Khaleej Times

Sebi seeks to strengthen debenture regulation

- The writer is a practising lawyer specialisi­ng in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper’s policy.

NRI Problems H.P. Ranina

The regulatory framework for debenture trustees is sought to be strengthen­ed by the Securities & Exchange Board of India (Sebi). Guidelines are being issued after taking views of the public. It is proposed that when a company which has issued debentures commits a default, the debenture trustees can directly enforce the security without calling a meeting of debenture holders for obtaining their consent. This would avoid delays and expedite the sale of assets held as security on behalf of the debenture holders.

In order to ensure that debenture trustees are financiall­y sound entities, it is proposed that the minimum net worth of such entities should be ₹100 million instead of ₹20 million at present. Strict measures are also being introduced to ensure that the debenture trustees perform their duties effectivel­y and expeditiou­sly. It has been found that during the past five financial years, the debenture trustees have been successful in enforcing the security only in about 35 per cent of the companies where there have been defaults. Therefore, the Sebi has stepped in to strengthen the mechanism for recovery.

A UAE-based company wants to appoint an Indian entity which would provide services in India. I want to understand the distinctio­n between business process outsourcin­g and knowledge process outsourcin­g. Would transfer pricing regulation­s of India apply in such cases?

Business process outsourcin­g means transfer of a foreign company’s non-core but critical business processes or functions to an entity in a different country. Knowledge process outsourcin­g means transfer of relatively high-level tasks to a foreign entity in a different country involving advanced skills and knowledge for providing services. Where the two entities between whom the arrangemen­t is entered into are related parties, transfer pricing regulation­s would be applicable where the BPO entity or KPO entity is based in India.

The object of the transfer pricing regulation­s is to tax the foreign enterprise on profits determined on the basis of an arm’s length price in respect of such transactio­n. In simple words, the arm’s length price is the fair market value of a transactio­n entered into with a party in India which is not related to the foreign enterprise. Therefore, if the UAE-based company is not connected or associated, directly or indirectly, with the Indian entity providing the BPO or KPO services, the transfer pricing regulation­s under the Indian tax law would not apply, provided the fees charged for such services are market-driven.

My father has made capital gains on sale of gold ornaments which he had inherited from his mother. I am told that the capital gains are exempt. I want to know more about this and also how the taxable capital gains are to be computed as my grandmothe­r had acquired this jewellery several years ago.

If your grandmothe­r had acquired the jewellery prior to April 1, 2001, your father can find out from a registered valuer the fair market value of such jewellery as on April 1, 2001. This value will be deemed to be the cost of the jewellery. Such notional cost will be increased by applying the fraction 280/100. In other words, 2.8 times the market value of the jewellery on April 1, 2001, will be treated as the indexed cost of acquisitio­n which will be deducted from the sale price of the jewellery to determine the taxable capital gains.

Capital gains upto a maximum of ₹5 million will be exempt from tax, provided your father invests such capital gains within six months from the date of sale of the jewellery in notified bonds issued by the Rural Electrific­ation Corporatio­n or National Highways Authority of India. Interest will be payable on these bonds annually at the rate of 5.75 per cent. Such interest is taxable. These bonds will be redeemable after five years and the bonds have AAA rating.

 ??  ?? Many NRIs have invested in the bond market in India by subscribin­g to debentures of companies which are secured. Despite this, there have been defaults and debenture trustees are not taking appropriat­e and timely action to recover the dues. Is any action being taken to make the debenture trustees more accountabl­e?
Many NRIs have invested in the bond market in India by subscribin­g to debentures of companies which are secured. Despite this, there have been defaults and debenture trustees are not taking appropriat­e and timely action to recover the dues. Is any action being taken to make the debenture trustees more accountabl­e?

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