Bulwark Solicitors, Nariman Point and New Marine Lines, Mumbai (2026)

08/02/2021

BULWARK SOLICITORS’ ANALYSIS OF 2021 BUDGET (WITH FOCUS ON INTERNATIONAL TAXATION)
PART I OF RESEARCH SERIES - EQUALIZATION LEVY

The team of Bulwark Solicitors is pleased to share with you the Part I of the Research Series which deals with significant changes made by the 2021 Indian Budget to the provisions in relation to "Equalization Levy" which has created a stir in the e-commerce industry, particularly for the non-resident e-commerce operators who do not have a ‘Permanent Establishment’ (“PE”) in India.

This analysis is written by the Firm's Founder Partner, Deep Shridharani who articulates the concept of Equalization Levy (which was first introduced in 2016 to tax the consideration received by non-residents for online advertisement and related services in India and thereafter expanded in 2020 to cover non-resident e-commerce operators not having a PE in India but still earning revenues in India) and briefly discusses about the ambiguity likely to be created by the changes introduced by this Budget (Finance Bill 2021) with respect to E-Commerce Operators.

ABOUT EQUALISATION LEVY (BACKGROUND)

a) As per the Double Tax Avoidance Agreements entered into between India and several countries, if a non-resident enterprise carries on its business in India through a Permanent Establishment (“PE”) situated in India, India could also tax business profits of such non-resident enterprise to the extent attributable to the PE.

b) Fundamentally, in order to be considered to be a PE, physical presence in India is a pre-requisite. In this background, foreign companies which offer electronic platforms and online services in India could avoid paying taxes in India as they could not be considered to be having a physical presence in India and as a corollary, not having a PE in India.

c) These enterprises made substantial revenues in India by providing a platform for online advertisers in India. Therefore, in order to tax the revenues earned by such non-residents, India introduced the Equalization Levy (“EL”) with effect from June 1, 2016.

d) The EL was levied at a rate of 6% on the amount of gross consideration received by non-residents for online advertisement and related services provided to (i) a person resident in India and carrying on a business or profession; or (ii) a non-resident not having a PE in India.

e) The ‘equalisation’ happens because the government is supposedly levelling the playing field and making non resident companies pay for the money they make from local advertisers in India. The levy of the EL was intended to be an interim measure till the time the DTAAs are modified to include electronic economic presence of the non-residents in India.

f) Finance Act, 2020 expanded the scope of EL to apply EL at rate of 2% on ‘e-commerce operators’ on ‘e-commerce supply or service’ to specified persons. As per the GoI, the rationale for applying EL to non-resident e-commerce operators was to exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations, to ensure a level-playing field with regard to e-commerce activities undertaken in India and to act as an additional safeguard against BEPS (Base Erosion and Profit Shifting) and loss of revenue in India due to activities of the e-commerce operators operating in the country.

g) The term “e-commerce operators” meant a non-resident who owns, operates or manages a digital or electronic facility or platform for online sale of goods or online provision of services or both.

h) The term “e-commerce supply or services” meant the following:

i. online sale of goods owned by the e-commerce operator; or
ii. online provision of services provided by the e-commerce operator; or
iii. online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
iv. any combination of the above.

i) EL on E-Commerce Operators is not applicable where the E-Commerce Operator has a PE in India.

2. MAIN CHANGES BROUGHT BY THIS BUDGET (FINANCE BILL 2021) AND THE AMBIGUITIES CREATED BY IT
Definition of “online sale of goods” and “online provision of services” – Leads to ambiguity and chance of cascading of taxes
a) As the Finance Act, 2020 did not define the terms “online sale”/”online provision of service,” it was unclear as to what all transactions were covered under the ambit of EL. Also, the possibility of taxing such payments as royalty or fee for technical services created a fertile ground for tax disputes.

b) Therefore, in order to provide clarifications on the above, the Finance Bill, 2021 introduced the definition of “online sale of goods” and “online provision of services”. However, instead of clearing ambiguities, the definitions rather seem to have added to the uncertainty by expanding the scope of EL to such an extent that even if the entire transaction is not concluded, offline, but even if part of a transaction is conducted online and rest offline, EL may now be applicable.

c) The Finance Bill, 2021 adds an Explanation in clause (cb) of section 164to define the terms “online sale of goods“ or “online provision of services” to include one or more of the following online activities, namely:-

i. acceptance of offer for sale; or
ii. placing of purchase order; or
iii. acceptance of the purchase order; or
iv. payment of consideration; or
v. supply of goods or provision of services, partly or wholly.

d) The inclusion of “Payment of consideration” and supply of goods or provision of services “partly or wholly” may imply that even the payment gateways and payment aggregators which facilitate the payment would get included within the ambit of EL. Also, transactions which are not fully performed online but only some part of it is performed online may also get covered under EL.

e) A literal interpretation of the new provisions seems to include not only the transactions related to digital businesses, but also the day-to-day transactions of multinational companies involving the use of electronic facilities that are not per se conventional digital business.

f) Moreover, if the entire e-commerce transaction is dissected and if at every stage the EL is levied, then it may lead to a situation where the EL may have a cascading effect and may result in the e-commerce operators grossing up their costs and end customer bearing the entire burden of paying the entire chain of EL with inability to claim tax credits.
EL shall not be applicable on consideration which is taxable as Royalty or Fee For Technical Services
g) Prior to the Budget, it was possible that the same transaction could be covered under the ambit of Royalty / Fees for Technical Services and accordingly one could have chosen between 2% EL or withholding 10% tax on royalty / FTS possibly with relief from double taxation under the relevant tax treaty.

h) The Finance Bill, 2021, clarifies that if the consideration received or receivable for specified services and for e-commerce supply or services are taxable as royalty or FTS under the ITA, read with the notified tax treaties, then such consideration should not be taxable under the EL provisions.
Expanding the Scope of “Consideration received or receivable from e-commerce supply of Services”
a) The Finance Bill has expanded the scope of “consideration received or receivable from e-commerce supply or services” by including (a) consideration for sale of goods irrespective of whether the e-commerce operator owns the goods; and (b) consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.

28/05/2020

SUPREME COURT SETS ASIDE AN AWARD AS BEING AGAINST INDIAN PUBLIC POLICY DUE TO ERRONEOUS INTERPRETATION OF CONTRACT BY THE ARBITRATORS: SEAMEC V. OIL INDIA CASE

1. INTRODUCTION AND BACKGROUND

1.1. In the recent judgment delivered by the Hon’ble Supreme Court of India on May 11, 2020 in the case of SEAMEC v. Oil India Ltd, the Court set aside a domestic arbitral award due to the reason that the Arbitral Tribunal had interpreted contract wrongly and such interpretation caused the award to become against the public policy of India.

1.2. This judgment has become a topic of discussion in legal circle. This is because arbitral awards can be interfered by Courts and set aside on very limited grounds which are mentioned under section 34 of the Arbitration and Conciliation Act, 1996, and determining that an award is against the public policy of India because it was given due to erroneous interpretation of contract is unprecedented.

1.3. Section 34 states that an arbitral award could be set aside on any of the following grounds:

i. When a party was under some incapacity;
ii. the arbitration agreement is not valid under the law to which the parties have subjected it;
iii. the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case;
iv. the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matter beyond the scope of the submission to arbitration;
v. the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties;
vi. the subject-matter of the dispute is not capable of settlement by arbitration;
vii. the award is in contravention with the fundamental policy of Indian law [prior to Arbitration and Conciliation (Amendment) Act, 2015 which came into effect on 23rd October, 2015 it was to be read as ‘against public policy of India’];
viii. it is in conflict with the most basic notions of morality or justice

1.4. Keeping in mind the aforesaid section 34, in the case of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd, the Supreme Court has held that domestic awards should not be interfered with in a casual and cavalier manner under Section 34, unless the Court comes to a conclusion that the perversity of the award goes to the root of the matter. It also held that if the Courts were to interfere with the arbitral award in the usual course on factual aspects, then the commercial wisdom behind opting for alternate dispute resolution would stand frustrated. In past precedents too, the Supreme Court has held that, - domestic awards could be set aside only if they were patently illegal or have been given by ignoring vital evidence.

1.5. In the aforesaid background, judgment of the Supreme Court in the SEAMAC Case (supra) seems to be contradicting its own precedent.

2. FACTS (IN BRIEF)

2.1. Oil India Limited floated the tender for the purpose of well drilling and other auxiliary operations in Assam. The tender was awarded to the SEAMEC Limited.

2.2. Clause 23 of the Agreement that, -

“Subsequent to the date of price of Bid Opening, if there is a change or enactment of any law or interpretation of existing law, which results in additional cost/reduction in cost to Contractor on account of the operation under the Contract, the Company/Contractor shall reimburse/pay Contractor/Company for such additional/reduced cost actually incurred.”

2.3. During the subsistence of the contract, the prices of High-Speed Diesel (HSD), one of the essential materials for carrying out the drilling operations, increased. The said increase occurred due to a circular issued by the Ministry of Petroleum & Natural Gas, Government of India. SEAMAC claimed that the said increase in the price of HSD, triggered the “change in law” clause under the contract and accordingly, Oil India became liable to reimburse SEAMAC for the additional cost.

2.4. Oil India rejected this claim of SEAMAC. SEAMAC invoked Arbitration. The Arbitral Tribunal (by a majority decision) gave the award in favour of SEAMAC and held that, - even while an increase in HSD price through a circular issued under the authority of State or Union is not a “law” in the literal sense, but it had the “force of law” and on a liberal and harmonious construction of the Contract, it fell within the ambit of Clause 23.

2.5. Aggrieved by the award, Oil India challenged the same under Section 34 of the Arbitration Act before the District Judge. The District Judge, upheld the award and held that the findings of the Arbitral Tribunal were not without basis or against the public policy of India or patently illegal and did not warrant judicial interference.

2.6. Oil India further challenged the order of the District Judge by filing an appeal before the High Court of Guwahati. The High Court allowed the appeal and set aside the Arbitral Award on the ground that the Arbitral Tribunal had interpreted Clause 23 erroneously and the award based on such interpretation was against the public policy of India.

2.7. Aggrieved by the order of the High Court, SEAMAC filed an appeal against it in the Supreme Court of India by the way of a Special Leave Petition.

3. JUDGMENT OF THE HON’BLE SUPREME COURT OF INDIA (KEY PARTS UNQUOTED)

3.1. At the outset the Supreme Court observed that question which was required to be answered was that, - Whether the interpretation provided to the contract in the award of the Tribunal was reasonable and fair, so that the same passed the muster under Section 34 of the Arbitration Act?

3.2. Before deciding the aforesaid question the Court delved into the ambit and scope of the court’s jurisdiction under Section 34 of the Arbitration Act. The Court while considering the scope of judicial review and interference with an arbitral award, the Supreme Court relied on its earlier decision in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. where it was observed that,- arbitral awards should not be interfered with in a casual and cavalier manner, unless the Court comes to a conclusion that the perversity of the award goes to the root of the matter without there being a possibility of alternative interpretation which may sustain the arbitral award.

3.3. The Court looked into the merits of the case and held that the contract was based on a fixed rate. The party, before entering the tender process, entered the contract after mitigating the risk of such an increase. If the purpose of the tender was to limit the risks of price variations, then the interpretation placed by the Arbitral Tribunal cannot be said to be possible one, as it would completely defeat the explicit wordings and purpose of the contract. There was no gainsaying that there will be price fluctuations which a prudent contractor would have taken into margin, while bidding in the tender. Such price fluctuations could not be brought under Clause 23 unless specific language pointed to the inclusion.

3.4. The Court also held that the thumb rule of interpretation is that the document forming a written contract should be read as a whole and so far, as possible as mutually explanatory. In the case at hand, this basic rule was ignored by the Arbitral Tribunal while interpreting the clause.

4. OUR ANALYSIS (ARTICULATED IN BRIEF)

4.1. While on one hand the Supreme Court is conscious that it has very limited scope to review an arbitral award, but on the other hand, in the SEAMAC Case (Supra) it has itself intervened and set aside an award on the ground that the arbitral tribunal has wrongly interpreted the contract leading the award to become against the policy of India.

4.2. With due respect to the judgment of the Supreme Court, in our opinion, we don’t think that the Arbitral Tribunal had interpreted the Clause 23 of the contract incorrectly. What perhaps could have gone against SEAMAC was that the term ‘law’ would not have been expressly or widely defined under the contract to include circular issued by Government departments or by authorities having control over oil prices. It is not unknown that enactment and enforcement of changes in law is not necessarily made through changes made in the legal enactments at Parliament or State Legislature. Such changes in law can also be introduced through the regulatory authorities who have been delegated powers to introduce the changes under certain circumstances and subject to certain conditions. Secondly, assuming that the Tribunal is deemed to have interpreted the same erroneously, the award could still not have been treated as contravening “the public policy of India”.

4.3. It is important to note that, - the criteria to set as aside an order is not simply misinterpretation of contract, but to see whether such misinterpretation has resulted the award to be against the fundamental policy of Indian law. If it does not then, Courts should ideally not examine the merits of the case and set aside the award. Section 34 also specifically states that, - in determining whether or not an arbitral award contravenes the fundamental policy of Indian law, the Courts cannot do a review on the merits of the dispute.

4.4. The judgment in SEAMAC Case has now blurred the line of difference between a case as to when can a mis-interpretation of contract be considered to have contravened with the fundamental policy of Indian law and when it does not.

4.5. The aforesaid decision in SEAMAC Case, opens a big window for award debtor to challenge the arbitral award on the ground that the Arbitral Tribunal has given the award on the basis of misinterpretation of contract. The award debtor would however have to show that such misinterpretation goes into the root of matter and makes the award against contravening the fundamental policy of Indian law.

28/04/2020

LOOPHOLES IN DIPP’S PRESS NOTE - CURBING THE OPPORTUNISTIC TAKEOVER OF INDIAN ENTITIES BY CHINESE

PART I OF RESEARCH UPDATE

1. INTRODUCTION

1.1 With a view to curb the opportunistic takeovers / acquisitions of Indian companies due to the current Covid-19 pandemic, the Department for Promotion of Industry and Internal Trade has amended the extant Consolidated Foreign Direct Investment Policy, 2017 (“FDI Policy”) to the effect that an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route (i.e. approval of Government is required to be obtained before making such investment).

1.2 Further, in the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the aforesaid restriction/purview of the aforesaid amendment, then such subsequent change in beneficial ownership will also require Government approval.

1.3 While the Press Note 3 does not specifically mention China (of the other neighbouring countries), in background of the pandemic, it is obvious that the intention of the Government of India is to specifically target and prevent the Chinese from making opportunistic takeovers / acquisitions of Indian companies. The Press Note will only take effect after the requisite amendments to Rule 6 of the FEMA (Non-Debt Instruments) Rules 2019 are notified.

1.4 Now, while the amendments prima facie seem to be unambiguous, the lack of clarity on the concept of “beneficial owner” and a closer look at the FDI Policy in the context of “ownership” / “beneficial ownership” and “control” would go to show that there are numerous questions left unanswered. This is particularly when one has to determine the ultimate beneficial owner in different cases where there are multi-layered corporate structures.

1.5 The absence of definition of the term “beneficial owner” in the FDI Policy may give an opportunity to circumvent the FDI Policy because transactions can be structured in such a manner where an Indian resident can hold more than 50% of the capital of the ultimate holding entity of the Indian entity, however, the control of this ultimate holding entity may be given to a Chinese by way of highly confidential shareholders agreements / voting trust agreements or the like.

1.6 As a part of our Corporate Law Practice, we are pleased to share with you Part I of this Research Update which deals with the following questions:

i. What is the capital threshold limit on the basis of which a Chinese Investor be regarded as the “beneficial owner” of an Indian Company or a LLP?

ii. Is the beneficial ownership to be determined on the basis of shareholding only or can it be determined on the basis of “control” also?

iii. Can a Chinese investor be considered to be an indirect and ultimate beneficial owner if he / it does not hold majority capital of the Indian entity but nevertheless exercises “indirect” control in the Indian Company or LLP?

iv. Can ‘control’ be deemed to have been exercised by way of affirmative voting rights, i.e. can ‘negative control’ be regarded as ‘control’ for the purpose of the aforesaid amendment?

v. The Chinese Investor may not hold majority capital in an Indian Company or a LLP or exercise control in the Indian Company or LLP individually but it may do so by acting in concert with other Investor. In such case, can such Investor be regarded as a beneficial owner of such Indian entity?

vi. Can a Chinese be deemed to be a beneficial owner of an Indian Company / LLP if he / it does not hold majority capital / profit share in the Indian Company / LLP but nonetheless exercises direct control in the Indian entity?

2. OUR ANALYSIS

What is the capital threshold limit on the basis of which a Chinese Investor be regarded as the “beneficial owner” of an Indian Company or a LLP?

2.1 As per the FDI Policy, a company is considered as ‘Owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens. Likewise, a Limited Liability Partnership will be considered as owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/or entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian citizens and entities have majority of the profit share.

2.2 The term ‘Capital’ means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures and warrants. [Side Note: if the Chinese Investor subscribes to any optionally convertible debt instruments, it will be regarded as an external commercial borrowing and not an investment]

2.3 Therefore, in absence of the definition of the term ‘beneficial owner’ in the Press Note / FDI Policy, the meaning of it may be inferred from the FDI Policy that, - a Chinese Investor may be considered to be a beneficial owner in an Indian Company if the said Investor holds more than 50% of the capital in the Indian entity either directly or indirectly (i.e. through step down entities). [Side Note: We will deal with indirect holding in the 2nd part of our Research Update]

2.4 [Side Note: In our preliminary view, considering that the term “owned” is defined in the FDI Policy, one cannot look at the Companies (Significant Beneficial Owners) Rules, 2018 or the and/or the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 for determining the meaning of “beneficial owner” for the purpose of FDI Policy / FEMA even when Companies Act, 2013 or Prevention of Money-laundering Act may be considered to be in pari-materia with FDI Policy and FEMA for this specific purpose]

Is the beneficial ownership to be determined on the basis of shareholding only or can it be determined on the basis of “control”?

2.5 As per the FDI Policy, a company is considered as ‘Owned’ by resident Indian citizens if:-

i. more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or
ii. more than 50% of the capital in it is beneficially owned by Indian companies, which are ultimately owned and controlled by resident Indian citizens.

2.6 Likewise, a Limited Liability Partnership will be considered as owned by resident Indian citizens if:-

i. more than 50% of the investment in such an LLP is contributed by resident Indian citizens; and/or
ii. more than 50% of the investment in such an LLP is contributed by entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian citizens and entities have majority of the profit share.

2.7 Further, as per the FDI Policy, the term ‘Control’ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. For the purposes of Limited Liability Partnership, ‘control’ will mean right to appoint majority of the designated partners, where such designated partners, with specific exclusion to others, have control over all the policies of the LLP.

2.8 Therefore, it may be inferred that, - the beneficial ownership can be determined not only on the basis of shareholding but it can be determined on the basis of “control” also. [Side Note: Pls. see the below mentioned question and answer for further understanding of the highlighted portion]

Can a Chinese investor be considered to be an indirect and ultimate beneficial owner if he / it does not hold majority capital of the Indian entity but nevertheless exercises “indirect” control in the Indian Company or LLP?

2.9 As per the FDI Policy, a company is considered as ‘Owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens. Likewise, a Limited Liability Partnership will be considered as owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and/or entities which are ultimately ‘owned and controlled by resident Indian citizens’ and such resident Indian citizens and entities have majority of the profit share.

2.10 It can be inferred from the above that, - unless the ultimate Holding Company of the Indian entity is both owned and controlled by a Indian resident, the Indian entity cannot be regarded as being beneficially owned by non resident investor. In other words, if the Ultimate Holding Company is “controlled” by a Chinese, the Chinese may be regarded as a beneficial owner of the step down Indian entity.

2.11 For example, - ‘A’ is an Indian entity in which ‘B’, a Mauritius based entity holds 51% capital. More than 51% of capital of ‘B’ is held by ‘C’, another Indian entity. Now, assuming that despite ‘C’ holding majority capital in ‘B’, the control of ‘C’ is with ‘D’, a Chinese entity, In such case, ‘C’, the Indian entity may not be considered to be a beneficial owner of ‘A’ because the control of ‘B’ is with ‘D’ the Chinese Investor and not with ‘C’.

2.12 The absence of definition of the term “beneficial owner” in the FDI Policy (dealing with the aspect of indirect control) may give an opportunity to circumvent the FDI Policy because transactions can be structured in such a manner where an Indian Investor can hold more than 50% of the capital of the ultimate holding entity of the Indian entity, however, the control of this of the ultimate holding entity may be given to a Chinese by way of highly confidential shareholders agreements / voting trust agreements or the like.

Can ‘control’ be deemed to have been exercised by way of affirmative voting rights, i.e. can ‘negative control’ be regarded as ‘control’ for the purpose of the aforesaid amendment?

2.13 In most of the investment transactions, the investors nominate non-executive directors on the Board who are given affirmative voting rights wherein certain important financial / operating decisions cannot be taken without the prior written consent of such Investor nominee director. Most investors consider these rights critical in order to have some level of supervision over the target company’s operation and management.

2.14 In such cases, a question arises that if a Chinese is having ‘Reserved Matters Rights’ / ‘Affirmative Voting Rights’ in the ultimate holding company of the Indian entity, can the Chinese considered to be having “control” over the concerned entity?

2.15 In such cases, there can be two views as under:

i. Affirmative voting rights signify a ‘negative’ control and not an active controlling power to drive the affairs of the Company. Inference can be drawn from the judgment by the Hon’ble Securities Appellate Tribunal (SAT) in the case of Shubhkam Ventures, wherein it was held that, - “control”, as per the definition of the term in the Takeover Code, was a proactive and not a reactive power. The SAT in its order held that control really means creating or controlling a situation by taking the initiative. Power by which an acquirer can only prevent a company from doing what the latter wants to do is by itself not control. Considering that the definition of the term “control” as given under FDI Policy is identical as the definition given under the Takeover Code, the two statutes may be read as being pari materia with each other and accordingly, basis the aforesaid judgment, one may argue that the “control” inferred under the FDI Policy signifies ‘positive’ control and not ‘negative’ control.

ii. A converse view may also be taken that, - the intention of the Press Note is very strict. Therefore, having ‘indirect negative control’ also would mean that Chinese is the ultimate beneficial owner of the Indian entity.

The Chinese (Investor) may not hold majority capital in an Indian Company or a LLP or exercise control in the Indian Company or LLP individually but it may do so by acting in concert with other Investor. In such case can such Chinese (Investor) be regarded as a beneficial owner of such Indian entity?

2.16 As per the SBO Rules prescribed under Companies Act, 2013, an individual will be considered to be a "significant beneficial owner" not only when he indirectly holds majority stake or exercises significant influence or control in the reporting company alone but when he is acting “together”. Such individual shall be deemed to be 'acting together' if he / she acts with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be. Unlike the Takeover Code (i.e. SEBI SAST Regulations), the SBO Rules however do not list the relationships which are regarded as “Deemed Persons Acting in Concert”. However, some guidance may be taken from the Takeover Code to interpret the term “acting together”. For example, individuals having blood relationship / immediate relatives having right to control the management or policy decisions of the Indian Company may be deemed to be persons acting together to have “significant influence” or “control” over the Indian Company, unless there is evidence to show otherwise.

2.17 While the Press Note 3 / FDI Policy do not explicitly mention that beneficial ownership can be established not only by virtue of single handed control but also when investor is “acting together”; but given that the intention of the amendment is to protect the Indian entities from being taken over by the Chinese, in most likelihood this interpretation will be taken by the judicial authorities.

Can a Chinese be deemed to be a beneficial owner of an Indian Company / LLP if he / it does not hold majority capital / profit share in the Indian Company / LLP but nonetheless exercises direct control in the Indian entity?

2.18 As per the FDI Policy, a company is considered as ‘Owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens. Likewise, a Limited Liability Partnership will be considered as owned by resident Indian citizens if more than 50% of the investment in such an LLP is contributed by resident Indian citizens and such resident Indian citizen(s) have majority of the profit share.

2.19 Again, in absence of definition on what is a ‘beneficial owner’, there may be two interpretations. On one hand, it maybe interpreted that, - as long as more than 50% of the capital of the Indian entity is held by a resident Indian, even if the Indian entity is controlled by the Chinese, the Chinese may not be considered to be a beneficial owner of the Indian entity. On the other hand, a strict interpretation may also be taken that the Indian entity must not only be owned but also controlled by an Indian resident only to be considered to be beneficially owned by an Indian.

-TO BE CONTINUED IN PART II-

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