who shall disclose?

Every individual, who acting alone or together, or through one or more persons or trust, possess one or more of the following rights in a company shall be deemed to be a significant beneficial owner (SBO):

·  holds indirectly, or together with any direct holdings, at least 10% of the shares or voting rights;

·   has the right to receive or participate (by virtue of their indirect and/or direct holdings) is not less than 10% of the total distributable dividend or any other distribution; or

· has the right to exercise significant influence or control (through their indirect holdings only) on the company.

However, individuals directly holding shares of the company in their own name or hold or acquires a beneficial interest in the share of the reporting company under subsection section 89 (2) of the Act and necessary reporting is made is not be considered to be a significant beneficial owner.

Further, an individual is considered to hold a right or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in respect of a member of the reporting company, namely:

·  If the member is a body corporate (Indian or foreign) – the individual holding majority stake in that body corporate or majority stake in the ultimate holding company of such body corporate member

·  If the member is a HUF – the individual who is the Karta of the HUF

· If the member is a partnership entity – the individual is a partner or holding a majority stake in a body corporate which is a partner or majority stake in the ultimate holding company of such body corporate which is a partner

·  If the member is a trust – the individual who is a trustee (discretionary or charitable trust), a beneficiary (Specific trust), Author/settlor (revocable trust)

· If the member is a pooled investment vehicle or an entity controlled by the pooled investment vehicle – the individual who is a general partner or investment manager or Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity

What needs to be done?

· To send notice of this requirement to all non-individual members who hold not less than 10% of its Shares, or voting rights, or right to receive or participate in the dividend or any other distribution payable in a financial year seeking information in Form BEN-4.

·  The company to identify any such individual who is an SBO and obtain a declaration of significant beneficial ownership in Form No. BEN-1.

 Non-applicability of this requirement:

These rules shall not apply if the shares of a reporting company are held by the following entities:

· Investor Education and Protection Fund

· Holding Reporting Company of the Reporting Company (however, details of such holding company have to be filed in Form No. BEN-2)

·  the Central Government, State Government or any local Authority

·  any entity controlled by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments;

· Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InVITs) regulated by the Securities and Exchange Board of India;

· Investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

(a) Form BEN-1

(b) Form BEN-2

(c) Form BEN-4

 

(a) Form BEN-1- on or before 9 May 2019

(b) Form BEN-2- within 30 days from the date of receipt of Form BEN-1

(c) Form BEN-4- To be sent to seek information in Form BEN-1.

 

2. Companies (Incorporation) Amendment Rules, 2019[2] Applicability:

Every Company incorporated on or before the 31 December 2017 shall file the particulars of the Company and its registered office, in e-Form INC-22A_ACTIVE (Active Company Tagging Identities and Verification)

Pre-requisites

The Company before filing Form INC 22A Active shall ensure that it has filed the following pending forms as may be applicable:

(a) Form AOC-4- Filing of Financial statements for the previous financial year;

(b) Form MGT 7- Filing of Annual Return (e-Form MGT-7) for the previous financial year;

(c) Form DIR 12 & MR 1 as may be applicable for the purpose of appointment of whole-time company secretary. This is mandatory for the Companies whose paid-up capital is more than 5 Crore.

Non-Applicability

The following companies are not required to filed Form INC 22A Active:

1.    Companies which have been Struck off or

2.    Under the process of striking off or

3.    Under Liquidation or

4.    Amalgamated or

5.    Dissolved

Consequences of non-filing

The Company will be marked as Active non-compliant and MCA would not allow filing the following forms unless the Form INC-22A Active is filed:

a.   Form SH-7 (Change in Authorised Capital)

b.   Form PAS-3 (Change in Paid-up Capital)

c.   Form DIR-12 (Changes in Director except for cessation)

d.   Form INC-22 (Change in Registered office)

e.   Form INC-28 (Amalgamation, De-merger)

Form INC 22A Active On or before 25 April 2019.
3. The requirement of filing of MSME Form-I[3]  

With a view to support the growth of and to protect the interest of MSME’s, the MCA has issued a notification dated 22 January 2019, mandating all the Specified Companies[4], whose supply of goods or services from registered MSME and the respective payments to these registered MSME suppliers exceed 45 days from the date of acceptance or the date of deemed acceptance of the goods or services, shall file the Initial Return in MSME Form I with Ministry of Corporate Affairs

 Details required to be collected from the MSME suppliers before filing the return with the MCA

Following details are required to be collected from MSME for the purpose of filing the said form:

1. Certificate of Registration issued by the Ministry of Micro Small and Medium Scale Enterprises to the MSME to ensure that the concerned entity is an MSME.

2. Financial years to which the amount relates

3. Name of the MSME

4. PAN of MSME

5. Amount due

6. Date from which amount is due

7. Total outstanding amount due as on date of notification of this order (i.e. 22 January 2019)

8.    Reason for delay

Filing of Half yearly return

Every company who receive goods or services from MSME and whose payments to MSME suppliers exceed forty-five days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of the MSME Act 2006 shall file the half-yearly returns for the period ended April to September and October to March every year.

 

MSME Form I Within 30 days from the date of Notification of the said Form[5]

 

Due date for filing half yearly return

1.    For the period from April to September- On or before 31st October every year

2.    For the period from October to March- on or before 30th April of every year

4. The Companies (Acceptance of Deposits) Amendment Rules, 2019[6] Every Company shall have to file Form DPT 3 providing particulars of transaction that has not been considered as deposit[7] or both. Thus, all companies other than Government Companies will have to file Form DPT-3 also for transactions that are listed under Deposit Rules.

 Further the companies in its annual financial statements, are required to disclose about the money received from Directors (in case of companies other than private companies) and money received from Directors or relatives of Directors (in case of private companies only).

 

Form DPT 3 On or before 22 April 2019

Author: Ashwin Bhat, Junior Partner at NovoJuris Legal.

[1] Source: http://www.mca.gov.in/Ministry/pdf/CompaniesOwnersAmendmentRules_08020219.pdf

[2] Source: http://www.mca.gov.in/Ministry/pdf/CompaniesIncorporationAmendmentRules_21022019.pdf

[3] Source: http://www.mca.gov.in/Ministry/pdf/MSMESpecifiedCompanies_22012019.pdf

[4] ‘Specified companies’ means, all the Companies who receives goods or services from MSME and if the payment is not made within 45 days from the date of acceptance or the date of deemed acceptance of goods or services.

[5] MSME Form I is yet to be notified by the MCA

[6] Source: http://www.mca.gov.in/Ministry/pdf/AcceptanceDepositsAmendmentRule_22012019.pdf

[7] Transactions provided in Rule 2 of the Deposit Rules

DPIIT registered Start-ups to get relief from Angel Tax. Recognition of Start-ups becomes easier

The Department for Promotion of Industry and Internal Trade (DPIIT) vide its press release dated 19 February 2019 has shared that the Minister of Commerce & Industry and Civil Aviation, Suresh Prabhu has cleared a proposal for simplifying the process of exemptions Start-ups under Section 56(2)(viib) of the Income Tax Act, 1961.

Earlier, the DPIIT had also issued notification number GSR 34(E) dated 16 January 2019 to provide relaxations with respect to exemptions from taxation of angel investments. However, the Indian Start-up community widely considered that further relaxations were required and several industry pressure groups had been in constant deliberations with government agencies to push for further reforms.

A round-table was organized on 4 February 2019 under the chairmanship of Secretary DPIIT with Start-ups, angel investors, and other stakeholders with a view to discuss the new measures undertaken by the DPIIT to address the Angel Tax issue and understand the mechanism to deal with it institutionally.

Vide gazette notification number GSR 127(E) (the “Notification”), the Ministry of Commerce and Industry, in supersession of the earlier Notification number GSR 34(E) has amended the Start-up Policy (GSR 364(E), dated 11 April 2018) to provide for the following key relaxations:

Broadening of the definition of ‘Start-up’ and revamp of recognition process

The definition of Start-ups will be expanded. Now an entity will be considered as a Start-ups up to a period of 10 years from the date of incorporation and registration in place of the earlier duration of 7 years.

Such an entity will continue to be recognised as a Start-up, if its turnover for any of the financial years since incorporation and registration has not exceeded INR 100 Crores in place of INR 25 Crores earlier.

The process of recognition of an eligible entity as Startup has also been simplified, the steps for DPIIT recognition now are as follows:

  1. Online application over mobile app or portal set-up by DPIIT;
  2. Application to be accompanied by a copy of Certificate of Incorporation or Registration, and a write-up about the nature of business and how it is working towards innovation and other criteria for recognition;
  3. The DPIIT may after calling for further documents or after making further enquiries may grant or reject the recognition request. In case of rejection, reasons will have to be stated.

Relaxations wrt Section 56(2)(viib)

All Start-ups recognized by DPIIT will be eligible for the exemption under Section 56(2)(viib) of the Income Tax Act, 1961. The aggregate amount of paid up share capital and share premium of the startup after the issue or proposed issue of shares should not exceed INR 25 Crores.

The abovementioned limit of INR 25 Crores as aggregate amount of paid up share capital and share premium, shall not include any considerations, meaning thereby the Start-ups may raise tax-free capital, from the following entities:

  1. Non-Residents
  2. Venture capital company or a venture capital fund;
  3. Listed company having a net worth of INR 100 Crores or turnover of at least INR 250 Crores, provided that its shares are frequently traded as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

However, the Start-up availing the exemption must not be investing in any of the following assets:

  1. Building or land appurtenant thereto, being a residential/ non-residential property, other than that used by the Start-ups for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business
  2. Loans and advances, other than loans or advances extended in the ordinary course of business by the Start-ups where the lending of money is substantial part of its business
  3. Capital contribution made to any other entity
  4. Shares and securities
  5. Any motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds INR 10 Lakhs, other than that held by the Start-ups for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business
  6. Jewellery other than that held by the Start-ups as stock-in-trade in the ordinary course of business
  7. Any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act

It is to be noted that the Notification also requires the Start-up to not invest in any of the above-mentioned assets for a period of 7 years from the end of the latest financial year in which the shares are issued at a premium.

Mode for availing exemption:

Any prior approval from any government agency to avail the exemption has also been done away with. The eligible Start-ups may file a duly signed self declaration in Form 2 annexed in the Notification, with the DPIIT for availing the tax exemption. The declaration shall thereafter be transmitted by the DPIIT to Central Board of Direct Taxes (CBDT).

Scope of the Notification:

The Notification shall apply irrespective of the dates on which the shares are issued by the Start-up from the date of its incorporation, except for the shares in respect of which an assessment order has been made under Income Tax Act, 1961.

Author: Mr. Avaneesh Satyang

 

Source:

Press Release: https://dipp.gov.in/sites/default/files/press_release_19022019.pdf

Gazette Notification: http://egazette.nic.in/WriteReadData/2019/198133.pdf

Proposal cleared for DPIIT registered Start-up to get exemption from Angel Tax, definition of Start-ups widened

The Department for Promotion of Industry and Internal Trade (DPIIT) vide its press release dated 19 February 2019 (Gazette notification is awaited) has shared that the Minister of Commerce & Industry and Civil Aviation, Suresh Prabhu has cleared a proposal for simplifying the process of exemptions Start-ups under Section 56(2)(viib) of the Income Tax Act, 1961.

Earlier the DPIIT had also issued Notification number GSR 364 (E) dated 16 January 2019 to provide relaxations with respect to exemptions from taxation of angel investments. However, the Indian Start-up community widely considered that further relaxations were required and several industry pressure groups had been in constant deliberations with government agencies to push for further reforms.

A round-table was organized on 4 February 2019 under the chairmanship of Secretary DPIIT with Start-ups, angel investors, and other stakeholders with a view to discuss the new measures undertaken by the DPIIT to address the Angel Tax issue and understand the mechanism to deal with it institutionally.

The DPIIT has also stated the changes shall be soon notified vide appropriate gazette Notification, which is expected soon.

As per the Press Release the key changes to be brought in by the Notification are as follows:

Broadening of the definition of ‘Start-up’

The definition of Start-ups will be expanded. Now an entity will be considered as a Start-ups upto a period of ten years from the date of incorporation and registration in place of the earlier duration of 7 years.

Such an entity will continue to be recognised as a Start-up, if its turnover for any of the financial years since incorporation and registration has not exceeded INR 100 Crores in place of INR 25 Crores earlier.

Relaxations wrt Section 56(2)(viib)

All Start-ups recognized by DPIIT will be eligible for the exemption under Section 56(2)(viib) of the Income Tax Act, 1961. The consideration so received for the proposed issue or issuance of shares shall be exempt up to an aggregate limit of INR 25 Crores.

The abovementioned limit of INR 25 Crores shall not include any considerations, meaning thereby the Start-ups may raise tax-free capital, from the following entities:

  1. Non-Residents
  2. Alternative Investment Funds- Category-I registered with SEBI
  3. Listed company having a net worth of INR 100 Crores or turnover of at least INR 250 Crores, provided that its shares are frequently traded as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

However, the Start-up availing the exemption must not be investing in any of the following assets:

  1. Building or land appurtenant thereto, being a residential/ non-residential property, other than that used by the Start-ups for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business
  2. Loans and advances, other than loans or advances extended in the ordinary course of business by the Start-ups where the lending of money is substantial part of its business
  3. Capital contribution made to any other entity
  4. Shares and securities
  5. Any motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds INR 10 Lakhs, other than that held by the Start-ups for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business
  6. Jewellery other than that held by the Start-ups as stock-in-trade in the ordinary course of business
  7. Any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act

Mode for availing exemption:

Any prior approval from any government agency to avail the exemption has also been done away with. The eligible Start-ups may file a duly signed self declaration with the DPIIT for availing the tax exemption. The declaration shall thereafter be transmitted by the DPIIT to CBDT.

Source: https://dipp.gov.in/sites/default/files/press_release_19022019.pdf

Relaxations to FPIs and Companies under bankruptcy wrt ECB

Regulatory update: RBI’s Bi-Monthly Monetary Policy Statement grants important relaxations to FPIs and Companies under bankruptcy with respect to ECB

The Reserve Bank of India (RBI) on 7 February 2019 has issued its Sixth Bi-monthly Monetary Policy Statement (Monetary Policy Statement), for the current fiscal year 2018-19. The key relaxations announced for foreign investors are as follows:

  1. Relaxation to FPIs investing under the debt route:

Under the extant framework for FPI investment in corporate debt, the RBI’s A.P. (DIR Series) Circular No. 31 dated June 15, 2018 restricted an FPI from having more than 20% exposure of its total corporate bond portfolio, in the corporate debt market in a single corporate (including exposure to entities related to the corporate). Imposed with the aim of incentivizing FPIs to maintain a diverse portfolio of assets, existing FPIs were also given an exemption from this requirement till end of March 2019 to adjust their portfolios. However, the market feedback according to the RBI indicated that FPIs have been constrained by the earlier requirements, and relaxations were needed.

Accordingly, in order to encourage investment in the Indian corporate debt market, the RBI vide the Monetary Policy Statement, removed the abovementioned restriction and has declared that all FPIs shall henceforth again be permitted to invest any portion of its corporate bond portfolio in a single borrower entity. The Monetary Policy Statement indicates that RBI would issue a circular in this regard by mid-February 2019 to make it official.

The Monetary Policy Statement however did not provide any relaxation on the following key restrictions imposed vide the aforementioned A.P. (DIR Series) Circular No. 31 dated June 15, 2018:

  1. Investment by a single FPI or a group of related FPIs shall not exceed 50% of the issue size of a corporate bond; and
  2. At any point of time, a FPI’s investments in corporate / government bonds maturing within one year shall not exceed 20% of the FPI’s total portfolio in corporate / government bonds.
  1. Relaxation ECB framework norms on end-use restrictions for companies under bankruptcy:

Under the extant External Commercial Borrowing (ECB) framework, any borrowing proceeds from an ECB could not be utilized for repayment or for on-lending for repayment of domestic rupee loans. However, cognizant of the prospect that resolution applicants under Corporate Insolvency Resolution Process (CIRP) under Insolvency and Bankruptcy Code (IBC), 2016 might find it attractive to borrow abroad to repay the existing lenders, the RBI has decided to relax the end-use restrictions for resolution applicants under the CIRP.

Further under A.P. (DIR Series) Circular No. 18 also dated 7 February 2019 the resolution applicants, who are otherwise eligible borrowers, have been allowed to raise ECBs from recognised lenders, except the branches/ overseas subsidiaries of Indian banks, for repayment of Rupee term loans of the target company under the approval route.

Sources:

  1. Sixth Bi-monthly Monetary Policy Statement for the current fiscal year 2018-19: https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=46237
  2. P. (DIR Series) Circular No. 18 date February 07, 2019: https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11472&Mode=0

Issuance of Convertible Notes in India

The definition of a ‘convertible note’ first came in through a notification dated 29 June 2016 that amended the Companies (Acceptance of Deposits) Rules, 2014 (the “Rules”). A convertible note is defined under the Rules as an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument (Convertible Note”). The notification dated 29 June 2016 effectively excluded any amount of 25 lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person[1], from the ambit of ‘deposit’. However, the Rules define start-up as a private company incorporated under the provisions of the Companies Act, 1956 or the Companies Act, 2013 (the “Act”) and recognised as a start-up under the notification on start-ups issued by the Department for Promotion of Industry and Internal Trade (“DPIIT”).

Read as such, post this 2016 amendment, a DPIIT recognised start-up company is allowed to accept money from investors by issuing Convertible Notes and without having to comply with the stringent provisions of the Rules.

Prior to this amendment, if a start-up (whether recognised by DPIIT or not) wanted to raise funds by way of any compulsorily or optionally convertible capital instruments, the start-up had to go through valuation of its shares (at least for the floor value). Valuation at early stages is always difficult, irrespective of the method of valuation adopted.

Only equity shares; fully, compulsorily & mandatorily convertible preference shares; and fully, compulsorily & mandatorily convertible debentures are treated as ‘capital’ under the existing Foreign Direct Investment Policy. Therefore, subject to certain specific exemptions under the FDI Policy, investments from foreign investors by way of any other instrument or optional conversion or repayment like a loan, fall under the ambit of External Commercial Borrowings regulated under the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange Regulations), 2000 (“ECB Regulations”).

With the objective of simplifying the process of foreign investments into Indian recognised start-ups and in consonance with the 2016 notification discussed above, the Reserve Bank of India (“RBI”) issued a notification on 10 January 2017 amending the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2016 (“RBI Regulation”). By virtue of this, recognised start-ups are now allowed to issue Convertible Notes to foreign investors without having to arrive at valuations.

Conditions to be fulfilled for issuance of Convertible Notes to non-resident or foreign investors:

  • A person who is resident outside India (other than an individual who is a citizen of Pakistan or Bangladesh or an entity which is registered/ incorporated in Pakistan or Bangladesh), can purchase Convertible Notes issued by a recognised start-up company.
  • The minimum amount to be invested for subscription to Convertible Notes is INR 25 lakhs in a single tranche.
  • If the start-up is engaged in a sector which requires government approval for foreign investment, Convertible Notes shall be issued only with prior approval of the government. Also, the issue of shares against such Convertible Notes has to be in accordance with Schedule 1 of the RBI Regulation.
  • The start-up issuing the Convertible Notes shall receive the consideration amount by inward remittance or by debit to the NRE/FCNR (B)/ escrow account maintained by the investor in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016. In the event an escrow account is maintained for the above purposes, it shall be closed immediately after the requirements are completed or within a period of 6 months, whichever is earlier. However, in no case, continuance of such escrow account shall be permitted beyond a period of 6 months.
  • NRIs may acquire Convertible Notes on non-repatriation basis in accordance with Schedule 4 of the RBI Regulation.
  • A person resident outside India can acquire or transfer, by way of sale, Convertible Notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by RBI. Prior approval from the Government shall be obtained for such transfers in case the start-up company is engaged in a sector which requires Government approval.
  • Compliance with the reporting requirements prescribed by the RBI is also required.

Critical Analysis:

Recognition of Convertible Notes as a capital investment instrument is definitely a positive move to make the process of investments into Indian companies’ swifter, easier and less expensive.

However, it is pertinent to note that the advantage is available only for recognised start-ups, which means that non-recognised start-ups are still not allowed to issue Convertible Notes as a capital instrument under the RBI Regulation or as a non-deposit under the Rules.

Further, a Convertible Note has to be repaid or converted into equity shares of a start-up company within 5 years from the date of issuance of the Convertible Note upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument. In case of conversion, the instrument would be converted into equity shares as per Section 62(3) of the Act.

Also, there is a minimum requirement to invest atleast Rs. 25 lakhs. It might be better if there is no threshold as such.

Another important aspect to be considered is with respect to the terms of conversion of the Convertible Notes. If the Convertible Notes are being converted into equity shares at the time of a subsequent investment, the conversion will be based on a valuation arrived at the time of such conversion. Whether such conversion will be at a discount to the shares being issued to the new investors and other terms will have to be carefully evaluated, so that the same is in compliance with the applicable laws, including the pricing guidelines, in case the Convertible Notes are held by non-resident investors.

Authors: Paul Albert and Ashwin Bhat

[1] Rule 2 (1) (xvii) of the Companies (Acceptance of Deposits) Rules, 2014.

Authorisation of New Retail Payment Systems : RBI’s Policy Paper

Reserve Bank of India (“RBI”) vide its press release on January 21, 2019 has invited comments on the Policy Paper on Authorisation of New Retail Payment Systems (“Policy Paper”). Earlier in June 26, 2018 RBI had released a Statement on Developmental and Regulatory Policies which aimed to minimize the concentration risk in retail payments systems and foster innovation and competition in the retail payments market. With this objective in mind RBI has placed this Policy Paper in public domain, inviting comments till February 20, 2019.

Existing retail payment services and operators in India

RBI is the regulator for payment and settlements systems under the Payment and Settlement Systems Act, 2007 and it ensures that the payment systems operate in a secure and efficient manner with regard to banks as well as non-bank entities. Banks have been the traditional gateway to payment systems but with the demand for varied payment systems and technological changes, non-bank entities have been granted access to the payment systems. These non-bank entities have been competing with the banks by providing retail electronic payment services. As a result, RBI has been issuing guidelines for various payment systems and granting the non-bank entities to setup and operate payment systems. It is to be noted that RBI had granted permission to eighty- nine (89) non-bank entities to act as payment system operators.

Analysis of the current landscape w.r.t retail payment system operators

Though there are many payment systems such as card networks, Prepaid instrument issuers (PPIs), ATM networks, etc. there are only a handful of payment operators in India. As a result of which, there are concerns around concentration and competition and its impact on the current financial of the country. Therefore there are a number of issues which need attention. The issues for discussion are as follows:

  1. a single operator having multiple and varied retail payment systems versus diversification across multiple operators;
  2. payments systems managed by a single operator such as Unified Payments Interface (UPI), Immediate Payment Service (IMPS), Aadhaar Enabled Payment System (AePS) ,etc. versus multiple systems with similar product features being offered by multiple operators;
  3. availability of a window for licensing operators of a payment system on-tap; and
  4. reviewing the criteria of licensing to foster innovation and competition and to broad base potential applicants.

RBI has classified the payment systems as follows:

Serial Number. Basis of Classification Particulars
1. Number of operators 1.    Single operator for a single or multiple retail payments systems

·         NPCI- National Financial Switch (NFS), IMPS, BHIM Aadhaar Pay, National Electronic Toll Collection (NETC), etc.

·         Empays-IMT

 

2.    Multiple operators for similar payment services- to name a few:

·         ATM networks- 5

·         Card Payment Networks- 5

·         Prepaid Payment Instrument (PPI) issuers- 48 non-banks and 60 banks

 

2. Type of payment services Classification on the payment service based on the end user as under:

1.    Fund transfer and merchant payments systems- IMPS, UPI, PPI, Aadhaar based payments, etc.

2.    Card based payments- Card networks, ATM networks

3.    Bulk and repetitive payments, utility payments- NACH, BBPS

4.    Toll collection- NETC

5.    MSME receivables’ financing- TReDs

NPCI has become pivotal to the operation of many critical retails payments systems in the country. By October 2018, NPCI was accounting for almost 48% of the retail electronic payment transactions (excluding paper) in volume to 15% of the value of the retail electronic payment transactions.

The advantages of having concentrated system operations with few entities are as follows: (a) leads to standardisation with uniform and tested payment systems; (b) less pressure on capital and infrastructure; and (c) a unity of approach by the regulators. Whereas the disadvantages of having a single operator are as follows: (a) absence of redundancy and fall-back arrangements may impact continued availability; (b) inadequate competition may lead to complacency with no upgradation and improvement in the product; and (c) increase of the prices at which the services are being offered with reduction in quality of service.

The Policy Paper also discusses a multi-pronged action for a more appropriate level of retail payment systems and operators.

The pros of having multiple entities which provide similar payment services would be to increase the competition. However, this may require additional investments, creation of a suitable infrastructure, and this may be achieved over phases. Also, the feature of adding inter-operability in the new payment systems would incur huge costs.

Open and keep-on-tap window for making applications

There can be an open and keep-on-tap window for making applications by all the payment systems in place. This window would permit the receipt of applications for all payment systems and would prescribe for a specific “point of arrival” metric which would allow the entities who are unable to achieve the desired capacity and scale to have a defined-time line exit.

Liberal entry norms

The Policy calls for a liberal entry norm which would require reviewing the entry point capital (net worth) requirement and an analysis of the capability potential of the entities. Finally the Policy also recommends that all payment systems should have a physical presence in the country, an impeccable track record, and shall conform to the best overall standards including those pertaining to customer service and efficiency.

The Policy also makes it clear that there should be an alignment of regulatory framework to encourage enhanced participation of both bank and non-bank entities.

Further, Annexure III of this Policy Paper lays down the authorisation criteria for non-bank payment system operators which discusses the review possibility of the financials in terms of the reduction or revision of the net worth for payment systems such as WLAOs, BBPOUs, and TReDS.

Source: https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/ANRPS21012019A8F5D4891BF84849837D7D611B7FFC58.PDF