The Hon’ble Finance Minister of India, made the budget speech for the year 2019-2020 and presented the Finance (No. 2) Bill, 2019 on July 05, 2019.
Amongst several measures that were announced as part of the Budget Speech and Finance Bill, from a policy and developmental perspective, there were certain announcements made which may have an impact in the corporate sector in general. The proposed amendments have been provided in the Finance Bill.
Minimum public shareholding in the listed companies increased from the existing threshold of 25% to 35%
The Securities and Exchange Board of India (“SEBI”) is to consider increasing the minimum public shareholding in the listed companies from the existing threshold of 25% (twenty five percent) to 35% (thirty five percent).
The amendment has been proposed to increase public shareholding in listed companies and to further protect the interest of the public investors in listed companies.
Pursuant to the amendment, closely held public listed companies (i.e. listed companies having 75% of shareholding held by promoters) need to evaluate option of (i) delisting the securities of such listed companies or (ii) to increase the minimum public shareholding to 35%.
Additionally, this will also have impact on (i) related party transactions of such listed companies considering that approval of majority of minority shareholders will be required for such transactions and (ii) passing of special resolution matters of such listed companies.
Local sourcing norms will be eased for FDI in Single Brand Retail Trading (“SBRT”) sector
The relaxation in local sourcing norms requirement for SBRT is a move to benefit foreign investors (especially, those dealing in technology advanced products) to invest in India.
Earlier, under the FDI Policy, 2017, a 3-year exemption period was given from the requirement of 30% sourcing norms for entities undertaking SBRT of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing was not possible.
The norms were further liberalized with the amendments made pursuant to Press Note No. 1 (2018 series) dated January 23, 2018 whereby an exemption of 5 (five) years was provided to avoid duplication of compliance requirements for SBRT entities which were already sourcing 30% locally for their global operations.
This proposed amendment encourages more FDI in SBRT sector or business activity by allowing new entrants in to this sector.
100% Foreign Direct Investment will be permitted for insurance intermediaries
This amendment has been introduced to further liberalize FDI for insurance intermediaries.
With the proposed amendment coming into force, the foreign investors will be able explore insurance intermediary sector as well in addition to other financial services sector and this will potentially increase the FDI inflow for insurance intermediaries.
FDI in aviation, media (animation, AVGC) and insurance sectors to be further liberalized
Currently, under the FDI Policy, 2017, FDI up to 26% is permitted in print media sector through the approval route whereas in aviation sector, FDI up to 49% is permitted for air transport services through automatic route.
The proposed liberalization (i) will provide a much needed boost to the aviation sector and (ii) seeks to further liberalize the aviation sector including with respect to financing and leasing activities made from the Indian shores.
Existing Know Your Customer (KYC) norms for Foreign Portfolio Investors (“FPIs”) to be rationalized and streamlined
It is proposed to rationalize and streamline the existing Know Your Customer (KYC) norms for FPIs to make it more investor friendly without compromising the integrity of cross-border capital flows.
Under the existing regime, the FPIs were reluctant in sharing the complete KYC details especially, in relation to identification of beneficial owners of FPIs and other disclosures required to be made by FPIs with respect to such beneficial owners.
The proposed amendment will provide relief to the existing FPIs and also seeks to encourage new FPI into the Indian securities market.
Listing norms for social enterprises and voluntary organizations to be introduced
Under the Budget Speech a new provision is proposed to be made for creating an electronic fund raising platform similar to a social stock exchange under the regulatory ambit of SEBI for listing social enterprises and voluntary organizations working for the realization of a social welfare objective so that such enterprises and organizations can raise capital as equity, debt or as units like a mutual fund.
It will be interesting to see how the term ‘social enterprises’ and ‘voluntary organizations’ will be defined under the proposed listing norms of SEBI.
The proposed amendment will help Section 8 companies, charitable trusts and societies in mobilizing funds for public welfare.
Statutory limit for investment by FPIs to be increased
The statutory limit for FPIs to make investment in a company has been increased from 24% to sectoral foreign investment limit. The proposed amendment also provides an option to concerned corporates to limit the investment to a lower threshold. Post this amendment, FPIs will be permitted to subscribe to listed debt securities issued by Real estate investment funds (ReITs) and Infrastructure Investment Trusts (InvITs).
With the notification of the proposed amendment, FPIs will be able to invest in both stock targeted investment and also in passive investments wherein funds are dependent upon available floating stock which are on the global indices.
Non-Resident Indian (“NRI”) and portfolio investment scheme route to be merged with the FPI route
The Budget speech also proposed merger of NRI and portfolio investment scheme route with the FPI route. Such merger of investments will provide for a single law governing foreign investors and regulate investments and ensure proper regulations regulating funds brought in by the non-resident Indians and person of Indian origin. However, the merger of the investments will require a legal framework to enable smooth transition from present law to the proposed law.
Proposed amendments to Payments and Settlement Systems Act, 2007
With the increase in usage of low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, RTGS and other such digital modes, it is proposed that business establishments with annual turnover of more than Rs. 50,00,00,000 shall mandatorily offer such low cost digital modes of payment to their customers and no charges or merchant discount rate shall be imposed on customers as well as merchants for opting for such payment mechanism.
Under the Finance Bill, it has been stated and proposed as an amendment in Payments and Settlement Systems Act, 2007 that no bank or system provider shall impose any charge upon anyone, either directly or indirectly, for using the electronic modes of payment prescribed under Section 269SU of the Income-tax Act, 1961.
Consolidation of labour law
In order to reduce the labour law related disputes, it has been proposed to streamline multiple labour laws into a set of four labour codes. The proposed amendment will ensure that registration process and process for filing of returns will get standardized and streamlined.
Eligibility criteria for NBFC tightened
Section 45-IA of the RBI Act, 1934 has been proposed to be modified to increase the requirements related to registration and net owned funds in relation to non-banking financial companies (NBFCs) which intends to carry on the business of non-banking financial institution. The minimum threshold for the NBFC’s has been proposed to be raised from ‘twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees’ to ‘twenty-five lakh rupees or such other amount, not exceeding hundred crore rupees’.
The above increase proposed to be made in the threshold is subject to condition that banks may notify different amounts of net owned fund for different categories of NBFC’s. This will create a restriction on all the deposit taking as well as systemically important non-deposit taking NBFCs. Further, now stringent compliances will have to be followed in order to fall under the ambit of NBFCs.
Additional relaxations for start-ups
Under the extant regulations for start-ups, the start-ups are relaxed to justify their fair market value of shares to the Category I Alternate Investment Fund (“AIF”). This relaxation is proposed to be extended to the investors falling in the Category II AIF. Accordingly, the valuation of shares issued to these funds by start-ups shall be beyond the scope of income tax scrutiny. Further, the proposed amendment is in line with ‘Startup India’ initiative with an aspiration to impart more funding support.