Until very recently, Indian private equity (PE) firms works in a very different fashion in comparison with the PE firms in the west.  Most of the deals in the west are leveraged buyouts of family businesses followed by replacing the existing management of the company with professionals. However, in India, until recently PE deals are mostly financial investors, who buys minority stakes in the companies and infuse money into the mid-sized companies, and does not involve management buyout or control of the management of the company. PE firms would seek for management control only when they found out financial irregularities or mismanagement in the company.

As most of the traditional businesses are family run businesses, the promoters of the companies are not comfortable with going out public or giving away control to outsiders. Most of such businesses, does not like handing over the company for the growth capital, until and unless they are in dire need of such capitals.

Family businesses have their own limitations, after a certain point, it becomes hard for such businesses to scale up, and need to be handled by professionals who can help in scaling up the business. PEs generally bring with them expertise knowledge of operations in the particular sector, which is key for improving the operations of the company.  In 2008, PE firm Actis Captial acquired 63 % stakes of Paras Pharmaceuticals, and made several changes in the management of the company, which was instrumental in streamlining the operations of the company. There was an increase in turnover of Paras from less than 300 crores to 400 crores by March 2010. In December 2010, Paras was bought over by Reckitt Benckiser for a sum of Rs 3260 crores, resulting in profit for both Actis and the promoters of the company.

Apart from outright purchasing of the majority stakes of the companies from the promoters or public, the PE firms are taking alternative ways to acquire majority shares. The PE firms would enter into an understanding wherein the firms would lend out loan money through its NBFC arm to the promoter, and in turn the promoters will convert the loan into equity over a period of time.

Major controlling deals in 2013-14

According to Protiviti Consulting, in 2013 there were 450 PE deals worth $10,391 million in India. Out of the 450 PE deals, there were 13 PE deals amounting to a total of $2 billion, which involved purchase of either majority states or the entire stakes of the company. Most of the PE deals are in the IT or ITES sector, mostly owing the young ownership of such companies, who does not have significant emotional connection with the company and ready to part away with the ownership of the company. The PE firms are increasingly recruiting experienced senior executives having a long experience in the operations, to run the acquired companies.

• Baring (Asia) acquired 71.4 % stakes of Hexaware Technologies for $443 million. Out of the 71.4% stakes, 41.8% were acquired from the promoter Atul Nishar and General Atlantic Partners, 9.6 % from Chris Capital and 20% from the open market).
• KKR India acquired Israel based tire manufacturer, Alliance Tire for $470 million, which is one of the highest PE deals in India.
• Apax Partners acquired outsourcing software R&D firm GlobalLogic for $ 420 million
• Partner’s Group acquired technology support firm CSS Corp for $270 million.
• Blackstone Real Estate Partners acquired Unitech Ltd. for $414.78 million

The new trend of taking not only financial control but active participation in the management control by the PEs in India over the last 2 years has been quite significant. However, as most PEs look for exits in an average of 5-6 years, it would be interesting to see how they can turn the companies more profitable and expect a better return on the investment made. In most cases the PE firms found out that they are not capable enough to handle the operations, only after the deal has been made and the existing management is not performing efficiently to deliver the expected returns. Apart from inefficient management, other problems in Indian companies include poor corporate governance, inadequate cash liquidity, which needs to be managed by the PE firms.

This article is written by Amrita Basu, a student of New Law College, Bharati Vidyapeeth (Deemed) University, Pune.

An Non-Government Organisation,as we understand, is engaged with socio-economic activities catering to the needs of the general public at large and do not come under the ambit of the Income Tax Act, 1961. But this is a general mis-conception that we tend to have because of the truth of it being a non-profit organisation. Initially it was exactly the scenario but with increase in unscrupulous practices these NGOs were made liable to pay tax and also allowed exemption.

TAX LIABILITY OF NGOs:

All voluntary or charitable organisation as defined U/S.2(15) of the Act has the liability to pay service tax on the income actually received by them, except for that donation which has been specified to be ‘corpus’ by the donor in writing. However, the interest or dividend accrued on such fund can also be utilized.

As provided by the Act only 85% of the total income received by an NGO is to be utilized and the remaining 15% is accumulated for later use and corpus fund forms a part of such remaining income. And this accumulated income can be used within the next five years and if not used then shall be considered as the income of the eleventh year.

A public trust with an income of atleast 50,000 rupees or less or more than 50,000 needs to file a return to income every financial year.Further, if the voluntary organization in question has not been registered U/S.12A of the Act and earns an income that exceeds the minimum taxable limit then its total income and the corpus fund will be taxable on the amount excess.

In addition to all these, what has been made taxable are the kind of anonymous donations made by any organization or institutions or individual to a charitable organization at a rate of 30%. However,the Constitution of India has made such donations made to religious institutions non-taxable.

The Money Laundering Act, 2002 is applicable to the anonymous donations, irrespective of  made to a charitable or religious institution. Accordingly whoever is found guilty under the Act, shall be punishable with an imprisonment for a term that shall not be less than three years but may extend to seven years and fine which may extend upto five lakh rupees.

BENEFITS AVAILABLE TO THE NGO & CONTRIBUTORS:

An NGO by getting itself registered u/s. 12A of the Act within a year from the date of its establishment can avail exemption from the payment of tax u/s.11 of the Act.

A resident of India having a taxable income and a non-resident having an Indian passport can claim for benefits if they have made a donation to an NGO which is registered with the Income Tax Department and holds tax exemption status u/s. 80G, 80GGA, 35AC(i& ii) and (i&iii) of the Act.

SPECIAL PROVISION AS U/S.80G:

1. A deduction to the extent of 100% of the contribution made if it has been made to the following:

a) The   National   Defence   Fund   or   the   Prime Minister’s National Relief Fund

b) The Prime Minister’s Armenia Earthquake Relief Fund

c) The Africa (Public Contribution-India) Fund

d) The   National   Foundation   for   Communal Harmony

e) The Chief Minister’s Earthquake Relief Fund, Maharashtra

f) The National Blood Transfusion Council

g) The State Blood Transfusion Council

h) The Army Central Welfare Fund

i) The Indian Naval Benevolent Fund

j) The Air Force Central Welfare Fund

k) The Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996

l) The National Illness Assistance Fund

m) The Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund, in respect of any State or Union Territory, as the case may be, subject to certain conditions

n) The University or educational   institution   of national eminence approved by the prescribed authority

o) The National Sports Fund to be set up by the Central Government

p) The National Cultural Fund set up by the Central Government

q) The Fund for Technology Development and Application set up by the Central Government

r) The national trust for welfare of persons with autism, mental retardation, cerebral palsy and multiple disabilities

2. A deduction to the extent of 50% of the contribution can be made if so has been made to either of the following:

a) The Jawaharlal Nehru Memorial Fund;

b) The Prime Minister’s Drought Relief Fund

c) The National Children’s Fund

d) The Indira Gandhi Memorial Trust

e) The Rajiv Gandhi Foundation

U/S. 35AC of the Act if an NGO gets registered the central government approves of the scientific research programs/projects to be carried out by such organization.

By making donations to such NGOs, a business or corporate organisation can get a deduction of 175% on the donated amount as has been amended by the Finance Act, 2010 which was previously 125%. Further, a deduction of 100% of the amount contributed from the taxable income of the assessee can be made under the Section and further no monetary ceiling is applicable on donations made U/S. 35AC of the Act.

WHAT HAPPENS TO THE PROFIT EARNED BY THE NGO?

The surplus income can be utilized to carry on with the activities towards the fulfillment of the objective of the particular NGO. The surplus can either be carried forward to the succeeding years without any kind of limitation or accumulated for a specific purpose. However the DTC proposes for the utilization of the 15% of the surplus or 10% of the receipts within three years in order to restrain the accumulation for a longer period and in such case where the surplus is not utilized it shall become taxable at a rate of 15%.

Further the profits earned by any charitable trust from a construction project cannot be subjected to exemption u/s.11 but be entitled to deduction u/s.80IB(10). However, if an NGO working for women empowerment earns profit by selling off the handicrafts made by the women employed by them shall not be made taxable.

When the revenue exceeds the expenses of the NGO, it is then that such organization earns profit. Therefore it can’t be implied from the nature of a charitable or voluntary or religious organization or any such organization that carries out social or economic or developmental programs to reach to those people where even the government cannot reach. It is actually the opposite. Profits earned by NGOs can be channelized in the most effective way if so is desired for.

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This article is written by Yash Bagra, a student of Institute of Law, Nirma University during his internship with iPleaders.

Key changes which have been done in Companies Act, 2013 under related party transactions:

• Central government approval of these transactions has been done away with.
• The ambit of these transactions has been widened up, such as leasing of property of any kind, the appointment of any agent for the purchase and sale of goods, material, services or property.
• ‘Arm’s length transaction’ has substituted cash at prevailing market price and it is also defined in the act.
• Transactions entered into with related parties now to be included in the board’s report along with justification for entering into such contracts and arrangements.
• The penalty for contravention of the provisions of section 297 was covered in general provisions before, but this is now covered specifically in the section itself which also now extends to imprisonment.
• Additional conditions may be prescribed by the Central Government.

Meaning of ‘Related Party’

Under Companies Act, 1956 ‘related party’ to any transaction was not defined. However, the old Companies Act dealt with restrictions on transactions with parties like the director of the company or his relative, firm in which such a director or relative is a partner, any other partner in such a firm and private company of which the director is a member or director. Companies Act, 2013 defines ‘related party’ with reference to a company in multiple entities like a firm, in which a director, manager or his relative is a partner, any corporate body whose board of Directors, Managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager, or any company which is a holding, subsidiary or an associate company of such company.

Restrictions on related party transactions

Companies Act, 1956 had section 297 which corresponds to section 188 of Companies Act, 2013 imposing restrictions on contract or arrangement for the sale, purchase or supply of any goods, materials or services and for underwriting the subscription of any shares in, or debentures of, the company with a related party.

On the other hand, section 188 of the Companies Act 2013 has widened the scope of restricted transactions, including various kinds of transactions which require consent of the board of directors given by a resolution in a meeting of the board like sale, purchase or supply of any goods or materials, selling or otherwise disposing of, or buying, property of any kind leasing of property of any kind, availing or rendering of any services, the appointment of any agent for the purchase or sale of goods, materials, services or property, underwriting the subscription of any securities or derivatives of the company and such related party`s appointment to any office or place of profit in the company, its subsidiary company or associate company.

No contract or agreement in the case of a company having a paid up share capital of not less than the prescribed amount or transaction not exceeding prescribed sums will be entered except with the prior approval of the company by a special resolution. No member of the company will be allowed to vote on a special resolution for approving any contract or arrangement entered by the company if such a member is a related party.

Companies Act, 2013 explains the term “office or place of profit” as an office or place which is held by a director and if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation and where office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation.

EXEMPTION

Companies Act, 2013 provides exemption to transactions which are at “arm`s length” i.e., a transaction which leads to no conflict of interest as the relation between the two related parties was like as if they were unrelated parties.

It is required that every contract or arrangement which is a related party transaction will be referred to in the board`s report to the shareholders along with the justification for entering into such contract or arrangement.

LOSS RECOVERY

Old companies act did not provide any provision related to loss recovery in case of related party transactions. Under Companies Act, 2013 if a director or any other employee has not obtained the consent of the board or approval by a special resolution in the general meeting and has entered into any contract or arrangement with a related party and it is not even ratified by the board or by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into such contract will be voidable at the option of the board and if the contract or arrangement is with a related party to any director or it is authorized by any director the concerned director will indemnify the company against any loss incurred by it.

It is open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of the act for the recovery of any loss sustained by it as a result of such contract or arrangement.

PENALTY FOR CONTRAVENTIONS

Under the companies act of 2013 any director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of the provisions of the act in case of a listed company or any other company he/she will be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty five thousand rupees but which may extend to five lakhs.  There was no separate penalty provision in the Companies Act, 1956.

APPROVALS

A contrasting change in the Act of 2013 in comparison to Act of 1956 is that in the latter, it was mandatory to get previous approval from the central government to enter into any transaction with “related party” for companies having paid up capital of not less than one crore rupees but in the new act this approval route has been done away with.

Every company has to seek approval from the board of directors to enter into any related party transactions irrespective of the capital of the company and the approval has to be obtained at a meeting of the board and it cannot be obtained by passing a resolution by circulation. Any director who has an interest in any contract entered with a related party, he shall not be present at the meeting during discussion on the subject matter relating to related party transactions.

Companies Act, 2013 also requires the Audit Committee to approve or modify transactions with related parties, scrutinize inter-corporate loans and investments and value undertakings or assets of the company, wherever it is necessary. Further, the Companies Act gives Audit Committee the authority to investigate into any matter falling under its domain and the power to obtain professional advice from external sources and have full access to information contained in the records of the company. Transactions entered into with related parties are required to be included in the board’s report along with justification for entering into such contracts and arrangements.