COMPLIANCES GALORE - FOR INDIAN LISTED COMPANIES

In the name of protection of investors, here is another salvo from the Ministry of Corporate Affairs (MCA). With effect from September 7, 2016, an Investor Education and Protection Fund Authority has been constituted under the Investor Education and Protection Fund Authority Rules, 2016. The Authority will have the responsibility to maintain the Fund and do other related acts. And the companies, on their part, have to follow the Rules with respect to unclaimed and unpaid shares in respect of the dividends which have remained unclaimed for the past seven years continuously. It’s as simple as that.

Or is it? Simple, I mean. Of course not. When the regulator is stepping in, things and business cannot remain simple. There are plethora of rules to comply with, deadlines to be met, statements and returns to be filed, investors to be chased and if you dare to blink and miss, you get penalized.

Well, coming back to the Investor Education and Protection Fund (IEPF) which has been proposed, but yet to be set up under the Companies Act, 2013 wherein the companies would transfer all unclaimed/unpaid shares and dividends for distribution to innocent investors who lose their money by investing in illegal or unlawful funds. The Government would also deposit all disgorged amounts to the IEPF. Interestingly, the Authority has been constituted but the Fund itself is yet to be set up.

The companies have to traverse a detail path in order to transfer the unclaimed/unpaid shares and dividends under the IEPF Rules. First, the companies have to identify such shares with respect to unclaimed dividends, within a period of 90 days after holding its AGM, and every year thereafter, for a period of seven years. Once these amounts are identified, it has to prepare a statement and upload it on its own website and on the website of the IEPF through the prescribed forms for this purpose. The Company Secretary of the company has been assigned this task.

At the completion of seven years, the company has to notify each investor whose dividend has remained unclaimed for seven years. Mind you, the company cannot transfer the funds to the IEPF unless the shareholder has been notified and informed 90 days in advance from the date of transfer. The detailed step-wise procedure for such notification to the shareholder has been provided in Rule 6 of the IEPF Rules, 2016. Let us see what the steps entail:-

1.       Shareholder has to be informed at the current available address;

2.       A notice has to be published in the newspapers in English and regional language having a wide circulation;

3.       Publish information of all such share and their beneficiaries on the company’s own website.

After all this, if the shares and dividends still remain unclaimed, the companies have to transfer the amounts to the IEPF. Any non-compliance with the Rules and the procedures attracts a penalty of minimum five lakh of rupees going upto a maximum of 2 lakh rupees and the officer responsible for the compliance shall be penalized separately up to a maximum of five lakh rupees.

The most interesting aspect of these Rules is that if the concerned shareholder decides to suddenly become aware, after a period of seven years, of his rights as a shareholder and the fruits he was supposed to reap from the investments he had forgotten he had made, he can claim them from the IEPF Authority by simply filling up a form and paying some fee. And the company shall, after verifying his credentials, be obligated to disburse the shares and the dividends earned on those shares.

It is agreed that the poor gullible innocent investors need to be protected from the bad wolves, that is, the companies. At the same time, the investors also need to be educated and careful of their belongings and possessions. The companies bear so much cost in terms of employing resources to maintain and record all the information and seven years is a long time. In my personal opinion, after seven years all unclaimed shares and dividends ought to be forfeited and all claims ought to be rejected, except under most special and genuine circumstances.

Not surprisingly, as a corporate lawyer, I caution my clients to ponder and think at least a dozen times before they are serious about incorporating a company and not less than a hundred times before they would like to see their company listed on one of the national stock exchanges. Because it’s easier to incorporate a company, somewhat arduous to list, but without a doubt, almost impossible to remain fully compliant year after year.

An afterthought - shouldn’t the government also move its hawk-eye to vanishing and fly-by-night companies? What about the money lost by investors in IPOs raised by such companies who just disappear after collecting huge amounts?

Ciao!!!

Ruchira Gupta

India-Mauritius Double Tax Avoidance Treaty Amended

“The protocol for amendment of the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius was signed by both countries on May 10 at Port Louis, Mauritius,” the Finance Ministry of the Government of India said in a statement.

This is a much needed amendment to the India-Mauritius Double Tax Avoidance Agreement (“the Treaty”). This bilateral agreement earlier provided that the capital gains tax on sale of securities in India can be taxed only in Mauritius. The laws of Mauritius, on the other hand, provided zero tax under certain conditions. Hence, the Mauritius route to Indian capital markets was the most preferred and profitable route for foreign investors.

The statement further said, “The protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.”

Under the new protocol, capital gains arising from sale of shares of Indian resident companies acquired after April 1, 2017 will be taxed in India. This will apply to Singapore based companies also.

A transition window has been provided to the companies before the rules kick in. The following is the broad framework:-

·       Presently, under the Treaty, India does not tax capital gains on sale or transfer of shares of Indian-resident companies by Mauritius-resident companies.

·       From April 1, 2017 to 31^st March, 2019, companies based in Mauritius and Singapore will pay capital gains tax @50% of the domestic tax rate. For example, if the current rate is 15%, the companies shall pay only 7.5%.

·       After April 1, 2019, the companies will have to pay full tax.

·       The benefit of tax at half the domestic tax rate will be given under special conditions of passing the main purpose test and bonafide business test.

·       In case the expenditure of a company resident in Mauritius is less than Rs. 2,700,000 in the immediately preceding 12 months, it will be considered as a shell company.

·       Not only capital gains tax, there is a witholding tax of 7.5% on interest income arising in India in respect of claims and loans to the banks resident in Mauritius. This will be triggered from April 1, 2017.

Increased cooperation between India and Mauritius is envisioned with respect to exchange of information and collection of taxes, among other things.

Non-Resident Indians (NRIs), FATCA and FBAR

Every non-resident Indian (NRI) resident in United States of America (US or USA) has an obligation to timely file true and accurate returns and forms to IRS. Any non-compliance may invite penalties or even criminal prosecution.

To give effect to FATCA, Indian financial institutions will either seek self-certification from the NRIs about their status. In case the NRIs have US indicia, the institutions will ask them to provide Form W - 9 which apart from other details have provision for disclosing US TIN. All these details will be reported by the financial institution to Indian tax authorities which will share it with IRS.

The financial institution will also, on an annual basis share the details about the value of the account maintained by NRI as on December 31. Thus, an NRI’s income in India will get reported to IRS by the Indian financial institutions. Since, US follows a world-wide income tax concept and the DTAA between India and US mostly provides for taxation of the income by both the countries, it becomes mandatory to disclose all such income in the income tax return filed with IRS. Of course, it is open to them to off-set the income tax liability in the US by the amount of income tax already paid in India.

American residents are already required to annually file Foreign Bank Accounts Report (FBAR) to the Department of Treasury. FBAR is to be filed when a US person has a financial interest in or signature authority over foreign financial accounts if the aggregate value of the foreign financial accounts exceeds USD 10,000 at any time during the calendar year.  The financial accounts to be reported are bank account, brokerage account, mutual fund, trust or other type of foreign financial account.

It can be seen that there is a self (FBAR) as well as third party (FATCA) reporting for foreign financial accounts. Though the definition of financial account is not the same between the two requirements but there is substantial over-lap. Other differences pertains to the minimum value threshold and the period for which the value shall be reported. At the same time, the two reports can be compared to seek information in case of any difference between the two.

For more details and to know if you are compliant, get in touch at ruchira@thejurisociis.com