We extend a warm welcome to our esteemed readers as we present our newsletter. In this edition, we shed light on the latest developments in India’s corporate legal sphere for November 2024. We are thrilled to bring you varied news and insights, encompassing regulatory advancements to keep you up to date. From recent updates to court decisions, we have got all the news you need to stay ahead in the corporate legal landscape. So, sit back, enjoy your favorite beverage, and dive into the latest developments in India’s corporate legal landscape.
Recent Updates:
- The Government is intensifying efforts to prevent the unauthorized use of personal data ahead of the Digital Personal Data Protection Act, 2023’s (DPDP) implementation. The Indian Cybercrime and Coordination Centre is pushing against fintech companies by prohibiting them from dealing in “PAN enrichment” services, which typically involves accessing sensitive information like full names, addresses, phone numbers, and credit scores through the Income Tax department’s backend systems. While authorized PAN verification via NSDL continues without sharing personal data, the crackdown aims to ensure data privacy and compliance with the DPDP’s consent-based processing requirements. Despite potential disruptions, the move is expected to strengthen data security and streamline industry practices.
- During pre-budget consultations, major industry bodies, including the Federation of Indian Chambers of Commerce & Industry (FICCI), Confederation of Indian Industry (CII), and PHD Chamber of Commerce and Industry (PHDCCI), proposed tax reforms focused on simplifying compliance and enhancing business ease. Key suggestions included rationalizing capital gains taxes, streamlining customs procedures, and introducing a dedicated dispute resolution mechanism. FICCI emphasized upon relaxed Tax Deducted at Source (TDS) norms and automation of compliance processes, while CII called for Goods and Service Tax (GST) 2.0 with a simplified three-rate structure. PHDCCI advocated reduced taxes for partnership firms, tax neutrality for share buybacks, and eliminating dividend distribution tax. Furthermore, the industry requested zero customs duty on critical raw materials and the implementation of measures to streamline appeals and certifications.
- On November 12, 2024, India secured a position in the top 10 countries in Patents, Trademarks, and Industrial Designs: WIPO 2024 Report, achieving record (15.7%) growth in Patent applications, leading among the top 20 origins in 2023. India’s Industrial Design applications surge by 36.4%, highlighting manufacturing and creative industry growth. India recorded the fastest growth in patent (+15.7%) applications in 2023 among the top 20 origins, marking the 5 consecutive year of double-digit growth. India ranks sixth globally for patents with 64,480 applications, with resident filings accounting for over half of all submissions (55.2%)—a first for the country. The patent office also granted 149.4% more patents in 2023 compared to the previous year, underlining the country’s fast-evolving IP ecosystem.
- The Government is planning to introduce new accounting standards for Limited Liability Partnerships (LLPs), aiming to align their reporting practices with those of companies and enhance transparency. These proposals, developed by the National Financial Reporting Authority (NFRA) and the Institute of Chartered Accountants of India (ICAI), will require significant and timely disclosures on financial performance and cash flows, promoting accountability and investor confidence. LLPs, with turnovers and borrowing above ₹250 crores and ₹50 crores respectively will be subject to greater disclosures. The changes may coincide with amendments to the LLP and Companies Acts in the upcoming parliamentary session, reflecting a broader push to adopt global standards and improve regulatory oversight.
- India may revamp its auditing framework by April 2026, as the NFRA proposes to align all auditing and quality management standards with global norms. The NFRA, after discussions with the ICAI, has endorsed most of the proposed standards, though key disagreements remain. The ICAI opposes revisions to SA600, which would make principal auditors fully responsible for group financial statements, fearing it could lead to dominance by large firms. Disputes also persist over joint audits (SA299) and the treatment of quality management standards (SQMs).
- The Indian government is preparing voluntary ethical guidelines for organizations working with artificial intelligence (AI) and generative AI, particularly those developing large language models (LLMs) or using data for AI training. Spearheaded by the Ministry of Electronics and Information Technology (MEITY), these guidelines aim to promote responsible AI practices, covering areas such as training, deployment, and misuse prevention. While a formal AI law is not imminent, the guidelines, expected by early 2025, seek consensus from industry stakeholders. Inspired by the G7’s AI code of conduct, India’s approach will be distinct but aligned in principle. Earlier, MEITY had issued and later retracted directives requiring registration and government approval for AI models before deployment.
- The Employees’ Provident Fund Organization (EPFO) is preparing an amnesty scheme aimed at companies that avoided registration or defaulted on employee contributions to the retirement fund, set to launch by late 2024 alongside employment-linked incentive (ELI) schemes. The initiative seeks to boost workforce formalization and social security coverage, with a proposed waiver for defaults between 2017 and 2024, allowing employers to regularize their status by paying minimal contributions. However, firms that withheld employee deductions must fully remit the amounts with penalties. The scheme will require approval from EPFO’s central board of trustees and is expected to run for six months after its launch.
- The Insurance Amendment Bill, which proposes 100% foreign direct investment (FDI) in the insurance sector, awaits high-level approval before being introduced in Parliament. Prioritizing the Banking Laws Amendment Bill, the Government aims to lower capital requirements, introduce composite licenses, and enhance operational efficiencies. The proposed bill aligns with the Insurance Regulatory and Development Authority of India’s (IRDAI) push for more capital to achieve “insurance for all” by 2047. It also seeks to boost policyholder security, improve returns, and attract new players to stimulate economic growth and job creation.
- India’s new cybersecurity rules are expected to raise compliance costs for telecom operators, potentially leading to higher mobile tariffs. The proposed rules mandate reporting cybersecurity incidents within six hours, a timeframe significantly shorter than the 72 hours allowed in the US and EU. Legal experts have raised privacy concerns due to the undefined scope of “traffic data” and the absence of limits on data retention, which could lead to indefinite storage of consumer information. Telecom companies may turn to automation and AI tools to manage compliance costs, but concerns remain about balancing privacy rights with security requirements.
Reserve Bank of India (RBI) Updates:
- RBI through its notification issued Amendment to the Master Direction – Know Your Customer (KYC) Direction, 2016 reflecting updates from the Prevention of Money Laundering Rules and the Unlawful Activities (Prevention) Act (UAPA). The key highlights of this notification are as follows:
- Revision in customer acceptance policies to streamline the Customer Due Diligence (CDD) process for existing customers opening additional accounts or acquiring new services.
- Clarification on the periodic KYC update procedure and introduced new requirements for updating KYC records with the Central KYC Records Registry (CKYCR).
- On November 07, 2024, RBI issued ‘Fully Accessible Route’ for Investment by Non-residents in Government Securities – Inclusion of Sovereign Green Bonds’, through which, it broadened the scope of its Fully Accessible Route (FAR) to include 10-year Sovereign Green Bonds for non-resident investors. Prior to this, as outlined in the multiple circulars since March 2020, the FAR had been utilized to facilitate seamless access to certain government securities for both domestic and foreign investors.
- RBI provides a framework for the reclassification of investment threshold by foreign portfolio investors (FPIs) to foreign direct investment (FDI). Once an FPI surpasses the limit, its entire holding is reclassified as FDI, subject to sectoral caps, pricing guidelines, and reporting requirements. The facility of reclassification shall not be permitted in any sector prohibited for FDI. FPIs must obtain Government approvals (wherever applicable), notify custodians, transfer shares from FPI to FDI DEMAT accounts, and adhere to the reclassification process. This move aligns with India’s increased scrutiny of investments from frontier-sharing nations for national security reasons.
Securities Exchange Board of India (SEBI) Updates:
- SEBI through its circular allowed mutual funds to invest in overseas mutual funds or unit trusts having exposure to Indian exposures subject to a cap of not more than 25% of their assets and the contribution of all investors of the overseas MF/UT is pooled into a single investment vehicle, with no side-vehicles segregated vehicles. All investors must have equal and proportional rights in the fund. Furthermore, these overseas MF/UTs are required to disclose their portfolios to the public at least quarterly to ensure transparency.
- SEBI vide its circular states that if FPI (along with its investor group) acquires 10% or more of the total paid-up capital of the Company (on a fully diluted basis) and intends to reclassify its holdings as FDI, it must adhere to the relevant FEMA rules and circulars. Upon receiving such an intent from the FPI, the respective Custodian shall notify the Board and suspend any further purchase transactions by the FPI in the equity instruments of the Indian company until the reclassification is finalized.
- SEBI issued circular to facilitate ease of onboarding for FPI applicants and reduce duplication of available information and allows certain FPI applicants an option to either fill the entire Common Application Form (CAF) or fill an abridged version i.e., a shortened version of CAF. Form is available for categories like funds managed by registered investment managers, sub-funds of master funds, and insurance schemes. The remaining fields shall either be auto-populated or shall be disabled, as applicable, in case the applicant opts for this abridged version of CAF. Applicants must confirm that the auto-filled information is correct and agree to its use.
- SEBI has proposed new rules for SME IPOs, including raising the minimum investment from ₹1 lakh to ₹4 lakh and establishing a monitoring agency to oversee IPO fund utilization. This follows concerns over the misuse of funds and inflated revenues through related-party transactions. SEBI suggests eligibility criteria requiring a minimum IPO size of ₹10 crore and operating profits of ₹3 crore in at least 2 of the past 3 years. Promoter sales through offer-for-sale (OFS) would be capped at 20% of the issue size. The move aims to ensure SME platforms meet their original purpose of supporting genuine growth for small enterprises.
- SEBI dispenses the requirement of a deposit of 1% of the issue size available for subscription to the public by the issuer under Regulation 38 (1) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Tax Update:
- The Department of Income Tax vide its notification dated November 13, 2024, encourages taxpayers to fully disclose foreign income and assets. If taxpayers missed reporting in their original return for Assessment Year 2024-25, they could file a revised return by December 31, 2024, to correct omissions and avoid penalties.
- Central Board of Direct Taxes (CBDT) has extended the due date for filing returns in the case of an assessee who is required to furnish a report from a chartered accountant in relation to the international transaction/ specified domestic transaction under Section 92E of the Income Tax Act, 1961 for the assessment year 2024-25. Now the said report can be filed by Dec 15, 2024.
Upcoming Nuggets:
- SEBI has released a consultant paper to review the definition of Unpublished Price Sensitive Information (UPSI) under SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations). The consultant paper aims to address regulatory clarity and enhance uniform compliance. The proposal seeks to align the definition of UPSI as defined under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Stakeholders are invited to submit their comments, along with supporting rationale, by November 30, 2024.
From the Docket:
- The Hon’ble Supreme Court of India, while considering Review Petition No. 400 of 2021 revisited the judgement given by the Court in the case of Canon India Pvt. Ltd. v. Commissioner of Customs, Civil Appeal No. 1827 of 2018 holding that the Directorate of Revenue Intelligence (DRI) officers have the power to issue show cause notices under Section 28 of the Customs Act, 1962. Further, the Court upheld the constitutional validity of Section 28(11) and Section 97 of the Finance Act 2022, which retrospectively validated such notices.
- Hon’ble Supreme Court of India in the case of M/s. Crystal Transport Private Limited and Anr. (Appellants) v. A. Fathima Fareedunisa and Ors., while relying upon Section 37 of the Partnership Act, 1932, held that when a Company’s assets are taken over by another company, and the latter is carrying out business with the assets of the former, it is imperative in light of that any outgoing partner of the former Company would be entitled to seek for accounts and a share in the profits. The profits such a partner is entitled to can be calculated based on the partner’s share in the assets.
DISCLAIMER
The content provided in this newsletter is intended for general awareness and should not be considered as legal advice. Readers are advised to consult with a qualified legal professional regarding any specific issues mentioned herein. If you have any questions about any of these developments or would like to see something different next month, reach out to us at knowledge@sarthaklaw.com.
We will be back next month with another update. Thank you for reading!