Securitisation Tax Rules: Uncertainty still prevails

In the absence of rules providing for the conditions applicable to securitisation trusts for the Chapter XII-EA, the worst apprehensions of the industry may come true, as the whole Chapter would become inoperative

The securitisation industry, it seems must learn to live with the environment of uncertainty. First the need for pass-through treatment for special purpose vehicles (SPVs) issue, then the service tax issue and more. With great efforts to voice its concerns before the finance ministry, the Finance Act, 2013 came up with special provisions for securitisation trusts. The newly inserted provisions gave immediate relief, but left the industry in doldrums for sometime. Like a pendulum, the industry has been swinging between choosing direct assignments and pass through certificates (PTCs) route.


With the introduction of the special provisions for securitisation trusts, the securitisation industry has been on tenterhooks waiting for the rules “as may be prescribed” to be notified by the authorities sooner than later. While one of the rules was notified on 4 September 2013, the larger issue still remain unaddressed.


Background for rules relating to securitisation trusts

Clause 30 of the Finance Bill, 2013 (now Act) inserted a new Chapter XII-EA consisting of new sections 115TA, 115TB and 115TC in the Income Tax Act with regard to special provisions relating to tax on distributed income by securitisation trusts.


Section 115TA – 115TC (along with the explanations) of the Chapter provided for the Income Tax Authorities to prescribe two set of rules. One, section 115TA sub-section (3) states that –


(3) The person responsible for making payment of the income distributed by the securitisation trust shall, on or before the 15th day of September in each year, furnish to the prescribed income-tax authority, a statement in the prescribed form and verified in the prescribed manner, giving the details of the amount of income distributed to investors during the previous year, the tax paid thereon and such other relevant details, as may be prescribed.

Second, the explanation (d) to the Chapter provided for the meaning to securitisation trusts, as below -

(d) "securitisation trust" means a trust, being a-

(i)    "special purpose distinct entity" as defined in clause (u) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), and the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and regulated under the said regulations ; or

(ii)    "special purpose vehicle" as defined in, and regulated by, the guidelines on securitisation of standard assets issued by the Reserve Bank of India,
which fulfils such conditions, as may be prescribed.'

The first set of rules in relation to the statement providing details of the income distributed and tax paid thereon have been notified by the Department of Revenue (Central Board of Direct Taxes) on 4th September, 2013.


Under Rule 12BA, the statement of income distributed has to be furnished by the securitisation trust in Form 63AA and is to be duly verified by an accountant. Among the basic details required of the securitisation trust, the Form has two very significant details requirement. The form requires the securitisation trust to confirm whether it is regulated by Securities Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulation, 2008, or whether the securitisation trust is regulated by the Reserve Bank of India guidelines on securitisation of standard assets.


The form requires the securitisation trust to confirm if they are regulated by either of the regulators. The issue here is what if the securitisation trust does not fall under either of the regulations? Will the securitisation trust be still bound by the requirements under the rule or the conclusion is to be drawn that there cannot be a securitisation trust which is not regulated by either of the entities. If one has to take a liberal view on the issue, it only requires the trust to confirm if there is a regulatory body under whose periphery it falls, it does not prohibit a securitisation trust which is not regulated by either of the bodies.


The requirement for furnishing such a statement was on or before 15th September each year, as provided in Chapter XII-EA. Hence the rules were notified timely.


Where are we now?

However, the bigger concern is rules relating to securitisation trust to fulfil certain conditions that were to be later prescribed for the securitisation trusts to fall under the provisions of the Chapter.


What is surprising is that the authorities have not yet come out with these rules which seem the backbone of the very Chapter; without which it can be argued that the machinery itself is not complete. Currently, there are no conditions prescribed for the securitisation trusts to fall under the provisions of this Chapter and applicable rules thereof. On the other hand, it surely cannot be assumed that there shall be no conditions applicable to such securitisation trusts to fall under the periphery of such rules.


These rules have been the much awaited rules, which the department has not yet considered notifying while the Chapter has come into effect from 1 June 2013. In absence of rules providing for the conditions applicable to securitisation trusts for the Chapter to become applicable to ‘such trusts’ the worst apprehensions of the industry may come true as the whole chapter would become inoperative.


Between the rules on the reporting requirement and the operative rules, the latter rules were not only much awaited but also are the base on which the entire Chapter shall function. While the securitisation trusts are continuing to fulfil the requirements of the Chapter in absence of the conditions, the lurking uncertainty has certainly not come to rest as yet. Stuck between Scylla and Charybdis, are we waiting for another roller coaster?

(Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd. She can be contacted at [email protected])


Intrinsic value of Indian rupee is probably Rs57 against the US dollar

There appears to be no other suitable alternative but accept or introduce a dual exchange rate to be kept operational for a year at least

In the last six months, the rupee has lost 13.83% of its value and after touching a low of Rs68.85 against the US dollar, is slowly recovering. Its movement is still very uncertain though experts predict its return to anything between Rs55 to Rs60 range. The intrinsic value of the rupee is probably Rs57 to a dollar, which remains to be seen.


In the interim, exports in certain areas are picking up while major dollar expenses like oil, gas and coal have remained practically unchanged.


Both importers and exporters who took the defensive hedging mechanism have much less worry than the rest who did not foresee the possibility of this great fall.


Media reports indicate huge stock pipe of coal at the ports with importers unwilling to take delivery due to higher rupee element, as it has become costlier by 14% or so. Non-clearance will additionally impact them with demurrage that is being incurred.


Already, the ports are overburdened with more than 3.5 million tonnes of coal. Domestic production, which has increased, also has resulted in stockpiles at pitheads and elsewhere leading to a deteriorating situation. The international price of coal which was around

$85 a year ago has come down to $77, almost a 19% drop, due to lower Chinese offtake, but fall in rupee value has effectively balanced the advantage.


What should the government do to ensure the removal of coal at port and move them to the stockyards of power generators? If the power generators have to pay higher price, because of the increased rupee burden, surely, they will pass it on to the consumer. This is a vicious circle.


To resolve this issue speedily, all privately imported coal, of high grade thermal variety, be directly consigned to power generators with a specially fixed rate of exchange, to be determined by the Finance Ministry/ Reserve Bank of India, to nullify the devaluation effect. Perhaps, the rate of exchange, as was applicable (or available) at the time of opening of letter of credit for purchase, could be used a guideline. Effectively, we are thinking in terms of having a dual exchange rate to overcome the current impasse and manage the CAD (current account deficit) also.


In a likewise manner, all imports of oil, gas and fertilisers, whose import contracts are valid, be given this special rupee exchange rate, so that the government does not have to go through the usual process of subsidising the costs later. For the fertiliser industry alone, the total amount of subsidy runs to a staggering Rs30,000 crore.


Agriculture, which thanks to the monsoon, can expect a better kharif production has millions of farmers using diesel pumps in their fields and increase in fuel supply costs which is bound to happen due to rupee decline, will impact their livelihood and, ultimately, their production.


This rupee fall effect leads to a vicious circle that can be only slowed down by greater exports and reduced imports, supported by increased production and export of foodgrains and industrial products. Revival of export of iron ore would also help, apart from expeditious clearances relating to increase in production of oil and gas from indigenous sources.


At the moment, there appears to be no other suitable alternative but accept or introduce a dual exchange rate to be kept operational, for a year at least.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


From Russia with PR

Vladimir Putin wrote an op-ed about Syria in the New York Times that was placed by the public-relations giant Ketchum. As ProPublica reported in November, this is not the first time the firm placed pro-Russia op-eds in American publications without discussing the role of the Russian government

On Thursday, Vladimir Putin wrote an op-ed about Syria in the New York Times. The piece was placed by the public-relations giant Ketchum, Buzzfeed reported. On Nov. 16, 2012, we explored how Ketchum placed pro-Russia op-eds in American publications by businesspeople and others without disclosing the role of the Russian government. Ketchum's latest public filing says it was paid $1.9 million by Russia for the six-month period ending May 31, 2013. It received another $3.7 million for its work for Russian energy giant Gazprom over the same period. Here is our original report.

Several opinion columns praising Russia and published in the last two years on CNBC’s web site and the Huffington Post were written by seemingly independent professionals but were placed on behalf of the Russian government by its public-relations firm, Ketchum.

The columns, written by two businessmen, a lawyer, and an academic, heap praise on the Russian government for its “ambitious modernization strategy” and “enforcement of laws designed to better protect business and reduce corruption.” One of the CNBC opinion pieces, authored by an executive at a Moscow-based investment bank, concludes that “Russia may well be the most dynamic place on the continent.”

There’s nothing unusual about Ketchum’s work on behalf of Russia. Public relations firms constantly peddle op-eds on behalf of politicians, corporations, and governments. Rarely if ever do publications disclose the role of a PR firm in placing an op-ed, so it’s unusual to get a glimpse behind the scenes and see how an op-ed was generated.

What readers of the CNBC and Huffington Post pieces did not know — but Justice Department foreign agent registration filings by Ketchum show — is that the columns were placed by the public-relations firm working on a contract with the Russian government to, among other things, promote the country “as a place favorable for foreign investments.”

In at least one case, a Ketchum subcontractor reached out to a writer and offered to place his columns in media outlets. The writer, Adrian Pabst, a lecturer in politics at the University of Kent, said that his views were his own and that he was not influenced or paid by Ketchum.

A spokesman for CNBC, which published the pieces on the Guest Blog section of its website, declined to comment. A Huffington Post spokesman said the column placed by Ketchum did not violate the site’s policy.

Ketchum spokeswoman Jackie Burton told ProPublica that when the firm corresponds with experts or the media on behalf of Russia, “consistent with Ketchum’s policies and industry standards, we clearly state that we represent the Russian Federation.”

Russia, often criticized for human rights abuses and corruption, paid handsomely for the public-relations work. From mid-2006 to mid-2012, Ketchum received almost $23 million in fees and expenses on the Russia account and an additional $17 million on the account of Gazprom, the Russian state-controlled energy giant, according to foreign agent filings.

Op-ed editors interviewed by ProPublica said they work to include full disclosure of relevant financial interests or conflicts — or decline to run pieces that read like advertorial.

“People write op-eds because they have agendas. Separating out what’s an ethical agenda from an unethical agenda is really tough,” says Sue Horton, op-ed editor of the Los Angeles Times.

Horton said the role of the Russian government’s public-relations firm in placing the CNBC and Huffington Post op-eds "absolutely seems like something the reader would want to know.”

The op-eds placed by Ketchum for Russia, according to the filings, are:

A March 2010 CNBC piece by Peter Gerendasi, then managing partner of PricewaterhouseCoopers Russia, that praises the government of then-President Dmitry Medvedev for its “strategic priorities [of] diversification, innovation, promoting small business, supporting families and strengthening the country's financial system so that it can provide the investment capital that will enable business to grow and people to realize their potential.” Gerendasi declined to comment on the piece and PricewaterhouseCoopers said it did not pay Ketchum to place the piece and declined to comment further.

An April 2010 CNBC piece by Kingsmill Bond, then chief strategist at the Moscow investment bank Troika Dialog, that ran under the headline “Russia—Europe's Bright Light of Growth.” It called Russia possibly “the most dynamic place on the continent” for investors. Bond, now at Citigroup, told ProPublica he could not recall Ketchum’s role in the piece.

A September 2010 Huffington Post piece, titled “President Medvedev's Project Of Modernization,” by Pabst, the University of Kent academic. While acknowledging human rights and corruption problems, the thrust of Pabst’s op-ed was praise for Medvedev’s “transformational vision for Russia's domestic politics and foreign policy.” Pabst told ProPublica he was contacted by a Ketchum subcontractor, Portland Communications, and that he was not paid to write the piece. The piece, as well as another he wrote for a web site run by Ketchum, “reflect my own ideas and arguments,” he said in an email.

A January 2012 CNBC piece by Laura Brank, the head of the Russia practice for the international law firm Dechert. Brank praised the Russian government for working to overcome the perception of an inhospitable investment climate “through the implementation and enforcement of laws designed to better protect business and reduce corruption.” Brank did not respond to requests for comment.

While Ketchum maintains it always identifies its client when dealing with the media, the 2010 email sent by Ketchum to Huffington Post pitching the Pabst column did not mention that Russia was the firm’s client. (See the full email.)

“Below is a piece from Adrian Pabst, a leading Russia scholar in Europe,” wrote then-Ketchum Vice President Matt Stearns, who is now at UnitedHealth Group.

Ketchum says that Stearns had in previous correspondence identified Russia as his client to the Huffington Post editor, including to set up "a blog on the editor’s site for a member of the Russian government." The company did not provide that correspondence.

Huffington Post spokesman Rhoades Alderson said the site has a policy requiring bloggers to disclose any financial conflicts of interest related to the issue they are writing about, but Pabst did not violate the policy.

“The job of our blog editors is to make sure all of our posts add value for our readers,” Alderson said in a statement. “Part of that is making judgment calls about the transparency of each blogger's motive, even in cases when there is no technical violation of the disclosure policy. A submission by a PR firm raises flags but is not automatically disqualified if the blog adds value and is in keeping with our guidelines.”

Placement of op-eds is a standard part of the influence game, but it’s rare for readers ever to find out who is behind the curtain.

In 2011, top public-relations firm Burson-Marsteller came under criticism after it asked a blogger to author an op-ed criticizing Google’s privacy standards. Burson was working on a contract for Facebook at the time.

Public-relations firms have also been known to write op-eds and have them placed under the byline of a third party, and even to pay experts to write favorable op-eds. There’s no evidence Ketchum paid any of the authors of the Russia op-eds or that it ghost-wrote them.

Update: This post has been updated with more detail on Ketchum's correspondence with Huffington Post.



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