RBI Notifies Transition to its Benchmark Rates from Overseas Borrowings

 With the imminent discontinuation of the publication of the London Interbank Offered Rate (LIBOR) by the end of 2021 for most currencies, the Reserve Bank of India (RBI) by its circular dated 8 December 2021 (Circular) amended the RBI’s Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations dated 26 March 2019 (ECB Master Directions) to provide for a risk free benchmark rate as an alternative to the LIBOR (which has been used since inception for majority foreign currency borrowings).

LIBOR has been a preferred benchmark rate for the syndicated loan markets and as a pricing source by financial markets globally and in India for a wide array of financial instruments including loans and derivative products. In view of the cessation of publication of LIBOR, the RBI in August 2020 had indicated to all the banks and the financial institutions to frame a board-approved plan, outlining an assessment of exposures linked to the LIBOR and the steps to be taken to address risks arising from the cessation of LIBOR, including preparation for the adoption of the Alternative Reference Rates (ARR) and putting in place a framework to mitigate risks arising from such exposures on account of transitional issues including valuation and contractual clauses.

The amendments to the ECB Master Directions provide much-needed clarity to the financial institutions, hedge providers and borrowers on the new applicable alternative reference rates for external commercial borrowings and encourage them to use any widely accepted ARRs as soon as practicable in lieu of the cessation of LIBOR from December 2021.

Increase to overseas investment limits for mutual funds

The Securities and Exchange Board of India has announced amendments to the overseas investment limits for mutual funds. The amendments provide that:

• mutual funds can make overseas investments subject to a maximum of US$1 billion per mutual fund, within the overall industry limit of US$7 billion;
• mutual funds can make investments in overseas exchange traded funds subject to a maximum of US$300 million per mutual fund, again within the overall industry limit of US$1 billion; and

in respect of investment limits to be disclosed in the scheme documents at the time of a new fund offer as specified in the relevant Circular and the investment limits on ongoing schemes as specified in the relevant Circular, such limits will henceforth be soft limits for the purpose of reporting only by mutual funds on a monthly basis in the prescribed format.

SEBI introduced a new rules for mutual funds companies.

 On April 28, 2021, SEBI introduced a new rule. They mandated key employees of asset management companies i.e. mutual fund companies to invest about 20% of their salary in the schemes they run or oversee. They’ll have to tie it up for 3 years or for the duration of the scheme, whichever is shorter.

Basically, it’s a diktat forcing fund managers and other key personnel to have their skin in the game. 

Rumour has it that SEBI only acted after Franklin (an asset management company) wound down 6 different mutual funds overnight sending ripples across the entire sector. Reports allege that the fund managers, in this case, took on inordinate amounts of risks, acted recklessly, and pulled out their money when things took a turn for the worse. A few days later they wound down the funds leaving hundreds and thousands of investors in the lurch. There were no consequences for their actions. No penalties, no harm, and no damage done.

Because remember, fund houses are paid despite how their schemes perform. Most companies seek a fee (1–2% of the sum you invest), without promising much. According to one report from 2019, 82% of active large-cap funds have underperformed the S&P BSE 100 index, which includes the 100 largest Indian companies. Imagine that — You could pick a passive basket of the 100 largest Indian companies and still outperform those who are paid ludicrous amounts of money to actively manage a mutual fund scheme.

Bottom line —Most fund managers aren’t really that good at managing money and it’s probably why you’re seeing some backlash from the incumbents. 

SEBI wants mutual fund companies to have skin in the game. But other key stakeholders in the industry want the rule gone. The only question remaining —What do you think?.... 

S. 90, 91: An Indian taxpayer is not entitled to claim refunds from the Government of India of taxes paid by the said taxpayer outside India, i.e., to the foreign Governments, in respect of the income taxes paid abroad on income earned in the respective tax jurisdictions, if the said income is not taxed in India due to a loss. However, the taxes paid abroad are allowable as a deduction in the computation of the business income of the assessee .

 Bank of India vs ACIT ( ITAT MUMBAI) 

In the present case, our entire focus was on whether these foreign tax credits could be allowed even when such tax credits lead to a situation in which taxes paid abroad could be refunded in India, but that must not be construed to mean that, as a corollary to our decision, these foreign tax credits would have been allowed, even if there is no domestic tax liability in respect of the related income in India if it was not to result in such a refund situation. At the cost of repetition, we may add that, for the detailed reasons set out earlier, we have our reservations on the applicability of the Wipro decision (supra) on this bench, being situated outside of the jurisdiction of Hon’ble Karnataka High Court, and we are of the considered view that full tax credit for source taxation cannot, as such and to that extent, be extended in the residence jurisdiction when a tax treaty sanctions only proportionate credit, and does not, in any case, specifically provide for the full foreign tax credit. A full tax credit, which goes beyond eliminating double taxation of an income, actually ends up subsidizing the foreign exchequer, to the extent that the taxes paid to the foreign exchequer are allowed to discharge exclusive domestic tax liability, rather than eliminating double taxation of an income, and that is the reason that even in the solitary full credit situation visualized in the Indian tax treaties, in the Indo Namibia tax treaty (supra), it’s one-way traffic inasmuch as while India, as a relatively developed nation, offers, under article 23(2), full credit for taxes paid in Namibia, whereas, in contrast, Namibia, as a developing nation, offers, under article 23(1), proportionate credit for taxes paid in India. It reinforces our understanding that the full foreign tax credits cannot be inferred to be permissible as a matter of course and normal practice

Cabinet approves participation of Private Sector into Space exploration

The government’s recent reforms for the space sector will not only enable private companies to build rockets and satellites but also let them use the Indian Space Research Organisation’s (Isro’s) facilities,  It was perhaps the first admission that existing regulations impeded the private sector from fully participating in space exploration. And just a few days back, the Union cabinet finally approved the formation of a new organization- the Indian National Space Promotion and Authorisation Centre (IN-SPACe) under the Department of Space (DoS). IN-SPACe will now be in charge of regulating, guiding and promoting the activities of the private sector in the space industry. More importantly, through INSPACe, private companies will be allowed to build their own facilities on DoS premises after they vet their application.

And this is a big positive. Here's ISRO chairman, Dr. Sivan explaining this bit.

“Under the present situation, ISRO has reached its limit on providing our services due to manpower limitations and we can’t scale up more than 3 per cent market share. That’s why we need private players to get involved and that will also boost market share when they diversify into many  

services" 

Essar Shipping Limited vs. CIT (Bombay High Court)

S. 28(iv): The Dept's argument that the waiver of a loan constitutes an operational subsidy which is taxable is not correct. There is a fundamental difference between “loan” and “subsidy” & the two concepts cannot be equated. While “loan” is a borrowing of money required to be repaid back with interest; “subsidy” is not required to be repaid back being a grant. Such grant is given as part of a public policy by the state in furtherance of public interest. Therefore, even if a “loan” is written off or waived, which can be for various reasons, it cannot partake the character of a “subsidy”. The waiver of a loan cannot be brought to tax u/s 28(iv) of the Act

Conceptually, “loan” and “subsidy” are two different concepts. As per the Concise Oxford English Dictionary, Indian Edition, the term “loan” has been explained as a thing that is borrowed, especially a sum of money that is expected to be paid back with interest; the action of lending. Black’s Law Dictionary, Eight Edition, describes “loan” as an act of lending; a grant of something for temporary use; a thing lent for the borrower’s temporary use, especially a sum of money lent at interest; to lend, especially money. In Supreme Court on Words and Phrases, it is stated that “loan” necessarily supposes a return of the money loaned; in order to be a loan, the advance must be recoverable; “loan” is an advance in cash which includes any transaction which in substance amounts to such advance

ECB launched bond buying Program to ease euro zone economy

The 3Cs - Coronavirus, Crude oil and Credit Risk seem to have shocked the whole world. The infection from the pandemic and the economic fallout is taking a toll on equity markets. Though central banks and the government are pacifying sentiments through rate cuts and liquidity infusion, the fall in the markets is highly disturbing due to the rising confirmed coronavirus cases and deaths in Europe surpassed China on Wednesday, the ECB launched a €750B bond-buying program to stop a pandemic-induced financial rout shredding the eurozone's economy. The new policy brings this year's planned purchases to €1.1T, with the new round alone worth 6% of the bloc's GDP. Eurozone government bonds surged after the decision, with 10-year Italian bond yields dropping as much as 90 bps to 1.40%. Spanish and Portuguese 10-year bond yields slid around 30 bps each, while benchmark 10-year German Bund yields were down 12 bps at 0.35%.