INVESTOR PROTECTION IN INDIA

WHY IN NEWS:

• Permanent Court of Arbitration at The Hague in Sept 2020 ruled that India’s retrospective tax demand imposed on Vodafone group for a 2007 deal was “in breach of the guarantee of fair and equitable treatment”.

WHAT IS THE CASE:

• In 2007, Vodafone had bought a 67% stake in Hutchison Whampoa
• In the same year, India government raised a demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison.
• Vodafone challenged the order in the Supreme Court, which in 2012 ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and that it did not have to pay any taxes for the stake purchase.
• In 2012, government circumvented the Supreme Court’s ruling by proposing an amendment to the Finance Act, thereby giving the Income Tax Department the power to retrospectively tax such deals.
• The Act was passed by Parliament that year and the onus to pay the taxes fell back on Vodafone.
• The case had by then become infamous as the ‘retrospective taxation case’.
• Following international criticism, India tried to settle the matter amicably with Vodafone, but was unable to do so
• Vodafone Group then invoked Clause 9 of the Bilateral Investment Treaty (BIT) signed between India and the Netherlands in 1995
• One of the major factors for the Court of Arbitration to rule in favour of Vodafone was the violation of the BIT and the United Nations Commission on International Trade Law (UNCITRAL).

BACKGROUND:

• Indian tax authorities legal battle with Vodafone group has serious implication of undermining the faith of foreign investors
• Strong investor protection is essential for the trust that needs to be inhibited in the mind of investors
• Most countries have laws and regulations designed to protect investors from unfair, improper and fraudulent practices.
• The investor-protection regime that is now prevailing in India is a mixture of self-regulatory and statutory provisions.
• Under the ‘Strength of Investor Protection’ Indicator, measured by the World Bank, India is placed at 48^th rank with a value of 0.57.

PREVAILING INVESTOR PROTECTION REGIME IN INDIA:

• Securities and Exchange Board of India (SEBI):
  • One of the main purpose of the SEBI is to protect the interest of investors in securities
  • Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009 provides a framework for investor protection
  • SEBI Complaint Redressal System(SCORES)
    • It is a web based centralized grievance redress system of SEBI.
    • It enables investors to lodge and follow up the complaints and track the status of redressal of the complaints.
• Companies Act,2013:
  • Section 125 of Companies Act,2013:
    • It provides for establishment of Investor Education and Protection Fund which shall be utilized for promotion of investors’ education, awareness and protection etc.
  • Mandatory disclosure norms under the Act:
    • Proper and timely disclosures are central to safeguarding investor grievances. The law ensure a disclosure regime that compels companies to disclose material information on a continuous, timely and equitable basis
  • Section 245 of Companies Act,2013:
    • It provides to file a class action suit if they are of the opinion that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the investors
• The Securities Contracts (Regulation) Act
  • It provides for the regulation of the transaction in securities through control over stock exchanges
• Investor awareness programme
  • Investor awareness programme is being regularly conducted by SEBI and stock exchanges in India. For example Securities Market Awareness Campaign (SMAC) of SEBI
• Insolvency and Bankruptcy Code (IBC):
  • IBC will help boost investor confidence and encourage fund inflows into the corporate bonds market, especially in low-rated instruments.
• Goods and Services Tax (GST)
  • GST had replaced myriad cascading state and central taxes; and bring transparency and ease in compliance  which in-effect helps in boosting investor’s confidence in India’s indirect tax system

ISSUES:

• Taxation issues:
  • Provision for retrospective taxation under Income Tax Act has caused much damage to India’s reputation as a safe destination for investments.
  • This provision was used against Vodafone PLC and the U.K.’s Cairn Energy
• Threat of financial instability:
  • Non-performing assets continue to hold back banks’ profits and restrict their lending, and the sudden collapse of the non-bank financial company Infrastructure Leasing & Financial Services (IL&FS) in 2018 led to a credit crunch
  • If necessary measures are not taken immediately, it can affect the trust of investors in Indian economic stability.
• Unresolved disputes:
  • Pending grievances in SEBI’s SCORES, lack of investor awareness etc. deters investors avenue to find legal recourse to their complaints
• Corporate issues:
  • Prevalence of stock market scams, price rigging, insider- trading etc. affects investors’ confidence
• Dominance of public sector
  • Dominance of public sector may deter investors’ ambition to expand their business to a larger level
• Unpredictable tariff regime:
  • Unpredictable tariff increases in recent years, ostensibly in response to India’s large trade deficit with China, has disrupted the supply chains of both domestic industry and foreign investors and led to the cancellation of both new investments and expansions of existing investments in India. 
• Decreased performance in protecting minority investors:
  • While India ranks relatively high in ‘protection of minority investors’, it saw its rank slip in the latest 'Ease Of Doing Business' ranking of World Bank

WAY FORWARD

• Improving predictability of our tax system:
  • Government must do away with retrospective taxation and bring transparency and predictability in both direct and indirect tax regime
  • The current approach of setting targets for tax officials in tax collections is often counter-productive.
• Dispute resolution:
  • Relying on already over-burden courts in settling investor’s complaints will lead to pendency issues.
  • Therefore government take efforts to formulate alternate methods of dispute resolution like arbitration etc.
• Robust disinvestment policy:
  • A loss-making and inefficient public sector is a burden for the whole economy.
  • It causes distortions which deter private participation in several sectors.
  • Therefore the government must execute the disinvestment/privatisation effectively to improve investor’s confidence
• Incentivising FDI:
  • Government must revisit and rationalise on the FDI caps that remain across sectors.

PRACTICE QUESTION:

Q. ‘Aggressive taxation regime would undermine overseas investors’ faith in India’s commitment to rule of law’. Comment.