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Report of the Insolvency Law Committee: The New Way Forward
Report of the Insolvency Law Committee: The New Way Forward
On November 16, 2017, the Government of India constituted a committee to undertake a comprehensive review of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) in light of the experiences of various stakeholders during the past year. The Ministry of Corporate Affairs (‘MCA’) constituted the Insolvency Law Committee (‘ILC’) which comprises representatives from across the industry. Bahram N Vakil, a founding partner of AZB & Partners (‘Firm’) and a member of the Bankruptcy Law Reform Committee (the committee entrusted with drafting of the IBC in 2015) is one of the members of the ILC.
The MCA released ILC’s report on April 3, 2018 (‘Report’). The Report proposes various amendments to the IBC and the rules and regulations thereunder. The Parliament is likely to consider the Report in the near future to make the relevant legislative changes. Some of the major changes proposed by the Report are as below:
- Homebuyers upgraded
The IBC does not explicitly categorise homebuyers who have paid advances towards completion of real estate projects as financial or operational creditors in the corporate insolvency resolution process (‘CIRP’) of the real estate developer.The ILC took the view that advances paid by homebuyers are effectively used by real estate developers as working capital to finance the completion of projects thereby giving it the commercial effect of a borrowing and has proposed that homebuyers be treated as financial creditors. Note that their secured status depends on the nature of their contract with the developer and the bank providing the home loan. The ILC has also proposed that a large block of creditors be allowed to participate in meetings of the committee of creditors (‘CoC’) through an authorised representative.
- Interest clock on interim finance extended
Under the IBC, interim finance and any interest on it is classified as insolvency resolution process cost which receives the highest priority on any payout under a resolution plan. However, in the event of liquidation, though the principal amount of interim finance still retains its highest priority, the interest stops accruing from the date of the liquidation order.The ILC felt that the clog on accrual of interest in liquidation was affecting liquidity and raising the coupon on interim finance. The ILC has proposed that interest on interim finance shall continue to accrue for up to one year from the liquidation commencement date. Note that the Insolvency and Bankruptcy Board of India (‘IBBI’) has already made necessary changes to this effect in the IBBI (Liquidation Process) Regulations, 2016.
- Disqualification for bidders – revisited again
Section 29A of the IBC was introduced to address concerns that persons who by their conduct had contributed to the financial distress of the corporate debtor or are otherwise deemed not to be fit and proper to gain control over distressed assets, should be disqualified from being resolution applicants. However, the market felt that the range of disqualifications and the affected persons was too large. To address this issue, the ILC has made several proposals, some of which are set out below:
i. Section 29A of the IBC lays down eligibility criteria vis-à-vis the resolution applicant as well as any person acting jointly or in concert with the applicant. The term ‘acting jointly or in concert’ is not defined in the IBC and causes market participants to rely on the definition contained in the Securities and Exchange Board of India (‘SEBI’) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This results in inclusion of an extremely broad range of persons, including even those who are involved in the resolution plan in an ancillary way. The ILC proposes to restrict the eligibility test only to the applicant and its connected persons. Additionally, any person acting with a common objective of acquiring voting rights or control over the company would also have to pass the eligibility test.
ii. Section 29A(c) of the IBC bars persons who have been in control of a non-performing asset (‘NPA’) for more than one year. However, this provision effectively disqualified several ‘pure play’ financial investors who are in the business of investing in companies across the credit spectrum. For instance, asset reconstruction companies, private equity and distressed debt funds are quite likely to have some distressed assets in their portfolios. The ILC has proposed that the test under Section 29A(c) of the IBC should not apply to such pure play financial entities.
iii. Section 29(A)(d) of the IBC bars persons who have been convicted of a criminal offence punishable with imprisonment for more than two years. This disqualification was thought to be very expansive and would disqualify applicants for offences, the commission of which have no nexus to the ability of the person to run the corporate debtor successfully. The ILC has proposed that the nature of offences, the commission of which will incur the disqualification should be economic in nature and a schedule listing such specific crimes be provided. Additionally, the disqualification should also not apply in case a stay against the conviction has been obtained from a higher court.
iv. Section 29A(h) of the IBC disqualifies persons who have executed an enforceable guarantee in favour of a corporate debtor currently undergoing CIRP. The ILC felt that the scope of the disqualification is overreaching since it bars guarantors solely on account of issuing an enforceable guarantee. The ILC has proposed that the disqualification should only apply against guarantors against whom the underlying guarantee has been invoked by the creditor and remains unpaid.
- Curious case of guarantors’ liability – now resolved
Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, a few recent judicial pronouncements have suggested that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor since it is not feasible to determine the liability of the relevant third party until the CIRP is concluded.The committee felt that the scope of the moratorium is very clear and should not be interpreted broadly. The intent of law could not have been to deprive creditors of contractually negotiated remedies against third parties as long as the corporate debtor’s assets remain unaffected. The ILC proposes that an explanation be added to Section 14 of the IBC to clarify that the moratorium does not apply to any recovery action that does not impact the assets of the corporate debtor.
- CoC voting thresholds reduced
The IBC provides that all decisions by the CoC be taken by vote of 75% of the CoC, by value. The ILC felt that effectively granting minority lenders constituting 25% of the CoC a veto right to any proposed resolution plan could cause many companies to be liquidated. To ensure that there is a higher likelihood of resolving a distressed company as a going concern under the IBC, the ILC has proposed that the voting threshold for important matters during the CIRP including voting on resolution plans be reduced to 66% of the CoC. Additionally, for other routine decisions that the CoC is required to take during the CIRP, the voting threshold should be reduced to 51% to assist the resolution professional in ease of conducting day to day operations.
- IBC trigger threshold now ten times
To keep debt recovery actions from small operational creditors at bay, the ILC recommended that the minimum amount to trigger the IBC be raised to Rs. 10 lakh (approx. US$ 15,000). This may reduce pressure on the NCLT – as statistics suggest that many small creditors used the IBC to coerce recovery. But what of the small creditor? Back to the long queues in the debt recovery tribunals? Perhaps small creditors can accumulate their debt and then trigger IBC.
- In and out with ninety percent
Currently, once an IBC case is admitted, the law does not permit withdrawal of the same without the consent of all creditors. This is consistent with the philosophy that this is a collective and representative process for all creditors and settlement with the ‘filing creditor’ should not permit withdrawal. The Supreme Court has thought otherwise and has permitted withdrawal post admission. The ILC reiterated the aforesaid philosophy but saw merit in permitting withdrawal post admission if 90% of the committee of creditors deem fit. Would this have been of use in the Binani Cement saga?
- Regulatory approvals window
An immediate issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Should the bidders bear this risk or the CoC live with the uncertainty? Today, negotiations resolve this tug-of-war to some extent while bidders draft their resolution plans treating the NCLT as a single window clearance. The ILC observed that single window clearance was not the intent of the IBC. This is a critical observation for bidders. Some solutions were debated but a comprehensive solution remained elusive. Instead, the ILC has recommended that a requirement be placed to obtain consents, dispensations and permits within a maximum of one year. It’s unclear how this will impact the fine balance currently trying to be achieved in practice by bidders.
- Competition approval fast tracked
In a welcome development, the ILC has been informed that the Competition Commission of India will clear notifications for combinations arising out of the IBC within 30 days, with an extension of 30 days for exceptional cases. This is already being borne out in practice and echoes the collaborative effort being taken by Indian regulators to make the IBC work.
- Liquidation waterfall and priority of security
Concerns had been raised that the language in the IBC liquidation waterfall may override inter se ranking of security amongst creditors; i.e., in liquidation, a secured creditor with a first charge over an asset may receive the same amount as another with a second charge over such asset. After reviewing the language, related laws and relevant case law, the ILC felt confident that any such interpretation would be incorrect and valid subordination agreements should not be disregarded by the IBC and so no change has been proposed.
- MSME promoters get a breather
Micro, small and medium enterprises are thought to be the bed rock of the Indian economy. When such companies go through the IBC process, keeping their incumbent promoters out of the bidding process has raised concerns of mass liquidation of such companies leading to potentially significant job losses. The ILC has recommended that promoters of such companies be permitted to bid for their companies in the IBC process (despite Section 29A disqualifications) unless they are willful defaulters. In balancing the opposing forces involved, this seems to be the socially appropriate decision.
- Limitation now uncomplicated
Lenders benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although doctrine of laches might still apply). But this was yet to be confirmed by the Supreme Court, which had declined to comment on this issue in one matter. The ILC has recommended that limitation should apply to IBC applications other than those made by a corporate debtor itself.
- No man’s land now occupied
A resolution plan is approved by the CoC and submitted to the NCLT for confirmation. At this stage, the role of the resolution professional ends and the CoC ceases to exist. But the NCLT order may take weeks or months. Who runs the company during this time and what duties, powers and protections apply to such person? The ILC has recommended that the resolution professional be statutorily required to continue during this period, presumably with the same duties, powers and protections as during the CIRP.
For queries, please email email@example.com, firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com. Bahram N Vakil, one of the founding partners of the Firm, leads the Restructuring and IBC Practice Group at the Firm. Ashwin Ramanathan, Piyush Mishra and Nilang Desai are partners and Suharsh Sinha is a senior associate in the Restructuring and IBC Practice Group at the Firm.
The Dirty Dozen – first off the block
The Dirty Dozen – first off the block
Electrosteel Steels Limited was one of the twelve large stressed accounts directed by the Reserve Bank of India (‘RBI’) to be placed into the corporate insolvency resolution process of the Insolvency and Bankruptcy Code and has now become the first to be resolved under that process. The National Company Law Tribunal yesterday (i.e. April 17, 2018) approved the resolution plan submitted by Vedanta Limited. News reports suggest that the haircut taken by lenders is in the region of 55%. Vedanta awaits clearance from the Competition Commission of India before it can complete the acquisition. Many of the other ‘dirty-dozen’ are in the closing stages of their corporate insolvency resolution process and the next few weeks will see more resolutions and in some cases objections and litigation. The litigation in this space may settle some of the issues that lenders and acquirers fret about.
Major Amendments introduced to the Insolvency and Bankruptcy Code
Major Amendments introduced to the Insolvency and Bankruptcy Code
The President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (‘Ordinance’), which has become effective from June 6, 2018. Pursuant to the Ordinance, many of the amendments suggested by the Insolvency Law Committee (‘ILC’), which included our founding partner Mr. Bahram N Vakil, have now been implemented. The major changes introduced by the Ordinance have been summarised below:
- Homebuyers Upgraded as ‘Financial Creditors’
Prior to the Ordinance, the Insolvency and Bankruptcy Code, 2016 (‘IBC’) did not recognise persons who had paid advances towards completion of real estate projects as either ‘financial creditors’ or ‘operational creditors’. The Ordinance now provides that any amount raised from an allottee under a real estate project shall be considered a financial debt under the IBC. Since the number of such allottees could be numerous and their participation in a committee of creditors (‘CoC’) could be unwieldy, the Ordinance provides that allottees may appoint authorised representatives to attend CoC meetings on their behalf, with prior instructions on voting matters.
- Amendments to Eligibility Criteria for a Resolution Applicant
Section 29A sets out ineligibility criteria for potential bidders in a corporate insolvency resolution process (“CIRP”). The ambit of Section 29A may have been in some instances too wide and could have unintentionally disqualified some sophisticated bidders on technical grounds. The Ordinance has, therefore, introduced the following amendments to Section 29A :
i. Section 29A(c): NPA Related disqualification
(a) Section 29A(c) provides that persons controlling accounts which have remained non-performing assets (‘NPA’) in excess of one year are barred from acting as resolution applicants in an ongoing CIRP. However, no clarification had been provided on whether the one-year period would be determined from: (i) insolvency commencement date of the corporate debtor; or (ii) the time at which the bid was submitted in the ongoing corporate insolvency resolution process (‘CIRP’) of the corporate debtor. The Ordinance has clarified that the relevant date should be the latter.
(b) The Ordinance provides that the disqualification under Section 29A(c) shall not apply to a ‘financial entity’ (scope of which is discussed under Paragraph iii below).
(c) Successful resolution applicants acquiring companies under the CIRP end up being in control or management of accounts which have turned NPA. Such acquirers would, as a result, fall foul of Section 29A(c) and would be estopped from making any further bids for any other company undergoing CIRP. In order to rectify this anomaly, the Ordinance provides for a grace period of three years in favour of a resolution applicant, calculated from the date of acquisition of such corporate debtors with NPAs during which the acquirer will not be disqualified from bidding for other companies undergoing CIRP. A similar carve-out has also been granted under Section 29(A)(g) of the IBC, to successful bidders, who have acquired companies in CIRP where certain avoidable transactions may be been undertaken by the previous promoters or officers.
ii. Section 29A(d): Disqualification on account of Criminal Convictions
(a) Section 29A(d) of the IBC disqualified a resolution applicant if it or any of its ‘connected persons’ had been convicted for an offence punishable with imprisonment for two years or more. It was argued that there must be a rational nexus between the underlying offence and the ability of the bidder to successfully restructure the corporate debtor.
(b) This sub-section has been amended to provide that: (i) conviction for two years or more is a bar only if the offence relates to certain statutes prescribed in the newly introduced Twelfth Schedule to the IBC; and (ii) conviction for seven years or more would be a bar irrespective of which statute the offence fell under.
(c) A list of twenty-five laws is specifically mentioned in the Twelfth Schedule covering areas such as money laundering, foreign exchange, pollution control norms, tax, anti-corruption and securities market regulations. The Twelfth Schedule only covers Indian statutes and an interpretation may be taken that similar violation by the bidder or its connected persons under foreign laws may not attract the disqualification. However, the disqualification relating to conviction for seven years or more would apply under Indian as well as foreign laws.
(d) The Ordinance provides that the bar under Section 29A(d) will not apply if more than two years have elapsed from the date of release from imprisonment (rather than a bar in perpetuity).
iii. Explanation to Section 29A(i) : Reducing the Scope of ‘Connected Person’
(a) Part (iii) of the definition of ‘connected person’ under Section 29A(i) of the IBC, is extremely broad and includes the holding company, subsidiary company, associate company or any related party of the proposed acquirer, its promoters, the acquirer’s board as well as the proposed management of the corporate debtor or its promoters. By virtue of their business model, it was inevitable that several pure play financial entities would have connected persons through their investee companies in India or abroad which suffered from the disqualifications (especially relating to NPAs) listed in Section 29A. The IBC was amended late last year to create a carve-out from part (iii) of the definition for scheduled banks, asset reconstruction companies and alternate investment funds registered with the Securities and Exchange Board of India (‘SEBI’) – however this exemption did not benefit foreign private equity players, venture capital and distressed assets funds.
(b) Pursuant to the Ordinance, relaxation has now been provided to foreign financial investors. The definition of ‘financial entities’ now includes the following additional classes of entities: (i) any entity regulated by a foreign central bank or any other financial sector regulator of a jurisdiction outside India; and (ii) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor as defined in regulation 2 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2017.
iv. Section 29A(d): Disqualification on account of Criminal Convictions
(a) The impact of Section 29A of the IBC was such that in many cases, it would force a change of control of the erstwhile promoter under a resolution plan or in liquidation. There was a concern that there may not be enough interest from third party buyers in companies under IBC, which are of a comparatively smaller size. A ‘one size fits all’ approach could hamper recoveries where there is little scope for turnaround of smaller companies unless the promoters submit a resolution plan. Recognizing this, the Ordinance provides for limited exemptions from the provisions of Section 29A of the IBC for Micro, Small and Medium Sector Enterprises (‘MSMEs’).
(b) However, the statutory thresholds for recognizing MSMEs under the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) are low. For instance, for companies engaged in manufacturing, the thresholds for classification as MSMEs are investment in plant and machinery ranging from less than INR 25,00,000 (approximately USD 37,000) to INR 10,00,00,000 (approximately USD 1.5 million). The Central Government had approved an amendment to the MSME Act on February 7, 2018 providing that the thresholds in the MSME Act be redefined. The proposal is to re-align the definition of MSMEs on the basis of annual turnover ranging from less than INR 5,00,00,000 (approximately USD 750,000) to INR 250,00,00,000 (approximately USD 37 million). Once the proposed amendment to MSME Act is notified, it will provide significant relief to promoters of a large number of small companies facing financial distress.
- Withdrawal of an Ongoing CIRP Proceeding
Once an application filed under the IBC is admitted, it can either lead to a successful resolution plan or liquidation. Under the IBC, a company undergoing the CIRP process did not have the power to arrive at a settlement or compromise by which the ongoing CIRP proceedings could be withdrawn. However, in a few cases, the courts had gone beyond the purview of the IBC and allowed settlement of the claims of a creditor, bilaterally leading to withdrawal of the matter.
The Ordinance clarifies that withdrawal of a CIRP proceeding will be permissible if 90% of the CoC approves it. However, such withdrawal will be permissible only prior to the resolution professional formally inviting resolution plans from interested bidders.
- CoC voting thresholds reduced
The IBC provided that all decisions by the CoC be taken by a vote of 75% of the CoC by value. The Ordinance has reduced the voting threshold from 75% to 66% for major decisions such as: (i) applying for an extension for the CIRP period from 180 to 270 days; (ii) replacement of an interim resolution professional or resolution professional; and (iii) approving a resolution plan. For other routine decisions, the voting threshold has been reduced to 51%.
- Role of shareholders of the corporate debtor in approving resolution plans
The consent of shareholders of the corporate debtor is generally required for significant corporate actions. The Ministry of Corporate Affairs (‘MCA’) released a clarification last year to the effect that approval of shareholders of the company for any corporate action in the resolution plan (otherwise required under any law) is deemed to have been given on its approval by the NCLT. The Ordinance specifically amends the IBC to incorporate the clarification proposed by the MCA.
- Resolution professional responsible for ongoing legal compliances by the corporate debtor
Under Section 17 of the IBC, on insolvency commencement date, the board of the company is suspended and an insolvency professional takes control over management control. However, several laws including many provisions of the Companies Act, 2013, regulations issued by SEBI, Factories Act, impose obligations on the board of the company. The Ordinance clarifies that insolvency professionals shall be responsible for complying with the requirements under all applicable laws on behalf of the corporate debtor.
- Participation of ‘related party’ financial creditors in the CoC
The IBC provided that financial creditors which were related to the corporate debtor would not be allowed to participate, attend or vote in CoC meetings. Financial institutions which had converted their debt into substantial equity stakes in the corporate debtor under any previous restructuring, were deemed ‘related’ to the corporate debtor and were thereby precluded from attending or voting in CoC meetings. The Ordinance provides an exemption from this prohibition for such financial creditors provided they are regulated by a financial sector regulator.
- Grace period for fulfilling statutory obligations
A critical issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Currently, acquirers tend to draft their resolution plans treating National Company Law Tribunal (‘NCLT’) as a single window clearance for all such approvals. But this approach is susceptible to legal challenge. The Ordinance provides for a one year grace period for the successful resolution applicant to fulfill various statutory obligations required under various laws to implement the resolution plan.
- Issue of guarantors’ liability resolved
Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, in a few cases, courts had taken the view that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor. The Ordinance states that the moratorium under Section 14 will not apply to the enforcement of guarantees granted by promoter guarantors or other group companies which are not undergoing a CIRP.
- Further regulations to govern the bidding process
In most CIRP proceedings, the CoC formulates a process memorandum which governs the timelines for receiving bids, procedure for rebidding, grounds for rejection of bids etc. Such provisions and their application have been subject to several legal challenges at the NCLT by unsuccessful bidders. In a press release accompanying the Ordinance, the government has indicated that the regulations will govern issues such as non entertainment of late bids, bar on negotiations with late bidders and a standardised process for maximization of value of the corporate debtor.
- Triggering CIRP by a company voluntarily
The IBC provided that a company may initiate its own CIRP and that the persons eligible to initiate a voluntary CIRP were: (i) the corporate debtor itself; (ii) a shareholder of the company specifically authorised to do so under the articles; (iii) director and key employees; and (iv) the chief financial officer. The Ordinance now makes a special resolution of shareholders mandatory for filing for its CIRP. It remains to be seen if a special resolution will be possible in closely held companies where promoters have a dominant stake. But directors and officers will need to be mindful of provisions in the IBC which impose civil and criminal sanctions on erstwhile directors and officers of the company for wrongful trading.
- Limitation Act to apply to IBC
Lenders have benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although the doctrine of laches might still apply). However this has not been confirmed by the Supreme Court till date, as it had declined to comment on this issue. The Ordinance now provides that the law of limitation will apply to IBC applications.
Mandatory Reporting of Foreign Investment to RBI
With the objective of integrating the extant reporting structures of various types of foreign investments in India, the Reserve Bank of India (‘RBI’) has, by its circular dated June 7, 2018 (copy enclosed) provided that it will introduce a Single Master Form, which will have to be filed online by an Indian company or limited liability partnership (including investment vehicles) (‘Indian Entity’) for reporting total foreign investment in such Indian Entity. Accordingly, all Indian Entities having direct or indirect foreign investments are required to undertake the following reporting actions in respect of their existing and future foreign investment.
Existing foreign investment: Any Indian Entity, which has received foreign investment in the past, is required to file the ‘Entity Master’ on RBI’s website in respect of its existing foreign investment. For this purpose, the RBI will provide an interface to the Indian Entities from June 28, 2018 to July 12, 2018 on its website rbi.org.in. This is a mandatory requirement and any failure by an Indian Entity in making such filing within the prescribed timeline will result in such Indian Entity not being able to receive foreign investment (including indirect foreign investment) and such an Indian Entity will be held to be non-compliant with Foreign Exchange Management Act, 1999 and regulations made thereunder.
Future foreign investment: Once the Single Master Form is implemented by the RBI, an Indian Entity will be required to file the Single Master Form as and when foreign investment is received by such an Indian Entity.
RBI has, till date, only released the indicative formats of the Single Master Form and the Entity Master (both of which are enclosed). The final format of these forms will be released by RBI in due course under the Master Directions for Reporting under Foreign Exchange Management Act, 1999.
Necessary steps will be required to be taken by all Indian Entities in relation to reporting the existing foreign investment and to prepare the relevant data in advance, so that the ‘Entity Master’ is completed within the prescribed timelines.
Exemptions to Companies Established in International Finance Service Centers
Public unlisted companies and private companies, which have been licensed to operate by the Reserve Bank of India (‘RBI’), Securities and Exchange Board of India (‘SEBI’), or the Insurance Regulatory and Development Authority of India (‘IRDAI’) from an International Financial Services Centre (‘IFSC’) located in an approved multi services Special Economic Zone (‘Specified IFSC Companies’), have been exempted from the applicability of certain provisions of the Companies Act, 2013 (‘CA 2013’). Pursuant to the notifications dated January 4, 2017, the MCA has granted certain general exemptions to the Specified IFSC Companies from compliance with the following provisions of CA 2013:
i. prohibition under Section 42(3) on making fresh offer for private placement of securities during pendency of allotment under an earlier;
ii. restriction under Section 54(1)(c) on issuing sweat equity shares within a period of one year from the commencement of business;
iii. requirement under Section 118(10) requiring all companies to observe secretarial standards with respect to general and board meetings;
iv. compliance with corporate social responsibility under Section 135 to not apply for a period of five years from the commencement of business;
v. restriction under Section 139(2) on the ability of a company to appoint / re-appoint statutory auditors for more than the prescribed period;
vi. director residency requirement under Section 149(3) of having at least one director who has stayed in India for a total period of not less than 182 days, to not apply for the first financial year from the date of its incorporation;
vii. prohibition on making investments through more than two layers of investment companies under Section 186(1); and
viii. directors of Specified IFSC Companies will be entitled to exercise powers either by means of resolutions passed at board meetings or through circular resolutions, including for those matters prescribed under Section 179(3).
In addition to the general exemptions, specific exemptions from applicability of the following provisions of CA 2013 have been granted to public unlisted companies located in IFSC:
i. restriction under Section 47 on the voting rights of preference shareholders, provided that the charter documents provide for it;
ii. restrictions under Section 73(2)(a) to (e) on raising public deposits from members, provided that the deposits accepted do not exceed 100% of the aggregate of the paid-up share capital and free reserves and the details of monies so accepted has been filed with the Registrar of Companies in the manner prescribed;
iii. requirement under Section 149(1) to have a woman director;
iv. requirement under Section 152(6) providing for retirement of directors of public companies by rotation;
v. requirement to appoint the audit committee, nomination and remuneration committee or stakeholders’ relationship committee under Sections 177 and 178;
vi. consent of board of directors as stipulated under Section 188(1) for related party transactions;
vii. requirement under Section 196(4) to appoint a whole-time director, managing director or manager; and
viii. restriction under Section 197 on the remuneration payable to managerial personnel.
No Overseas Direct Investment in Countries Identified as Non-Cooperative Countries and Territories
RBI has, by way of a notification dated January 2, 2017, amended the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 to restrict an Indian Party from making an investment in an entity set up or acquired abroad either directly or indirectly, in countries identified by the Financial Action Task Force as “non co-operative countries and territories” (or as notified by the RBI from time to time).
Amendments to FEMA 20
RBI has, by way of a series of notifications, amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (‘FEMA 20’). The key amendments pursuant to these notifications have been summarized below.
i. Issuance of Convertible Notes by Startups: RBI notification dated January 10, 2017 (‘January Notification’) provides for the issuance of convertible notes by Indian startup companies (‘startups’). A ‘convertible note’ has been defined to mean “an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument”.
The newly introduced Regulation 6D of FEMA 20 sets out the relevant provisions, which provide that:
a. A person resident outside India (other than an individual who is a citizen of, or an entity registered / incorporated in, Pakistan or Bangladesh), may purchase convertible notes issued by startups for an amount of Rs. 2,500,000 (approximately US$ 39,000) or more in a single tranche;
b. Startups engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with Government approval;
c. Issue of shares against convertible notes will be as per Schedule 1 of FEMA 20;
d. Startups issuing convertible notes to a non-resident must receive the consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / escrow account maintained as per the Foreign Exchange Management (Deposit) Regulations, 2016 and closed upon the earlier of the requirements having been completed or within a period of six months;
e. Non-resident Indians may acquire convertible notes on non-repatriation basis as per Schedule 4 of FEMA 20;
f. A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by RBI; and
g. Startup issuing convertible notes are required to furnish reports as prescribed by RBI.
ii. Foreign Investment in Infrastructure Companies: The January Notification also amends conditions relating to foreign direct investment (‘FDI’) under Schedule 1 of FEMA 20 in commodity exchanges, which have been combined with those relating to infrastructure companies in the securities market (namely stock exchanges, commodity derivative exchanges, depositories and clearing corporations). The key revisions introduced by the January Notification are:
a. FDI, including by foreign portfolio investors (‘FPI’), in commodity exchanges will now be subject to guidelines prescribed by RBI in addition to those issued by the Central Government (‘GoI’) and SEBI;
b. FDI in other infrastructure companies in securities market will now be subject to guidelines by GoI and RBI, in addition to those issued by SEBI;
c. the earlier condition permitting FIIs / FPIs to invest in commodity exchanges or infrastructure companies only through the secondary market has been removed; and
d. the restriction on investment by a non-resident in commodity exchanges to a maximum of 5% of its equity shares has been removed.
The Consolidated Foreign Direct Investment Policy dated June 7, 2016 (‘FDI Policy’) has also been amended, by way Press Note 1 of 2017 dated February 20, 2017, to align it with the January Notification.
iii. FDI in LLPs: Pursuant to notification dated March 3, 2017, RBI has amended Regulation 5(9) and Schedule 9 of FEMA 20 to further liberalize FDI in Limited Liability Partnerships (‘LLPs’). Companies having FDI can now be converted into LLPs under the automatic route provided that the concerned company is engaged in a sector where: (a) 100% FDI is permitted under the automatic route; and (b) no FDI linked performance conditions exist. Previously, conversion of companies with foreign investment was only permitted under the approval route. The erstwhile ‘Other Conditions’ stipulated under Schedule 9 of FEMA 20 have been completely omitted resulting in the following key changes:
a. Previously, the designated partner of a LLP having FDI had to satisfy the condition of being “a person resident in India”. Also, a body corporate other than a company registered in India under CA 2013 was not permitted to be a designated partner of a LLP with FDI. These conditions have been removed. Consequently, a LLP having FDI will have to comply only with the provisions of the LLP Act, 2008 for appointment of designated partners;
b. Earlier, designated partners were responsible for compliance with FDI conditions for LLPs and liable for all penalties imposed on a LLP for any contraventions. This condition has now been deleted from Schedule 9 but no corresponding provision has been included in the revised Schedule 9; and
c. Express prohibition on LLPs availing External Commercial Borrowings (‘ECB’) has been removed. However, the extant ECB guidelines have not yet been amended to permit LLPs to avail ECBs. Therefore, LLPs will not be able to avail ECBs until the extant ECB guidelines are amended.
iv. FDI in E-commerce: The Department of Industrial Policy and Promotion had, by way of Press Note 3 of 2016 dated March 29, 2016 (‘Press Note 3’), prescribed that no FDI is permitted in an inventory based model of e-commerce and 100% FDI under the automatic route is permitted in the marketplace model of e-commerce subject to compliance with the guidelines prescribed thereunder. A summary of the key changes introduced through Press Note 3 have been captured in the April 2016 edition of Inter Alia. RBI has, by way of a notification dated March 9, 2017, amended FEMA 20 in line with the changes introduced through Press Note 3. However, RBI has introduced a minor change to Press Note 3 by clarifying that the threshold of 25% of sales emanating from one vendor or their group companies will be computed based on the sale value during the relevant financial year.
 Being a private company incorporated under CA 2013 and recognized as such as per Notification G.S.R. 180(E) dated February 17, 2016 issued by the Department of Industrial Policy and Promotion.
SEBI Revises Regulatory Framework on Schemes of Arrangement
SEBI has issued a circular dated March 10, 2017, as amended by circular dated March 23, 2017, (‘Scheme Circulars’) which replaces the circular dated November 30, 2015 issued by SEBI in relation to the regulatory framework on schemes of arrangement, amalgamation and capital reduction involving listed companies (‘2015 Circular’). Some of the key changes brought about by the Scheme Circulars are:
i. The Scheme Circulars will now not apply to schemes that solely provide for merger of a wholly owned subsidiary with the parent company. However, such draft schemes will have to be filed with the stock exchanges by way of disclosures and the stock exchanges are required to publish the scheme documents on their websites.
ii. The pricing related provisions of Chapter VII of the ICDR Regulations will be followed in case of issuance of shares to a select group of shareholders or shareholders of unlisted companies pursuant to such schemes. The ‘relevant date’ for the purpose of computing pricing will be the date of board meeting in which the scheme is approved.
iii. The circumstances under which the approval of majority of public shareholders of the listed entity will be required have been expanded to include the following:
a. where a scheme involving merger of an unlisted company results in reduction in the voting share of pre-scheme public shareholders of the listed entity in the transferee/ resulting company by more than 5% of the total capital of merged entity; and
b. where the scheme involves transfer of whole or substantially the whole of the undertaking of the listed entity and the consideration for such transfer is not in the form of listed equity shares.
iv. Listed entity is not required to provide the option of voting by postal ballot and is only required to provide shareholders with the option of e-voting.
v. Schemes of arrangement between listed and unlisted entities will be subject to the following conditions:
a. Percentage shareholding of pre-scheme public shareholders of the listed entity and of the qualified institutional buyers of the unlisted entity in the post scheme shareholding pattern of the resulting company must not be less than 25%;
b. Listed entity must disclose the material information pertaining to the unlisted entity(ies) involved in the scheme in the format specified for abridged prospectus as provided in Part D of Schedule VIII of the ICDR Regulations, as part of the explanatory statement sent to the shareholders while seeking approval of the scheme. Such disclosures are required to be certified by a SEBI registered merchant banker, and are also required to be uploaded on the stock exchange(s) website(s); and
c. Unlisted entities are permitted to merge with a listed entity only if the listed entity is listed on a stock exchange having nationwide trading terminals;
vi. In case of schemes involving the demerger of a division of a listed entity into an unlisted entity and the subsequent listing of the unlisted entity, specific conditions for seeking relaxation of the strict enforcement with respect to listing prescribed by the Securities Contracts (Regulation) Rules, 1957 have been modified as follows:
a. Conditions specified for lock-in of the pre-scheme share capital of the unlisted entity seeking listing are not applicable where the post scheme shareholding pattern of the unlisted entity is exactly same as the shareholding pattern of the listed entity; and
b. Pre-scheme share capital of the unlisted entity seeking listing held by non-promoters shall be locked-in for a period of one year from the date of listing of the shares of the unlisted entity, instead of the three years prescribed earlier;
vii. Subsequent to filing the draft scheme with SEBI, no changes to the draft scheme are permitted except with SEBI’s written consent. However, this requirement is not applicable for changes mandated by other regulators, authorities or by the NCLT; and
viii. The listed entity must pay a fee to SEBI in an amount of 0.1% of the paid-up share capital of the listed / transferee / resulting company, whichever is higher, post sanction of the scheme, subject to a cap of Rs. 5,00,000 (approximately US$ 7,800).
The provisions of the Scheme Circulars are not applicable to schemes already submitted to the stock exchanges, which will continue to be governed by the 2015 Circular.
 The expression has been defined under Section 180(1)(a)(i) of CA 2013 to mean 20% or more of value of the company in terms of consolidated net worth or consolidated total income during previous financial year.
Finance Act, 2017
Some of the key amendments introduced to the ITA by Finance Act, 2017 are:
i. Conversion of preference shares into equity shares will not be regarded as transfer and will be exempt from capital gains tax. Further, cost of acquisition and period of holding of the preference shares will be attributable to the equity share received upon conversion;
ii. Exemption from long term capital gains arising from transfer of equity share of a company that are chargeable to Securities Transaction Tax (‘STT’) will be available only if the acquisition of such shares was also subject to STT. Further, to protect some of the genuine transactions (e.g. acquisition pursuant to IPO, FPO, bonus or rights issue by a listed company, by non-resident as per the FDI Policy etc.), the GoI will notify transfers to which the proposed condition of chargeability of STT on acquisition will not apply;
iii. If consideration for transfer of unlisted shares is less than fair market value (‘FMV’) determined as per the prescribed manner, such FMV will be deemed to be the full value of consideration for the purposes of computing capital gains;
iv. Indirect transfer provisions will not be applicable to investments held by a non-resident, directly or indirectly, in FIIs/ Category-I or Category II FPIs;
v. Domestic transfer pricing provisions will now be applicable only in cases where one of the related party to the transaction is availing tax holidays; and
vi. The scope of applicable tax on any deemed gift has been widened by extending its applicability to all ‘persons’ and extending the scope of properties to all ‘properties’, except contribution of money or assets by an individual to a trust created solely for benefit of relative of the contributor.
Notification of Section 2(87) of the Companies Act, 2013 and the Companies (Restrictions on number of layers) Rules, 2017
The Ministry of Corporate Affairs (‘MCA’) has, by way of notifications dated September 20, 2017, notified the proviso to Section 2(87) of the Companies Act, 2013 (‘Companies Act’) and the Companies (Restrictions on Number of Layers) Rules, 2017 (‘Layers Restrictions Rules’). Pursuant thereto, no company can have more than two layers of subsidiaries other than (i) banking companies, (ii) non-banking financial companies, (iii) insurance companies, and (iv) Government companies. Existing companies, which currently have more than two layers of subsidiaries, are:
i. required to file a return in Form CRL- 1, disclosing details in relation to such companies, within 150 days from September 20, 2017; and
ii. restricted from having any additional layer of subsidiaries over and above the layers existing on the date of notification of the Layers Restrictions Rules, and will not, in case one or more layers are reduced by it subsequent to the commencement of these rules, have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed under the Layers Restrictions Rules (whichever is more).
The Layers Restriction Rules specify that for computing the number of layers, a layer comprising of one or more wholly owned subsidiary or subsidiaries will not be counted. It has also been clarified that Layers Restrictions Rules do not derogate from the proviso to Section 186(1) of the Companies Act which deals with the layers of investment companies a company may have. These provisions do not restrict any company from acquiring a company outside India with subsidiaries beyond two layers, as per the laws of such foreign country.
Exemption to Certain Unlisted Public Companies from Appointment of Independent Directors
By way of notification dated July 5, 2017, the MCA amended the Companies (Appointment and Qualification of Directors) Rules, 2014 inter-alia amending Rule 4 whereby an unlisted public company which is a joint venture, wholly owned subsidiary, or a dormant company, has been exempted from appointing independent directors. In this regard, the MCA has, by way of notification dated September 5, 2017 clarified that “joint venture” would mean a joint arrangement, entered into in writing, whereby the parties that have joint control of the arrangement, have rights to the net assets of the arrangement. The usage of the terms is similar to that under the accounting standards.
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.
Amendment to the Companies (Acceptance of Deposit) Rules, 2014
Under Rule 3 of the Companies (Acceptance of Deposit) Rules, 2014 (‘Deposit Rules’), a company is prohibited from accepting or renewing deposits from its members if the amount of such deposits, together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits, exceeds 35% of the aggregate of the paid-up share capital, free reserves and securities premium account of the company; provided that in case of private companies the applicable limit was 100% instead of 35%. Rule 3 of the Deposit Rules has been amended pursuant to the MCA notification dated September 19, 2017, whereby the enhanced limit of 100% has been extended to a Specified IFSC Public Company. The following classes of private companies have been exempted from the 100% limit as well:
i. a private company which is a start-up, for five years from its incorporation; and
ii. a private company which is not an associate or subsidiary of any other company; and the borrowings of such company from banks, financial institutions or body corporate is less than twice of its paid up share capital or INR 50 Crores, whichever is less; and such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under Section 73.
 An unlisted public company licensed to operate by a regulatory authority from the International Financial Services Centre located in an approved multi services Special Economic Zone.
Foreign Direct Investment Policy, 2017
On August 28, 2017, the Department of Industrial Policy and Promotion (‘DIPP’) issued the consolidated foreign direct investment policy circular of 2017 (‘FDI Policy 2017’), which replaces the consolidated foreign direct investment policy circular of 2016, dated June 7, 2016 (‘FDI Policy 2016’). The FDI Policy 2017 also consolidates press notes issued by the DIPP since June 7, 2016.
Set out below are the key changes introduced in the foreign direct investment (‘FDI’) regime through the FDI Policy 2017.
i. Conversion of companies and LLPs: The FDI Policy 2016 did not cover or prescribe any rules for conversion of companies into Limited Liability Partnerships (‘LLPs’) and vice versa. The FDI Policy 2017 now provides that conversion of LLPs with foreign investment into a company and vice-versa is permitted under the automatic route, if the converting LLP / company is operating in sectors/activities in which: (a) 100% FDI is allowed through the automatic route; and (b) there are no FDI linked performance conditions. The term ‘FDI linked performance conditions’ has been clarified to mean “sector specific conditions for companies receiving foreign investment”.
ii. Retail trading by wholesale companies: Per FDI Policy 2016, a wholesale / cash & carry trade was permitted to undertake ‘single brand retail trading’. FDI Policy 2017 provides that wholesale/cash & carry traders may undertake ‘retail trading’, i.e., both single brand retail trading and multi brand retail trading (subject to applicable conditions).
iii. ‘State of the Art’ and ‘Cutting Edge’ single brand product retail trading:
a. Press Note 5 (2016 series) dated June 24, 2016 issued by the DIPP did away with local sourcing norms for a period of three years from commencement of business (being, opening of the first store) for entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible.
b. FDI Policy 2017 provides that a committee under the chairmanship of Secretary, DIPP, with representatives from NITI Aayog, concerned administrative ministry and independent technical expert(s) on the subject will examine the claim of applicants on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology where local sourcing is not possible and give recommendations for such relaxation.
iv. E-commerce: Under the FDI Policy 2016, an e-commerce entity with foreign investment was not permitted to effect more than 25% of sales through its market place by one vendor or its group companies. FDI Policy 2017 clarifies that the 25% threshold applies to sales value on a financial year basis.
v. Government approval for additional FDI: Per FDI Policy 2016, additional FDI into the same entity within the approved foreign equity percentage or into a wholly owned subsidiary did not require fresh Government approval. FDI Policy 2017 provides that Government approval will be required for additional FDI within the approved foreign equity percentage or into a wholly owned subsidiary beyond a cumulative amount of Rs. 5,000 crores (approx. US$ 764 million).
vi. Downstream investment intimation: FDI Policy 2017 requires intimation of downstream investments by foreign owned and/or controlled Indian companies to be made to the Reserve Bank of India (‘RBI’) and the Foreign Investment Facilitation Portal within 30 days of the investment (instead of the Secretariat of Industrial Assistance, DIPP and the Foreign Investment Promotion Board, as prescribed earlier).
 This article does not cover changes introduced through press notes and other amendments since June 7, 2016 (which have only been consolidated and introduced in the FDI Policy 2017).
 Incorporated in Note (iii) of Paragraph 220.127.116.11 of FDI Policy 2017
Removal of Names of Companies from the Register of Companies
On December 26, 2016, the Ministry of Corporate Affairs (‘MCA’) notified Sections 248 to 252 of the Companies Act, 2013 (‘CA 2013’), which deal with removal of / striking the companies off the Register of Companies (‘Register’). Section 248 of the CA 2013 empowers the Registrar of Companies (‘ROC’) to remove the name of any company from the Register, if it has reasonable cause to believe that: (i) the company has failed to commence its business within one year of its incorporation; or (ii) the company is not carrying on any business or operations for a period of two preceding financial years. Additionally, Section 248 also permits a company, after extinguishment of its liabilities, to make a voluntary application for removal of its name from the Register for any of the grounds mentioned above. In furtherance of Section 248, the MCA has, on December 26, 2016, notified the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 (‘Removal of Companies Rules’), in place of the Guidelines for Fast Track Exit Mode for Defunct Companies issued under Section 560 of the Companies Act, 1956 (‘CA 1956’).
The significant changes introduced under Sections 248 to 252 of the CA 2013 and the Removal of Companies Rules are set out below:
i. Under the current regime, a ‘defunct company’ may apply for striking-off of its name from the Register if it has failed to commence business within a two year period from its incorporation or has ceased carrying on business for a period of one year or more. The earlier requirements under Section 560 of the CA 1956 for a defunct company to apply for striking-off of its name from the Register on having no assets and not commencing business or ceasing to carry on business for a period of one year appear to have been deleted under the CA 2013. However, there is some lack of clarity on this issue and we are awaiting the final forms in this regard;
ii. Pursuant to Section 248 of the CA 2013, a company is required to pass a special resolution or obtain consent of 75% members in terms of its paid-up share capital in order to make an application for striking-off of its name from the Register (such approval was not required under the CA 1956);
iii. Section 249 of the CA 2013 has introduced certain restrictions on companies from applying for removal (even if they fulfill the conditions under Section 248), if during the previous three months the company has undertaken certain actions, such as, disposal for value, of property or rights immediately before cessation of trade, and if such company has made an application to the National Company Law Tribunal (‘NCLT’) for the sanctioning of a compromise or arrangement and the matter has not been finally concluded, or is being wound-up, whether voluntarily or by the NCLT;
iv. In addition to listed companies, ‘not-for-profit’ companies, companies that have accepted deposits, etc., the ROC is now not permitted to exercise its removal powers in case of, companies whose application for compounding is pending for offences by the company / officers in default, and companies having charges that are pending satisfaction; and
v. The CA 2013 has clarified that upon passing of the removal order, the company would cease to operate except for the purpose of realizing amounts due to it and for the discharge of its liabilities or obligations. Further, the CA 2013 grants persons aggrieved by the ROC removal order, a period of three years for filing an appeal before the NCLT for restoration of the company name.
Amendments to Schedule 5 of FEMA 20: Investment in Corporate Debt Securities
The Reserve Bank of India (‘RBI’) has, by way of a notification dated October 24, 2016, amended Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘FEMA 20’) to permit registered Foreign Institutional Investors and Foreign Portfolio Investors (‘FPIs’) to invest in unlisted non-convertible debentures (‘NCDs’)/bonds issued by an Indian company and securitized debt instruments, including certificates/instruments issued by special purpose vehicles set up for securitization of assets with banks, financial institutions or Non-Banking Financial Companies (‘NBFCs’) as originators, and any listed securitized debt instruments. Additionally, by its circular dated November 17, 2016, the RBI has specified that unlisted corporate debt securities in the form of NCDs/bonds issued by Indian companies would be subject to minimum residual maturity of three years along with an end use-restriction on investments in real estate business, capital market and purchase of land. The RBI has also specified that such investments in unlisted corporate debt securities and securitized debt instruments will be permitted up to an aggregate of Rs. 35,000 crores (approximately US$ 5 billion) within the existing investment limits prescribed for corporate bonds from time to time (presently, Rs. 2,44,323 crore (approximately US$ 35 billion)).
The Securities and Exchange Board of India (‘SEBI’) in its board meeting dated November 23, 2016 (‘SEBI Board Meeting’) approved corresponding amendments to the SEBI (Foreign Portfolio Investors) Regulations, 2014, which are yet to be notified by SEBI.
Corporate Governance Issues in Compensation Agreements
SEBI, in a consultation paper released by it on October 4, 2016, had noted the practice followed by private equity firms (‘PE Firms’) of entering into side agreements with senior management personnel and/or key managerial persons (‘KMP’) of listed companies (in which such PE Firms are shareholders). While SEBI acknowledged that it is not unusual for PE Firms to incentivize the promoters/ KMPs, it also raised concerns on potential unfair practices being resorted to by the promoters/ KMPs if such agreements were not approved by the board of directors and shareholders of such companies. Pursuant to the decisions of SEBI in the SEBI Board Meeting, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) have been amended with effect from January 4, 2017. The key amendments are as follows:
i. Restriction on all employees of listed companies (including KMPs, directors or promoters) from entering into an agreement with any shareholder or third party in relation to compensation or profit sharing regarding dealings of securities in such listed entity without the prior approval of the board of directors and public shareholders of the company by way of an ordinary resolution;
ii. All such agreements entered into during the previous three years (including those that have expired) are to be disclosed to the stock exchanges for public dissemination;
iii. Approval of the relevant company’s board of directors and its public shareholders is to be sought for all such subsisting agreements in the forthcoming board meeting and general meeting, respectively; and
iv. Interested persons involved in such transactions, i.e., persons who are directly or indirectly interested in the agreement or the proposed agreement, are not permitted to vote in such board / shareholder meetings to be held as per iii above.
SEBI Circular in relation to Schemes of Arrangement by Listed Entities
Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957 (‘SCRR’) provides that SEBI may, at its own discretion or on the recommendation of a recognized stock exchange, waive or relax the strict enforcement of any or all of the requirements with respect to listing as prescribed under the SCRR in relation to schemes of arrangements by listed entities. By its circular dated March 10, 2017, SEBI had provided that at least 25% of the post-scheme paid up share capital of the transferee entity seeking relaxation from Rule 19(2)(b) of the SCRR (which provides specific conditions for securities offered to the public for subscription) should comprise shares allotted to the public shareholders in the transferor entity.
By its circular dated September 21, 2017, SEBI has provided that in the event the entity fails to comply with the aforementioned requirement, it may alternatively satisfy the following conditions:
i. It has a valuation in excess of Rs. 1,600 crores (approx. US$ 246 million) as per the valuation report;
ii. The value of post-scheme shareholding of public shareholders of the listed entity in the transferee entity is not less than Rs. 400 crores (approx. US$ 62 million);
iii. At least 10% of the post-scheme paid-up share capital of the transferee entity comprises shares allotted to the public shareholders of the transferor entity; and
iv. It must be required to increase its public shareholding to at least 25% within a period of one year from the date of listing of its securities and an undertaking to this effect is incorporated in the scheme of arrangement.
CBDT notifies Final Rules prescribing Method of Valuation
The Finance Act, 2017 amended the Income-tax Act, 1961 to insert two new provisions, namely Section 56(2)(x) and Section 50CA. Section 56(2)(x) provides that where a person receives any property for a consideration less than its fair market value (‘FMV’), the difference between the consideration received and such FMV shall be taxable in the hands of the recipient. Section 50CA provides that where a person receives any consideration for transfer of unquoted shares which is less than their FMV, the FMV shall be deemed to be the full value of consideration for computation of capital gains tax liability. The Central Board of Direct Taxes has now notified the final Rules providing for the manner of computation of FMV of unquoted shares under the aforesaid provisions.
 Rules 11UA and 11UAA of the Income-tax Rules, 1962 [Notification No. 61/ 2017 dated July 12, 2017].
Amendment to the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014
The Ministry of Corporate Affairs (‘MCA’) has, by way of a notification dated June 30, 2016, amended the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Pursuant to the amendment, the erstwhile thresholds applicable to the statement on employees prescribed for inclusion in the report by the board of directors of listed companies and such statement have now been revised to include, inter alia: (i) the top 10 employees in terms of remuneration; (ii) any employee who has received Rs 10,200,000 (approximately USD 150,000) in the preceding financial year (the erstwhile threshold in this regard was Rs 6,000,000 (approximately USD 90,000)); and (iii) any employee who was employed for a part of the preceding financial year and has received remuneration at any time, at a rate which, in aggregate was more than Rs 850,000 per month (approximately USD 13,000) (the erstwhile threshold in this regard was Rs 500,000 (approximately USD 7,000)).
Amendment to Schedule V of the Companies Act, 2013
The MCA has, by way of a notification dated September 21, 2016 (‘Schedule V Notification’), amended Schedule V of the Companies Act, 2013 (‘Companies Act’) which prescribes certain conditions for the payment of remuneration by a company having no profits or inadequate profits to its managerial personnel, without approval of the Central Government. The Schedule V Notification has amended the limits and conditions prescribed under Schedule V by: (i) doubling the erstwhile yearly remuneration payable; and (ii) removing the requirement for Central Government approval for payment of remuneration to managerial personnel in excess of the prescribed limits, provided that such managerial personnel meet certain qualification criteria.
Amendments to the Companies (Incorporation) Rules, 2014
The significant amendments made to the Companies (Incorporation) Rules, 2014, by way of notification dated July 27, 2016 are: (i) permitting change in the name of company once its pending annual returns or financial statements have been filed or the payment or repayment of its matured deposits or debentures or interest thereon has been made; and (ii) requiring a registered non-banking financial company (‘NBFC’) to obtain a no-objection certificate from the Reserve Bank of India (‘RBI’) for changing the registered office from one State or Union Territory to another.
Further, by way of a notification dated October 1, 2016, MCA has introduced the Simplified Proforma for Incorporating Company Electronically (‘Spice’) e-form for providing speedy incorporation related services, in line with international best practices. With Spice, the process of incorporation of a new company has become completely digital and can be achieved in a much faster time frame than previously.
Provisions relating to Applications against Oppression and/or Mismanagement brought into force
The MCA has notified the following provisions of the Companies Act, which came into force on September 9, 2016:
i. Section 227, which deals with confidentiality of privileged communications made to any legal advisor and information regarding legal proceedings before any Governmental authority;
ii. Section 242(1)(b), which deals with the circumstances in which the company tribunal may exercise its powers for winding up of a company upon receipt of an application under Section 241 of the Companies Act, regarding oppression and mismanagement of the affairs of the company;
iii. Section 242(2) (c) and (g), which deals with the powers of the company tribunal to pass orders for reduction of the share capital of the company upon purchase of the shares of an existing member and / or for setting aside any transfer, delivery of goods payment, execution or other act relating to property taken by or against the company within the preceding three months of the date of application under Section 241; and
iv. Section 246, which states that Sections 337 to 341, which deal with liability for the fraudulent conduct of business and powers of the company tribunal to assess damages against delinquent directors in companies / partners in firms, respectively, would apply mutatis mutandis to applications made under Section 241 and Section 245 (which deals with class action suits), of the Companies Act.
Companies (Accounts) Amendment Rules, 2016
The significant changes introduced by the MCA, by way of a notification dated July 27, 2016, to the Companies (Accounts) Rules, 2014 are as follows:
i. Companies that are unlisted (and not in the process of listing), both in India or overseas, are exempted from the obligation to prepare consolidated financial statements, provided that: (i) such company is a subsidiary of another company and all its members have been notified and no objection has been received from the members in relation thereto; and (ii) the ultimate or intermediate holding company of such company files consolidated financial statements (in compliance with applicable accounting standards), with the relevant Registrar of Companies;
ii. The Board’s report in respect of the subsidiaries’ / joint ventures’ / associate companies’ performance is now required to only provide highlights (and not contain a detailed report as was previously required); and
iii. In addition to ‘a firm of internal auditors’, companies may now appoint either individual/s, partnership firm/s, or a body corporate/s to act as internal auditors and a ‘Cost Accountant’ may be appointed along with a ‘Chartered Accountant’.
Companies (Share Capital and Debentures) Third Amendment Rules, 2016
The significant amendments introduced by the MCA, by way of a notification dated July 19, 2016, to the Companies (Share Capital and Debentures) Rules, 2014 (‘Share Capital Rules’), are as follows:
i. A company that has defaulted in payment of: (a) dividend on preference shares or repayment of any term loan or interest that has become repayable; (b) dues with respect to statutory payments relating to employees; or (c) requisite amounts in the Investor Education and Protection Fund, is now permitted to issue shares with differential voting rights upon expiry of five years from the end of the financial year within which such default has been rectified;
ii. Start-ups have been provided with exemptions to issue: (a) sweat equity shares up to 50% of their paid-up capital for the first five years from the date of their incorporation as opposed to the limit of 25% applicable to other companies; and (b) employee stock option plans to its employee/s being a promoter or a director who either directly or indirectly, holds more than 10% of the outstanding equity shares of the company for the first 5 (five) years from the date of its incorporation (which is not permitted in case of other companies);
iii. There is no longer a requirement for all shares issued by way of preferential allotment to be fully paid up;
iv. In case of preferential allotment of convertible securities, the price of the resultant shares (pursuant to conversion) is permitted to be arrived at either: (a) at the time of issuance of the convertible securities, based on the valuation report given at the time of the offer; or (b) within 30 days prior to the date when the holder is entitled to apply for shares (on conversion), based on the valuation report given no earlier than 60 days from such date. Provided that, the relevant time for determination of the price is required to be determined and disclosed by the company at the time of offer of the convertible securities;
v. Security for “secured debentures” can now be created not only by the issuing company, but also by its subsidiaries, holding company or associates companies; and
vi. A company intending to redeem its debentures prematurely is now permitted to transfer such amounts as are in excess of the prescribed limits to the Debenture Redemption Reserve, the adequacy of which has been now clarified to mean at least 25% of the value of the outstanding debentures rather than the value of debentures issued.
 As defined in notification dated February 17, 2016 issued by the Department of Industrial Policy and Promotion.
Rupee Denominated Bonds Issued by Indian Companies Exclusively to Persons Resident Outside India exempted from certain provisions of the Companies Act
The MCA has, by way of a notification dated August 3, 2016, clarified that unless otherwise specified by the RBI, provisions of Chapter III of the Companies Act (relating to prospectus and allotment of securities) and Rule 18 of the Share Capital Rules (relating to debentures) do not apply to issue of rupee denominated bonds made exclusively to persons resident outside India. A corresponding amendment has been made to Rule 18(11) of the Share Capital Rules as well.
Companies (Mediation and Conciliation) Rules, 2016
The MCA has, by way of a notification dated September 9, 2016, notified the Companies (Mediation and Conciliation) Rules, 2016 (‘Mediation Rules’), whereby any party to a proceeding before the Central Government or the company tribunal or the Appellate Tribunal (‘Authority’) can apply to the Authority, or the Authority may apply suo moto, for the matter to be referred to the Mediation and Conciliation Panel in accordance with the process prescribed under the Mediation Rules.
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Thirteenth Amendment) Regulations, 2016
RBI has, by way of a notification dated September 9, 2016 (‘FEMA 20 Notification’), amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘FEMA 20 Regulations’), to inter alia: (i) permit 100% foreign direct investment (‘FDI’) under the automatic route in financial services activities regulated by financial sector regulators (as may be notified by the Government of India (‘GoI’)); (ii) remove the restriction for FDI, under the automatic route, in NBFCs engaged in any one of the 18 specified activities; (iii) remove the erstwhile minimum capitalization requirements, however, capitalization norms and other limits prescribed by the relevant financial sector regulator will still apply; and (iv) clarify that in sectors where financial services are not regulated / partially regulated by a financial sector regulator, then 100% FDI is permitted under the Government approval route subject to conditions including minimum capitalization requirements, as may be decided by the Government.
Foreign Exchange Management (Remittance of Assets) Regulations, 2016
RBI has, by way of a notification dated April 1, 2016, issued the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 (‘2016 Remittance Regulations’), which supersedes the erstwhile regulations. Some of the key changes introduced under the 2016 Remittance Regulations are as follows: (i) any non-resident Indian (‘NRI’) or person of Indian origin desirous of remitting any amounts from an NRO account is now required to submit an undertaking to the authorized dealer bank (‘AD’) confirming that the remittances are being made from the balance arising from legitimate receivables in India, and not by borrowing from any other person or a transfer from any other NRO account; and (ii) it is no longer required for Indian companies remitting assets when under liquidation to furnish a tax clearance certificate from the relevant tax authorities.
Corrigendum to Foreign Exchange Management (Deposit) Regulation, 2016
RBI has issued a corrigendum dated September 8, 2016 (with effect from April 1, 2016) (‘Corrigendum’) to the Foreign Exchange Management (Deposit) Regulation, 2016 (‘Deposit Regulations’) clarifying that the restriction on ADs from allowing their branches / correspondents outside India to grant loans to or in favour of non–resident depositors or third parties for purposes other than for relending or carrying on agricultural / plantation activities or for investment in real estate business, has now been dispensed with.
Messer Holdings: Supreme Court Judgement on Enforceability of Share Transfer Restrictions
In the case of Messer Holdings Ltd. v. Shyam Madanmohan Ruia, an appeal had been preferred before the Supreme Court (‘SC’) from a decision of the division bench of the High Court of Mumbai (‘Mumbai HC’), which had held that share transfer restrictions as set out in an agreement between shareholders are not violative of the Companies Act, 1956 (‘CA 1956’). The issue of enforceability of share transfer restrictions has long been vexed. It was expected, therefore, that SC would provide some clarity on this issue. However, in its judgment on April 19, 2016, SC effectively refused to answer the questions of law and further criticised the parties for unreasonably taking up the time of the court. While the Companies Act, 2013 (‘CA 13’) appears to clarify this issue under Section 58(2), there continue to remain some unanswered questions, including whether the Mumbai HC judgment would still be valid law.
 Messer Holdings Ltd. v. Shyam Madanmohan Ruia, SLP (Civil) Nos. 33429-33434 of 2010.
Constitution of NCLT
On June 1, 2016, the Ministry of Corporate Affairs (‘MCA’) notified the constitution of the National Company Law Tribunal (‘NCLT’) and the National Company Law Appellate Tribunal (‘NCLAT’) with immediate effect. The rules in this regard are yet to be notified. The NCLT will initially have 11 branches – two in New Delhi (one of which will be the principal bench) and one each in Mumbai, Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad and Kolkata.
With the above notification, the erstwhile Company Law Board (‘CLB’) constituted under CA 1956 stands dissolved and all the cases pending before CLB, except for matters relating to winding up, compromise, amalgamation and capital reduction, stand immediately transferred to NCLT. The establishment of NCLT consolidates the corporate jurisdiction of the following authorities: (i) CLB; (ii) Board for Industrial and Financial Reconstruction (‘BIFR’); (iii) Appellate Authority for Industrial and Financial Reconstruction; and (iv) jurisdiction and powers relating to winding up, restructuring and other such provisions, vested in High Courts (‘HCs’).
Matters relating to the investigation of a company’s accounts, freezing of assets, class action suits, oppression and mismanagement and conversion of a public company to a private company will now be governed by the NCLT, and appeal therefrom would be before the NCLAT instead of the HCs.
Amendment to the Companies (Corporate Social Responsibility Policy) Rules, 2014
MCA has, by way of a notification dated May 23, 2016 (‘May 23 Notification’), amended the Companies (Corporate Social Responsibility Policy) Rules, 2014 (‘CSR Rules’). The CSR Rules earlier permitted corporate social responsibility (‘CSR’) activities to be undertaken through a company established under Section 8 or a registered trust or a registered society (each a ‘Permitted Medium Entity’), which is established by the company either by itself or along with another company, and such entities were not required to show any minimum track record. In addition, the May 23 Notification now permits a company to undertake CSR activities through a Permitted Medium Entity established by the Central or State Government or by any entity established under an Act of Parliament or a State Legislature, without having to show any minimum track record. However, if CSR activities are carried out through any other permitted entity, then the existing requirements under CA 13 continue unaltered.
 Company registered as a company with charitable objects, etc.
Amendment to the Companies (Acceptance of Deposit) Rules, 2014
On June 29, 2016, the MCA has notified the Companies (Acceptance of Deposits) Amendment Rules, 2016 (‘Amended Rules’), inter alia, expanding the scope of exemptions available for deposit of monies received by a company from being classified as a ‘deposit’ under the Companies (Acceptance of Deposit) Rules, 2014.
The Amended Rules permit companies to accept or renew deposits from members up to a maximum of 35% of the aggregate of their paid-up share capital, free reserves and securities premium account, as opposed to the earlier limit of 25%. Further, a private company can accept or renew deposits from its members up to 100% of the aggregate of its paid-up share capital, free reserves and securities premium account.
The Amended Rules have included a requirement for every eligible company to obtain a credit rating at least once every year for deposits accepted by it and disclose the deposits received from a director in its financial statements. The Amended Rules will come into force upon publication in the Official Gazette.
Companies (Removal of Difficulties) Third Order, 2016
Section 139 of CA 13, which deals with appointment of auditors, inter alia, provides that no listed company and companies falling within the prescribed class are allowed to appoint / re-appoint an individual / an audit firm, respectively, as an auditor for more than one term of five consecutive years in case of an individual and two terms of five consecutive years in any other case. As per the provisions of Section 139(1), companies are required to appoint / re-appoint auditors at annual general meetings only.
Pursuant to the Companies (Removal of Difficulties) Third Order, 2016, effective retrospectively from April 1, 2014, MCA has allowed compliance with the above requirements within a period ending no later than the date of the first annual general meeting held three years after the date of commencement of CA 13.
Amendments to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2016
Reserve Bank of India (‘RBI’) has, by way of notifications dated April 28, 2016 and May 20, 2016, made the following amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000:
i. The term ‘startup’ has been defined to mean a private limited company / limited liability partnership, incorporated within the preceding five years, with an annual turnover not exceeding Rs 25 crores (approximately US$ 3.7 million) in any preceding financial year, working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property, provided that such entity is not formed by splitting up or reconstruction of an existing business;
ii. Schedule 6 has been amended to permit foreign venture capital investors (‘FVCI’) registered with Securities and Exchange Board of India (‘SEBI’) to invest in: (a) equity, equity-linked instruments or debt instruments issued by startups, irrespective of the sector of such startup; (b) units of a registered Category I Alternative Investment Fund (‘Cat-I AIF’) or units of a scheme or a fund set up by a Cat-I AIF; (c) equity, equity-linked instruments or debt instruments issued by an unlisted Indian company engaged in specified sectors;
iii. A new Regulation 10A has been inserted which provides for the following:
• In case of transfer of shares between a resident and a non-resident, not exceeding 25% of the total consideration can be paid by the buyer on a deferred basis, for which an escrow arrangement may be made, for a period not exceeding 18 months from the date of the transfer agreement; and
• Even if the total consideration has been paid, the seller may furnish an indemnity for an amount not exceeding 25% of the total consideration, for a period not exceeding 18 months from the date of payment of the full consideration.
iv. The total consideration finally paid for such shares must comply with applicable pricing guidelines.
Revisions to FDI Policy
The Department of Industrial Policy and Promotion (‘DIPP’) has, by way of Press Note No. 5 dated June 24, 2016 (‘Press Note 5’), introduced the following notable amendments to the FDI Policy:
i. 100% foreign direct investment (‘FDI’) is permitted under the approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India;
ii. In the defence sector, FDI beyond 49% is permitted through the approval route, where the investment results in Indian access to modern technology or for other reasons. The erstwhile condition for such FDI, requiring such investment to result in access to ‘state-of-art’ technology, has been dispensed with;
iii. Foreign investment in the civil aviation sector has been liberalised, whereby: (a) 100% FDI is permitted under the automatic route in brownfield and greenfield airport projects; and (b) FDI has been raised to 100% (with up to 49% under the automatic route and 100% through the automatic route for non-resident Indians (‘NRIs’)) for scheduled air transport services, domestic scheduled passenger airlines and regional air transport services. Foreign airlines continue to be allowed to invest in the capital of Indian companies operating scheduled and non-scheduled air-transport services up to 49%;
iv. FDI in brownfield pharmaceutical projects has been permitted up to 100%, with 74% under the automatic route. However, a non-compete clause is not permitted in transactions, except in certain special circumstances with the prior approval of the Foreign Investment Promotion Board;
v. Local sourcing norms have been relaxed for three years for entities engaged in single brand retail trading of products having ‘state-of-art’ and ‘cutting edge’ technology, and where local sourcing is not possible;
vi. FDI in private security agencies has been raised to 74%, with 49% permitted under automatic route. It is clarified that the terms ‘private security agencies’, ‘private security’, and ‘armoured car service’ will have the same meaning as ascribed to such terms under the Private Security Agencies (Regulation) Act, 2005. Accordingly, private security agencies would include any person (other than any governmental agency) providing private security services including training of private security guards and deployment of armoured cars;
vii. FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture was permitted up to 100% under the automatic route under controlled conditions. The requirement of ‘controlled conditions’ for FDI in these activities has now been removed; and
viii. 100% FDI in broadcasting carriage services, including teleports, direct to home, cable networks, mobile TV and headend-in-the-sky broadcasting services, has been permitted under the automatic route.
RBI Circular on Investment in Credit Information Companies
Pursuant to the circular dated May 19, 2016 issued by RBI, all credit information companies (‘CIC’) have been directed to comply with the following:
i. Investments by any person (whether resident or otherwise), directly or indirectly, in a CIC, must not exceed 10% of the equity capital of the investee company. However, RBI may consider allowing higher FDI limits to entities with an established track record in running a credit information bureau in the following cases:
• up to 49%, if ownership is not well diversified (i.e., one or more shareholders each hold more than 10% of voting rights in the company);
• up to 100%, if ownership is well diversified, or if their ownership is not well diversified, but at least 50% of the directors of the investee CIC are Indian nationals/ NRIs/ persons of Indian origin (out of which at least one third of the directors must be Indian nationals resident in India); and
• The investor company should preferably be listed on a recognised stock exchange.
ii. A foreign institutional investor (‘FII’)/ foreign portfolio investor (‘FPI’) is permitted to invest in a CIC subject to certain prescribed conditions.
If the investor in a CIC is a wholly owned subsidiary (directly or indirectly) of an investment holding company, then the above conditions will be applicable to the operating group company that is engaged in the credit information business and has undertaken to provide technical know-how to the CIC in India.
Disclosure of Compounding Orders Passed by RBI on RBI’s Website
With a view to ensure transparency and disclosure, compounding orders passed by RBI on or after June 1, 2016 will be publicly available on RBI’s website (www.rbi.org.in). The RBI circular dated May 26, 2016 in relation thereto also sets out a guidance note for calculating (on an indicative basis) the amount of penalty/ fine that may be imposed on the applicant, although the actual amount may vary on a case to case basis.
Foreign Exchange Management (Establishment in India of a Branch or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016
RBI has, by way of a recent notification issued the Foreign Exchange Management (Establishment in India of a Branch or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016 (‘New Regulations’) which replace the erstwhile regulations of 2000. The key changes in the New Regulations, inter alia, include: (i) the term ‘branch office’ has been defined to mean any establishment described as such by the concerned company; (ii) cancellation of approval if no office is opened within six months of receiving the approval letter, subject to an extension of six months by the Authorised Dealer Category-I bank (‘AD Bank’) on account of reasons beyond control; (iii) citizens of certain specified countries are required to obtain registration with the relevant State police authorities in addition to the RBI approval for establishing a branch office or liaison office or project office or any other place of business; and (iv) AD Bank may permit intermittent remittances by branch office/ project offices pending winding up/ completion of the project subject to submission of specified documents.
Foreign Investment in Units Issued by REITs, InvITs and AIFs
Salient features of foreign investment permitted by RBI, pursuant to its circular dated April 21, 2016, in the units of investment vehicles for real estate and infrastructure registered with the SEBI or any other competent authority are as under:
i. A person resident outside India (including a Registered Foreign Portfolio Investor (‘RFPI’) and NRIs may invest in units of real estate investment trusts (‘REITs’);
ii. A person resident outside India who has acquired or purchased units in accordance with the regulations may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by RBI;
iii. An Alternative Investment Fund Category III with foreign investment can make portfolio investment in only those securities or instruments in which a RFPI is allowed to invest; and
iv. Foreign investment in units of REITs registered with SEBI will not be included in ‘real estate business’.
Revision of Sectoral Limits – ARCs
DIPP has, by way of Press Note 4 dated May 6, 2016 (‘Press Note 4’), permitted 100% FDI in asset reconstruction companies (‘ARCs’) under the automatic route, from the erstwhile 49%, subject to the following key conditions:
i. Earlier, an ARC sponsor was not allowed to hold more than 50% shareholding, including by way of FDI or by routing it through a FII/ FPI controlled by the same sponsor, in line with the existing restriction under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’). This restriction is proposed to be done away with by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016. Therefore, Press Note 4 provides that the investment limit of a sponsor in an ARC’s shareholding will be governed by SARFAESI;
ii. Permissible FII/ FPI investment in each tranche of security receipts has been increased to 100%, as opposed to the earlier 74%, subject to compliance with RBI’s directions; and
iii. Foreign investment in an ARC is now subject to all provisions of SARFAESI (instead of only Section 3(3)(f)).
Orders of Two Different High Courts on Stamp Duty Payable on a Scheme of Amalgamation
A bench of three judges of the Mumbai HC in the case of Chief Controlling Revenue Authority, Maharashtra State, Pune and Superintendent of Stamp (Headquarters), Mumbai v. Reliance Industries Limited, Mumbai and Reliance Petroleum Limited, Gujarat has considered whether stamp duty would be payable on orders of two different HCs in case of a scheme of arrangement under Sections 391 to 394 of the CA 1956 involving two States.
In 2002, Mumbai HC and the Gujarat High Court sanctioned a scheme of amalgamation between Reliance Industries Limited (‘RIL’) having its registered office in Maharashtra and Reliance Petroleum Limited (‘RPL’), having its registered office in Gujarat (‘Scheme’). While RPL paid stamp duty in Gujarat on the order passed by the Gujarat High Court, RIL contended before the Superintendent of Stamps, Mumbai that the stamp duty paid in Gujarat by RPL should be set off against the stamp duty payable on the Mumbai HC order under the Maharashtra Stamp Act, 1958.
Based on an application made by RIL, Mumbai HC held that: (i) stamp duty is charged on an ‘instrument’, and not on the ‘transaction’ effected by the ‘instrument’; and (ii) orders passed by two different HCs, albeit pertaining to the same scheme of amalgamation, are separate instruments, and therefore, full stamp duty is payable in all States where such a scheme of amalgamation is sanctioned.
 Chief Controlling Revenue Authority, Maharashtra State, Pune and Superintendent of Stamp (Headquarters), Mumbai v. Reliance Industries Limited, Mumbai and Reliance Petroleum Limited, Gujarat, AIR 2016 Bom 108
Removal of independent directors re-appointed for a second term only by way of a special resolution
Section 149(10) of the Companies Act, 2013 (‘Companies Act’) provides that an independent director of a company is eligible for re-appointment for a second term on passing of a special resolution by the company. However, under Section 169(1) of the Companies Act, a company is permitted to remove any director before the expiry of his term, by passing an ordinary resolution. Based on a joint reading of the aforementioned sections, it appeared that an independent director could be re-appointed for second term only by way of a special resolution, but may be removed thereafter by way of an ordinary resolution. The Central Government has, by way of the Companies (Removal of Difficulties) Order, 2018, amended Section 169(1) to provide that an independent director, who is re-appointed for a second term, can be removed only by passing a special resolution after giving him a reasonable opportunity of being heard.
RBI notifies the Cross Border Merger Regulations
The Reserve Bank of India (‘RBI’) has notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (‘Cross Border Merger Regulations’), by way of a notification dated March 20, 2018. Some of the key provisions of the Cross Border Merger Regulations are set out below:
i. Inbound Mergers: In case of an inbound merger (i.e. a cross border merger wherein an Indian company is the resultant company), the resultant Indian company may issue shares to persons resident outside India, subject to compliance with the requirements prescribed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘FEMA 2017’). Further, if (a) the foreign company in an inbound merger is a joint venture (‘JV’) or wholly owned subsidiary (‘WOS’) of the Indian company; or (b) the inbound merger of a JV or WOS results in the acquisition of a step down subsidiary, then compliance with the provisions of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (‘ODI Regulations’) is required. Some of the key provisions governing inbound mergers are set out below –
• Acquisition/transfer of assets and liabilities by the resultant Indian Company: If the resultant Indian company acquires any asset or comes to hold any liability outside of India as a result of the inbound merger, which acquisition is not permitted under FEMA, then the resultant Indian company would be required to sell such asset / security or extinguish such liability from the sale proceeds of the overseas assets, within two years of the merger scheme being sanctioned by the National Company Law Tribunal (‘NCLT’).
• Offices of the foreign transferor company: The overseas office(s) of the foreign transferor company would be deemed to be the offshore branches/office outside India of the resultant Indian company, which will be required to undertake the activities of a branch/office as permitted under the Foreign Exchange Management (Foreign Currency Account by a person resident in India) Regulations, 2015.
• Borrowings and guarantees of the foreign transferor company: Any borrowings raised or guarantees issued by the foreign transferor company, which come to be held by the resultant Indian company, will have a period of two years to become compliant with the applicable foreign exchange regulations governing external commercial borrowings, borrowing or lending in Rupees or guarantees. No remittance for paying such liability can be made by the resultant Indian company within the two years of the merger scheme being sanctioned by the NCLT. In such cases, end use restrictions will not apply.
With respect to an inbound merger, if the resultant Indian company intends to continue operations outside India post completion of such cross-border merger, then such resultant Indian company will be required to maintain a presence outside India, through an offshore branch or a subsidiary in the manner permitted under foreign exchange regulations.
ii. Outbound Mergers: In case of an outbound merger (i.e. a cross border merger wherein a foreign company is the resultant company), a person resident in India may hold or acquire securities of the resultant foreign company, in accordance with the provisions of ODI Regulations (including the fair market value of such foreign securities being within the limits prescribed under the Liberalized Remittance Scheme, where the resident Indian is an individual). Some of the key provisions governing outbound mergers are set out below:
• Offices of the Indian transferor company: Indian offices of the Indian transferor company will be deemed to be branch offices of the resultant foreign company. Transactions can be undertaken out of such Indian branch offices in accordance with the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016.
• Borrowings and guarantees of the Indian transferor company: The guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant foreign company are required to be paid as per the scheme sanctioned by the NCLT. However, the resultant foreign company will not be permitted to acquire any liability payable towards an Indian lender in Rupees which is not in conformity with the provisions of the Foreign Exchange Management Act, 1999 (‘FEMA’).
• Acquisition/transfer of assets by the resultant foreign Company: If the resultant foreign company acquires any asset or security which it is not otherwise permitted to hold under FEMA, it will be required to sell such asset or security within two years of the merger scheme being sanctioned by the NCLT, and the proceeds of such divestment are required to be repatriated outside India immediately through normal banking channels. However, repayment of Indian liabilities from the proceeds of the sale of such assets or securities within such two year period is permitted.
• Valuation: In accordance with Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016, valuation for an outbound merger has to be conducted by a valuer who is a member of a recognized professional body in the jurisdiction of the transferee company in accordance with internationally accepted principles on accounting and valuation.
With respect to an outbound merger, if the resultant offshore company intends to continue operations in India post completion of such cross-border merger, then such resultant offshore company will be required to maintain a presence outside India through a subsidiary in the manner permitted under foreign exchange regulations.
Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018
The RBI has, by way of a notification dated March 26, 2018, issued the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 (‘2018 Regulations’) that replaces the erstwhile Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 (‘2000 Regulations’). Some of the key changes introduced by way of the 2018 Regulations are set out below:
i. The 2018 Regulations has replaced the concepts of ‘a person resident outside India who is a citizen of India’ and ‘a person of Indian origin’ under the 2000 Immovable Property Regulations with ‘Non-Resident Indian’ (‘NRI’) and ‘Overseas Citizen of India (‘OCI’), respectively and treats NRIs and OCIs at par with respect to their capacity to hold and / or transfer immovable property in India.
ii. An NRI or an OCI is generally permitted to acquire any immovable property, other than agricultural land/ farm house / plantation property in India, by way of a sale or gift from a person resident India or another NRI or OCI, who is a ‘relative’ (as defined under Section 2(77) of the Companies Act, 2013). While the 2000 Regulations were silent on this aspect, the 2018 Regulations provide that a person resident outside India, not being an NRI or OCI but whose spouse is an NRI or an OCI, may acquire one such immovable property, jointly with the NRI / OCI spouse.
iii. Any person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, or persons of Hong Kong, Macau or Democratic People’s Republic of Korea, and including persons from aforesaid countries having a place of business in India in a manner permissible under FEMA, will not be permitted to acquire or transfer any immovable property in India in their individual capacity, without the prior approval of the RBI, other than on lease not exceeding five years. However, such restriction would not apply where such person is an OCI.
iv. Under the 2018 Regulations, a person resident in India under a long term visa, who is a citizen of Afghanistan, Bangladesh or Pakistan and belongs to minority communities in those countries (namely, Hindus, Sikhs, Buddhists, Jains, Parsis and Christians), may purchase only (a) one residential immovable property for self-occupation and (b) one immovable property for carrying out self-employment activities, inter alia subject to such immovable property not being in / around any restricted / protected areas and cantonment areas. This dispensation was not provided for under the 2000 Regulations.
v. The 2018 Regulations do not have retrospective application on any existing holding of immovable property by a person resident outside India, which was acquired under the 2000 Regulations.
 Section 2 (77) of the Companies Act, 2013 states: “relative”, with reference to any person, means any one who is related to another, if— (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed.
Amendments to FEMA 2017
The RBI has, by its notification dated March 26, 2018 introduced the following amendments to the sector specific policy for foreign investment, under FEMA 2017:
i. Foreign investment in investing companies: (a) Foreign investments in investing companies not registered as non-banking financial companies (‘NBFCs’) with the RBI and in core investment companies, both engaged in the activity of investing in the capital of other Indian entities, will require prior Government approval; and (b) foreign investment in investing companies registered as NBFCs with the RBI, will not require any prior approval and will be permissible under 100% automatic route.
ii. Single brand product retail trading: In case of entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible, a committee under the chairmanship of the Secretary, DIPP, with representatives from Niti Aayog, concerned Administrative Ministry and independent technical expert(s) on the subject will examine the claim on the issue of the products being in the nature of ‘state-of-art’ and ‘cutting-edge’ technology, and give recommendations for such relaxation.
iii. Issuance of capital instruments to persons resident outside India: No prior Government approval will now be required for issuance of capital instruments to persons resident outside India against: (a) import of capital goods / machinery / equipment (excluding second hand machinery); or (b) pre-operative / pre-incorporation expenses, unless the Indian investee company is engaged in a sector under the Government route.
As set out in our January 2018 edition of the Inter Alia, the Union Cabinet had approved certain amendments to the foreign direct investment regime in India on January 10, 2018, which have now been incorporated in FEMA 2017.
Notification of Cross-border Mergers
On April 13, 2017, the Ministry of Corporate Affairs (‘MCA’) notified Section 234 (merger or amalgamation of a company with a foreign company) of the Companies Act, 2013 (‘Companies Act’), paving the way for cross-border mergers and amalgamations. Simultaneously, the MCA notified an amendment to the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2016 (‘Merger Rules’) by inserting a new Rule 25A, which prescribes the rules governing (i) inbound mergers by foreign companies with Indian companies, and (ii) outbound mergers by Indian companies with foreign companies incorporated in certain ‘notified jurisdictions’.
Section 234 of the Companies Act inter alia provides that, with the prior approval of the Reserve Bank of India (‘RBI’), a foreign company may merge into an Indian company and vice versa and that the terms and conditions of the scheme of merger may provide, among other things, for payment of consideration to the shareholders of the merging company in cash, or in depository receipts, or partly in cash and partly in depository receipts. The amendment to the Merger Rules further prescribes that such cross-border mergers and amalgamations must adhere to the requirements under the Companies Act and that the valuation (in case of an outbound merger) be conducted by valuers who are members of a recognised professional body in the country of the transferee company and as per internationally accepted accounting standards and valuation.
While the MCA has now permitted cross-border mergers, there are certain aspects that would require evaluation for successful implementation of cross-border mergers, including feasibility of tax neutrality in all the relevant countries and evaluation of impact under other tax provisions such as general anti-avoidance rules etc.
Schemes of arrangement by listed entities
SEBI, by its circular dated January 3, 2018 (‘Scheme Circular’), has amended its circular issued in March, 2017 (‘March Circular’). Some of the key amendments are as follows:
i. The scope of the March Circular has been extended to schemes which solely provide for merger of a division of a WOS with its parent company, in addition to the merger of a WOS with its parent company.
ii. In respect of the valuation report and a fairness opinion by an independent chartered accountant and an independent SEBI registered merchant banker to be submitted by a listed entity, SEBI has clarified that the term ‘independent’ will mean that there is no material conflict of interest among the chartered accountant and the merchant banker or with the company, including that of common directorships or partnerships.
iii. The percentage of pre-scheme public shareholders of the listed entity and the Qualified Institutional Buyers of the unlisted entity should not be less than 25% on a fully diluted basis in the post-scheme shareholding pattern of the merged company.
iv. The requirements under the March Circular, in relation to the scheme once the scheme has been sanctioned by the High Court or the NCLT, have been dispensed with.
v. The lock-in requirements relating to the pre-scheme share capital of the unlisted issuer seeking to be listed in case of a scheme involving merger of a listed company or its division into an unlisted entity have been amended as follows:
• Shares held by promoters up to the extent of 20% of the post-merger paid-up capital of the unlisted issuer to be locked-in for three years from the date of listing of the shares of the unlisted issuer.
• The remaining shares are to be locked-in for one year from the date of listing of the shares of the unlisted issuer.
• No additional lock-in is applicable if the post-scheme shareholding pattern of the unlisted entity is exactly similar to the shareholding pattern of the listed entity.
Draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017
Following the notification of Section 234 of the Companies Act, the RBI, on April 26, 2017, released the draft Foreign Exchange Management (Cross Border Merger) Regulations, 2017 (‘Draft Cross Border Merger Regulations’) to provide a regulatory framework for cross border mergers. Some of the key provisions of the Draft Cross Border Merger Regulations have been summarized below.
i. Issue/ transfer/ acquisition of security: Any issue or transfer of security by the resulting company is required to comply with the Foreign Exchange Management Act, 1999 (‘FEMA’) and the regulations issued thereunder.
a. In inbound mergers, any borrowing from overseas sources entering the books of resultant company arising must conform to the External Commercial Borrowing (‘ECB’) norms or trade credit norms or other foreign borrowing norms.
b. In outbound mergers, the resultant company must be liable to repay outstanding borrowings or impending borrowings as per the scheme sanctioned by the National Company Law Tribunal (‘NCLT’).
iii. Repatriation on Contravention: If the assets/ securities held by the resultant company is in contravention of the Companies Act or FEMA provisions, the resultant company would be required to sell those off within 180 days of the sanction of the scheme and the proceeds are to be repatriated to or outside India, as the case may require.
iv. Valuation: The valuation of both Indian and foreign company must be conducted as per internationally accepted pricing methodology, shares on arm’s length basis and duly certified by an authorised chartered accountant/public accountant/ merchant banker in the relevant jurisdiction.
v. Reporting: Any transaction that arises in relation to the scheme must be reported in the same manner in which it is otherwise required to be reported under FEMA. The Indian company and the foreign company involved in an overseas merger will be required to furnish reports as prescribed by the RBI.
While Section 234 of the Companies Act only allows cross border mergers and amalgamations, the draft regulations include demergers and arrangements as well. Thus, this issue requires clarity and may need some amendments to the law. Further, effective implementation of the cross-border merger provisions will require amendments to FEMA, securities and tax laws, etc. While it is unclear how the proposed cross-border merger provisions will be specified under various laws, it may become a useful tool for companies to undertake expansion and restructuring activities.
Additional Exemptions for Private Companies
By way of notification dated June 13, 2017, the MCA has declared some additional exemptions to a specified class of private companies from certain provisions of the Companies Act, which have been summarized below:
i. The definition of ‘Financial Statements’ under Section 2(40) has been amended to provide that a private company which is a start-up may not include cash flow statement as part of its financial statements.
ii. Section 73(2) of the Companies Act provides that companies may accept deposits from members subject to prescribed conditions, such as creation of a deposit repayment reserve account, maintenance of deposit insurance, etc. Following private companies are now exempted from complying with these requirements:
a. A private company that accepts deposits from its members not exceeding the aggregate of 100% of the paid up share capital, free reserves and securities premium account; or
b. For a period of five years from the date of incorporation for a start-up; or
c. A private company (i) which is not an associate or subsidiary company of any other company; (ii) its borrowings from banks and financial institutions is less than twice its paid up share capital or INR 50 crores (approx. USD 7.7 million), whichever is lower; and (iii) which has not defaulted in the repayment of borrowings from banks and financial institutions subsisting at the time of accepting deposits.
iii. Section 92(1)(g) provides that the annual returns prepared by a company should, inter-alia, provide details of remuneration to the directors and key managerial personnel. Pursuant to the exemption, private companies, which are small companies, are only required to provide details of the aggregate remuneration drawn by directors.
iv. As per the proviso to Section 92(1), annual return of one person companies and small companies are only required to be signed by the company secretary, or where there is no company secretary by the director of the company. This has now been made applicable to private companies which are start-ups.
v. A private company which: (i) is a one person company or a small company; or (ii) has turnover less than INR 50 crores (approx. USD 7.7 million) as per the latest audited financial statements; or (iii) has aggregate borrowings at any point of time during the financial year less than INR 25 crores (approx. USD 3.8 million), is exempt from the requirement under Section 143(5)(i) of the Companies Act of including under its auditor’s report a statement on whether the company has adequate internal financial control systems in place and operating effectiveness of such controls.
vi. Start-ups have been exempted from the requirement of holding four board meetings in a year. Such companies are required to hold only one meeting of the Board in each half of the calendar year, provided that the gap between the two meetings is not less than 90 days.
vii. Interested directors can be counted towards quorum for adjourned board meetings of private companies under Section 174(3) of the Companies Act after disclosure of their respective interest pursuant to Section 184 of the Companies Act.
Benefits of the exemptions set out above can only be availed by a private company which has not committed a default in filing its financial statements under Section 137 or annual return under Section 92 of the Companies Act.
 Means a private company recognized as a ‘start-up’ in accordance with the notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry
Additional Exemptions for Section 8 Companies
By way of notification dated June 13, 2017, the MCA has amended its earlier Notification GSR 466(E) dated June 5, 2015 (‘Section 8 Principal Notification’), by prescribing additional exemptions for companies with charitable objects registered under Section 8 of the Companies Act (‘Section 8 Companies’) from compliance with certain provisions of the Companies Act, which have been summarised below:
i. Under the Section 8 Principal Notification, Section 8 Companies were exempted from complying with the minimum and maximum director requirements under Section 149(1) of the Companies Act. Pursuant to the recent amendment, Section 8 Companies are mandatorily required to have a minimum number of 3 directors (in the case of a public company) and 2 directors (in the case of a private company). However, there continues to be no limit on the maximum number of directors.
ii. As per Section 186(7) of the Companies Act, loans provided by any company to another person must bear interest not lower than at a rate specified under the Companies Act. Section 8 Companies are exempted from complying with this requirements if: (a) not less than 26% of its paid up share capital is held by the Central Government or any State Government(s) or both; and (b) the loan is being granted for funding industrial research and development projects, in furtherance of the objects stated in the memorandum of association of such Section 8 Company.
Benefits of exemptions set out above can only be availed by Section 8 Companies that have not committed a default in filing their financial statements under Section 137 or annual return under Section 92 of the Companies Act.
Amendment to the Companies (Audit and Auditors) Rules, 2014
By way of notification dated June 22, 2017, the MCA has notified an amendment to Rule 5 of the Companies (Audit and Auditors) Rules, 2014 (‘Audit Rules’). Prior to the amendment, as per Section 139(2) of the Companies Act read with Rule 5, inter alia all private limited companies having a paid up share capital of INR 20 crores (approx. USD 3 million) (or more), were permitted to appoint (i) an individual as the statutory auditor only for a single term of five consecutive years; and (ii) an audit firm as the statutory auditor only for two terms of five consecutive years. Pursuant to the amendment, the limit of INR 20 crores (approx. USD 3 million) (or more) has been increased to INR 50 crores (approx. USD 7.7 million) (or more).
Amendment to the Transfer of Pending Proceedings Rules, 2016
The MCA has by way of its notification dated June 29, 2017 amended the Companies (Transfer of Proceedings) Rules, 2016 (‘Transfer Rules’), which specified rules for transfer of pending proceedings under the Companies Act, 1956 (‘CA 1956’) in relation to winding up and voluntary winding up of companies from the High Court to the NCLT. Rules 4 and 5 of the Transfer Rules have been amended as follows:
i. All proceedings related to voluntary winding up, where notice of resolution by advertisement has been given under CA 1956 but such company has not been dissolved before April 1, 2017, will continue to be dealt with under CA 1956 and not under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).
ii. The erstwhile Rule 5 of the Transfer Rules provided for winding up proceedings pending before the High Court to be transferred to the NCLT. If the petition was not served on the respondent then such petitions, and the petitioner would, thereafter, be required to provide information as if such petition were an application under the IBC. The time for providing such information has now been extended up to July 15, 2017, failing which, such petition will stand abated and a fresh application under the IBC will have to be filed.
Abolition of the Foreign Investment Promotion Board
The Department of Economic Affairs, Ministry of Finance (‘DEA’), has, by way of an office memorandum dated June 5, 2017, notified the Government’s approval to abolish the Foreign Investment Promotion Board (‘FIPB’). 11 sectors (including telecom, broadcasting, defence and banking) would continue to require Government approval for foreign investments, while the responsibility to grant such approvals would now vest with the concerned administrative ministries / departments. Applications for investment in core investment companies or Indian investing companies, and investments in financial services sectors not regulated by any financial services regulator, will be processed by DEA.
Further, the following foreign investment proposals requiring Government approval, will be dealt with by the Department of Industrial Policy and Promotion (‘DIPP’):
i. Trading (Single, Multi brand and Food Product Retail Trading);
ii. Proposals by non-resident Indians / export oriented units;
iii. Issue of equity shares under the Government route for import of capital goods / machinery / equipment (including second hand machinery); and
iv. Issue of equity shares for pre-operative / pre-incorporation expenses.
The DIPP will identify the relevant ministry in respect of applications where there is doubt about the administrative ministry concerned. The office memorandum also specifies that all applications pending with the FIPB portal as on the date of abolition of FIPB, will be transferred immediately by the DIPP to the relevant administrative ministry / department.
The DIPP has also issued a detailed standard operating procedure (‘SOP’) on June 29, 2017, which outlines the guidelines to the relevant administrative ministries / departments for processing of the FDI proposals. The SOP inter alia prescribes the process of inter-ministerial consultations as well as indicative timelines within which the proposals are to be assessed and disposed off. The applications will continue to be filed on the current online FIPB portal (now renamed as the ‘Foreign Investment Facilitation Portal’).
The SOP further prescribes that proposals involving a total foreign equity inflow of more than INR 5,000 crores (approx. USD 772 million) will additionally require the approval of the Cabinet Committee on Economic Affairs (Ministry of Finance), and that the concerned ministry will also seek DIPP concurrence where a proposal is being rejected or being granted subject to conditions not specified in the relevant laws.
Insolvency and Bankruptcy Code, 2016 Update
The provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) dealing with (i) voluntary liquidation of corporate persons; and (ii) setting up and regulation of information utilities (“IUs”) were notified by the central government with effect from April 1, 2017. Additionally, the Insolvency and Bankruptcy Board of India (“IBBI”) simultaneously notified:
a. The Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (“Voluntary Liquidation Regulations”); and
b. The Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 (“IU Regulations”).
This update discusses the important provisions of the Voluntary Liquidation Regulations and IU Regulations.
A. VOLUNTARY LIQUIDATION REGULATIONS
Section 59 of the IBC provides a mechanism for the voluntary liquidation of corporate persons which have not committed a payment default. To initiate a voluntary liquidation proceeding, the majority of the directors or designated partners of the corporate person (as the case may be) must make a declaration that:
a. They have made a full enquiry into the affairs of the corporate person;
b. In their opinion, the corporate person has no debt or that it will be able to pay its debt in full, from the proceeds of the assets sold under the proposed liquidation; and
c. The corporate person is not being liquidated to defraud any person.
The Voluntary Liquidation Regulations lay down the conditions and procedural requirements for conducting the voluntary liquidation process, the salient features of which are discussed below.
Who may be appointed as a liquidator in a voluntary liquidation?
The Voluntary Liquidation Regulations lay down the eligibility for insolvency professionals (“IPs”) proposed to be appointed as liquidators. They include that the proposed IP and every director or partner of an insolvency professional entity (“IPE”) that such proposed IP is part of:
a. Must be independent of the corporate person;
b. Must not be under a restraint order of the IBBI; and
c. Must not represent other stakeholders in the same liquidation process.
The Voluntary Liquidation Regulations further provide for the following:
a. Process of commencement of voluntary liquidation;
b. Manner of appointment and remuneration of liquidators and their powers and functions;
c. Process for submitting proof of claims by creditors;
d. Sale of assets comprising the liquidation estate;
e. Distribution of proceeds to stakeholders; and
f. Dissolution of the corporate person.
Applicability of other provisions of IBC
Other provisions dealing with the liquidation of a corporate debtor (which has made a payment default) contained in sections 35-53 of the IBC continue to be relevant even in a voluntary liquidation conducted under section 59 of the IBC. For instance, preferential transactions, undervalued transactions, transactions defrauding creditors and extortionate credit transactions must be reviewed by the liquidator and may be set aside by the National Company Law Tribunal (“NCLT”).
The Voluntary Liquidation Regulations are a significant departure from the process of voluntary liquidation under the Companies Act, 1956. They introduce a streamlined and more efficient regime in which the liquidation is conducted by independent IPs in a timely manner. This will prove to be of great value particularly to sponsors of special purpose vehicles which have served their limited purpose and foreign investors with commercially unviable subsidiaries which are otherwise solvent and need to be wound up.
B. IU REGULATIONS, 2017
What is an IU?
IUs are intended to be electronic databases which store financial information about borrowing entities submitted by interested parties. The scheme of the IBC provides that details of both financial as well as operational debt may be filed with IUs. In addition, information relating to security interests created under debt documents, notice of any dispute raised by a corporate debtor in relation to the existence of an operational debt and record of assets and liabilities of corporate debtors may also be submitted to an IU.
Who can be registered as an IU?
The IU Regulations set out the following eligibility criteria for a person to register as an IU:
a. It must be a public limited company with minimum net worth of INR 50 crores;
b. It must not be controlled by person(s) resident outside India;
c. A person resident outside India must not (directly or indirectly) hold more than 49% of the equity shares of the IU;
d. The IU, its promoters, directors, key managerial personnel and persons holding more than 5% of its equity shares must be ‘fit and proper persons’;
e. The maximum shareholding of the IU by a single person should not be more than 10% of equity share capital of the IU; and
f. Any government company, public financial institution, stock exchange, depository, bank or insurance company may (by itself or collectively) hold up to 25% of the equity share capital of the IU.
The IBC does not contemplate the existence of a single state sponsored IU. The IBBI will license and regulate multiple IUs which can be privately owned and compete with each other on the basis of services offered and fee charged.
The IU Regulations also provide for:
a. A framework for registration and regulation of IUs;
b. Guidelines on shareholding and governance of IUs;
c. Specifications on technical standards and bye laws to be adopted by the IU for performance of its core services;
d. Duties and services to be performed by an IU; and
e. Grievance redressal policy in order to safeguard the interests of the user.
IUs will play a vital role in the CIRP and liquidation processes. A readily accessible record of debt and the dates of default will aid the NCLT in reviewing an application to commence a CIRP more expeditiously.
The notification of the IU Regulations is a major milestone in implementation of the IBC. However, it remains to be seen how quickly market participants are able to set up IUs, how the IBBI will ensure fair competition between multiple IUs and how easily accessible and secure the stored data will be.
C. NOTABLE PARTS OF THE IBC THAT HAVE NOT BEEN NOTIFIED YET
Pursuant to section 55 of the IBC, a fast track process (“Fast Track CIRP”) is available for corporate debtors with relatively low levels of assets and income; and such class of creditors or such amount of debt as may be notified by the central government.
Fast Track CIRP provides for the insolvency resolution to take place in a more condensed period of 90 days (extendable by a maximum of another 45 days). Fast Track CIRP will be of use for smaller companies with uncomplicated balance sheets which are capable of being resolved within more strict timelines.
Chapter IV (of Part II) of the IBC dealing with Fast Track CIRP has not been notified yet.professionals.
A Guaranteed Mess?
Recent news reports indicate that State Bank of India, India’s largest corporate lender has decided to invoke all outstanding personal and corporate guarantees in relation to companies undergoing Corporate Insolvency Resolution Process (‘CIRP’) under the Insolvency and Bankruptcy Code 2016 (‘IBC’).
The treatment of guarantees issued by and in favour of companies undergoing CIRP should be relatively straightforward under the IBC. But jurisprudence over the last few months in this context has introduced complexity. This note briefly sets out the key themes that have evolved so far.
Invocation of Guarantee issued by a corporate debtor after Insolvency Commencement Date (‘ICD’).
Courts (in the Edu Smart case and MBL case)[i] have held that invoking a guarantee issued by a corporate debtor after its ICD is analogous to foreclosing, recovering or enforcing any security interest in respect of the property of the corporate debtor, which is prohibited on account of the moratorium imposed under Section 14 of the IBC.
Submission of proof of claim for guarantees yet to be invoked
Courts (in the Edu Smart case and the Binani case)[ii] have held that a proof of claim can only be submitted for claims that have crystallized “i.e.,” are due and payable by the corporate debtor on the ICD. A guarantee claim will be considered due and payable only after due invocation under the terms of the contract. So effectively, if a guarantee issued by a corporate debtor has not been invoked before ICD, no proof of claim can be filed. As a result, the rights of such beneficiary post-resolution plan remains uncertain (for the beneficiary and the resolution applicant).
Guarantee issued by a third party (“e.g.,” promoter or group company of the corporate debtor) not undergoing CIRP not hit by moratorium
Some judgements (the Alpha & Omega case and the Schweitzer case)[iii] have indicated that enforcement of any security interest granted by a third party for the debts of the corporate debtor is not prohibited by the moratorium under Section 14 of the IBC, since the moratorium only applies to the security created in respect of the assets of the corporate debtor appearing on its balance sheet. Though these cases don’t explicitly deal with third party guarantees, the principal enunciated could easily be extended to guarantees as well inferring that invoking a third party guarantee after ICD would not be prohibited.
On second thoughts, (invoked) guarantee issued by a third party (“e.g.,” promoter or group company of the corporate debtor) not undergoing CIRP hit by moratorium
Somewhat contrary to the above, the Allahabad High Court (in the Sanjeev Shriya case)[iv] held that in an ongoing CIRP, the obligations of the corporate debtor are in a fluid state and have not been conclusively determined; and that therefore, till such time as the CIRP continues any guarantee given by the promoters of the corporate debtor cannot be enforced since the guarantor’s obligations cannot be established while the company’s obligations are in flux. For the record, the guarantee was invoked before ICD of the corporate debtor.
On further reflection, (invoked) guarantee issued by a third party (“e.g.,” promoter or group company of the corporate debtor) not undergoing CIRP hit by moratorium and cannot be used to start IBC proceedings against the issuer
In the recent Vista Steel case[v], a group company of a borrower had provided a guarantee to a financial creditor. This financial creditor also benefited from security provided by the borrower. There was an ongoing CIRP against the borrower/principal debtor. The financial creditor of the principal debtor (in CIRP) invoked the guarantee granted by the group company before the ICD of the principal debtor. The guarantor did not make payment under the invoked guarantee and so the creditor sought to invoke IBC proceedings against the guarantor (for crystallised debt). The court held that doing so would cause the guarantor to be subrogated to the rights of the secured financial creditor causing creation of a security interest over the assets of the borrower/principal debtor, violating the moratorium under Section 14 of the IBC. On this basis, the court denied the financial creditor from proceeding with the IBC application against the guarantor.
Where do we stand?
The principle set out by the Alpha & Omega case and the Schweitzer case was, in our view, the right way to approach the matter. Subsequent decisions have made it difficult for lenders to proceed simultaneously against guarantors and borrowers. This dilutes the usefulness of a guarantee for a lender and currently provides one of the few silver linings for promoters whose companies are in CIRP/IBC.
[i] Axis Bank Limited v. Edu Smart Services Private Limited NCLT, New Delhi October 27, 2017 and RBL Bank Limited v. MBL Infrastructures, NCLT Kolkata, December 18, 2017.
[ii] Axis Bank Limited v. Edu Smart Services Private Limited NCLT, New Delhi October 27, 2017 and Bank of Baroda v. Binani Cements Ltd., NCLT Kolkata, November 17, 2017.
[iii] Alpha & Omega Diagnostics (India) Ltd. v. Asset Reconstruction Company of India Ltd & Ors, NCLAT, New Delhi July 31, 2017 and Shweitzer Systemtek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd. & Ors, NCLAT, New Delhi, August 9, 2017.
[iv] Sanjeev Shriya v. State Bank of India, Allahabad High Court, September 6, 2017.
[v] ICICI Bank Limited v. Vista Steel Private Limited, NCLT Kolkata Bench, December 15, 2017
The Companies (Amendment) Act, 2017
Amendments to the Companies Act, 2013
The Government has proposed to bring about several significant changes/ amendments to the Companies Act, 2013 (‘Companies Act’) pursuant to the Companies (Amendment) Act, 2017 (‘Amendment Act’) which was passed by the Lok Sabha on July 27, 2017 and the Rajya Sabha on December 19, 2017, and received presidential assent on January 3, 2018. The provisions of the Amendment Act are being notified in a phased manner. The Ministry of Corporate Affairs (‘MCA’) has, by way of notifications dated January 23, 2018 and February 9, 2018 (‘MCA Notifications’) notified, with effect from January 26, 2018 and February 9, 2018, various Sections under the Amendment Act. The other amendments proposed under the Amendment Act, which have not yet come into force, will become effective on such date(s) as the Central Government may notify.
This special edition of Inter Alia… sets out, in brief, the key amendments brought about by the Amendment Act and the MCA Notifications notifying certain amendments.
1. Definition of Associate Company: Section 2(6) of the Companies Act defines an ‘associate company’ to mean “a company in which the other company has ‘significant influence’, but which is not a subsidiary and includes a joint venture company of such company having significant influence”. Pursuant to the Amendment Act:
(i) the definition of the term ‘significant influence’ has been changed to mean: (i) 20% of the voting power instead of 20% of the share capital (which included preferential share capital); and (ii) control of or participation in business decision under an agreement (thereby linking participation making rights for business decisions, under an agreement, to determine the influence exercised).
(ii) a new definition of ‘joint venture’ has been added, to mean “a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement”. The intention has been to align the definition to the meaning assigned under the Indian Accounting Standards (Ind AS 28).
This amendment has not yet become effective.
2. Holding Company: The definition of a ‘holding company’ under Section 2(46) of the Companies Act was restricted only to ‘companies’ of which other ‘companies’ are subsidiary companies. The term ‘company’ is defined under Section 2(20) of the Companies Act to include only those companies incorporated under the Act or any previous company law. This resulted in a few discrepancies; for example, it could be argued that a foreign parent is not a holding company/related party under the Companies Act. In order to rectify this anomaly, the Amendment Act has clarified that a holding company now includes ‘body corporate’. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
3. Key Managerial Personnel: The Amendment Act has also widened the meaning of ‘key managerial personnel’ under Section 2(51) of the Companies Act to include officers, not more than one level below the directors, who are whole-time employees and are designated as key managerial personnel by the board. This change has been introduced as per the recommendation of the Companies Law Committee (‘CLC’) Report of February 2016, to provide greater flexibility to companies to designate other whole time officers of the company as key managerial personnel. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
4. Related Party: The term ‘related party’, as currently defined, used the word ‘company’ in Section 2(76), thereby including in its purview only that those entities that were incorporated in India. This resulted in the impression that companies incorporated outside India (such as holding/ subsidiary/ associate / fellow subsidiary of an Indian company) were excluded from the purview of related party of an Indian company. The Amendment Act has rectified this anomaly by substituting the word ‘company’ with ‘body corporate’, and has also widened the scope of a ‘related party’ to include an investing company or the venturer of a company. An ‘investing company’ or a ‘venturer of a company’ has been defined to mean “a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate”. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
5. Subsidiary: Similar to the changes proposed to the term ‘significant influence’, the definition of the term ‘subsidiary’ under Section 2(87) of the Companies Act is proposed to be revised to link control from ‘total share capital’ (which includes preferential share capital) to ‘total voting power’ (which includes only equity share capital), to ensure that the equity share capital acts as the basis for determining the holding/subsidiary relationship. This amendment has not yet become effective.
6. Effect of Number of Members Falling below Prescribed Threshold: The Amendment Act has introduced a new provision in the Companies Act, Section 3A, whereby, if the number of members in a company falls below the required number of members (seven for a public company and two for a private company), and the company continues carries on business for more than six months cognizant of the fact that the number of members is below the statutory minimum, then the members of the company will be severally liable for the payment of the whole debts of the company contracted during that period. This new section corresponds to Section 45 of the Companies Act, 1956. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
7. Reservation of Name for a Company: The period for reservation of name provided under Section 4 of the Companies Act has been revised from ‘60 days from date of application’ made by a company to the Registrar of Companies, to (a) ‘20 days from the date of approval’ for new companies, and (b) ‘60 days from date of approval’ for existing companies. Pursuant to the MCA Notifications, this amendment has come into effect from January 26, 2018.
8. Authentication of Documents: Section 21 of the Companies Act provides that a document requiring authentication by a company, or contracts made by, or on behalf of a company, may be signed by any key managerial personnel or an officer of the company, who has been duly authorized by the board of directors of the concerned company. The term ‘officer’ under Section 2(59) of the Companies Act only included top level management persons in a company. Therefore, in order to remove the practical difficulty and enable the personnel in-charge of the day-to-day operations to authenticate documents on behalf of a company, the Amendment Act has now permitted any ‘employee’ to sign, provided such employee has been directed pursuant to a board resolution. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
9. Change in Contents of Prospectus: Disclosures in the prospectus required under the Companies Act, and the Securities and Exchange Board of India Act, 1992 (‘SEBI’) and the regulations made thereunder are proposed to be aligned by omitting the information requirement under the Companies Act. Accordingly, the amended Section 26(1) states that the contents of the prospectus with respect to financial information and reports on financial information will be specified by SEBI in consultation with the Central Government. Until SEBI specifies the information and reports on financial information under this sub-section, the regulations made by SEBI under the SEBI Act in respect of such financial information or reports on financial information will apply. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
10. Private Placement of Securities: The Amendment Act has substituted Section 42 of the Companies Act relating to private placement of securities. The following are the changes:
(i) To ensure accountability and transparency, a company is prohibited from utilizing the money raised through private placement unless allotment is made and a return of allotment has been filed with the Registrar of Companies (‘RoC’). Further, the time to file the return of allotment with the RoC has been reduced from 30 days of allotment to 15 days of allotment. A new sub-section has been added imposing monetary liability on promoters and directors in case of default.
(ii) The private placement process is simplified by doing away with separate offer letter details to be kept by company and reducing number of filings to the RoC. Pursuant to the amendment, the board of directors will identify the select group of person to whom the private placement offer is to be made and the company will keep a record of such persons. Earlier, a company was required to file a complete record of the offers in the Form PAS-5 with the RoC.
(iii) Since renunciation of rights was being used as a way to bypass the provisions of private placement, a private placement offer letter and application is now not to carry any right of renunciation.
(iv) It has been clarified that a company may at any time make more than one issue of securities subject to the cap on the maximum number of identified persons.
(v) Penalty for the contravention has been changed from higher of amount raised through private placement or Rs. 2 crores (approx. US $307,700), to lower of the aforesaid amounts.
This amendment has not yet become effective.
11. Prohibition on Issue of Shares at Discount: Earlier, the Companies Act provided that shares could be issued at a discount, only in the case of sweat equity shares. In order to enable restructuring of a distressed company pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India, the newly introduced Section 53(2A) permits a company to issue shares at a discount to its creditors, as per the statutory guidelines. Further, the word ‘discounted price’ has been substituted for the word ‘discount’ under Section 53(2) to clarify that the section pertains to issue of shares lower than its nominal value. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
12. Acceptance of Deposits by Companies: The provisions relating to acceptance of deposits by companies contained in Sections 73 to 76 have been amended as follows:
(i) Deposit Repayment Reserve Account: The requirement for maintaining a deposit repayment reserve account in a scheduled bank has been revised to 20% of the amount of deposits maturing during the following financial year (earlier the requirement was 15% of the amount of deposits maturing during the relevant financial year and the succeeding financial year). This amendment has not yet become effective.
(ii) Deposit Insurance: The requirement of obtaining deposit insurance in relation to acceptance of deposits from members has been deleted. This amendment has not yet become effective.
(iii) Defaulting Companies: Companies which have made good on a default committed in the past would be allowed to accept deposits after expiry of five years from the remedy of such default. This amendment has not yet become effective.
(iv) Time Period for Repayment of Deposits: Time period for repayment of deposits accepted by companies before the commencement of the Act has been revised to earlier of, three years from the commencement of the Companies Act or on or before expiry of the period for which the deposits were accepted. This amendment has not become effective yet pursuant to the MCA Notifications.
(v) Penalties: The minimum fine for contravention of Section 73 (which contains provisions relating to acceptance of deposits from members) and Section 76 (which contains provisions relating to acceptance of deposits from persons other than its members) has been modified from Rs. 1 cores (approx. US $154,000) to the lower of Rs 1 cores (approx. US $154,000) or twice the amount of deposits accepted by the company. Further, the officers in default may be liable for fine as well as punishable with imprisonment. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
13. Beneficial Interest in Shares: Earlier, Section 89 of the Companies Act obligated every person acquiring/holding beneficial interest in a share as well as the legal owner to make a declaration to the company in respect of such beneficial interest, and Section 90 provided for investigation of beneficial ownership of shares in certain cases by the Central Government. In order to strengthen the existing machinery to identify the natural persons actually controlling a corporate entity, so as to reduce illegal practices like tax evasion and money laundering through corporate vehicles, the provisions have been amended. The Amendment Act has introduced a definition of ‘beneficial interest’ and reporting mechanism as follows:
(i) Definition of Beneficial Interest: The proposed definition of ‘beneficial interest’ is in line definition under the Prevention of Money Laundering Act and the definition under circulars and guidelines issued by SEBI from time to time. ‘Beneficial interest in a share’ “includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to: (a) exercise or cause to be exercised any or all of the rights attached to such share; or (b) receive or participate in any dividend or other distribution in respect of such share”.
(ii) Declaration of Significant Beneficial Interest: Individuals who, acting alone or together, or through other persons or trusts, hold not less than 25% or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control (as defined in Section 2(27) of the Companies Act), over the company are required to compulsorily make a declaration to the company in this regard. The company is required to maintain a register of interest declared by such individuals and file this return and any changes therein with the RoC. A company will also have the obligation to intimate persons who have a beneficial interest in the company according to the knowledge of the company and seek information under such notice. A company also has the power to apply to the National Companies Law Tribunal (‘NCLT’) within a period of 15 days upon failure by persons to whom such notice is issued fail to provide the relevant information. Stringent penalties including liability for fraud have been introduced for violating this section.
These amendments have not yet become effective.
14. Declaration of Dividend: The Amendment Act prescribes the following key amendments to Section 123 dealing with declaration and payment of dividend:
(i) Computation of Profits: Any amount representing unrealized gains, notional gains or revaluation of assets are to be excluded from the computation of profits. Any change in carrying amount of an asset or liability on measurement of the asset or liability at fair values is also to be excluded.
(ii) In case of inadequate profits, dividend can be declared out of the accumulated profits of previous years transferred to free reserves (earlier, dividend could be declared out of the reserves).
(iii) Interim Dividend: It is clarified that interim dividend can be declared from the closure of the financial year till holding of the annual general meeting and such interim dividend can also be declared out of the profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend. However, where the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of the interim dividend, the interim dividend can not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.
Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
15. Financial Statements: The key changes introduced by the Amendment Act with respect to financial statements of a company, are as follows:
(i) As per the revised Section 129 of the Companies Act, while preparing its consolidated financial statements, a company is required to include ‘associate companies’ (which now includes joint ventures as well) in addition to its subsidiaries. The consolidated statement will have to be prepared in accordance with applicable accounting standards. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
(ii) Section 130 provides for re-opening of accounts, after due approval from a court or NCLT. A proviso has been added to the section to restrict re-opening of accounts to eight years, unless a contrary direction has been issued by the Central Government. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
(iii) Under the old regime, the chief executive officer (‘CEO’) of a company was required to sign its financial statement only if he was also acting as a director. However, pursuant to the Amendment Act, a CEO is now mandatorily required to sign the statements even if he is not the director. This amendment has not yet become effective.
(iv) In an effort to make the report of board of directors’ more concise, Section 134 has been revised to provide that instead of reproducing the disclosures made in the financial statements, as a part of the board’s report, only the web address of the location where the annual return has been placed is to be mentioned in the report. Further, only salient features of the remuneration and CSR policies have to be mentioned in the report if they have been made available on the company’s website. This amendment has not yet become effective.
(v) As per the revisions prescribed to Section 136, every listed company is required to place on its website the audited accounts of each of its subsidiary. If the subsidiary, being a foreign entity, is not statutorily required to prepare consolidated financial statements under the law of the country of its incorporation, then the holding Indian company is required to place and file with the RoC the unaudited financial statements of such foreign subsidiary on its website. Further, a company has now been permitted to circulate the audited financial statements to its members at a shorter notice with the consent is obtained of members holding majority in number entitled to vote and who represent at least 95% of the paid-up voting share capital of the Company. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
16. Appointment of Auditors:
(i) The requirement of ratification of the appointment of auditor at every annual general meeting has been omitted. This amendment has not yet become effective pursuant to the MCA Notifications.
(ii) Section 141(3)(i) of the Companies Act provides that any person whose subsidiary, associate company or any other form of entity is engaged, on the date of appointment, in rendering services prohibited under Section 144, will be disqualified from being appointed as an auditor. The Amendment Act amends the language of Section 141(3)(i) to clarify that the restriction would apply only if the services were directly or indirectly rendered to the company, its holding company or its subsidiary company which proposes to appoint the auditor. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
(iii) The Companies Act under Section 147 provides that where an audit is conducted by an audit firm, and it is proved that the partner or partners of the audit firm have acted in a fraudulent manner or abetted or colluded in any fraud, the liability, whether civil or criminal for such action, will be of the partner or partners concerned of the audit firm and of the firm jointly and severally. The Amendment Act provides that the criminal liability shall only devolve on partners who acted in a fraudulent manner or abetted it. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
17. Residence Requirement in respect of Directors: Section 149(3) of the Companies Act requires a company to have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year. Based on the recommendations set out in the CLC Report, the requirement of 182 days’ stay in India now has to be computed based on the extant financial year instead of the previous calendar year, and in the case of a newly incorporated company, this requirement will apply proportionately at the end of the financial year in which such company is incorporated. This amendment has not yet become effective.
18. Appointment of Independent Directors: Following changes have been introduced with respect to provisions of an independent director under Section 149:
(i) One of the criteria for selection of an independent directors under Section 149(6)(c) is that such director should have no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoter or directors, during the two immediately preceding financial years or during the current financial year. However, this requirement was not in harmony with the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which prohibit only ‘material’ pecuniary relationships for disqualifying appointments as independent directors. Accordingly, the Amendment Act has introduced a materiality threshold, such that remuneration as director or transaction not exceeding 10% of a person’s total income or such amount as may be prescribed will not be regarded as a pecuniary relationship and will not impair independence.
(ii) Section 149(6)(d) has been amended with respect to the scope of restriction on a ‘pecuniary relationship or transaction’ entered by a relative and has been made more specific by clearly categorizing the types of transactions. For example, holding of any security of/interest in the company, indebted to the company, etc.
(iii) Currently, an individual is prohibited from being appointed as an independent director if such person or his or her relative is/was a key managerial personnel or an employee in the company, its holding, subsidiary or associate company during any of the preceding three financial years. The Amendment Act has provided that this restriction will not apply if the relative was merely an employee during the preceding three financial years.
These amendments have not yet become effective.
19. Disqualification & Vacation of Office of Directors: Pursuant to the Amendment Act, it has been clarified that when a director is appointed in company, which is in default of filing of financial statements or annual return or repayment of deposits or payment of interest or redemption of debentures or payment of interest thereon or payment of dividend, then such director shall not incur the disqualification for a period of six months from the date of his appointment. This allowance was made to avoid the paradoxical situation under the Companies Act wherein if a company has not made the requisite filings, all its directors, including new directors, would automatically be disqualified from being directors. Further, once the director incurs disqualification under section 164(2) due to above grounds, then such director would be required to vacate office in all the companies other than the company which is in default. This amendment has not yet become effective.
20. Constitution of the Audit Committee and Nomination and Remuneration Committee: In order to do away with any confusion regarding the requirement of a private company whose debt securities are listed on a stock exchange to constitute any committee, the Amendment Act has clarified that listed public companies (instead of all listed companies) are required to constitute an Audit Committee and Nomination and Remuneration Committee. This amendment has not yet become effective.
21. Loans to Directors and Interested Persons: Section 185 of the Companies Act currently imposes a complete embargo on companies from granting loans, advances etc. to directors and/or provision of guarantee or security for the benefit of directors, and/or persons in which a director is interested. In order to address the difficulties being faced in genuine transactions, this Section has now undergone an overhaul pursuant to the Amendment Act. The key changes introduced are summarized below:
(i) Under the Act, the following persons were, inter-alia, deemed to be persons in whom director of a lending company was interested: (a) any firm in which a director or relative of a director of the lending company is a partner; and (b) director or relative of a director of the holding company of such lending company, thereby restricting any loans or security to be provided by the lending company to the firm and such director or relative of the director of the holding company. However, pursuant to the Amendment Act, these are not deemed to be persons in whom director of a lending company is deemed to be interested.
(ii) Relaxations have been made to the general rule contained in Section 185, by permitting grant of loans and advances and provision of security by a company to a person in whom a director is interested, subject to prior approval by way of a special resolution in a general meeting and the utilization of the loan being restricted to principal business activities of the borrowing entity. Additional penal provisions have been introduced for every officer in default.
This amendment has not yet become effective.
22. Related Party Transactions: Following are the key amendments to Section 188 of the Companies Act:
(i) Earlier, no member of the company was entitled to vote on an ordinary resolution in connection with a related party transaction, if such member was a related party. Challenges were faced by closely held companies in complying with this requirement. To address this issue, the Amendment Act states that a company, wherein 90% or more members in number are relatives of the promoter or are related parties, all shareholders will be entitled to vote on the ordinary resolution.
(ii) Section 188(3) provided that where a related party transaction entered into by the company without obtaining the necessary consent of the board and/shareholder approval, was not ratified subsequently within three months from the date on which such transaction was entered into, then such transaction would be voidable at the option of the board and that the concerned directors would indemnify the company against any loss incurred by it. The Amendment Act states that, in addition to the above, such a transaction would also be voidable at the option of the shareholders.
Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
23. Managerial Remuneration: Currently, pursuant to Section 197, the total managerial remuneration payable by a public company should not exceed 11% of the net profits of the company for that financial year. The limits could be exceeded with the approval of the shareholders and the Central Government, subject to Schedule V of the Companies Act. The Amendment Act clarifies the following with respect to payment of managerial remuneration:
(i) The requirement of obtaining Central Government approval for exceeding the current threshold limits under Schedule V for payment of managerial remuneration has been done away with.
(ii) If the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, is also required to be obtained before obtaining the approval of shareholders in the general meeting.
(iii) The statutory auditor of the company is now required to make a statement as to whether the remuneration is being paid by the company to its directors is in accordance with the provisions of Section 197, and whether remuneration paid to any director is in excess of the limit laid down under this section and give such other details as may be prescribed.
This amendment has not yet become effective.
24. Amendments in respect of Foreign Companies: Currently, a foreign company in which not less than 50% of the paid-up share capital (whether equity or preference or partly equity and partly preference) is held by one or more citizens of India or one or more companies/bodies corporate incorporated in India, whether singly or in the aggregate, such a company is required to comply with the provisions of the Companies Act, as if it were a company incorporated in India. The Amendment Act clarifies that Sections 380 to 386 (provisions relating to documents to be submitted by foreign company, accounts of foreign company, etc.) and Section 392 (punishment for contravention) and Section 393 (company’s failure to comply with provisions of chapter applicable to foreign company not to affect validity of contracts, etc.) would be applicable to all foreign companies. However, pursuant to the revised Section 379, the Central Government may exempt any class of foreign companies from compliance with any of the provisions of Sections 380 to 386 and Sections 392 and 393 of the Companies Act. Pursuant to the MCA Notifications, this amendment has come into effect from February 9, 2018.
25. Delayed filing fee: Section 403 of the Companies Act allows a company to file documents belatedly up to 270 from the due date for filing, subject to payment of additional fee. This framework has been specifically mentioned for filings under Section 89 (filing of declaration of beneficial interest), Section 92 (filing of Annual Return), Section 117 (filing of resolutions and agreements), Section 121 (annual general meeting report for listed companies), Section 137 (filing of financial statements) and Section 157 (company to inform DIN of directors to ROC). It was observed that the provision was leading to low level of statutory filings within the initial specified period. Therefore, the Amendment Act has removed this condonation period of 270 days.
However, the Amendment Act further provides where any filing is required to be made under Section 92 (filing of Annual Return) or 137 (filing of financial statement), such filing can be made after expiry of the specified period, on payment of such additional fee as may be prescribed, and such fee shall not be less than Rs. 100 (approx. US $1.5) per day and different amounts may be prescribed for different classes of companies. In case of filings other than under sections 92 or 137, the filings can be made after the prescribed time subject to payment of additional fee as may be prescribed and different fees may be prescribed for different classes of companies. The delayed filing fee has been also linked to the number of defaults. Further the Amendment Act provides that the officers of the company, who are in default, will be liable to punishment, without prejudice to the liability for the payment of fee and additional fee.
This amendment has not yet become effective pursuant to the MCA Notifications.
 Please see Paragraph 1 above of this Special Edition to note the changes proposed to the term ‘significant influence’.
Mandatory Disclosure of ICC Constitution Status in the Board Report of Eligible Companies
The Ministry of Corporate Affairs has notified an amendment to the Companies (Accounts) Rules, 2014 (‘Accounts Rules’), requiring all eligible companies to incorporate a statement disclosing their compliance with the provisions relating to constitution of an internal complaints committee under the Prevention of Sexual Harassment at the Workplace (Prevention, Prohibition and Redressal) Act, 2013 (‘POSH Act’) in the Board of Directors Report, to be prepared under the provisions of Section 134 of the Companies Act, 2013 (‘Companies Act’). Key highlights of this amendment are set out below:
1. Section 134 of the Companies Act requires all companies to seek approval of its financial statements from the Board of Directors, and file the same with the Registrar of Companies, in accordance with provisions of the Companies Act. The financial statements are to be accompanied with any notes annexed to or forming part of such financial statements, the auditors’ report and the Board of Director’s report.
2. Section 134 (3) describes the extent of information to be disclosed under the Board of Director’s report, such as extracts of annual return, directors’ responsibility statement, etc. Additional information that has to be disclosed has been prescribed under Rule 8 of the Accounts Rules.
3. Failure to include disclosures mandated under Section 134 of the Companies Act and the rules framed thereunder in the Board of Director’s report is punishable with fine of not less than INR 50,000 (approx. USD 715) which may extend to INR 25,00,000 (approx. USD 35,850). Additionally, every officer of the company who is in default is punishable with imprisonment for a term which may extend to 3 years or with fine of not be less than INR 50,000 (approx. USD 715), which may extend to INR 5,00,000 (approx. USD 7,150), or with both.
Key aspects of the Amendment
4. The amendment to the Accounts Rules requires every eligible company to mandatorily include a statement in its Board of Directors’ report that it has complied with the provisions relating to the constitution of the Internal Complaints Committee, now re-named as the Internal Committee (‘ICC’), under the POSH Act.
5. The amendment is effective as of July 31, 2018. The amendment is not applicable to a One Person Company or a Small Company.
Existing Compliance Framework
6. It may be noted that the POSH Act requires all companies who have more than 10 employees to constitute an ICC in the prescribed manner, and to receive and redress complaints received from women in a time-bound and confidential manner. Further, Section 22 of the POSH Act already requires such companies to make an annual filing which discloses details such as number of cases filed, pending or disposed by the ICC in the company’s annual report.
7. This amendment is merely adding an additional action item for the Board of Directors for making a specific statement that the company has constituted an ICC in compliance with the POSH Act. This will possibly help in formalizing the institution of ICCs across companies since many companies still set-up an ICC only when a complaint arises, which practice is not compliant with the POSH Act.
Mandatory Disclosure of POSH Compliance in the Board Report of Companies
Here is a quick update on the obligation under the Indian Companies Act, 2013 (‘Companies Act’) for companies to disclose and confirm their compliance with the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (‘POSH Act’). The Ministry of Corporate Affairs has notified an amendment to the Companies (Accounts) Rules, 2014 (‘Accounts Rules’), requiring companies to incorporate a statement disclosing their compliance with the provisions relating to constitution of an internal complaints committee under the POSH Act in the Board of Directors Report, to be prepared under the provisions of Section 134 of the Companies Act. Key highlights of this amendment are set out below:
1. Section 134 of the Companies Act requires all companies to seek approval of its financial statements from the Board of Directors, and file the same with the Registrar of Companies, in accordance with provisions of the Companies Act. The financial statements are to be accompanied with any notes annexed to or forming part of such financial statements, the auditors’ report and the Board of Director’s report.
2. Section 134 (3) describes the extent of information to be disclosed under the Board of Director’s report, such as extracts of annual return, directors’ responsibility statement, etc. Additional information that has to be disclosed has been prescribed under Rule 8 of the Accounts Rules.
3. Failure to include disclosures mandated under Section 134 of the Companies Act and the rules framed thereunder in the Board of Director’s report is punishable with fine of not less than INR 50,000 (approx. USD 715) which may extend to INR 25,00,000 (approx. USD 35,850). Additionally, every officer of the company who is in default is punishable with imprisonment for a term which may extend to 3 years or with fine of not be less than INR 50,000 (approx. USD 715), which may extend to INR 5,00,000 (approx. USD 7,150), or with both.
Key aspects of the Amendment
4. The amendment to the Accounts Rules requires every eligible company to mandatorily include a statement in its Board of Directors’ report that it has complied with the provisions relating to the constitution of the Internal Complaints Committee, now re-named as the Internal Committee (‘ICC’), under the POSH Act.
5. The amendment is effective as of July 31, 2018. The amendment is not applicable to a one person company or a small company.
Existing compliance framework
6. It may be noted that the POSH Act requires all companies who have more than 10 employees to constitute an ICC in the prescribed manner, to receive and redress complaints from women in a time-bound and confidential manner. The POSH Act already requires such companies to make an annual filing which discloses details such as number of cases filed, pending or disposed by the ICC in the company’s annual report.
7. This amendment has added an additional action item for the Board of Directors to confirm that the company has constituted an ICC in compliance with the POSH Act. This will possibly help in formalizing the institution of ICCs across companies since many companies still set-up an ICC only when a complaint arises, which practice is not compliant with the POSH Act..
NCLT Allows Amalgamation of a Limited Liability Partnership with a Private Limited Company
The Chennai Bench of the National Company Law Tribunal (‘NCLT’) has approved the merger of a limited liability partnership (‘LLP’) with a private limited company holding that the legislative intent behind enacting both the Limited Liability Partnership Act, 2008 (‘LLP Act’) and Companies Act, 2013 (‘New Companies Act’) is to facilitate ease of doing business and create a desirable business atmosphere for both LLPs and companies.
1. Real Image LLP (‘Transferor LLP’) and Qube Cinema Technologies Private Limited (‘Transferee Company’) filed a merger petition with the NCLT involving merger of the Transferor LLP with the Transferee Company.
2. The question of law considered by the NCLT was whether the New Companies Act permits an LLP to merge with a private limited company under a scheme of amalgamation filed before the NCLT. Primary arguments advanced to the NCLT for approving the merger scheme were:
(a) The erstwhile Section 394(4)(b) of the Companies Act, 1956 (‘Old Companies Act’), defined the ‘transferor company’ to include a body corporate including an LLP. The rationale for this was to ensure that while the resultant entity is a company, no such restriction is imposed on the transferor entity.
(b) The New Companies Act permits a ‘foreign company’ to merge into an Indian company, where foreign company means a body corporate outside India including a foreign LLP. Thus, it is an anomaly to permit a foreign LLP to merge into an Indian company while restricting an Indian LLP from merging into an Indian company.
3. The NCLT held that the legislative intent behind enacting both the LLP Act and the New Companies Act is to facilitate ease of doing business and create a desirable business atmosphere for LLPs and companies and for this purpose, both the enactments have provided for merger or amalgamation of two or more LLPs and companies.
4. The NCLT held that the absence of a provision in the New Companies Act corresponding to Section 394(4)(b) of the Old Companies Act is a case of casus omissus i.e. a miss in the legislation.
5. The NCLT agreed that if the intention of the parliament is to permit a foreign LLP to merge with an Indian company, then it would be wrong to presume that the New Companies Act prohibits a merger of an Indian LLP with an Indian company.
6. Thus, the NCLT held that there appears to be no express legal bar to allow/ sanction merger of an Indian LLP with an Indian company, and accordingly approved the scheme in this case.
7. Section 47 of the Income-tax Act, 1961 (‘IT Act’) read with Section 2(1B) of the IT Act does not specifically exempt an amalgamation of an Indian LLP with a company. Thus, while the above NCLT ruling permits merger of an Indian LLP into an Indian company, the same is not expressly exempt under the provisions of the IT Act.
Commencement of Certain Provisions of the Companies (Amendment) Act, 2017
In the Special Edition of Inter alia (April 2018), we had highlighted the key amendments to the Companies Act, 2013 (‘Companies Act’) proposed to be introduced pursuant to the provisions of the Companies Amendment Act, 2017 (‘Amendment Act’), as and when notified. With effect from May 7, 2018, the Ministry of Corporate Affairs (‘MCA’) has notified certain provisions of the Amendment Act (‘MCA Notification’). Set out below are the key amendments to the Companies Act that have been notified by way of the MCA Notification:
i. Section 2(6) of the Companies Act (definition of ‘associate’) has been amended to modify the meaning of the term ‘significant influence’ and clarify the meaning of the term ‘joint venture’, as used in the definition of ‘associate’;
ii. In the definition of subsidiary, the phrase ‘total share capital’ has been replaced with ‘total voting power’. Along with this amendment, the MCA has issued a notification dated May 7, 2018, deleting the definition of ‘total share capital’ under Rule (2)(1)(r) of the Companies (Specification of Definitions Details) Rules, 2014 as the term is not used under the Companies Act anymore;
iii. Amendments to Section 26 of the Companies Act relating to matters to be disclosed in the prospectus;
iv. Section 54(1) of the Companies Act has been amended by deleting the criterion of one year having elapsed from the date the company had commenced business for it to be eligible to issue sweat equity shares;
v. Section 89 of the Companies Act has been amended to introduce the definition of “beneficial interest” for the purpose of Sections 89 and 90 by inserting a new sub-section (10);
vi. Section 90 of the Companies Act has been amended to incorporate provisions relating to declaration of significant beneficial interest;
vii. Section 129(3) of the Companies Act has been amended by extending the requirement to prepare consolidated financial statements to cover both subsidiaries and associates (earlier, only subsidiaries were covered);
viii. Section 139(1) of the Companies Act has been amended by deleting the requirement for appointment of auditors to be ratified by shareholders at every general meeting;
ix. Section 149 of the Companies Act has been amended to clarify the residency requirement of directors for newly incorporated companies and to amend the eligibility criteria for independent directors;
x. Section 164 of the Companies Act has been amended to provide that a person appointed as a director of a company, who is in default of Section 164(2), would not incur the disqualification for a period of six months from the date of their appointment;
xi. Section 167 of the Companies Act has been amended in connection with the circumstances in which the office of a director is vacated;
xii. Section 173(2) of the Companies Act has been amended to provide directors with the ability to attend meetings, to consider certain matters through video conferencing and other audio visual means;
xiii. Section 177 of the Companies Act has been amended to modify the circumstances in which a company is required to constitute an audit committee and amends the terms of reference of the audit committee;
xiv. Section 178 of the Companies Act has been amended to modify the circumstances in which a company is required to constitute a nomination and remuneration committee and amends the role of such nomination and remuneration committee;
xv. Section 185 of the Companies Act has been amended to modify the provisions relating to companies granting loans, giving guarantee or providing security to directors and certain persons/entities considered to be related to such director; and
xvi. Section 186 of the Companies Act has been amended relating to loans/guarantees/security provided by or securities of another body corporate acquired by, a company.
The term ‘total share capital’ was defined to mean the aggregate of (a) the paid-up share capital, and (b) the convertible preference capital.
Amendments to Companies (Meetings of Board and its Powers) Rules, 2014
The MCA has, by way of notification dated on May 7, 2018, amended the Companies (Meetings of Board and its Powers) Rules, 2014 (‘Board Meeting Rules’). The key amendments are:
i. Rule 4 of the Board Meeting Rules provides a list of matters which had to be dealt with only in a physical meeting of the board of directors of a company. Pursuant to the amendment, in respect of these matters, directors are now been permitted to participate in such a meeting through video conferencing or other audio visual means, provided that the quorum to constitute such a board meeting is present through physical presence of directors. This has also been clarified by way of an amendment to Section 173(2) of the Companies Act, effective from May 7, 2018.
ii. Rule 6 of the Board Meeting Rules required every ‘listed company’ to set up an audit committee and a nomination and remuneration committee. Pursuant to the amendment, this requirement has been restricted only to only ‘listed public companies’.
Amendments to the SEBI Listing Regulations
The key amendments introduced by the Securities and Exchange Board of India (‘SEBI’) on May 9, 2018 to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations) are as follows:
i. Any person or entity belonging to the promoter or promoter group holding 20% or more of the shareholding in the listed entity is now deemed to be a ‘related party’.
ii. Payments made by the listed entities to related parties with respect to brand usage/royalty amounting to more than 2% of consolidated turnover of the listed entity as per the last audited financial statements, will be considered to be a material related party transaction.
iii. The definition of ‘independent director’ has been amended to exclude: (i) any director who is or was a member of the promoter group of the listed entity; and (i) any director who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director.
iv. At least one independent woman director is required to be appointed on the Board of the top 500 listed entities by April 1, 2019, and of the top 1000 listed entities by April 1, 2020.
v. The threshold for determining whether a subsidiary is a ‘material subsidiary’ has been reduced from 20% to 10% of the consolidated income or net worth of the listed entity and its subsidiaries in the previous accounting year.
vi. Additional requirements have been imposed in relation to age limits for non-executive directors, eligibility criteria for the chairman of the board, quorum for board and committee meetings, remuneration of directors and other related matters.
vii. No person can be a director on the Board of more than eight listed companies (with effect from April 1, 2019) and seven listed companies (with effect from April 1, 2020).
viii. Listed companies are now required to include clear threshold limits, duly approved by the Board of Directors, in their materiality policy for related party transactions and such policy must be reviewed once every three years.
Amendment in relation to Cap for Spectrum Holding
The Department of Telecommunications (‘DoT’) has, by way of a circular dated May 30, 2018 amended the guidelines for transfer/merger of various categories of telecommunications service licenses/authorization under unified license on compromises, arrangement and amalgamation of companies dated February 20, 2014.
Pursuant to this amendment, DoT has removed the cap of 50% in a particular spectrum band for access services and increased the cap on the total spectrum holding by an entity to 35% of the total spectrum assigned for access services, from the previous cap of 25%. The revised overall cap also applies to entities resulting from implementation of a scheme of compromise, arrangement or amalgamation and merger of licenses in a service area.
However, the spectrum holding cap for 700 MHz, 800 MHz and 900 MHz bands (‘Sub 1 GHz Bands’) is different. DoT has prescribed that the combined spectrum holding of an entity must not exceed 50% of the total spectrum assigned in the Sub 1 GHz Bands. However, no such limit has been prescribed for individual or combined spectrum holding of an entity above the 1GHZ band.
DoT has also notified an option for telecom licensees to choose higher number of installments for deferred payment liabilities in respect of the award of spectrum in 2012, 2013, 2014, 2015 and 2016. There is no change or modification in the moratorium period for payment of deferred payment liabilities and the instalments already paid.
Extension of Timeline for Filing Forms Relating to Significant Beneficial Ownership
The Ministry of Corporate Affairs (‘MCA’) had, by way of its notification dated June 13, 2018, introduced the Companies (Significant Beneficial Owners) Rules, 2018 (‘Rules’) with the intention of identification of significant beneficial owners (‘SBO’) of companies. The Rules mandated, inter alia, certain compliance requirements including filing of Form No. BEN-1 (to be filed by the SBO with the company) and Form No. BEN-2 (to be filed by the company with the relevant Registrar of Companies), each in respect of Section 90 of the Companies Act, 2013.
By way of a Circular dated September 6, 2018, the MCA had extended the timeline for the filing of Form No. BEN-2 (the timeline was extended to 30 days from the date of deployment of Form No. BEN-2 on the MCA-21 portal). The MCA has now, by way of a Circular dated September 10, 2018, stated that in light of representations received from various stakeholders, it will be revising Form No. BEN-1 as well as the due date for filing the form (which was initially September 10, 2018). The revised form as well as the revised due date for filing the same will be notified shortly.
Commencement of Certain Provisions of the Companies (Amendment) Act, 2017
The Ministry of Corporate Affairs (‘MCA’) has, from time to time, notified certain provisions of the Companies (Amendment) Act, 2017 for amending the provisions of the Companies Act, 2013 (‘Companies Act’). Pursuant to recent MCA notifications dated July 5, 2018, July 31, 2018, August 7, 2018 and September 12, 2018, amendments to Section 42 (relating to private placement of securities), Sections 73 and 74 (relating to acceptance of deposits by companies) and Section 197 (dealing with managerial remuneration) of the Companies Act have been notified. Please refer to our Client Update dated April 9, 2018 available at https://www.azbpartners.com/bank/the-companies-amendment-act-2017/), for a detailed summary of the Amendment Act, as well as June 2018 edition of Inter Alia… for a summary of the commencement notifications issued on May 7, 2018 (available at https://www.azbpartners.com/bank/commencement-of-certain-provisions-of-the-companies-amendment-act-2017/).
Pursuant to the MCA notification dated September 19, 2018, Section 135 of the Companies Act has been amended to clarify that for determining whether the threshold for constituting a corporate society responsibility (‘CSR’) committee has been met, the net worth / turnover / net profit of ‘the immediately preceding financial year’ is to be considered. Further, the requirement of appointing at least one independent director on the CSR Committee has been relaxed to provide that a company which is not required to appoint an independent director under Section 149(4) of the Companies Act does not need to appoint an independent director on its CSR Committee, and instead, must have two or more directors on its CSR Committee.
Constitution of the National Financial Reporting Authority
Pursuant to the MCA notification dated October 1, 2018, Sections 132(1) and 132(12) of the Companies Act have been notified and the National Financial Reporting Authority (‘NFRA’) has been constituted as on October 1, 2018, with its head office in New Delhi. The NFRA has been established to deal with matters relating to accounting and auditing standards under the Companies Act. It may be noted that the other sub-sections of Section 132, which provide for administration, functions and powers of NFRA, are yet to be notified.
Issue of Securities in Demat Form by Unlisted Public Companies
The MCA has, by way of a notification dated September 10, 2018, incorporated Rule 9A to the Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘Prospectus Rules’), which sets out conditions required to be adhered to by unlisted public companies with respect to securities issued by them. Some of the key conditions are set out below.
i. Securities are required to be issued only in dematerialized form and the company should facilitate dematerialization of all its existing securities;
ii. Securities held by promoters, directors and key managerial personnel of unlisted public companies have to be dematerialized prior to making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer;
iii. Any securities proposed to be transferred on or after October 2, 2018, will be required to be converted into dematerialized form prior to the transfer; and with respect to any subscription on or after October 2, 2018, the securities will be allotted to the subscriber in dematerialized form; and
iv. A company will not be permitted to offer any new securities, buyback existing securities, or issue bonus or right shares, till such time that it is in non compliance with the regulations, directions etc. in relation to dematerialization of shares.
Share Buy-back at Lower than Book Value, not Subject to Deemed Income-tax Implications
The Mumbai bench of the Income-tax Appellate Tribunal (‘ITAT’), in a recent ruling, has ruled on the applicability of Section 56(2)(viia) of the Income-tax Act, 1961 (‘ITA’) on buy-back of shares by an Indian company. Section 56(2)(viia), inter alia, provides that in case of receipt of shares for a consideration below fair market value, the excess of fair market value over the consideration is subject to tax in the hands of the recipient (subject to certain exceptions). The fair market value for this purpose means the book net asset value of the shares being received. The ITAT has held that Section 56(2)(viia) will be applicable only where the shares become ‘property’ of the recipient which is only possible where the recipient receives shares of another company (and not possible where the recipient company receives its own shares). In case of a share buy-back, the company purchases its own shares which are extinguished by reducing the capital and, hence, the test of becoming property fails in this case. Accordingly, the ITAT has held that Section 56(2)(viia) does not apply in case of a share buy-back.
 M/s Vora Financial Services Private Limited V ACIT: ITA No. 532/Mum/2018.
 Section 56(2)(viia) has been superseded by Section 56(2)(x) of the ITA with effect from April 1, 2017.
Defining and Identifying ‘Group’ Entities – The Slippery Slope of ‘Control’
Competition regulators rely primarily on information furnished by parties notifying transactions, while assessing the potential impact on competitive conditions. To ensure that notifying parties provide all the information necessary for regulators’ assessment, merger control regulations usually contain a laundry list of information that must accompany merger notifications. Merger control regulations also empower regulators to seek additional information from notifying parties as well as third parties during their review process. As an extraordinary measure, merger control regulations empower regulators to take punitive actions against notifying parties for providing incorrect information or withholding information that the regulator considers material for their review.
Exercising its power to penalize companies for material non-disclosure for the very first time, CCI recently penalized UltraTech Cement Limited (‘UltraTech’) for not disclosing the details of shareholdings of Kumar Mangalam Birla (and his family members) (‘KMB’ / ‘KMB Family’) and the companies owned/ controlled by them in companies competing with Jaiprakash Associates Limited whose cement manufacturing plants were being acquired by UltraTech (‘Decision’). While this Decision marks the beginning of CCI’s use of its powers under Section 44 of the Competition Act, 2002 (‘Act’), it equally increases the scope of disclosures for notifying parties and adds to the uncertainty surrounding the already somewhat muddled discourse on ‘control’.
The prescribed longer form II requires notifying party(ies) to provide information on horizontal and vertical overlaps not just between the immediate parties to the transaction (i.e. the acquirer and the target enterprises, including their subsidiaries) but also between the group to which the acquirer belongs (i.e. the acquirer group) and the target enterprise (including its subsidiaries).
While determining the extent of UltraTech’s obligation to disclose its own and KMB’s shareholding in companies engaged in cement business that competed with the acquired target business, namely, Century Textiles and Industries (Century) and Kesoram Industries (Kesoram), CCI expanded the meaning of the term ‘control’ to include ‘material influence’ in addition to ‘de-facto’ and ‘de-jure’ control. In doing so, the Decision has altered one of the three tests for determining whether two or more enterprises belong to the same ‘group’.
Statutory Tests for ‘Group’
The Act defines a ‘group’ as: two or more enterprises that are directly or indirectly in a position to (‘Group Tests’):
i. exercise 50% or more of the voting rights in the other enterprise (‘Voting Rights Test’); OR
ii. appoint more than 50% of the members of the board of directors in the other enterprise (‘Board Test’); OR
iii. control the management or affairs of the other enterprise (‘Control Test’).
While the Voting Rights Test and the Board Test are premised on objective parameters, the Control Test is nebulous. ‘Control’ is defined under the Act to ‘include’ controlling the affairs or management by one or more enterprises or groups, over another enterprise or group. This broad definition has led CCI to clarify the meaning of the term ‘control’ through its decisions.
Implications of the Decision
When examining whether Kesoram and Century satisfied the Control Test, the Decision does not identify any rights that KMB had in Kesoram and Century. Instead, CCI clarifies that while the ability to manage the affairs of the other enterprise (the definition of control under the Act) may be inferred from special or veto rights, other sources of control including, “status and expertise of an enterprise or person, board representation, structural/financial arrangements” may equally also exist. On this basis, CCI concludes in the Decision that all degrees and forms of control constitute control (within the meaning of the Act) and that ‘material influence’ is the lowest form of control followed by de facto control and controlling interest (de jure control).
In doing so, the Decision appears to expand an already diluted interpretation of the term ‘control’, to now include all forms of ‘material influence’. Not only does this interpretation deviate from a well-established, globally acceptable, definition of ‘control’ i.e. ‘the ability to exercise decisive influence over the management or affairs’ of another enterprise, but owing to the definitional link between ‘group’ and ‘control’, expands the scope of the term ‘group’.
The interlacing of the statutory definition of the term ‘group’ with the definition of the term ‘control’ and the subsequent dilution of the meaning of ‘control’ to include ‘material influence’ has far reaching implications (a) the computation of jurisdictional thresholds and the application of various exemptions available to intra-group transactions; and (b) ascertaining the extent of horizontal and vertical overlaps in merger filings.
Computation of jurisdictional thresholds
One of the eight jurisdictional thresholds/tests to determine whether a transaction is notifiable to CCI, involves computing the value of assets and turnover generated by the group to which the target/ merged entity will belong post the transaction (‘Group Thresholds’). Further to the Decision, notifying parties can arguably be required to carry out an onerous time-consuming self-assessment to identify each such enterprise in which it may directly or indirectly exercise ‘material influence’ to conclusively determine if the Group Thresholds are breached.
Consider the example of Enterprise A, that proposes to acquire 51% of the total share capital of Enterprise B. Enterprise A, also owns 25% of the total share capital of Enterprise C and has the right to appoint 1 director to the board of Enterprise C. Enterprises B and C operate in the same relevant market. Enterprise A satisfies neither the Voting Rights Test nor the Board Test in relation to enterprise C. Yet, the newly coined test of “material influence” can lead to the inference that as a result of its shareholding and presence on the board of enterprise C, Enterprise A controls Enterprise C. Such an inference, premised on the Decision is likely to lead to an incorrect agglomeration of minority investments made by an enterprise to comprise a larger group. This would increase the possibility of Group Thresholds being breached, resulting in the notification of transactions over which CCI lacks jurisdiction.
Yet, the expanded Control Test may not enable notifying parties to benefit from the “intra-group” exemption (provided under Item 8 of Schedule I of the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (‘Combination Regulations’)) (‘Intra-Group Exemption’). Consider the same example as above where Enterprise A decides to acquire additional shares in Enterprise C. Further to the Decision, while Enterprise A may arguably claim that Enterprise C satisfies the Control Test (and Enterprises A and C are part of the same group), the expanded scope of the Control Test may well allow Enterprise C to now belong to more than one ‘group’. Where a target (Enterprise C) is under the ‘joint control’ of a group other than that of the acquirer, the Intra-Group Exemption would not be available.
The longer form II requires notifying party(ies) to provide information on horizontal and vertical overlaps not just between the immediate parties to the transaction (i.e. the acquirer and the target enterprises, including their subsidiaries) but also between the group to which the acquirer belongs (acquirer group) and the target enterprise (including its subsidiaries). Although the shorter form I does not require parties to map overlaps vis-à-vis the acquirer group, CCI nonetheless expects notifying parties to do so.
The expanded meaning of the term ‘control’ and the consequent possibility of a wider set of enterprises being agglomerated to comprise a ‘group’ adds another layer of complexity to the exercise of mapping overlaps. An informed mapping of overlaps requires the acquirer and the target to share the entire list of products/ services offered by them with their advisors. Companies which have been agglomerated as part of the acquirer or target group, only because of the material influence test may not share details of the products or services offered by them to help map overlaps exhaustively, thereby exposing the notifying party(ies) to potential risk of penalty for material non-disclosure.
The first two Group Tests, i.e., the Voting Rights Test and the Board Test clearly set out the legislative intention for identifying a ‘group’. The MCA in 2011 specifically increased the percentage thresholds in the Voting Rights Test to 50% (from 26%) so that only those entities that directly or indirectly held 50% or more shareholding or votes in another enterprise would constitute a group. The well-established statutory interpretation principle of ejusdem generis requires that the Control Test be interpreted in accordance with the Voting Rights Test and the Board Test. No wider construction may be afforded. However, the expansive interpretation of the Control Test in the Decision effectively dilutes, if not entirely negates, the statutory Voting Rights and Board Tests.
In sum, the Decision raises more questions than it answers. By expanding the meaning of the term ‘control’ to include control by way of ‘material influence’ – a term open to multiple interpretations, CCI has unwittingly also changed the meaning of the term ‘group’. Notifying parties must tread with caution and till the time CCI issues a clarification, it would perhaps help to err on the side of caution. Notifying parties may also consider approaching CCI for pre-filing consultations, which may help address some of the ambiguities discussed above.
 The term “enterprise” is defined under the Act to include its “subsidiaries”.
 In 2011, by way of a notification, the MCA increased the percentage thresholds in the Voting Rights Test from 26% to 50% such that any ‘group’ exercising less than 50% of the voting rights in another enterprise is exempt from the provisions of Section 5 of the Act for a period of 5 years. The operation of the notification was further extended for 5 years (until 2021) in 2016.
 See Explanation (b) to Section 5 of the Act.
 Independent Media Trust, C-2012/03/47.
 The European Commission (‘EC’)considers ‘decisive influence’ i.e., the ‘power to block actions which determine the strategic commercial behavior of an undertaking’. In essence, EC may assess minority acquisitions only when such acquisitions result in the investor being conferred AVRs that allow it to veto decisions that are ‘essential for the strategic commercial behavior’ of an enterprise. The EC appears to distinguish between investor protection AVRs from those that relate to strategic decisions of business policy of the proposed target.
 In the Decision, CCI defined ‘material influence’ as “the lowest level of control, implies presence of factors which give an enterprise ability to influence affairs and management of the other enterprise including factors such as shareholding, special rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc.”.
 Item 8 exempts “an acquisition of shares or voting rights or assets, by one person or enterprise, of another person or enterprise within the same group, except in cases where the acquired enterprise is jointly controlled by enterprises that are not part of the same group.”
CCI Approves the Acquisition by Tata Steel Limited of Bhushan Power and Steel Limited
On August 6, 2018, CCI approved the acquisition of up to 100% of the total issued and paid up share capital of Bhushan Power and Steel Limited (‘BPSL’) by Tata Steel Limited. (‘TSL’).  The combination was proposed pursuant to proceedings under Insolvency and Bankruptcy Code, 2017 (‘IBC’) that BPSL had been subject to (‘Proposed Combination’). TSL and BPSL are collectively referred to as ‘Parties’.
TSL is a public limited company engaged in integral steel manufacturing operations, ranging from mining to steel-making and further downstream processing. Similarly, BPSL is also engaged in steel manufacturing operations, including downstream processing of flat carbon steel products as cold rolled sheets and coils, surface coated products, tubes and pipes and alloy based long steel products, etc. CCI observed that TSL’s annual crude steel capacity across India is nearly 18.6 million ton per annum (‘MTPA’) and that of BPSL is 2.30 MTPA.
In consideration of the fact that steel making process involves various steps and the finished products obtained pursuant to each step could also be sold in the market, CCI identified the following overlapping product segments between TSL and BPSL:
i. Hat rolled coils (‘HR-CS’) and plates (‘HR-P’) (together ‘HR-CSP’);
ii. Cold rolled coils and sheets (‘CR-CS’);
iii. Surface coated products (‘SCP’) (including galvanized products (‘GP’) and colour coated products (‘CCP’)); and
iv. Flat steel tubes and pipes (‘T&P’) (including precision and non-precision T&Ps).
(collectively ‘Identified Overlaps’)
In identifying the abovementioned product segments as distinct from each other, CCI relied on the fact that HR-CSP, CR-CS, SCP and T&P differ on the basis of technical characteristics, intended use, price levels, etc. However, CCI did not define the exact relevant market in consideration of the fact that the Proposed Combination was not likely to give rise to AAEC regardless of how the relevant market was defined.
For its assessment of the competitive effects of the combination, CCI considered market share data in terms of installed production capacity, gross production, production for sale, and domestic sales. CCI noted that the combination was not likely to cause AAEC in any of the Identified Overlaps since the post combination market shares of TSL and BPSL in each of the Identified Overlaps would be in a range of 20% – 30% with an insignificant increment of 0-5% Even in certain Identified Overlaps such as CR-CS, GP and CCP, where the increment in market share was 5-10%, CCI noted that the combined market share was in the range of 20% – 30% and that the parties would continue to compete with several large and significant competitors such as JSW, Essar and SAIL etc. CCI also took into consideration the fact that the Parties’ competitors in the Identified Overlaps had significant unutilized production capacity, and such competitors could increase their production, if required, thereby impeding any attempts of the Parties at capturing the market. In the GP segment, CCI also observed that imports constituted 15% – 20% of the total domestic sales and therefore exerted considerable competitive constraint on the Parties. CCI also observed that Parties were also present in the markets for pig iron, sponge iron and alloy billets although the Parties either had limited presence in the domestic market, or produced qualitatively distinguishable products, such as basic pig iron (BPSL) and foundry pig iron (TSL). Accordingly, as per CCI, it was unlikely that the Proposed Combination would have adversely impacted the market.
 Combination Registration No. C-2018/07/582
CCI Approves the Acquisition of 21 Century Fox by The Walt Disney Company
On August 10, 2018, CCI approved the acquisition of Twenty-First Century Fox (‘21CF’) by The Walt Disney Company (‘TWDC’) (TWDC and 21CF are collectively referred to as ‘Parties’). Notably, 21CF’s news, sports, broadcast businesses, including inter alia Fox News Channel, Fox Business Network, and certain other assets (‘Separated Assets’) were to remain with 21CF pursuant to the Proposed Combination.
For the purposes of its assessment, CCI identified the following overlapping product segments between TWDC and 21CF (‘Identified Overlaps’) in India and analysed the competitive scenario in each overlapping segment as follows and concluded that the Proposed Combination would not lead to AAEC in any of the Identified Overlaps.
i. Production and supply of films to third-party distributors and exhibitors for theatrical release in India: CCI observed that this segment could be further sub-segmented on linguistic basis, however, it did not go to the extent of defining the exact relevant market. CCI observed that the combined market share of the Parties (in terms of gross box office receipt) had reduced from 60% – 65% in 2016 to 30% – 35% in 2017 for English films, and to 15% – 20% in 2017 from 35% – 40% in 2016 for Bollywood films. In this regard CCI observed the hit-driven nature of this segment. It also considered Parties’ market share in terms of top 5 grossing films across 15 years, which was 20% – 25%, and at par with Warner Bros, a significant player in this market. CCI also noted that Parties had insignificant market share at 0-5% for 2017 in the sub-segment of regional films. Further, the Parties also faced significant competitive constraints from existing large competitors.
ii. Business of licensing of audio-visual content in India: CCI observed that Parties’ activities overlapped in the sub-segments of film-content rights, sports-content rights and non-film and non-sports rights, although, it did not define the exact relevant market. CCI observed that the Parties did not have significant business activities in these sub-segments, and TWDC at the moment was not active in the sub-segment of sports-content rights.
iii. Business of operation and wholesale supply of TV channels: CCI observed that Parties’ activities overlapped in the sub-segments of films, kids, infotainment & Lifestyle, sports, Hindi general entertainment channels (‘GEC’), English GEC and Regional GEC, and music. CCI noted that in the sub-segments of films, infotainment & lifestyle, kids, Hindi GEC, and Regional GEC, the combined market share of the Parties was in the range of 25% – 35% and, further, in the sub-segments of music, English GEC, the market share was even lower and in the range of 0-5% and 15% – 20%, respectively. It was further observed by the CCI, that in all these markets, the Parties would continue to face substantial competitive constraints from significant players.
iv. Retail supply of Audio Visual Content in India: While assessing this segment, CCI observed that the Parties’ competed in the segment of supply of audio-visual content in India through over-the-top applications (‘OTT’) with a combined market share of 30% – 35%, but that TWDC only had a negligible presence. Further, CCI noted that the concerned segment was marked by the presence of numerous players such as Amazon Prime, Netflix etc. and therefore the Parties would remain competitively constrained.
v. Supply of advertising airtime on TV channels in India: CCI observed that advertisements were not genre specific and that targets of advertisements (viewers) were largely genre agnostic. CCI observed that 21CF had a market share of 20% – 25% but TWDC had a much smaller share and, therefore, the Proposed Combination would have resulted in only an insignificant increment in market shares.
vi. Supply of consumer products: CCI observed that the Parties were active in ‘character merchandising’ only by licensing of intellectual property (‘IP’), and that the combined market share of the Parties was insignificant in the segment.
vii. Licensing of Music rights in India: CCI observed that both TWDC and 21CF had only insignificant market share in this segment.
viii. Licensing of Publication Rights in India: CCI observed that both TWDC and 21CF license their intellectual property to third-party publishers who published non-academic books and magazines. It was observed that the Parties had insignificant market share in this segment.
Interactive Media in India: CCI observed that interactive media is a means of actively engaging with the customers by providing an interactive form of entertainment, which includes games, digital media etc. and the Parties were active in this segment through licensing of IP. However, the market share of the Parties was insignificant in this segment.
 Combination Regulations C-2018/07/582
CCI Approves Acquisition of Intelnet BPO Holdings Private Limited by Dutch Contact Centres B.V
On August 08, 2018, CCI approved the proposed acquisition of 100% of equity shares of Intelenet BPO Holdings Private Limited and Intelenet Global Services Private Limited (collectively, ‘Targets’) by Dutch Contact Centres B.V (‘DCC’/’Acquirer’). The proposed acquisition contemplates acquisition of shares in the Targets, both directly and indirectly, i.e. through the Acquirer’s wholly owned subsidiary, Teleperformance Services India Private Limited. The Acquirer will also acquire group debentures and group loans of the Targets.
The Acquirer is engaged in the business of providing information technology and information technology enabled services, particularly, business process outsourcing (‘BPO’) services. The Targets are also engaged in the same business.
CCI identified overlaps in the market for provision of (a) information technology and information technology enabled services; and (b) BPO services. However, as the market shares of the parties were insignificant in both markets, the relevant market was left open. CCI concluded that the proposed combination will not result in an AAEC and thus, approved the transaction.
CCI Approves Acquisition of Alight HR Services India Private Limited by Wipro Limited
On August 3, 2018, CCI approved the proposed acquisition by Wipro Limited (‘Wipro’/ ‘Acquirer’) of Alight HR Services India Private Limited (‘Alight’/ ‘Target’).
Wipro operates in the Information Technology – Business Process Management (‘IT- BPM’) industry and provides: (a) Information Technology (‘IT’) products; (b) IT services; (c) Business Project Management (‘BPM’); and (d) E-commerce. Further, Wipro’s IT services include IT and IT enabled services such as digital strategy advisory, customer centric design, technology consulting. Alight, on the other hand, provides only BPM services to its overseas group entities and cloud deployment services.
CCI observed that as the market dynamics were unlikely to change further to the proposed combination, it is unlikely to result in an AAEC. The proposed combination was accordingly approved.
CCI Approves Walmart’s Acquisition of the Outstanding Shares of Flipkart
On August 08, 2018, CCI approved the proposed acquisition of 51% to 77% of outstanding shares of Flipkart Private Limited (‘Flipkart’) by Wal-Mart International Holdings, Inc. (‘Walmart’). Walmart, which is part of the Walmart group, is present in India through its indirect wholly-owned subsidiary Walmart India Private Limited (‘Walmart India’). Flipkart, on the other hand, is principally an investment holding company incorporated in Singapore with presence in India. Walmart and Flipkart are together referred to as ‘Parties.’
Walmart India is engaged in wholesale cash and carry of goods (‘B2B Sales’) operating: (i) 20 B2B Sales stores spread across nine states in India; and (ii) a B2B e-commerce platform. Both operate on a ‘members-only’ model. While Flipkart is also present in B2B Sales, unlike Walmart India, it (i) operates a marketplace based e-commerce platforms (B2C Sales); and (ii) other ancillary services such as payment gateway, unified payment interface, advertising services, information technology product related issues, etc..
CCI noted that the presence of both Walmart India and Flipkart in overall B2B Sales or in any narrower segment was insufficient to raise competition concerns. The combined market share of the Parties was less than 5%, with Walmart India’s market share being less than 0.5%. CCI also considered a narrower B2B Sales market on the basis of vertical segmentation. While Flipkart was relatively strong in the mobile and electronic market, Walmart’s operations in this segment were insignificant. Operations of Walmart focused on groceries whereas Flipkart was not present in this market. While both were present in the market for lifestyle products, the combined value of both Parties’ was low and relatively insignificant in comparison to the size of the markets. CCI did not distinguish between organized and unorganized B2B Sales as the market was found to be competitive on account of larger players such as Reliance Retail, Metro Cash and Carry, Amazon wholesale etc..
In terms of the vertical overlap, CCI noted that both Walmart India and Flipkart were restricted under the foreign direct investment (‘FDI’) policy from participating in B2C Sales. In any event, it was noted that, while Flipkart offered online marketplace platform to facilitate B2C Sales, Walmart was not engaged in any such services. Accordingly, no vertical overlap existed.
CCI’s order records that it had received representations against this transaction from traders and retailers relating to: (i) allegations of predatory pricing; (ii) concerns over compliance of FDI norms; (iii) concerns over preferential treatment to specified sellers in Flipkart’s online marketplaces and (iv) concerns over impact of the transaction on employment, entrepreneurship, and retailing among other things. CCI noted that the majority of concerns raised had no nexus with competition law and were beyond CCI’s jurisdiction. Against allegations of deep discounting and preferential treatment to select sellers that were within CCI’s domain, CCI observed that Flipkart’s discounting practice and preferential treatment to some of its retailers was not specific to, and did not result from the proposed combination under review. Clarifying the scope of regulation under Sections 5 and 6 of the Act, CCI opined these practices were unrelated to the proposed combination although CCI may examine these concerns under Sections 3(4) and 4 of the Act.
The retailers and traders have now appealed CCI’s decision before NCLAT. NCLAT has directed Walmart and Flipkart to provide details of their business models in the relevant markets in India.
 Combination Registration No. C-2018/05/571
National Financial Reporting Authority
Pursuant to the notifications dated October 1, 2018 and October 24, 2018, the National Financial Reporting Authority (‘NFRA’) has been constituted and the Ministry of Corporate Affairs (‘MCA’) has notified the provisions under the Companies Act, 2013 (‘Companies Act’) dealing with the powers and duties of the NFRA, appeals against orders of the NFRA as well as certain procedural and compliance requirements for the NFRA. NFRA’s duties include making recommendations to the Central Government on accounting and auditing policies and standards for adoption by companies and their auditors, monitoring and ensuring compliance with the aforementioned accounting and auditing standards, and overseeing the quality of services of professions associated with these. NFRA has been granted the authority, inter alia, to investigate matters of professional or other misconduct committed by any member or firm of chartered accountants, and to pass orders (covering both imposition of fine and debarment) in such matters. An appeal against an order of the NFRA can be preferred before the Appellate Tribunal. However, the rules in relation to this are yet to be prescribed.
Subsequently, on November 13, 2018, the MCA also notified the National Financial Reporting Authority Rules, 2018 (‘NFRA Rules’) which specify that, inter-alia, the following classes of companies and auditors are subject to the governance and supervision by the NFRA in relation to accounting and auditing standards and compliances:
(i) Indian companies listed in India or overseas;
(ii) unlisted public companies with paid up capital of INR 500 crores (approx. US$ 72 million) or more, or annual turnover of INR 1000 crores (approx. US$ 140 million) or more, or having outstanding loans, debentures and deposits (in aggregate) of INR 500 crores (approx. US$ 72 million) or more, in each case as of March 31 in the previous financial year;
(iii) insurance companies, banking companies, electricity generating and supply companies and companies governed by a special legislation;
(iv) any body corporate or person who is referred to the NFRA by the Central Government in public interest; and
(v) any foreign body corporate which is a subsidiary or an associate company of an Indian company or other body corporate referred to in (i) to (iv) above, provided that the income or net worth of such foreign subsidiary or associate company exceeds 20% of the consolidated income or consolidated net worth of such Indian company or other body corporate.
All existing body corporates covered under the NFRA Rules (other than companies governed by the NFRA Rules) are required to file Form NFRA-1, setting out the particulars of their respective auditors, within 30 days from the date of deployment of Form NFRA-1.
SEBI Circular on Disclosure of Significant Beneficial Ownership
Pursuant to the Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’), the Securities and Exchange Board of India (‘SEBI’) issued a circular dated December 7, 2018 (‘SBO Circular’) modifying disclosure requirements under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) relating to the quarterly disclosures of shareholding patterns by listed entities. The SBO Circular requires disclosure of details pertaining to significant beneficial owners in a prescribed format, including details of the significant beneficial owner, registered owner, shares in which significant beneficial interest is held and the date of creation / acquisition of significant beneficial interest. The SBO Circular is to come into force with effect from the quarter ending on March 31, 2019.
However, the MCA issued a clarification on September 10, 2018 stating that it would be issuing an amended format for making disclosures under the SBO Rules and has granted an extension for making the filing. Consequently, if the amended SBO Rules are not issued before March 31, 2019, there is likely to be uncertainty regarding the scope and applicability of the SBO Circular.
Changes Introduced for Streamlining the Process of Public Issues of Equity and Convertibles
SEBI, by way of its circular dated November 1, 2018, in its endeavor to provide an efficient fund-raising process, and in consultation with various stakeholder groups, has decided to introduce the Unified Payments Interface (‘UPI’), as a payment mechanism supported with the Application Supported by Block Amount (‘ASBA’), for applications in public issues through various channels. This will be done by retail investors through various kinds of intermediaries (i.e. syndicate members, registered stock brokers, registrar and transfer agents and depository participants). This new process is expected to improve efficiency and reduce the duration from issue closure to listing by up to three working days in a phased manner. Prior to the introduction of ASBA, this process usually took 12 working days.
For the purpose of public issues, UPI would allow the facility to block the funds at the time of the application. In order to ensure that there is parity across the various channels for the submitted application, it has been decided that the investor must only use his/her own bank account linked UPI ID to make an application in public issues. Further, merchant bankers are required to ensure appropriate disclosures with respect to UPI in offer documents and advertisements of a company undertaking a public issue.
This circular is applicable to all red herring prospectuses filed for public issues opening on or after January 1, 2019.
 UPI is an instant payment system, developed by the National Payments Corporation of India (‘NPCI’), which enables merging several banking features and allows instant transfer of money between any two persons’ bank accounts using a unique payment address.
National Minimum Guidelines for Crèche Facilities
The Ministry of Women and Child Development, Government of India has, through its office memorandum dated November 2, 2018, issued the National Minimum Guidelines to Establish and Manage Crèche Facilities (‘Guidelines’) as required under the Maternity Benefit (Amendment) Act, 2017 (‘MBAA’). The MBAA mandates employers employing 50 or more employees in an establishment to provide crèche facilities, where a woman is allowed to visit four times a day (including the interval for rest allowed to her). The Guidelines provide the age group of children for whom the crèche facility should be provided, minimum standards to set up and run crèches against key parameters such as location, timings, infrastructure, equipment, safety, health, nutrition, trained human resource and parents’ engagement.
Liberalization of Visa Regime of India
The Ministry of Home Affairs has issued a press release on November 14, 2018, for further liberalizing the visa regime in India during the past year, to facilitate the smooth entry, stay and movement of foreign nationals in India. Some of the key changes are:
i. Employment visas and business visas can now be extended from within India, by the Foreigners Regional Registration Offices (‘FRRO’), for a period of up to 10 years. Previously foreign nationals had to leave the country at the end of five years and apply for a renewal from their home country.
ii. Intern visas are now available at any time during the course of study. The minimum remuneration requirement for grant of Intern Visa has now been reduced from INR 780,000 per annum to INR 360,000 per annum (subject to prescribed conditions).
iii. Two new categories of e-visas (i.e. e-conference and e-medical attendant) visas have been introduced and e-visas available for tourists, business, medical, conferences and medical attendants, can be availed of three times in a year (which was previously twice a year) which can be extended for 90 days by the FRRO.
CCI Approves DENSO’s 7% Increase in its Shareholding in Subros
On November 22, 2018, CCI approved the proposed combination of DENSO Corporation (‘DENSO’) to increase its shareholding in Subros Limited (‘Subros’) from 13% to 20%, by way of a share subscription. The transaction would also give DENSO the right to nominate one more director on the board of directors of Subros.
In India, DENSO is engaged in the manufacture and commercial sale of automotive air-conditioning systems. Subros is an integrated manufacturing unit in India for automotive air conditioning systems and engine cooling system. It also manufacturers, inter alia, compressors, condensers and heat exchangers i.e. all components of an air conditioning system. Subros is a joint venture between Suzuki Motor Corporation, DENSO and the Suri family.
CCI noted that DENSO already held 13% shareholding in Subros along with the right to nominate one director on the board of directors of Subros. Therefore, the proposed increase in shareholding by 7% and the right to nominate one more director was not likely to have any appreciable adverse effect on competition in India. Accordingly, the combination was approved by CCI.
 Combination Registration No. C-2018/11/614.
CCI Approves Liberty House’s Acquisition of Amtek Auto Limited
On September 11, 2018, CCI approved Liberty House Group Pte. Ltd.’s (‘Liberty House’) 100% acquisition of Amtek Auto Limited (‘Amtek Auto). Liberty House’s resolution plan for acquisition of Amtek Auto filed under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) was approved by a Committee of Creditors (‘CoC’) and the National Company Law Tribunal (‘NCLT’).
Liberty House also submitted details of its resolution plan under the IBC for the acquisition of Adhunik Metaliks Limited (‘Adhunik’), which was approved by the CoC and the NCLT. CCI carried out the competition assessment in light of this development.
In its assessment, CCI noted that Liberty House and Amtek Auto overlap in the business of connecting rods. A connecting rod is a component of an automobiles’ engine that transfers motion from the piston to the crankshaft and functions as a lever arm. Liberty House submitted that connecting rods differ based on the size of vehicles, like two-wheeler, three-wheeler and a heavy vehicle, and are manufactured for specific model types. It was submitted that the connecting rods supplied by Liberty House are aluminum -based while those of Amtek Auto are micro-alloy and carbon steels based.
Further, the acquisition of Adhunik by Liberty House created a vertical relationship between the parties, since Adhunik supplied alloy based non-flat steel rolled products, which is an upstream business segment to Amtek Auto. CCI noted that this vertical relationship is not likely to result in any competition concern as original equipment manufacturers (‘OEMs’) largely determine the type and grade of inputs, and there are other players present in this upstream business segment. Therefore, the combination was not likely to cause any appreciable adverse effect on competition in India.
Based on the above, the combination was approved by CCI.
 Combination Registration No. C-2018/09/599.
Introduction of alternative merger control thresholds – is it the way forward?
Background – traditional jurisdictional thresholds and perceived enforcement gap
Since the aim of merger review by a competition authority is to examine whether a transaction causes an adverse effect on the market, merger notification thresholds should screen out transactions that are unlikely to result in appreciable adverse effects in a market. Turnover and asset based jurisdictional thresholds have generally been considered by most competition agencies, including the Competition Commission of India (‘CCI’), as an effective tool to identify potential transactions which may have an effect on the competitive dynamics of a market.
However, with the advent of digital economy, there have been discussions across competition agencies as to whether these thresholds are indeed effective in capturing all categories of transactions and if not, whether there is a demonstrable ‘enforcement gap’. There has been concern expressed over some high-profile global transactions in the digital sector in the recent past (like Facebook’s acquisition of Whatsapp) which have escaped review by the competition agencies on account of the parties not generating substantial turnover or having a significant asset value. This is because companies in the digital sector mostly provide services for ‘free’ which has not given them the ability to scale their activities to such a level which translates into significant revenues or a large asset base. Further, these companies may have low turnover in the early stages but their valuation may be quite significant as a result of their degree of innovation, technical know-how and the perceived ability to disrupt the market for the incumbents. Given this, competition authorities may want to review such acquisitions since they may lead to an adverse impact on competition.
For example, consider an established online logistics services provider acquiring a new entrant in the online logistics services segment. Given the nature of the industry (characterized by low turnover), the transaction may not be notifiable, but in effect the purchase made by the large logistics company may be of an innovative business idea with great competitive market potential. Consequently, a competition authority may want to review the transaction to ensure that the market remains competitive. Other than digital markets described above, markets characterized by low turnover (but potentially high valuation) are pharmaceuticals, biotechnology as well as patent portfolio acquisitions.
Is there a need for alternative jurisdictional thresholds?
The perceived enforcement gap has led to an increased demand to find better means of capturing such transactions. These include considering new thresholds which can either replace the existing thresholds or complement them in a manner which would result in such transactions being potentially notifiable – for example, transaction value thresholds or market share thresholds.
The German and Austrian competition authorities have recently introduced alternative criteria i.e., transaction-size threshold to capture transactions where companies may have low turnover but due to the value of the transaction or ‘deal size’, the competition agency will have jurisdiction (the United States already has this rule). The European Union (‘EU’) considered introducing transaction value thresholds but ultimately decided against it. The Korean Fair Trade Commission has also recently proposed alternative jurisdictional thresholds to complement the traditional jurisdictional threshold. Finally, even the CCI has considered whether the current thresholds (based on assets and turnover of companies) might have a ‘blind spot’ when it comes to transactions where the target’s asset and turnover value are relatively low.
A critical question before introducing new thresholds is whether there is indeed an empirically tested enforcement gap, i.e. whether there are transactions that a competition authority should have reviewed but missed as a result of the traditional jurisdictional thresholds. In the absence of cogent evidence on enforcement gap, the introduction of additional thresholds may be disproportionate and create unnecessary administrative burden. For instance, the Facebook-WhatsApp transaction which is often used as an example in support of introduction of transaction value thresholds was examined by the European Commission and cleared without a detailed review or any remedies. Further, unlike the German and Austrian merger control regimes, acquisition of “control” or some form of competitively significant influence is not a prerequisite to notifiability in India. The introduction of a transaction value threshold in the absence of such a prerequisite could result in unintended consequences and exacerbate the risk of false positives.
This may also lead to a chilling effect on innovation and investments in the jurisdiction where such thresholds are introduced. In the context of India which has emerging digital markets, introducing alternative thresholds may lead to a prolonged wait for competition approval before a cash-strapped start-up company actually receives investments. The downside of this process may be the loss of competitive edge for the start-up company. Further, adding to the existing competition approval requirements may discourage investment in these companies. Moreover, the culture of start-up companies is at a nascent and developing stage in India compared to more developed economies like Germany and South Korea. Given their lack of expertise, these companies are often characterized by cash burn and more often than not require external investments from experienced, established players in the market for their survival. In a recent decision of the CCI, an information alleging abuse of dominance against e-commerce company Flipkart India Private Limited was dismissed with the CCI specifically noting that intervention in such nascent markets should be carefully crafted lest it stifles innovation.
In addition, even though a particular transaction is not notified to the competition authority, the authority is likely to still have the ability to review its conduct under abuse of dominance or vertical restraints provisions. For example, the Competition Act, 2002 (‘Act’) provides a prohibition on these conducts. Even in the past 9 years since the Act has been enforced, the CCI has already used its powers under these sections to conduct investigations against e-commerce companies, search engines, radio-taxi services, pharmaceutical companies, etc.
Points to consider regarding transaction-size and market share thresholds
The German and Austrian competition authorities have introduced ‘transaction-size’ thresholds to catch transactions with a high valuation. With respect to these thresholds, some points to bear in mind are: (i) the purchase price/ transaction value is subjective and does not give any indication of the possible competitive significance of a transaction; (ii) the valuation of transaction may pose a big challenge in itself and may vary significantly across sectors; and (iii) critically, the deal-size test may not account for local nexus (for example, whether a target has any geographic presence in a particular jurisdiction). This may mean that a USD 1 billion transaction may get notified in a country that has these thresholds even if the target company’s activities are outside that country.
Similarly, market share thresholds also introduce uncertainty into the notification process and is not consistent with internationally recognized best practices since consideration of the appropriate ‘market’ is inherently subjective. Further, using market shares as notification thresholds may impose costs on all transactions i.e. the parties to any merger would have to calculate their market shares regardless of whether the transaction ultimately needs to be notified. Also, parties are usually not in possession of robust data on market shares and may lack the ability to properly define markets in the first place. In the online logistics company example mentioned above – the company itself may consider brick-and-mortar logistics providers as competitors and the market to be for overall ‘logistics services’. However, the competition authority may consider the market to be only for ‘online logistics services’. Accordingly, given the likely differing views of the regulator and transaction parties on definition of the appropriate ‘market’, market shares may not constitute objectively quantifiable criteria.
Even the International Competition Network (‘ICN’) (a network of competition agencies and practitioners) in its set of recommended practices for merger notification and review procedures states that asset and turnover notification criteria are the preferred types of notification thresholds. While the specific level of assets and/or turnover required to trigger a notification requirement may vary among the various jurisdictions, the requirement for these is similar across competition agencies.
Competition authorities including the CCI should consider carefully whether there is cogent evidence that suggests an enforcement gap before introducing any new type of notification thresholds. Further, the ICN recommends that setting objectively quantifiable criteria as thresholds (that are clear and understandable) are a key requisite to bring legal certainty to both the competition authority and the merging parties. Ultimately, the competition agency should aim to minimize the number of transactions that must be notified i.e. the ones that are unlikely to raise competitive concerns, without allowing transactions that do raise concerns to fall outside the notification requirement.
 The 2008 ICN Recommended Practices for Merger Notification and Review Procedures.
 In relation to the pharmaceutical industry, the concern appears to be that if a new drug is being developed but has not been approved for sale, it will have little or no turnover (and therefore may miss the scrutiny of agencies) but may be a critical and ‘high value’ asset for the acquirer.
 Summary of replies to the Public Consultation on evaluation of procedural and jurisdictional aspects of EU merger control accessible at http://ec.europa.eu/competition/consultations/2016_merger_control/summary_of_replies_en.pdf.
 Transaction size or value threshold means that mergers between parties exceeding certain size or value will be notified to a competition agency for its review.
 Market share thresholds means that if the market shares of the parties to a combination exceed a pre-determined market share threshold, they will be subject to the jurisdiction of the particular competition authority.
 German and Austrian competition authorities introduce alternative notification threshold to the existing thresholds, accessible at https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Leitfaden/Leitfaden_Transaktionsschwelle.pdf?__blob=publicationFile&v=2.
 CCI chief D.K. Sikri seeks changes in uniform threshold norms for M&As, accessible at https://economictimes.indiatimes.com/news/economy/policy/competition-law-cci-chief-d-k-sikri-seeks-changes-in-uniform-threshold-norms-for-mas/articleshow/64125187.cms.
 The rise and fall of TinyOwl: Lessons that start-up founder Saurabh Goyal learnt, accessible at https://economictimes.indiatimes.com/magazines/panache/the-rise-and-fall-of-tinyowl-lessons-that-start-up-founder-saurabh-goyal-learnt/articleshow/60069036.cms.
 Case No. 20 of 2018.
 Supra note 3.
 The 2008 ICN Recommended Practices for Merger Notification and Review Procedures.
CCI Approves Application Filed Jointly by Siemens AG, Germany and Alstom SA, France
On November 1, 2018, CCI approved the proposed acquisition of 50% of Alstom S.A.’s (‘Alstom’) share capital by Siemens Aktiengesellschaft (‘Siemens’), filed under Section 6(2) of the Act. The proposed combination relates to the combination of Alstom and the mobility business of Siemens by way of a contribution of Siemens’s mobility business to Alstom. This contribution of Siemen’s mobility business to Alstom is in consideration for newly issued Alstom shares (representing 50% of Alstom’s share capital) on a fully diluted basis (‘Proposed Combination’).
In India, Siemens provides services concerning transportation of people and goods by rail and road and operates through its three subsidiaries which are part of the Proposed Combination. Further, Alstom is engaged in the business of products, services and solutions relating to mobility business. It manufactures and supplies signaling systems, rolling stock (including locomotives), rail electrification, track works, maintenance services and also provides associate construction and engineering services through its subsidiaries.
CCI considered the wide product portfolio of Alstom and Siemens and segmented the product market for assessment, without defining it, as:
i. Signaling solutions (systems providing safety controls on mainline and urban rail networks);
ii. Rail electrification (power supply and contact line systems for urban mainline railways);
iii. Rolling stock (trains including locomotive, mainline stock such as intercity and regional trains and urban rolling stock such as metros).
This was done since both Alstom and Siemens competed in tenders only in the above-mentioned products/services. However, as mentioned above, the relevant product and geographic market definition was left open by CCI for all the three segments since the Proposed Combination did not raise any competition concerns irrespective of the manner in which the market is delineated. CCI approved the Proposed Combination since the CCI held that it will not have any appreciable adverse effect on competition in any of the relevant markets after considering: (i) the combined market share of the relevant parties; (ii) other players in the market competing for and winning bids; and (iii) third party responses on the other credible and big competitors in the market.
 Combination Registration No. C-2018/07/588.
CCI Approves Acquisition of 26% by Shell Gas B.V. in Hazira LNG and Hazira Port from Total Gaz Electricité
On December 6, 2018, pursuant to a share purchase agreement signed on November 6, 2018, CCI approved acquisition of 26% shares by Shell Gas B.V. (‘Shell’) in Hazira LNG Private Limited (‘HLPL’) and Hazira Port Private Limited (‘HPPL’) from Total Gaz Electricité Holdings France (‘Total’). The combination increased Shell’s shareholding in HLPL and HPPL from 74% to 100% and changed Shell’s control in HLPL and HPPL (from joint control to sole control). 
Shell is a Dutch company with businesses including oil and natural gas exploration, production and marketing, manufacturing, and marketing and shipping of oil products and chemicals. Shell group companies are engaged in India in the activities of: (i) exploration and production of oil and natural gas; (ii) supply of liquid natural gas (‘LNG’) into India; (iii) provision of LNG regasification (and related storage) services; (iv) wholesale and downstream supply of natural gas; (v) provision of port facilities to LNG terminals; and (vi) supply of fuel products.
HLPL and HPPL are joint venture companies set up by Shell and Total. HLPL provides LNG regasification services (and related storage) to large LNG importers and also has activities in the wholesale and downstream sale of natural gas in India. It operates and manages the re-gasification terminal at the Hazira Port, Gujarat. HPPL owns and manages the Hazira port used for unloading and receipt of LNG and receives a fee from HLPL for access to the facilities at Hazira port and other allied activities.
In its competitive assessment, CCI observed that HLPL is primarily engaged in LNG regasification (and related storage) services and Shell does not have any presence in the product segment other than through HLPL. As regards the activities of HLPL relating to wholesale and downstream supply of natural gas, CCI observed that Shell has independent presence but the extent of presence of HLPL is not significant enough to cause any change in competition dynamics. CCI further observed that HPPL is engaged in provision of port facilities at LNG terminals and Shell does not have any presence in previously mentioned product segment other than through HPPL.
In light of the above, CCI approved the combination as it is not likely to have any appreciable adverse effect on competition (‘AAEC’) in India in any of the markets catered to by HLPL and HPPL.
 Combination Registration Number C-2018/11/615.
CCI approves combination between LIC & IDBI
On November 22, 2018, CCI approved acquisition of 51% shareholding and management control rights in IDBI Bank Limited (‘IDBI’) by Life Insurance Corporation of India (‘LIC’). LIC is engaged in the provision of various schemes of life insurance to retail and corporate customers. IDBI operates as a full service universal bank and provides financial products and services, encompassing deposits, loans, payment services and investment solutions. 
In its competitive assessment, CCI found that the combination would not have an AAEC in India in the markets for (i) provision of life insurance; (ii) provision of housing finance; and (iii) banking services (other than housing finance), in particular the segments relating to deposits, home loans, agricultural banking, card business, retail banking services other than card business, deposits and home loan, medium and small business banking, and wholesale banking (other than retail business banking), on account of IDBI having an insignificant presence in these markets. Further, CCI found that while LIC’s and IDBI’s activities overlapped in the market for mutual funds, in particular the segments relating to (i) growth /equity oriented scheme; (ii) income/debt oriented scheme; (iii) balanced fund scheme; (iv) money market/liquid fund scheme; and (v) gilt funds, neither LIC’s nor IDBI’s presence in this markets was significant enough to result in an AAEC. With regard to a potential vertical relationship between LIC and IDBI in relation to bancassurance services, CCI held that considering the nature of bancassurance services and presence of IDBI in the segment, the combination will not confer any ability or provide any incentive to LIC to foreclose other banks engaged in the provision of bacassurance services. Based on the above, CCI decided to approve this combination.
 Combination Registration Number C-2018/10/605.
CCI Approves Acquisition by Ageas Insurance International from Royal Sundaram General Insurance
On December 19, 2018, CCI approved acquisition of 40% of the equity share capital of Royal Sundaram General Insurance Company Limited (‘RSGI’) by Ageas Insurance International N.V. (‘Ageas’) pursuant to the execution of a share purchase agreement and shareholders agreement entered into between the RSGI, Ageas, Sundaram Finance Limited (‘SFL’) and other selling shareholders of RSGI. 
Ageas is a Dutch company engaged in provision of international insurance solution to retail and business customers. In India, Ageas is present through IDBI Federal Life Insurance Company Limited (‘IFLI’) which engages in provision of life insurance services in India. RSGI is a subsidiary of SFL and is engaged in provision of general (non-life) insurance services to individuals and businesses. It offers motor, health, personal accident, home and travel insurance to individuals and also offers insurance products in fire, marine, engineering, liability, motor and business interruption risks to commercial customers.
In its competition assessment, CCI observed that since there was no horizontal overlap or vertical relationship between Ageas and RSGI, the combination was not likely to have any AAEC in India and therefore approved the acquisition.
 Combination Registration Number C-2018/11/618.
CCI Approves Acquisition by Integral Corporation from Toyo Engineering Corporation
On December 19, 2018, CCI approved subscription to optionally convertible preferential stock (without voting rights) amounting to 34.65% of shares of Toyo Engineering Corporation (‘Toyo’) by Integral Corporation (‘Integral’) pursuant to the execution of a share subscription agreement dated November 28, 2018. Integral also acquired a right to appoint two nominee directors in Toyo. 
Integral, a Japanese private equity firm based in Tokyo, is engaged in making long-term equity investments and providing support to investee companies in terms of management and finance. In India, Integral is present through its stake of 29.2% shares of Ohizumi Manufacturing Company Limited, a Japanese corporation which is engaged in manufacture and sale of electronic parts and electronic equipment/devices such as thermistors which are primarily used for measurement and control of temperature. Toyo is a Japanese engineering, procurement and construction (‘EPC’) company engaged in the provision of EPC services and R&D support, design, engineering, procurement, construction, commissioning and technical assistance for industrial facilities. It provides EPC services in various sectors such as oil & gas development, petrochemicals, chemicals and biotechnology. In India, Toyo is present through its subsidiary namely Toyo Engineering India Private Limited which is also engaged in providing EPC services in India.
In its competition assessment, CCI observed that there is no horizontal overlap or vertical relationship between the activities of the parties. Therefore, CCI approved the combination as it was unlikely to have any AAEC in India.
 Combination Registration Number C-2018/12/619.
New External Commercial Borrowings (ECB) framework
With the aim of further liberalising the foreign currency loan regime in India, the Reserve Bank of India (‘RBI’) has, pursuant to the circular dated January 16, 2019 (‘Circular’), introduced sweeping changes and rationalised the extant framework for external commercial borrowings (‘ECBs’) and Rupee denominated bonds.
The RBI notification dated December 17, 2018 had consolidated and streamlined the provisions of the principal regulations relating to borrowing and lending in foreign currency and Indian Rupees under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (‘B&L Regulations’), which superseded the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 and Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations, 2000. The framework/guidelines which were expected to be notified by the Government / RBI in furtherance of the B&L Regulations have been notified by RBI by issuance of the Circular. The Master Direction on ECBs, Trade Credit, Borrowing and Lending in Foreign Currency dated January 1, 2016 (‘ECB Master Directions’), and the associated FAQs, is still to be updated to reflect the changes made pursuant to the Circular, and provide further clarity (including on operational aspects). However, the amended ECB policy has come into force with effect from January 16, 2019.
Some of the key changes introduced by the Circular are set out below.
1. Merging of Tracks: Earlier, the foreign currency (‘FCY’) denominated ECB could be availed under Track I (short-term foreign currency ECB) and Track II (long-term foreign currency ECB) respectively. The RBI has now merged the FCY denominated ECB into a single track. Further, the RBI has also merged Track III (Rupee denominated ECB) and the framework on Rupee denominated bonds (i.e., Masala Bonds) as ‘Rupee denominated ECB’. Earlier, the framework for ECBs and Masala Bonds were separate.
2. ECB Limits: ECB upto USD 750 million (approx. INR 5,250 crores) or its equivalent per financial year (irrespective of specified activities/sector), which otherwise is in compliance with the parameters set out in the ECB Regulations, can be raised under the automatic route. Earlier, the ECB Regulations set out different limits for ECBs which could be raised by ‘eligible’ entities/ borrowers engaged in specified activities/sectors under the automatic route (such as upto USD 200 million (approx. INR 1,400 crores) for the software sector, USD 100 million (approx. 700 crores) for micro finance activities etc.), which have now been aggregated. Pursuant to the Circular, there are no sector specific limits.
3. Form of ECB: As was the case previously, both FCY ECB and INR ECB can be availed by way of loans including bank loans, securitised instruments (e.g., floating / fixed rate notes, bonds, non-convertible, optionally convertible or partially convertible debentures), trade credits beyond three years or financial lease. In addition, INR ECB can also be availed in the form of preference shares. Foreign Currency Convertible Bonds (‘FCCBs’) as well as Foreign Currency Exchangeable Bonds (‘FCEBs’) continue to be a mode for availing FCY ECB.
4. Eligible Borrowers: The list of ‘eligible borrowers’ has been expanded to include all entities eligible to receive foreign direct investment (‘FDI’). Additionally, port trusts, units in special economic zones, SIDBI, EXIM Bank, registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/trusts/cooperatives and non-Government organisations can now avail ECB. Some of such companies which can now avail ECB are companies in sectors such as animal husbandry, agriculture, petroleum and natural gas, broadcasting, insurance etc.
5. Recognised Lender: The RBI had specified certain categories of entities which could provide ECB to eligible Indian borrowers. As per the Circular, any resident of Financial Action Task Force or International Organization of Securities Commission compliant country can provide ECB to eligible Indian borrowers.
Additionally, note that:
(i) Multilateral and regional financial institutions, where India is a member country, will be recognized lenders under the ECB Regulations;
(ii) Individuals as lenders can only be permitted if they are foreign equity holders or subscribers to bonds / debentures listed abroad; and
(iii) Foreign branches / subsidiaries of Indian banks continue to be recognized lenders for FCY ECB (except FCCBs and FCEBs).
6. Minimum Average Maturity Period (‘MAMP’): Earlier, Track I and Track III ECBs were required to have a MAMP of three / five years whereas Track II ECB was required to have a MAMP of 10 years except in certain cases wherein specific MAMP was prescribed by RBI. The MAMP for all ECBs is now prescribed as three years. However, for ECBs raised from foreign equity holders and utilised for working capital purposes, general corporate purposes or repayment of rupee loans (in negative list in respect of other lenders), the MAMP will be five years. The MAMP for ECB up to USD 50 million per financial year raised by companies in the manufacturing sector will continue to be 1 year.
7. End-Uses: There has been no change to the negative list of end-uses prescribed by the RBI (especially as the FCY borrowing tracks have been merged) except the clarification on negative end use of ‘real estate activities’. Earlier, the ECB Regulations specified that ECB could not be availed for investment in real estate or purchase of land. While real estate activities continue to be a prohibited end-use for availing ECBs, the Circular now defines ‘real estate activities’ to mean any real estate activity involving owned or leased property for buying, selling and renting of commercial and residential properties or land and also includes activities either on a fee or contract basis assigning real estate agents for intermediating in buying, selling, letting or managing real estate. However, this does not include construction / development of industrial parks/integrated township / SEZ, purchase / long term leasing of industrial land as part of new project / modernisation of expansion of existing units or any activity under ‘infrastructure sector’ definition.
8. All-in-Cost (‘AIC’): The RBI has provided few clarifications in relation to AIC, which are as follows:
(i) It has been clarified that Export Credit Agency charges and guarantee fees, whether paid in Rupees or foreign currency, will be included in AIC; and
(ii) Various components of AIC have to be paid by the borrower without taking recourse to the drawdown of ECB i.e. ECB proceeds cannot be used for payment of interest/charges.
9. Late Submission Fee (‘LSF’) for Delay in Reporting: Any borrower, who is otherwise in compliance with ECB Regulations, can regularize delay in reporting / form submissions by payment of LSF as prescribed in the Circular.
10. Form 83: Earlier, Indian borrowers were required to obtain a Loan Registration Number (‘LRN’) by submission of Form 83 to the AD Bank. However, Form 83 has now been done away with and has been replaced with Form ECB. Accordingly: (i) to obtain an LRN, borrowers are now required to submit duly certified Form ECB; and (ii) changes in ECB parameters, including reduced repayment by mutual agreement between the lender and borrower, should be now reported to RBI through revised Form ECB.
11. Raising of ECB by Start-ups: Any entity recognized by the Central Government as a ‘start-up’ is allowed to raise ECB up to USD 3 million (approx. INR 21 crores) or equivalent per financial year. The AIC can be mutually agreeable between the borrower and the lender. This is in line with the earlier ECB framework. It has been clarified that start ups under the special dispensation or other start ups which are eligible to receive FDI, can also raise ECB under the general ECB Framework.
Raising of ECB by Entities under Restructuring: Any entity which is under restructuring scheme/ corporate insolvency resolution process (‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) can raise ECB only if specifically permitted under the resolution plan. Further, pursuant to a circular dated February 7, 2019, RBI has relaxed end-use restrictions for resolution applicants under CIRP and has allowed raising ECBs from recognised lenders (except branches / overseas subsidiaries of Indian banks) under the approval route for repayment of Rupee term loans of such entities.
Key Changes Proposed to the Indian Stamp Act
The Constitution of India, by way of the Seventh Schedule, empowers the Union Government and the State Governments to legislate provisions regarding stamp duties. Under Article 246, stamp duties on documents specified in Entry 91 of List I of the Seventh Schedule (‘Union List’) (viz. bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts) are levied by the Union. Stamp duties on documents other than those mentioned above are levied and collected by the States by virtue of the legislative entry 63 in List II of the Seventh Schedule (‘State List’). Provisions other than those relating to rates of duty (which fall within the scope the Union List and the State List) fall within the legislative power of both the Union and the States under Entry 44 of the Concurrent List in the Seventh Schedule of the Constitution.
The Finance Bill, 2019 (‘Finance Bill’) passed by both the Houses of the Parliament on February 12, 2019 has, inter alia, proposed certain amendments to the Indian Stamp Act, 1899 (‘Stamp Act’) with a view to streamline levy of stamp duties on transactions involving financial securities. The Finance Bill will be passed once it receives Presidential asset and is published in the Official Gazette. Some of the key changes proposed by the Finance Bill in this regard have been highlighted below:
(a) ‘Debentures’ are proposed to be excluded from the definition of ‘bonds’ under the Stamp Act and a separate definition has been proposed to be introduced. The newly proposed definition includes any instrument issued by a company evidencing a debt (like compulsorily convertible debentures, optionally convertible debentures, etc.), and short-term instruments such as certificates of deposit, commercial usance bill and commercial papers.
Under the existing Stamp Act, only debentures which were ‘marketable securities’ were liable to be stamped under Article 27 of Schedule I to the Stamp Act. The Finance Bill proposes to delete the reference to ‘marketable securities’ and consequently, all debentures (whether marketable or not) will become liable to be stamped.
(b) The existing Stamp Act provided that the stamp duty on issue of Debentures was 0.05% per year of the face value of the debentures up to 0.25%, subject to a cap of INR 25 lakhs (approx. US$ 35,300). The rate of stamp duty is now proposed to be changed to 0.005% with no cap. Whether the stamp duty will be calculated on the face value of the Debentures or whether the premium (if any) at which Debentures are issued will also be taken into consideration is currently unclear.
(c) A key change for several banks and financial institutions is the proposed removal of the exemption from payment of stamp duty for debentures issued under a mortgage deed. As a result, even if Debentures are issued in terms of a registered mortgage-deed which has been duly stamped, such Debentures would still be liable to be stamped as per the amended rates proposed under Article 27 of the Stamp Act.
(d) Stamp duty of 0.0001% is proposed to be levied on the transfer of Debentures as well. As ‘transfer of Debentures’ is not a specified entry in the Union List, the same would fall under the State List empowering the State Governments to prescribe stamp duty rates for such transfers. Therefore, it remains to be seen whether this provision would actually be enforceable.
2. Securities: A new definition of ‘securities’ has been proposed to be introduced under Section 23A of the Stamp Act, which includes, inter alia, ‘securities’ as defined under the Securities Contracts (Regulation) Act, 1956, derivatives, repo on corporate bonds, etc. (‘Security(ies)’).
The stamp duty rates proposed for Securities are as follows:
(a) issuance of Securities (other than Debentures): 0.005%. Please note that only rates of stamp duty payable on ‘transfer of shares’ is covered under the Union List, and therefore, State Governments are entitled to prescribe rates of stamp duty payable on issuance of shares. Therefore, it remains to be seen whether the proposed stamp duty rates would actually be enforceable); [Union list deals with only ‘issuance of debentures’ and not transfer of debentures – hence the deletion.]
(b) transfer of Securities (other than Debentures): 0.015% (if on delivery basis) and 0.003% (if on non-delivery basis);
(c) derivatives: 0.0001% to 0.003% depending on the nature of the derivative; and
(d) repo on corporate bonds – 0.00001%.
Prior to the proposed amendment, derivatives and repo transactions were not expressly included in Schedule I. However, no stamp duty is chargeable on the issuance of Securities issued by the Government.
3. Removal of Exemption on Stamp Duty on Transfer in Dematerialized Form: The Finance Bill seeks to amend Section 8A of the Stamp Act such that the exemption available for transfer of beneficial ownership of Securities and mutual fund units is proposed to be removed. Such waiver is now proposed to be made applicable only to transfers of Securities from a person to a depository or from a depository to a beneficial owner. Please note that the Central Government is entitled to prescribe rates of stamp duty payable only on ‘transfer of shares’ but not on ‘transfer of debentures’. Therefore, it remains to be seen whether the proposed removal of exemption in case of transfer of Debentures in dematerialized form would actually be enforceable.
4. Collection of Stamp Duty for Securities’ Transfer in Dematerialised Form: The proposed introduction of a separate regime for collection of stamp duty on Securities transactions in dematerialized form is a key change for stock exchanges, clearing corporations and depositories. A new section, Section 9A, is proposed to be introduced under which the stamp duty in case of sale, transfer and issue of Securities, must be collected on behalf of the State Government through the aforementioned agencies.
(a) In cases of transfer of Securities through the stock exchange, the stock exchange or a clearing house authorised by it will be liable to collect stamp duty from the buyer of the Securities at the time of settlement of the transaction.
(b) In cases of transfer of Securities in dematerialized form (other than through stock exchanges), the concerned depository will be liable to collect stamp duty from the transferor at the time of the transfer.
(c) In cases of issue of Securities in dematerialized form which leads to a change or a creation in the records of the depository concerned, the concerned depository will be liable to collect stamp duty from the issuer.
If the agencies named above do not collect the full stamp duty and transfer it to the relevant State Government within the prescribed time, these agencies will be required to pay a fine of INR 1 lakh (approx. US$ 1400), upto a cap of 1% of the amount that should have been so collected and transferred.
5. Responsible Party: Section 29 of the Stamp Act is proposed to be further amended to set out the responsibility of the party who will be liable to bear the stamp duty, in the absence of an agreement to the contrary.
|Sr. No.||Particulars of Transaction||Onus of Stamp Duty Payment|
|1.||Sale of Security through stock exchange||Buyer of Security|
|2.||Sale of Security otherwise than through a stock exchange||Seller of Security|
|3.||Transfer of security through a depository||Transferor of Security|
|4.||Transfer of security otherwise than through a stock exchange or depository||Transferor of Security|
|5.||Issue of security, whether through a stock exchange or a depository or otherwise||Issuer of Security|
|6.||Any other instrument not specified under Section 29 of the Stamp Act||Person making, drawing or executing such instrument|
The introduction of Section 9A has added a new twist to the tale for secondary transactions. Typically, in secondary transactions, the transferee bears the stamp duty liability on the transfer. But, the proposed addition of Section 9A would mean that, even if the parties have contractually agreed for the transferee to bear the stamp duty. the transferor may have to pay the stamp duty to the relevant agency and separately collect the amount from the transferee.
6. Disclosure of Securities Transactions: Another key change proposed is that the Central Government may, by way of rules, call upon any of the aforementioned agencies to furnish details of Securities transactions. If any such agency does not do so, it will be liable to pay a fine of INR 1 lakh (approx. US$ 1400) per day of default upto INR 1 crore (approx. US$ 14,000).
These amendments have been proposed pursuant to the Finance Bill, and it would be relevant to examine the actual amendments that are introduced to the Stamp Act once the Finance Act is passed.
New E-Form Active Notified to Curb Shell Companies
As part of its efforts to curb shell companies, the Ministry of Corporate Affairs has notified a new electronic form ACTIVE (Active Company Tagging Identities and Verification) (‘Form INC-22A’) through Rule 25A of the Companies (Incorporation) Rules, 2014. According to Rule 25A, every company incorporated on or before December 31, 2017 (subject to a few exceptions, such as companies which are in the process of being struck off) is required to file particulars of the company and its registered office in the prescribed form (Form INC-22A) on or before April 25, 2019. Form INC-22A, inter alia, requires companies to furnish details of the registered office, including the photo of the registered office showing at least one director/ key managerial personnel who has affixed his Digital Signature to Form INC-22A, geographical coordinates of the registered office and details of the company’s auditor and key managerial personnel. Form INC-22A also requires a list of all directors of the company to be provided. If any such director of the company does not have an ‘Active’ DIN status, such company will not be able to file Form INC-22A. Further, any company which has not filed its financial statements and / or annual returns is also restricted from filing Form INC-22A, unless such company is under management dispute and the Registrar of Companies has recorded the same.
A company may file this form after the lapse of the prescribed period upon payment of a late fee of INR 10,000 (approx. USD 140), and non-filing of the same gives the Registrar of Companies a right to cause a physical verification of the registered office. If the registered office is (upon such verification) found to be incapable of receiving and acknowledging all communications and notices addressed to it, then in addition to the imposition of a penalty not exceeding INR 1 lakh (approx. USD 1400) on the company and officers in default, the Registrar of Companies may take action for the removal of the company’s name from the register of companies. Additionally, unless Form INC-22A is filed, a company will not be able make filings in relation to change in its authorised capital or paid-up capital, changes in directors (except cessation), change in the registered office and / or filings in relation to any amalgamation or demerger.
 With effect from February 25, 2019; inserted by the Companies (Incorporation) Amendment Rules, 2019 dated February 21, 2019.
Companies (Significant Beneficial Owners) Amendment Rules, 2019
On February 8, 2019, the Ministry of Corporate Affairs issued the Companies (Significant Beneficial Owners) Amendment Rules, 2019 (‘Amendment Rules’), amending the provisions of Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’). Every individual who is considered to be a ‘significant beneficial owner’ (‘SBO’) for a reporting company, is required to file a declaration with the reporting company in Form BEN-1 on or before May 8, 2019. Some of the key requirements under the amended SBO Rules are briefly summarised below.
A. Who is an SBO in a Reporting Company?
1. As per the amended SBO Rules, an SBO for a reporting company is an individual who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:
i. holds indirectly, or together with any direct holdings, not less than 10% of the shares*;
*For the purposes of this test, the instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures are to be treated as ‘shares’.
ii. holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares;
iii. has right to receive or participate in not less than 10% of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings; or
iv. has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone.
2. Therefore, the amended SBO Rules now prescribe two categories of independent thresholds to be evaluated for assessing an SBO in a reporting company i.e. objective threshold and subjective threshold. Accordingly, it is possible that a reporting company may have more than one SBO.
3. Objective Threshold – 10% Indirect Holding Test:
i. Any individual holding indirectly 10% or more either of shares, voting rights in the shares or right to receive or participate in total distributable dividend or any other distribution (‘distribution rights’) along with direct holdings will be considered to be an SBO. For purposes of the objective test, it is important to determine whether the individual indirectly holds any shares, voting rights or distribution rights in a reporting company which, together with the direct holdings, amounts to 10% or more of the shares, voting rights and distribution rights of the reporting company. The amended SBO Rules have clarified that no individual will be an SBO merely on account of her/his direct stake in the reporting company.
ii. The amended SBO Rules prescribe different parameters for assessing ‘indirect holding’ of an individual in a reporting company depending on her/his status or relationship with the member of the reporting company:
|No.||Nature of Member of Reporting Company||Relationship of Individual to such Member|
|a.||Where the member of the reporting company is a body corporate (Indian or foreign), other than a limited liability partnership (‘LLP’).||An individual who:|
(a) holds majority stake (i.e. more than 50%) in that member; or
(b) holds majority stake in the ultimate holding company (Indian or foreign) of that member.
|b.||Where the member of the reporting company is a Hindu Undivided Family (‘HUF’) (through karta).||An individual who is the karta of the HUF.|
|c.||Where the member of the reporting company is a partnership entity (through itself or a partner).||An individual who:|
(a) is a partner;
(b) holds majority stake* in the body corporate which is a partner of the partnership entity; or
(c) holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.
|d.||Where the member of the reporting company is a trust (through trustee).||An individual who:|
(a) is a trustee in case of a discretionary trust or a charitable trust;
(b) is a beneficiary in case of a specific trust;
is the author or settlor in case of a revocable trust.
|e.||Where the member of the reporting company is:|
(a) a pooled investment vehicle; or
(b) an entity controlled by the pooled investment vehicle;
in each case, based in member country of the Financial Action Task Force (‘FATF’) on Money Laundering and the regulator of the securities market in such member country is a member of the International Organization of Securities Commissions.
|An individual in relation to the pooled investment vehicle who:|
(a) is a general partner;
(b) is an investment manager; or
is a chief executive officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity.
|f.||Where such member of the reporting company is:|
(a) a pooled investment vehicle; or
(b) an entity controlled by the pooled investment vehicle;
but does not satisfy the requirements set out in row (e) above.
|An individual determined under rows (a); (b); (c); or (d) above.|
*Rule 2(d) of the amended SBO Rules defines ‘majority stake’ to mean: (i) holding more than one-half of the equity share capital in the body corporate; or (ii) holding more than one-half of the voting share capital in the body corporate; or (iii) having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate.
i. It is important to note that the anti-money laundering and counter-terrorist financing system of Mauritius have been assessed by the Eastern and Southern Africa Anti-Money Laundering Group. The findings of this assessment have also been reviewed and endorsed by the FATF. However, Mauritius is not a member State of the FATF. This needs to be kept in mind while evaluating the SBO for funds based in Mauritius.
ii. There needs to be more clarity on the following aspects:
(a) While calculating the indirect stake for the purpose of determining the SBO, should only the direct shareholding of the individual in the body corporate (which is a shareholder of the reporting company) be considered, or should it also include their effective shareholding, factoring cross holdings through other holding companies.
(b) The threshold for a partnership or LLP is much more stringent than thresholds for any other categories of members. In a partnership, every partner (irrespective of their partnership interest), will be regarded as an SBO, which is a significantly higher threshold.
1. Subjective Test
i. The second test is the subjective test wherein any individual having a right to exercise or exercising significant influence or control other than through direct holdings alone is considered to be an SBO.
ii. The amended SBO Rules define ‘significant influence’ to mean the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not in control or joint control of those policies. This definition is quite broad and covers the right to participate in financial and operating policy decisions of the reporting company, without necessarily having any control over them. Therefore, whether any individual possesses or is entitled to exercise significant influence will be a factual test and would need to be determined on a case to case basis.
It should be noted that the definition of ‘significant influence’ under the amended SBO Rules is different from the definition prescribed under the Companies Act, 2013 (‘Act’), which is aligned with the definition set forth in the Accounting Standards and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The Act prescribes an objective threshold for determining whether ‘significant influence’ exists. The term ‘significant influence’ has been defined under the Act to mean control of at least 20% of the total voting power, or control of or participation in business decisions under an agreement.
iii. Further, for purposes of the amended SBO Rules, ‘control’ is as per the definition prescribed under the Act, which includes the right to appoint majority of the directors or to control the management or policy decisions, exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
iv. Given the manner in which the term SBO is defined, one may argue that a shareholders agreement between shareholders of the reporting company would not per se make them an SBO since such a shareholders agreement is only on account of their direct shareholding in the reporting company.
B. Duties of the Reporting Company
It is the duty of the reporting company to take ‘necessary steps’ to find out if there is any SBO of the reporting company, and to cause such SBO to make a declaration in Form BEN-1. What would be treated as ‘necessary steps’ has not been clarified, thereby putting a greater degree of onus on reporting companies.
Additionally, every reporting company is required to give notice in Form BEN-4 to such members (other than individual), who hold not less than 10% of its shares, voting rights, or distribution rights, to seek information relating to the SBO. Whilst the amended SBO Rules provide for filing of BEN-1 by the SBOs within 90 days from the date of commencement of the Amendment Rules, in the event the reporting company sends a notice under Form BEN-4, as per Section 90 of the Companies Act, the SBO is required to provide the details within 90 days from the date of the receipt of the Form BEN-4 from the reporting company.
C. Penalties for Non-Compliance
As per the provisions of the Act, an SBO who fails to make the prescribed declaration, shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Rs 1,00,000 (approx. US$1,450) but which may extend to Rs 10,00,000 (approx. US$14,500) or with both, and where the failure is a continuing one, with a further fine which may extend to Rs 1,000 (approx. US$145) for every day during which the failure continues. Separate penalties are also imposed on the reporting companies which fail to comply with the provisions of the Act. Willfully providing any false or incorrect information or suppressing material information in the declaration made under these amended SBO Rules will be regarded as a ‘fraud’ under Section 447 of the Act.
D. Non Applicability
The amended SBO Rules are not applicable to the extent the shares of the reporting companies are held by the following entities:
i. an authority for administration of Investor Education and Protection Fund;
ii. its holding reporting company (only if details of such holding company are reported in Form BEN-2);
iii. the Central Government, State Government or any local authority;
iv. a reporting company, body corporate or an entity which is controlled by the State Government/s or Central Government or partly by the Central Government and partly by one or more State Governments);
v. investment vehicles registered and regulated with the Securities and Exchange Board of India, such as mutual funds, alternative investment finds, real estate investment trusts, infrastructure investment trusts; and
vi. investment vehicles regulated by the Reserve Bank of India, Insurance Regulatory and Development Authority or Pension Fund Regulatory and Development Authority.