Weekly Round-up on Tax and Corporate Laws | 24th to 29th June 2024

his weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from June 24 to 29, 2024, namely

1. SEBI introduces a fixed price process as an alternative to reverse book-building process for delisting of companies;
2. SEBI amends Insider Trading norms; mandates Compliance Officer to approve/reject trading plan within 2 days of receipt;
3. No prosecution for non-disclosure of foreign assets in ITR if it occurred before enactment of Black Money Act: HC;
4. CBIC fixed monetary limits for filing appeals or applications by the Department before GSTAT, High Courts and Supreme Court;
5. CBIC issued clarification on POS for supply of goods to an unregistered person where delivery address is different from billing address;
6. Clarification issued on time limit under section 16(4) for supplies received from unregistered persons & taxable under RCM: Circular;
7. CBIC issued circular clarifying taxability of supply of salvage/ wreckage by general insurance companies; and
8. Accounting of Social Security Scheme Fund where contribution to the fund is uncertain under Ind AS 19

1. SEBI introduces a fixed price process as an alternative to reverse book-building process for delisting of companies

The SEBI, in its 206th board meeting dated June 27, 2024, introduced significant regulatory changes, including flexibility in voluntary delisting regulations, the issue and listing of Non-Convertible Securities, and measures to facilitate ease of doing business related to activities of InvITs and REITs.  These decisions represent a substantial shift towards improving transparency and governance in India’s financial markets. Some of the key highlights are as follows:

(a) SEBI prohibits unauthorized associations with individuals/entities providing securities advice

The Board approved measures to regulate associations between regulated entities and individuals/entities offering securities advice or making claims. Now, SEBI-regulated entities and agents are prohibited from associating directly or indirectly with individuals or entities providing securities advice, recommendations, or claims on returns or performance unless specifically permitted by SEBI.

(b) SEBI grants disclosure exemptions to simplify operations for ‘Category I FPIs’

The Board has approved a proposal to exempt University Funds and University-related Endowments registered or eligible to be registered as Category I FPI from additional disclosure requirements as prescribed under SEBI’s August 24, 2023 circular, subject to certain conditions.

(c) Introduction of fixed price process as an alternative to Reverse Book Building process for delisting of companies

In order to facilitate ease of doing business, protect the interests of investors and provide flexibility in the Voluntary Delisting framework, the Board has introduced the fixed price process as an alternative to the Reverse book-building process (RBB) for delisting of companies whose shares are frequently traded. The fixed price offered by an acquirer must be with at least a 15% premium over the floor price as determined under Delisting Regulations.

(d) Streamlining public issue process for debt securities and Non-Convertible Redeemable Preference Shares

The Board has approved a proposal to streamline the public issue process for debt securities and Non-Convertible Redeemable Preference Shares (NCRPS). The key changes include reducing the timelines for seeking public comments on draft offer documents from 7 working days to 1 day for listed issuers and 5 days for others, shortening the minimum subscription period to 2 working days and reducing the listing timeline to T+3 working days.

Additionally, SEBI has mandated the use of UPI for individual investors for investments up to Rs 5 lakhs, aligning the procedure with that of specified securities.

(e) SEBI proposes removal of financial disincentives for MDs and Chief Technology Officers of MIIs

SEBI proposes to eliminate automatic financial disincentives imposed on Managing Directors (MD) and Chief Technology Officers (CTO) of Market Infrastructure Institutions (MIIs) in the event of technical glitches in the nature of disaster. In this regard, various recommendations were received from advisory committees, and MIIs indicated that these disincentives hampered the retention of qualified talent.

(f) Revised eligibility criteria for entry/exit of stocks in derivatives segment

The Board has approved a revision in eligibility criteria for the entry and exit of stocks in the derivatives segment of exchanges. The exit criteria must apply only to stocks that have completed at least 6 months from the month of entry into the derivative segment. Further, for existing stocks, the exit criteria based on performance would be applicable 3 months after the date of issuance of the circular.

Read the Press Release

2. SEBI amends Insider Trading norms; mandates Compliance Officer to approve/reject trading plan within 2 days of receipt

Insider trading involves the buying or selling of a company’s shares by individuals who have access to non-public confidential information about the company. On June 25, 2024, SEBI vide notification no. SEBI/LAD-NRO/GN/2024/184 introduced new amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015. The key changes include reducing the trading commencement period for insiders from 6 months to 120 days, removing the requirement for a minimum 12-month trading period, setting clear price limits for trades, and clarifying trade splitting duration to prevent misuse. Some of the key amendments are discussed in detail below –

(a) Trading commencement period for insiders reduced from 6 months to 120 calendar days

The concept of a trading plan was introduced for the first time in the SEBI (Prohibition of Insider Trading) Regulations, 2015. A ‘trading plan ‘ refers to a plan framed by an insider for trades to be executed at a future date.

Regulation 5(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, specifies that an insider can formulate a trading plan and present it to the compliance officer for approval and public disclosure. Further, the trading plan must not allow the commencement of trading on behalf of the insider earlier than 6 months from the public disclosure of the plan. SEBI has now reduced this period to 120 calendar days. This change aims to streamline trading activities while ensuring compliance with insider trading norms.

(b) Insiders are exempted from a 12-month trading period requirement

Regulation 5(2)(iii) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, specifies that a trading plan must involve trading for a period of at least 12 months. However, this requirement has now been removed, simplifying compliance for insiders and allowing them to adapt trading plans to shorter durations as per market conditions.

(c) SEBI clarifies trade splitting duration to prevent misuse

SEBI now clarifies that while insiders can split their trades over different dates, there must be an outer limit to this duration to avoid misuse. This involves setting a maximum time frame for executing these split trades. “Trade splitting” refers to the practice where an insider divides a large transaction involving buying or selling securities into smaller parts that are executed over multiple dates or time intervals. This clarification aims to maintain transparency and prevent potential abuse of insider trading regulations.

(d) Deviations from ‘Trading Plan’ are allowed only in exceptional cases

Currently, under the SEBI (PIT) Regulations, once a trading plan, is approved, it must be irrevocable, and insiders must implement the plan without deviating from it or executing trades in the securities market outside its scope.

However, as per the amended norms, insiders are now required to adhere strictly to their trading plans without deviation or trading outside the plan, except in cases of permanent incapacity, bankruptcy, or operation of law. This change aims to provide greater flexibility to insiders facing unforeseen circumstances.

(e) Compliance Officer mandated to approve/reject trading plan within 2 trading days

Regulation 5(5) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, mandates the compliance officer to notify the stock exchanges of the approved trading plan. Under the amended norms, the compliance officer must now approve or reject the plan within 2 trading days of receipt. This change aims to streamline the approval process and ensure the timely implementation of trading plans.

Conclusion

SEBI’s recent amendments to insider trading regulations aim to enhance operational flexibility and compliance. By reducing the trading commencement period to 120 days and eliminating the mandatory 12-month trading requirement, SEBI enables insiders to adjust more quickly. Further, SEBI’s measures on trade splitting durations and allowing deviations under exceptional circumstances enhance market transparency in financial markets.

Read the Notification

3. No prosecution for non-disclosure of foreign assets in ITR if it occurred before enactment of Black Money Act: HC

The assessee was the Directors of two British Virgin Island Companies. A complaint under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘BM Act’) was filed against the assessee for not disclosing the information of the assets located outside India, including financial interest in any entity, in the income tax return (ITR).

The complaint was filed under section 50 of the BM Act. Section 50 makes it an offence if the assessee fails to furnish any information about an asset located outside India, including financial interest. The section further provides for punishment with rigorous imprisonment, which shall not be less than 6 months but may extend to 7 years, and with a fine.

Assessee filed a writ petition to the Karnataka High Court contending that the complaint was filed for the act committed in 2009. The BM Act came into force on 01-07-2015. Thus, the said act does not fall within the ambit of Article 20(1) of the Constitution of India, which provides that no person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence.

The High Court ruled that the Apex Court, in the case of Rao Shiv Bahadur Singh v. State of Vindhya Pradesh (1953 AIR 394), held that Article 20 of the Constitution of India grants a fundamental right to a person. This right ensures that a person cannot be convicted of an offence unless it violates the law in force at the time of the act, nor can they be subjected to a penalty greater than that which could have been imposed under the law in force at that time.

The Apex Court held that a legal fiction or a deeming fiction should not be extended beyond the purpose of the Act for which it is created or beyond the language deployed in the enactment. If the deeming section is given credence and criminal law is affirmed, it would defeat the tenor of Article 20 of the Constitution, as every post-facto law could be made retrospective.

In the present case, the assessee was prosecuted for the act committed before the BM Act came into force. The BM Act came into force on 01-07-2015, and the assessee was prosecuted for the act committed in 2009. Therefore, the assessee cannot be convicted of any offence except for violating the law in force at the time of committing the act charged as an offence.

Read the Notification

4. CBIC fixed monetary limits for filing appeals or applications by the Department before GSTAT, High Courts and Supreme Court

The CBIC has issued circular and fixed the monetary limits below which appeal or application or Special Leave Petition, as the case may be, shall not be filed by the Central Tax officers before Goods and Service Tax Appellate Tribunal (GSTAT), High Court and Supreme Court under the provisions of CGST Act. The monetary limit of Rs. 20 lakh is fixed for filing of appeal before GSTAT, Rs. 1 crore limit is fixed for filing of appeal before High Courts and Rs. 2 crore is fixed for filing of appeal to Supreme Court. In this regard, Circular No. 207/1/2024-GST, dated June 26^th, 2024, has been issued.

Read the Circular

5. CBIC issued clarification on POS for supply of goods to an unregistered person where delivery address is different from billing address

The CBIC has clarified that in case of supply of goods made to an unregistered person, where the address of delivery of goods recorded on the invoice is different from the billing address of the said unregistered person on the invoice, the place of supply of goods shall be address of delivery of goods recorded on the invoice. In this regard, Circular No. 209/3/2024-GST dated June 26th, 2024 has been issued.

Read the Circular

6. Clarification issued on time limit under section 16(4) for supplies received from unregistered persons & taxable under RCM: Circular

The CBIC has clarified that in case of supplies received from unregistered suppliers where tax has to be paid by the recipient under reverse charge mechanism (RCM), the relevant financial year for calculation of time limit for availing of ITC under section 16(4) of CGST Act will be the financial year in which the invoice has been issued by the recipient. In this regard, Circular No.211/5/2024-GST, dated June 26^th, 2024, has been issued.

Read the Circular

7. CBIC issued circular clarifying the taxability of supply of salvage/wreckage by general insurance companies

The CBIC has clarified that in cases where general insurance companies are deducting the value of salvage as deductibles from the claim amount, the salvage remains the property of insured and insurance companies are not liable to discharge GST liability on the same.

However, in cases where the insurance claim is settled on the full claim amount without deduction of the value of salvage/wreckage, the insurance company will be obligated to discharge GST on the supply of salvage to the salvage buyer. In this regard, Circular No.215/9/2024-GST, dated June 26th, 2024, has been issued.

Read the Circular

8. Accounting of Social Security Scheme Fund where contribution to the fund is uncertain under Ind AS 19

Post-employee benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. They are classified into two parts.

1. Defined contribution plan: plans under which the entity provides post-employment benefits for one or more employees.
2. Define benefit plan: Defined benefit plans are post-employment benefit plans other than defined contribution plans.

Under defined contribution plans, the entity’s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity to a post-employment benefit plan or to an insurance company, together with investment returns arising from the contributions. In consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall, in substance, on the employee. But in the case of defined benefit plans, the entity’s obligation is to provide the agreed benefits to current and former employees, and actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the entity. If actuarial or investment experience is worse than expected, the entity’s obligation may be increased.

If a company establishes a defined benefit plan, the company’s obligation can be subject to change at any point during the year. Such changes may have occurred due to final salaries, employee turnover and mortality, employee contributions, and medical cost trends. To measure the present value of the post-employment benefit obligations and the related current service cost, it is necessary to apply an actuarial valuation method, attribute benefit to periods of service, and make actuarial assumptions.

In a recent opinion from the Expert Advisory Committee (EAC) of ICAI, a company sought guidance on the accounting treatment of its Social Security Scheme (SSS), designed to provide financial assistance to dependent family members of employees who pass away during their service. The company established its own SSS trust fund and agreed to cover any shortfall in fund liabilities with additional contributions equivalent to the deficit in any financial year. The committee observed that these contributions, while not meeting the post-employment or termination benefits criteria, align with the characteristics of “Defined Benefit Plans” under Ind AS 19 due to the company’s commitment to address any fund deficits.

Read the Story