by Wadhwa & Shah | May 4, 2020 | Miscellaneous
HIGHLIGHTS OF SEBI’S CONSULTATION PAPERS ON RIA REGULATION
IA
Regulations were notified on January 21, 2013. The object of the IA
Regulations, was to lay the framework for independent financial advisers.
SEBI
had issued a consultation paper on October 07, 2016 seeking public comments on
the clarifications/amendments to IA Regulations. A revised consultation paper
was issued on June 22, 2017 clarifying certain issues raised by the market
participants. Based on the feedback received, the proposals were revised in the
consultation paper issued on January 02, 2018. The most recent consultation
paper rolled out on January 15, 2020. This is the 4th consultation paper issued
by SEBI in the past 3 years. The overall and basic objective of all the
consultation papers was to specify uniform standards across all the
intermediaries and to address the gaps or overlaps in legal or regulatory
standards.
Let
us now glance through the important proposals and try to understand their aftermath:
Most start-up entrepreneurs prefer to have
a Private Company for its own benefits. However, they can also prefer to have a
Limited Liability Partnership (LLP) or a Limited Company, based on their
requirements. Come what may, they will have to consider the requirements/
process of Registrar of Companies (ROC) in order start with which would involve
the process right from selecting the unique name for the entity till the
submission of various forms with ROC. A process done right, usually takes 10 to
14 days (differs based on the time taken by ROC to process the Forms) for a
company/ LLP formation after all the forms are submitted with ROC.
Segregation of Advisory & Distribution Services:
So far, a majority of RIAs offer both advisory and distribution services. SEBI’s latest consultation paper calls out for investment advisers to clearly segregate between its activities as an investment adviser and as a distributor of financial products. Non-individual entities are required to have client level segregation that is the same client cannot be accepted for offering both advisory and distribution services within the group of the non-individual entity. So basically, if this proposal is implemented a client can either be an advisory client where no distributor consideration is received at the group level or vice versa. The same is proposed for individual investment advisers where client level segregation is to be adhered at family level. This proposal addresses the issue of conflict of interest arising due to the dual role played by the entity.
Cap on fees charged to clients:
SEBI has received various complaints from investors against investment advisers charging extraneous fees like service fees, file handling fees apart from the advisory fees. Hence these instances lead SEBI to further define the reasonable fees chargeable to the client. It has proposed that an Investment Adviser can charge fees either on the basis of asset under advice (AUA) or a fixed fee. SEBI has also put a cap on fees to give an idea what is reasonable fees. This standardization in fee structure will rule out the possibilities of advisers charging unreasonable fees to their clients.
Eligibility Criteria for IA’s:
SEBI has enhanced the eligibility criteria to become an Investment Adviser. As per the proposal, all persons associated with the provision of advisory services should be duly qualified and experienced. Accordingly, an individual investment adviser, principal officer (for corporates) and persons associated with investment advice should have qualification as well as 5 years of relevant experience along with NISM certification. This is to ensure that an adviser providing investment advice have practical understanding of the business risks.
Higher net worth requirements:
SEBI has proposed a steep increase in the net worth for individual RIAs from Rs. 1 lakh to Rs. 10 lakhs. For non-individuals, the net worth is proposed to be increased from Rs. 25 lakhs to Rs. 50 lakhs. Adding to this, SEBI has also proposed that an individual investment adviser having more than 150 clients or having asset under advice exceeding forty crore rupees, must compulsorily re-register as corporate investment adviser within 6 (six) months of the trigger event.
Maintenance of record:
With a view of strengthening the process of grievance handling, SEBI in its latest consultation paper proposed that along with the maintenance of other records, the records of interactions with the client including prospective clients shall also be maintained by IAs. These records will help in substantiating the statements made by the concerned parties. These records can be in the form of physical records written & signed by client, telephone recording, emails, SMS and any other legally verifiable record.
Compliance audit requirement:
In the current scenario, an investment adviser is only required to conduct yearly audit in respect of compliance with the regulations from a Chartered Accountant or Company Secretaries, however is not required to report on the adverse findings to SEBI. In order to have a strict adherence to the audit requirement, it is proposed that the audit should be completed within three months from the end of each financial year and post completion of the said audit, a report of adverse findings along with action taken thereof shall be submitted to SEBI within a period of one month from the date of audit report.
Conclusion:
By
referring to the above, it is fairly evident that all the proposals as put
forth by SEBI in its consultation papers are intended to safeguard the interest
of the investors. Protection of investor’s funds is the primary concern of SEBI
and drives its proposals. Higher net worth requirements, cap on the maximum fees
that can be charged to the clients, higher qualification requirements etc are
all designed to strengthen investor’s confidence which in turn would lead to
higher investments and ultimately growth in the advisory sector.
In
addition to the above, in our view, following should be considered for the
purpose of amendments to IA Regulations:
- Inclusion
of the definition/ reference to the relevant act for the definition of free
reserves to be specified in the IA regulations- Since ‘free reserve’ is not
specifically defined in the IA regulations, there is a confusion in the minds
of the investment advisers, as to the specific items that should be
considered for the purpose of calculation of net worth. Therefore, free
reserves should be specifically defined by the regulator.
- Audit
Report Format- In order to bring consistency in reporting and enhance
comparison, it is necessary to have a standard audit report format for all the
investment advisers.
- IA’s
should be free to fix their own fees: RIA is a professional who renders
investment advice. Hence a cap of 75,000 is not enough considering that it also
requires complex product handling.
- Higher
net worth- Looking at the limited success of adoption of the RIA model till
date, it is to be noted that these proposals increases the financial and
operational burden of the investors.
Though
SEBI has taken the first step to think about the problem areas, it is important
for it to relook at the regulations from an investors point of view to achieve
an overall success in the RIA model.
by Wadhwa & Shah | May 4, 2020 | Stories
LATEST ON CRYPTOCURRENCY: SC instructs
to lift ban imposed by RBI
Crypto trading started in 2009
with Bitcoin and later it grew in volumes and many other crypto players came in
market with their own crypto currency. This uses strong cryptography to protect
end to end financial transaction and this because a means of negotiable
instrument across the globe for various transactions. Having understood that
this was vastly growing and had replaced fiat currency in many transactions,
the regulators of various countries feared economic turbulence and either
completely banned the crypto trading completely, introduced specific cryptos
and restricted its use, introduced separate regulations for regulating crypto
trading and in country like India, kept the whole evaluation in abeyance and
till the time they could actually decide on the course of action, the regulator
i.e. RBI instructed the bankers strictly not to transact any amount related
directly or indirectly to cryptocurrency.
Subsequent to such restriction,
various crypto platforms had filed their concerns with the apex court and the
RBI had explained that it had not banned crypto trading whereas it had
instructed the bankers not to allow transactions in such nature in order to
avoid any compromise to the banking channels in India.
Having understood the scenario in
India and the approach of the regulator towards the crypto currency, the
platforms in India had shifted their base from India to other country lands
where such trading and dealing is accepted more maturely viz. Singapore. Having
understood this scenario, there were a lot of traders as well, who were
developing strategies of trading in India through crypto currency had shifted
their base outside India have considered the approach of the regulator towards
the crypto markets. After due deliberation, the SC has now on 4th
March 2020 instructed the RBI to uplift the ban imposed which has brough a
great sign of relief to this industry.
As we have understood from past,
all the regulators in India have a tendency to ban such transactions which they
find complicated or where they feel they would take time to understand the
functioning. Instead, there should be an acceptance towards various changes
happening globally, the government should tend towards hiring literate
professionals to understand such programmes. India having highest number of
young population in todays date and having understood the entrepreneur
aspirations among such young bloods, these developments will have to be adopted
as a part and parcel and the regulators will have to cope up towards such
technology driven ideas instead of restraining and running away from them.
As a conclusion, since the SC has
given a welcoming precedence for the crypto lobby, now the lobby is awaiting a
detailed pronouncement and further actions from the RBI to quash its circular
initially given by it to the bankers so that they can get their ball rolling
again.
It will now be all the more
exciting to understand the income-tax implications on such transactions in cryptocurrency
as the next steps after the regulator removes such ban, CBDT will come up with
the tax treatment of various transactions involving virtual currencies which
has till now been based on various logics which we had explained in our earlier
article ‘Taxation
& other related issues related to Bitcoins (Cryptocurrencies)’.
by Wadhwa & Shah | May 4, 2020 | Stories
Back in 2006, when I entered in
CA profession, we were thought that CAs are expected to be perfect in their
accounting skills, we have to verify from the view point of substance over
form, consider materiality to form a true and fair view, etc. Accounting was
considered to be all about accounting standards, be it IGAAP or IFRS, and about
the disclosure requirements along with Balance Sheet, Profit & Loss A/c and
Cash Flow Statement. While we were trying to cope up with the international
standards during all these years, there were drastic changes globally in peoples
approach in carrying out their business. Ideally, CAs role is directly related
to the business environment of the nation. Which is to say that since the CAs
are accountable for the businesses they audit or advice, they are also expected
to understand the environment in which these businesses operate.
While the business owners were
adapting to the new technologies and the latest modes of carrying out their
business which included digitisation of the transactions, payments,
communication, etc. CA curriculum in India have always been kept traditional.
All these years since the independence, where the business developments have
happened in a phased manner, in the last 5 years there has been complete change
in the way business is looked at in India. People have been shifted to digital
means to transact, be it marketing, be it sales, be it payments, etc. Having
understood this, one has to realise the requirement for a complete shift in the
curriculum of CA and the approach which should be deliberated for the CA
students, from the old school to the Digital Era.
Why is this so important?
Ofcourse, this would be the first question which anyone would get in their mind
while starting this topic. We have always seen in Indian Bollywood movies that
the cops arrive at the scene after the incidence is occurred and the mischief
has happened. This culture remains throughout all verticals in India, including
the professional environment. There was a time when the E-commerce entered the
Indian economy, it was a welcome move where trading of products was moved from
showrooms to cellphones, ticket booking was moved from windows to mobile apps,
etc.
The Indian systems have, after
deliberating on the subject have lately comforted themselves with the way
E-commerce works, excluding the bureaucrats, who are still struggling to
understanding the modus operandi, due to lack of training, again it is because
of their curriculum which still remains old school. And now they have seen the
shift again, a new technology has stepped in the economy, BLOCKCHAIN.
Blockchain, having its own advantages, has its own way of functioning.
Professionals in each field which include accountancy, technology, marketing,
designing, and so on, need to understand this technology. One of its most
critical and important changes which has even impacted the economy which
functions with blockchain technology was introduction of CRYPTOCURRENCY.
Having understood that the
cryptos have a huge impact on the economy of any nation, it is also important
that the nation should understand the pros and corns both of this technology.
Blockchain is an accounting technology. It is
concerned with the transfer of ownership of assets, and maintaining a ledger of accurate financial
information. The accounting profession is broadly concerned with the
measurement and communication of financial information, and the analysis of
said information. Much of the profession is concerned with ascertaining or
measuring rights and obligations over property, or planning how to best
allocate financial resources. For accountants, using blockchain provides
clarity over ownership of assets and existence of obligations, and could dramatically
improve efficiency.
Blockchain
has the potential to enhance the accounting profession by reducing the costs of
maintaining and reconciling ledgers, and providing absolute certainty over the
ownership and history of assets. Blockchain could help accountants gain clarity
over the available resources and obligations of their organisations, and also
free up resources to concentrate on planning and valuation, rather than
recordkeeping.
Having
said the above, the auditors in India would need immense training on the
concept of blockchain and the Digital considerations which they need to keep in
mind before commencement of any audit which is being managed in the Digital
environment. Since internal financial control review is mandatorily to be
audited and commented upon by the auditors in the report in case of certain
companies, there it will be of utmost importance for the auditors to understand
the controls which are being exercised by the client in the Digital Financial
systems being maintained. This will have to be confirmed at each stage in each
area. Without there being a proper and adequate training being given in this
section, the auditors will find it difficult to understand and comment upon the
IFC of the Company.
The
stakeholders of the Company completely reply upon the report of the auditors,
the stakeholder, being layman to the entire system of the Company, would need
true and fair view to be given by the auditors for understanding the level of
reliability on the accounts reported by the Company.
It
is usually important that where the auditors are not technically sound, till
they attain proper training on the subject, they should jointly carry out their
audit assignments with proper technically sound and qualified professionals to
have a comfort on the accounting systems. The regulatory body of the
accountants should come up with the standards to operate and also audit in such
environment which would give the accountants some guidance and reliability.
As
a conclusion, the Digital Era in the accountancy should be taken as an
opportunity by the newly qualified chartered accountants where they are much
aware and comfortable with the entire management of the Digital Environment
than the traditional firms operating in the market. Also, the traditional firms
can closely work with the newly qualified chartered accountant practitioners to
get a comfort on the accounting environment of their client if it is operating
using the modern techniques as explained above. Mind you, this is not the end,
its just a beginning of the new Era and having considered the entrepreneur
aspirations in the new generation, there are a lot more changes in the
environment expected in near future.
by Wadhwa & Shah | May 3, 2020 | Start-ups
Today many innovative ideas have evolved around the nation
and people have come up with start-up entities to commercialise on their ideas.
Start-ups today are more in news considering their potential and the out of the
box thinking. But what looks exciting and attractive, is not necessarily simple
and easy. Entrepreneurs many times dwell into the idea of start-ups and tend to
ignore various perspectives from Indian tax & regulatory perspective. India
is known to have one of most complicated tax and regulatory systems. We have
therefore tried to list down various aspects to consider by a Start-up Company.
This would differ considering the nature of business (manufacture, trading,
service, etc.) but we have tried to cover this in general for having an overall
idea of regulatory systems in India. Further, we have brought out this note on
a broad level:
Formation of Company
Most start-up entrepreneurs prefer to have
a Private Company for its own benefits. However, they can also prefer to have a
Limited Liability Partnership (LLP) or a Limited Company, based on their
requirements. Come what may, they will have to consider the requirements/
process of Registrar of Companies (ROC) in order start with which would involve
the process right from selecting the unique name for the entity till the
submission of various forms with ROC. A process done right, usually takes 10 to
14 days (differs based on the time taken by ROC to process the Forms) for a
company/ LLP formation after all the forms are submitted with ROC.
Opening of bank account & Book keeping
This is the first step any company would do
after its registration process is completed with ROC. The bank documents are
considered one of the address proofs for further registrations required by the
Company/ LLP. Further, the entity should maintain the books of account.
Issue of Shares
Considering that the start-up companies are
embedded with the ideas, it is required that the Company shares are valued
before doing private placements. This is required under various laws viz. FEMA,
Income-tax and Companies Act. These regulations state various methods for the
purpose of valuing the shares of the Company below which the Company should not
issue the shares. Shares can be valued by a Chartered Accountant, Merchant
Banker or a Registered Valuer as per the specific requirement of the regulation
Taxation & Other registrations
- Shop
& Establishment Registration
This registration will be required if it satisfies the conditions
mentioned in the Act of the relevant state
- Permanent
Account Number (PAN): This will be received along with the Incorporation
Certificate
- Tax
Deduction & Collection Account Number (TAN): This will be received along
with the Incorporation Certificate
- There
are also various benefits provided to start-ups from Income-tax perspective,
for which certain compliances are requried
This registration
will be required if it crosses the threshold of 20 lacs in a particular fiscal
year. However, it is usually recommended to have this registration number if
the said threshold is estimated to be achieved considering that the input tax
credit can then be claimed by the entity.
There are other
registrations also which are required based on the eligibility criteria of the
business or entity or based on the number of employees employed. The various
statutory acts under which such registrations may be required have been stated
as under:
- Employee’s
Provident Fund & Miscellaneous Provisions Act, 1952
- Employee’s
State Insurance Act, 1948
- Profession
tax (state concept)
- Labour
Welfare Fund (state concept)
- The
Central Excise Act, 1944 (wherever applicable)
Compliance requirements
- Monthly payment of taxes deducted at source
(TDS) before 7th of subsequent month
- Quarterly
filing of eTDS returns
- Quarterly
reviewing the profits of the entity for payment of Advance tax
- Annual
filing of Income-tax returns
- Tax
audit of the Company in case required threshold limit of turnover is exceeded
- Transfer
pricing audit of the Company in case of international transaction with
associate enterprises
- Other
compliance requirements viz. FATCA & CRS, Specified Financial Transaction
reporting, etc. considering the specific transactions undertaken by the entity
- Monthly
payments & filing of GSTR 3B returns
- Monthly/
Quarterly filing of GSTR 1 returns (whichever applicable based on turnover)
- Annual
reconciliations between GST records and Books of accounts
- Annual
GST audit if turnover crosses specified threshold
- Other
GST compliances, as applicable
- Compliances
under Other laws
- Monthly
payment of PF, ESIC and Labour welfare funds (employer’s and employee’s
contribution)
- Monthly/
Annual payment of Profession tax (whichever applicable)
- Monthly
payment and return filing under Central Excise law
The above note has been drafting
considering the normal business activities of an entity and should not be
construed as inclusive. It is advisable to have a thorough discussion with a
consultant considering the specific business segment before deriving to any
conclusion.
by Wadhwa & Shah | Apr 18, 2020 | Company Law
Background
MCA on 30th March, 2020 has come up with the ‘Companies Fresh Start Scheme 2020’ (the scheme) to provide an opportunity to the company to make good any previous filing defaults, irrespective of duration without any additional fees. It is a one-time waiver of additional filing fees for delayed filings with MCA. It is a step taken by MCA to allow the Companies to make a fresh start as a fully compliant entity. The scheme shall come in force from 1st April, 2020 and will remain in force till 30th September, 2020.
About
the Scheme
Applicability:
Any defaulting company for
filing belated documents which were due for filing on any given date.
Defaulting Company: A Company defined under the CA, 2013 and which has
made default in filing of any of the documents, statements, returns, etc.
including annual statutory documents on MCA registry.
Benefits:
- No
additional fees on delayed filings of any forms with MCA
- Proceedings
for imposing penalty only pertaining to filing of belated documents
- Immunity
from the launch of prosecution
Scheme not applicable to:
- Companies
against which final notice for Striking off the name initiated,
- Companies
which voluntarily filed application for Striking off the name
- Companies
which have been amalgamated
- Companies
applied for Dormant Status
- Vanishing
Companies
- Increase
in authorised capital involved (Form SH-7)
- Charge
related documents (CHG-1, CHG-4, CHG-8 and CHG-9)
Other considerations
Defaulting companies can file Form
CFSS-2020 for application of immunity only after Company withdraws the appeal,
if any, filed by itself or by its officers in default, with respect to such
statutory filing, against any notice issued or complaint filed or any order
passed by the court or by adjudicating authority for violation of the
provisions of the Companies Act, 2013 for which application is made under CFSS
2020.
Special
measures
In
the case where the penalties were imposed by an adjudicating officer under the
Act for delay in filing of any documents, statements or returns, etc. on the
MCA 21 registry and no appeal has been preferred by the concerned company or
its officer before the Regional Director under the provisions of the Act as on
the date of commencement of the scheme, the following special measures would
apply:
- Last
date of filing appeal against order of adjudicating authority falls between 1st
March, 2020 to 31st May, 2020 (both days included) – an additional
period of 120 days shall be allowed from the last date for filing of such
appeal.
- During
such above stated additional period, prosecution for non-compliance relating to
delay in filing of any documents, statement or returns shall not be initiated
against such companies or officers.
Immunity
The
scheme also grants immunity from launching the prosecution of proceedings for
imposing penalty on account of delay with certain filing.
- Seeking
immunity:
Company has to file an application electronically in Form CFSS-2020
after closure of the scheme and after the documents are taken on file or
approved by the designated authority. Application shall not be filed after
closure of 6 months from the date of closure of scheme. It shall be noted that
no fee shall be payable for filing Form CFSS-2020. Immunity is only against
delay in filing of forms on MCA 21 and not against any violation of law.
- Cases were Immunity of this scheme not applicable:
- Any appeal pending before court of law
- In case of management disputes of company pending before any court of law or tribunal
- Court has ordered conviction in any matters and no appeal preferred before this scheme
- Any order imposing penalty has been imposed and no appeal preferred before this scheme.
- Designated
authority will issue an immunity certificate to the Company in respect
of documents based on the declaration made in the Form CFSS-2020.
- Effect
of Immunity:
Designated Authority shall withdraw the pending prosecution, if any, and the
proceedings of adjudication of penalties under Section 454 of the Companies
Act, 2013, in respect of defaults against which immunity has been so granted
shall be deemed to have been completed without any further action on the part
of the Designated Authority.
Conclusion
This scheme has
been introduced with an intention that all the old non-compliance cases can use
this one time opportunity and streamline their records. The MCA has already
initiated the process of considering all the proceedings and non-compliance
issues online, that could be the major reason for introduction of this scheme
so that the MCA can start the online process afresh with most of the
outstanding compliances streamlined by the Companies by taking this one time
benefit. However, due to this global pandemic situation of COVID 19, the MCA
may consider extension of the date beyond 30 September 2020. However, the MCA
should review the same after due course.
