DPIIT ISSUED NEW SOPS FOR CLEARANCE OF FDI PROPOSAL

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INTRODUCTION:

With the aim of enhancing "ease of doing business" and "promoting the principle of Maximum Governance and Minimum Government", the Government of India abolished the Foreign Investment Promotion Board ("FIPB") on May 24, 2017. In its place, the relevant administrative ministry/department in consultation with the Department for Promotion of Industry and Internal Trade ("DPIIT") are now directly responsible for processing applications for foreign direct investment ("FDI") in India in sectors which require prior approval of the Government. However, (DPIIT) earlier known as Department of Industrial Policy & Promotion (DIIP).

The Government of India, vide its Notice No. 1/8/2016-FDI Policy Government of India, Ministry of Commerce & Industry, Department of Industrial Policy & Promotion on 9th November, 2020 revamp the existing Standard Operating Procedures (SOPs) for processing foreign direct investment (FDI) proposals to fast track approvals.

The Salient features of the updated SOPs for processing FDI proposals, inter alia includes:

     A.      Online Filing of Application:

• Proposals for foreign investment in sectors/activities requiring Government approval as per the Consolidated FDI Policy dated 15.10.2020, as amended from time to time (FDI Policy) and Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 dated 17.10.2019, as amended from time to time (FEM Non-Debt Instrument Rules 2019) would be filed online through the Foreign Investment Facilitation Portal (FIFP).
• The applicant would be required to submit the proposal for foreign investment in terms of the guidelines and requirements under the FDI Policy, SOP and FIFP. The applicant shall make the application as per the format and requirements under the FIFP and have to upload 23 documents of which 9 are mandatory. The documents include details of ownership, control and significant beneficial owners of the entities involved, and registration of outlets with states.
• After filing the proposal, DPIIT will identify the concerned Administrative Ministry/Department and e-transfer the proposal within 2 days to the concerned Administrative Ministry/Department (Competent Authority) for processing and disposal of the case. In case if applications are not digitally signed, upon receipt of the online communication from DPIIT  the applicant would be required to  submit the signed physical copy of the application within 7 days of such communication from DPIIT. However, additional 7 days may be provided by the Competent Authority for submission of application.

         B.       Competent Authorities for Approval/Rejection of Foreign Investment:

After the abolition of the FIPB, the DPIIT issued a standard operating procedure ("SOP") for processing FDI proposals with guidelines, including detailed timelines, to ensure uniformity of approach across sectors. The SOP identified administrative ministries/departments (the "Competent Authority") for respective sectors in which FDI requires the prior approval of the Government.

Investments from an entity of a country that shares a land border with India, or where the beneficial owner of an investment into India situated in or is a citizen of any such country, would require clearance from the Ministry of Home Affairs.

 C.   Procedure for Processing of Applications Seeking Approval for Foreign Investment for a simpler and expeditious disposal:

1.     Upon receiving the proposal, DPIIT shall circulate the same within 2 days to RBI and Ministry of External Affairs for their comments. Additionally, if security clearance is required the proposal would be referred to Ministry of Home Affairs (MHA).

2.     If specific issues of proposals requires clarification in FDI Policy, the same shall be referred to DPIIT for clarification within 2 weeks of referral.

3.     Consultation with any other Ministry/ Department will require full justification and approval of the concerned Secretary.

4.     Comments of the concerned ministries/departments and MHA for security clearance shall be uploaded on the portal within 4 weeks and 6 weeks from the  online receipt of the proposal, respectively.

5.     Within 1 week of scrutinizing the application with additional comments, the Competent Authority shall raise queries or ask for additional documents from the applicant. Time taken by applicant to address the same to be excluded from time limit for disposal of application.

6.     Once the proposal is complete, the approval/rejection shall be communicated online to the applicant and the consulted Ministries/ Departments by the Competent Authority within 4 weeks.

7.     In case of proposals involving total foreign equity flow of more than Rs. 5000 crores, the Competent Authority will place the same for consideration before the Cabinet Committee on Economic Affairs within the timelines specified, with the decision to be communicated 1 week from such consideration concluding.

8.     Proposals which are sought to be rejected, or proposals stipulating additional conditions, shall require concurrence of DPIIT by the Competent Authority within 10 – 12 weeks (MHA should be consulted) from receipt of the proposal.

9.     All Mergers & Acquisitions involving FDI requires approval of the NCLT/Competent authority as a “necessary pre-condition”. In case if NCLT/Competent authority approval is not available the applicant may be advised to resubmit the application along with requisite approval(s).

10. Secretary, DPIIT is the competent authority that issued the approval letter in the prescribed format for rejection of the proposal/stipulation of additional condition.

11. DPIIT and each of the Competent Authorities shall maintain a database on the proposals received along with details such as date of receipt, investor and investee company details, volume of foreign investment involved, and date of grant of approval/rejection letter.

12. If an applicant proposes to surrender an approval letter granted to the investee entity/investor, then concerned administrative Ministry/Department may accept the withdrawal of the approval letter and an acknowledgement in this regard has to be sent to the applicant clearly indicating the date from which the approval letter stands withdrawn.

    D.  Monitoring & Reviewing:

• Competent Authorities will hold a regular monthly review on the foreign investment proposals pending with them.
• Regular Review meeting on pendency of FDI proposals with concerned Administrative Ministry(ies)/Department(s) would be convened by Secretary, DPIIT, periodically every four (04) to six (06) weeks. The Secretary of the concerned Administrative Ministry/Department may also attend the meeting.
• Administrative Ministries/Departments should update the information regarding date of physical receipt of the application and update the decisions taken on the portal.
• Administrative Ministries/Departments should furnish a fortnightly report on pending proposals. Also, administrative Ministries/ Departments should maintain an updated database of all proposals dealt by them.

CONCLUSION:-

DPIIT has issued a new set of guidelines in place of existing SOP issued in 2017, to expedite the process for clearances, including security, for processing FDI proposals on the fast track approval route in terms of the guidelines and requirements under the FDI Policy, SOP and FIFP. 

This Article has been Compiled by Deepika Sharma  (Senior Associate) You can direct your queries or comments to the author at deepika@factumlegal.com

Disclaimer:

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

 

 

Revised Framework for Core Investment Companies

 The Reserve Bank of India (‘RBI’) vide its circular dated August 13, 2020 has revised the regulatory framework applicable to core investment companies (‘CICs’)  in order to ensure stability of the financial system and address systemic risks posed by CICs and their group companies.

CICs are non-banking financial company holding not less than 90% of their net assets as investments in equity shares, preference shares, bonds, debentures, debt or loans in group companies. Its investments in equity shares in group companies constitute a minimum of 60% of its net assets.

RBI had constituted a Working Group (WG) to Review Regulatory and Supervisory Framework for CICs, on July 03, 2019, with Shri Tapan Ray, former Secretary, Ministry of Corporate Affairs, GoI as the Chairperson. Based on the key recommendations provided by the WG, the revised framework has now been issued by RBI.

The key takeaways from the revised guidelines are as follows:

• Restriction on the number of layers in group structure: RBI has directed CICs to restrict the number of layers in their group structure to just two as it seeks to clean up the structure of complex financial groups. Existing CICs have been given until the end of March 2023 to comply with this simplified structure.
• Adjusted Net Worth (ANW) : While computing ANW, the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent such amount exceeds ten per cent of owned funds of the investing CIC, will be deducted. The deduction will take place immediately for any investment made by one CIC in another CIC from now on. If an investment by a CIC in another CIC is already in excess of 10% as of August 13, 2020, the entity need not deduct the amount till March 31, 2023.
• Constitution of a Group Risk Management Committee (GRMC): The parent CIC in the group or the CIC with the largest asset size, in case there is no identifiable parent CIC in the group, will constitute a Group Risk Management Committee (GRMC), to analyse the material risks to which the group, its businesses and subsidiaries are exposed. The GRMC shall report to the board of the CIC that constitutes it and shall meet at least once in a quarter. The GRMC shall consist of a minimum of five members, including executive members. At least two members shall be independent directors, one of whom shall be the chairperson of the GRMC. Members will be required to have adequate and commensurate experience in risk management practices.
• Corporate Governance and Disclosure Requirements: CICs are required to develop and maintain a functional website revealing the basic information about the entity and the group, annual report, corporate governance report, management discussion and analysis.
• CICs shall ensure that a policy is put in place with the approval of the Board for ascertaining the ‘fit and proper’ status of directors not only at the time of appointment, but also on a continuous basis.
• The RBI has mandated strict disclosure formats which require details of leverage, guarantees and investments. A detailed disclosure of the maturity pattern of assets and liabilities has also been prescribed.
• Exceptions to carrying other financial activity: RBI has now permitted CICs to invest in money market instruments, including mutual funds which make investments in money market instruments/debt instruments with a maturity of up to 1 year.
• Consolidation of Financial Statement (CFS): It has been directed that CICs shall prepare CFS as per provisions of Companies Act, 2013, so as to provide a clear view of the financials of the group as a whole. However, it is possible that entities that meet the definition of group as per extant regulations are not covered under consolidation due to exemptions granted as per statutory provisions/ applicable accounting standards. For such entities which are not included in the consolidation, disclosures shall be made in the indicative format.
• Change in nomenclature and Registration: Besides the above, the revised framework has also modified the nomenclature of Systemically Important CIC to “Core Investment Company” and exempts CICs to "Unregistered CICs". The exempt CICs are the CICs with an asset size of (a) less than INR 100 Crore; or (b) with an asset size of INR 100 Crore and above and not accessing public funds.

This Article has been Compiled by Charu Jhamtani (Associate)

You can direct your queries or comments to the author at charu@factumlegal.com

 

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

 

Analysis on Foreign Portfolio Investor under NDI Rules, 2019

Introduction

The Finance Act, 2015 amended Section 6 (Capital Account Transaction), Section 46 (Power of Central Government to make rules) and section 47 (Power of RBI to make regulations) of the Foreign Exchange Management Act, 1999 (FEMA, 1999). These amendments have the effect of altering the powers of the Central Government and Reserve Bank of India (RBI).

In terms of  amended provisions of FEMA, the Central Government has made Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules") on October 17, 2019 superseding the erstwhile Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 ("TISPRO") and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018, whereas RBI has notified Foreign Exchange Management (Debt Instruments) Regulations, 2019 superseding TISPRO, and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, which provides for reporting requirements in relation to any investment made under the NDI Rules.

The foreign investments allowed to be received from different types of investors including Foreign Portfolio Investors registered with the SEBI under SEBI (FPI) Regulations, 2014

In this article we have encapsulated provisions dealing with investment by Foreign Portfolio Investors under the NDI rules.  

Acquisition of equity instruments/other securities/units by FPI

“FPI” or “Foreign Portfolio Investor” means a person registered in accordance with the provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.

Under Rule 10 read with Schedule II of NDI Rules permit FPIs to invest in listed entities in equity instruments as well as other identified securities. The provisions regulating the investment by FPI have been captured under Chapter IV of NDI Rules which inter-alia prescribed that FPI may:

1. Purchase equity instruments of an Indian company which is listed or to be listed on a recognised Stok exchange.
2. Purchase units of domestic mutual funds or Category III Alternative Investment Fund or offshore fund for which no objection is issued in accordance with the SEBI (Mutual Fund) Regulations, 1996, which in turn invest more than 50 percent in equity instruments on repatriation basis subject to the terms and conditions specified by the SEBI and the Reserve Bank.
3. Trade or invest in all exchange traded derivative contracts approved by SEBI from time to time subject to the limits specified by SEBI and in compliance of conditions prescribed in Schedule II of NDI Rules.
4. Purchase, hold, or sell Indian Depository Receipts (IDRs) of companies’ resident outside India and issued in the Indian capital market, in the manner and subject to the terms and conditions as prescribed in Schedule X of the NDI Rules.
5. Purchase equity instruments of an Indian company through public offer or private placement, subject to prescribed limit and in compliance of pricing conditions as prescribed under Schedule II.

Permitted Aggregate Holding by a FPIs

The pertinent change in NDI Rules, regulating investment by FPIs is that the default aggregate investment limits in an Indian company is the applicable sectoral cap, as laid out in Schedule I. Unlike the erstwhile the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, where the aggregate limit of FPI was upto 24%, with the company being provided the option of enhancing the limits to the applicable sectoral cap.

Ø  Until March 31,2020 the total holdings of all FPIs put together (including any other direct and indirect foreign investments in the Indian Company permitted under the NDI Rules) in an Indian Company is not permitted to exceed 24% of the paid up equity capital on a fully diluted basis or paid up value of each series of debentures or preference shares or share warrants (except if the ceiling has been raised to sectoral cap or statutory ceiling by the board or shareholders of the company).This is in line with the framework that was prescribed under FEMA.

Ø   Under the NDI Rules, from April 01, 2020 the aggregate limit will automatically be deemed to be the sectoral cap as contained in the NDI Rules without the requirement to pass any board or shareholders resolutions. The aggregate limit can be decreased by the Indian company to a lower limit of 24%, 49% or 74% as deemed fit, with the approval of its board and shareholders (by way of a special resolution) before March 31,2020.Similarly, where an Indian company has decreased its aggregate limit as mentioned above ,it may increase such aggregate limit to 49% or 74% or the sectoral cap or statutory ceiling as deemed fit, with the approval of its board or shareholders(by way of a special resolution).However, once the aggregate limit has been increased the Indian company cannot reduce it to a lower threshold.

Purchase or sale of securities other than equity instruments by FPIs

FPI can now invest in:

1. Units of domestic mutual funds Category III Alternative Investment Funds offshore fund for which no objection is issued under the SEBI (Mutual Fund) Regulations, 1996 and which in turn invests more than 50% in equity instruments on repatriation basis. 
2. Units of real estate investment trusts and infrastructure investment trusts on repatriation basis subject to the terms and conditions specified by SEBI.

Transfer of equity instruments of an Indian company by FPI (Automatic route)

FPI may transfer equity instrument/s of Indian company or unit in compliance of conditions as prescribed by SEBI and those as specified in the schedules under NDI Rules. However, the government approval would be required in case:

•  Transfer of equity instruments of company engaged in a sector which requires the Government approval.
• Acquisition of equity instruments by FPI made under Schedule II of these rules has resulted in a breach of the applicable aggregate FPI limits or sectoral limits.

Closing Note:

• In case, two or more FPI’s including foreign Governments/their related entities are having common ownership, directly or indirectly, of more than fifty percent or common control, all such FPI’s shall be treated as forming part of an investor group. Control includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
• If FPI’s investment breach the prescribed limits as discussed above, FPI shall have an option to of divesting their holdings within 5 trading days from the date of settlement of the trades causing the breach, failing which the entire investment by FPI and its investor group would be considered as the FDI and they will not be allowed to make investment in concerned entity as a FPI.
• The FPI, through its designated custodian, shall bring the same to the notice of the     depositories as well as the concerned company for effecting necessary changes in their records, within -seven trading days from the date of settlement of the trades causing the breach .
• In case of breach of investment limits by an FPI, the divestment of holdings by the FPI and the reclassification of FPI investment as foreign direct investment shall be subject to further conditions, if any, specified by the Securities and Exchange Board of India and RBI, in this regard.

This Article has been Compiled by Deepika Sharma (Senior Associate)

 Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

 

ANALYSIS OF SUPREME COURT JUDGEMENT IN THE MATTER OF BABU LAL VARDHARJI GURJAR VS VEER GURJAR ALUMINIUM INDUSTRIES PVT. LTD & ANR.

Case Name	BABU LAL VARDHARJI GURJAR VS VEER GURJAR ALUMINIUM INDUSTRIES PVT. LTD & ANR. Case Citation – 6347 of 2019
Corporate Debtor	Veer Gurjar Aluminium Industries Pvt Ltd
Appellant	Babu Lal Vardharji Gurjar
Respondent	Veer Gurjar Aluminium Industries Pvt. Ltd & Anr.
Respondent No. 2	JM Financial Assets Reconstruction Company Pvt. Ltd.
Date of Judgement	14th August,2020

ISSUE OF THE CASE

Whether the application made by respondent under Section 7 of the Code is within limitation ?

FACTS OF THE CASE

On 22.12.2007, the lender banks viz., Corporation Bank, Indian Overseas Bank and Bank of India sanctioned and extended various loans, advances and facilities to the corporate debtor. The corporate debtor executed various security documents in favour of the lender banks in the years 2008 and 2009, including those of equitable mortgage against the facilities obtained. The Corporation Bank proceeded to rephrase/enhance the facilities to the corporate debtor from time to time and lastly on 27.08.2010 where for, various additional security documents were executed by the corporate debtor. The corporate debtor having defaulted in payment of the amount due against such loans, advances and facilities, its account with Corporation Bank was classified as Non Performing Asset on 08.07.2011 and that with Indian Overseas Bank was classified as NPA on 05.08.2011. Then, on 15.11.2011, demand notice under Section 13(2) of the SARFAESI Act, 2002 was issued by Indian Overseas Bank to the corporate debtor and its guarantors. These steps were followed up with recovery proceedings against the corporate debtor by the consortium of lenders and respondent No. 2 before the Debts Recovery Tribunal, Aurangabad under Section 19 of the Recovery of Debts Due to the Banks and Financial Institution Act, 1993.

Even when the aforesaid proceedings were pending before DRT, on or about 21.03.2018, the respondent No. 2 moved an application before the Adjudicating Authority under Section 7 of the Code.

DECISION BY NATIONAL COMPANY LAW TRIBUNAL (NCLT) ORDER DATED 09.08.2018

The Adjudicating Authority, dealt with the submissions of the parties and, while rejecting the objections of corporate debtor in relation to the frame of application and the correctness of loan accounts, the Hon’ble NCLT held that the applicant was entitled to initiate CIRP under Section 7 of the Code when there was a debt and there was default; and that being a statutory remedy available to the financial creditor, the corporate debtor cannot question its maintainability only for the applicant having adopted other proceedings under other enactments.

Accordingly, the Adjudicating Authority (NCLT) admitted the application for consideration; passed necessary order of moratorium; and appointed the interim resolution professional.

DECISION BY NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT) ORDER DATED 14.05.2019

In the impugned order dated 14.05.2019, the Appellate Tribunal has observed that the Code having come into force on 01.12.2016, the application made in the year 2018 is within limitation. The Appellate Tribunal stated  that mortgage security having been provided by the corporate debtor, the limitation period of twelve years is available for the claim made by the financial creditor as per Article 61 (b) of the Limitation Act, 1963 and hence, the application is within limitation. The substance of the relevant factual and background aspects, as emanating from the contents of the application under Section 7 moved by the respondent No. 2.

The Appellate Tribunal has rejected the plea of bar of limitation essentially on two major considerations:

1.      That the right to apply under Section 7 of the Code accrued to the respondent financial creditor only on 01.12.2016 when the Code came into force; and

2.      That the period of limitation for recovery of possession of the Mortgaged property is twelve years.

 DECISION BY SUPREME COURT

The application made by the respondent No. 2 under Section 7 of the Code in the month of March 2018, seeking initiation of CIRP in respect of the corporate debtor with specific assertion of the date of default as 08.07.2011, is clearly barred by limitation for having been filed much later than the period of three years from the date of default as stated in the application.

Also the observations in this judgment are relevant only in regard to the issue determined that the application under Section 7 of the Code is barred by limitation and not beyond. In other words, nothing in this judgment shall have bearing on any other proceeding that shall be dealt with on its own merits and in accordance with law.

CONCLUSION

The Court held that in view of the above, this appeal is allowed to the extent indicated and with the observations foregoing. The impugned orders dated 14.05.2019 as passed by the National Company Law Appellate Tribunal, New Delhi in Company Appeal (AT) Insolvency No. 549 of 2018 and dated 09.08.2018 as passed by the National Company Law Tribunal, Mumbai Bench in CP(IB)-488/I&BP/MB/2018 are set aside; and the application made by the respondent No. 2 under Section 7 of the Code, seeking initiation of Corporate Insolvency Resolution Process in respect of respondent No. 1 is rejected for being barred by limitation. Consequently, all the proceedings undertaken in the said application under Section 7 of the Code, including appointment of IRP, stand annulled. No costs.

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This Article has been Compiled by Richa Singh 

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

BUY BACK OF SHARES BY UNLISTED COMPANIES

Buyback of shares is the repurchase of its outstanding shares by a company. Companies generally buyback shares in order to reorganise its capital structure, return cash to shareholders and enhance overall shareholders’ value. Buyback leads to reduction in outstanding number of equity shares, which may lead to improvement in earnings per equity share and enhance return on net worth and create long term value for continuing shareholder.

SOURCES OF FUNDS WHICH CAN BE UTILISED FOR BUYBACK

A company may purchase its own shares or other specified securities out of –

1. free reserves; or
2. Securities premium account; or
3. The proceeds of any shares or other specified securities

A company intending to buy its shares/other securities must have at the time of buyback, balance in any one or more of these accounts, which is sufficient to accommodate the total value of buy back. Buyback of shares out of free reserves/securities premium  account does not mean that amount in the reserve  or premium account is represented by equivalent cash in hand or invested so that the company draw requisite amount of cash from it for the purpose of payment to the shareholders whose shares are bought back. It will be noted that reserve is not a fund; it is only an account created by appropriation of profits by book entry. So far as premium is concerned, though at the time of issue of shares it is received in cash (or kind), it does not remain in that form forever or invested in securities, since it is used by the company for its business and thus used up. Therefore, a company which buys its securities by debiting to free reserves or premium account must have liquid cash sufficient to meet its obligation of payment to the shareholders whose securities are bought.

CONDITIONS FOR BUY-BACK

1. Buy-back is authorized by its Articles of Association;
2. Special resolution is passed by the company authorizing buy-back. However, if the buy-back is 10% or less of the total paid-up equity capital and free reserves, board resolution, in this regard, will suffice;
3. Buy-back is 25% or less of the aggregate of paid up capital and free reserves of the company;
4. The Ratio of debt (secured and unsecured) owed by the company is not more than twice the paid up capital and its free reserves after such buy-back;
5. All the shares or other specified securities for buy-back are fully paid up;
6. No offer of buy-back shall be made within a period of one year from the date of the closure of the preceding offer of buy-back, if any.

TIME LIMIT FOR COMPLETION OF BUY BACK

Within a period of one year from the date of passing of the special resolution, or board resolution, as the case may be, buy-back shall be completed

OPTIONS FOR BUY BACK

The buy-back can be from:

1. from the existing shareholders or security holders on a proportionate basis;
2. from the open market;
3. by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity

TAXATION ON BUY BACK OF SHARES

In case of a domestic company, Section 115QA of the Income Tax Act, 1961 provides for the levy of tax on account of buy-back of shares, at an effective rate of 23.296% (20% + 12% SC + 4% H&EC).    

Buy-Back Tax has to be paid by the company on the distributed income which is nothing but the consideration paid by the company on buy back of shares, as reduced by the amount received by the company on issue of such shares, determined in the manner prescribed under Rule 40BB of the Income Tax Rules, 1962. Also, such Buy Back Tax has to be paid by the company over and above the tax paid by it, if any, on its total income.

Back Tax is levied at the level of company, the consequential income arising in the hands of shareholders is exempt from tax, as per Section 10(34A) of the Income Tax Act, 1961.

For the purpose of Section 115QA, ‘Buy-Back’ means purchase by the company of its own shares, in accordance with the provisions of any law for the time being in force relating to companies.

APPLICABILITY OF STAMP DUTY

No Stamp Duty is payable in case of buy back of shares as company is buying back its own shares and hence, the same does not result in any transfer.

PROHIBITIONS ON BUY BACK

1. No company shall directly or indirectly purchase its own shares:-
2. through any subsidiary company including its own subsidiary companies;
3. through any investment company or group of investment companies; or
4. if a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

 However, the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.

The Company shall not buy-back its shares if the company has not complied with the provisions of 92 (Annual Return), 123 (Declaration of Dividend), 127 (punishment for failure to distribute dividends) and section 129 (Financial Statement).

PENALTY

If a company makes any default in complying with the applicable provisions of the Companies Act, 2018 (i.e. Section 68 of the Companies Act, 2013) the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.   

This Article has been Compiled by Swati Garg (Senior Associate)

You can direct your queries or comments to the author at swati@factumlegal.com

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.