India – Legal and Regulatory Update (January 2017)

January 19, 2017

The Indian Market

The Indian economy continues to be an attractive investment destination due to its sustained stable growth and implementation of further liberalisation policies by the Government of India ("Government"). In November 2016, the Government announced that Indian Rupees 500 and 1000 would cease to be legal tender. These high-value currency notes comprised the majority of the currency in circulation in the market. While this move has created some uncertainty in the market, the Government expects that this will lead to an increase in tax collections and bank deposits, creating room for reductions in interest and tax rates in the first half of 2017.

Following on from our previous update dated October 3, 2016 (which sets out an overview of key legal and regulatory developments in India from May 1, 2016 to August 31, 2016), this update will provide a brief overview of the key legal and regulatory developments in India between September 1, 2016 and December 31, 2016.

Key Legal and Regulatory Developments

Foreign Investment

  1. 100% Foreign Investment in Certain Financial Services: The Reserve Bank of India ("RBI") has permitted 100% foreign investment, without prior Government approval, in non-banking finance companies ("NBFCs") providing financial services regulated by financial services regulators such as the RBI, Securities and Exchange Board of India ("SEBI"), Insurance Regulation and Development Authority etc.[1] However, such investment will be subject to applicable conditions imposed by relevant financial services regulators or other applicable laws, including minimum capitalisation requirements. Further, 100% foreign investment in unregulated financial services has also been permitted under the Government approval route. Previously, foreign investment up to 100% was permitted under the automatic approval route only in NBFCs engaged in 18 specified financial services.
  2. India-Singapore Double Taxation Avoidance Agreement Amendment: India and Singapore have signed a protocol (the "Protocol") amending the agreement between India and Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income ("India-Singapore DTAA").[2] This radically changes the tax liability on capital gains earned by a Singapore tax resident from sale of shares of an Indian company. Under the erstwhile regime, such gains were taxable in the country of residence i.e. Singapore, where there is no tax on capital gains. Now, the Protocol imposes taxes on such gains at the source i.e. in India (where the company is registered) at the applicable domestic tax rate. This amendment effectively takes away the capital gains benefits that were available to investments by Singapore tax resident entities. The Protocol has been made effective on investments made on or after April 1, 2017. Therefore, investments made prior to March 31, 2017 and related exits/share transfers will remain unaffected by this change. This follows similar amendments to the convention for the avoidance of double taxation and the prevention of fiscal evasion between India and Mauritius ("India-Mauritius DTAA") (discussed in our previous update dated October 3, 2016).
  3. India-Cyprus Revised Double Taxation Avoidance Agreement: India and Cyprus have also revised their agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital ("India-Cyprus DTAA"), to incorporate source-based taxation in place of the residence-based taxation under the existing agreement.[3] This change will be effective from April 1, 2017. This is in line with recent amendments to the India-Mauritius DTAA and the India-Singapore DTAA (as discussed above). Previously, the Government had, by a notification, declared Cyprus to be a jurisdictional area with lack of effective exchange of information, which made Cypriot entities ineligible for any tax benefits. This notification has now been withdrawn to make the revised India-Cyprus DTAA fully operational.

    Subsequent to the recent amendments to India’s tax agreements with various countries, Mauritius has emerged as an attractive jurisdiction for banking transactions. The withholding tax rate for interest payments by Indian residents to Mauritius-resident banks under the recently amended India-Mauritius DTAA is 7.5%, while the withholding rates on such interest payments under the India-Singapore DTAA and the India-Cyprus DTAA remain at 10%.

Corporate Law and Financing

  1. Notification of Companies Act Provisions: The new [Indian] Companies Act, 2013 ("2013 Act") has been brought into force in a phased manner since the Act received presidential assent three years ago. In December 2016, the Government notified several provisions of the 2013 Act which effect significant changes to corporate laws in India. Two key provisions that were notified are discussed below.
    1. Procedure for Court Approved Mergers: Schemes for mergers, de-mergers and compromises will now fall under the jurisdiction of the National Company Law Tribunal ("NCLT"). While state High Courts previously had jurisdiction over these matters, the NCLT is now the dedicated quasi-judicial body responsible for company law matters. The 2013 Act introduces some major changes from the framework previously provided for such schemes under the [Indian] Companies Act, 1956 ("1956 Act"). These changes include (a) recognition of cross-border mergers; (b) shorter procedure for mergers of small companies[4] and those involving holding companies and their wholly owned subsidiaries; (c) prescription of monetary thresholds for maintaining objections to the approval of schemes; and (d) clear description of mandatory filings such as valuation reports for effective compliance.
    2. Purchase of Minority Shareholding: Under the 1956 Act there was no effective procedure for the purchase of minority shareholding other than in the circumstances of a purchase of shares of dissenting shareholders under a court-approved scheme or a contract approved by a majority of the shareholders. The 2013 Act provides for the acquisition of minority shareholding without court intervention. An "acquirer" or "a person acting in concert" ("Acquirer") holding 90% or more of the issued equity share capital of a company must notify the company of his intention to acquire the minority shareholding of such company. The minority shareholding may be acquired at a price determined by a registered valuer pursuant to an offer issued by the Acquirer or, alternatively, by an offer made by the minority shareholders. Notably, there is some ambiguity in relation to this provision as it does not make such purchase of minority shareholding a mandatory obligation nor does it provide for a specified time period to accept or reject such offer.
  2. Indian Banks Permitted to Issue Rupee Denominated Offshore Bonds: The RBI has permitted Indian banks to raise capital by issuing rupee denominated offshore bonds to meet their capital requirements and for financing infrastructure and affordable housing.[5]

Insolvency and Restructuring

  1. Changes in the Corporate Insolvency Framework: A substantial part of the [Indian] Insolvency and Bankruptcy Code, 2016 ("Insolvency Code") came into effect on December 1, 2016. Please refer to our update dated June 8, 2016, for an overview of the Insolvency Code. Petitions for winding-up of companies under the 1956 Act that are currently pending will now be dealt with by the NCLT. This change applies to winding up petitions that have been filed on the grounds of a company’s inability to pay its debts that are yet to be served on all respondents.  
  2. Debt Restructuring Procedures Streamlined: Since 2014 the RBI has introduced several measures to better equip lenders to deal with distressed assets. The RBI continues to review and fine tune these schemes from time to time. In 2014, the RBI had provided banks with greater flexibility in structuring and refinancing long term project loans extended to key sectors such as infrastructure, energy and resources. In November 2016 the RBI extended such flexibility to project loans across all sectors. In June 2016, the RBI had announced the scheme for sustainable structuring of stressed assets ("S4A"), which permitted banks to separate funded liabilities of a stressed borrower into sustainable and unsustainable debt. While the sustainable debt portion is required to be serviced by the borrower in accordance with existing loan terms, the S4A scheme allows for the conversion of the unsustainable debt portion into equity or quasi-equity instruments. In November 2016, the RBI increased the time period for the formulation and implementation of such S4A resolution plans from 90 to 180 days.[6]


  1. Rules Relaxed for Angel Funding for Start-ups: SEBI has amended the SEBI (Alternative Investment Funds) Regulation, 2012 to permit angel funds (registered with SEBI) to invest in entities incorporated up to five years ago. Further, the lock-in period has been reduced from three years to one year and the minimum investment threshold has been reduced to Indian Rupees 2.5 million (approximately USD 37,000) from Indian Rupees 5 million (approximately USD 74,000). Angel funds are now also permitted to invest up to 25% of their investible corpus overseas, in order to manage risks through diversification.

   [1]   A.P. (DIR Series) Circular No. 8 dated October 20, 2016 issued by RBI available at

   [2]   Third Protocol amending the Agreement Between the Government of the Republic of Singapore and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, available at Quick_Links/Protocol%20amending%20Singapore-India%20DTA%20(Not%20in%20force)%20(31%20Dec% 202016).pdf

   [3]   Press release issued by the Central Board of Direct Taxes, Government of India, dated December 16, 2016 available at

   [4]   Small Companies are companies with paid-up share capital less than Indian Rupees 5 million (approximately USD 74,000)

   [5]   A.P. (DIR Series) Circular No. 14 dated November 3, 2016 issued by the RBI, available at:

   [6]   Circular issued by RBI dated November 10, 2016 (DBR.No.BP.BC.34/21.04.132/2016-17) available at:

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Singapore office:

India Team:
Jai S. Pathak (+65 6507 3683, [email protected])
Karthik Ashwin Thiagarajan (+65 6507 3636, [email protected])
Sidhant Kumar (+65 6507 3661, [email protected]) 

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