Category Archives: regulatory updates

Update: Regulatory Department of Industrial Policy and Promotion (DIPP) Notification on Definition of Start-ups

The Department of Industrial Policy and Promotion (DIPP) vide its notification dated 11 April 2018 has amended its previous notification dated 23 May 2017 on the eligibility guidelines for ‘start-ups’. This notification is in suppression of the earlier notification dated 23 May 2017.

Definition of Start-Up:

An entity shall be considered as a start-up:

  • up to a period of 7 years from the date of incorporation/registration, if it is incorporated as a private limited company or registered as a registered partnership firm or a limited liability partnership in India. In the case of start-ups in the biotechnology sector, the period shall be up to 10 years from the date of its incorporation/ registration.
  • The turnover of the entity shall not exceed Rs.25 Crore.
  • The entity should be working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. However, an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘start-up’.

Income Tax benefits:

Relaxation under section 80-IAC

Prior to this notification, in case of claiming tax benefits under section 80-IAC of Income Tax Act, 1961, the start-ups had to be incorporated on or after 1 April 2016, but before 1 April 2019 but as per the new notification, the period has been extended to 1 April 2021 and can claim 100% tax exemption on profits for 3 out of 7 years. With this new change, the start-ups shall enjoy income tax benefit for 3 out of 7 consecutive assessment years. Further, the Certification from the Inter-Ministerial Board is necessary to avail such exemption.

Tax benefit under section 56 (2) (viib) of Income Tax Act 1961

As per section 56(2) (viib) of Income Tax Act 1961, in case of Company receiving consideration issuance of shares above Fair Market Value (FMV), then the excess of consideration above the FMV would be taxed in the hands of Company as other Income. Prior to this notification, the start-ups were exempted from the aforementioned provisions. The valuation of the Company in such case should be as per 11UA of the Income Tax Act 1961, which states that it should be as per Discounted Free Cash Flow method determined by either Merchant Banker or by Chartered Accountant.

Pursuant to this notification, the start-ups could avail such tax benefits on issue of shares for a consideration above the fair market value, only upon fulfilment of following conditions:

  1. The aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares should not exceed Rs.10 Crore.
  2. The investor/ proposed investor, who proposed to subscribe to the issue of shares, should either have (i) an average returned income of Rs.25 Lakh or more for the preceding three financial years or (ii) Net worth of Rs. 2 Crore or more as on the last date of the preceding financial year.
  3. The start-up has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11 UA of the Income Tax Rules 1962.

Further, start-ups shall have to make an application to Inter-Ministerial Board and obtain the approval for such exemption.

Pursuant to this notification, it shall be expensive for start-ups to obtain merchant banker certificate for such issuance. This may require clarity as rule 11UA allows both Merchant Banker or by a Chartered Accountant to issue valuation certificate. However, this notification mandates such valuation could be done by only merchant banker.

Source: https://www.startupindia.gov.in/notification.php

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Regulatory update: Department of Industrial Policy and Promotion (DIPP) Notification on Definition of Startups

The Department of Industrial Policy and Promotion (DIPP) vide its notification dated 11 April 2018 has amended its previous notification dated 23 May 2017 on the eligibility guidelines for ‘start-ups’. This notification is in supersession of the earlier notification dated 23 May 2017.

Definition of Start-Up:

An entity shall be considered as a start-up:

  • up to a period of 7 years from the date of incorporation/registration, if it is incorporated as a private limited company or registered as a registered partnership firm or a limited liability partnership in India. In the case of start-ups in the biotechnology sector, the period shall be up to 10 years from the date of its incorporation/ registration.
  • The turnover of the entity shall not exceed Rs.25 Crore.
  • The entity should be working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. However, an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘start-up’.

Income Tax benefits:

Relaxation under section 80-IAC

Prior to this notification, in case of claiming tax benefits under section 80-IAC of Income Tax Act, 1961, the start-ups had to be incorporated on or after 1 April 2016, but before 1 April 2019 but as per the new notification, the period has been extended to 1 April 2021 and can claim 100% tax exemption on profits for 3 out of 7 years. With this new change, the start-ups shall enjoy income tax benefit for 3 out of 7 consecutive assessment years. Further, the Certification from the Inter-Ministerial Board is necessary to avail such exemption.

Tax benefit under section 56 (2) (viib) of Income Tax Act 1961

As per section 56(2) (viib) of Income Tax Act 1961, in case of Company receiving consideration issuance of shares above Fair Market Value (FMV), then the excess of consideration above the FMV would be taxed in the hands of Company as other Income. Prior to this notification, the start-ups were exempted from the aforementioned provisions. The valuation of the Company in such case should be as per 11UA of the Income Tax Act 1961, which states that it should be as per Discounted Free Cash Flow method determined by either Merchant Banker or by Chartered Accountant.

Pursuant to this notification, the start-ups could avail such tax benefits on issue of shares for a consideration above the fair market value, only upon fulfilment of following conditions:

  1. The aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares should not exceed Rs.10 Crore.
  2. The investor/ proposed investor, who proposed to subscribe to the issue of shares, should either have (i) an average returned income of Rs.25 Lakh or more for the preceding three financial years or (ii) Net worth of Rs. 2 Crore or more as on the last date of the preceding financial year.
  3. The start-up has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11 UA of the Income Tax Rules 1962.

Further, start-ups shall have to make an application to Inter-Ministerial Board and obtain the approval for such exemption.

Pursuant to this notification, it shall be expensive for start-ups to obtain merchant banker certificate for such issuance. This may require clarity as rule 11UA allows both Merchant Banker or by a Chartered Accountant to issue valuation certificate. However, this notification mandates such valuation could be done by only merchant banker.

Source: https://www.startupindia.gov.in/notification.php

Regulatory Update: Ministry of Finance – Relaxes MAT Provisions for Companies Facing Insolvency

The Ministry of Finance vide its press release dated 6 January 2018 has informed that representations are received from the companies against whom an application for corporate insolvency resolution has been admitted by the adjudicating authority under section 7, 9 and 10 and are facing hardship due to restriction in allowance of brought forward loss for computation of book profit under section 115JB of the Income Tax Act 1961 .

In view of the above, proposed relaxations in the provisions relating to levy Minimum Alternate Tax (MAT) in case of the companies against whom an application for corporate Insolvency Resolution Process has been admitted under the insolvency and Bankruptcy Code 2016.

With effect from the assessment year 2018-19 and financial Year 2017-18, it is proposed that in case of a company, against whom an application for corporate insolvency resolution process has been admitted by the adjudicating authority, the amount of total loss brought forward (including unabsorbed depreciation) shall be allowed to be reduced from the book profit for the purposes of levy of MAT under section 115JB of the Act.

Source:http://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Jan/CBDT_MAT_2018-01-06%2023:31:56.pdf

Regulatory Update: Amendment in Agreement Between India and China for Avoidance of Double Taxation and Prevention of Fiscal Evasion

The Union Cabinet has accorded its consent for the protocol amending the Agreement between India and China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income. The key aim is to update the provisions on exchange of information of the DTAA to the latest international standards. Further the Protocol will incorporate changes required in relation to implement treaty related minimum standards under the action reports of Base Erosion & Profit shifting (BEPS), in which India had participated on an equal footing. Besides minimum standards, the protocol will also bring in changes as per BEPS action reports as agreed upon by both the countries.

Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=176361

Regulatory Update: The Central Board of Direct Tax – Non-Recovery of Tax Demands From “Start-Up” Companies Issuing Shares at Premium.

The Income Tax Act, 1961 (the IT Act) mandates the taxation of premium received on issue of shares to resident Indians in excess of Fair Market Value (‘FMV’) by a company, as income u/s 56(vii) (b) of the Income Tax Act, 1961 in the hands of such company. Tax on the excess money received over and above the FMV was exempted in case if issuer is a start-up company. However, the tax authority continued raise tax demand quoting reason as the abnormal valuation projections etc. The Central Board of Direct Tax has instructed the tax authority that if additions have been made after modifying/rejecting the valuation reports submitted by start-up companies, no coercive measures to recover the tax demand be taken. Further, for all such cases which are pending before the Appellate Authority, necessary administrative steps should be taken for expeditious disposal of appeals, preferably by March 31, 2018.

Source: https://www.incometaxindia.gov.in/Lists/Latest%20News/Attachments/218/Determination-fiar-market-value-unquoted-equity-shares-Start-Up-6-2-2018.pdf

Regulatory Update: The Ministry of Health and Family Welfare of Government – Draft Clinical Trial (CT) Rules, 2018

DRUG & CLINICAL TRIAL RULE 2018

The Ministry of Health and Family Welfare of Government of India has released draft Clinical Trial (CT) Rules 2018, which will come in force after its final publication in the Official Gazette. The new rules have been drafted after consultation with the Drugs Technical Advisory Board (DTAB).

Applicability:

Drug & Clinical Trial Rule 2018 will be applicable to all new drugs, investigational new drugs for human use, clinical trial, bioequivalence study, bioavailability study and ethics Committee.

The Key Highlights of the Draft Clinical Trial Rules:

  1. All clinical trial institution, organization, entities or any other such group, which intends to conduct a CT or bioavailability study or bioequivalence study, is required to have an Ethics Committee (EC) supervising the CT at all times. The role of the EC has been expanded and has been made vital to any CT or bioavailability study or bioequivalence study.
  2. An EC needs to obtain a registration from the Central Licensing Authority (CLA) and it must have a minimum of seven members from Medical Science, Scientific, Non-medical, Non- scientific, and layperson and a woman member constituted by an institution conducting CT.
  3. Form CT-02 is the relevant form under which an EC is granted a registration under the draft rules, registration will be valid for a period of three years from the date of its issue unless suspended or cancelled by the Central Licensing Authority.
  4. Any person or institution intending to conduct a clinical trial of a new drug or investigational new drug shall procure a prior approval from the CLA, the permission to conduct a clinical trial is granted under rule 22 of the draft rules and as per the specifications of Form CT-06. Once the CLA approves and provides a license to conduct a CT, the same shall remain valid for a period of two years from the date of its issue, unless suspended or cancelled by the CLA.
  5. Whereas, the scope of the CT is only to do academic trials i.e. constraining the CT only to academic findings without human intervention then no permission is required from CLA to conduct a CT for any drug in the following circumstances:
  • The CT drug formulation is intended solely for academic research purposes,
  • The CT has been approved by the EC,
  • The observations of such CT are not required to be submitted to the CLA; and
  • The observations of such CT are not used for promotional purposes.
  1. Cases where an EC is not available on the site of CT, then a CT can only be initiated after getting the protocol approved from the Institutional Ethics Committee of another trial site or an independent EC constituted under the Rule 7. Provided that the approving Ethics Committee shall in such case be responsible for the study at the trial site or the centre, as the case may be.
  2. Provided further that, the approving Ethics Committee and the clinical trial site or the bioavailability and bioequivalence centre, as the case may be, shall be located within the same city or within a radius of 50 km of the clinical trial site.
  3. In case of termination of any CT, the detailed reasons for such termination should be communicated to the CLA within thirty days of such termination.
  4. Any report of a serious adverse event occurring during the CT to a subject of the CT, after due analysis, should be forwarded to the CLA, the chairperson of the EC and the Institute where the CT has been conducted within fourteen days of its occurrence.
  5. In case of an injury during a CT to the subject of such trial, complete medical management and compensation should be provided by the firm and details of compensation provided in such cases shall be intimated to the CLA within thirty days of the receipt of recommendations made by EC.
  6. In case of a CT related death or permanent disability of any subject during the trial, compensation shall be provided within thirty days of receipt of the order issued by the CLA. Whereas, the details of compensation provided in such cases should be intimated to the CLA.
  7. A license has to be obtained by the institutions or organizations for manufacturing or importing new drugs or investigational new drugs or for the manufacture of unapproved active pharmaceutical ingredient for the development of any formulation, for a CT, bioavailability, bioequivalence study etc.
  8. The institutions or organizations have to also obtain a license to manufacture or import new drugs for sale or for distribution under the Rules.
  9. No CT can be conducted without procuring a free consent from its participants or study subject. The consent shall be freely given, it should be an informed consent and shall be in written form. It is the duty of the investigator to provide detailed information to the participants both orally as well as by using an information sheet, that too in a language that is understandable by the respective participants.
  10. A written consent from the participants of the CT is mandatory as per the draft rules, the same needs to be taken through an “Informed Consent Form”, the patient information sheet and the informed consent form must be approved by the ethics committee and shall be submitted to the CLA. In case any changes are to be made to the informed consent documents, the same has to be approved by the EC and subsequently shall be submitted to CLA.
  11. In case a participant fails to or is not able to provide his/her consent then a legal representative of the participant can provide the consent or the same may be obtained in presence of witnesses.
  12. Where a CT on paediatrics is been conducted and the participants are unable to provide written informed consent, the consent shall be obtained from the parent or legal guardian. Additionally, paediatric participants should additionally agree to enrol in the CT.
  13. It is mandatory to have an audio-video recording of the informed consent process where vulnerable subjects, CT of New Chemical Entity or New Molecular Entity including procedure of providing information to the subject and his understanding on such consent, shall be maintained by the investigator for record. In cases of anti- HIV and anti-leprosy drugs, only an audio recording of the informed consent process needs to be maintained.
  14. The quality assurance system shall be implemented to ensure that data generated, documented and reported in compliance with the protocol and GCP guidelines, proper implementation of the rules and regulations under the draft CT rules is the responsibility of the Sponsor of the respective CT.
  15. Status report needs to submitted by the Sponsor to ensure that the CT is been conducted as per the prescribed rules and regulations.
  16. Where any serious adverse event occurs at the CT site, the sponsor shall submit a Serious Adverse Event (SAE) report to CLA, it the duty of the Sponsor to submit the SAE after due analysis of the event and shall make the necessary payment for medical management of the participants and the sponsor shall also provide financial compensation for the CT related injury or death (If any).
  17. Post-trial access of the investigational drug shall be provided by the sponsor by providing a drug free of cost to the participants as per the directions of the CLA, and in special circumstances on the recommendations of the investigator and the EC upon taking a written consent of the patient.

Source:

http://www.cdsco.nic.in/writereaddata/Draft%20CT%20Rules%20sent%20for%20Publication.pdf

 

 

 

 

Regulatory update: SEBI – Compensation to Retail Individual Investors (RIIs) in an IPO.

SEBI vide its circular dated 15 February 2018 has directed that RIIs applying for shares in IPO should be compensated if Self Certified Syndicate Banks (SCSB) fail to make the allotment despite of RIIs eligibility.

In order to bring uniformity in the calculation of compensation available to the RIIs, SEBI has stated that the compensation shall be calculated as below:

(Listing price– issue price) *multiplied by* (no. of shares that would have been allotted if a bid was successful) *multiplied by* (probability of allotment of shares determined on the basis of allotment).

Source:

https://www.sebi.gov.in/legal/circulars/feb-2018/compensation-to-retail-individual-investors-riis-in-an-ipo_37864.html