Compliance & Investigation
Notification of Provisions related to Investigations by Serious Fraud Investigation Office
On August 24, 2017, the MCA issued a notification for bringing into force subsections (8), (9) and (10) of Section 212 of the Companies Act. Section 212 deals with investigation into affairs of a company by the Serious Fraud Investigation Office (‘SFIO’). The newly notified subsections deal with the powers of arrest given to the designated officers of the SFIO.
The MCA has also notified the Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 (‘SFIO Rules’) on August 24, 2017, which SFIO Rules are to be read with Section 212 and 469 of the Companies Act and inter alia elaborate the powers and manner in which arrests are to be made by SFIO officers pursuant to Section 212.
Changes in Conditions for Issuance and Transfer of Offshore Derivative Instruments
SEBI has, by way of a circular dated June 10, 2016, introduced the following key changes in the conditions for issuance and transfer of Offshore Derivative Instruments (‘ODI’), effective from July 1, 2016:
i. Beneficial owners of corporate subscribers are to be verified on a look-through basis, as per the thresholds set out in the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, i.e., 25% in the case of a company and 15% in case of partnership firms/ trusts/ unincorporated bodies, and Know Your Customer documentation has to be obtained from beneficial owners exceeding these thresholds. If no entity’s holding is in excess of the thresholds, the ODI issuer must obtain the identity and address proof of the relevant natural person who holds the position of senior managing official of the material shareholder/ owner entity;
ii. Any transfer of ODIs, issued by or on behalf of the ODI issuer, is to be made to only persons eligible to deal in ODIs, with the prior consent of the ODI issuer (unless the transferee is pre-approved by it) and reported to SEBI on a monthly basis;
iii. ODI issuers must file suspicious transaction reports (if any) with the Indian Financial Intelligence Unit;
iv. ODI issuers must reconfirm ODI positions on a semi-annual basis, and report any deviations from the monthly reports to SEBI; and
v. ODI Issuers must carry out a periodical review and evaluation of its controls, systems and procedures with respect to ODIs, and their chief executive officer must submit a certificate in this regard to SEBI annually.
SEBI Order in the matter of Price Waterhouse relating to the case of Satyam Computer Services Limited.
An order was passed by SEBI in relation to the financial fraud perpetrated by the senior management of Satyam Computer Services Limited (‘Satyam’).
PriceWaterhouseCoopers, Chartered Accountants (‘PWC’) were the statutory auditors of Satyam since April 1, 2000. When the financial irregularities at Satyam came to light, SEBI issued notices to 11 entities in the PWC group and the 2 signatories of the auditors’ report of Satyam on behalf of PWC, namely, Mr. S Gopalakrishnan and Mr. Srinivas Talluri (collectively, the ‘Noticees’). The Noticees were accused by SEBI of (i) acting in violation of certain provisions of the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘FUTP Regulations’) and in gross violation of their duties and responsibilities as auditors while certifying the financial statements of Satyam for the period from 2000 to 2008; and (ii) being complicit or acquiesced in the fraud perpetuated at Satyam.
In its order of January 10, 2018 (‘Order’), SEBI observed that there had been a total abdication by PWC of its duty to follow minimum standards of diligence (including PWC’s own manual), which inter alia required external confirmation of bank balances and fixed deposits. Further, PWC failed to reconcile discrepancies in the records of Satyam, which it had full knowledge of and which had been flagged by Satyam’s internal auditors, and its report certified the fairness of Satyam’s financial statements, forming a vital component of the prospectus inducing investors to trade in the scrip of Satyam believing it to be in a sound financial position.
SEBI inferred that their involvement was mala fide, and that the only reason for such a casual approach taken by PWC could be either complacency or complicity, and that PWC’s acts amounted to commission of fraud for the purposes of the SEBI Act and the PFUTP Regulations. In SEBI’s view, while PWC group entities are separate entities, they functioned as a single unit for all practical purposes in the context of the fraud at Satyam, and therefore, SEBI directed: (i) debarment from directly or indirectly issuing certificates of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with SEBI for a period of two years for all PWC entities practicing as chartered accountants in India, and for a period of three years for the Noticees; (ii) disgorgement of wrongful gains of approximately Rs. 13.09 crore (approx. US$ 2 million) (joint and several liability) by PWC, Bangalore and the Noticees, with interest; and (iii) all listed companies and intermediaries registered with SEBI not to engage audit firms forming part of the PWC network for issuing any certificate with respect to compliance of statutory obligations for a period of two years.
An appeal against this Order filed by PWC is pending before the Securities Appellate Tribunal (‘SAT’). SAT has refused to grant a stay on the two-year audit ban imposed by SEBI, but has clarified that PWC is permitted to service its existing clients for the fiscal year 2017-2018 and is also permitted to complete assignments already undertaken for listed entities that follow the calendar year as their fiscal year, but is not permitted to undertake any new listed assignments.
The Competition Commission of India Amends Lesser Penalty Regulations
On 22 August 2017, the Competition Commission of India (‘CCI’) introduced certain amendments to the Competition Commission of India (Lesser Penalty) Regulations, 2009 (‘Lesser Penalty Regulations’) (‘Amendment’)1. The Amendment will impact multiple ongoing, as well as fresh cartel proceedings initiated by the CCI. Broadly, the Amendment expands the scope of the Lesser Penalty Regulations by allowing individuals to approach the CCI with evidence on collusion; abolishing the earlier upper limit on the number of leniency applicants who could benefit from the penalty waiver (i.e. three), and significantly changing the provisions on confidentiality and file inspections. Below, we provide a brief background of the leniency program in India, a summary of the changes introduced by the CCI, and their possible implications on the cartel proceedings in India.2
A. Brief Background
The Competition Act, 2002 (‘Competition Act’) allows the CCI to impose lesser penalty on any member of a cartel, alleged to have contravened Section 3 of the Competition Act. In applying these provisions, the CCI follows the “first come-first serve approach” – i.e., the first member to approach the CCI who fulfills the requirements laid down by the Lesser Penalty Regulations may be eligible for a waiver of penalty up to 100%. Successful applicants who subsequently contact the CCI are also eligible for penalty waivers up to 50% and 30% respectively only if they provide additional valuable information which was previously unknown to the CCI.
B. Individuals can now approach the CCI under the Lesser Penalty Regulations
Section 46 of the Competition Act allows, “any producer, seller, distributor, trader or service provider included in any cartel, which is alleged to have violated Section 3” to apply for imposition of lesser penalties. The Lesser Penalty Regulations, until now, only permitted an “enterprise” to disclose anti- competitive conduct, and seek the benefit of lesser penalty under Section 46.
The Amendment now allows even an “individual” to approach the CCI to seek benefit of the Lesser Penalty Regulations – thereby expanding the reach of the leniency program to individual whistleblowers – who could be employees, or even former employees involved in such anti-competitive conduct on behalf of the enterprise. Allowing individuals to come forward to the CCI with incriminating evidence of collusion will allow the CCI to strengthen its leniency program and effectively identify more cartels, with better quality of evidence and expending lesser amount of resources.
C. Enterprises seeking the benefit of the Lesser Penalty Regulations will now additionally need to submit details of individuals involved in the cartel
The Lesser Penalty Regulations, until now, required an applicant seeking to benefit from the provisions of leniency provision, to: (a) provide vital disclosure in respect of the contravention; (b) provide all relevant information, documents and evidence as required by the CCI; (c) co-operate with the CCI throughout the proceedings; and (d) not conceal, destroy, manipulate or remove documents which are relevant to the proceedings, and may contribute to establishment of a cartel.
The Amendment, by insertion of Clause 1A, to Regulation 3, brings an additional requirement for enterprises applying for leniency to also furnish details of individuals who have been involved in the cartel on behalf of such enterprise, and for whom lesser penalty is sought. Consequently, even Regulation 4, which is the operative regulation for lessening the penalty applicable, has been extended to individuals. By implication, therefore, while filing a leniency application, the applicant enterprises will also be allowed to seek immunity for their employees, and former employees who may have been involved in a cartel.
Earlier, lack of clarity on whether individual employees could benefit from the leniency regime was one of the reasons why enterprises were not forthcoming in seeking the benefit of the Lesser Penalty Regulations. The Amendment marks a welcome development, and now, enterprises will be able to seek lesser penalties for itself, as well as for the individuals who may have contributed to a cartel.
However, since the Amendment makes it mandatory for enterprises to provide details of individuals involved in the collusive conduct, the applicant enterprises will now be subject to the onerous requirement of interviewing employees, and former employees in respect of conduct – which, in many instances, could even go back to many years in the past, and subject them to proceedings under Section 48 of the Competition Act, albeit with full or partial immunity from penalty.
D. No cap on the number of applicants who may benefit from the Lesser Penalty Regulations
Earlier, the Lesser Penalty Regulation capped the number of applicant who were eligible to secure immunity to three. The Amendment now expressly allows the CCI to accept (and grant immunity to) more than three applicants. The third, and any subsequent applicant will be eligible for a penalty waiver for up to 30%. From CCI’s perspective, this amendment is aimed at encouraging all cartel participants to come forward and seek leniency.
E. Confidentiality on identity of the applicant, and the confidential information submitted under Regulation 6 of the Lesser Penalty Regulations diluted: the Director General may now disclose such information to other parties subject to certain checks.
Until now, the identity of an applicant seeking immunity, as well as the evidence submitted by it under the Lesser Penalty Regulation was not permitted to be disclosed by the Director General or the CCI – unless such disclosure was required by law, was consented by the applicant, or such information was publicized by the applicant itself. The Amendment dilutes this provision, and grants the Director General the flexibility to disclose such information to other parties on an additional ground. We clarify the revised position on confidentiality below:
· What can be claimed as confidential? The identity of the applicant, and the information, documents and evidence furnished by it can be claimed as confidential under the Lesser Penalty Regulations.
· Can confidential information be disclosed? Information which has been claimed as confidential under the Lesser Penalty Regulations can be disclosed if (a) the disclosure is required by law; (b) the applicant has agreed to such disclosure in writing; or (c) there has been a public disclosure by the applicant. While there has been no change to these grounds, the following bullet explains the proviso which has now been inserted.
· Can the Director General disclose the confidential information to other parties? Yes. The Amendment allows the Director General to disclose such confidential information to “any party” for the purposes of investigation if it “deems necessary”. However, if the applicant does not consent to such disclosure, the Director General will have to necessarily (a) record its reasoning for disclosure in writing; and (b) seek the approval of the CCI.
· What will guide the Director General’s, or the CCI’s discretion in making such disclosure? The Amendment does not clarify this. This Amendment appears to be intended to (a) ensure that the parties against whom a negative finding may be made are afforded a fair opportunity to controvert evidence; and (b) allow the Director General to test such evidence (or collect further evidence) by putting it to other parties. Therefore, the Director General may be guided by these factors while evaluating the need to make such a disclosure. Notably, an opportunity to rebut evidence is also available to the parties before the CCI – after the report of the Director General is forwarded to the parties.
· Will the applicant be allowed to contest disclosure? The Amendment does not clarify this. Principles of natural justice may, however, require the CCI to allow the parties whose identity and information is being disclosed to make a representation to the CCI. It remains to be seen whether the CCI will indeed allow such an opportunity.
· Will confidentiality under the Lesser Penalty Regulations be lifted after the Director General completes its investigation? The Amendment also introduces Regulation 6A which extends the provisions of the Competition Commission of India (General) Regulations, 2009 (‘General Regulations’) relating to file inspection by parties, to the information submitted by the applicants under the Lesser Penalty Regulations. Notably, this overrides the confidentiality provision of the Lesser Penalty Regulations.
With this, after the CCI forwards the report of the Director General to the parties concerned, the “non-confidential” version of the report of the Director General shall become available to inspection to the parties. It appears that the reference to “non-confidential” version refers to the version which redacts non-public, commercially sensitive information and business secrets which have been allowed confidential treatment under Regulation 35 of the General Regulations, read with Section 57 of the Competition Act. Resultantly, the identity of the applicant, and the evidence and documents furnished by is likely to be revealed in the Report of the Director General which is available to inspection to parties.
· Does this impact confidentiality sought, or granted, over commercially sensitive information, business secrets etc.? No. The Amendment only governs confidential treatment under the Lesser Penalty Regulations. Therefore, if confidentiality has been claimed, or allowed under the General Regulations read with Section 57 of the Competition Act (which are the key provisions governing confidentiality over commercially sensitive information), the Amendment is unlikely to have an impact on such confidential treatment.
F. Limiting the information requirement in respect of volume of business affected by the alleged cartel to India
The Schedule to the Lesser Penalty Regulations enlisted the items which each application for lesser penalty must contain.3 One of the items that the CCI required earlier was to furnish an estimate of the
Volume of business affected by the alleged cartel. The Amendment limits this requirement to furnishing this estimate to the volume of affected business in India.
This is a significant development, and brings the requirement of furnishing the affected volumes in consonance with Section 32 of the Competition Act, which allows the CCI to have jurisdiction over extra- territorial conduct having an appreciable adverse effect on competition in India.
Leniency programs are among the most effective tools used by competition authorities to collect high quality evidence in establishing cartels. Given that cartels are typically very difficult to detect, the CCI’s extension of India’s leniency program to individuals will significantly strengthen the regime, and allow the CCI to get additional evidence on cartels. Reportedly, there are many leniency cases pending investigation. While the change to the confidentiality provisions brings much needed clarification on the temporal and scope of disclosure permissible, allowing the Director General to disclose such information during the course of the enquiry could be of some concern. It remains to be seen how frequently, and on what legal grounds, will the Director General invoke this provision.
1 The Amendment is dated 8 August 2017, but was published in the Gazette of India on 22 August 2017.
2 AZB, in its “Inter Alia…” edition of March, 2017 had published a broad overview of the leniency regime in India titled “Leniency Programs: What can India do to Achieve the World’s Best Practice?”.
3 The application for lesser penalty shall, inter-alia, include the following, namely;- (a) name and address of the applicant or its authorized representative as well as of all other enterprises in the cartel; (b) in case the applicant is based outside India, the address of the applicant in India for communication including the telephone numbers and the e- mail address, etc. ; (c) a detailed description of the alleged cartel arrangement, including its aims and objectives and the details of activities and functions carried out for securing such aims and objectives; (d) the goods or services involved; (e) the geographic market covered; (f) the commencement and duration of the cartel; (g) the estimated volume of business affected in India by the alleged cartel; (h) the names, positions, office locations and, wherever necessary, home addresses of all individuals who, in the knowledge of the applicant, are or have been associated with the alleged cartel, including those individuals which have been involved on behalf of the applicant ; (i) the details of other Competition Authorities, forums or courts, if any, which have been approached or are intended to be approached in relation to the alleged cartel; (j) a descriptive list of evidence regarding the nature and content of evidence provided in support of the application for lesser penalty; and (k) any other material information as may be directed by the Commission.
Prevention of Corruption (Amendment) Act, 2018
With the objective of reviewing anti-bribery and anti-corruption laws in India, the Prevention of Corruption Act, 1988 (‘PCA’) has recently been amended by the Prevention of Corruption (Amendment) Act, 2018 (‘Amendment Act’). The Amendment Act has come into force with effect from July 26, 2018. Some of the key amendments are summarized below:
1. Giving Bribes to a Public Servant is now a Direct Offence: Prior to the amendment, a bribe giver could be penalized under the PCA only for abetment of an offence committed by the bribe receiver. The Amendment Act has now made the act of giving any undue advantage to another person (directly or through a third party) to induce or reward any public servant to perform or improperly perform any public duty, an offence by itself. The term “undue advantage” includes any gratification (other than legal remuneration) and is not limited to pecuniary gratifications or gratifications capable of estimation in monetary terms. Some exceptions have been built in, for example, for persons who claim that the bribe is given under coercion, in which case, they have to inform the investigating agency within seven days of giving the bribe. The immunity previously available under Section 24 of the PCA grants an immunity to a bribe giver from prosecution for any statement made by the bribe giver during a corruption trial against a bribe receiver. This protection granted to the bribe has been done away with pursuant to the Amendment Act.
2. Offences by Public Servants: Under the Amendment Act, a public servant obtaining, accepting or attempting to obtain any undue advantage will be held guilty, if the act is done: (i) with the intent to perform or cause the performance of public duty improperly or dishonestly; (ii) as a reward for improper or dishonest performance of any public duty; or (iii) for inducing another public servant to improperly or dishonestly perform a public duty. It has been further clarified that, obtaining, accepting, or the attempting to obtain an undue advantage will itself constitute an offence by a public servant, even if the performance of public duty is not improper by the public servant. For example, if a public servant accepts an amount of INR 5000 in order to process a routine ration card application on time / expeditiously, he will be guilty of an offence under the PCA. Further, misuse of the earlier Section 13(1)(d)(iii) of the PCA is now being plugged by the Amendment Act, which recognizes only two forms of criminal misconduct by a public servant, being: (a) misappropriation of property entrusted to a public servant; and (b) possession of disproportionate assets to intentionally enrich oneself illicitly. Under the Amendment Act, except when a public servant is caught red-handed, the police cannot arrest or begin an enquiry or investigation without the approval of the relevant Governmental authority. These amendments are aimed at protecting bona fide performance of duties by public servants and enabling them to take bona fide decisions without fear of harassment under the PCA.
3. Offence under PCA by Commercial Organizations: A commercial organization will now be liable, if any person associated with it offers any undue advantage to induce or reward any public servant in exchange of any advantage for the business or conduct of the business. In addition to Indian companies, commercial organizations also include foreign entities carrying on business in India.
An associated person, for this purpose, includes any person who performs a service for the commercial organization. The test to determine an associated person in respect of a commercial organization would be by reference to all the relevant circumstances and not merely by reference to the nature of relationship between such person and the commercial organization. Further, where the offence is committed by a commercial organization with the consent or connivance of any director, manager, secretary or any other officer of such commercial organization, pursuant to the Amendment Act, such persons will also be liable to face punishment with imprisonment and fine. Commercial organizations may prove innocence by demonstrating that it had adequate procedures which were in compliance with prescribed guidelines to prevent persons associated with it from undertaking such conduct. However, guidelines in this regard have not yet been prescribed under the PCA.
4. Timeframe for Trial of Offences: The Amendment Act provides that trial by the special judges under the PCA will be conducted on a day-to-day basis, with an endeavor to complete such trial within a period of two years. This period may be extended by an additional six months at a time, for reasons to be recorded in writing. However, in aggregate, the proceedings should ordinarily be concluded within four years.
5. Attachment and Confiscation of Properties: The Amendment Act grants the ability to the Government to attach or confiscate any money or property which has been procured by means of an offence under the PCA, in accordance with Criminal Law Amendment Ordinance, 1944.
6. Amendments to PMLA: The scheduled offences under the Prevention of Money Laundering Act, 2002 now include within its ambit, the offences listed under Sections 7 to 14 of the PCA (including the offence of bribing of public servant and the offence of bribing of public servant by a commercial organization).
7. Penalties Prescribed:
Know Your Client Requirements for FPIs
SEBI has, by way of its circular dated April 10, 2018, prescribed the following key changes to the existing Know Your Client (‘KYC’) requirements for FPIs:
i. Identification and verification of beneficial owner (‘BO’) should be in accordance with Rule 9 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PMLA Rules’). Accordingly, the BOs of FPIs having a company or trust structure should be identified on controlling ownership interest and control basis, and in case of partnership firms and unincorporated association of individuals, should be identified on ownership or entitlement basis.
ii. The materiality threshold for identification of BOs on controlling ownership interest will be: (i) 25% in case of a company; and (ii) 15% in case of a partnership firm, trust and unincorporated association of persons. In respect of FPIs from ‘high risk jurisdictions’, intermediaries may apply lower materiality threshold of 10% for identification of BOs and also ensure compliance with KYC documentation as applicable for category III FPIs. This threshold will first be applied at the FPI level, and next look through principle will be applied to identify the BO of the material shareholder / owner entity level. When no BO is identified, the BO will be the senior managing official of the FPI
iii. Non Resident Indians (‘NRIs’) / Overseas Citizens of India (‘OCIs’) / resident Indian cannot be BOs of FPIs. However, if an FPI is Category II investment manager of other FPIs and is a non-investing entity, it may be promoted by NRIs / OCIs.
Clubbing of investment limits for FPIs will also be based on the abovementioned manner of identification of BOs.
Clarification on Clubbing of Investment Limits of Foreign Government / Foreign Government related entities
SEBI has, by way of its circular dated April 10, 2018 (‘Circular’), issued certain clarifications in relation to clubbing of investment limits of foreign Governments and their related entities viz. foreign central banks, sovereign wealth funds and foreign Governmental agencies registered as foreign portfolio investors (‘FPIs’) in India. The key clarifications are set out below:
i. In case of the same set of underlying beneficial owner(s), the holding of all foreign Government and its related entities from the same jurisdiction, as well as foreign Government agencies forming part of the same investor group, is required to be cumulatively below 10% of the total paid-up capital of the Indian company;
ii. If the Government of India enters into treaties with other sovereign Governments specifically recognizing certain entities to be treated distinctly, SEBI may, during the validity of such treaties, recognize them as such for the purpose of investment limits applicable to FPIs;
iii. The investment by foreign Government/ its related entities from provinces/ States of countries with federal structure will not be clubbed if such provinces/ States have different beneficial owners identified in accordance with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
Lastly, the Circular clarifies that in case of a breach of the investment limits, the FPIs are required to divest their holdings within five trading days from the date of settlement of trades causing the breach. Alternatively, at the FPI’s option, such investment may be considered as a foreign direct investment.