AUGUST 2011

VOLUME 1 ISSUE 2

PocketCorp
Message from Editors
Hello readers! After the welcome response the first issue got from you, it brings us immense pleasure to bring forth the second issue of PocketCorp first volume. In furtherance of our endeavors, this issue contains interesting perspectives on some off-beat topics like Islamic Finance and so on. We are confident that it shall serve to be an interesting read. We look forward to bringing out many more informative pieces in our forthcoming issues. Happy Reading!!!

In a Nutshell
The week that was...........................................................................................................................Page 2 Court Watch.....................................................................................Page 3 Is Islamic Finance the next BIG thing?............................................................................................Page 4 Sec 211, Sec 394 & ICAI Who is the Culprit?.............................................................................Page 9 Fees for Technical Service, Territorial Nexus, Extra Territoriality A need to read down?......Page 12 An Analysis of Information Technology (Intermediary Guideline) Rules, 2011............................Page 13 Say Fees The way a lawyer smiles.............................................................................................Page 17

The week that was..

A recap of all the action, fuss and drama over the last week in corporate world and courts

Top Editorials
Our suggestion of must read editorials. Wake Up And Smell The Company! By Shaili Chopra. Economic Times, August 1st, 2011. Please follow the link to read the complete article. IMF Reforms 2010: Do They Mirror Global Economic Realities? By Arvind Virmani and Michael Debabrata Patra. EPW Vol. XLVI No. 30, July 23rd , 2011. Please click on the link to access the article. Towards A Negative List Of Services By Karthik Sundaram, MyLaw. Net, August 8th, 2011. Please follow the link to read the complete article. The US Is Downgraded, Now What? By Dylan Matthews, Washington Post, August 8th, Please follow the link to read the complete article

SEBI introduces a host of long awaited changes in its recent Board Meeting
The prominent changes includes the SEBI board accepting most of the changes suggested by TRAC committee with respect to Takeover Regs, Amendment to SEBI (Mutual Fund) Regulation, Introduction of Infrastructure Debt Funds by insertion of Chapter VI B to SEBI (Mutual Fund) Regulation, 1996 and Amendment to SEBI insider trading regulations. Please follow the link here.

Tightening of transfer and ownership in insurance Cos

dilution

of

The IRDA has come out with draft guidelines aiming to control transfer and dilution of ownership in insurance companies. It has proposed a series of measures including mandatory prior approval for anyone to raise stake beyond 5%, and anyone keen to buy 1% or more should seek regulatory approval.

Government is all set to review tax treaty with Mauritius.

In light of the recent structuring of transactions to avoid payment of tax on sale of shares as capital gains, the Government has decided to review the Double Taxation Avoidance Agreement with Mauritius to eliminate such loopholes in the tax treaty.

Research Idea of the Week Should all sectoral caps for foreign equity participation below 49 percent be relaxed?

Like all great travelers, I have seen more than I remember, and remember more than I have seen - Benjamin Disraeli

COURT WATCH
Super Cassettes Industries Ltd v. MySpace Inc & Anr (Delhi High Court) (July 29, 2011) The Court gave its decision in the dispute between T-Series and MySpace wherein T-Series had alleged infringement of its copyright by MySpace. The present judgment has to an extent cleared the ambiguous nature of the safe harbour provisions under Section 79 of the Information Technology Amendment Act, 2008. The moot point was interpreting s.79 and s.81 to hold intermediaries liable for copyright infringement. The Court held that MySpace is liable for copyright infringement u/s 51 of the Copyright Act, 1957. T.N. Godavarman Thriumulpad v. Union of India (Supreme Court) (July 6, 2011) In a recent judgment the Apex Court adjudicated upon the extent of judicial review in a situation where environmental clearances with regard to mining process had already been granted and where questions are subsequently raised with respect to the validity of the process? The Court lays down clearly that if a project developer complies with the specified procedure for obtaining environmental clearances and there is evidence on record that the entity granting the clearance had done so after due consideration, such clearances would not be reversed to the prejudice of the project developer. Further the Court has gone ahead and laid down a set of comprehensive guidelines for future projects that involve both forest and environmental clearances. The Court in coming to this conclusion had applied the Margin of Appreciation Doctrine and also observed that Doctrine of Proportionality should apply to environmental matters.

Editorials
A collection of the choicest articles and write ups!

If you are planning to get into the finance and banking business you
are probably thinking that you are going to largely survive on charging an interest on various loans or investments that you give out. Well, what if your country passed a law that prohibited you from simply charging interest on loans or investments that you gave out? Now, before you come to the conclusion that this would shatter all your dreams of making money, and begin to think your government consists of a bunch of lunatics, read this article. As a matter of fact, there does exist a couple of words that could still make you an extremely rich, successful and satisfied banker or investor. These two words happen to be Islamic Finance. Islamic finance in essence is finance under Islamic law (or Shariah) principles. The basic sources of Shariah are the Quran and the Sunna, which are followed by the consensus of the jurists and interpreters of Islamic law1. The Islamic Financial System, as stated above, is primarily characterized by the absence of payment and receipt of interest or riba which is expressly prohibited in the Quran. Islamic Finance has had its foundations laid in the latter half of the 20th Century with one of the First Islamic Banks coming up in Egypt in 1963. The growth and development of Islamic Finance has been further propelled by Saudi investors. In 1975, the Islamic Development Bank (IDB) was established to foster the economic

Special article * Is Islamic

Finance the next BIG thing? This article deals with the concept of Islamic Finance and it tells you why, it is fast emerging into a favoured and lucrative practice for Investment banks and firms.

*This Article has been contributed by Abishek Jebraj (V BSL LLB)

development and social progress of member countries and Muslim communities. Slowly countries such as Sudan, Iran and Malaysia began to adopt Islamic banking practices, with the former two even bringing in a 100 percent Islamic Financial System. In 1991, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established while the Islamic Financial Services Board (IFSB) that sets industry standards was set up in Malaysia in 2002. It has been said that as of the year 2007, total Islamic asset aggregates were up to USD 300 billion, and had grown at the rate of 10-15% over the past 10 Years. Bedrock Principles of Islamic Finance - The main principles that govern Islamic Finance can be summed up as follows: The prohibition of taking or receiving interest (Riba); Employment of profit sharing and fee-based financing approaches; and Capital to have a social and ethical purpose beyond pure, unfettered return;

The following approaches are expressly prohibited: Riba which is the taking or giving of interest. Gharar, which is uncertainty about the terms of contract or the subject matter, e.g. prohibits selling something which one does not have a title over. Masir, which is involvement in speculative and gambling transactions Investment in businesses dealing in alcohol, drugs, gambling, armaments, etc. which are considered unlawful or undesirable

ILLUSTRATIVE TABLE OF IMPORTANT INSTRUMENTS IN ISLAMIC FINANCE PRODUCT NAME CATEGORY/NATURE CHARACTERISTICS

MURABAHA

Asset based

Bank purchases the commodity and resells it at a higher price to the capital user, disclosing the profit of margin in the sales price In case of default the client is liable only for the contracted sales price

Cost plus financing

MUDARABA

Asset based

Under Mudaraba, one party provides 100% capital and the other party manages the investment project

Liability based

Profits are shared in a pre-agreed ratio whereas losses accrued are borne by the provider of capital only.

Profit Sharing
Mudaraba is often used for investment funds, where investor provides money to the Islamic bank, which the bank invests charging a management fee

IJARA / IJARA-WA-IKTANA

Asset based

The bank buys and leases out the asset for a rental fee, which includes the capital cost of the equipment plus a profit margin The ownership of the equipment remains with the lessor bank and in case of a finance lease, is transferred on pre-determined terms available under both operating lease and finance lease (ijara-wa-iktana) widely used in house and aircraft financing

Leasing

SUKUK

Islamic Bond

Sukuks are similar to conventional bonds with the difference that these are asset backed and represent proportionate beneficial ownership in the underlying asset

Sukuk holders are entitled to a share in the revenues generated and in the proceeds of the realization of the Sukuk assets

TAKAFUL

Islamic Insurance

Takaful is insurance based on mutual co-operation, responsibility, protection and assistance between groups of participants. It is akin to a cooperative insurance wherein members contribute a specific sum of money to a common pool. Every policyholder pays his subscription to help those that need assistance Losses are divided and liabilities spread according to the community pooling system

ISLAMIC FINANCE DISTINGUISHED FROM CONVENTIONAL FINANCE: Some of the ways in which, apart from the prohibition of giving or taking of interest, Islamic Financial Transactions differ from conventional financial Transactions are: a) The Lender, in almost all financial transactions, at some stage or the other is the owner of the goods financed. This means that the element of risk and other ownership liabilities that the lender undertakes is much greater than in conventional finance. There are however ways to bring down or to protect the lenders risk and liabilities (such as the borrower insuring the lender).

b) The charging of additional interest on default payment is not possible in Islamic financial transactions and hence other methods, such as payment of late fee, have to be employed. c) The usage of complex documentation in Islamic finance to maintain compliance of the Shariah principles. ISLAMIC FINANCE INTO MAINSTREAM MOTION: If you are asking yourself the question why Islamic Finance rest assure that Islamic finance is not only growing but has now officially moved into the mainstream financial markets. Islamic Finance appeals greatly even to non-Islamic people because of the fact that elements of Islamic finance can be combined with Conventional financial techniques and export credit agency support to yield great benefits as well as the attraction it holds to a lot of Islamic investors who are particular about complying with Shariah principles. Islamic finance, in spite of its documentational complexity, not only provides us with diversely structured products but has also contributed enormously in the areas of real estate, aircraft financing, shipping and trade, and importantly, project finance. Global brands such as HSBC and Dubais prided airline Emirates are examples of companies that have employed Islamic financial techniques and instruments to achieve great gain. Current global Islamic banking assets and assets under management are estimated at around USD 1 Trillion1, and with its value set to hit well over USD 1 Trillion in the next 5 years1, mainstream banks are being given a run for their money. ***

*SEC 211, SEC 394 & ICAI WHO IS THE CULPRIT?

A research note about conflicts between of Secs 211, 391 & 394 of Companies Act, Accounting Standard 14.

Let us 1st have a look at the exemptions u/s 211 of Companies Act, 1956 Section 211(3): Sec 211(3) gives the Government the power to exempt by issue of notification any class of companies from complying with the requirements in schedule VI if it deems it necessary for public interests. Such exemptions maybe either conditional or unconditional. The requirements under Sec 211 (3A onwards) simply state that every profit and loss account and balance sheet of a company shall comply with accounting standards and if they do not then it shall disclose particulars such as the deviation from following the standards laid down, reasons for such deviation and financial effect of such deviations.

The standards being referred to in this section are the Accounting Standards (AS) recommended by the Institute of Chartered Accountants of India (ICAI). However, not all accounting standards are necessarily to be followed under this section but only those which are prescribed by the government. The Central government reserves the power to allow any one company to modify the particulars to be mentioned in its Balance Sheet or Profit and Loss Account. The above provisions clearly list the Central government as the sole authority for permission regarding deviance from ICAI Accounting Standards. In fact the Central government itself prescribed the usage and subsequent mandate of application of Accounting Standards to all companies governed under the Act. An isolated reading of Sec 211(3B) would lead to an erroneous inference as stated earlier. The clause is to be read along with clause (4) that gives the Central government the power to accept or reject the reasons offered by the Company for any deviation from the AS prescribed. Now an important point to note here is that with relation to the exemption under Sec 211 no authority other than the Central government has been mentioned so it wouldnt be too farfetched to infer that the Central government is the sole body capable of granting said exemption under this section coupled with the fact that

it was the same body on whose mandate the compulsion of following the AS provisions came into force. Now coming to the alleged point of Conflict between the Accounting Standards and Section 394 of Companies Act Sec 394 deals with the procedure for amalgamation and the sanction that Companies require by the High Court to carry forward the amalgamation. Under Sec 394, the sole authority for permitting the sanction is the HC and therefore any exemptions to be granted with respect to amalgamation of companies should rest with the Courts. However, a closer examination of Sec 394 leads us to the following conundrum: Since section 394 nowhere states that the Court order will override accounting standards prescribed u/s 211 of Companies Act. Usually any section which has overriding powers usually starts with the words notwithstanding any other provision of this Act But neither Section 391 nor Sec 394 contain any such words. So, where is the power given to Courts to override accounting standards prescribed by ICAI? Is it a myth? The answer is NO and this takes us to the real culprit ICAI and its Accounting Standard 14 Accounting for Amalgamations. A reading of the AS14 dealing with Treatment of Reserves under a Scheme of Amalgamation shows us that the sanctioning authority (in this case the HC) has the power to allow any deviance from following the accounting standards prescribed. To put this into perspective: The AS14 prescribed by the ICAI which has derived its mandate from an insertion by the Central Government (in Sec 211 3A-3C), contains in itself a provision that empowers the sanctioning authority (in this case the HC) to override the powers of the very authority that has mandated the usage of such AS, which is a set standard for all Companies incorporated under the Companies Act. So, it is widely believed, the problem is not with the High Courts. The crux of the issue lies in AS14, which has allowed the Court to override the powers given to ICAI u/s 211 of Companies Act. Interestingly, the Income Tax Department of late have objected to many schemes of amalgamations on the ground that the motive behind these schemes is tax evasion. Significantly, Gujarat HC in the case of Vodafone Essar, accepted the

IT Department argument and struck down the scheme. The Delhi HC has gone a step ahead and held in the case of scheme of amalgamation of Spice Communications and Idea Cellular that Courts can always stipulate that scheme, which will come into effect only when all the requisite statutory and contractual permissions and licenses have been obtained from the concerned authorities required under any separate statues or laws or license. This clearly means that the High Court orders sanctioning the schemes us/ 391 to 394 DO NOT have overriding powers. So, why are we blaming the High Courts for all the murky accounting treatment when it is the ICAI which has created this ambiguity via AS14?

***

*This article has been contributed by Mr. Arun Giri (Co founder Tax Sutra) and Oscar Abraham ( IV BSL LLB)

*Fees for Technical Service, Territorial Nexus, Extra Territoriality A need to read down?
This article deals with principle of Territorial Nexus with regard to fee paid for Technical Services.

The principle of territorial nexus has played an important role in bridging the gap between the powers of the Parliament to make laws under Article 245 of the Indian Constitution and the extra-territorial operation of such laws with regard to Section 9 of the Income Tax Act, 1961. This section contains the categories of incomes which are deemed to accrue or arise in India. Clause (vii) of Sub-Section (1) contains provisions for income by way of fees for technical services paid by the Government or a resident to a non-resident. It also covers cases where such amounts are paid by non-residents. As regards taxability of payments made by a resident, exception is made where services for which the payment is made is utilized by such person in his business or profession outside India or when the payment is made in order to make or earn income from a source outside India. Payments made for technical services by non-residents are taxable in India only when such payments are made for services utilized in the business or profession of such non-resident in India or when such payment is made in order to make or earn income from a source in India. It is thus clear that the test for taxability of fees for technical services is not the person making the payment, but the nexus such income has with India. When such nexus exists, payments made by non residents are brought to tax and when there is absence of such nexus, even the payments made by residents are immune from tax liability. The Apex Court has also applied this principle in two of its landmark judgments on the issue. The Supreme Court in the ECIL case [(1990) 183 ITR 43 (SC], upholding the constitutional validity of Section 9(1) (vii), held that Article 245(1) of the Constitution gives power to the Parliament to make laws for any part or the whole of the territory of India, and that according to Sub-Section (2), such laws shall not be invalid on the ground that they have extra-territorial operation. It is, however, necessary that such law must have some relationship within India, failing which, in the words of Honble Justice Pathak, the then Chief Justice of India it is inconceivable for Parliament to make such laws. In an equally landmark case G. V. K. Industries Ltd. v. Income Tax Officer [(1997) 228 ITR 564 (AP)] where the question was regarding the taxability of success fees paid to a non-resident company for raising of finances of the Indian company, the High Court held that such financial services fell within the purview of Section 9(1) (vii)(b) in the form to technical services and hence were taxable in India. On appeal, the Apex Court laid down that although Clause 2 of Article 245 was an exception to Clause 1, the operation of laws with extra-territorial aspects without having any nexus with India was beyond the powers of the Legislature. Hence, it is essential to read down this provision to include those aspects which have a territorial nexus with India. ***

*This article has been contributed by Akhilesh Gupta (V BSL LLB). To read the detailed article, Please follow the link

*An Analysis of Information Technology (Intermediary Guideline) Rules, 2011

A research note that seeks to classify the duties and obligations of Intermediary as envisaged under the said rules.

The meaning of Intermediary for the purposes of Information Technology Act, 2000 amended 2008 is found in Section 2, sub clause (w): Intermediary, with respect to any particular electronic records, means any person who on behalf of another person receives, stores or transmits that record or provides any service with respect to that record and includes telecom service providers, network service providers, internet service providers, web hosting service providers, search engines, online payment sites, online auction sites, online market places and cybercafs. The recently notified Information Technology (Intermediaries Guidelines) Rules, 2011 impose certain obligations which are sine qua non for performing their operation(s). Sub Clause 3 of the said Guidelines titled Due diligence to be observed by the intermediary spells out the obligations that an intermediary must observe while discharging their functions. The obligations of the intermediary are hereinafter listed in the order in which they appear in the said guidelines DOS Intermediary shall publish a compilation of rules & regulations, privacy policy and user agreement for access or usage of the intermediarys computer resource by any person. Such rules & regulations, terms and conditions or user agreement requires the users of the intermediarys computer resource NOT to host, display, upload, modify, publish, transmit, update or share any information (These obligations enlist the dont on part of the users): 1. information belonging to another person; 2. is considered grossly (harmful, harassing, blasphemous, defamatory, obscene, pornographic, pedophilic, libelous, invasive of anothers privacy, hateful, or racially, ethnically objectionable, disparaging, relating or encouraging money laundering or gambling or otherwise unlawful in any manner whatever); 3. causes harm to minors;

4. infringes intellectual property rights of others; 5. violates any other law in force; 6. information capable of deceiving or misleading the addressee the true origin of such message 7. information having the potential of being grossly (offensive or menacing in nature); 8. indulges in impersonation of another; 9. information contains (any software viruses, or other computer codes, program) which are designed and capable of disrupting the smooth functioning or destroy, impede or severely limit the functionality of any computer resource; and 10. the information threatens (the unity, integrity, defense, sovereignty of India, friendly relation with foreign state, insults foreign nation, public order, incites commission of any punishable offence and deters or prevents ongoing investigation) Upon receiving knowledge in writing or by email from the affected person of any content that is abusive, intrusive or otherwise as listed above to infringe any persons right, the intermediary must within a period of 36 Hours disable access to such infringing information, and shall preserve such information for a period of 90 days for investigative purposes. The intermediary should inform its users of non compliance (with rules & regulations, user agreement and privacy policy for access or usage of intermediarys computer resource) the intermediary has the right to terminate the access of usage right of such users Utmost compliance of the provision of this Act and other laws in force is required of the intermediary.

The intermediary is required to provide information for the assistance of government agencies for the purpose of investigative, protective and cyber security activity. The information or any other assistance shall be provided for (verification of identity, prevention, investigation, prosecution, cyber security incidents and other punishment of offences under any law in force) provided such a request is clearly made in writing. It is also required to report cyber security incidents and share information related to such incidents with Indian Computer Emergency Response Team. The intermediary is required to take all reasonable measures to secure its computer resource and information. It is required to follow reasonable security and practice procedures as prescribed under Information Technology (Reasonable security practices and procedures and sensitive personal information) Rules, 2011 Compliances required under reasonable security and practice procedures are listed below as follows 1. A body corporate or person on its behalf is said to have complied with reasonable security practices and procedures (if, they have implemented security practice standards and have a comprehensive documented information security program and information security policies that contain managerial, technical, operational and physical security control measures that are appropriate with the information asset being protected with the nature of business) 2. In the event of information security breach, the body corporate or a person on its behalf is required to demonstrate to agency mandated under the law that they have implemented security control measures as per their documented security program and information security policies. 3. The standards that have been referred to in (1) and (2) are International Standard IS/ISO/IEC 27001 on information Technology Security Techniques Information Security Management System Requirements. The body corporate or a person on its behalf who have implemented either IS/ISO/IEC 27001 standard or the codes of best practices for data protection as approved and notified under sub rule (3) shall be deemed to have complied with necessary standards and practices provided the same has been certified and / or audited on a regular basis by an independent auditor.

4. Any industry association or an entity formed by such an association, whose members are self regulating by following standard other than IS/ISO/IEC 27001 codes of best practices. The same shall get their codes for best practices duly approved by the Central Government.

The intermediary is required to publish the contact details of its grievance officer on its website. The grievance officer is to redress complaints within 1 month of it being brought to his notice.

DONTS

The intermediary must not knowingly (host, publish, initiate transmission, select the receiver of transmission and select and / or modify the content of such transmission). Exception to these obligation are 1. If the intermediary happens to be (temporary, transient or immediate storage of information automatically within the computer resource as an intrinsic feature of such computer resource) and involving no human editorial control (for onward transmission). 2. Removal of any information, data, or communication link if its brought immediately to the knowledge of the intermediary to be bad in law. The intermediary must not knowingly (deploy, install, modify the technical configuration of computer resource) which can thereby aid in circumvention of law in force. Exception to the above if the intermediary may develop, produce, distribute or employ technological means for the sole purpose of performing the acts of securing computer resource and information.

***

*Article by the Editorial Board

Say Fees- The way a lawyer smiles

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February. ~ Mark Twain Q: Why did God create stock analysts ? A: In order to make weather forecasters look good. Q: Why are lawyers like nuclear weapons? A: When they land, they prevent anything from functioning for the next hundred years. You have the right to remain silent, anything you say will be misquoted and used against you in court ~ Anonymous Q. What's the difference between a lawyer and a vampire? A. A vampire only sucks blood at night. Q: Whats wrong with lawyer jokes? A: Lawyers dont think they are funny and nobody else thinks they are jokes.

SOURCE: - WASHINHTON POST, AHAJOKES [dot] COM

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PocketCorp is the initiative of Corporate Law Cell of ILS Law College. PocketCorp is conceptualised, designed, and edited by: -

Editorial Oversight Committee

Lakshmi Krishnan (V BSL LLB) Mrinali Kaul (V BSL LLB) Reuben Perumal ( V BSL LLB) Kirthi Srinivas G (IV BSL LLB)

News Editors
Ishita Luthra (IV BSL LLB)

Assistant Editors Devahuti Phatak (II BSL LLB)

Disclaimer: The views and opinions expressed by the contributors are personal and do not in any way reflect or represent the opinion and views of Corporate Law Cell of ILS Law College, Pune.

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