SEBI’s Contrasting Approach towards applicability of Securities Laws to Offshore Subsidiaries

Introduction

Indian securities laws have various legal requirements which require Indian companies to comply with requirements in relation to their offshore subsidiaries. Such requirements may in many ways conflict with local laws or requirements applicable to offshore subsidiaries. As corporate group structures increasingly involve listed Indian companies with offshore subsidiaries, the need to apply and synchronize corporate governance requirements between Indian and offshore laws assumes importance.

The Securities and Exchange Board of India (“SEBI”) was recently faced with two instances of such conflicts between SEBI requirements and local laws. SEBI’s approach in both instances is briefly set out below.

Informal Guidance to HCL Technologies Limited[1]

1. HCL Technologies Limited (“HCL”) acquired Actian Corporation (“Actian”), a US incorporated company. Actian has 15 subsidiaries and step-down subsidiaries, of which 13 are incorporated outside India.

2. There is no statutory requirement for audit of annual financial statements for Actian and some of its offshore subsidiaries under local laws. However, Regulation 46(2)(s) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) requires publication of separate audited financial statements of each subsidiary of a listed company on its website. HCL accordingly approached SEBI for an informal guidance.

3. SEBI took note of a relaxation provided to listed companies under Section 136 of the Companies Act, 2013 (“Companies Act”), which has a similar requirement of placing audited accounts of subsidiaries on the website of the Indian company. The relaxation provided that where an offshore subsidiary of a listed company is not required to prepare audited financial statements in accordance with local laws, the listed company can place unaudited financial statements of such offshore subsidiary.

4. SEBI concluded that given the relaxation under Section 136 of the Companies Act, unaudited financial statements of the offshore subsidiaries would suffice (even though Regulation 46 of the Listing Regulations did not provide any such dispensation).

Informal Guidance to KCP Limited[2]

1. KCP Limited (“KCP”) had a material subsidiary incorporated in Vietnam (“KCP Vietnam”). Regulation 24 of the Listing Regulations require an independent director on the board of the listed company to be a director on the board of every unlisted material subsidiary of the listed company.

2. However, the laws of Vietnam do not require a company with less than 11 members to have a board of directors and accordingly, KCP Vietnam (which had less than 11 members) did not legally require a board.

3. KCP sought clarification from SEBI in this regard. SEBI took note of Article 55 of the Law on Enterprises of Vietnam which provides that a company with fewer than 11 members may form a supervisory board to meet its management requirements.

4. Accordingly, in the absence of an explicit prohibition to form a supervisory board, SEBI was of the view that KCP Vietnam can form a supervisory board, and the KCP’s independent director shall be appointed on such board to comply with Regulation 24 of the Listing Regulations.

Conclusion

SEBI’s approach in both the instances above is quite contrasting. While SEBI enabled HCL to disclose unaudited financials of subsidiaries in absence of a local law requirement to audit financial statements, it mandated KCP Vietnam to have a supervisory board even though there was no such requirement under local laws.

Since requirements applicable to offshore subsidiaries under securities laws could often be in conflict with local laws, it is relevant for Indian companies to take such conflicts into consideration while acquiring or setting up offshore subsidiaries, as these could lead to costly and time-consuming compliances. It would also be interesting to see how SEBI would deal with non-compliances by offshore subsidiaries where there are obstacles under local laws.

Authors:

Pranav Atit, Senior Associate
Priyanka Butani, Senior Associate

Footnotes:

[1] Interpretative letter bearing reference number SEBI/CFD/CMD1/PR/OW/13689/1/2019 dated May 30, 2019, accessible at: https://www.sebi.gov.in/sebi_data/commondocs/may-2019/SEBI%20Letter%20-%20Informal%20Guidance%20issued%20in%20the%20matter%20of%20HCL%20Technologies%20Limited_p.pdf
[2] Interpretative letter bearing reference number SEBI/CFD/CMD1/PR/OW/1353/1/2020 dated January 9, 2020, accessible at: https://www.sebi.gov.in/sebi_data/commondocs/jan-2020/InfoLetter09_p.pdf

Date: September 3, 2020