AZB & PARTNERS

ADVOCATES & SOLICITORS

SEPTEMBER 2010 • STRICTLY FOR PRIVATE CIRCULATION

In This Issue

page

2 : Intellectual Property

2 : Media & Telecommunications

3 : Foreign Exchange

5 : Insurance & Real Estate

6 : Infrastructure

6 : Competition Law

7 : Capital Market & Securities Law

8 : Banking & Finance

10 : Litigation

10 : Taxation

Inter alia…is a legal newsletter published each quarter by AZB & Partners for a select list
of clients and colleagues. Each issue aims to provide a snapshot of the recent legal devel-
opments in certain critical areas: infrastructure, foreign direct investment, securities law,
exchange control regulations, corporate law, media and entertainment, intellectual prop-
erty and banking. We hope you will find the content informative and useful. If you have
any questions or comments, please email us at: editor.interalia@azbpartners.com or call
AZB & Partners.

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v Royalty rates for broadcast
of sound recordings
standardised
v Trade Marks (Amendment)
Bill, 2009 passed by Rajya
Sabha
v Recommendations on
uplinking and downlinking
of television channels
Amendments to the
Telecommunication
(Broadcasting and Cable
Services) Interconnection
Regulations
v Amendments of various
licenses for security related
concerns
2  september 2010
Intellectual Property
v The Indian Copyright Board (‘Copyright Board’) has on August 25, 2010, in the case of Mu-
sic Broadcast Pvt. Ltd. & Ors. v. Phonographic Performance Ltd.1, standardized the royalty rate
for broadcasting of sound recordings on private FM radio stations payable by them to Phono-
graphic Performance Ltd. (‘PPL’). This has settled the long standing controversy on this issue.
The Copyright Board directed the Registrar of Copyrights to grant to the radio stations separate
licenses for communicating the work (sound recordings in the repertoire) to the public, on the
condition that 2% of the net advertisement earnings of each FM radio station (accruing from the
radio business only) must be set apart for pro rata distribution to all music providers (including
PPL) in proportion to the music provided by the respective music providers and broadcast by
the radio stations. The Copyright Board also directed each of the FM radio stations to furnish,
within a week of grant of license by the Registrar of Copyrights, a bank guarantee of ¤ 10,000 in
favour of PPL. The license granted by the Registrar of Copyrights will expire on September 30,
2020.
v In August 2010, the Rajya Sabha (Upper House of the Parliament) passed the Trade Marks
(Amendment) Bill, 2009 (‘TM Bill’), which enables any individual or enterprise to seek registra-
tion of a trade mark in any of the 84 member countries of the Madrid Protocol through a single
application. The TM Bill will become law once it gets Presidential assent and is notified. For de-
tails on the TM Bill, please refer to our March 2010 issue of Inter alia.
Media & Telecommunications
v On July 22, 2010, the Telecom Regulatory Authority of India (‘TRAI’) released its recommen-
dations on policy issues relating to uplinking and downlinking of television channels in India.
TRAI has recommended, inter alia, an increase in the minimum net worth requirements of com-
panies engaged in the business of uplinking and downlinking of channels, including experience
of the top management as one of the eligibility criteria for applicant companies, and exclud-
ing the minimum commitment period. Also, it has recommended that the permission period be
made uniform; i.e. 10 years for both uplinking and downlinking of channels (which is currently
10 years for uplinking and 5 years for downlinking).
TRAI has further made certain key recommendations for developing India as a teleport hub
and has suggested that channels which are only being uplinked from India (for viewing in an-
other country) and not being downlinked in India should be exempt from the programme and
advertisement codes of India.
v The Ministry of Information and Broadcasting announced policy guidelines (‘Policy
Guidelines’) for providing ‘head end in the sky’ (‘HITS’) broadcasting services in India on No-
vember 26, 2009. Subsequently, on July 30, 2010, TRAI issued an amendment to the Telecom-
munication (Broadcasting and Cable Services) Interconnection Regulations, 2004 to reflect the
changes announced in the Policy Guidelines. This amendment alters the definitions of ‘HITS
operator’ and ‘multi-system operator’.
v In order to address security related concerns for expansion of telecom services in various
zones of India, the Department of Telecommunications (‘DOT’) has issued certain notifications
dated July 28, 2010 and August 11, 2010 (‘DOT Notifications’) amending the licence agreements
for cellular mobile telephone services (‘CMTS License Agreements’), basic services, unified ac-
cess services (‘UAS License Agreements’), national and international long distance services. The
contents of the DOT Notifications are similar and some of the key amendments are as follows:
i. Licensees are required to adopt a security and security management policy for their
networks, which must be approved by DOT.
ii. Licensees are required to work towards a phased plan to provide for the maintenance
and operation of their networks entirely by Indian engineers, with the assistance of
foreign engineers being minimal or almost nil, within a period of two years from the
date of the respective DOT Notifications.
iii. All licensees using the services of any vendor/supplier of equipment, software or
services (‘Vendor’) are required to enter into a valid legal agreement in relation to
duties and obligations of the licensee and such Vendors, in the template specified by
the DOT.
1 Case No. 1 of 2002.
 iv. The template agreement specified by DOT prescribes certain conditions including the
Vendor being required to transfer to the telecom service provider all tools, proce-
dures, documents, skills, software etc. used to maintain the network of the telecom
AZB & PARTNERS
service provider at the time of termination of the contract or, as and when required ADVOCATES & SOLICITORS
by the telecom service provider.
v. In case any security breach is subsequently detected (i.e. even after installation or
deployment of equipment) the relevant equipment will be taken out of service and a
penalty of (i) ¤ 500 million for each purchase order; and (ii) 100% of contract value v Amendments to UAS and CMTS
will be imposed upon the licensee. License Agreement

v DOT, on September 1, 2010, has amended its UAS Licence Agreements and CMTS License
Agreements in order to enable telecom operators to use 3rd Generation spectrum (‘3G Spec-
trum’) and Broadband Wireless Access spectrum (‘BWA Spectrum’) for providing telecom ac-
cess services. Broadly, the amendments are with respect to (i) term for which the operator has
been given 3G Spectrum and BWA Spectrum usage rights; (ii) roll out obligations; (iii) license
fee and spectrum usage charges for 3G Spectrum and BWA Spectrum; (iv) merger of spectrum
blocks, where applicable; and (v) breach, revocation and surrender of 3G Spectrum and BWA
Spectrum. These amendments, therefore, apply to those entities that were granted 3G Spectrum
and BWA Spectrum usage rights pursuant to an auction process, including inter alia Bharti Airtel
Ltd., Aircel Ltd. and Vodafone Essar Ltd..

Foreign Exchange

v The Department of Industrial Policy and Promotion (‘DIPP’) had issued a consolidated v FDI Consolidated Circular 2 of
press note on March 31, 2010 that incorporates all the prior policies/regulations on the foreign 2010 issued
direct investment (‘FDI’) policy in India, which was to be updated/revised every six months. Ac-
cordingly, on September 30, 2010, DIPP issued Circular 2 of 2010 updating all instructions and
clarifications relating to the FDI policy, 2010 (effective October 1, 2010) (‘FDI Circular’). Some of
the key amendments to the extant policy are broadly summarized below:
i. Press Note 2 of 2010 prohibited the manufacturing of ‘cigars, cheroots, cigarillos and
cigarettes, of tobacco or of tobacco substitutes’, which have now been included in the
list of sectors/activities in which FDI is prohibited.
ii. Under the extant policy, FDI is allowed in animal husbandry, development of seeds,
pisciculture, aquaculture and floriculture/horticulture/cultivation of vegetables ‘un-
der controlled conditions’. The FDI Circular has now specified various technical and
operational parameters that constitute ‘controlled conditions’ in these sectors.
iii. It has been clarified that 100% foreign owned non-banking financial companies
(‘NBFCs’) with a minimum capitalization of Us$50 million, can set up subsidiaries for
specific NBFC activities, without being required to separately comply with the mini-
mum capitalisation norms with respect to such downstream subsidiaries proposing
to engage in NBFC activities.
iv. It has been clarified that Indian companies which are ‘owned and/or controlled by
non-resident entities’ are now permitted to make downstream investments utilizing
internal accruals, subject to compliance with other guidelines applicable to down-
stream investments.
v. With respect to FDI in permitted real estate development activities, it has been
clarified that the term ‘original investment’ means the entire amount brought in as
FDI. Further, it has been clarified that the lock-in-period of three years will be applied
from the date of receipt of each installment/tranche of FDI or from the date of com-
pletion of minimum capitalization, whichever is later.
vi. With respect to FDI in wholesale cash and carry trading, the condition that wholesale
trading to group companies would be permitted only for the purposes of internal
consumption has been omitted. However, the requirement, that wholesale trade to all
group companies taken together should not exceed 25% of the total turnover of the
wholesale venture, has been retained.
vii. It has been clarified that ‘minimum capitalisation’ includes share premium received
along with the face value of the shares only when it is received by the issuer company
upon issue of the shares to the non-resident investors, and does not include amounts
paid by a non-resident to a transferee in excess of the issue price in the case of trans-
fer of shares post issuance. This is relevant in sectors such as NBFCs and real estate
development where ‘minimum capitalization’ requirements have been stipulated.
viii. A clarification has been added to the definition of ‘capital’ to permit FDI in partly-
  3
september 2010

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ADVOCATES & SOLICITORS
v Discussion papers issued by
DIPP
v FDI through warrants
v Refinancing of domestic
Rupee loans for certain
infrastructure sectors
v Liberalisation of ECB Policy
for hospitals, hotels and
software sectors
v Extension of period allowing
buyback/prepayment of
Foreign Currency Convertible
Bonds
v Guidelines on trading
of currency options on
recognised stock exchanges
4  september 2010
paid shares and warrants under the approval route.
v DIPP has issued the following discussions papers and has sought views and suggestions of
the public on such papers: (i) discussion paper dated July 6, 2010 regarding FDI in the multi
brand retail sector; (ii) discussion paper dated September 10, 2010 that considers the possible
liberalisation of Press Note 1 of 2005; (iii) discussion paper dated September 28, 2010 that con-
siders various aspects relating to promoting FDI in limited liability partnerships; and (iv) dis-
cussion paper dated September 28, 2010 that considers the issue of shares to non-residents for
consideration other than cash.
v Based on certain recent press reports, it appears that the Government of India (‘GoI’) is
considering approving FDI through warrants, subject to an upfront payment of 25% of the in-
vestment being made on the date of issuance of the warrants and their conversion into fully paid
up equity shares within 12 months from the date of issuance. If the warrants are not converted
within such 12 month period, the issuing company would be liable to face rejection of its applica-
tion to receive FDI through such warrants, and could also face subsequent penalty and manda-
tory winding up. However, these conditions on issuance of warrants reported by the press have
not been notified by DIPP.
v By way of its circular dated July 22, 2010, the Reserve Bank of India (‘RBI’) has permitted
refinancing of Indian Rupee (‘Rupee’) loans availed from domestic banks, through take-out fi-
nancing arrangements availed in the form of External Commercial Borrowings (‘ECBs’) under
the approval route by eligible borrowers for certain sectors, i.e. sea ports and airports, roads in-
cluding bridges and the power sector for the development of new projects, subject to prescribed
conditions, including the following: (i) a tripartite agreement should be in place between the
corporate developing the infrastructure project, the domestic bank and the overseas recognised
lender for the take-out of the loan within three years of the scheduled commercial operation
date. The take-out may be conditional or unconditional and the tripartite agreement should
clearly provide for the scheduled date of occurrence of the take-out; (ii) the loan should have
a minimum average maturity period of seven years; (iii) the fee payable, if any, to the overseas
lender until the take-out must not exceed 100 basis points per annum; (iv) on take-out, the resid-
ual loan agreed to be taken-out by the overseas lender will be considered an ECB; such loan must
be designated in a convertible foreign currency and must also comply with all extant norms
relating to ECBs (including the reporting arrangement as prescribed under the existing ECB pol-
icy); and (v) domestic banks/financial institutions must not guarantee the take-out finance.
v As per the extant policy on ECBs, companies in the hotels, hospitals and software sectors
are allowed to avail of ECBs up to Us$100 million per financial year under the automatic route.
RBI has now, by way of a circular issued on August 12, 2010, allowed companies in these sectors
to avail of ECBs beyond Us$100 million under the approval route for foreign currency and/or
Rupee capital expenditure for permissible end uses, provided the proceeds of such ECBs are not
used for acquisition of land.
v RBI by way of a circular dated August 9, 2010 has extended the period allowed to Indian
companies for buyback of their Foreign Currency Convertible Bonds under the approval route
till June 30, 2011. Previously, this facility was available only till June 30, 2010.
v By its circular dated July 30, 2010, RBI has increased the number of exchange-traded hedging
tools available in India. While persons resident in India were already permitted to participate
in the currency futures market in India, pursuant to the aforesaid circular, such persons can
also participate in the trading of currency options on spot Us$-Rupee exchange rate in the cur-
rency derivatives segment of recognised stock exchanges. The currency options market would
function subject to relevant regulations issued by RBI and the Securities and Exchange Board of
India (‘SEBI’) from time to time currently contained in the Exchange Traded Currency Options
(Reserve Bank) Directions, 2010 (‘Currency Directions’). Pursuant to the Currency Directions,
standardised exchange traded currency options are required to have certain prescribed features
including inter alia: (i) the underlying for the currency option should be the Us$-Rupee spot
rate; (ii) the options should be premium styled European call and put options; (iii) the size of
each contract should be Us$1,000; (iv) the maturity of the contract must not exceed 12 months;
(v) the contract is required to be settled in cash in Rupees; and (vi) the settlement price should
be RBI’s Reference Rate on the date of expiry of the contract. Scheduled banks and other entities
regulated by RBI are required to seek RBI’s prior approval before trading in currency options.
Entities regulated by other regulators are required to seek prior approval of such regulators for
trading in currency options and comply with any additional directions in this regard.
The Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations,
2000 have also been amended by RBI pursuant to a notification dated July 19, 2010 to effect the
aforesaid changes.
v Pursuant to the Foreign Exchange Management (Guarantees) (Amendment) Regulations,
2010 dated June 1, 2010, RBI has amended the Foreign Exchange Management (Guarantees) Reg-
ulations, 2000 with retrospective effect from April 20, 2009, permitting a person resident in In-
AZB & PARTNERS
dia to issue a corporate guarantee in favour of an overseas lessor, for financing import through ADVOCATES & SOLICITORS
operating lease in conformity with the Foreign Trade Policy in force, the Foreign Exchange Man-
agement (Current Account Transactions) Rules, 2000 and other relevant directions issued by
RBI from time to time.
v Permission to Indian residents
to issue corporate guarantee
in favour of an overseas lessor
Insurance & Real Estate

v The Insurance Regulatory and Development Authority (‘IRDA’) has by way of its circular v Cancellation of circulars on
dated July 12, 2010 clarified that consequent to issue of notification dated July 1, 2010 regarding referral arrangement
IRDA (Sharing Of Database For Distribution Of Insurance Products) Regulations, 2010 (‘Data- v Clarifications to the Database
base Regulations’), all previous circulars issued by it in relation to referral arrangements stand Regulations
cancelled with immediate effect. The circulars rendered defunct had set out specific guidelines v Guidelines on issue and
for life and general insurance companies entering into referral arrangements with banks. renewal of licences to
corporate agents
v IRDA by way of its circular dated August 9, 2010 (‘IRDA Circular’) has clarified certain pro-
visions of the Database Regulations. The Database Regulations required inter alia that all the v Additional compliances
for advertisements of life
referral arrangements entered into prior to the coming into effect of the Database Regulations, insurance products and unit
which were not in conformity with the provisions of the Database Regulations, be terminated linked life insurance products
forthwith. The Database Regulations also provided that such arrangements could continue if v Guidelines for Grievance
they were suitably modified or amended in terms of the Database Regulations within a period Redressal by insurance
of six months from the date of notification of the Database Regulations after obtaining IRDA’s companies
prior approval. v Shifting of Special Economic
The IRDA Circular clarifies the above provision of the Database Regulations and draws a dis- Zone Units
tinction between those referral entities that are not eligible to share data under the new regime
and those that may be eligible. In case of the former entities, the referral arrangements have to be
terminated forthwith with no extension period whatsoever. However, certain entities that have
running referral agreements with insurers may be eligible for data sharing under the Database
Regulations and an extension of six months may be granted for modifying such agreements to
comply with the Database Regulations, if the insurers seek IRDA’s prior approval in this regard.
v With a view to streamling the process of issuance and renewal of licenses of corporate agents
by insurance companies, IRDA has issued fresh guidelines on June 28, 2010 (‘IRDA Guidelines’).
Under the IRDA Guidelines, an insurance company must obtain the prior approval of IRDA be-
fore issuing or renewing any such licence. IRDA has also prescribed a checklist-cum-certification
that the applicant company must submit along with the application for issuance/renewal of li-
cense to a corporate agent. The procedure has been detailed in the IRDA Guidelines.
IRDA has also amended the IRDA (Licensing of Corporate Agents) Regulations, 2002 (‘Li-
censing Regulations’) by way of the IRDA (Licensing of Corporate Agents) (Amendment) Regu-
lations, 2010 (notified on July 1, 2010), which amends the code of conduct applicable to corporate
agents to include more stringent norms including a restriction with regard to payment of com-
mission towards any unauthorised referral arrangements. The amending regulations have also
included a process for cancellation of licenses of corporate agents, corporate insurance execu-
tives or any other person who holds a licence or certificate under the Licensing Regulations.
v IRDA has by its circular dated August 16, 2010 stipulated additional measures required to be
complied with by life insurers in order to enhance transparency in advertisements, especially
those relating to insurance products. These measures relate to (i) clear disclosure of the under-
lying conditions under which a guarantee operates, in cases where insurance advertisements
highlight the benefits of guarantees; (ii) clearly identifying the product advertised as an insur-
ance product; (iii) naming of the insurance products; and (iv) periodic information on invest-
ment updates in case of unit linked life insurance products.
v In a move to put in place speedy and effective grievance redressal systems, IRDA has issued
guidelines (effective August 1, 2010) providing minimum time-frames, uniform definitions and
classifications with respect to grievance redressal by insurance companies. The guidelines are
applicable for disposal of ‘grievances/complaints’ as defined therein.
v The Ministry of Commerce and Industry, through Instruction 59 (‘SEZ Instruction’), has
clarified that while there is no objection in-principle for shifting of units from one special eco-
nomic zone (‘SEZ’) to another, all proposals for transfer of units will be considered by the SEZ
Board of Approval on a case by case basis.
  5
september 2010

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ADVOCATES & SOLICITORS
v Developer not authorized to
sell parking space
v The Civil Liability for Nuclear
Damage Bill, 2010
v Competition Commission
of India v. Steel Authority of
India & Other
6  september 2010
v The Supreme Court (‘SC’) has held in the case of Nahalchand Laloochand Private Ltd. v.
Panchali Co-operative Housing Society Ltd.2 that stilt parking space/open parking space of a
building regulated by Maharashtra Ownership Flats (Regulation of the Promotion of Construc-
tion, Sale, Management and Transfer) Act, 1963 (‘MOFA’) is not a ‘garage’ under the provisions
of MOFA. SC further held that stilt parking space/open parking space are part of ‘common areas
and facilities’ and that a developer does not have the right to sell ‘stilt parking spaces’ as these
are neither a ‘flat’ nor appurtenant or attachment to a ‘flat’.
Infrastructure
v The Civil Liability For Nuclear Damage Bill, 2010 (‘Nuclear Bill’) has been passed by both
the Houses of the Parliament, and now awaits assent by the President. For details on the Nuclear
Bill, please refer to our Client Update of September 2010.
Competition Law
v In 2009, Jindal Steel & Power Ltd. (‘Jindal’) had provided information to the Competi-
tion Commission of India (‘CCI’) under the Competition Act, 2002 (‘Competition Act’) alleg-
ing that the Steel Authority of India Ltd. (‘SAIL’) had acted contrary to the provisions of the
Competition Act by abusing its dominant position in the market. Pursuant to a request for
information from CCI, SAIL requested for an extension in time to file its comments. However,
not finding any justification in SAIL’s request for extension, CCI formed the opinion that a
prima facie case existed against SAIL and on December 8, 2009, asked the Director General
(‘DG’) to investigate the matter.
The directions passed by CCI were challenged by SAIL before the Competition Appellate
Tribunal (‘CAT’). CCI filed an application before CAT for impleadment in the appeal filed by SAIL.
CAT dismissed CCI’s application for impleadment and held that CCI was not a necessary party
before CAT, in proceedings that were initiated by third parties. CAT further held that CCI must
give reasons while passing any order, direction or taking any decision, and set aside CCI’s direc-
tions on the basis that there was violation of principles of natural justice (i.e. if an opportunity
had been given to SAIL to be heard then it was not open for CCI to change its mind midway and
direct investigations). This order was appealed by CCI, before SC.
SC on September 9, 2010, held that taking a prima facie view and issuing a direction to the DG
for investigation is not an order appealable to CAT under the Competition Act as it constitutes
an administrative direction by CCI without entering upon any adjudicatory process and there is
no statutory duty cast on CCI to issue notice or grant a hearing, nor can any party claim a right
to notice and/or hearing at the stage of formation of the opinion by CCI in terms of a direction to
the DG to initiate investigation.3 SC also held that the power to issue interim orders should be ex-
ercised by CCI sparingly and under compelling and exceptional circumstances and that it should
in clear terms that it is satisfied that an act of contravention has been committed and continues
to be committed, with the possibility of a party suffering irreparable and irretrievable damage
or there being a definite apprehension of an appreciable adverse effect on competition in India.
SC issued directions to the effect that where interim orders are issued by CCI, a final order in that
regard must be passed as expeditiously as possible, and in any case, not later than 60 days. SC fur-
ther held that CCI will be a necessary party in cases where the inquiry has been initiated by CCI
suo moto, and in all other cases, CCI will be a proper party in the proceedings before CAT.
Significantly, SC has held that where investigation has been initiated by the DG, pursuant to
directions from CCI, the DG’s report should be submitted within the time as directed by CCI and
in all cases, no later than 45 days.
2 Civil Appeals Nos. 2544 to 2456 of 2010.
3 Competition Commission of India v. Steel Authority of India & Others, D. No. 12247 of 2010
Capital Market & Securities Law
AZB & PARTNERS
ADVOCATES & SOLICITORS
v The Takeover Regulations Advisory Committee (‘TRAC’) constituted by SEBI in September,
2009, submitted its recommendations for a revised SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 (‘Takeover Code’) on July 19, 2010. Following are some of the key
amendments suggested by TRAC:
v TRAC recommends changes
i. The initial trigger for open offer is proposed to be increased from 15% to 25%; to the SEBI (Substantial
ii. Open offer is to be increased to 100% of the shares of the target, other than the shares Acquisition of Shares and
of the sellers; Takeovers) Regulations, 1997
iii. Creeping acquisition of 5% per financial year should be computed on a gross basis for v Mandatory disclosures by
all shareholders holding more than 25% of the voting rights and allowed up to a limit media companies
of 75% of the shares or voting rights of a company; v Securities trading using
iv. For direct acquisitions, the price for the open offer is to be determined inter alia on wireless technology
the basis of the volume weighted average price of the shares for a period of 60 trad-
ing days or 52 weeks preceding the acquisition. For indirect acquisitions, the high-
est price paid by the acquirer or persons acting in concert between the date of the
primary acquisition and the date of public announcement of the indirectly acquired
target company must also be taken into account;
v. The independent directors of the target should be required to make a reasoned rec-
ommendation on the offer;
vi. An indirect acquisition of a company which is a predominant part (in excess of 80%
as per the most recent audited annual financial statements) of the business or entity
being acquired should be treated as a direct acquisition for all practical purposes in-
cluding pricing, timing for making a public announcement etc.;
vii. A short public announcement of the open offer should be made on the day of occur-
rence of the transaction that triggered the open offer, followed by a detailed public
statement within five business days from the date of the short public announcement.
The timeline for the entire open offer process should be shortened to 57 business
days;
viii. The current categories of exemptions under the Takeover Code have been analysed
by the Committee depending on the nature of the transaction;
ix. The definition of ‘control’ has been proposed to be amended to include not just the
‘right’ but also the ‘ability’ to appoint a majority of the directors on the board of the
target company or to control the management or policy decisions of such company;
x. For a voluntary open offer, a minimum limit has been proposed at 10% of the share-
holding;
xi. Promoters of the target company should no longer be permitted to receive a separate
non-compete fee or control premium; and
xii. Grounds for withdrawal of an open offer should be widened. Obligations of a mer-
chant banker should also be increased, with the merchant banker being required to
demonstrate bona fide efforts.
v SEBI, by way of press release dated August 27, 2010 (‘Press Release’), issued guidelines for
mandatory disclosure by media companies of their stake in listed companies. SEBI noted that
private treaties4 by media companies, without appropriate and adequate disclosures may not be
in the interest of investors and financial markets. The Press Council of India has, on the sugges-
tion of SEBI, mandated the following guidelines to media companies on August 2, 2010:
i. Disclosures regarding the stake held by the media company in any company should
be made by the media company in any news report, article or editorial relating to
such company, whether in print or on television.
ii. Media groups should disclose on their websites details of the percentage sharehold-
ing held by them in various companies under such private treaties.
iii. It is also now mandatory for a media company to disclose any agreements which en-
title such media company to appoint its nominee on the board of directors of another
company, or which provide such media company management control over another
company or which may create a potential conflict of interest for such media company
vis-à-vis another company.
v SEBI by a circular dated August 27, 2010 has permitted registered stock brokers who are al-

4 A private treaty is typically an arrangement whereby a listed company or a company proposing a public offering of
shares, offers a stake in itself (through an issue of shares, warrants, bonds etc.) to a media company. In return, the
media company provides media coverage for the first-mentioned company through advertisements, news reports,
advertorials etc.
  7
september 2010

AZB & PARTNERS
ADVOCATES & SOLICITORS
v Transferability of units of
mutual funds
v Proposal on regulation of
fees and charges of portfolio
managers
v Changes in reporting of
lending of securities bought in
the Indian market and OTC’s
transactions
v Physical settlement of stock
derivatives
v RBI regulations on Core
Investment Companies
8  september 2010
ready providing internet based trading to their customers in accordance with the SEBI circular
dated January 31, 2000 to provide securities trading services using wireless technology (subject
to prescribed conditions). Securities trading using wireless technology includes trading through
devices such as mobile phones, laptops with data cards etc. that use Internet Protocol.
v Regulation 37(1) of the SEBI (Mutual Fund) Regulations, 1996 specifies that ‘a unit unless
otherwise restricted or prohibited under the scheme, shall be freely transferable by act of parties
or by operation of law’. SEBI has in its circular dated August 18, 2010 (‘MF Circular’) instructed
all asset management companies to clarify (by way of an addendum) that units of all mutual
fund schemes held in dematerialised form will be freely transferable from the date of the issue
of this addendum, and no later than October 1, 2010. However, SEBI has also clarified that restric-
tions on transfer of units of equity linked savings scheme (‘ELSS’) during the lock-in period will
continue to be applicable as per the terms of the ELSS guidelines.
v To bring about greater uniformity, clarity and transparency in the fees and charges levied in
client agreements by portfolio managers who are registered with SEBI under the SEBI (Portfolio
Managers) Regulations 1993 (‘PM Regulations’), SEBI issued a consultative paper on July 26, 2010
containing, inter alia, the following proposals (to which public comments have been invited)
which pertain to: (i) profit sharing/performance related fees be charged on the basis of a ‘high
water mark’5 principle over the life of the investment; (ii) all fees and charges will be levied on
the actual amount of clients’ funds under management. If there has been a partial withdrawal of
funds by investors, all fees and charges to be proportionately charged and the ‘high water mark’
to be accordingly adjusted; and (iii) the client agreement should contain a separate annexure
that will list all fees and charges payable to the portfolio manager. The format for such annexure
has been provided in the circular.
v SEBI through its recent circulars has decided to modify certain requirements relating to: (i)
reporting to be made by foreign institutional investors regarding securities lent by them to enti-
ties abroad, which have been amended from daily submissions to weekly submissions; and (ii)
reporting to be made by regulated entities in relation to their over the counter transactions in
certificates of deposit and commercial papers on the Fixed Income Money Market and Deriva-
tives Association of India reporting platform.
v SEBI through its circular dated July 15, 2010 has decided to provide flexibility to stock ex-
changes to offer: (i) cash settlement (settlement by payment of differences) for stock options and
stock futures; (ii) physical settlement (settlement by delivery of underlying stock) for stock op-
tions and stock futures; or (iii) a combination of cash and physical settlement for stock options
and stock futures.
Banking & Finance
v By way of a notification dated August 12, 2010 (‘CIC Notification’), RBI has notified the regu-
latory framework for Core Investment Companies (‘CICs’). CICs are holding companies which
have their assets predominantly as investments in shares, not for trading but for holding a stake
in group companies, not carrying out other financial activities and not accepting public depos-
its. Prior to the CIC Notification, CICs were not considered to be in the business of acquisition of
shares and securities if (a) at least 90% of such company’s total assets were in the form of invest-
ments in shares of investee companies purely for the purpose of holding stake; (b) they were not
trading in such shares except to divest or dilute their holding; (c) they were not carrying out any
other financial activity; and (d) they were non-deposit taking companies. Such companies were
not required to register themselves with RBI. However, the CIC Notification now defines CICs
with an asset size of not less than ¤ 1 billion as Systemically Important Core Investment Com-
panies (‘CICs-ND-SI’) and requires such companies to be registered with RBI. CICs with an asset
size of less than ¤ 1 billion are exempt from this registration requirement.
As per the CIC Notification for computing the asset size of the CIC, all CICs belonging to a
‘group’6 will be aggregated. With respect to CICs-ND-SIs, the CIC Notification proposes to (i)
regulate the quantum of investments in equity, debt, or loans in group companies; (ii) restrict
share trading activities (although block sales may be permitted); (iii) prohibit the acceptance of
public deposits; (iv) prohibit the conduct of other financial activities; (v) impose minimum capi-
5 The ‘high water mark’ principle means that if the portfolio value goes down and then recovers, the manager does
not earn fees till all losses have been made up and the performance based fee will be charged only on increase in
portfolio value in excess of the previously achieved ‘high water mark’.
6 The term ‘group’ has not been defined in the CIC Notification. However, as per the common parlance test, it could
cover entities under common control or entities controlling a common entity.
tal ratio requirements and leverage ratios; and (vi) provide relief from requirement to maintain
minimum net owned funds, capital adequacy and adherence to exposure norms.
v SC on September 30, 2010 in the case of ICICI Bank v. Official Liquidator APS Star7 (‘APS AZB & PARTNERS
ADVOCATES & SOLICITORS
Star Case’) ruled that the assignment of debt by banks is permissible in terms of Section 6(1) of
the Banking Regulation Act, 1949 (‘BR Act’).
The dispute in the APS Star Case related to the assignment of rights, title and interests aris-
ing from a portfolio of loans along with the security underlying such loans by ICICI Bank Ltd.
v SC rules assignment of debt is
(‘Assignor’) in favour of Kotak Mahindra Bank (‘Assignee’). One of the loans in the portfolio permissible
so assigned was extended to APS Star India Ltd. (‘Borrower’), a company which is now in liq-
uidation. Consequently, the Assignee made an application to a single judge bench (‘Company v Bombay High Court judgment
on validity of derivatives
Court’) of the Gujarat High Court (‘Gujarat HC’) for substitution of the Assignee in place of the
Assignor as a secured creditor of the Borrower in the liquidation proceedings. The Company v SC ruling that writ jurisdiction
to not be exercised in debt
Court dismissed the aforesaid application. The Assignee appealed to a division bench of the Gu- recovery matters
jarat HC.
Gujarat HC had in the Kotak Mahindra v. Official Liquidator APS Star8 inter alia ruled that
the assignment of debt by banks amounted to ‘trading’ of debt which did not fall within Section
6(1) of the BR Act (which sets out the universe of permissible activities for banks) and, accord-
ingly, could not be undertaken.
SC ruled that assignment of debt is a bona fide banking activity and further stated that RBI
is empowered in terms of the BR Act to frame rules and policy on banking matters relating to
inter alia capital adequacy asset provisioning etc. Such policy may specify parameters enabling
banks to expand their business beyond Section 6(1) of the BR Act, provided such activities did
not fall within the prohibitions set out in the BR Act. SC held that RBI has expressly promulgated
regulations relating to assignment of debt in recognition of the fact that such activity would
enable a bank to reduce non performing assets and strengthen its capital adequacy ratio. Such
assignment of debt towards the restructuring of a bank’s portfolio would not amount to ‘trading
in debt’ and is permitted in terms of the BR Act.
v In the case of Kotak Mahindra Bank Ltd. v. J.B. Diamonds Ltd.9 (‘JB Diamonds Case’) the
Bombay High Court (‘Bombay HC’) on August 11, 2010 has ruled that derivative contracts are
valid and enforceable if such derivative contracts are in compliance with the RBI Act, 1934 (‘RBI
Act’) and relevant regulations of RBI. This is the second substantive ruling on the validity and
enforceability of derivative contracts after the Rajshree Sugars and Chemicals Ltd. v. Axis Bank
Ltd. 10 (‘Rajshree Judgment’).
In the JB Diamonds case, a winding up petition was filed by Kotak Mahindra Bank Ltd. (‘Pe-
titioner’) against J.B. Diamonds Ltd. (‘Respondent’). The Respondent had entered into two for-
ward contract transactions with the Petitioner in 2008 (‘Transactions’). The Respondent can-
celled the Transactions in February 2009 resulting in an amount of approximately ¤ 22.4 million
due and payable to the Petitioner.
One of the defenses raised by the Respondent was that the Transactions, being illegal and
contrary to public policy, were void and unenforceable and, therefore, the winding up petition
ought to be dismissed. Relying on the Rajshree Judgment and statutory provisions and circu-
lars (Sections 45U (a) and 45V of the RBI Act, and the Foreign Exchange Management (Foreign
Exchange Derivatives Contracts) Regulations, 2000), Bombay HC held that the Transactions are
permissible in law and are legal, valid and binding on the parties. Reliance was also placed on
the fact that the Respondent had contractually represented and agreed that it had the necessary
power and authority to enter into and perform the Transactions in terms of applicable law.
v SC, in a ruling on July 26, 201011 has held that High Courts should tread carefully when ex-
ercising writ jurisdiction in terms of Article 226 of the Constitution of India (‘Constitution’) in
respect of matters relating to debt recovery and should allow lenders to follow the process set out
in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘DRT Act’) and Se-
curitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act,
2002 (‘SARFAESI Act’) and other fiscal and debt recovery statutes.
This case related to Union Bank of India (‘UBI’) filing an appeal with SC against an interim
order passed by the Allahabad High Court restraining UBI from resorting to the remedies avail-
able to it under Sections 13 and 14 of the SARFAESI Act for recovery of amounts due to it from the
respondent.
SC allowed the appeal, noting that the debt recovery statutes provide a hierarchy for appeal

7 Civil Appeal No. 8393 of 2010.

8 OJ Appeal No. 156 of 2007.
9 Kotak Mahindra Bank Ltd. v. JB Diamonds Ltd., 2010 6 Taxmann.com 125 (Bom.).
10 Rajshree Sugars and Chemicals Ltd. v. Axis Bank Ltd., (2008) 8MLJ261.
11 Union Bank of India v. Satyawati Tondon and Ors., SLP (C No.10145 of 2010).
  9
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AZB & PARTNERS
ADVOCATES & SOLICITORS
v Restrictions on bank finance
of promoters’ equity
v Financial inclusion and use of
business correspondents
v Restrictions on transfer of
shares of public companies
v Direct Taxes Code, Bill 2010
tabled in the Parliament
10  september 2010
and this fast track process should not be derailed either by filing a writ petition or resorting to
a civil suit which is expressly barred under the debt recovery statutes. While recognising that no
act or statute could oust the jurisdiction under Articles 226 and 227 of the Constitution, SC also
noted that judicial prudence required that courts restrain exercise of their jurisdiction under
these Articles of the Constitution, where there was an alternate remedy provided by law. In the
present case therefore, SC held that the High Court ought not to have entertained a writ petition
under Article 227 of the Constitution. In matters relating to the recovery of the debts, SC held
that the grant of a stay by a High Court in exercise of its writ jurisdiction could adversely impact
the health of financial institutions, which in turn would affect the economy. Accordingly, the
High Court should be extremely circumspect in exercising its discretion to grant stays in such
matters.
v RBI, by way of a circular dated September 27, 2010 has clarified that the restriction on banks
financing promoters’ contribution towards the equity capital (set out in RBI circular dated Au-
gust 28, 1998) extends to all activities incidental and ancillary to such promoter’s acquisition of
shares, including payment of non-compete fees. RBI has further confirmed that this restriction
applies to offshore branches and subsidiaries of Indian banks.
v RBI, by way of a circular dated September 28, 2010 has decided to permit banks to engage for
profit companies (except NBFCs), as a business correspondent.
Litigation
v A division bench of Bombay HC on September 1, 2010, in the case of Messer Holdings Ltd.
v. Shyam Madanmohan Ruia and others12 (‘Messer case’) has ruled that transfer restrictions
relating to shares of a public limited company, consensually agreed to between shareholders, are
valid and enforceable and not in violation of Section 111A of the Companies Act, 1956 (‘Compa-
nies Act’). Bombay HC also ruled that in order for such share transfer restrictions to be enforce-
able, the company need not be a party to the document recording such transfer, and neither do
such restrictions have to be incorporated in the articles of association of a company. With this
decision, Bombay HC overruled an earlier decision of a single judge bench of Bombay HC in the
case of Western Maharashtra Development Corporation Ltd.13 which ruled that ‘free transfer-
ability’ as provided for in Section 111A of the Companies Act meant that any form of transfer
restrictions relating to shares of a public limited company is unenforceable. For further details
on this decision, please refer to our Client Update of September 2010.
Taxation
v Direct Taxes Code Bill, 2010 (‘DTC’) has been introduced in the Parliament on August 30,
2010. Some of the key proposals are as follows:
i. Change in the concept of residence for foreign entities;
ii. Income from transfer outside India, of any share or interest in a foreign company, tax-
able in India, if at any time during the 12 months prior to transfer, the assets owned,
directly or indirectly, by such company represent at least 50% of the fair market value
of all the assets owned by it;
iii. Introduction of General Anti-Avoidance Rules (‘GAAR’) and Controlled Foreign
Companies (‘CFC’) provisions;
iv. Corporate tax rate for both, domestic and foreign company, to be the same i.e. 30%.
Surcharge and education cess abolished. MAT levied at the rate of 20% on book prof-
its. Branch profit tax (‘BPT’) at the rate of 15% to be levied on income attributable,
directly or indirectly, to a permanent establishment;
v. Treaty to override DTC subject to situations where GAAR/CFC/BPT provisions invoked;
vi. Withholding tax rate on royalty and fees for technical services arising to non-resi-
dent increased from 10% to 20%;
vii. Capital gains to be taxed at marginal rates applicable to tax payers, subject to the
following:
12 Appeal No. 855 of 2003 in Notice of Motion No. 534 of 2002 in Suit No. 509 of 2001.
13 Western Maharashtra Development Corporation Ltd. v. Bajaj Auto Ltd., judgment dated February 15, 2010 in
Arbitration Petition No. 174 of 2006.
 • No capital gains on sale of listed shares on which Securities Transaction Tax (‘STT’)
is paid, if held for more than 1 year14;
• 50% of capital gains exempt on sale of listed shares on which STT is paid, if held for
AZB & PARTNERS
1 year or less15. ADVOCATES & SOLICITORS

v SC, in a recent case16 on September 9, 2010, reversed the decision of Karnataka High Court in
the case of CIT v. Samsung Electronics Co. Ltd and Ors.17. SC held that a person paying any sum
to a non-resident is neither liable to deduct tax nor is required to approach the tax authorities
under section 195(2) of the Income-tax Act, 1961, if no part of such sum is chargeable to tax in v SC reverses Karnataka High
India. Court decision in the case of
GE India Technology Centre
v In the case of Vodafone International Holdings B.V v. Union of India & Another18, Bombay Pvt. Ltd. v. CIT
HC on September 8, 2010, has held that the proceedings initiated by the Indian Revenue Authori-
ties (‘IRA’) under Section 201 of the IT Act cannot be held to lack jurisdiction. Key observations v Bombay HC ruling in Vodafone
International Holdings B.V v.
of Bombay HC are as follows: Union of India & Another
i. There is a difference between tax planning and tax evasion. Tax planning is legitimate;
ii. Controlling interest is not an asset separate from the shares;
iii. For the transfer of a capital asset to be taxable in India, the capital asset must be situ-
ated in India. Shares are situated where the register of members is maintained;
iv. Shareholders of a company have no direct interest in the property of the company (so
transfer of shares does not result in the transfer of the company’s property);
v. Where a payment is made to a non-resident, the whole or a part of which is liable to
Indian income tax, the obligation to withhold tax at the time of payment arises. This
applies to non-resident payers as well;
vi. The true nature of the transaction as it emerges from the transactional documents
is that the transfer of the solitary share of the Cayman Island company reflected
only a part of the arrangement put into place by the parties in achieving the object
of transferring control of Hutchison Essar Ltd. to Vodafone International Holdings
BV (‘Vodafone’);
vii. The transaction was not the mere sale of shares of the Cayman Island company. In-
trinsic to the transaction was a transfer of other rights and entitlements, namely con-
trol premium, use and rights to the Hutch brand in India, non-compete agreement,
value of non-voting non-convertible preference shares, loan obligations and an enti-
tlement to acquire a further 15% indirect interest in Hutchison Essar Ltd. These rights
and entitlements were in themselves capital assets, that were located in India; and
viii. Not the entire sale consideration is attributable to India. The principle of apportion-
ment will apply.
Vodafone appealed to SC against the above order. SC on September 27, 2010, issued notice direct-
ing the IRA to compute Vodafone’s tax liability within four weeks.19

14 Lack of clarity whether one year to be counted from the date of purchase or from the end of financial year in which
purchase made.
15 Lack of clarity whether one year to be counted from the date of purchase or from the end of financial year in which
purchase made.
16 GE India Technology Centre Pvt. Ltd. v. CIT, 2010-TII-07-SC-INTL.
17 [2009] 185 Taxman 313 (Kar).
18 2010-TII-13-HC-MUM-INTL.
19 Order dated September 27, 2010 in SLP (Civil) No. 26529/ 2010.
  11
september 2010
 AZB & PARTNERS
ADVOCATES & SOLICITORS

v
Best Law Firm (India) Golden Award
International Legal Alliance Summit & Awards, 2010

v
Best National Law Firm (India)
Chambers Asia Law Awards, 2010

v
Firm of the Year (India)
PLC Which Lawyer? Awards, 2010

v
Asian-Counsel 2010
Firm of the Year in India for Corporate / M&A
& awarded the Most Responsive Domestic Firm of the Year

v
M&A Law Firm of the Year in India
Finance Monthly Law Award for Achievement 2010

v
Ranked 1
Indian Law Firm – 2010 in the RSG Top 40 Ranking

v
“Most Trusted Law Firm of the Year – India”
InterContinental Finance Magazine’s Global Awards 2010

v
India M&A Law Firm of the Year
The M&A Atlas Awards 2010 by the Global M&A network

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12  september 2010