Tag Archives: NovoJuris Legal

An Overview of the Labour Welfare Fund Rules in India

NovoJuris Legal through the presentation available at our SlideShare page analyses the various labour welfare fund rules in India. A short background is provided herein:

There are 16 States and Union Territories which have enacted or adopted the Labour Welfare Fund Act and corresponding Rules. These legislations aim to provide for a Board titled “State Labour Welfare Fund Board” with a fund titled “Labour Welfare Fund”. The important duties of this fund are to grant allowance for pension, maternity, marriage, treatment, education, death etc., to labourers in respective States.

The Labour Welfare Fund (LWF) established by the LWF Boards, mandate three methods through which an employer is required to pay the money into the fund as below:

Methods mandated for Employers to pay monies in the LWF Description
1.     Payment of Unpaid Accumulation Any wages or gratuity or bonus (excluding provident fund contributions and compensation due to injured workmen), which is not paid to the employees for a period of three (3) years will be termed as unpaid accumulation. 

Such unpaid accumulation is to be deposited into the respective State LWF within 30 days from the end of every quarter in a calendar year.

(Example: An ex-employee’s statutory bonus in respect of previous financial year)

2.     Payment of Fines realised All fines realized by way of penalty for any violation of code of conduct by employees are also required to be deposited into the respective State LWF within 30 days from the end of every quarter in a calendar year.

(Example: fines realised by way of deduction of salary for late coming).

3.     Payment of contribution (Employer’s share together with deductions from employee’s share Annual/half-yearly contribution is to be deducted from employee’s salary and paid into the LWF

The consequences of non-payment of fines/contribution: Where any penal interest amount is not provided, the employer is liable to be punished with imprisonment of up to three (3) months or with fine of up to INR 500 (In Punjab/Chandigarh, the penalty is up to INR 5,000).

Kindly go through our SlideShare page to have a detailed understanding of the same.

Disclaimer: The compliances mentioned in this article are subject to the amendments promulgated by respective state governments.



The word ‘secretary’ has originated from the Latin word ‘secretarius’ which means a person who is entrusted with a secret. In the corporate world, a Company Secretary is a person whom every Board member value and when correlated with the literal meaning of the word ‘secretary’, it reflects the confidentiality of the role and the trust that is placed on that position. The trust is built through their competence and it is their honesty, integrity, authenticity, accountability fused with skills, knowledge, experience and performance that make them stand out of the crowd.

Despite having an array of roles in different areas, it is a common belief that the role of Company Secretaries is confined to Company Law alone. However, over the years it has been observed that Company Secretaries have ventured into areas beyond Company Law and have emerged as experts in taxation, financial market services, mergers & amalgamations, etc. Hence, we as professionals should explore beyond our comfort zone and be the experts that we are.

Analysing the Role of Company Secretaries

The role of a Company Secretary is not the typical stereotype of a man or woman who assists a board chair or executive director. The role has evolved from just being a support person to being the ‘trusted advisors’ and the ‘go to experts’ because Company Secretaries understand the law. Company Secretaries have transitioned to one of the key governance positions within a corporation and can help align the Company’s policies, the management functions, various regulatory compliances and the mutual ethics and trust in a Company to achieve corporate growth.

It has been very rightly said that “the profession of Company Secretaries has an important part to play in the introduction of professionalism in the area of corporate management” by Shri P Shiv Shankar, former Minister of Law, Justice and Company Affairs. The Company Secretaries possess the fundamental and distinctive characteristics or qualities of being remarkable professionals that corporates seek. They develop a law-abiding culture and a sustainable framework for the Company wherein a constant watch prevails over the company’s activities. With corporate governance being very prominent in recent times, the role of Company Secretaries has increased multiple folds in achieving the same and also maintain harmony among its stakeholders with respect to compliance simultaneously.

Thus, it is imperative that we discuss the role of Company Secretaries beyond the boundaries of Company Law. Company Secretaries have ventured into areas relating to corporate restructuring, taxation services, capital market related activities, foreign collaborations and joint ventures, international trade and WTO services, labour and industrial laws, intellectual property laws etc. They independently handle such activities and have emerged as experts in these areas.

The one such area that Company Secretaries have mastered now over the years is the field of taxation. Company secretaries are the one who are capable of understanding the dynamics of law and taxation system. Company Secretaries are termed to be masters of law; whether it is in indirect tax laws or the GST law, they were already recognized under the various tax laws and in VAT profiles by various State Governments. It has been often seen that Company Secretaries in Practice, along with providing secretarial compliance services are now tax advisors for corporates too. The advent of the reforms in the tax laws in the country are a welcoming change for professionals as it has expanded the ambit of practice of Company Secretaries particularly. After GST implementation the work area of professionals become wide and they can provide a single window solution to their client. It’s a new tax and a new opportunity. For better administration of new tax regime in the country, it is required to have more and more competent and equipped professionals to facilitate regulators to ensure compliance of various statues and thus help in achieving this ambitious task. The Company Secretaries, who practice in almost all the branches of law and have a strong accounting background, are competent professionals to handle the regulatory compliance under the proposed GST laws. They are skilled professionals who understand legal, financial and compliance dimensions of business entity comprehensively.

It has been also seen that Company Secretaries are speaking on public forums on topics related to Foreign Direct Investment (FDI), Cross-border mergers, Banking regulations, International Trade, Corporate Communications, Public relations, etc. In the Indian corporate set-up, ensuring governance has become a mandate owing to the introduction of various acts, tax reforms and policies by the Government. Also, the role of a Company Secretary becomes very limited when it comes to unlisted and private companies. They are often entrusted with finance and legal work to fill in their working hours. Hence, keeping the practice areas confined to Company Law will result in the stunted professional growth of Company Secretaries. It is important that Company Secretaries are updated about the various economic reforms brought about in the country and broaden their scope of work into different sectors. There has to be a constant effort in staying relevant.

A guide to the Board of Directors of the Company

Apart from being an expert in their own field, it is the ethics and the values that make Company Secretaries distinct as a professional. Being diligent in what they do and responsible for their act makes the company achieve its goals. It is their responsibility to ensure that the company and its directors operate within the law. In simple terms, they are the professionals who act as power boosters for the companies to encourage their plans and ensures its smooth accomplishment with complying all applicable laws in the field. Beyond their normal course of duties, company secretaries provide advice and counsel to the board of directors, company’s shareholders and serve as confidantes.

Company Secretaries are the officers of the company who align various management functions with company policies, ensures compliance of all applicable laws and endeavours to develop mutual trust between various stakeholders for sustainable growth of the company. In addition to providing advice and guidance, they are called upon to create and manage relationships between the different players in the corporate governance system. But how do they act as the guide to the Board? Few attributes that Company Secretaries possess which make the Board of Directors of a Company bank on them, are listed below:

  • Possessing crisp and thorough knowledge of the business environment in which the organization operates as well as of the laws, rules, and regulations that govern its activities.
  • Identifying what and advising why certain corporate governance best practices should be adopted by the organization. This may be as a result of compliance with laws, regulations, standards and codes or because the practices make good operational sense for the organization.
  • Implementing within the organization those best practices through the creation and maintenance of cultures and relationships.
  • Being flexible, creative and detailed, not losing sight of perspective and giving the board and managers a “heads up” about new developments.
  • Having a holistic view of the governance framework and ensuring that this framework and any supporting policies and procedures are clearly implemented by the Company.
  • Being articulate about the decision to be taken and what impact it would have on implementation.

Organizations need to put in place structures, policies, and procedures that comply with best practice. This on its own is compliance and doesn’t create good governance. For good governance to be present, the people who work in the organization need to apply or practice these structures, policies, and procedures to create a culture within the organization that enables them to work effectively. This, in turn, leads to the organization being successful. For example, compliance is putting in place a code of ethics; governance is about creating an ethical culture.

A good Company Secretary should be able to assist the organization with identifying what should make up the correct infrastructure for each organization. In addition, and some would say more importantly, once the correct infrastructure has been identified, the Company Secretary should be able to assist the organization with the creation of the culture and the relationships required to ensure that the infrastructure is implemented, managed, and maintained effectively for the success of the organization. Hence, as professionals, it is a constant endeavour to develop themselves to be better at their job and have the knowledge to be able to guide not only the Board of Directors of a Company but also each individual who help run the show.

Whatever type of organization the Company Secretary works for, he or she usually plays a valuable role as a “bridge” for information, communication, advice, and arbitration between the board and management and the organization and its stakeholders, including its shareholders. The Company Secretary can, among other things, help management understand the requirements of the board, help the board understand the challenges faced by management in meeting the requirements of the board, and help the organization manage stakeholder relations.

In the light of economic developments in recent years stakeholders of companies, are increasingly concerned with the conduct of the affairs of the company and therefore it is essential that best practice is adhered to at all times and evidence is available to demonstrate the same. Thus, Company Secretaries have to ensure that the decisions taken by the Board and the management are transparent and the society is benefited from those decisions ultimately. Thus, Company Secretaries are the professionals, who are responsible for the Company’s actions. The onus of educating the Directors about the law, the ethical aspect of abiding the law and finally taking the decisions legally and ethically, is on the Company Secretaries. They are the watchdogs of a Company who are constantly updated about the changes in legislation and educating the Directors and management of the Company about such changes. Simply put, Company Secretaries should have a proactive approach rather than a reactive one.

Skills to be a Professional

It is apparent that Company Secretaries are required to have a thorough knowledge of the law. That is how they are the experts in what they do. But it should also be noted that merely having the knowledge is not enough as professionals. There are certain soft skills that they should possess to shape them as one of the best professionals in the country. Few have been listed below:

  1. Reliability: A person should be consistent in his or her job, for the organisation to rely on their advice. Being confident and delivering accurate results every time is a sign of consistency. The professional should be dependable because someone else’s work will be impacted by his or her actions.
  2. Quality Work: Delivering quality work every single time is what is expected of a Company Secretary. This includes accuracy and in-depth knowledge about their field of work as well as providing practical support to the Board.
  3. Depth of knowledge: The profession of a Company Secretary requires them to be constantly updated about the changes in laws. Increasing their knowledge makes them the expert in what they do. It is a constant learning process.
  4. Accountability: Being a professional it is their duty to be accountable for their work. They are entrusted with responsibilities and thus are expected to take up ownership for their job.
  5. Leadership: Being accountable is the path to leadership. It is a quality that a professional should possess to excel in their job.
  6. Integrity: Professionals are known by their integrity. Keeping moral principles intact and being ethical are the key factors of being country’s one of the best professionals.
  7. Diligence: A professional should show diligence in his/her work. One should make utmost effort to execute their responsibilities with care because that is what they are expect of. They should be thorough in their job.
  8. Communication: Company Secretaries serve as a link between the Company, the Board of Directors and other stakeholders. Hence, communication is important to ensure that the gap is bridged between the Company and its stakeholders.
  9. Time Management: Timeliness might seem simple, but it is one of the most important qualities in a professional.
  10. Flexibility: The law is changing every day and as professionals Company Secretaries should also be adapt the change. This profession requires flexibility and the willingness to change.
  11. Confidentiality: The information acquired by Company Secretaries during the course of their employment in an organisation is strictly confidential. It is of utmost importance that he or she does not disclose it or misuse it in any manner whatsoever.
  12. Independent: The professional should possess skills to independently handle the work responsibility they are entrusted with.

It is a great deal of responsibility that Company Secretaries carry on their shoulders. Thus, it is imperative that they as professionals grow constantly. There always exists a burden on these professionals to keep themselves updated and motivated to learn and also nurture their skills as they are among the most valued professionals in terms of importance and impact.

Concluding Thoughts

As a professional, Company Secretaries handle multiple roles. The are one of the Key Managerial Personnel of the Company who carries a huge responsibility on their shoulders and have immense responsibility towards the nation. They contribute in several areas such as Direct and Indirect Taxation, Corporate governance, Arbitration & Conciliation, Corporate Communication & Public Relations, Human Resources, Corporate Laws, Corporate Administration, Foreign Exchange matters, Board and shareholders meetings, Corporate Compliance Management, Stock exchanges and Listing agreement, Mergers and Amalgamations, Arbitrations and Reconciliation and many more. With each passing day, this profession is commanding respect not only in the corporate sector but is well regarded by other professionals as well as by governmental authorities and agencies concerned with corporate governance in India.

Company Secretaries possess the power to influence the nations’ corporate governance framework, so to abide the law in letter and spirit by all the professionals would become a boon for the country and give rise to well-governed business boosting the economic sector, helping the nation towards rapid economic growth. Seeing the factual and today’s scenario there is a lot of scope for Company Secretaries in India and the possibility of future growth is high as the demand of corporate governance is rising. Thus, the role of Company Secretaries shall increase multiple folds owing to the compliance requirements getting stricter in the years to come.

Author: Alivia Das Senior Associate, NovoJuris Legal

This article was first published in the ICSI Charted Secretary Journal – March 2019 issue.

Regulatory Update: MCA amends Incorporation Rules in relation to Shifting of Registered Office and Incorporation fee for companies

As part of Government’s efforts to make India a startup hub and continuous efforts of ease of doing business in India, the Ministry of Corporate Affairs (the MCA) has issued notification dated 6 March 2019. With this notification following changes will come into effect:

Sl No Category Before Amendment After Amendment Effect of this amendment
1. Shifting of Registered Office from One State to Another The Companies desirous to shift their Registered office from one state to another state shall advertise the notice of shifting the registered office in a vernacular newspaper in the principal vernacular language in the district and in the English language in an English newspaper with the widest circulation in the State in which the registered office of the company is situated.





The Companies desirous to shift their Registered office from one state to another state can advertise the notice of shifting the registered office in a vernacular newspaper in the principal vernacular language in the district and in the English language in an English newspaper with the wide circulation in the State in which the registered office of the company is situated.



This will remove the confusion among the stakeholders with respect to publication of notice in the newspaper and they can choose the newspapers with minimum circulation as well.


Prior to amendment if any Company choose to publish in 2nd widest circulation newspaper, then the application would be rejected and this entails to start shifting process a fresh and this would take additional 3-5 months to complete.


With this relaxation, companies can choose among various newspapers which has wide circulation.

2. Fee on Incorporation of a Company The companies incorporated with a nominal capital of less than or equal to rupees ten lakhs, fee on INC-32 (SPICe) shall not be applicable. The companies incorporated with a nominal capital of less than or equal to rupees fifteen lakhs, fee on INC-32 (SPICe) shall not be applicable with effect from 18 March 2019. Earlier the Companies with initial authorised capital up to INR 10 lakh was exempted from any MCA fee on Incorporation and only stamp duty was applicable.


Now the exemption limit has been increased to INR 15 lakh. Therefore, Companies to be incorporated with nominal capital up to 15 lakh is exempted from MCA fee and stamp duty shall continue to be applicable.


Source: http://egazette.nic.in/WriteReadData/2019/199251.pdf

M&A through Share Swap/Stock Swap Arrangements


A share swap arrangement signifies issuance of a share in exchange for a share rather than remittance of cash consideration. Share Swap arrangements occur when shareholders’ ownership of the target company’s shares is exchanged for shares of the acquiring company as part of any restructuring.

For instance, two companies, A and B, come together to form company C. If the two companies enter into a Share Swap Arrangement, the shareholders of company A can be given shares of company C for every share of company A that they owned. A similar arrangement can be made for company B as well. Now, if such an arrangement occurs between companies wherein the Indian parties are shareholders of the Indian company and the other company is a foreign company, the arrangement would attract both regulations prescribed under the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (the ODI Regulations) and the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (the FDI Regulations).

Share Swap arrangements can be useful mechanisms to raise investment in the case of an externalisation plan. Externalisation plans involve promoters of Indian entities moving their holding entities outside India (in case more information about externalisation is required, refer to our article on externalisation schemes, which can be accessed at https://novojuris.com/2018/06/24/ externalisation-many-Indian-startups-are-choosing-to-have-their-holding-entity-outside-india/).

In such scenarios, both FDI Regulation and ODI Regulations become applicable owing to the fact that there is a transfer of shares of an Indian company to a person resident outside India and there is an acquisition of shares of a Foreign Company by a resident Indian in the manner. Therefore, an adherence with the applicable FDI Regulation and ODI Regulation is required for the share swap arrangements.

Implications under FDI Regulations

The FDI Regulations would be applicable in the case of a share swap arrangement where any one company to the transaction is non-resident and the transaction becomes eligible to be governed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 and Foreign Direct Investment policy (“FDI Policy”) issued by the Department of Industry Policy and Promotion every year. A key thing that has to be kept in mind is that as per the FDI Regulation, the price of shares offered should not be less than the fair market value of shares valued by SEBI registered Merchant Banker.

Reporting Requirements

The FDI policy provides primarily for two types of reporting mechanisms:

  1. one through the filing of an FC-TRS (Foreign Currency- Transfer of Shares) Form by the Indian company which becomes applicable in the case of transfer of shares, where one party is a non-resident and another one being a resident Indian; and
  2. second being through the filing of an FC-GPR (Foreign Collaboration- General Permission Route) Form by the Indian company which becomes applic`able in the case of allotment of-of shares by an Indian Company to a person resident outside India.

General permission has been granted to non- residents to acquire shares from Indian shareholders under swap arrangement, provided that the price of shares offered is not less than the fair market value of shares valued by SEBI registered Merchant Banker. However, in the case of share swap arrangement between the entities whose sector is under Government approval route, prior approval would be required.

Implications under ODI Regulations

As mentioned above, the ODI Regulations would be applicable in the case of a share swap arrangement where any one company to the transaction is non-resident. In case of share swap arrangement under externalization, the shareholders of Indian company who are resident Indians would acquire shares of the foreign company in exchange for their shares of the Indian company. The share swap arrangement under the ODI Regulations would fall under the automatic route unless otherwise prescribed under FDI Regulation. The arrangement would also be subject to the sectoral caps and entry mechanisms as applicable under the FDI Regulation and approvals from the relevant ministries.

Reporting Requirements

The resident Indian shareholders of an Indian company would be required to file Form ODI with the Authorised Dealer Bank for reporting the share swap arrangement. The Form is required to be submitted to the RBI within 30 (thirty) days of making the share swap.


From a regulatory standpoint, the key question which is not clear is whether the share swap arrangement would fall under general permission category of ODI Regulation & FDI Regulation or under the Government approval. While the respective regulations are clear that prior approval is needed only in case if the sector is under approval route as per FDI Policy and FDI Regulation. However, practically it has been seen that the Reserve Bank of India on case to case basis, has insisted upon such prior approval requirement. There is a need for better clarification or notification from the Reserve Bank of India.

Additionally, it is pertinent to note that the ODI Regulation mandates for prior approval of the Foreign Investment Promotion Board (FIPB) which has been abolished in 2017. Now, in case any such approvals are required, the proposals will be scrutinized and cleared by sector-specific departments concerned.

Authors: Mr Spandan Saxena and Mr Ashwin Bhat

Regulatory Update:Notification of Regulations For Civil Use Of Remotely Piloted Aircraft System (RPAS)

The Ministry of Civil Aviation on 27 August 2018 by way of a Press Note released the Drone Regulations 1.0 in the furtherance of enabling safe, commercial usage of drones effective from 1 December 2018. The Press Note provides for the setting up of a Drone Task Force under the Chairmanship of the Minister of State to provide draft recommendations for Drone Regulations 2.0.

The Office of the Director of Civil Aviation furthermore released a detailed document containing requirements for the operation of RPAS on 29 August 2018.

The Regulations provide for an online platform for registering and operation of drones by the name of the Digital Sky Platform. This platform is designed to be an unmanned traffic management (UTM) platform which can be operated through a mobile application and users will be required to seek permission on this application. The request for use of drone would be processed by an automated algorithm and the request would be subjected to acceptance or refusal almost immediately.

These Regulations implement the policy of no usage without registration. Every drone user would be required to register their drones and a Unique Identification Number (UIN) would be generated against such registration. This registration would be in regard to the drone and not the user. The user would be required to seek permission to use the drones before every instance of usage.

Under the Regulations RPAS have been categorised into 5 categories based on their maximum take-off weight:

  1. Nano :       Less than or equal to 250 gm
  2. Micro :       Greater than 250 gm and less than or equal to 2 kg.
  3. Mini :       Greater than 2 kg and less than or equal to 25 kg.
  4. Small  :        Greater than 25 kg and less than or equal to 150 kg.
  5. Large :       Greater than 150 kg

The requirement for seeking permission for use of RPAS systems does not apply for drones falling under the nano category. The UTM would operate as a traffic regulator in the drone airspace and would co-ordinate closely with defence and civilian air traffic controllers to prevent unauthorised flights and to ensure that drones remain on approved flight paths.

Additionally, an Unmanned Aircraft Operator Permit would be required by RPA operators. The requirement to obtain this permit does not apply in the case of nano RPAS operating below 50 feet, micro RPAS operating below 200 feet and for RPAS owned by the NTRO, ARC or Central Intelligence Agencies. However, micro RPAS operators would be required to provide an intimation to their local police station at least 24 hours prior to usage. In regard to usage by agencies, they would be required to provide an intimation to local police stations and ATS units prior to usage.

For all RPAS other than those falling under the nano category, the mandatory equipment required for operation are:

  1. Global Navigation Satellite System (GPS)
  2. Return-to-home
  3. Anti-collision light
  4. ID plate
  5. Flight controller with flight data logging capability
  6. Radio Frequency Identification (RFID) and SIM/ No Permission No Takeoff

In addition, RPAS are under a requirement to operate within visual line of sight, during the day and only upto a maximum altitude of 400 feet. The Regulations also demarcate the permissible zones for operation of drones. The zones have been categorised into three categories:

  1. Red Zone: operation of drones not permitted
  2. Yellow Zone: this is a controlled zone and operation of drones would be subject to prior approval. For operation of drones in this zone, filing of flight plans and obtaining Air Defence Clearance/ Flight Information Centre number would be necessary.
  3. Green Zone: this would form the uncontrolled airspace with an automatic permission for operation of drones.

The Regulations also define No Drone Zones which would cover the following areas:

  1. Radius areas of 5 kms from airports
  2. Within a radius of 50 km from the international borders
  3. Within a radius of 5 km from Vijay Chowk
  4. Buildings such as State Secretarial Complex in State Capitals, strategic and military installations

The enforcement actions provided for include:

  1. Suspension or cancellation of registration or permit
  2. Penalties under the Aircraft Act, 1934 or Aircraft Rules
  3. Penalties under Indian Penal Code

Source: https://pbs.twimg.com/media/DlmxNbvU8AA1II-.jpg



Mauritius: A Prime Financial Center for FPI Investments in India

 A. SEBI Circular Letter Dated 10 April 2018

On 10 April 2018, the SEBI, issued a circular titled ‘Know Your Client Requirements for Foreign Portfolio Investors (FPIs)’ clarifying its position on the concept of identification and verification of Beneficial Owner of an FPI (BO). The Circular fell as a death knell to NRIs (Non-Resident Indians), PIOs (Persons of Indian Origin) and OCIs (Overseas Citizens of India) who are BOs of FPIs by imposing a blanket restriction on the eligibility of such category of persons to make investments as FPIs. In essence, the Circular retains the concept of controlling ownership interest and control basis for identification of BOs. Hence, in case of a company, the BO is identified as per the materiality threshold of 25%, and in case of other entities such as a partnership firm or trust, the threshold stands at 15%. As for “high-risk jurisdictions,” a lowered materiality threshold of 10% is applicable.

It is now expected that SEBI will review its position on the BO construct by excluding PIOs and OCIs from the Beneficial Ownership restrictions imposed by the April Circular. However, no official confirmation to that effect has been obtained yet. In any event, while the intent of the Circular is to curb the evils of money laundering and round-tripping of funds, NRIs who currently hold significant interest in Indian equities and coming in as FPIs or through offshore funds, may get affected as from 10 October 2018 which is the deadline for existing FPI structures to rejig their operations and comply with the new requirements.

B. Mauritius not a High-Risk Jurisdiction

According to certain media reports, SEBI had requested custodian banks to prepare a list of such high-risk jurisdiction and among the names submitted were China, Cyprus, UAE and more significantly Mauritius. However, pursuant to a high-level discussion between the Mauritius Financial Service Commission and SEBI, it was subsequently confirmed that SEBI is neither working on nor contemplating to produce any list at its level, which will identify Mauritius as a High-Risk jurisdiction. At this meeting, the FSC received the comfort that SEBI acknowledges all initiatives undertaken by Mauritius to ensure full adherence to best international norms and practices with respect to regulatory oversight and enforcement. (vide https://www.fscmauritius.org/media/54904/fsc-issues-communique-high-level-discussions-between-the-financial-services-commission-fsc-and-the-securities-and-exchange-board-of-india-sebi.pdf).

C. Mauritius, still attractive for FPI?

The Mauritian legislations caters for structures which allow domestic funds to invest into another fund established in another jurisdiction. The core traits of such type of structures are to invest in a portfolio that contains different underlying assets instead of investing directly in bonds, stocks and other types of securities.

The prevailing Acts and Regulations contain provisions for the structuring of Fund of Funds where the concept relates to a feeder fund whose main role is to pool funding from worldwide investors and then inject the capital amount into a master-feeder fund domiciled outside Mauritius, for instance, an Alternative Investment Fund (Category 1) established in India. Under such equation, the AIF will be subject to Indian regulations and will ventilate the money received from the Feeder Fund in Mauritius into short-term and/or long-term investments.

The Mauritian framework and regulations also offer the possibility to incorporate a multiclass Fund. Such Fund is well reputed to invest under the FPI route and meet the definition of a broad-based fund under the SEBI regulations. The regulations in Mauritius are flexible enough to formally register a Fund with multiple sub-fund where segregation of assets and liabilities can be done under the creation of sub fund for each type of investors and underlying investments. Provided that some conditions are met, this Fund can apply for FPI license and engaged in investment activities in quoted securities and/or private equity investments.

Investments in securities:

Quoted investments made through the FPI route in India are now subject to tax following the Treaty re-negotiation. It is to be noted that income from the sale of shares is characterized as capital gains and at present, FPIs enjoy the benefits of the capital gains provisions under the India-Mauritius DTAA.  While there is a zero percent rate applicable on gains arising out of shares that are listed and sold on a recognized stock exchange if such shares are held for more than 12 months, capital gains arising out of investments are subject to a tax rate of 15% (exclusive of applicable surcharge and cess) if such shares are held for less than 12 months i.e. short-term capital gains. During the Transition Period (1 April 2017 – 31 March 2019), and subject to the satisfaction of the limitation of benefits clause, this rate may be reduced to 7.5%. Hence, while short-term capital gains have been affected by the treaty re-negotiation, long-term investments in shares of listed Indian Companies are not affected by the DTAA amendment and continue to enjoy the treaty benefits. The above should be read in light of recent legislative changes brought to the (Indian) Income Tax Act which extends the scope of capital gains taxation to gains on the transfer of a long-term capital asset with effect from 1 April 2018. While the amendments to the taxation of LTCG would not affect transfers made on or before 31 March 2018, the impact on securities acquired on or after 1 April 2017 and transferred on or after 1 April 2018 would be taxable at the maximum marginal rate of 10.92% of gains arising from the transfer of these securities. In the latter case, gains arising from sale or transfer of long-term equity shares shall be taxable at the rate of the 50% of the prevailing domestic (Indian) tax rate under the DTAA, that is, 5.82% plus applicable charge and cess for shares acquired after 1 April 2017 and sold before 31 March 2019. As for shares sold post 31st March 2019, the full domestic rate will apply.

In a nutshell, it is posited that the modification on capital gains taxation is limited to gains arising on sale of shares. This ensures continuity of benefit to other instruments and also provides much-needed certainty in respect of the position of the India-Mauritius DTAA. Mauritius still retains its attractiveness as far as channeling of foreign portfolio investments is concerned, the more so that other alternative structures are being constantly explored so as to offer wider options to investors.

Debt Investment:

Mauritius accounts for the highest level (about 16%) of total foreign portfolio inflows in India after the US. It is considered as an inexpensive and a favourite route for many NRI and PIO investment managers. Furthermore, it is not gainsaid that following the re-negotiation of the India-Mauritius DTAA in 2016, Mauritius still remains a competitive jurisdiction for making debt investments through the FPI route in listed securities either on the primary or secondary markets in India.

Essentially, a foreign investor investing in debt instruments could earn the following incomes from investments in India: either (a) gains arising from sale / transfer of securities held in Indian companies or (b) interest income.

It has been clarified that any gains arising to an FPI from the sale of securities (equity or debt) held in Indian companies will be characterized as ‘capital gains.’ Under the India-Mauritius DTAA, if the gain from the alienation of debt instruments (compulsorily, optionally and non-con­vertible debentures), other than redemption premium, is treated as ‘capital gains’, such instruments shall only be tax­able in Mauritius, which is beneficial as Mauritius does not levy a tax on capital gains.

As for interest income, the Protocol provides that all Mauritius entities including banks earning interest income from Indian sources will now be required to pay tax at a rate of not more than 7.5% of the gross amount of interest provided that the Mauritius entities are the beneficial owners of such interest income.  Furthermore, in case the domestic (Indian) tax rate is lower than 7.5%, then it is the domestic rate which will be applicable. Based on the above analysis, it can be said that for now, Mauritius is certainly the preferred route for investing in the debt market in India and now emerges as the preferred jurisdiction for debt investments consider­ing the lower withholding tax rates for interest income as well as the capital gains tax exemption, as compared to such other jurisdictions as Singapore (15%) and Netherlands (10%).

D. Benefits of Using Mauritius

Mauritius has built a solid reputation of being a jurisdiction of substance internationally. Supported by its legislative framework and financial services infrastructure, Mauritius offers an ideal platform for investments around the globe with a focus on Africa and Asia including India.

While the current fiscal advantages will play a major role in the choice of jurisdiction for a cross-border investment, they are not the only factors which should be taken into account. Mauritius is considered as one of the most reputable offshore financial centers in the world, for a number of reasons including:

  1. well established administrative infrastructure for setting up and operating special purpose vehicles;
  2. a well-established rule of law founded on the Common and civil law;
  3. its modern and flexible company legislation which is based on the Anglo- Saxon laws;
  4. compliance with anti-money laundering laws and international standards;
  5. Mauritius has never been blacklisted internationally by any of the OECD, FATF or UN;
  6. the long-term commitment and support of the Mauritius government in the development of the financial services sector;
  7. its political stability and a free market economy;
  8. several Investment Protection and Promotion Agreements which have been signed in order to safeguard investors business and assets;
  9. the relatively low cost of services compared to other jurisdiction;
  10. Unlike such offshore jurisdictions like Singapore which does not have any specific corporate structures that are geared towards investment funds, Mauritius has a variety of corporate structures which can be used to channel foreign portfolio investments, including for example Expert Fund or Professional CIS regulated by the Financial Services Commission;
  11. an educated and bilingual workforce;
  12. good international telecommunications services;
  13. Presence of the Mauritius FSC Representative Office in Mumbai as a key point of contact for SEBI; and
  14. a convenient time zone location which allows for the conduct of business in the Far East in the morning, Europe during the early afternoon and the United States, later in the day

E. What Next?

Mauritius has been undoubtedly a vibrant International Financial Centre during the last 25 years. Its strategic location, its stable socio-political environment, its business-conducive framework, it’s well-established and yet competitive regulatory framework, and its connectivity and openness to the rest of the word makes Mauritius an attractive hub for financial services and capital raising, linking Asia/Europe/USA to Africa. With more challenges ahead and investors seeking for long-term visibility, new legislative changes have been brought by the Finance (Miscelleneous Provisions) Act 2018 to the global business sector in order to bring more certainty, clarity and harmonisation to the treatment of foreign investors and cross-border investments alike. Mauritius is now gearing itself towards becoming a leader in the African region and beyond. Policy makers are presently in the process of elaborating a 10 year ‘Blueprint’ for the Financial Services sector, which will make significant in-roads into existing and new activities which Mauritius has to offer from its jurisdiction.

This Article is authored by our Mauritius partner Anex Management Services Limited, licensed by Mauritius Financial Services Commission and having more than 20 years of experience in providing incorporation, accounting, compliance and administration services to global business entities in Mauritius.

Post Formation Compliance Requirements for Alternative Investment Funds (AIFs)

AIFs are privately pooled investment funds in India, typically set up in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP). Please see our previous post to read more on a brief introduction to AIFs.

As per the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (the ‘AIF Regulations’), an AIF can be registered in one of the following three categories:

Categories Particulars Type Tenure
Category I Mainly invests in start-ups, SME’s or any other sector which Govt. considers economically and socially viable. Close Ended Determined at the time of application which shall be minimum 3 years.
Category II Private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator Close Ended Determined at the time of application which shall be minimum 3 years.
Category III Hedge funds or funds which trade with a view to making short-term returns or such other funds which are open-ended and for which no specific incentives or concessions are given by the government or any other Regulator. Open Ended or Close Ended No specific tenure


Reporting Mechanism

For proper adoption of the AIF regulations, 2012 the Securities and Exchange Board of India has issued the Operational, Prudential and Reporting Norms for Alternative Investment Funds vide its Circular No. CIR/IMD/DF/10/2013 dated 29 July 2013. Furthermore, in order to ensure conformity with the operational guidelines, the SEBI introduced the “Guidelines on disclosures, reporting and clarifications under AIF Regulations” vide its Circular No. CIR/IMD/DF/14/2014 dated 19 June 2014.

Following are the reporting obligations for all categories of AIF:

  1. As per Regulation 28 of the AIF Regulations, periodical reports (with respect to funds raised, net investments by the AIF, leverage undertaken if any, exposure, categories of investor, etc) shall be submitted by all AIFs to the SEBI with respect to their activity.
  2. Category I and II AIFs and Category III AIFs that do not undertake leverage shall submit a quarterly report with the SEBI as per the Annexure I.
  3. Category III AIFs undertaking leverage shall submit a monthly report with the SEBI as per Annexure II.
  4. As per the Circular No. CIRCULARSEBI/HO/IMD/DF1/CIR/P/2017/87 dated 31 July 2017 the aforementioned reports shall be submitted through the SEBI Intermediary Portal at https://siportal.sebi.gov.in
  5. Such reports shall be submitted within 7 calendar days from the end of the quarter/end of the month as the case maybe.

Further, all AIFs have to comply with the requirements of preparation of a Compliance Test Report (CTR) as laid down below:

  1. At end of financial year, the manager of an AIF shall prepare a compliance test report on compliance (an exhaustive reporting of the AIF’s activities) with AIF Regulations and circulars issued thereunder in the format as specified.
  2. In case of the AIF is a trust, the CTR shall be submitted to the trustee and sponsor within 30 days from the end of the financial year. In the case of other AIFs, the CTR shall be submitted to the sponsor within 30 days from the end of the financial year.
  3. In case of any observations/comments on the CTR, the trustee/sponsor shall intimate the same to the manager within 30 days from the receipt of the CTR. Within 15 days from the date of receipt of such observations/comments, the manager shall make necessary changes in the CTR, as may be required, and submit its reply to the trustee/sponsor.
  4. In case any violation of AIF Regulations or circulars issued thereunder is observed by the trustee/sponsor, the same shall be intimated to SEBI as soon as possible.

Apart from the aforementioned reporting requirements, Category III AIFs have to comply with certain other reporting and compliance norms.

Risk Management and Compliance requirements for Category III AIFs employing leverage

Category III AIFs that employ leverage have to comply with the following risk management requirements:

  1. The AIF should have a comprehensive risk management framework along with an independent risk management function which shall be appropriate to the size, complexity and risk profile of the fund.
  2. Presence of a strong and independent compliance function appropriate to the size, complexity and risk profile of the fund. The same shall be supported by sound and controlled operations and infrastructure, adequate resources and checks and balances in operations.
  3. Appropriate records of the trades/transactions performed shall be maintained and such information should be available to SEBI, whenever sought.
  4. Full disclosure and transparency about conflicts of interest should be made to the investors. Further, how such conflicts are managed from time to time shall also be disclosed in accordance with Regulation 21 of the AIF Regulations and any other guidelines as may be specified by SEBI from time to time. The details of such conflicts shall be disclosed to the investors in the placement memorandum and by separate correspondences as and when such conflicts arise. Such information shall also be disclosed to SEBI as and when required by SEBI.

Redemption Norms for open-ended Category III AIFs

  1. The Manager of these AIFs should ensure that there is a sufficient degree of liquidity of the scheme/ fund so that it meets redemption obligations and other liabilities.
  2. The Manager shall establish, implement and maintain a liquidity management policy and process so that the liquidity of the various underlying assets is consistent with the overall liquidity profile of the fund/scheme while making any investment.
  3. The Manager shall disclose any possibility of suspension of redemptions to the investors in the placement memorandum
  4. Suspension of redemptions shall be justified by the Manager only if such suspension is in the best interest of the investors of the AIF or if such suspension is required under the AIF regulations or SEBI
  5. Operational capability shall be built by the Managers of such AIF so that redemption can be suspended in an efficient manner. No new subscriptions shall be accepted during the suspension of redemptions.
  6. The Manager shall communicate to SEBI the decision of suspension along with the reason for such suspension and the same shall be appropriately documented.
  7. The Manager shall review the suspension regularly and take all necessary steps to resume operations in the best interest of the investors.
  8. It shall be the duty of the Manager to keep the SEBI informed about the actions undertaken throughout the suspension and also the decision to resume normal operations.

Category III AIFs undertaking leverage shall have to comply with the prudential requirements (calculation of leverage, total exposure, etc) as laid down in the Circular.

Compliance requirements in case of breach of leverage limits for Category III AIFs

Category III AIFs shall ensure that adequate systems are in place to monitor their exposure so that the leverage does not exceed at any time beyond the prescribed limits. The AIF shall report to the custodian on a daily basis the amount of leverage at the end of the day (based on closing prices) and whether there has been any breach of limit. Such reporting shall be done by the end of the next working day (as per Circular No. CIR/IMD/DF/14/2014 dated 19 June 2014).

Reporting requirements in case of breach of limit:

  1. AIF shall send a report to the custodian in case of any breach of limit. The custodian shall report to SEBI providing a name of the fund, the extent of breach and reasons for the same before 10 A.M. on the next working day.
  2. A report shall be sent to all the clients stating that there has been a breach in the limit along with reason, before 10 A.M. of the next working day
  3. The AIF shall square off the excess exposure and bring back the leverage within the prescribed limit by end of next working day. However, an action may be taken by SEBI against the AIF under SEBI (Alternative Investment Funds) Regulations, 2012 or the SEBI Act.
  4. A confirmation of squaring off of the excess exposure shall be sent to SEBI by the custodian by end of the day on which the exposure was squared off.

Author: Ms. Alivia Das