Monday, July 28, 2014

SEBI: Infrastructure Investments and Portfolio Investments

Infrastructure Investment Trusts

Last last year, we had discussed the SEBI Consultation Paper on Infrastructure Investment Trusts. While the move towards the establishment of infrastucture investment trusts (InvITs) was welcome, certain issues such as tax treatment remained to be ironed out. Now that the tax treatment has been addressed in the Budget 2014, SEBI has published a draft of the SEBI (Infrastructure Investment Trusts) Regulations, 2014 for public comments. Only a short window of 7 days was available for comments, which expired on July 24, 2014. For a more detailed discussion of the implications of this draft as well as a comparative analysis, see The Firm – Corporate Law in India.

Foreign Portfolio Investors

The legal regime surrounding foreign institutional/portfolio has undergone a change with the enactment of the SEBI (Foreign Portfolio Investors) Regulations, 2014. In this regard, SEBI has issued a detailed set of Frequently Asked Questions (FAQs) which deal extensively with the legal and operational aspects for foreign portfolio investors (FPIs). This is particularly useful for industry players as well as the regulators in the implementation of the new regime, and makes the process entirely transparent.

“Inversion” Takeovers

Standard treatises on mergers & acquisitions (M&A) contain the usual benefits or rationale for why a company would take over another. These include growth, size, synergies, and so on. One of the significant benefits of takeovers could also be tax synergies such as setting off the losses of one company against the losses of another. Similar benefits may be available with respect to unabsorbed depreciation and other capital allowances in the loss-making company.

In recent times, a whole new tax rationale has been driving M&A activity in relation to US companies, and that is to achieve relocation of U.S. businesses into other jurisdictions so as to minimise the effect of exorbitant U.S. taxes. This is accomplished through “inversion” deals. “Inversions” are described in the Wall Street Journal as follows:

Inversions enable a U.S. company to lower its tax rate. In these deals, a U.S. company buys a foreign target and adopts its home country’s domicile, or the combined company establishes a holding company in a country with a low tax rate. U.S. companies can lower their tax rate to the single digits from as much as 35% through an inversion.

An explanatory video is also available through the M&A Law Prof Blog.

Inversion deals have become quite common in the pharmaceutical and healthcare sectors, with Ireland and the Netherlands becoming common destinations for U.S. companies to relocate to. The deal that has been making waves is U.S. company AbbVie’s proposed acquisition of Shire PLC for US$ 54 billion (as discussed here and here).

Inversion deals give rise to greater concerns in countries such as the U.S. where not only are tax rates high but even the global income of U.S. companies are subject to taxation. There are potentially two ways to deal with this issue. One would be to impose legal restraints on inversion deals, a matter that the U.S. government appears to be seriously considering. The other is a more permanent solution to streamline and minimise the adverse impact of taxation on U.S. businesses.

The issue of reincorpoation and corporate migration is not limited to taxation concerns. Reincorpoations may occur due to other reasons, including onerous regulation in home jurisdictions. Hitherto, concerns had been expressed even in the Indian context due to policy paralysis and overarching legal regulations that led to a few companies relocating from India to other jurisdictions such as Singapore. Now that the Companies Act, 2013 permits Indian companies to amalgmate into foreign companies in reciprocating territories, relocations could very well be implemented through that method.

While inversion deals and cross-border mergers could provide sufficient flexibility to companies to manoeuvre around burdensome taxation or other regulation, equally there exists the concerns as to whether it leaves too much room to engage in tax or regulatory arbitrage through competition amongst various jurisdictions that might lead to a “race to the bottom”.

Paper on CSR in China and India

Professors Afra Afsharipour and Shruti Rana have a new paper titled The Emergence of New Corporate Social Responsibility Regimes in China and India, which is now available on SSRN. The abstract is as follows:

In an era of financial crises, widening income disparities, and environmental and other calamities linked to corporations, calls for greater corporate social responsibility (“CSR”) are increasing rapidly around the world. Though CSR efforts have generally been viewed as voluntary actions undertaken by corporations, a new CSR model is emerging in China and India. In a marked departure from CSR as it is known in the United States and as it has been developing through global norms, China and India are moving towards mandatory, not voluntary, CSR regimes. They are doing so not only in a time of great global economic change, but at a time when both countries are themselves undergoing massive economic and social changes as they re-orient towards more market-based economies and seek to enter the ranks of global economic superpowers.

This Article conducts a comparative analysis of the emerging CSR regimes in China and India and highlights key characteristics of these developing frameworks. This Article begins an inquiry into some of the most significant implications of the CSR regimes now unfolding in China and India, and their potential for effecting legal and societal change. It also raises questions about why China and India are moving towards mandatory CSR when other key global players are taking a largely voluntary approach. Finally, this Article seeks to add to global debates over corporate governance models by enhancing understanding of the corporate governance developments and innovations now arising in China and India.

Sunday, July 27, 2014

Legislative & Regulatory Initiatives in Corporate Governance

Prof. N. Balasubramanian has a new research paper titled Strengthening Corporate Governance in India: A Review of Legislative and Regulatory Initiatives in 2013-2014 that is available on SSRN. The abstract is as follows:

The passing of the long awaited Companies Act in 2013 is probably the single most important development in India’s history of corporate legislation, next only to the monumental Companies Act 1956 which it replaces. While significant improvements have been effected in required standards of corporate governance, there is also some concern of possible overreach making life more difficult for companies as well as their independent directors. Among the major provisions of the Act are those of restraining voting rights of interested shareholders on related party transactions, recognition of board accountability to stakeholders besides shareholders, and extension of several good governance requirements to relatively large unlisted corporations. The paper is organized in three sections. Section I briefly documents the evolution of corporate governance in the country; section II sets out how some of the key governance objectives are sought to be addressed by the Initiatives; and section III concludes highlighting some areas that still need further strengthening.

Briefing on Corporate Social Responsibility

The NSE Centre for Excellence in Corporate Governance (CECG) has issued its most recent quarterly briefing titled Corporate Social Responsibility Under Companies Act, 2013 authored by Prof. Subrata Sarkar. The executive summary is as follows:

The newly enacted Companies Act, 2013 and the Rules notified thereunder makes it statutory for all companies above a certain size to spend 2 percent of their profits towards meeting Corporate Social Responsibility. India is the first country in the world to have mandatory CSR spending (with provisions for exemption) along with mandatory reporting. According to some quick estimates, Indian companies have to spend upwards of Rs. 10,000 crores on CSR in FY 15 and more in subsequent years as the corporate profits grow. While the new CSR regulations will not be a game changer in terms of enhancing overall social spending, the Briefing--after assessing their pros and cons--argues that the CSR regulations are a step in the right direction. The implementation of the new CSR regulations, however, entails certain challenges, which would require measures such as improved regulatory oversight, further clarity on what constitutes CSR spending and coordination among companies. The success of the CSR regulations would depend mainly on how well these challenges are addressed.