Intellectual property
In a landmark decision on 6 August the Chennai High Court rejected Swiss firm Novartis AG’s challenge of a key provision of the 2005 patent law. Dismissing Novartis’ petition, the bench observed that the relevant section was in compliance with the World Trade Organization’s Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement and was not “vague or ambiguous”. The courts also noted that the section did not give the patent authority any arbitrary powers. Multinational corporations greeted the decision with dismay, but health activists and patients’ groups said it was as an important step towards ensuring the availability of cheap generic or off-patent drugs. (See pages 21 and 22.)
Securities
With a view to enabling investors to access information about the performance of listed companies as soon as possible, the Securities and Exchange Board of India (SEBI) has rationalized the way in which they provide financial information. In its 10 July circular, SEBI modified the process and format for submission of financial results to stock exchanges. A revised Listing Agreement now requires listed companies to furnish either unaudited or audited quarterly and year-to-date financial results within one month of the end of each quarter.
In an effort to strengthen the sustainability and liquidity of securities the government amended the rule relating to the issuance of Indian Depository Receipts (IDR) by foreign companies. The amended rules provide for net worth and market capitalizations ceilings as eligibility conditions for IDR issuers instead of the earlier ceilings based on net worth and market capitalization. Under the new rules, issuers must also have a continuous trading record or a history on a stock exchange for at least three immediately preceding years. The changes are intended to reflect the sustainability and liquidity of issuers and ensuring issuers have proven track records. Approval procedures have also been streamlined.
In a bid to make debenture trustees more accountable, the SEBI directed on 6 August that all information must be made public if an issuer defaults on debenture interest payments or redemptions. Debenture issuers will also be required to inform investors about their failure to follow norms related to the creation of rights on assets.
Credit
To put in place a regulatory framework, the RBI issued draft guidelines in May for trading credit default swaps (CDS), which are essentially insurance-like contracts that protect against default and restructuring. In view of the complexities involved, the RBI has published these guidelines as a first draft, and will finalize them only after receiving comments and feedback from various stakeholders. The release of these guidelines is seen as a first step in introducing credit derivatives – the fastest growing financial tools in the world.
Capital markets
As part of its efforts to flush out excess foreign capital, the RBI allowed resident Indians to open bank accounts outside the country and to transfer up to US$100,000 per year without approval. Clarifying the provisions of the Liberalized Remittance Scheme, the RBI said that resident individuals can remit up to $100,000 in a financial year to acquire and hold immovable property, make investments in financial instruments or purchase any other asset without any prior approval.
Permanent establishment
The Supreme Court reinforced a number of generally accepted principles in regards to Permanent Establishment (PE). In a 9 July decision in Mumbai v Morgan Stanley and Co and Morgan Stanley and Co v Director of Income Tax, Mumbai the court also held that a deputation arrangement could create a PE, thereby raising concerns regarding the cross-border mobility of personnel and risks that such activities could pose to multinationals.
Logistics
With the approval of a number of proposed amendments to the Aircraft Act, 1934, on 2 August the government will now be able to exercise supervisory control on standards of airport, communication, navigation and surveillance and air traffic management facilities. The changes also give the government the authority to license personnel engaged in air traffic control and to make rules to ensure civil aviation security. Further, increased penalties for violations of the act could have a deterrent effect and go a long way towards better compliance.
Foreign exchange
In line with international practices, the National Security Council concluded 23 July that catch-all umbrella legislation should be enacted to check security threats from certain categories of foreign direct investment.
The legislation would be designed to block the takeover of an Indian company by foreign investors considered to be a threat to national security but the challenge would lie in ensuring the proposed legislation is used sparingly so as not to hinder FDI inflows.
In a significant move, the government revised the External Commercial Borrowing (ECB) policy on 7 August to modulate capital inflows. Borrowers proposing to use ECB of up to US$20 million for rupee expenditures will require prior approval from the Reserve Bank of India under the approval route. ECB of more than US$20 million per year will only be permitted for foreign currency expenditures in approved uses. ECB borrowers that raise more than US$20 million will have to park the proceeds overseas for use as foreign currency expenditures and will not be able to remit the funds to India.
The SEBI released new guidelines on 9 August for investment by registered venture capital funds in overseas companies, subject to prior approval and a limit of US$500 million.
Clarifying that no separate permission from the RBI will be needed, the guidelines say venture capital funds will be allowed to invest up to 10% of their funds, within six months, in overseas companies that have an Indian connection and are not listed on recognized stock exchanges in India or abroad.
