India: Update On India - Cabinet Approves The Public Procurement Bill 2012

The Indian Cabinet of Ministers has recently approved the draft Public Procurement Bill 2012 (Procurement Bill), which will be tabled before the Indian parliament.  At present there is not legislation in India governing public procurement by the Indian government's ministries, departments and offices.  The Bill seeks to create a single overarching legislation to govern the state's procurement process.

  • The Bill establishes the procedure to be followed by the government and by public sector undertakings for procurements.  This procedure will not apply to procurements where the estimated cost is less than INR 0.5 million.
  • Each bidder is required to establish a code of integrity, which should contain provisions to prohibit offers, solicitation and acceptance of any bribes or material benefits either directly or indirectly in exchange for any unfair advantage in a procurement process, to prevent any collusion or anti-competitive behaviour which would impair transparency in the procurement process, and to prohibit any obstruction of any investigation or audit of a procurement process.
  • The Bill envisages a grievance process under which any bidder aggrieved by a decision on procurement can approach the procuring entity giving the specific grounds on which it feels aggrieved.  The procuring entity is required to address the grievance within a period of 30 days or the time mentioned in pre-qualification documents.
  • If the procuring entity is unable to address the grievance within the allocated time period, the bidder is entitled to file an application with a procurement redressal committee to be constituted by the government.
  • The Bill also proposes the establishment of a Central Public Procurement Portal which will be accessible by the public for posting notices with respect to public procurement.
  • The Bill stipulates the contents of the bidding documents and lays down a mechanism for seeking pre-bid clarifications.
  • The Bill also sets out penalties for non-compliance.  Any person who interferes with or influences the procurement process is subject to imprisonment for a term which may extend to five years and a fine which may extend to INR five million or 10% of the assessed value of the procurement. If a bidder withdraws from the procurement process after the opening of the financial bids or after being declared the successful bidder, or fails to provide the performance security without valid grounds, such bidder may be punished with a fine which may extend to INR five million or 10% of the assessed value of the procurement, in addition to any penalty specified under the bidding document or contract. Where any such offence has been committed by a company, every person in charge of and responsible for the conduct of the business of the company may also be liable.
  • The Bill further proposes that a bidder shall be debarred from bidding if it has been convicted of an offence under the Prevention of Corruption Act 1988 or the Indian Penal Code.

The Bill will also be subject to debate upon its introduction in the current session of the Parliament and it is expected that the provisions of the Bill will be further fine-tuned for effective implementation.

Significant changes to the Foreign Direct Investment Policy

The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry issued their much awaited circular setting out the consolidated Foreign Direct Investment (FDI) Policy (the 'Policy'). While the Policy liberalises and brings clarity to certain important aspects of foreign investment in India, many other expected clarifications on key investment concerns that were seen as necessary to give impetus to foreign investments in India (for instance, relaxation of the sourcing rule on single brand retail, and the Reserve Bank of India's stance on guaranteed return put options) remain untouched.

Policy Changes:

  • Investment in commodity exchanges has been brought in line with the policy applicable to other infrastructure companies in the securities market. Government of India approval will now only be required for FDI in a commodity exchange, and not for investments made by registered Foreign Institutional Investors (FIIs) under the Portfolio Investment Scheme (PIS).
  • The Policy now provides that the activity of 'leasing and finance', which is one of the 18 Non-Banking Financial Companies activities for which FDI is permitted under the automatic route, covers only 'financial leases' and not 'operating leases'.  This change will ease minimum capitalization requirements for companies that provide equipment and other facilities on an 'operating lease' basis.
  • Equity shares cannot be issued as consideration for the import of second hand machinery.

Clarifications and Consolidation of Existing Provisions

The Policy also consolidates certain recent changes introduced by the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) including:

  • Currently, FIIs are permitted to invest in an Indian company under the PIS subject to a maximum individual holding limit of 10%, and an aggregate 24% limit for all FII investments. Relevant Indian companies can now increase the 24% aggregate limit to the applicable sector cap by a special resolution of its shareholders.  Any increase beyond the 24% limit will require prior notification to the RBI.
  • Foreign Venture Capital Investors (FVCIs) can acquire eligible securities (i.e. equity, equity linked instruments, debt, debt instruments, debentures of an Indian Venture Capital Undertaking or Venture Capital Fund (VCF), units of schemes/funds set up by a VCF) by way of a private arrangement or purchase from a third party, subject to applicable terms and conditions.
  • The government has permitted Qualified Foreign Investors (QFIs) to invest, through SEBI registered depository participants, in equity shares of listed Indian companies as well as in equity shares of Indian companies which are offered to the public in India. QFIs have also been permitted to acquire equity shares by way of rights issue, bonus shares or equity shares, on account of stock splits/consolidations or amalgamations, demergers and other corporate actions.
  • The liberalised policy under the RBI circular dated 4 November 2011, which did away with the requirement to seek prior RBI approval for transfer of shares/ convertible debentures in an Indian company engaged in the financial services sector between a resident Indian to a non-resident, has been incorporated in the Policy.

From now on the consolidated FDI Policy will be issued once a year and not every six months.

Amendments to the Finance Bill 2012

Certain proposals of the Finance Minister's Finance Bill 2012 (Bill) presented on 16 March 2012 shook investors and triggered significant international debate. The Finance Minister has introduced some significant amendments to the Bill, which have been passed by the Lower House of the Indian Parliament.  The Bill will go through the Upper House and upon receiving Presidential assent, will be incorporated in the Income Tax Act 1961 (IT Act). 

Key Amendments to the Bill:

  • The Bill introduced General Anti Avoidance Rules (GAAR) to tackle aggressive tax planning and to codify the principle of 'substance' over 'form' for tax purposes.  GAAR was to be applicable from the financial year 2012-13, with the tax payer bearing the onus of proving that the main purpose of the arrangement was not to obtain a tax benefit.  Application of GAAR has been deferred by a year and it is now applicable from the financial year 2013-14.  The taxpayer is no longer required to prove that the main purpose of the arrangement was to obtain a tax benefit
  • Both residents and non-residents may approach the tax authorities for advance rulings to determine whether an arrangement is an impermissible avoidance arrangement under the GAAR.
  • The Bill provided that when a closely held company received a share premium from a resident shareholder which exceeded the fair market value of the shares, such excess amount would be taxed as 'income' in the hands of the company.  However, this provision was not applicable if the company in question was a Venture Capital Company (VCC) or a Venture Capital Fund (VCF).  This exemption is to be extended to another class of investors, which is to be confirmed.  This may benefit "angel" investments in start-up companies.
  • Long term capital gains realised by non-residents upon the sale of unlisted shares are taxed at 20%.  It is now proposed to provide tax treatment similar to that given to FIIs, so that long term capital gains arising to a non-resident on the sale of unlisted shares would be taxed at 10%.
  • The exemption from application of withholding tax and dividend distribution tax on income distributed by VCFs/VCCs has been restored. 
  • The Bill proposed that interest paid to a non-resident by a 'company' engaged in defined infrastructure activities in respect of borrowing in foreign currency between 1 July 2012 and 1 July 2015, where the loan arrangement has been approved by the Indian Government, would be subject to lower withholding tax at the rate of 5% (plus the applicable surcharge and rate).  The scope for this concessionary withholding tax treatment has been extended to borrowings of the same nature under a loan agreement or though long term infrastructure bonds by all businesses/sectors.
  • The Bill proposed that residents would be required to report their foreign assets or any offshore bank account over which they have signing authority.  This has been amended so that non-ordinarily resident individuals are excluded from the requirement of this reporting.
  • A securities transaction tax of 0.2% will now be levied on the sale of unlisted shares in an Initial Public Offer (IPO) and long term capital gains on such sales will be exempt from tax. 
  • Capital gains arising from the conversion of an Indian branch of a foreign bank to a subsidiary will be, subject to certain conditions, exempt from tax.

The Finance Minister has also clarified that the retrospective amendment relating to indirect transfers of Indian assets (in response to the Vodafone case) does not seek to overrule existing tax treaties, and would only impact cases where the transaction is routed though a low tax or no tax country with which India does not have a double tax treaty.  He also said that cases where assessment orders have already been passed would not be reopened. 

We are very grateful to Khaitan & Co, the leading Indian law firm with offices in Mumbai, New Delhi, Kolkata and Bangalore, for allowing us to use their newsletters to prepare this briefing note.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 15/08/2012.

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