‘Mandatory Safety Net Mechanism’ for retailers investing in IPOs – Discussion

Background

Regulation 44 of SEBI (ICDR) Regulations, 2009 addresses the concept of Safety Net in public Issues. Excerpts from the same are reproduced below:

^“An issuer may provide for a safety-net arrangement for the specified securitiesoffered in any public issue in consultation with the BRLM after ascertaining the financial capacity of the person offering the safety-net arrangement, subject to disclosures specified in this regard in Part A of Schedule VIII of SEBI (ICDR) Regulations, 2009.

Provided that any such arrangement shall provide for an offer to purchase up to a maximum of one thousand specified securities per original resident retail individual allottee at the issue price within a period of six months from the last date of dispatch of security certificates or credit of demat account.”

Reasons for review

In the analysis of price performance of the scrips listed during 2008 to 2011, it was observed that out of 117 scrips, 72 (around 62% issues) were trading below the Issue price after 6-months of theirlisting. Out of those 72 scrips which witnessed fall in price, in 55 scrips the fall was more than 20% of the Issue price. In this scenario if the trend continues, the sentiments of the investors would get affected and they may lose confidence in the capital market. Thus, there is a need to provide Safety Net arrangement for RIIs to build their confidence in capital market.

Discussion in Primary Market Advisory Committee meeting held on 31/07/2012  The Primary Market Advisory Committee (PMAC) was of the view that considering the recent post-listing price performance of IPOs, it is necessary to make the safety net mechanism mandatory for IPOs so as to reinforce investor confidence in capital markets and discipline issuers and market intermediaries. Thus, the Committee was, broadly, in concurrence with SEBI on the need for such a mechanism. However, the Committee was of the view that the proposed mandatory Safety Net mechanism would impact various segments of market participants such as investors, issuers, promoters, BRLMs, etc., and that public comments be sought.

Discussions in the SEBI Board held on 16/08/2012

, Considering the Indian market dynamics and the recent post-listing price performance of IPOs, the Board opined that besides disclosures, other measures are needed to bring in self-discipline in IPO pricing. One such measure which could help protect the interests of small investors is a safety net mechanism. While agreeing with the approach in this regard, it was of the view that more public consultation on the details of the proposal was needed, before it could be implemented.

Accordingly, the following proposed broad framework for a ‘Mandatory Safety Net Mechanism’ is hereby placed for public comments.

Proposed Broad Framework for Safety Net Mechanism

A. Safety Net provision shall be mandatory for all IPOs.

B.   Safety Net Trigger:

Safety Net provision shall trigger only in cases where the price of the shares depreciate by more than 20% from the issue price. The price for this provision shall be calculated as the volume-weighted average market price of such shares for a period of 3 months from the date oflisting.

Further, the 20% depreciation in share price shall be considered over and above the general fall, if any, in market index. The market index for this purpose may be BSE-500 or S&P CNX 500. The market index to be considered for this purpose shall be disclosed, in advance, in the offer document.

Following illustrations will explain the point further:

Illustration-1

Assume listing price for share is Rs. 100 and market index on listing date is 1000. After 3 months, volume-weighted average market price of the shares is Rs. 79 (drop of 21%) and the market index is 1000 (drop of 0%). The Safety Net provision will trigger since relative fall of 21% (21 %-0%) is more than 20% trigger level.

Illustration-2

Assume listing price for share is Rs. 100 and market index on listing date is 1000. After 3 months, volume-weighted average market price of the shares is Rs. 79 (drop of 21%) and the market index is 900 (drop of 10%). The Safety Net provision will not trigger since relative fall of 11% (21%-10%) is less than 20% trigger level.

Illustration-3

Assume listing price for share is Rs. 100 and market index on listing date is 1000. After 3 months, volume-weighted average market price of the shares is Rs. 69 (drop of 31%) and the market index is 900 (drop of 10%). The Safety Net provision will trigger since relative fall of 21% (31%-10%) is more than 20% trigger level.

Illustration-4

Assume listing price for share is Rs. 100 and market index on listing date is 1000. After 3 months, volume-weighted average market price of the shares is Rs. 89 (drop of 11%) and the market index is 1100 (increase of 10%). The Safety Net provision will not trigger even if relative fall of 21% (11 %-(-1 0%)) is more than 20% trigger level since the absolute drop in share price is 11% which is less than 20% trigger level.

C. Eligibility:

The facility will be available for all the allotted securities to original resident retail individual allottees who had made an application for up to Rs 50,000 subject to following:

ü      The total obligation on Safety Net provider will be capped at 5% of the issue size.

ü      In case the total number of shares offered under the safety net scheme works out to be more than 5% of issue size, the purchase of securities from original resident retail individualallottees shall be done on proportionate basis such that total obligation does not exceed 5% of the issue size. For eg., in an issue of size Rs. 1000 Cr., post-issue promoter holding is 50% of the capital of the company and market capitalisation of the company is Rs. 2000 Cr., the safety net obligation would work out as under:-

(i)        The maximum obligation of the promoter would be 5% of Rs. 1000 Cr., i.e., he will be obliged to buy the shares worth Rs. 50 Cr. at the issue price.

(ii)       Even if more than 5% of the issue size has been originally allotted to RIIs who had applied for Rs. 50,000 or less and all of them tender their shares, the promoter will be obliged to buy shares worth Rs. 50 Cr. only at the issue price, i.e. 5% of Rs. 1000 Cr., the issue size. The acceptance will be done on a proportionate basis.

(iii) However, if the number of eligible shareholders or the number of shares tendered is less than the above, the cost for the promoter in providing the safety net would be limited to fall in the value of the actual number of shares tendered. For eg., if 5% shares (i.e. approx 15% of the RII quota of 35%) are tendered in safety net and if the fall in price is 20% from the issue price, the cost of providing safety net will be Rs. 10 Cr. only, i.e. 1% of the issue size of Rs. 1000 Cr. In this case, if the shares tendered are less than 5% of the issue size, the cost will be even lesser.

D. Period for Safety Net:

ü      The Issuer/ BRLM to announce, within 3 working days from the date of completion of three months from listing date, triggering of Safety Net provision and invite eligible shareholders to tender their shares.

ü      Safety Net arrangement shall be open for 10 working days from the date of announcement. Eligible investors may tender their shares to Safety Net Provider under the scheme during this period. The shares so tendered shall be kept in escrow account till successful settlement of shares and funds.

ü      The settlement of shares and funds shall be completed within 10 working days of the completion of the last date for surrender of shares by eligible shareholders.

ü      Eligible investors may tender their shares through a separate exchange window (similar to buyback of shares).

E. The primary safety net obligation would rest with the promoters of the issuer. However, they may choose to fulfill the same, directly or through BRLMs/any other Safety Net Provider.

F. The arrangements made for the purpose of meeting the Safety Net obligation shall be disclosed in the offer document.

G. Any acquisition of shares under the scheme of Safety Net shall be exempt from the provisions of SEBI (SAST) Regulations, 2011.

Public Comments

Comments on the above framework may be emailed on or before October 31, 2012, topranav@sebi.gov.in/ cfddil@sebi.gov.in or sent, by post, to:-

Mr. Sunil Kadam

General Manager

Corporation Finance Department – Division of Issues & Listing

Securities & Exchange Board of India SEBI Bhavan

Plot No. C4-A, “G” Block

Bandra Kurla Complex

Bandra (East)

Mumbai – 400 051

Ph: +912226449630/+912226449463

Source : http://taxguru.in/sebi/mandatory-safety-net-mechanism-retailers-investing-ipos-discussion.html

The Insurance Laws (Amendment) Bill, 2008 approved by Union Cabinet

The Union Cabinet today approved necessary official amendments in the Insurance Laws (Amendment), Bill 2008, pending in the Rajya Sabha, with such drafting and consequential changes, if any, in consultation with the Legislative Department.

These amendments are aimed at removing archaic and redundant provisions in the legislations and incorporating certain provisions to provide Insurance Regulatory Development Authority (IRDA) with flexibility to discharge its functions effectively and efficiently. The overall objective is to further deepen the reform process which is already underway in the insurance sector. 

The official amendments will be moved in the Insurance Laws (Amendment) Bill, 2008 pending in the Rajya Sabha. 

Based on the recommendations of the Standing Committee on Finance, the Cabinet has approved amendments containing the following : 

1. The foreign equity cap is proposed to be kept at 49 per cent as provided in the Insurance Laws (Amendment) Bill, 2008 as against the 26 percent. This is done in order to meet the growing capital requirement of insurance companies. 

2. Foreign reinsurers will be permitted to open branches only for reinsurance business in India and the provisions of Section 27E, which prohibits an insurer to invest directly or indirectly outside India the funds of policyholder, would apply to such branches. 

3. The definition of "Foreign Company" for the purpose of Insurance and reinsurance would mean :a company or body established under a law of any country outside India and includes Lloyd`s established under the Lloyd`s Act, 1871 (United Kingdom). 

4. In order to encourage health insurance in India, the capital requirement for a health insurance company is now proposed at Rs.50 crores (instead of Rs.100 crores for General Insurance companies) with a view to reduce the entry barrier to a sector which is a priority sector in the insurance space. 

5. The definition of `health insurance business` has been revised to clearly stipulate that health insurance policies would cover sickness benefits on account of domestic as well as international travel. 

6. In the case of any insurer having a joint venture with a person having its principal place of business domiciled outside India, the Authority may withhold its registration, if it is satisfied that in the country in which such person has been debarred by law or practice of that country to carry on insurance business. 

7. Regarding the obligatory underwriting of third party risk on Motor Vehicles, a separate Motor Vehicle Insurance and Compensation Legislation is being proposed by the Government and the concerns of the Standing Committee regarding the obligatory third party insurance on motor vehicles will be taken care of. 

8. With a view to serve the interest of the policy holders better, the period during which a policy can be repudiated on any ground, including misstatement of facts etc. has been confined to three years from the commencement of the policy and thus no policy would be called in question on ground of misstatement after three years. 

9. The Public Sector General Insurance Companies and GIC will be permitted to raise capital from the market to meet future capital requirements, provided that the Government`s shareholding would not be allowed to come below 51 per cent at any point of time. 

10. The appointment of agents is proposed to be done by insurance companies subject to the agents meeting the qualifications, passing of examinations etc. as specified by IRDA. While the licensing of agents be no longer with IRDA, the Authority is empowered to take action against agents under Section 42(4) of the Insurance Act, 1938 which is essentially to protect the policy-holders interests. This provision will help expansion of agents` network throughout the country and better management and control of insurance companies over them. This will ultimately lead to better insurance penetration. 

11. Mechanism for appeal in case of orders of IRDA against intermediaries has been defined by proposing to amend clause (8) of section 33 of the Insurance Act 1938 to provide for any insurer or intermediary or insurance intermediary aggrieved by any order made under this section to prefer an appeal to the Securities Appellate Tribunal. 

12. Register of claims and policies to be maintained by insurers in any form including electronic. 

13. To specify fine on intermediaries and insurance companies for misconduct of intermediaries and to make appropriate provision in the legislation to effectively deter multilevel marketing of insurance products in the interest of policyholders, and to curtail the practice of mis-selling. 

14. In order to improve the functioning of surveyors and bring in greater transparency, certain modifications are made to provide for regulations on qualifications regarding appointment of surveyors and to strengthen the Institute of Indian Insurance Surveyors and Loss Assessors (IIISLA). The amendments proposed in the Bill seek to do away with the existing statutory prescriptions pertaining to licensing insurance surveyors and loss assessors etc. and leave these issues to be addressed by way of regulations. 

15. Further, although the Standing Committee suggested retaining licensing of agents and their commission structure in the Insurance Act 1938, however, keeping in view the interest of the policyholders and to effectively monitor the performance and activities of the agents, the commission structure and the Code of conduct for agents is to be specified by regulations by the IRDA and accordingly, ceilings on commission in the Act have been done away with and the insurance companies along with the agents are made liable for any violation of the regulations and stiff penalties have been provided for mis-selling, rebating and marketing of products through multi level marketing schemes. 

Background: 

The Insurance Laws (Amendment) Bill, 2008, with a view to amend the Insurance Act 1938, the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority Act, 1999 was introduced in the Rajya Sabha on the 22nd December, 2008. The Bill as introduced and referred to the Standing Committee on Finance for examination and report. The Standing Committee submitted its report to Parliament on 13lh December. 2011. There are a total of 111 clauses in the Insurance Laws (Amendment) Bill, 2008

Read more: http://www.simpletaxindia.net/2012/10/the-insurance-laws-amendment-bill-2008.html#ixzz28OykCixU

Pension Fund Regulatory and Development Authority Bill, 2011 amendments approved

The Union Cabinet today approved the introduction of certain official amendments to the Pension Fund Regulatory and Development Authority Bill, 2011. These official amendments have been necessitated in view of the recommendations of the Standing Committee on Finance which has examined the Bill. Based on the recommendations of the Standing Committee on Finance, the Government has decided to accept the following: 

1. that the subscriber seeking minimum assured returns shall be allowed to opt for investing his funds in such schemes providing minimum assured returns as may be notified by the Authority; 

2. withdrawals not exceeding 25 per cent of the contribution made by subscriber will be permitted from the individual pension account subject to the conditions, such as, purpose, frequency and limits, as may be specified by regulations by the Pension Fund Regulatory Authority and Development Authority (PFRDA)

3. the foreign investment ceiling in the pension sector at 26 per cent or such percentage as may be approved for the Insurance Sector, whichever is higher may be incorporated in the present legislation; 

4. to establish a vibrant Pension Advisory Committee with representation from all major stakeholders to advise PFRDA on important matters of framing of regulations under the PFRDA Act. 

5. the membership of the PFRDA will be confined to professionals having expertise in economics, finance or law only. 

The New Pension Scheme (NPS) has been made mandatory for all the Central Government employees (except Armed Forces) entering service with effect from 1.1.2004. 27 State / UT Governments have notified NPS for their employees. NPS has been launched for all citizens of the country including unorgnised sector workers, on voluntary basis, with effect from 1st May, 2009. Further, to encourage people from the unorganised sector to voluntarily save for their retirement, Government has launched the co-contributory pension scheme titled "Swavalamban Scheme" in the Budget of 2010-11. As on 7th September, 2012 the number of subscribers under NPS is 37.45 lakh with a corpus of Rs. 20535.00 crore. 

In order to effectively invest and manage such huge funds belonging to a large number of subscribers and to ensure the integrity of the NPS, creation of a statutory PFRDA with well defined powers, duties and responsibilities is considered absolutely necessary and would benefit all NPS subscribers. 

The official amendments to the Bill will be moved in the next session of the Parliament. 

Background: 

The following recommendations of the SCF have not been accepted: 

• As regards the recommendation of SCF for compulsory insurance of the funds of subscribers by pension fund managers, a provision has already been made in the PFRDA Bill, to protect the interest of the subscribers by ensuring safety of contribution of subscribers and also by keeping the operational costs in check, 

• As regards the selection of pension fund managers in such a manner that one third of all such fund managers are from the public sector, since a provision has already been made in the PFRDA Bill that at least one of the pensions fund shall be from the public sector which sets a floor, the ceiling can be any number based on objective criteria. 

The Pension Fund Regulatory and Development Authority Bill, 2005 was initially introduced in the Lok Sabha in March, 2005 to provide for a statutory PFRDA. However, since the Bill and the official amendments, based on the recommendations of the Standing Committee on Finance, could not be considered by the Lok Sabha, and the Bill lapsed on dissolution of the 14th Lok Sabha. 

The Government had announced in the Budget 2011-12 that the revised PFRDA Bill would be moved in Parliament. Accordingly, the PFRDA Bill, 2011 was introduced in the Lok Sabha on the 24th March, 2011 to provide for a statutory regulatory body, the Pension Fund Regulatory and Development Authority (PFRDA) under the provisions of the Bill. The legislation sought to empower FRDA to regulate the New Pension System (NPS). 

The PFRDA Bill, 2011 was referred to the Standing Committee on Finance on the 29th March, 2011 for examination and report thereon. The Standing Committee on Finance gave its Report on 30th August, 2011. Based on the recommendations of Standing Committee, a Cabinet Note, to introduce additional recommendations of the Standing committee on Finance was moved on 19th December, 2011. Since the PFRDA Bill, 2011 was deferred in the Winter Session of the Lok Sabha, therefore the Cabinet Note was withdrawn.

Read more: http://www.simpletaxindia.net/2012/10/pension-fund-regulatory-and-development.html#ixzz28OyUlpvU

Forward Contracts (Regulation) Amendment Bill, 2010

The Union Cabinet today approved the proposal to move official amendments to the Forwards Contracts (Regulation) Amendment Bill, 2010 (the Bill, 2010), based upon the recommendations of the Parliamentary Standing Committee of the Ministry of Consumer Affairs, Food & Public Distribution in its 15th Report, in the next session of Parliament. 

After the Bill is passed and enacted by Parliament, Forward Market Commission (FMC) as a regulator will get autonomy and power to regulate the market effectively. New products like `options` will be allowed in the commodity market. This will benefit various stakeholders including farmers to take benefit of `price discovery and `price risk management`. The Bill would enhance public accountability of the Regulator by providing for an Appellate Authority. 

The recommendations of the Committee with regard to definition of the "Commodity Derivative" in Clause 3, establishment and constitution of Forward Markets Commission in Clause 4, term of office of the Chairman and every other whole time members in Clause 5, accounts and audit in Clause 9, penalties for contravention of certain provisions of Chapter IV in Clause 25 of the Bill, 2010 have been accepted and are proposed to be incorporated as official amendments. The amendment in Clause 25 will require consequential amendment in Clause 26, which is also proposed to be included in the official amendments. 

Background: 

The Forward Contracts (Regulation) Act provides for the regulation of commodity futures markets in India and the establishment of the Forward Markets Commission (FMC). While the markets have been liberalized with effect from April, 2003 and modern institutional structures are in the process of being evolved, yet the market regulator, FMC is largely functioning in its traditional format. 

Many of the existing provisions of the Forward Contracts (Regulation) Act need changes to strengthen and reinforce legal provisions to meet the requirements of changing environment. In order to amend further the Forward Contracts(Regulation) Act, the Bill, 2010 was introduced in the Lok Sabha on 6.12.2010. The Bill, 2010 went through examination by the Committee which submitted its 15th Report on 22nd December, 2011

Read more: http://www.simpletaxindia.net/2012/10/forward-contracts-regulation-amendment.html#ixzz28OwuoHmq

Companies Bill, 2011 Amendments approved by Cabinet

The Union Cabinet today approved the proposal to make official amendments to the Companies Bill, 2011. 

The Companies Bill, 2011, on its enactment, would allow the country to have a modern legislation for growth and regulation of corporate sector in India. The existing statute for regulation of companies in the country, viz. the Companies Act, 1956 had been under consideration for quite long for comprehensive revision in view of the changing economic and commercial environment nationally as well as internationally. In view of various reformatory and contemporary provisions proposed in the Companies Bill, 2011 together with omission of existing unwanted and obsolete compliance requirements, the companies in the country would be able to comply with the requirements of the proposed Companies Act in a better and more effective manner. 

The Salient features of amendments approved by the Cabinet are as follows: 

1. The words `make every endeavour to` omitted from Clause 135(5). Such clause is also amended to provide that the company shall give preference to local areas where it operates, for spending amount earmarked for Corporate Social Responsibility (CSR) activities, The approach to `implement or cite reasons for non implementation1 retained. (Amendment of Clause 135). 

2. To help in curbing a major source of corporate delinquency, Clause 36 (c) amended, to also include punishment for falsely inducing a person to enter into any agreement with bank or financial institution, with a view to obtaining credit facilities. (Amendment in Clause 36). 

3. Provisions relating to audit of Government Companies by Comptroller and Auditor General of India (C&AG) modified to enable C&AG to perform such audit more effectively. {Amendment in Clauses 143(5) and (6)}. 

4. Clause 186 amended to provide that the rate of interest on inter corporate loans will be the prevailing rate of interest on dated Government Securities. (Amendment in Clause 186). 

5. Provisions relating to restrictions on non audit services modified to provide that such restrictions shall not apply to associate companies and further to provide for transitional period for complying with such provisions. (Amendment in Clause 144). 

6. Provisions relating to separation of office of Chairman and Managing Director (MD) modified to allow, in certain cases, a class of companies having multiple business and separate divisional MDs to appoint same person as `chairman as well as MD. (Amendment in Clause 203). 

7. Provisions relating to extent of criminal liability of auditors particularly in case of partners of an audit firm reviewed to bring clarity. Further, to ensure that the liability in respect of damages paid by auditor, as per the order of the Court, (in case of conviction under Clause 147) is promptly used for payment to affected parties including tax authorities, Central Government has been empowered to specify any statutory body/authority for such purpose. (Amendments in Clause 147 and 245). 

8. The limit in respect of maximum number of companies in which a person may be appointed as auditor has been proposed as twenty companies. {Amendment in Clause 141(3) (g)}. 

9. Appointment of auditors for five years shall be subject to ratification by members at every Annual General Meeting (Amendment of Clause 139(1). 

10. Provisions relating to voluntary rotation of auditing partner (in case of an audit firm) modified to provide that members may rotate the partner `at such interval as may be resolved by members` in stead of `every year` proposed in the clause earlier. {Amendment in Clause 139(3)}. 

11. `Whole-time director` has been included in the definition of the term `key managerial personnel` {Amendment of Clause 2(51)}. 

12. The term `private placement` has been defined to bring clarity. (Amendment in Clause 42). 

13. Approval of the Tribunal shall be required for consolidation and division of share capital only if the voting percentage of shareholders changes consequent on such consolidation {Amendment of Clause 61(1) (b)}. 

14. Clarification included in the Bill to provide that `Independent Directors` shall be excluded for the purpose of computing `one third of retiring Directors`. This would bring harmonisation between provisions of Clause 149(12) and rotational norms provided in clause 152. (Amendment in Clause 152). 

15. Provisions in respect of removal of difficulty modified to provide that the power to remove difficulties may be exercised by the Central Government upto `five years` (after enactment of the legislation) in stead of earlier upto `three years`. This is considered necessary to avoid serious hardship and dislocation since many provisions of the Bill involve transition from pre-existing arrangements to new systems. (Amendment in Clause 470). 

Background: 

(i) The Companies Bill, 2011 was introduced in the Lok Sabha on 14th December, 2011 and was considered by the Parliamentary Standing Committee on Finance which submitted its report to the Honourable Speaker, Lok Sabha on 26th June, 2012. The report was laid in Parliament on 13th August 2012. Keeping in view the recommendations made by such Committee it was decided to make certain modifications in the Companies Bill, 2011 through official amendments. 

(ii) In view of the developments taking place nationally as well as internationally, and with the intent to modernize the structure for corporate regulation in India and also to promote the development of the Indian corporate sector through enlightened regulation and good corporate governance practices, a decision has been taken to revise the existing Companies Act, 1956 comprehensively. Various stakeholders viz Industry Chambers, Professional Institutes, Government Departments, Legal Experts and Professionals etc. were consulted in the process and accordingly, the Companies Bill 2009 was introduced in the Lok Sabha on 3rd August, 2009 which was referred to Parliamentary Standing Committee on Finance for examination and report, which submitted its report to the Parliament on 31st August, 2010. 

(iii) Keeping in view the recommendations made by the Standing Committee and consultation with various Ministries/Departments etc. a revised Companies Bill, 2011 was prepared which was approved by the Cabinet on 24th November, 2011. The revised Bill was introduced in the Lok Sabha on 14th December, 2011. On introduction of the Companies Bill, 2011, the Companies Bill, 2009 was withdrawn. 

(iv) The Companies Bill, 2011 was referred to the Parliamentary Standing Committee on Finance for examination and report. The Committee examined the Bill and presented its report/ recommendations to the Speaker, Lok Sabha on 26th June, 2012. The report was laid in the Parliament on 13th August, 2012. Keeping in view the recommendations made by the Committee and the inter-ministerial consultation held with concerned Ministries/Departments, it has been decided to make official amendments to the Companies Bill, 2011.

Read more: http://www.simpletaxindia.net/2012/10/companies-bill-2011-amendments-approved.html#ixzz28Ov8o17s

DIRECTORATE OF STUDENT SERVICES

http://www.icsi.edu/docs//WebModules/Student/ebulletin/July-2012.pdf

Service Tax on Director’s Services – Company to Pay

Dr. Sanjiv Agarwal

With Service Tax regime migrating  to negative list approach w.e.f. July 1, 2012, almost all the services except those in negative list (section 66D) and exempted services (Notification No. 25 2012-ST dated 20.06.2012) have become exigible to service tax .

Thus, services rendered by company directors in the capacity of director have also become taxable w.e.f. 1.7.2012 and are now liable to Service Tax. The remuneration they get for attending board meetings shall be subjected to Service Tax. However, Central Board of Excise and Customs  has recently amended the provisions of reverse charge so as to provide that Service Tax on Services rendered by the directors shall be payable by the companies under the reverse charge mechanism.

The directors (generally whole time / managing / executive directors) who are under contractual employment with the company and receive salary or remuneration from the company will not be covered as they shall be considered as employees of the company. All such directors who are not in employment with the company shall be considered as providing services to the company which shall attract Service Tax. In case of whole-time directors, it is a contractual employment and is governed by the provisions of the Companies Act, 1956 which also require Government’s approval in certain cases.

The directors of body corporates shall also be covered for the purpose of service tax and service tax payable on services of directors of such body corporates. Body corporate includes a company. Since all the services provided by directors in their capacity of a directors shall be covered under scope of Service Tax, the gross charges payable to them by the company shall be liable to Service Tax. It may be in the form of any one or more – sitting fee, commission, bonus, share in profit, benefit in form of ESOPs etc.

All amounts paid as remuneration except salary to directors shall be liable to Service Tax, whether for attendingboard meetings or committee meetings or for any other service rendered in the capacity of a director. If an employed director gets sitting fee for attending the meeting, it may be liable to Service Tax as Department is likely to view it that way. There is need for clarification on this issue. However, the following amounts received by the directors from the company will not attract Service Tax as such amounts does not represent service provided by directors – interest on loan by director to company, dividend on shares and other professional charges on account of services not rendered as a director (in professional capacity)

  Service Tax is payable under reverse charge by the companies who receive services from their directors who are not in employment. A director may be appointed either in an individual capacity or to represent an entity (including government) who has either invested in the company or is otherwise authorized to nominate a director.  When a director receives payment in his personal capacity, the same is liable to be taxed in the hands of the director.  However, where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be supplied by such an entity and not by the individual director.

In the case of Government nominees, the services shall be deemed to be provided by the Government   and liable to be taxed under the exclusion sub- (iv) of clause (a) of section 66D of the Finance Act, 1994 i.e. support services by Government to business.  Such services are liable to be taxed on reverse charge basis.

Sha-Azam Siddiqui

Management Trainee

Email – trainee4@hsassociates.net

azamsuniverse@gmail.com