Regulatory Practice & Securities Laws
Regulatory Framework on FDI in E-Commerce
Regulatory Framework on FDI in E-Commerce
With the stated aim of clarifying the foreign direct investment (‘FDI’) regime for e-commerce activities, the Department of Industrial Policy and Promotion (‘DIPP’) has issued Press Note No. 3 (2016 Series) on March 29, 2016 (‘Press Note’). Prior to the Press Note, the Consolidated Foreign Direct Investment Policy issued by DIPP (‘FDI Policy’) allowed 100% FDI under the automatic route (i.e. without requiring prior approval of the Government of India) in business to business (B2B) e-commerce activities, but did not permit FDI in multi-brand retail trade activity through online e-commerce. In such a regulatory landscape, the ‘marketplace’ model became popular; under the marketplace model, the marketplace entity provided a technology platform to connect buyers and sellers and did not itself undertake any trading activity. Such entities received FDI without any prior approvals from the Government of India. The regulatory framework for e-commerce has now been altered by the Press Note in the manner discussed below.
- Salient Features
i. FDI up to 100% under the automatic route is now permitted in the ‘marketplace’ model (definition discussed below in paragraph (iv) of the section on New Definitions), subject to certain conditions, including those described below.
ii. FDI is not permitted in the ‘inventory-based’ model (definition discussed below in paragraph (iii) of the section on New Definitions).
iii. Subject to the conditions in the FDI Policy applicable to the services sector and applicable laws / regulations, security and other conditionalities, FDI up to 100% is also permitted, under the automatic route, in entities engaged in the sale of services through e-commerce.
iv. Other noteworthy aspects of the new framework for e-commerce include:
a. the inclusion of goods coupled with services within the purview of e-commerce;
b. the clarification that marketplace entities are permitted to provide ancillary services such as delivery, logistics etc.;
c. marketplace entities not being permitted to have sales of more than 25% from one seller / vendor; and
d. marketplace entities being restricted from directly or indirectly influencing the sale price of goods/ services and being required to maintain a level playing field.
- New Definitions
The Press Note has introduced the following new definitions:
i. E-commerce: E-commerce means “buying and selling of goods and services including digital products over digital & electronic network”.1 The definition of e-commerce includes buying and selling of goods and services (including digital products) within its purview. At the same time, paragraph 3.0 of the Press Note suggests that the services sector is outside the purview of the Press Note and continues to remain eligible for 100% FDI under the automatic route. The interplay of the definition of e-commerce read with paragraph 3.0 of the Press Note suggests that the Press Note may not apply to entities merely providing services including digital products, except where they are buying and selling both, goods and services.
ii. E-commerce Entity: An e-commerce entity has been defined to mean “a company incorporated under the Companies Act, 1956 or the Companies Act, 2013 or a foreign company covered under section 2(42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2(v)(iii) of the Foreign Exchange Management Act, 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.”
It is not clear why the Government felt the need to include, within the definition of e-commerce entity, a foreign company or a branch or agency in India, when the conditions in the Press Note are applicable only to FDI investment, which is a very specific route of investment in an Indian incorporated entity under the Foreign Exchange Management Act, 1999 and the rules and regulations notified thereunder ( ‘FEMA Regulations’).
An office or branch of a foreign company is merely a form of presence of the foreign company itself, the establishment and operation of which is separately regulated under FEMA Regulations. This kind of presence i.e. a foreign company or an office, branch or agency of a foreign company in India does not actually receive FDI, and therefore inclusion of these kinds of entities in the Press Note (which is intended to govern conditions for FDI in the e-commerce sector) is unclear. Also, given that the definition is restricted to companies and does not specifically include limited liability partnerships (‘LLP’), it is not clear if it is intended to exclude LLPs from the purview of the Press Note, implying that an LLP cannot conduct permissible e-commerce activities.
iii. Inventory Based Model of E-commerce: This model has been defined under the Press Note to mean “an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly”. The Press Note does not permit FDI in entities that operate under an inventory based model of e-commerce.
iv. Marketplace Based Model of E-commerce: The Press Note defines this model as “providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.” This is the model that is popular in the market and which has been adopted by various aggregation platforms, more prominently for online hotel / room reservations, taxi booking services and online shopping.
- Relaxations Provided for the Marketplace Model
i. Marketplace entity allowed to provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services: This clarification is very welcome. Even before the Press Note was issued, a marketplace entity could have engaged in all these activities. However, the specific clarification included in the Press Note brings in more transparency in implementing the policy. The ability for e-commerce entities to provide these kinds of services could result in greater efficiencies as services ancillary to marketplace operations are commonly housed in different legal entities. We expect marketplace entities to be more optimistic about consolidating these functions within a single entity in light of this clarification.
ii. Express Recognition of Marketplace Model: There has been an increasing trend amongst investors to be a little more cautious about investing or increasing their investments in the Indian e-commerce space. While profitability has been a commercial issue and may continue to be an issue in the foreseeable future, there has also been some circumspection that has resulted from the absence of an express policy statement regarding FDI in the e-commerce sector, negative publicity around FDI in e-commerce and queries that have previously been raised by the regulators.
As the Government’s policy is now expressly stated, it will address concerns raised by various trade associations in their petitions before multiple judicial forums, where it is being argued that the marketplace model is not recognized under the FDI Policy and therefore not eligible for FDI. In our view, this argument was flawed since the FDI Policy cannot be expected to positively list every business model or opportunity that emerges in this fast moving technology rich environment. On the contrary, paragraph 6.2 of the FDI Policy specifically clarifies that FDI is allowed up to 100% under the automatic route in sectors and activities not listed in the FDI Policy. Hence, merely because the marketplace model was not expressly mentioned in the FDI Policy, did not imply that such activity was not eligible to receive FDI prior to the Press Note. If each of its ingredients were eligible for FDI investment, such sector/activity was always eligible to receive FDI.
- Restrictions on the Marketplace Model
i. Marketplace entity cannot exercise ownership over the inventory (goods purported to be sold), as ownership of the goods would result in an inventory based model: While it is clear that ownership of goods by a marketplace entity is not permitted under the Press Note, the scope of the term ‘exercise ownership’ used in paragraph 2.3(iv) of the Press Note is unclear.
ii. Not more than 25% of the sales from one vendor/ its group companies: This condition may affect the business model of certain e-commerce entities, where a significant percentage of sales are often made by one large reseller. Marketplace operators may now have to limit sales made by these resellers to ensure compliance with the Press Note. Such large resellers are therefore impacted despite the Press Note not being applicable to them. While the Press Note does not expressly clarify as to how and when the 25% limit on sales is to be computed, we expect that such compliance will be reviewed on an annual basis. Similar annual checks at the end of the financial year are prescribed in the FDI Policy on wholesale trading where the wholesale entity cannot sell more than 25% of its wholesale turnover to a group company.
iii. Post sales, delivery of goods and customer satisfaction to be seller’s responsibility: There seems to be an inconsistency between this obligation of the seller and the ability of the marketplace entity to provide ancillary support services. On the one hand, the Press Note permits a marketplace entity to provide logistics and ancillary services, while on the other it requires that following the sale, delivery of goods will be the seller’s responsibility. It is likely that the Press Note intended to clarify that the responsibility for all post-sale obligations is that of the seller, and not the marketplace entity. However, contractually, the seller should be free to provide such services in the manner it deems fit (including through an agreement with the marketplace entity, in which case the marketplace entity would be contractually liable to the seller for such services).
iv. Warranty/ guarantee of goods and services sold to be seller’s responsibility: This condition appears to stem from the requirement that goods/ services not be owned by the marketplace entity. This condition seems more in the nature of a clarification rather than a change in the legal position given that a marketplace entity would not usually provide any warranty / guarantee in respect of goods/ services; which warranties / guarantees are usually extended by the manufacturer / service provider.
v. Marketplace entity will not directly or indirectly influence the sale price of goods/ services and will maintain a level playing field: This condition is one of the key changes introduced by the Press Note and is likely to have a significant impact on marketplace entities and their business models. Popular marketplaces invest meaningfully to promote their platform to make it attractive for customers and sellers. Unlike brick and mortar stores which are able to promote their marketplace / shops in numerous ways that can be seen and felt by a customer, there are only a limited number of ways in which an online marketplace entity can promote its virtual presence. The broad language of the Press Note makes it even more difficult for a marketplace entity to promote its platform.
With regard to the obligation to maintain a ‘level playing field’, more than one interpretation may be possible. One school of thought is that this requirement is intended to apply to the sellers on the e-commerce platforms inter-se, such that the marketplace is not built around a single large / dominant seller, which seller is then accorded preferential treatment over other sellers by the marketplace entity. Another reading of this provision could be that the requirement is intended to apply to sellers on the e-commerce platforms vis-à-vis brick and mortar stores, such that brick and mortar stores are not unduly disadvantaged by e-commerce platforms through the actions of such e-commerce platforms, such as through offering discounts / incentives / promotional pricing on goods sold through such platforms. It is however difficult for a marketplace entity to ensure a level playing field with respect to brick and mortar stores, particularly given the inherent differences between the two mediums.
The Press Note is a step in the right direction by the Government and has introduced much needed and anticipated clarity on FDI in the e-commerce sector.
The conditionalities and restrictions imposed by the Press Note (which states that it shall take immediate effect) are prospective in nature and are not stated to apply to FDI already received by entities engaged in e-commerce activities. Any marketplace e-commerce entities which now intend to receive FDI would need to ensure that such FDI is received in compliance with all conditions of the Press Note. Likewise, any entities with existing FDI (received prior to the issuance of the Press Note) but which intend to receive additional FDI, would need to ensure that the conditions prescribed by the Press Note are complied with going forward. To this end, it may serve well for all existing e-commerce companies to revisit their business models and ensure that their business models are aligned to the Press Note as soon as possible.
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.
Amendment to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
The key amendments notified by SEBI to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’) on February 15, 2017 are:
i. Regulation 70 of the ICDR Regulations specifies certain instances when the provisions of the chapter relating to preferential issue do not apply. One such instance is when the preferential issue is pursuant to a scheme approved by a High Court under Sections 391 to 394 of the Companies Act, 1956 or the National Company Law Tribunal (‘NCLT’) under Sections 230 to 234 of CA 2013. The amendment clarifies that the pricing provisions for the preferential issue will apply to issuance of shares under such schemes in case the allotment of shares under such scheme is only to a select group of shareholders or to shareholders of unlisted companies.
ii. The amendment also empowers stock exchange(s) to take action against listed entities or any other person thereof contravening the provisions of the ICDR Regulations, in addition to applicable liabilities under securities laws, by way of imposition of fines, suspension of trading, freezing of promoter / promoter group holding of designated securities in coordination with depositories and/or any other action as may be specified by SEBI. Further, any failure to pay such fines within the specified time period may result in the stock exchange(s) initiating other actions in accordance with law, after giving a written notice.
Amendment to the SEBI (Portfolio Managers) Regulations, 1993
SEBI, by way of a notification dated January 2, 2017, has amended the SEBI (Portfolio Managers) Regulations, 1993 (‘PM Regulations’) to provide an enabling framework for registration of fund managers desirous of providing services to overseas funds. A new chapter on ‘Eligible Fund Managers’ has been introduced, which inter alia sets out the registration procedure and obligations and responsibilities of eligible fund managers. Pursuant to the amendment, SEBI has permitted existing portfolio managers as well as new applicants compliant with the requirements specified under Section 9A(4) of the Income Tax Act, 1961 (‘ITA’) to act as ‘Eligible Fund Managers’. Eligible Fund Managers are exempt from certain provisions of the PM Regulations.
Amendment to the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014
SEBI, by way of a notification dated February 27, 2017 has amended the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014. Some key amendments are:
i. In case of delay, the applicant has to file an application for condonation of delay and the settlement fees payable by the applicant will be increased by levying simple interest at the rate of 6% p.a.;
ii. An application for default, which has been previously rejected by SEBI or withdrawn by the applicant, may be refiled and considered in exceptional circumstances (such as lapse of time since the default, weight of evidence against the applicant) and the payment of the additional fees and/or interest as recommended by the High Powered Advisory Committee;
iii. The settlement amount must be paid within 15 calendar days from the receipt of the notice of demand and such period may be extended by the panel of whole time members by an additional 15 calendar days, but no later than 90 calendar days from the date of the receipt of the demand notice. If the amount is remitted between the 30th and 90th calendar day, interest at 6% p.a. will be levied from the date of the notice till the payment of the settlement amount. Upon failure by the applicant to remit the settlement amount within such period and/or abide by the relevant undertaking and waivers, SEBI may reject the application;
iv. Except in cases specifically excluded from settlement, a settlement notice indicating the substance of charges and the probable actions may be issued in advance of the notice to show cause so as to afford an opportunity to file a settlement application within 15 calendar days from the receipt of such settlement notice. However, SEBI will have the power to modify the enforcement action to be brought against the notice and the notice will not confer any right to seek settlement or avoid any enforcement action; and
v. Applications filed voluntary or suo moto will get the benefit of a proceeding conversion factor of 0.65 as opposed to the existing 0.75.
SEBI (Listing Obligations and Disclosure Requirements) Amendment Regulations, 2017
SEBI, by way of a notification dated February 15, 2017, has amended the SEBI (Listing Obligations and Disclosure Requirements Regulations, 2015 (‘LODR’). Regulation 37 of the LODR stipulates that a listed company desirous of undertaking a scheme of arrangement or involved in such scheme is required to file the draft scheme with the relevant stock exchanges and obtain a no-objection / no-observation letter from the stock exchange prior to filing such scheme under the provisions of the Companies Act, 1956 or CA 2013. Pursuant to the amendment, SEBI has provided that these provisions of Regulation 37 will not be applicable in case of a scheme, which provides solely for the merger of a wholly owned subsidiary with its holding company, provided that the draft scheme is filed with the stock exchanges for the purpose of disclosure.
SEBI Permits FPIs to Invest in Unlisted Debt Securities and Securitized Debt Instruments
SEBI has, by way of a notification dated February 27, 2017, amended the provisions of the SEBI (Foreign Portfolio Investors) Regulations, 2014 to permit registered FPIs to invest in (i) unlisted non-convertible debentures (‘NCDs’)/bonds issued by an Indian company subject to the guidelines issued by the Ministry of Corporate Affairs and (ii) 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 certain listed securitized debt instruments. Additionally, SEBI has specified by its circular dated February 28, 2017, that investment by FPIs in unlisted corporate debt securities in the form of NCDs/bonds will 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. SEBI has also clarified that investment by FPIs in securitized debt instruments will not be subject to the minimum three-year residual maturity requirement. SEBI has also specified that investments in unlisted corporate debt securities and securitized debt instruments will be permitted up to an aggregate of Rs. 35,000 crores (approximately US$ 5.4 billion) within the existing investment limits prescribed for corporate debt from time to time (presently, Rs. 244,323 crores (approximately US$ 38 billion)).
RBI had earlier, by way of a notification dated October 24, 2016, introduced corresponding amendments to FEMA 20 and prescribed similar conditions for such investments by an FPI by way of a circular dated November 17, 2016. A summary of these RBI notifications has been captured in our January 2017 edition of Inter Alia.
Further, SEBI has also amended the definition of ‘offshore derivative instrument’ to permit FPIs to issue instruments with the underlying being unlisted debt securities or securitized debt instruments held by such FPI.
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.
Revised Guidelines for Registration of Infrastructure Provider – I
On January 13, 2017, the Department of Telecom (‘DoT’) issued revised guidelines for registration of Infrastructure Provider – I (‘IP-I’) to incorporate the relevant provisions of the FDI Policy. 100% FDI is permitted in an IP-I, with 49% FDI permitted under the automatic route. The guidelines clarify that both direct and indirect foreign investment in the IP-I entity will be taken into account for computing FDI.
 Infrastructure providers who provide dark fiber, right of way, duct space and towers.
Claim of Damages for Breach of Contract under Section 73 of the Contract Act, 1872 by a non-resident does not violate the RBI guidelines
On February 9, 2017, in the case of Shakti Nath and Ors v. Alpha Tiger Cyprus Investments, the Delhi High Court (‘Delhi HC’), while deciding a challenge to an arbitral award involving enforcement of put option rights, held that awarding damages to a non-resident investor does not amount to an indirect enforcement of an optionality clause under a contract.
Two foreign entities (‘Respondents’) had entered into inter alia a shareholders’ agreement (‘SHA’) with certain resident entities (‘Petitioners’) to invest in an Indian company in the real estate sector. The SHA provided for a ‘put option right’ in favour of the Respondents, entitling the Respondents, upon non-fulfilment of certain conditions by the Petitioner, to require the Petitioners to acquire the Respondents’ shares at a price ‘equal to the Investors’ Capital plus a post tax IRR of 19% on the Investors’ Capital’. The arbitral tribunal, appointed upon occurrence of certain disputes, awarded damages to the Respondents on finding that the Petitioners had breached their obligations under the SHA.
The issue before the Delhi HC was whether awarding damages to the Respondents would amount to an enforcement of their put option right, thereby violating the guidelines set out in the RBI Circular dated July 15, 2014 (‘RBI Circular’). The RBI Circular states that a transfer of shares between a resident and a non-resident is required to be undertaken at a price computed in accordance with internationally accepted methodology, with the underlying principle being that a non-resident investor cannot be guaranteed an assured return on its exit price.
The Delhi HC held that the Respondents had a choice between enforcement of the put option and claiming damages for breach of the SHA. Given that the Respondents chose to make a claim for damages for breach of contract under Section 73 of the Contract Act, 1872, the question of violation of the RBI Circular did not arise.
It is pertinent to note that the judgment reflects the pro-arbitration stance of Indian Courts, and indicates a liberal approach towards enforcement of awards arising out of obligations under optionality contracts.
 Judgment dated February 9, 2017, in OMP (Comm) 154/2016. (Delhi High Court)
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
Guidelines on Issuance of Offshore Derivative Instruments with Underlying Derivatives
On July 7, 2017, the Securities and Exchange Board of India (‘SEBI’) issued a circular on guidelines for issuance of offshore derivative instruments (‘ODIs’), with derivatives as underlying, by the ODI issuing foreign portfolio investors (‘FPI’) (‘ODI Guidelines’). As per the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’), FPIs are required to comply with certain conditions for issuance of ODIs. Per the ODI Guidelines, FPIs issuing ODIs are required to comply with the following from July 7, 2017:
i. The ODI issuing FPIs will not be allowed to issue ODIs with derivatives as underlying, with the exception of those derivative positions that are taken by the ODI issuing FPIs for hedging the equity shares held by them, on a one-to-one basis;
ii. If there are existing ODIs issued by FPIs where the said underlying derivatives position are not for the purpose of hedging the equity shares held by it, the ODI issuing FPIs are required to liquidate such ODIs latest by the earlier of the date of maturity of the ODI instrument or by December 31, 2020. However, such FPIs must endeavor to liquidate such ODI instruments prior to the said timeline;
iii. If fresh ODIs are issued with derivatives as underlying, a certificate would need to be issued by the compliance officer (or its equivalent) of the ODI issuing FPI, certifying that the derivatives position, on which the ODI is being issued, is only for hedging the equity shares held by it, on a one-to-one basis. The said certificate will be submitted alongwith the monthly ODI reports; and
iv. It has been clarified that the term ‘hedging of equity shares’ means taking a one-to-one position in only those derivatives which have the same underlying as the equity share.
Debt Investments by FPIs
SEBI issued a circular on July 20, 2017, which brought about the following modifications to the existing legal framework governing investments in corporate debt by FPIs:
i. 95% of the combined corporate debt limit (‘CCDL’) will be available for FPI investment on tap, after which an auction mechanism will be initiated for allocating the remaining limits.
ii. Once such limit is exceeded, the National Securities Depository Limited and Central Depository Services Limited will direct custodians to halt further investments in corporate debt securities by FPIs, and inform BSE Limited and National Stock Exchange of India Limited to conduct an auction for allocation of the unutilised FPI corporate debt limit, provided such limit is at least Rs. 100 crores (approx. US$ 15.3 million). If the unutilised FPI corporate debt limit continues to remain lower than the above amount for 15 consecutive trading days, then an auction is to be conducted on the 16th day.
iii. The minimum bid is Rs. 1 crore (approx. US$ 153,000), and the maximum bid is for 10% of the unutilised FPI corporate debt limit. A single FPI/ FPI group cannot bid for more than 10% of the limits being auctioned.
iv. Once the unutilised FPI corporate debt limit has been auctioned, the FPIs have a utilisation period of 10 trading days to make investments, after which the unutilized FPI corporate debt limit allocated to them, reverts to the pool of free limits.
v. Investment in corporate debt by FPIs on tap and issuance of rupee denominated bonds overseas by Indian companies will again be available once the FPI corporate debt limit utilisation levels fall back to less than 92%.
vi. Investments by FPIs in unlisted corporate debt will compulsorily be in dematerialised form, and be subject to a minimum residual maturity period of three years.
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.
Amendment to SEBI (Alternative Investment Funds) Regulations, 2012
Pursuant to the decision taken in the SEBI Board Meeting, the SEBI (Alternative Investment Funds) Regulations, 2012 have been amended with effect from January 4, 2017 as follows:
i. The upper limit of angel investors in a scheme has been increased from 49 to 200;
ii. Angel funds are permitted to invest in start-ups incorporated within five years from incorporation, which has been increased from the earlier limit of three years;
iii. The requirements of minimum investment amount by an angel fund in any venture capital undertaking has been reduced from Rs. 50,00,000 (approximately US$ 75,000) to Rs. 25,00,000 (approximately US$ 37,500), and the lock-in period of these investments has been reduced from three years to one year; and
iv. Angel funds will now be permitted to invest in securities of foreign companies, subject to the guidelines and conditions issued by the RBI and SEBI.
Change in Corporate debt limits for FPIs
SEBI, on August 4, 2016, had redefined the corporate debt limit of Rs. 244,323 crores (approx. US$ 38 billion) for FPIs as the CCDL for all foreign investments in rupee denominated bonds (‘RDBs’) issued onshore and offshore by Indian corporates. Subsequently, the RBI, by way of its circular dated September 22, 2017, excluded foreign investment in RDBs issued offshore by Indian corporates from CCDL, with effect from October 3, 2017. In line with the same, SEBI, on September 29, 2017, has notified that foreign investments in rupee denominated bonds issued offshore by Indian corporates would no longer form a part of CCDL. Additionally, CCDL would be renamed as the corporate debt investment limits (‘CDIL’) for FPIs and the upper limit for CDIL would be stated only in Rupee terms.
The circular also contemplates the creation of a sub-limit within the overall CDIL exclusively for investments by long term FPIs in the infrastructure sector, which sub-limit would include investment in both listed and unlisted corporate debt issued by companies in the infrastructure sector. The sub-limit would be Rs. 9,500 crores (approx. US$ 1.5 billion) from October 3, 2017 and will be enhanced to Rs. 19,000 crores (approx. US$ 3 billion) on January 1, 2018 and will also be available for investment on tap. As mandated by SEBI previously, investment by FPIs in unlisted corporate debt securities and securitized debt instruments is not permitted to exceed Rs. 35,000 crores (approx. US$ 5.4 billion) within the extant CDIL.
Consultation Paper on Easing of Access Norms for Investment by FPIs
SEBI, on June 28, 2017, issued a consultation paper on Easing of Access Norms for Investment by FPIs, which inter alia proposes the following key amendments to the FPI Regulations:
i. The jurisdictions from which Category I FPI registrations are allowed should also include jurisdictions that are compliant with the extant foreign exchange regulatory framework and that have formal diplomatic ties with India (such as Canada). Presently, such registrations are limited to those entities which are resident of a country whose securities market regulator is either a signatory to International Organisation of Securities Commissions’ Multilateral Memorandum of Understanding or has a bilateral Memorandum of Understanding with SEBI;
ii. Discontinuance of the requirement to seek prior approval from SEBI in case of change of the designated depository participant / custodian of the FPI.
iii. Deeming as ‘broad based’ (for the purpose of Category II FPI registration) applicant funds which have banks, sovereign wealth funds, insurance/ reinsurance companies, pension funds, and/or exchange traded funds as underlying investor(s), subject to the condition that such underlying investor(s) in the applicant fund should either individually or jointly hold majority stake in the applicant fund at all times; and
iv. Permitting different custodians for FPI and foreign venture capital investor (‘FVCI’) registrations for the same entity (presently, an entity holding FPI and FVCI registration is required to have the same custodian for both registrations). SEBI has also proposed that if an entity has a FPI registration and a FVCI registration, then the investment limit of 10% under the FPI Regulations should also include FVCI investments by entities forming a part of the same investor group. Further, SEBI proposes that FPIs must report details of all other FVCIs which share more than 50% common beneficial ownership to the designated depository participant at the time of seeking registration, and FVCI applicants are also proposed to be mandated to provide details of ‘group’ FPI accounts to SEBI at the time of making an application for FPI registration.
The Consultation Paper also prescribes norms for rationalization of fit and proper criteria for FPIs, rationalization of certain compliance requirements, and other related matters. SEBI invited comments and views on the consultation paper by stakeholders, the window for which is now closed.
Disclosure of Divergence in the Asset Classification and Provisioning by Banks
Pursuant to the RBI notification dated April 18, 2017 requiring certain disclosures by banks in cases of divergence in asset classification and provisioning, SEBI, by its circular dated July 18, 2017 mandated banks with listed specified securities (equity shares and convertible securities) to disclose divergences in asset classification and provisioning to the stock exchanges in the prescribed format where:
i. the additional provisioning requirements assessed by the RBI exceed 15% of the published net profits after tax for the reference period; and/or
ii. the additional gross non performing assets identified by the RBI exceed 15% of the published incremental gross non performing assets for the reference period.
Such disclosures are required to be made along with the annual financial results filed immediately following communication of such divergence by the RBI to the concerned bank, as an annexure to the disclosures to the annual financial results filed with the stock exchanges in accordance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Amendment to SEBI (Real Estate Investment Trusts) Regulations, 2014 and SEBI (Infrastructure Investment Trusts) Regulations, 2014
Pursuant to the meeting of the SEBI board held on September 23, 2016, SEBI has amended the SEBI (Real Estate Investment Trusts) Regulations, 2014 and the SEBI (Infrastructure Investment Trusts) Regulations, 2014. Some of the key amendments include:
i. The minimum holding of the mandatory sponsor in the infrastructure investment trust (‘InvIT’) has been reduced from 25% to 15%;
ii. The existing limit of three sponsors has been removed from both regulations;
iii. The permissible investment limit for investment by real estate investment trusts (‘REIT’) in ‘under construction’ assets has been increased from 10% to 20%; and
iv. InvITs and REITs are allowed to invest in a two-level SPV holding structure, through a holding company.
Disclosure by Listed Entities of Defaults on Payment of Interest or Repayment of Principal Amount on Loans
SEBI had issued a circular on August 4, 2017 mandating disclosures by listed entities that have defaulted on inter alia, either the payment of interest or the repayment of the principal amount on loans taken from banks or financial institutions, with effect from October 1, 2017. Accordingly, all entities which have listed any specified securities (equity and convertible securities), non-convertible debt securities or non-convertible and redeemable preference shares, are required to disclose any default with respect to, either the payment of interest, or instalment obligation on debt securities (including commercial paper), medium term notes, foreign currency convertible bonds, loans from banks and financial institutions, external commercial borrowings, etc.
However, SEBI, through its press release dated September 29, 2017, has decided to indefinitely defer the implementation of this circular.
Amendments to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
SEBI, on August 14, 2017, notified amendments to Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) pursuant to which exemptions from making an open offer have been accorded to certain acquisitions under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and under debt restructuring schemes subject to compliance with the conditions specified therein.
Definition of ‘Control’ under the Takeover Regulations
With a view to bring about clarity on the definition of “control” under the Takeover Regulations, SEBI had, on March 14, 2016, published a discussion paper setting out certain bright line tests for the interpretation of the term “control”, which, inter alia, sets out a set of protective (as opposed to participative) rights which would not be constituted as ‘control’. However, SEBI has, by a press release, on September 8, 2017, clarified that it does not propose to formalize these rights into the Takeover Regulations and, instead, proposes to continue with the subjective definition of “control”, and determine what constitutes “control” on a case to case basis.
Consultation Paper on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013
SEBI, on June 22, 2017, issued a consultation paper on Amendments/ Clarifications to the SEBI (Investment Advisers) Regulations, 2013 (‘IA Regulations’), setting out the following key proposals:
i. Segregation between “investment advisory” services and “distribution/execution services”: To maintain a clear segregation between these two services provided by the same entity and to prevent associated conflicts of interest, SEBI has proposed amending the IA Regulations to prohibit entities offering investment advisory services from offering distribution/execution services, including in cases of banks, non-banking financial companies and body corporates that offer such services through separately identifiable departments or divisions. Such departments will be required to be segregated within a period of six months through a separate subsidiary. Entities which provide advice solely on products which do not qualify as securities have been excluded from the purview of the IA Regulations.
ii. Distribution of mutual fund schemes by distributors: To maintain a clear segregation between “advising” and “selling / distribution” of mutual fund products”, SEBI proposes that mutual fund distributors will only be permitted to explain the features of schemes of which they are distributors and distribute them while ensuring suitability of the scheme to the investors, but will not give any investment advice.
iii. Incidental advice by recognized intermediaries: Under the existing framework, exemptions from IA registration have been granted to inter alia various intermediaries, who give investment advice to their clients incidental to their primary activity. SEBI has now proposed that in order to have a clear segregation between “investment advisory services” and other services provided by such intermediaries, all intermediaries who receive separate identifiable consideration for investment advisory services will need to register with SEBI as an investment adviser. Moreover, persons who provide holistic advice/ financial planning services are compulsorily required to be registered as investment advisers.
iv. Relaxation in registration requirements: SEBI has proposed that the educational qualification requirements for representatives/employees of registered investment advisers be relaxed. It has also been proposed to reduce the net worth requirement for body corporates from Rs. 25 lakhs (approx. US$ 38,000) to Rs. 10 lakhs (approx. US$ 15,000).
v. Regulation of the activity of ranking of mutual fund scheme: SEBI has proposed that the activity of ranking of mutual fund schemes be brought within the ambit of SEBI (Research Analyst) Regulations, 2014, under a separate chapter.
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.
Notification of Reserve Bank Commercial Paper Guidelines, 2017
The RBI has by a notification dated August 10, 2017 issued the Reserve Bank Commercial Paper Directions, 2017 (‘New CP Directions’) in supersession of the existing directions on the same, which inter alia specifies the following:
i. A commercial paper (‘CP’) will be issued in the form of a promissory note, held in a dematerialized form with a denomination of Rs. 5 lakhs (approx. US$ 7,600) or multiples thereof. The issuance must be at a discount to face value with no issuer having such issue underwritten or co-accepted. Optionality clauses, such as put and call options, are not permitted on a CP. The original tenor of a CP must be between seven days to one year.
ii. Companies, including non-banking financial companies and All India Financial Institutions will be eligible to issue CPs, with no minimum net worth requirement. Entities such as co-operative societies / unions, Government entities, trusts, LLPs and other bodies corporate can also issue CPs, provided that they have a presence in India and a minimum net worth of Rs. 100 crores (approx. US$ 15.3 million).
iii. Eligible investors include all residents, non-residents who are permitted to invest in CPs under the exchange control regulations. However, no person is allowed to invest in CPs issued by related parties either in primary or secondary market. Additionally, investment by regulated financial sector entities will be subject to conditions imposed by the concerned regulator.
iv. Issuers, whose total CP issuance during a year is Rs. 1,000 crores (approx. US$ 153 million) or more, should obtain credit rating of a minimum of ‘A3’ from at least two SEBI registered credit rating agencies.
v. No end-use restriction to a CP issuance has been prescribed but it should be disclosed in the offer document at the time of issuance.
vi. The buyback of a CP, in full or in part, must be at the prevailing market rate, which cannot be made before 30 days from the date of the issue.
vii. A CP will be a ‘stand-alone’ product, with banks and financial institutions optionally choosing to provide stand-by assistance / credit, back stop facility, etc. as a means of credit enhancement. Non-banking entities may provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided the offer document for CP properly discloses the net worth of the guarantor company, among other details.
viii. In case of secondary market trading and settlement of CP, all over-the-counter trades in CP will be reported within 15 minutes of the trade to the Financial Market Trade Reporting and Confirmation Platform of Clearcorp Dealing System (India) Ltd.
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.
SEBI Circular for Disclosure of the Impact of Audit Qualifications by Listed Entities
The Securities and Exchange Board of India (‘SEBI’), has issued a circular on May 27, 2016, for streamlining the existing process of disclosure of the impact of audit qualifications by listed companies under the SEBI (Listing and Other Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’). Listed companies are required to disclose the cumulative impact of all audit qualifications in a separate format for the period ending on or after March 31, 2016, simultaneously, while submitting the annual audited financial results to the stock exchanges. SEBI has now dispensed with the requirement of filing Form A or Form B for audit report with unmodified or modified opinion and the requirement of making adjustment in the books of accounts of the subsequent year, and the management of the listed entity will have the option to explain its views on the audit qualifications. If the impact of the audit qualification is not quantified by the auditor, the management must provide an estimate and if the management is unable to provide an estimate, it must state reasons for the same. In both instances, the auditor is required to review and provide comments.
Informal guidance under the Listing Regulations
SEBI has issued an informal guidance dated August 23, 2016, under the SEBI (Informal Guidance) Scheme, 2003 (‘IG Scheme’) in the matter of Krebs Biochemicals & Industries Limited regarding the requirement to obtain a shareholders’ resolution for reclassification of the promoters as per the Listing Regulations. SEBI has clarified that subject to compliance with Regulation 31A of the Listing Regulations (which lists down conditions for reclassification), reclassification of the promoters of a listed company as public shareholders, not being pursuant to an open offer (in terms of Regulation 31A(5) of the Listing Regulations) or pursuant to a listed entity becoming professionally managed (in terms of Regulation 31A(6) of the Listing Regulations), would not require any approval from the shareholders of the listed entity.
Amendment of the Listing Regulations
Pursuant to the notification dated July 8, 2016, SEBI has amended the Listing Regulations to include Regulation 43A, which states that the top 500 listed entities based on market capitalization (calculated as on March 31 of every financial year) are required to formulate a dividend distribution policy that must be disclosed in their annual reports and on their websites. Further, if a listed entity declares dividend on the basis of any additional parameters or proposes to amend the dividend declaration policy, it will be required to disclose the rationale for such changes in its annual report and on its website. However, companies other than the top 500 listed entities may voluntarily disclose their respective dividend distribution policies.
Amendments to the SEBI (Foreign Portfolio Investment) Regulations, 2014
SEBI, by way of a notification dated July 8, 2016, amended the SEBI (Foreign Portfolio Investment) Regulations, 2014, by substituting Regulation 22(2). The amendment stipulates that a foreign portfolio investor (‘FPI’) is required to ensure that transfer of offshore derivate instruments (‘ODIs’) issued by or on behalf of it, is made subject to: (i) the ODIs being transferred to persons subject to fulfilment of Regulation 22(1), i.e., no FPI may issue, subscribe to or otherwise deal in ODIs, directly or indirectly, unless: (a) such ODIs are issued only to persons who are regulated by an appropriate foreign regulatory authority, and (b) such ODIs are issued after compliance with ‘know your customer’ norms; and (ii) prior consent of the FPI having been obtained for such transfer (except when the transferee has been pre – approved by the FPI).
FAQs in relation to issuance and transfer of ODIs
As per the key clarifications provided by SEBI in the FAQs dated September 2, 2016, in relation to its circular dated June 10, 2016, which had specified the conditions for issuance and transfer of ODIs:
i. The beneficial owners of an ODI subscriber cannot be a non-resident Indian, a person of Indian origin, or an Indian resident, (as defined under the Income-tax Act, 1961);
ii. Regarding verification of beneficial owners of ODI subscribers pursuant to the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, SEBI has clarified that the relevant thresholds for identification of the beneficial owner are required to be applied at the subscriber level (and not to the material shareholder / owner entity of the subscriber, as prescribed earlier). Similarly, if no material shareholder / owner entity is identified as the ODI subscriber, the ODI issuer must obtain the identity and address proof of the relevant natural person who holds the position of senior managing official of the ODI subscriber entity (and not in the material shareholder / owner entity, as had been specified earlier).
Meeting of the SEBI Board
The SEBI Board met on September 23, 2016 and took the following decisions:
i. Currently, FPIs are required to transact in securities through stock brokers registered with SEBI, while domestic institutions such as banks, insurance companies, pension funds etc. are permitted to access the bond market directly (i.e. without brokers). SEBI has decided to extend this privilege to Category I and Category II FPIs.
ii. In order to facilitate the growth of Investment Trusts (“InvIT”) and Real Estate Investment Trusts (“REIT”), SEBI has decided to amend the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and the SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”). The key amendments will include:
a. InvITs and REITs will be allowed to invest in the two level SPV structure through the holding company subject to sufficient shareholding in the holding company and other prescribed safeguards. The holding company would have to distribute 100% cash flows realised from the underlying SPVs and at least 90% of the remaining cash flows.
b. The minimum holding of the mandatory sponsor in the InvIT has been reduced to 15%.
c. REITs have been permitted to invest upto 20% in under construction assets.
d. The limit on the number of sponsors has been removed under the REIT Regulations.
iii. The SEBI Board has approved amendments to the SEBI (Portfolio Managers) Regulations, 1993, to provide a framework for the registration of fund managers for overseas funds, pursuant to the introduction of section 9A in the Income Tax, 1961.
iv. The SEBI Board has decided to grant permanent registration to the following categories of intermediaries: merchant bankers, bankers to an issue, registrar to an issue & share transfer, underwriters, credit rating agency, debenture trustee, depository participant, KYC registration agency, portfolio managers, investment advisers and research analysts.
v. The Securities Contracts (Regulation) (Stock Exchanges and Cleaning Corporations) Regulations, 2012 have been amended to increase the upper limit of shareholding of foreign institutional investors mentioned in the Indian stock exchanges from 5% to 15% and to allow an FPI to acquire shares of an unlisted stock exchange through transactions outside of recognised stock exchange including allotment.
Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016
The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (‘ESIRDA Act), which has been enacted by the Parliament and received Presidential assent on August 12, 2016, seeks to amend certain provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI’), the Recovery of Debts due to Banks and Financial Institutions Act, 1993, (‘RDBFI Act’), the Indian Stamp Act, 1899 (‘ISA’), and the Depositories Act, 1996 (‘Depositories Act’). Certain sections of the ESIRDA Act have been notified with effect from September 1, 2016.
i. Key Amendments to SARFAESI: (a) Debenture trustees registered with SEBI have now been included in the definition of ‘secured creditor’, and can take enforcement action under Section 13 of the SARFAESI, as the remedies under SARFAESI have been extended to apply to listed debt securities. The scope of SARFAESI has been widened to include hire purchase, financial leasing and conditional sale transactions; (b) the process of taking possession over collateral against which a loan has been provided by a secured creditor, with the assistance of the Chief Metropolitan Magistrate or District Magistrate, has been made time-bound, requiring an order to be passed within 30 days from the date of application by the secured creditor; (c) amendments relating to registration of security interest have been introduced, including: (1) a proposal to set up a central database to integrate records of security registered under various registration systems including those made under the Companies Act and the Registration Act, 1908; (2) Central Government may require creditors not qualifying as “secured creditors” under SARFAESI to register the creation, modification and satisfaction of security interest with such central registry; and (3) after registration of security interest with the central registry, the debts due to any secured creditor will have priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central, State or local Governmental authorities.
ii. Key Amendments to ISA: The ESIRDA Act amends the ISA to exempt stamp duty on instruments of transfer or assignment of rights or interest in financial assets to asset reconstruction companies, where such transfer is for the purpose of asset reconstruction or securitisation. Security receipts issued by such asset reconstruction companies may be subscribed to by non-institutional and other investors of prescribed classes.
iii. Key Amendments to RDBFI Act: (a) Debenture trustees registered with SEBI can initiate proceedings under the RDBFI Act regarding defaults in listed debt securities; (b) a bank or a financial institution has now been permitted to take proceedings under RDBFI Act before a tribunal in whose jurisdiction where the defaulted account is maintained / located; (c) a defendant, upon service of summons under the RDBFI Act, is restricted from transferring the secured assets or other assets disclosed in the application made by the bank or financial institution without the approval of the tribunal, except in the ordinary course of business; and (d) electronic filing of recovery applications, documents and written statements has been introduced.
iv. Other Significant Changes: The Depositories Act has been amended to require registration by a depository of any transfer of security in favour of an asset reconstruction company along with or consequent upon transfer or assignment of a financial asset of any bank or financial institution under SARFAESI. Additionally, every depository is also required to register any issue of new shares in favour of any bank or financial institution or asset reconstruction company or any of their assignees, by conversion of part of their debt into shares pursuant to reconstruction of debts of the company agreed between the company and the bank, financial institution or asset reconstruction company.
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 Exchange Management (Deposit) Regulations, 2016
RBI has, by way of notification dated April 1, 2016, issued the Foreign Exchange Management (Deposit) Regulations, 2016, which supersede the erstwhile regulations of 2000, with the following key changes:
i. A person resident outside India having a business interest in India is permitted to open a Special Non Resident Rupee Account (‘SNRR Account’) with an AD Bank for bona fide transactions in Rupees subject to certain conditions;
ii. A shipping or airline company incorporated outside India is permitted to hold and maintain a foreign currency account with an AD Bank for meeting expenses in India. However, freight or passage fare collections in India or inward remittances through banking channels from its office outside India are the only permissible credits; and
iii. An AD Bank is permitted to allow unincorporated joint ventures between foreign and Indian entities executing a contract in India, to open and maintain a non-interest bearing foreign currency account and a SNRR Account for the purpose of undertaking transactions in the ordinary course of its business, subject to certain conditions.
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)).
Guidelines for Public Issue of Units of Infrastructure Investment Trusts
SEBI has, on May 11, 2016, issued Guidelines for Public Issue of Units of Infrastructure Investment Trusts (‘Guidelines’), which amend the provisions of the SEBI (Infrastructure Investment Trusts) Regulation, 2014 (‘SEBI InvIT Regulations’).
The Guidelines set out the procedure to be followed by an infrastructure investment trust (‘InvIT’) in relation to a public issue of its units, which includes the appointment of a lead merchant banker and other intermediaries, procedure for filing of offer documents with SEBI and the stock exchanges, the process of bidding and allotment. Further, the allocation in a public issue is required to be in the following proportion: (i) not more than 75% to institutional investors; and (ii) not less than 25% to other investors; provided that the investment manager has the option to allocate 60% of the portion available for allocation to institutional investors and anchor investors (which includes strategic investors), subject to certain conditions. Further, the investment manager, on behalf of the InvIT is required to deposit and keep deposited with the stock exchange(s), an amount equal to 0.5% of the amount of the units offered for subscription to the public or Rs 5 crores (approximately US$ 7,45,000), whichever is lower. The price of units can be determined either: (i) by the investment manager in consultation with the lead merchant banker; or (ii) through the book building process. However, differential prices are not permitted.
Amendment of Guidance Note on SEBI (Prohibition of Insider Trading) Regulations, 2015
SEBI has, on April 12, 2016, amended the guidance note on SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) which was issued on August 24, 2015 to extend the exemption from ‘contra trade’ restrictions under the PIT Regulations to exit offers in addition to buy back offers, open offers, rights issues, Follow – on Public Offers, bonus issues, etc.
SEBI Board Meetings
SEBI, in its board meeting held on May 19, 2016, approved the incorporation of the internal guidance note in the SEBI (Settlement of Administrative and Civil Proceedings) Regulations 2014 (‘Settlement Regulations’), to clarify that only serious and substantial cases are to be taken for enforcement under Regulation 5(2)(b) of the Settlement Regulations. For this purpose, defaults which in the opinion of SEBI have a bearing on the securities market as a whole and not just the listed security and its investors may be considered to have market wide impact.
Thereafter, in its meeting held on June 17, 2016, SEBI approved the two consultation papers in relation to the changes to be made to the SEBI (Portfolio Managers) Regulations and the SEBI InvIT Regulations.
SEBI Circular on Restriction on Redemption in Mutual Funds
SEBI, on May 31, 2016 issued a circular providing details of certain specified circumstances in which mutual funds/ asset management companies/ trustees could impose restrictions on redemption of units of their mutual fund schemes. SEBI has provided that the restriction on redemption cannot exceed ten working days in any 90 day period and would be applicable for redemption requests above Rs 200,000 (approximately US$ 2,975). Further, specific approval of the board and trustees of an asset management company is required before imposing such restrictions and SEBI should be notified of such approval immediately.
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.
Manner of achieving minimum public shareholding
The Securities Exchange Board India (‘SEBI’) has, by its circular dated February 22, 2018 (‘MPS Circular’), introduced the following two additional methods that can be adopted by listed entities to achieve minimum public shareholding in compliance with the requirements under the Securities Contracts (Regulation) Rules, 1957 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘ICDR Regulations’):
i. Open Market Sale:
a. Promoters/ promoter group are now permitted to sell up to 2% of their total paid-up equity share capital in the company in the open market, subject to five times’ average monthly trading volume of the shares of such company.
b. The entity is required to, at least one trading day prior to every such proposed sale,announce the: (A) intention and purpose of sale; (B) details of the sellers and the shares to be sold; and (C) time period for completion of the sale, to the stock exchange(s) where its shares are listed.
c. The listed entity is also required to give an undertaking to the relevant stockexchange(s) obtained from the promoters/ promoter group to not buy any shares in the open market on the dates on which the offer for sale is open.
ii. Qualified Institutions Placement of eligible securities under Chapter VIII of the ICDR Regulations: SEBI, by way of a circular dated February 12, 2018, has dispensed with the requirement of adhering to minimum public shareholding for a listed issuer intending to make a Qualified Institutions Placement.
The MPS Circular supersedes a previous circular issued by SEBI on November 30, 2015.
Easing of access norms for investments by Foreign Portfolio Investors
SEBI has, by way of circulars dated February 15, 2018 and March 13, 2018 (collectively, the ‘FPI Circulars’), revised the regulatory framework governing foreign portfolio investors (‘FPIs’) under the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’) to ease the access norms for investments by FPIs. Some of the key changes that have come into force are set out below:
i. The current requirement of prior SEBI approval for a change in local custodian/ designated depository participant (‘DDP’) has been replaced with the requirement of obtaining a no-objection certificate from the earlier DDP, followed by a post-facto intimation to SEBI.
ii. The regime has been liberalized concerning FPIs having ‘Multiple Investment Managers’ structure and the same permanent account number, with respect to ‘Free of Cost’ transfer of assets. Approval of SEBI is now not required and DPPs are now entitled to process such requests.
iii. In case of addition of a new share class, where a common portfolio of Indian securities is maintained across all classes of shares/fund/sub-fund and broad based criteria are fulfilled at a portfolio level after adding a new share class, prior approval of the DDP is no longer required.
iv. Private banks and merchant banks are now permitted to undertake investments on behalf of their respective investors, provided that the investment banker/merchant banker submits a prescribed declaration.
v. SEBI also clarified that appropriately regulated Category II FPIs viz. asset management companies, investment managers/ advisers, Portfolio managers, Broker-dealer and Swap-dealer etc. are permitted to invest their proprietary funds.
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.
Participation by Strategic Investor(s) in InvITs and REITs
Pursuant to SEBI’s circular dated January 18, 2018 (‘SEBI Circular’), a Real Estate Investment Trust (‘REIT’) / Infrastructure Investment Trust (‘InvIT’) may invite subscriptions from strategic investors subject to inter alia the following:
i. The strategic investors can, either jointly or severally, invest not less than 5% and not more than 25% of the total offer size.
ii. The investment manager or manager is required to enter into a binding unit subscription agreement with the strategic investors proposing to invest in the public issue, which agreement cannot be terminated except if the issue fails to collect minimum subscription.
iii. The entire subscription price has to be deposited in a special escrow account prior to opening of the public issue.
iv. The price at which the strategic investors have agreed to buy units of the InvIT/ REIT should not be less than the public issue price. In case of a lower price, the strategic investors should bring in the additional amounts within two working days of the determination of the public issue price, and in case of a higher price, the excess amount will not be refunded and the strategic investors will be bound by the price agreed in the unit subscription agreement.
v. The draft offer document or offer document, as applicable, will disclose details of the unit subscription agreement, including the name of each strategic investor, the number of units proposed to be subscribed etc.
vi. Units subscribed by strategic investors, pursuant to the unit subscription agreement, will be locked-in for a period of 180 days from the date of listing in the public issue.
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.
SEBI informal guidance in the matter of UBS AG
UBS AG is a Category II registered FPI and is not a promoter of any listed entity. Regulation 32(2)(d) of the FPI Regulations requires the depository participant engaged by an FPI to ensure that equity shares held by the FPI are free from encumbrances and to obtain a declaration from the FPI to this effect. UBS AG, under the SEBI (Informal Guidance) Scheme, 2003, sought certain clarifications from SEBI:
i. whether the term ‘encumbrance’ would include non – disposal undertakings in relation to the FPIs who are investors in the capacity of acquirer and not promoter.; and
ii. whether the FPIs are restricted from executing non disposal undertaking with third parties by providing limited undertaking to the depository participant.
SEBI, by way of clarification dated March 14, 2018, was of the view that the term ‘encumbrance’ would include non – disposal undertakings and accordingly, FPIs would not be permitted to execute the non – disposal undertakings.
 It is pertinent to note that the term ‘encumbrance’ is not defined under the FPI Regulations. However the term includes pledges, liens, non disposal undertakings and other transactions in terms of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011.
SEBI Order in the matter of Price Waterhouse relating to the case of Satyam Computer Services Limited.
An order was passed by SEBI in relation to the financial fraud perpetrated by the senior management of Satyam Computer Services Limited (‘Satyam’).
PriceWaterhouseCoopers, Chartered Accountants (‘PWC’) were the statutory auditors of Satyam since April 1, 2000. When the financial irregularities at Satyam came to light, SEBI issued notices to 11 entities in the PWC group and the 2 signatories of the auditors’ report of Satyam on behalf of PWC, namely, Mr. S Gopalakrishnan and Mr. Srinivas Talluri (collectively, the ‘Noticees’). The Noticees were accused by SEBI of (i) acting in violation of certain provisions of the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘FUTP Regulations’) and in gross violation of their duties and responsibilities as auditors while certifying the financial statements of Satyam for the period from 2000 to 2008; and (ii) being complicit or acquiesced in the fraud perpetuated at Satyam.
In its order of January 10, 2018 (‘Order’), SEBI observed that there had been a total abdication by PWC of its duty to follow minimum standards of diligence (including PWC’s own manual), which inter alia required external confirmation of bank balances and fixed deposits. Further, PWC failed to reconcile discrepancies in the records of Satyam, which it had full knowledge of and which had been flagged by Satyam’s internal auditors, and its report certified the fairness of Satyam’s financial statements, forming a vital component of the prospectus inducing investors to trade in the scrip of Satyam believing it to be in a sound financial position.
SEBI inferred that their involvement was mala fide, and that the only reason for such a casual approach taken by PWC could be either complacency or complicity, and that PWC’s acts amounted to commission of fraud for the purposes of the SEBI Act and the PFUTP Regulations. In SEBI’s view, while PWC group entities are separate entities, they functioned as a single unit for all practical purposes in the context of the fraud at Satyam, and therefore, SEBI directed: (i) debarment from directly or indirectly issuing certificates of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with SEBI for a period of two years for all PWC entities practicing as chartered accountants in India, and for a period of three years for the Noticees; (ii) disgorgement of wrongful gains of approximately Rs. 13.09 crore (approx. US$ 2 million) (joint and several liability) by PWC, Bangalore and the Noticees, with interest; and (iii) all listed companies and intermediaries registered with SEBI not to engage audit firms forming part of the PWC network for issuing any certificate with respect to compliance of statutory obligations for a period of two years.
An appeal against this Order filed by PWC is pending before the Securities Appellate Tribunal (‘SAT’). SAT has refused to grant a stay on the two-year audit ban imposed by SEBI, but has clarified that PWC is permitted to service its existing clients for the fiscal year 2017-2018 and is also permitted to complete assignments already undertaken for listed entities that follow the calendar year as their fiscal year, but is not permitted to undertake any new listed assignments.
Outcome of SEBI meeting held on March 28, 2018
In its meeting held on March 28, 2018, SEBI accepted the recommendations of the Kotak Committee on Corporate Governance (‘Committee’) along with certain other proposals discussed. Set out below are some of the key proposals:
i. (a) Reduction in the maximum number of listed entity directorships from 10 to (x) eight by April 1, 2019, and (y) seven by April 1, 2020; (b) expanding the eligibility criteria for independent directors; (c) disclosure of utilization of funds from qualified institutional placement or preferential issue; (d) separation of chief executive officer/managing director and chairperson (to be initially made applicable to the top 500 listed entities by market capitalization with effect from April 1, 2020); (e) enhancing the role of the audit committee, nomination and remuneration committee and the risk management committee; (f) strengthening the disclosures pertaining to related party transactions and related parties being permitted to vote against such transactions; (g) enhancing the obligations on listed entities with respect to subsidiaries; and (h) shareholder approval (majority of minority) for royalty/brand payments to related party exceeding 2% of consolidated turnover.
ii. Certain amendments to SEBI (Alternative Investment Funds) Regulations, 2012, with respect to ‘Angel Funds’: (i) Maximum investment amount in venture capital undertakings by an angel fund has been increased from Rs. 5 crores to Rs. 10 crores (approx. US$ 750,000 to US$ 1.5 million); (ii) mandatory minimum corpus of an angel fund has been reduced to Rs. 5 crores (approx. US$ 750,000); and (iii) provisions of the Companies Act have been made applicable to an angel fund, if formed as a company.
iii. Revision of the existing framework for non-compliance of the listing regulations by listed companies, inter alia, empowering the stock exchanges to freeze the shareholding of the promoter and promoter group in a non-compliant entity along with their shareholding in other securities. SEBI is empowered to order suspension if the non-compliance persists.
iv. Undertaking a public consultation process for a review of the SEBI (Buy-back of Securities) Regulations, 1998 and the Takeover Regulations and inviting comments from stakeholders in relation to compliance with various SEBI regulations by listed entities subject to the corporate insolvency resolution process under the IBC.
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.
Changes to Framework for Masala Bonds
The RBI, by way of Circular No. 47 dated June 7, 2017, has reviewed the existing framework in relation to the issuance of rupee denominated bonds overseas (‘Masala Bonds’) in order to harmonize the various elements of the ECB framework and revised the framework. The circular provides as follows:
(i) Proposal for issuance of Masala Bonds will be examined by the Foreign Exchange Department; (ii) The minimum original maturity period for Masala Bonds up to USD 50 million (equivalent in INR per financial year) is 3 years and for Masala Bonds above USD 50 million is 5 years. Previously, such bonds were subject to a minimum maturity of 3 years; (iii) The all-in-cost ceiling for Masala Bonds will be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity. Previously, the all-in-cost ceiling was to be commensurate with the prevailing market conditions; and (iv) Investors in Masala Bonds should not be related parties (within the meaning given in Ind-AS 24).
Disclosure Requirements for Issuance and Listing of Green Debt Securities
The Securities and Exchange Board of India (‘SEBI’) has, by way of circular dated May 30, 2017, set out certain requirements to be considered, along with the requirements set out in the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, for the issuance of and disclosures pertaining to ‘Green Debt Securities’.
A debt security will be considered as a ‘Green Debt Security’, if the funds raised through its issuance are to be utilized for the following project(s)/ asset(s): (a) renewable and sustainable energy; (b) clean transportation; (c) sustainable water management; (d) climate change adaptation; (e) energy efficiency; (f) sustainable waste management; (g) sustainable land use; and (h) biodiversity conservation.
The issuer of green debt securities is required to make certain disclosures in its offer / disclosure documents including inter alia: (a) a statement on the environmental objectives of the issuance; (b) details of the system / procedures to be employed for tracking the deployment of proceeds of the issue; and (c) details of the project and/or assets where the issuer proposes to utilize the proceeds of the green debt securities.
Amendment to the SEBI (Foreign Portfolio Investors) Regulations, 2014
SEBI has amended the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’) with effect from May 29, 2017 to prohibit the issuance or transfer of an offshore derivative instrument (‘ODI’) to persons who are resident Indians or non resident Indians and to entities that are beneficially owned by resident Indians or non resident Indians.
Amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
Pursuant to its notification dated May 31, 2017, the key amendments introduced to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’) are as follows:
i. The definition of Qualified Institutional Buyers (‘QIBs’) has been amended to include systemically important and RBI registered non-banking financial companies, having a net-worth of more than INR 500 crores (approx. USD 77 million), as per the last audited financial statements.
ii. Regulation 16, which deals with monitoring agencies, has been amended to provide that:
a. if the issue size, excluding the size of offer for sale (‘OFS’) by selling shareholders, exceeds INR 100 crores (approx. USD 15 million), the use of proceeds is to be monitored by a public financial institution / scheduled commercial bank identified as the banker of the issue in the offer document;
b. the monitoring agency will be required to submit quarterly reports to the issuer until utilization of at least 95% of the proceeds, excluding the proceeds under the OFS and amount raised for general corporate purposes; and
c. the issuer to publically disseminate such report on its website and to the stock exchanges within 45 days from the end of each quarter.
Participation of Category III Alternative Investment Funds in the Commodity Derivatives Market
SEBI has by way of its circular dated June 21, 2017, permitted Category III Alternative Investment Funds to participate in the commodities derivatives market subject to the following conditions:
i. to participate on the commodity derivatives exchanges as ‘clients’, subject to compliance of all SEBI rules, regulations, position limit norms issued by SEBI / stock exchanges etc., as applicable to clients;
ii. to not invest more than 10% of the investable funds in one underlying commodity;
iii. leveraging or borrowing subject to consent from the investors and maximum limit specified by SEBI (presently capped at 2 times the net asset value of the fund);
iv. disclosures to be made in the private placement memorandum of intent to invest in commodity derivatives, consent of existing investors to be taken and exit opportunities to be provided to the dissenting investors; and
v. to comply with SEBI reporting requirements.
Proposals approved at SEBI Board Meetings
Some of the key proposals approved in the board meetings of the SEBI held on April 26, 2017 and June 21, 2017 are as follows:
i. Amendment to the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 to permit stock brokers / clearing members currently dealing in commodity derivatives to deal in other securities and vice versa, without setting up a separate entity;
ii. Relaxations from preferential issue requirements under the ICDR Regulations and from open offer obligations under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘SAST Regulations’) which are currently available to lenders undertaking strategic debt restructuring of listed companies in distress, and be extended to new investors acquiring shares in such distressed companies pursuant to such restructuring schemes. Such relaxations, however, will be subject to shareholder approval by way of a special resolution and lock-in of shares for a minimum period of 3 years. The relaxations will also be extended to lenders under other restructuring schemes undertaken in accordance with the guidelines of the RBI;
iii. Exemption from open offer obligations under the SAST Regulations, for acquisitions pursuant to resolution plans approved by the NCLT under the IBC;
iv. Extension of relaxations in relation to the lock-in provisions currently available to Category I AIFs in case of an initial public offering to Category II AIFs as well;
v. Proposal for initiation of a public consultation process to make amendments to the FPI Regulations: (a) expansion of the eligible jurisdictions for the grant of FPI registrations to Category I FPIs by including countries having diplomatic tie-ups with India; (b) simplification of broad based requirements; (c) rationalization of fit and proper criteria; and (d) permitting FPIs operating under the multiple investment managers structure and holding FVCI registration to appoint multiple custodians; and
vi. Levy of a regulatory fee of USD 1,000 on each ODI subscriber, once every 3 years, starting from April 1, 2017 and to prohibit ODIs from being issued against derivatives except those which are used for hedging purposes.
Recording of Non Disposal Undertaking in the Depository System
In order to enable the recording of non-disposal undertakings (‘NDU’) in the depository system, SEBI has, by way of circular dated June 14, 2017, permitted depositories to offer a system for capturing and recording NDUs subject to prescribed conditions. The provisions of the circular are required to be implemented by the depositories within four months.
Pursuant to the circular, on the creation of the freeze for recording the NDU, the depository will not effect any transfer, pledge, hypothecation, lending, rematerialisation or alienation in any form or any dealing of the encumbered securities till instructions are received from both parties for the cancellation of the NDU. The depository participants are prohibited from facilitating or being parties to any NDU created outside the depository system.
Review of OFS of Shares through Stock Exchange Mechanism
SEBI has modified the guidelines pertaining to OFS of shares through stock exchange mechanism by way of its circular dated June 27, 2017. The rationale for such revisions was to encourage greater participation by employees. The key modifications are as follows:
i. Promoters of eligible companies are permitted to sell the shares within 2 weeks from the OFS transaction to the employees, and such an offer would be considered to be a part of the OFS transaction.
ii. Promoters have the discretion to offer the shares at the price discovered in the OFS transaction, or at a price which is at a discount to such discovered price.
Promoters are required to make necessary disclosures in the OFS notice disseminated to the stock exchanges, and such disclosure would be required to contain details of the number of shares offered to employees and the discount offered, if any.
Copyright Board Merged with the IPAB
Sections 160 and 161 of the Finance Act, which have come into force on May 26, 2017, amend the provisions of the Copyright Act, 1957 and the Trade Marks Act, 1999 to pave way for the merger of the Copyright Board with the IPAB. As a result, all the functions of the Copyright Board (including adjudicating disputes in relation to assignment of copyright, granting of compulsory licenses and statutory licenses in relation to certain types of works) will now get transferred to the IPAB.
Pursuant to powers granted under the Finance Act, the Central Government has promulgated and brought into force the Tribunal, Appellate Tribunal and other Authorities (Qualifications, Experience and other Conditions of Service of Members) Rules, 2017 (‘Tribunal Rules’) which govern the qualifications, experience and other conditions of service of the members of various tribunals, including the IPAB. According to the Tribunal Rules, a search-cum-selection committee would be responsible for the recruitment of members for the IPAB.
Given the fact that the Copyright Board has not been functional for quite a few years now, the merger of the Copyright Board with the IPAB gives a forum to the concerned stakeholders to seek redressal of their grievances. However, it still remains to be seen how effectively the IPAB will be able to perform the tasks, roles and responsibilities erstwhile carried out by the Copyright Board, given the huge backlog of pending matters at the IPAB.
Changes in the Foreign Investment regime in India
The Reserve Bank of India (‘RBI’) recently issued the Master Directions on Foreign Investment in India (‘Master Directions’) on January 4, 2018, on the heels of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (‘New FEMA 20’) issued by way ofNotification dated November 7, 2017, which replace the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘Erstwhile FEMA 20’) and the Foreign Exchange Management (Investments in Firms of Proprietary Concerns in India) Regulations, 2000.
The New FEMA 20 and the Master Directions now contain comprehensive rules on foreign investment in India as issued by the RBI. A summary of some of the key changes to the Erstwhile FEMA 20 introduced by the RBI are set out below:
i. Definition of ‘Capital Instruments’: The New FEMA 20 has introduced a definition of ‘Capital Instruments’. While the base definition remains similar to that of ‘Capital’ under the Erstwhile FEMA 20, two clarifications have been provided as follows:-
(a) Non-convertible/ optionally convertible/ partially convertible preference shares issued up to April 30, 2007, as well as optionally convertible/ partially convertible debentures issued up to June 7, 2007 will be considered to be capital instruments till their original maturity; and
(b) Share warrants can be issued to a person resident outside India only in accordance with the regulations issued by the Securities and Exchange Board of India (i.e. the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009), i.e. share warrants can be issued to a person resident outside India only by a listed Indian company.
ii. Definition of ‘Foreign Investment’: ‘Foreign investment’ has been defined under the New FEMA 20 to mean any investment by a person resident outside India in the capital instruments of an Indian company or in the capital of a limited liability partnership (‘LLP’), on a repatriable basis; thereby clarifying that investments made on a non-repatriable basis are to be treated as domestic investments and not included in the foreign investment limits.
iii. Definition of ‘Foreign Direct Investment’: The definition of ‘foreign direct investment’ (‘FDI’) under the New FEMA 20 distinguishes between investments in unlisted and listed Indian companies. While any investment by a person resident outside India in the capital instruments issued by an unlisted Indian company is to be treated as FDI, in case of listed Indian companies, only investments of 10% or more of the post issue paid-up equity capital of a listed Indian company, computed on a fully diluted basis, is to be treated as FDI.
iv. New Concept – Foreign Portfolio Investment: Under New FEMA 20, RBI has introduced a new concept of an investment being categorized as ‘Foreign Portfolio Investment’ if the investment made by a person resident outside India in a listed Indian company is less than 10% of the post issue paid-up equity share capital (on a fully diluted basis) of such listed Indian company or less than 10% of the paid up value of each series of capital instruments of such listed Indian company. Please note that there a distinction between foreign portfolio investment and investment by an entity registered with SEBI as a foreign portfolio investor (‘FPI’). All investments by each FPI will necessarily be foreign portfolio investment, whereas investment by entities who are not registered as FPI can also be categorized as ‘foreign portfolio investment’ depending upon the percentage of investment made. Purchase / sale of capital instruments of listed Indian company on a stock exchange by FPIs is set out in Schedule 2 of the New FEMA 20.
Foreign portfolio investment by way of a primary subscription is exempt from the reporting requirements prescribed in respect of FDI transactions. In the event foreign portfolio investment exceeds the 10% limit, such investment will stand re-classified as FDI. However, on the other hand, in the event an existing investment by a non resident in a listed Indian company falls to a level below 10% of such company’s post issue paid up equity capital (on a fully diluted basis), such investment will continue to be treated as FDI.
v. Definition of ‘Indian entity’: The tern Indian entity has been defined to mean an Indian company and an LLP.
vi. Definition of ‘Investment Vehicle’: The Master Directions clarify that venture capital funds established in the form of a trust, company or a body corporate and registered under the SEBI (Venture Capital Funds) Regulations, 1996 will not be considered as investment vehicles for the purposes of the New FEMA 20. Prior Government approval would be required for making foreign investments in venture capital funds established as trusts.
vii. Definition of ‘Listed Indian Company’: Listed Indian Company has been defined to mean an Indian company which has any of its capital instruments listed on a recognized stock exchange in India. Accordingly, an Indian company which has only its non-convertible debentures listed on a stock exchange would not be considered as a Listed Indian Company.
viii. Acquisition through a rights or bonus issue: While the conditions relating to acquisition of capital instruments (other than warrants) by way of rights or bonus issue continue to remain the same, it have been clarified that the conditions would also apply to subscription to capital instruments issued as a rights issue that are renounced by the person(s) to whom they were offered.
Further, a person resident outside India exercising any rights in respect of capital instruments issued when he / she was resident in India, can exercise such rights on a non-repatriation basis (i.e. the original status of the holding will not change even in the event the residential status of the holder changes).
Similarly, an individual resident outside India exercising an option granted pursuant to an employee stock option scheme when he / she was resident in India, can hold the shares so acquired on exercising the option on a non-repatriation basis.
ix. Transfer of capital instruments: Transfer by way of sale of capital instruments by a non-resident Indian (‘NRI’) to non-residents other than NRIs no longer requires prior RBI approval, subject to certain conditions.
x. Reporting Requirements: The onus of filing Form FC-TRS for transfers on a recognized stock exchange will now vest with the non-resident party and not the relevant Indian company. The New FEMA 20 has further clarified that in case of transfer of repatriable capital instruments by a non-resident transferor to another non-resident transferee on non-repatriable basis, the onus of such filing would vest with resident transferor / transferee or the non-resident holding capital instruments on a non-repatriable basis, as the case may be. It is also clarified that a transfer of capital instruments between a non- resident transferor holding such instruments on non-repatriable basis and a resident transferee would not attract such a reporting requirement.
Further, Form FC-TRS is now required to be filed with the authorised dealer bank with 60 days of transfer of capital instruments or receipt / remittance of funds, whichever is earlier.
xi. Downstream investments: While the definition of ‘downstream investments’ under the Erstwhile FEMA 20 only considered indirect foreign investments by one Indian company into another Indian company, the definition has now been revised to include investments by Indian companies, LLPs or investment vehicles (each, an Indian entity), in the capital instruments or the capital (as the case may be), of another Indian company or LLP. Further, downstream investments are now required to be reported by way of a Form DI within 30 days of such investment to the Secretariat for Industrial Assistance, Department of Industrial Promotion. However, the format of this Form DI is yet to be specified by the RBI.
xii. Clarifications regarding reporting and pricing guidelines: In addition to the above, the New FEMA 20 has further clarified that capital instruments of any Indian company held by another Indian company which is not owned and not controlled by resident Indians or is owned and controlled by persons resident outside India (‘FOCC’), can be transferred to:
(a) a person resident outside India without any requirement to adhere to pricing guidelines, provided however such transfer is reported by way of Form FC-TRS;
(b) a person resident in India, subject to adherence with pricing guidelines only; and
(c) another FOCC, without any requirement to adhere to pricing guidelines or to the reporting requirements.
xiii. Rate of dividend on preference shares: Under the New FEMA 20, the ceiling limit of 300 basis points over the prime lending rate of State Bank of India on the rate of dividend on preference shares or convertible preference shares issued under the said regulations has been done away with.
xiv. Alignment with the provisions of Companies Act, 2013: In addition to the above, the New FEMA 20 has attempted to align several provisions with those of the Companies Act, 2013, in order to address ambiguities that existed under the Erstwhile FEMA 20. A few of such alignments include:
(a) the definitions of ‘employees’ stock option’ and ‘sweat equity shares’ have been aligned with the corresponding definitions under the Companies Act, 2013; and
(b) timeframe for allotment of capital instruments has been reduced from 180 days to 60 days.
xv. Late submission fee for delayed filings: The New FEMA 20 states that delay in complying with reporting requirements (including Forms FC-GPR and FC-TRS) will now attract late submission fee (‘LSF’) of such amount as may be determined by the RBI in consultation with the Central Government. Paragraph 12 of Part IV of the Master Direction on Reporting under Foreign Exchange Management Act, 1999 provides for the quantum of LSF for regularizing reporting delays without undergoing the compounding procedure as under:
Amount involved in reporting
LSF as a % of amount involved*
Maximum amount of LSF applicable
Up to 10 million
Rs.1 million or 300% of amount involved, whichever is lower.
More than 10 million
Rs.10 million or 300% of amount involved, whichever is lower.
* The LSF would be doubled every 12 months.
The LSF shall be applicable for the transactions undertaken on or after November 7, 2017.
xvi. New forms to be filed:
(a) A Indian company issuing employee stock option to, inter-alia, persons resident outside India who are its employees / directors, is required to submit Form –ESOP within 30 days of such issuance.
(b) An LLP receiving amount of consideration for capital consideration and acquisition of profits shall submit Form LLP (I) within 30 days of receipt of amount of consideration.
(c) The divestment of capital contribution between a resident and non-resident in case of an LLP shall be reported in Form LLP (II) to the authorised dealer within 60 days from the date of receipt of funds.
(d) An Indian start-up company issuing Convertible Notes to a person resident outside India shall report such inflows to authorised dealer bank in Form CN within 30 days of such issue.
 Regulation 2(v) of New FEMA 20 read with Paragraph 2.2 of the Master Directions.
 Regulation 2(xviii) of New FEMA 20 read with Paragraph 2.9 of the Master Directions.
 Regulation 2(xvii) of New FEMA 20 read with Paragraph 2.6 of the Master Directions.
 Regulation 2(ix) of New FEMA 20 read with Paragraph 2.7 of the Master Directions.
 Regulation 2(xxv) of New FEMA 20 read with Paragraph 2.11 of the Master Directions.
 Paragraph 2.14 of the Master Directions.
 Regulation 2(xxxi) of New FEMA 20 read with Paragraph 2.16 of the Master Directions.
 Explanation to Regulation 6 of New FEMA 20 read with Paragraph 6.11.4 of the Master Directions.
 Proviso to Regulation 6 of New FEMA 20 read with Paragraph 6.11.2 of the Master Directions.
 Proviso to Regulation 7 of New FEMA 20 read with Paragraph 6.12.2 of the Master Directions.
 Regulation 13.1(4)(b) of New FEMA 20.
 Regulation 13.1(4) of New FEMA 20.
 Regulation 13.1(4) of New FEMA 20.
 Regulation 4 of New FEMA 20 read with Paragraph 9 of the Master Directions.
 Regulation 13.1(11) of New FEMA 20.
 Regulation 14(5)(c) of New FEMA 20 read with Paragraph 9.6 of the Master Directions.
 Regulation 13.1(5) of New FEMA 20.
 Regulation 13.1(7) of New FEMA 20.
 Regulation 13.1(8) of New FEMA 20.
 Regulation 13.1(12) of New FEMA 20.
IBC Amendment: Legislating for Moral Hazard with a Broad Brush – Take 2
The President of India promulgated an ordinance on November 23, 2017 amending the Insolvency and Bankruptcy Code, 2016 (‘IBC’) (‘Ordinance’). Please refer to our previous edition of Inter Alia update attached herewith (readers may benefit from a second read of our previous edition before considering this update). A key change brought in by the Ordinance was the introduction of eligibility criteria for resolution applicants with an express prohibition on certain persons from submitting a resolution plan for a corporate debtor in a corporate insolvency resolution process (‘CIRP’) and also preventing such persons from purchasing the corporate debtor’s assets in liquidation.
Some market participants argued that these new eligibility criteria were too restrictive and may disqualify applicants whose participation in the IBC resolution process could be economically and strategically important for all stakeholders.
In this backdrop, a Bill was introduced in the Parliament (“Bill”) on December 29, 2017 by Mr. Arun Jaitley, the Finance Minister, to replace the Ordinance. The Bill has now been passed by the Lok Sabha and the Rajya Sabha (Lower and Upper House of the Parliament respectively). When the Bill is approved and signed by the President of India and then notified, it will amend some of the provisions of the IBC recently introduced by the Ordinance. The key changes proposed are set out below:
1. Who must be eligible?
The eligibility criteria for submitting a resolution plan under the Ordinance applied to the applicant or any person acting jointly with such person. The Bill requires that any person acting in concert with the applicant must also meet the eligibility criteria.
While ‘acting jointly’ may have been interpreted to be restricted to a joint applicant or equivalent, ‘persons acting in concert’ will be interpreted to have a wider import. The interpretation of this phrase as used in other Indian laws will be referred to. Resolution applicants, insolvency professionals and members of committees of creditors will carefully consider this much expanded scope and eagerly await jurisprudence to clarify the reach of this term.
2. Some disqualifications now time bound
The Bill clarifies that ineligibility on account of: (a) being a willful defaulter, (b) being disqualified to act as a director, and (c) prohibition by the Securities and Exchange Board of India from trading in securities or accessing the securities market, will only subsist as long as the person suffers from such ‘deficiency’ and not thereafter.
3. Disqualification for being classified as a non-performing asset (‘NPA’)
The Bill clarifies that in order to ascertain if one year has elapsed from classification of an account as an NPA (resulting in disqualification), the relevant look-back period will be from the date of the commencement of the CIRP of the corporate debtor. The interpretation of the language of the Ordinance was that the look-back period started from the date of submission of a resolution plan. This may help would-be-applicants that are involved with companies that have only recently become stressed.
The Bill clarifies that this ‘disqualification’ also applies to the promoter of the corporate debtor (whose account is so classified) and to anyone in management or control of the corporate debtor. Many stakeholders were already interpreting the language in the Ordinance to mean this. The clarification is, nonetheless, helpful.
The Ordinance indicated that any person affected by such ‘NPA disqualification’ may cure such ineligibility by making payments of all overdue amounts with interest thereon. The Bill clarifies this. There has been some suggestion in the Parliamentary debate on the Bill and speeches of Government officials that payment of overdue interest may be enough to avail of this cure. However, the text of the Bill which refers to “overdue amounts with interest” suggests otherwise and this now remains a matter left for interpretation by the relevant lenders.
The Bill also permits a resolution applicant who is otherwise ineligible due to this disqualification to remain an eligible resolution applicant if such person makes payment of the overdue amounts with interest within 30 days (or such shorter period permitted by the committee of creditors).
4. Preferential, undervalued or fraudulent transactions; and now extortionate credit transactions
The Bill clarifies that this ‘disqualification’ also applies to the promoter of the corporate debtor (in which such transactions took place) and to anyone who has been in management or control of such corporate debtor. Some stakeholders were already interpreting the language in the Ordinance to mean this. The clarification is, nonetheless, helpful. The Bill also adds extortionate credit transactions to the list of disqualifications.
5. Connected persons – now a global check with some exceptions
The Ordinance listed a number of disabilities in the context of Indian law. The Ordinance also listed any ‘corresponding disabilities’ under any foreign law as a relevant disability. This ‘foreign disability’ test did not seem to apply to connected persons under the Ordinance. The Bill will extend this ‘foreign disability’ test to connected persons also.
Under the Ordinance, connected persons included the holding company, subsidiary company, associate company or a related party of the relevant person. As all connected persons also need to pass the eligibility test, this became a challenge for some ‘bona fide’ applicants. The Bill provides that the extension of connected persons to include holding companies, subsidiary companies, associate companies or related parties will not apply to a scheduled bank, a registered asset reconstruction company or a registered alternate investment fund.
6. Disqualifications in respect of Guarantors
The Ordinance disqualified any person who had executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor under CIRP. This provision was recently interpreted by a Court to refer to guarantees which had been invoked but remained unpaid. The Bill seems to narrow the scope of this disqualification – which may assist persons involved with corporate debtors that have become stressed more recently.
To conclude, the Bill seeks to reduce some of the rigour of the disqualifications contained in the Ordinance while raising the bar and widening the impact in other respects. The eligibility criteria remain restrictive and may end up disqualifying some key players.
Separately, on December 31, 2017 the Insolvency and Bankruptcy Board of India amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (“Amendments”). The Amendments clarify that the term “dissenting financial creditor” will also include financial creditors who abstained from voting for the resolution plan approved by the CoC. Many stakeholders were already interpreting the language in the IBC and the regulations to mean this (including in relation to payment of liquidation value to such creditors). The clarification is, nonetheless, helpful. Additionally, the Amendments (i) omit the requirement to state the liquidation value of the corporate debtor in the information memorandum; (ii) mandates all stakeholders to keep the liquidation value of the corporate debtor confidential; and (iii) provides for submission of resolution plan within the time given in the invitation for the resolution plans. Many members of the CoC were concerned that general publication of liquidation value could depress bids. This amendment attempts to alleviate this concern.
Changes in Investment in Debt Securities by Foreign Portfolio Investors
The Reserve Bank of India (‘RBI’) recently issued a notification dated June 15, 2018, in supersession of the RBI notifications dated April 27, 2018 and May 1, 2018, for providing some operational flexibility as well as transition path for investments by Foreign Portfolio Investors (‘FPIs’) in debt (‘Notification’). Below is a summary of the key changes brought about by this notification:
i. Reduced minimum residual maturity for corporate bonds: The minimum residual maturity requirement for investments by FPIs in corporate bonds has reduced from three years to one year (subject to the condition that short-term investments in corporate bonds by a FPI, calculated on an end-of-day basis, must not exceed 20% of the total investment of that FPI in corporate bonds). Investments: (a) made in security receipts issued by asset reconstruction companies (‘SRs’); or (b) made on or before April 27, 2018, must not be included to calculate such limit.
ii. Single/ Group investor wise concentration limits: This notification imposes the following investor and group wise limits for investments in corporate bonds:
· Per ‘issue’ limit: FPIs can invest in any issue of corporate bonds subject to a cap of 50% of such issue. If such limit is already breached by investments made by an FPI and/or its investor group, such FPIs may not make further investments in such issue until such limit is met. This requirement is not applicable in respect of investments by FPIs in SRs.
· Per ‘corporate’ limit: As on April 27, 2018, FPIs cannot have an exposure of more than 20% of its entire corporate bond portfolio to a single corporate (this includes exposures to related entities of the corporate). If the exposure exceeds 20%, the FPI cannot make further investments in that corporate / group until the above concentration limit is met. Investments in new corporate bonds made by the FPI after April 27, 2018 (in corporates other than those referred to in para a) above) will have to meet the 20% corporate limit from April 1, 2019 onwards. FPIs registering after April 27, 2018 are permitted to comply with this requirement by: (a) March 31, 2019; or (b) six months from the date of registration, whichever is later. The restrictions mentioned above in respect of corporate bonds are not applicable to investments by multilateral financial institutions and to investments by FPIs in SRs.
iii. Relaxation of norms for pipeline investments: Investment transactions by FPIs in corporate bonds that were under process but had not materialised as on April 27, 2018 (pipeline investments), will be exempt from the ‘per issue’ limit and ‘per corporate’ limits described above, subject to the custodian of the FPI reasonably satisfying itself that: (a) the major parameters such as price/rate, tenor and amount of the investment have been agreed upon between the FPI and the issuer on or before April 27, 2018; (b) the actual investment will commence by December 31, 2018; and (c) the investment is in conformity with the extant regulations governing FPI investments in corporate bonds prior to April 27, 2018.
iv. Concentration limits per category of FPI: The following limits for the relevant category, inter alia, have been prescribed by this notification for investments by FPIs in Central Government securities (‘G-secs’), State Department Loans (‘SDLs’) and corporate debt securities: (i) 15% of the prevailing limit; and (ii) 10% of the prevailing limit.
v. Minimum residual maturity for G-secs: The Notification permits FPIs to invest in G-secs (including in treasury bills and SDLs) without any minimum residual maturity requirement, provided that investments by a FPI in securities with residual maturity less than one year, will not exceed 20% of the total investment of that FPI in that category.
vi. The cap on aggregate FPI investments in Central G-secs has been increased from 20% to 30% of the outstanding stock of that security.
vii. FPIs have been prohibited from investing in partly paid instruments.
 Investments with residual maturity up to one year.
Know Your Client Requirements for FPIs
SEBI has, by way of its circular dated April 10, 2018, prescribed the following key changes to the existing Know Your Client (‘KYC’) requirements for FPIs:
i. Identification and verification of beneficial owner (‘BO’) should be in accordance with Rule 9 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PMLA Rules’). Accordingly, the BOs of FPIs having a company or trust structure should be identified on controlling ownership interest and control basis, and in case of partnership firms and unincorporated association of individuals, should be identified on ownership or entitlement basis.
ii. The materiality threshold for identification of BOs on controlling ownership interest will be: (i) 25% in case of a company; and (ii) 15% in case of a partnership firm, trust and unincorporated association of persons. In respect of FPIs from ‘high risk jurisdictions’, intermediaries may apply lower materiality threshold of 10% for identification of BOs and also ensure compliance with KYC documentation as applicable for category III FPIs. This threshold will first be applied at the FPI level, and next look through principle will be applied to identify the BO of the material shareholder / owner entity level. When no BO is identified, the BO will be the senior managing official of the FPI
iii. Non Resident Indians (‘NRIs’) / Overseas Citizens of India (‘OCIs’) / resident Indian cannot be BOs of FPIs. However, if an FPI is Category II investment manager of other FPIs and is a non-investing entity, it may be promoted by NRIs / OCIs.
Clubbing of investment limits for FPIs will also be based on the abovementioned manner of identification of BOs.
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.
Implementation of Certain Recommendations of the Committee on Corporate Governance
SEBI has issued a circular dated May 10, 2018 (‘Circular’) that provides for implementation of certain recommendations of the committee on corporate governance under the chairmanship of Uday Kotak. The following provisions will now apply to entities whose equity shares are listed on a recognized stock exchange:
i. Disclosures on Board Evaluation: A listed entity may consider including observations about Board evaluation of the current year, the previous year’s observations and any actions taken pursuant to the same and proposed actions based on the current year’s observations as part of its disclosure on Board’s evaluation.
ii. Group Governance Units: If a listed entity has several unlisted subsidiaries, it may monitor their governance through a dedicated group governance unit or governance committee comprised of members of its Board and a strong and effective group governance policy.
iii. Medium term and long term strategy: The listed entity may consider disclosing its medium-term and long-term strategy under the management discussion and analysis section of the annual report, within limits of its competitive position and for a time frame as set by the board of directors. Additionally, the listed entity may articulate a clear set of long-term metrics specific to the company’s long term strategy to allow for appropriate measurement of progress.
Guidelines for Preferential Issue of Units by InvITs
SEBI issued a circular dated June 5, 2018 (‘Circular’) setting out guidelines for preferential issue of units by InvITs.As per the Circular, listed InvITs may make a preferential issue of units to an institutional investor subject to the fulfillment of the following conditions:
i. Conditions for preferential issue: (a) Unitholders of the InvIT have to pass a resolution approving the preferential issue; (b) InvIT must be in compliance with the minimum public unitholding requirements, conditions for continuous listing and disclosure obligations; (c) No preferential issue of units by the InvIT should have been made in the six months preceding the relevant date and the issue will be completed within 12 months of the authorizing resolution; (d) The preferential issue of units can be offered to a minimum of two and maximum of 1000 investors in a financial year.
ii. Placement document: The preferential issue of units by an InvIT will be done on the basis of a placement document, which must contain disclosures as specified in the Circular. While seeking in-principle approval from the recognised stock exchange, InvIts to furnish a copy of the placement document, a certificate issued by its merchant banker or statutory auditor confirming compliance with the provisions of this Circular along with any other documents required by the stock exchange
iii. Pricing: The preferential issue is required to be made at a price not less than the average of the weekly high and low of the closing prices of the units quoted on the stock exchange during the two weeks preceding the relevant date. The InvIT cannot allot partly paid-up units. Further, the prices determined for preferential issue will be subject to appropriate adjustments, if the InvIT: (i) makes a right issue of units; and (ii) is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, requires adjustments.
iv. Restriction on allotment: No allotment can be made to any party to the InvIT or their related parties except to the sponsor.
v. Restriction on transferability: The units allotted under preferential issue cannot be sold by the allotee for a period of one year from the date of allotment, except on a recognized stock exchange.
Guidelines for Issuance of Debt Securities by REITs and INVITs
SEBI had recently permitted Real Estate Investment Trusts (‘REITs’) and Infrastructure Investment Trusts (‘InvITs’) to issue debt securities by amending the SEBI (REIT) Regulations, 2014 (‘REIT Regulations’) and the SEBI (INVIT) Regulations, 2014 (‘InvIT Regulations’). SEBI has issued guidelines for issuance of such debt securities by REITs and InvITs by its circular dated April 13, 2018 (‘Circular’) which provides that REITs and InvITs issuing debt securities must follow the provisions of SEBI (Issue and Listing of Debt Securities Regulations), 2008 (‘ILDS Regulations’) in the following manner:
i. Restriction in Regulation 4(5) of the ILDS Regulations on issue of debt securities for providing loan to or acquisition of shares of any person, who is party of the same group or under the same management and the requirement for creation of a debenture redemption reserve, will not apply to issue of debt securities by REITs and InvITs;
ii. Compliances to be made under Companies Act in terms of the ILDS Regulations, will not apply to REITs / InvITs for issuance of debt securities, unless specifically provided in the Circular.
For the issuance of debt securities, REITs / InvITs will appoint one or more SEBI registered debenture trustees, other than the trustee to the REIT / InvIT issuing such debt securities. Further, the securities will be secured by the creation of a charge on the assets of the REIT / InvIT or holding company or SPV, having a value which is sufficient for the repayment of the amount of such debt securities and interest thereon. The Circular also provided for certain additional disclosure and compliance requirements.
IBC Exemptions introduced under the Delisting Regulations and Takeover Regulations
SEBI has, as on May 31, 2018, notified the amendments to the SEBI (Delisting of Equity Shares) Regulations, 2009 (‘Delisting Regulations’) and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) to provide that, with respect to a listed entity, the Delisting Regulations and the Takeover Regulations will not be applicable to a transaction proposed to be undertaken pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code (‘IBC’). The key amendments have been set out below:
i. The Delisting Regulations will not be applicable to delisting of equity shares of a listed entity made pursuant to a resolution plan, if such a plan: (i) lays down a specific procedure to complete the delisting of such shares; or (ii) provides an exit option to the existing public shareholders at a price specified in the resolution plan. However, the exit to shareholders should be at a price which is not less than the liquidation value as determined in accordance with the Section 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, after paying off dues in the order of priority as set out in the IBC. If the existing promoters or any other shareholders are proposed to be provided an opportunity to exit under the resolution plan at a price, then the delisting should be at a price which is not less than the price at which such promoters or other shareholders, directly or indirectly, are provided exit.
ii. The prohibition set out under the proviso to Regulation 3(2) of the Takeover Regulations, which restricts an acquirer from acquiring shares or voting rights in a target company, which would result in the aggregate shareholding of the acquirer, along with persons acting in concert with it, exceeding the maximum permissible non public shareholding i.e. 75%, will not be applicable to an acquirer proposing to acquire shares pursuant to a resolution plan approved under the IBC.
Enhanced Disclosure and Transparency Norms for Credit Rating Agencies
SEBI issued a circular dated May 30, 2018 (‘Circular’) setting out guidelines to enhance the governance, accountability and functioning of Credit Rating Agencies (‘CRA’).
i. Review of Ratings All cases of requests by issuers for review of the rating(s) provided to their instrument(s) by the CRA are required to be reviewed by a rating committee of the CRA that will consist of a majority of independent members.
ii. Disclosures for non-acceptance of Ratings: All non-accepted ratings have to be disclosed on the CRA’s website for a period of 12 months from the date of such rating being disclosed as a non-accepted rating.
iii. Rationalisation of Disclosures: CRAs are required to upload a rating summary sheet presenting a snapshot of the rating actions carried out during the half-year on their websites, on a half-yearly basis, within 15 days from the end of the half-year (March / September). These ratings must be segregated into securities and financial instruments other than securities.
 Persons not having any pecuniary relationship with the CRA or any of its employees.
Clarification on Clubbing of Investment Limits of Foreign Government / Foreign Government related entities
SEBI has, by way of its circular dated April 10, 2018 (‘Circular’), issued certain clarifications in relation to clubbing of investment limits of foreign Governments and their related entities viz. foreign central banks, sovereign wealth funds and foreign Governmental agencies registered as foreign portfolio investors (‘FPIs’) in India. The key clarifications are set out below:
i. In case of the same set of underlying beneficial owner(s), the holding of all foreign Government and its related entities from the same jurisdiction, as well as foreign Government agencies forming part of the same investor group, is required to be cumulatively below 10% of the total paid-up capital of the Indian company;
ii. If the Government of India enters into treaties with other sovereign Governments specifically recognizing certain entities to be treated distinctly, SEBI may, during the validity of such treaties, recognize them as such for the purpose of investment limits applicable to FPIs;
iii. The investment by foreign Government/ its related entities from provinces/ States of countries with federal structure will not be clubbed if such provinces/ States have different beneficial owners identified in accordance with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
Lastly, the Circular clarifies that in case of a breach of the investment limits, the FPIs are required to divest their holdings within five trading days from the date of settlement of trades causing the breach. Alternatively, at the FPI’s option, such investment may be considered as a foreign direct investment.
Monitoring of Foreign Investment limits in listed Indian companies
SEBI has, by way of its circular dated April 5, 2018 (‘Circular’), issued guidelines for monitoring of foreign investment limits (based on the paid-up equity capital of the company on a fully diluted basis) in listed Indian companies. The Foreign Exchange Management Act, 1999 (‘FEMA’), read with the regulations issued thereunder, prescribes the various foreign investment limits in listed Indian companies such as the aggregate FPI limit, the aggregate NRI limit and the sectoral caps. The onus of compliance with these foreign investment limits rests on the Indian company. In order to facilitate compliance by listed Indian companies, SEBI formulated a framework with effect from June 1, 2018.
The necessary infrastructure and IT systems for monitoring the limits in Indian listed companies are required to be implemented and housed at the depositories i.e. National Securities Depository Limited and Central Depository Securities Limited. Companies will have to appoint any one depository as its ‘Designated Depository’ for monitoring the foreign investment limits. The stock exchanges will provide the data on the paid-up equity capital of an Indian company to such company’s Designated Depository.
A red flag will be activated whenever the foreign investment is within 3% or less than 3% of the aggregate FPI / NRI limits or the sectoral cap. Once a red flag has been activated for a given company, the foreign investors will take a conscious decision to trade in the shares of the company, with a clear understanding that in the event of a breach of the aggregate FPI / NRI limits or the sectoral cap, the foreign investors will be liable to disinvest the excess holding within five trading days from the date of settlement of the trades.
Blockchain & Cryptocurrency Regulation – 2019 | India
In India, cryptocurrencies started gaining popularity since around 2013, when small scale businesses began accepting bitcoin as a form of payment. Since then, cryptocurrencies have grown into a means of investment evidenced by the emergence of cryptocurrency exchanges in India.
The first regulatory response in the context of cryptocurrencies was when the Reserve Bank of India (“RBI”) issued a press release – on December 24, 2013 (“Press Note 1”). The RBI (which is in charge of monetary policy, regulation of financial markets and exchange control related issues) was careful in terms of neither sanctioning, nor prohibiting, cryptocurrencies; rather, all that Press Note 1 constituted was a caution to users, holders and traders of ‘virtual currency’, of potential risks associated with cryptocurrencies.
Almost immediately after the issuance of Press Note 1, several bitcoin exchanges such as ‘Buysellbitco.in’ and ‘INRBTC’ temporarily shut operations. The Enforcement Directorate (“ED”, which enforces exchange control regulations) undertook raids on the proprietor of ‘Buysellbitco.in’ to examine if transactions being carried out on its platform violated foreign exchange control regulations.
While Press Note 1 and the ED’s actions caused a setback in the popularity of cryptocurrency transactions. This was only temporary; ultimately, cryptocurrencies weren’t banned or prohibited, and India witnessed a steady rise in transactions in cryptocurrency, tracking the global increase in similar activities.
The RBI released warnings similar in scope to Press Note 1 on February 01, 2017 (“Press Note 2”) and December 5, 2017 (“Press Note 3”) reiterating its caution, and went one step further to clarify that it (i.e. the RBI) has not provided any entity any license or sanction to transact with cryptocurrency.
It should be noted that the government does distinguish between bitcoin and its underlying technology, i.e., block chain. Despite the issuance of the press notes cited above, the RBI has issued a White Paper on ‘Applications of Block Chain Technology to the Banking and Financial Sector in India’ in January 2017, which views the application of block chain technology by banks favorably. The RBI has also indicated that it may create a domestic ledger platform involving National Payment Corporation of India similar to existing platforms (such as RTGS, NEFT and IMPS). Towards this end in particular, the RBI, in September 2017, announced that it has taken steps to create such a platform, and also filed three patent applications in this regard.
Along similar lines, the Indian Finance Minister, in his Budget Speech on February 1, 2018 stated that although the Indian government does not recognize bitcoin as legal tender, it does encourage the use of block chain technology in payment systems.
The Budget Speech is often cited as the precursor to the regulation on cryptocurrency in India, although it is certainly not the sole reflection of the Indian government’s attitude to cryptocurrency. Since RBI’s press releases, the government has constituted an inter-disciplinary committee (which includes representatives from the RBI) to examine (i) the present status of cryptocurrency in India and globally; (ii) the existing global regulatory and legal structures governing cryptocurrency; (iii) measures to address issues relating to consumer protection and money laundering.
These developments initially suggested a positive approach towards the regulation of cryptocurrency, in that it was expected, by some quarters at least, that the RBI and the government would officially permit the use of cryptocurrencies.
All that changed with RBI’s circular dated April 6, 2018 (“Circular”), as a result of which the dealing of cryptocurrency in India today has been substantially impeded. Through the Circular, the RBI banned all entitles regulated by it (i.e., banks, financing institutions, non banking financing institutions, payment system providers and the like) from dealing in, or facilitating any dealings in, cryptocurrencies. These entities were provided a three month period within which all accounts dealing with cryptocurrency would have to be shut down.
As a consequence, while the government has not per se banned cryptocurrency in India, it has certainly made it quite difficult for participants to conduct transactions by using traditional banking channels.
No other regulator in India has issued any directions concerning cryptocurrencies.
Press releases as recent as July, 2018, indicate that the government will clarify its stand on cryptocurrency and is working with various industry participants to issue detailed guidelines, although timing in this regard remains uncertain.
Indian Supreme Court on Cryptocurrency
Along with the executive contemplating regulation of cryptocurrency, several stakeholders have also approached the judiciary by filing petitions before the Indian Supreme Court (“SC”) in order to compel the government to provide clarity.
The two primary petitions seeking to address the legality of cryptocurrency were filed by (i) Vijay Pal Dalmia and Siddharth Dalmia through civil writ petition 1071 of 2017 on June 2, 2017 (“Dalmia Petition”), and (ii) Dwaipayan Bhowmick through civil writ petition 1076 of 2017 on November 03, 2017 (“Bhowmick Petition”).
The Dalmia Petition was filed against the Union of India (through the cabinet secretary), Ministry of Home Affairs, Ministry of Finance and the RBI (“Respondents 1”), seeking an order to direct Respondents 1 to “restrain/ ban the sale/ purchase of or investment in, illegal cryptocurrencies and initiate investigation and prosecution against all parties which indulged in the sale/ purchase of cryptocurrency.”
The grounds for the stated petition, as available on public sources, was based on (i) the anonymous nature of cryptocurrency transactions which makes it well-suited for funding terrorism, corruption, money laundering, tax evasion, etc.; (ii) production and introduction of new cryptocurrency being generated by private parties, without the intervention of the government, and hence violating the Constitution; (iii) use of cryptocurrency being in contravention of several laws such as FEMA and Prevention of Money Laundering Act, 2002; (iv) ransomware attacks having occurred through the use of bitcoin; (v) illegal cryptocurrency providing an outlet for personal wealth that is beyond restriction and confiscation; (vi) cryptocurrency exchanges encouraging undeclared and anonymous transactions making it difficult for government authorities to identify such transactions; and (vii) the fact that trading of cryptocurrencies permits players to bypass prescribed KYC norms.
The Bhowmick Petition was filed against the Union of India, Ministry of Finance, Ministry of Law and Justice, Ministry of Electronic and Information Technology, SEBI, RBI, Income Tax Dept. (through its secretary) and Enforcement Directorate (through its joint director) seeking an “issuance of direction to regulate the flow of bitcoins as well as requiring the constitution of a committee of experts to consider prohibition/regulation of bitcoins and other cryptocurrencies.”
The grounds for the petition, as reflected in public sources, inter alia include (i) bitcoin trading/ transactions, being unregulated, lack accountability; (ii) investigators can only track bitcoin holders who convert their bitcoin to regular currency; (iii) counterfeiting of cryptocurrency is not an issue so long as the miners keep the block chain secure; (iv) bitcoins may be used for trade and other financial activities without accountability, having an affect on the market value of other commodities; (v) conversion of bitcoin into foreign exchange does not fall under the purview of the RBI, making such transactions highly unsafe and vulnerable to cyber attacks; (vi) presently, no regulator has the power to track, monitor and regulate cryptocurrency transfers; (vii) cryptocurrency has the potential to support criminal, anti-social activities, like money laundering, terrorist funding and tax evasion; and (viii) use of cryptocurrency could result in widespread adverse financial implications if left unchecked.
Subsequent to the aforementioned petitions, certain industry participants have filed writ petitions challenging the constitutionality of the RBI’s Circular and reiterated the need for clarity on regulation. Other stakeholders, such as the Internet and Mobile Association of India have filed intervention applications in the Bhowmick Petition in order to draw attention to the impact that any restrictive regulation on cryptocurrencies may have to their businesses.
Till date, while the Supreme Court has admitted these petitions, the matters remain sub judice offering limited insight on the judiciary’s stance. Nevertheless, the arguments made (as publicy reported) indicate that there is a degree of acknowledgment that various risks are presented by the continuing lack of regulation around cryptocurrencies.
Is cryptocurrency valid currency in India?
The Indian Parliament has enacted (i) Reserve Bank of India, 1934 (“RBI Act”) regulating inter alia bank notes; and (ii) Coinage Act, 2011 (“Coinage Act”) regulating coins, and these remain the only statutes that define and recognize legal tender.
Per section 26 of the RBI Act, ‘every bank note shall be legal tender at any place in India for payment, or on account for the amount expressed therein, and shall be guaranteed by the Central Government.” The central government specifies and approves the denomination value, form and material of such bank notes and the RBI has the sole right to issue bank notes in the country. Similarly, section 6 (1) of the Coinage Act provides legal sanction to coins that are made of any metal or other material as approved by the Central Government. Bank notes and coins therefore encompass the entire universe of physical legal tender available in India.
Under the existing framework therefore, there is no sanction for cryptocurrencies as legal tender.
Is cryptocurrency a valid payment system in India?
In India, prepaid instruments and payment systems are regulated by the Payments and Settlement Act, 2007 (“PSSA”). Prior to the enactment of PSSA, a working group on electronic money set up by the RBI, issued a report in July 11, 2002 (“Report”), which defined electronic money as ‘an electronic store of monetary value on a technical device used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument.’
These products could be classified into two broad categories that is, (a) pre-paid stored value card (sometimes called “electronic purse” or “e-wallet”) and (b) pre-paid software based product that uses computer networks (sometimes referred to as “digital cash” or “network money”). It was highlighted that the stored value card scheme typically uses a microprocessor chip embedded in a physical device (such as a plastic card) while software based scheme typically uses specialized software installed in a personal computer.
The aforementioned definition may seem wide enough to include cryptocurrency in its scope. However, this must be read in conjunction with the PSSA which does not explicitly define electronic money, but regulates payment systems that affect electronic fund transfer. These payment systems include ‘systems that enable payment between a payer and beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange’. Such systems include credit cards, debit cards, smart cards, and money transfer operations.
In addition to the PSSA, the RBI has also issued the ‘Master Direction on Issuance and Operation of Prepaid Payment Instruments’ dated October 11, 2017 (“PPI Regulations’) that regulate prepaid wallets. Prepaid wallets may be issued by bank or non-bank entities to facilitate the purchase of goods and services, including financial services, remittance facilities, etc., against the value stored on such instruments.
In order to fall under the purview of the above, the instrument in question must store some monetary value. Cryptocurrencies may not have any value stored on them and their value (if any) is contingent on market speculation. Consequently, their issuance are not likely to be construed as regulated electronic money, or a valid payment system, as is currently understood by Indian regulation. Consequently, associated compliance requirements such as obtaining RBI registration, the requirement to establish an entity incorporated in India, the requirement to comply with AML regulations etc. are not applicable.
Are cryptocurrency cross border trades, valid?
Cryptocurrencies are easily capable of being traded on a cross-border basis, and are generaqlly speaking exchangeable into fiat currency. Under the RBI Master Directions – Liberalized Remittance Scheme dated January 1, 2016, an Indian resident individual may remit up to USD 250,000 per year towards a permissible current or capital account transaction or both.
A permissible current account transaction includes inter alia remittance towards (i) private visits, business travel, or remittance by tour operators; (ii) fee for participation in global conferences and specialized training; (iii) remittance for participation in international events / competitions (towards training, sponsorship and prize money); (iv) film shooting; (v) medical treatment abroad; (vi) disbursement of crew wages, overseas education, remittance under educational tie up arrangements with universities abroad; (vii) remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL, etc; (viii) employment and processing, assessment fees for overseas job applications; (ix) emigration and emigration consultancy fees; (x) skills / credential assessment fees for intending migrants; (xi) visa fees, or processing fees required for registration of documents with other governments; (xii) registration / subscription / membership fees to international organizations.
A permissible capital account transaction includes inter alia remittance towards (i) investment in foreign securities; (ii) foreign currency loans; (iii) transfer of immovable property; (iv) guarantees; (v) export, import or holding of currency notes; (vi) loans and overdrafts; (vii) maintenance of foreign currency accounts overseas; (viii) insurance policies; (ix) capital assets; (x) sale and purchase of foreign exchange derivatives.
As is evident from the above, payments for cryptocurrency is not per se listed as a permitted activity. Nevertheless, it may have been possible for an individual to broadly declare the remittance of funds towards investments, without specifying that the intent was to invest in cryptocurrency. At present, given the financial blockage imposed by RBI’s Circular, if a banking institution were to examine the purpose of the remittance further or trace such remittance to its ultimate use, the individual may be held liable for violating foreign exchange regulations (at the very least, the banking institution in question would be unable to facilitate the transaction).
Closely associated with cross border transactions are anti-money laundering regimes that require periodic reporting and declarations being made prior to undertaking the transaction. While Indian money laundering regulations only apply to specific regulated entities such as banks, financial institutions, securities market intermediaries, etc., as a means to address concerns relating to money laundering, several cryptocurrency participants, such as cryptocurrency exchanges have imposed self regulatory measures such as complying with standard ‘know your customer’ obligations.
Regulatory uncertainty doesn’t seem to have hindered industry participants from applying creative alternatives to capitalize on the Indian cryptocurrency market. For instance, cryptocurrency exchanges are exploring the option of setting up a ‘peer to peer’ platform to act as an intermediary between entities trading in cryptocurrency. As a proof of concept, it can be argued that businesses in India are keen to adopt block chain and cryptocurrency, evidenced by various banks exploring the use of block-chain to facilitate cross border payments and large business houses contemplating issuing their own cryptocurrency.
Given the burgeoning market and technological potential, the Indian government is likely to seek to strike a balance in its approach. It will be interesting to witness whether the government recognizes the need of such technology by provisioning for regulation similar to the United States or Singapore governments that have imposed their taxation regime on cryptocurrency or, in the alternative, choose to nip this disruptive technology in the bud, like China, which has banned cryptocurrency.
1. Ashwin Ramanathan, Partner
2. Anu Tiwari, Partner
3. Rachana Rautray, Associate
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.
Amendments to Provisions relating to Maintenance of Minimum Public Shareholding
The Ministry of Finance (Department of Economic Affairs) has, by way of a notification dated July 24, 2018, amended Rule 19A of the Securities Contracts (Regulations) Rules, 1957. The amendment provides that if pursuant to the implementation of a resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016, (i) the public shareholding of a listed company falls below 25%, then the company is required to increase its public shareholding to at least 25%, within a period of three years; and (ii) if the public shareholding of a listed company falls below 10%, the company is required to increase its public shareholding to at least 10% within a period of 18 months from the date of such decrease.
Amendment to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017
In light of the revised reporting structure for foreign investments under the recently notified Single Master Form, the Reserve Bank of India (‘RBI’) has, by a notification dated August 30, 2018, amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 as under:
i. Form ARF: The requirement of reporting foreign investments in the advance reporting form (Form ARF) has been discontinued.
ii. Downstream Investment Reporting: Prior to the amendment, an Indian company making an investment which would have been considered as indirect foreign investment in another Indian company was required to: (a) notify the Secretariat for Industrial Assistance, Department of Industrial Policy and Promotion (‘DIPP’) of such investment; and (b) file Form DI (Downstream Investment) within 30 (thirty) days of such investment, even if the capital instruments had not been allotted to such investing company. Pursuant to the amendment, in addition to an Indian company, an investment vehicle making any downstream investment which is considered as indirect foreign investment for the investee Indian entity is also required to report such downstream investment to DIPP within 30 days of such investment. Further, the Form DI is now required to be filed by the Indian company and investment vehicle within 30 days from the date of allotment of capital instruments to the investing entity.
iii. Form InVi: An investment vehicle which has issued its units to persons resident outside India is required to file Form InVi within 30 days from the date of issue of such units.
 ‘Investment Vehicle’ means an entity registered and regulated under relevant regulations framed by Securities and Exchange Board of India or any other authority designated for the purpose and shall include Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvIts) and Alternative Investment Funds (AIFs).
SEBI Circular on Investment by Foreign Portfolio Investors in Debt
On June 15, 2018, the Securities and Exchange Board of India (‘SEBI’) issued a circular withdrawing the minimum residual maturity restriction of three years for investment by Foreign Portfolio Investors (‘FPIs’) in Government Securities (‘G-Secs’) and State Development Loan’s (‘SDLs’) and permitting FPIs to invest in corporate bonds with minimum residual maturity of above one year, subject to certain specific conditions relating to short-term investments. Further, the circular discontinued the auction process being carried out by BSE Limited and the National Stock Exchange of India Limited, as had been previously stipulated in SEBI’s circular dated October 9, 2014. The circular also provides for the overall monitoring of G-Secs and SDLs to be conducted by the Clearing Corporation of India Ltd., and not depositories, as was previously required, and sets out other revised requirements for investments by FPIs in corporate debt securities, including in relation to concentration limits, investment limits in corporate bonds, pipeline investments in corporate bonds, partly paid instruments and actions in case of default. These changes were made in accordance with the RBI A.P. (DIR Series) circular No. 31 dated June 15, 2018 (Investment by Foreign Portfolio Investors in Debt – Review).
Investments by FPIs through Primary Market Issuances
On July 13, 2018, SEBI issued a circular on monitoring of investment limits applicable to FPIs in case of primary market issuances. Under the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’), a single FPI or an investor group (including entities with the same ultimate beneficial owner) cannot acquire more than 9.99% of the total issued capital of a company.
SEBI had previously clarified in its FAQs that, for the purpose of identifying the investor group, the Designated Depository Participant (‘DDP’) is required to obtain the details provided by the FPI under reporting requirements in accordance with the FPI Regulations and that depositories should monitor the investment limits at the level of the investor group based on information provided by DDPs. To ensure compliance with these requirements, SEBI has mandated that at the time of finalizing the basis of allotment during primary market issuances, Registrar and Transfer Agents (‘RTA’) should: (i) use Permanent Account Numbers to verify compliance for a single foreign portfolio investor; and (ii) obtain validation from depositories to ensure there is no breach of investment limits within the timelines for issue procedure.
Role of Sub-Broker vis-a vis Authorized Person
SEBI has, by a circular dated August 3, 2018, discontinued the intermediary category of sub-broker (‘Sub-Broker’). Accordingly, SEBI has instructed that no fresh registration will be granted to any person as a Sub-Broker and any pending applications would be returned. The registered Sub-Brokers have until March 31, 2019, to migrate to act as an Authorized Person and/ or Trading Member. Sub-Brokers who do not choose to migrate would be deemed to have surrendered their registration.
Enhanced Monitoring of Qualified Registrars to Issue and Share Transfer Agents
SEBI has, by a circular dated August 10, 2018, notified that qualified Registrars to Issue and Share Transfer Agents (i.e., Registrars to Issue and Share Transfer Agents servicing more than 200 million folios) (‘QRTA’) are required to comply with enhanced monitoring requirements through adoption and implementation of internal policy framework, periodic reporting on key risk areas, data security measures, business continuity, governance structures, measures for enhanced investor services, service standards, grievance redressal, insurance against risks, etc.
Consequently, QRTAs must formulate and implement a comprehensive policy framework, approved by the Board of Directors of the QRTAs, which will include aspects relating to maintaining risk management policies, business continuity plan, manner of keeping records, wind-down plans, data access and data protection policy, ensuring integrity of operations, scalable infrastructure, reports of board of directors/ committees of the board of directors, investor services and service standards and insurance against risks. All QRTAs must ensure compliance with this circular within six months of its notification. They must also submit compliance reports within 60 days of the expiry of each calendar quarter.
SEBI Streamlines Process of Public Issue of Debt Securities, Non-convertible Redeemable Preference Shares and Securitized Debt Instruments
On August 16, 2018, SEBI issued a circular to make the existing process of the issuance of debt securities, non-convertible redeemable preference shares (‘NCRPS’) and securitised debt instruments (‘SDI’) easier, simpler and cost effective for both issuers and investors under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015, SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 and SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008. The circular has sought to reduce the time taken for listing after the closure of the issue to six working days (instead of the earlier requirement of twelve working days). Some of the other key features of the circular are:
i. Submission of application form: For subscription to a public issue, all investors have to use an application supported by blocked amount facility for making payment, and submit a completed bid-cum-application form to Self-Certified Syndicate Banks (‘SCSBs’) (with whom the bank account to be blocked is maintained) or certain specified intermediaries.
ii. Role of SCSBs and intermediaries: The circular provides for the process of acknowledgement of applications by investors, uploading details in the electronic bidding system and blocking of funds in specified bank accounts to the extent of application money.
iv. Role of stock exchanges: Stock exchanges are required to validate electronic bid details with depository’s records for the DP ID, client ID and Permanent Account Number, by the end of each bidding day and notify the inconsistencies to SCSBs or intermediaries concerned, for rectification and re-submission. Stock exchanges are also required to develop systems to facilitate investors to view the status of their applications.
This circular is applicable for all public issues of debt securities, NCRPS and SDI opening on or after October 1, 2018.
SEBI order in the matter of United Spirits Limited
In 2012, the Diageo Group (comprising Relay B.V., Diageo Plc and their related parties) entered into certain share acquisition arrangements (which included a shareholders’ agreement (‘SHA’)) with the UB Group (comprising United Breweries Holding Ltd., Kingfisher Finvest India Limited and their related parties) in relation to shares of United Spirits Limited (‘USL’). The SHA accorded certain limited veto rights to the UB Group and prescribed certain voting arrangements between the shareholders in relation to USL. An open offer was undertaken pursuant to execution of such arrangements, followed by a voluntary open offer by the Diageo Group, as a result of which the shareholding of Diageo Group and UB Group in USL was 54.78% and 4%, respectively, thereby rendering the voting arrangement clause in the SHA infructuous. Subsequently, (following certain events) the SHA ceased to exist with effect from November 24, 2015. By way of its order dated September 6, 2018, SEBI inter alia deliberated on the issue of whether the UB Group held joint control over USL due to its veto rights under the SHA after completion of the voluntary open offer and prior to cessation of the SHA.
SEBI held that the UB Group’s veto rights were protective in nature and could not be construed as the UB Group having ‘control’ over USL, and that veto rights can grant control only if they are sufficient enough to govern the decision making process of a company’s management. It was also observed that listed companies would undergo repeated corporate restructuring if limited protective shareholder rights were equated with control. Therefore, the Diageo Group had acquired sole control over USL post the voluntary open offer, when the voting arrangement clause had ceased to exist. No change in control had taken place on November 24, 2015 with the cessation of the SHA. It was also noted that cessation of any one person from joint control, leaving the remaining person with sole control, cannot be considered as ‘change in control’ under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 considering that the public shareholders are already aware of the persons who are in control.
SEBI Order in the matter of In Re Insider Trading in the Scrip Of Multi Commodity Exchange of India Limited
On August 29, 2018, SEBI passed an order (‘Order’) against Mr. Hariharan Vaidyalingam (‘Respondent’) who had traded in the scrip of Multi Commodity Exchange of India Limited (‘MCX’) while in possession of certain information considered to be price sensitive by SEBI. By way of the Order, SEBI disposed of an interim order passed against the Respondent on August 2, 2017 which inter alia directed the impounding of losses averted by the Respondent while dealing in shares of MCX, given that the Respondent had not actually made a profit or averted a loss pursuant to such trading. However, SEBI did clarify that as to the charge of insider trading, it is irrelevant whether the person indulging in insider trading made a profit/ averted a loss, and therefore directed that the Respondent be restrained from accessing the securities market and be prohibited from buying, selling or otherwise dealing in securities either directly or indirectly for a period of seven years from the date of the Order.
 SEBI Order No. WTM/MPB/EFD-DRA-3/33/2018.
SEBI Circulars on KYC Requirements and Eligibility Criteria for Foreign Portfolio Investors
Pursuant to recommendations of the SEBI Working Group under the chairmanship of Shri H.R. Khan, SEBI issued two circulars on September 21, 2018, relating to guidance on the manner in which FPIs are required to identify and verify their respective beneficial owners and provide disclosures relating thereto, and dealing with eligibility criteria for participation in and management and control of FPIs by non-resident Indians, overseas citizens of India and resident Indians.
Key Changes under the SEBI (Buy-back of Securities) Regulations, 2018
On September 11, 2018, SEBI issued the SEBI (Buy-back of Securities) Regulations, 2018 (‘New Regulations’), repealing the erstwhile SEBI (Buy-back of Securities) Regulations, 1998 (‘1998 Regulations’), which inter alia aligns the provisions of the New Regulations with those under the Companies Act. In addition to such alignment, some of the key changes prescribed under the New Regulations include: (i) providing much needed clarity on the meaning of the ‘buy-back period’ (which is now defined to mean the period between the date of board of directors’ resolution or date of declaration of results of the postal ballot for special resolution, as the case may be, to authorize buyback of shares of the company and the date on which the payment of consideration to shareholders who have accepted the buyback offer is made), and (ii) according SEBI with discretionary powers to relax strict enforcement of procedural requirements under these regulations, subject to certain exceptions.
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.
Review of FDI in E-commerce
The Department of Industrial Policy and Promotion (‘DIPP’) has issued Press Note 2 of 2018 (‘PN2’) in connection with the foreign direct investment (‘FDI’) policy for entities engaged in the e-commerce sector. PN2 has been formulated with an intent to provide clarity to the existing FDI policy concerning the e-commerce sector. On January 3, 2019, the DIPP also issued certain clarifications to PN2 (‘PN2 Clarification’) with the objective of providing responses to the comments reported in the media on PN2.
By virtue of PN2, the existing framework applicable to entities engaged in e-commerce, and having received foreign investment has been revised.
While the prohibition to carry on the ‘inventory-based model of e-commerce’ continues to exist, by virtue of this PN2, certain new conditions have been made applicable to the ‘marketplace model of e-commerce’ – despite the sector continuing to remain eligible to receive upto 100% FDI under the automatic route. The revised policy on FDI in e-commerce under PN2 will take effect from February 1, 2019.
The PN2 Clarification clarifies that an e-commerce platform operating an inventory based model does not only violate the FDI policy on e-commerce but also circumvents the FDI policy restrictions on multi-brand retail trading, and therefore, PN2 has been issued to ensure that the rules are not circumvented.
- Marketplace Entity cannot exercise ‘control’ over inventory of the sellers: In addition to the existing restriction applicable to an e-commerce entity operating a marketplace (‘Marketplace Entity’) on exercising ‘ownership’ over the inventory (i.e. the goods purported to be sold), the Marketplace Entity is now expressly restricted from exercising ‘control’ over the inventory of a seller on its marketplace. Any such ownership or control over the inventory will render the business of the Marketplace Entity as an inventory-based model of e-commerce – PN2 continues to expressly prohibit FDI in the inventory-based model of e-commerce.
- Deemed Control over inventory: PN2 clarifies that a Marketplace Entity will be ‘deemed’ to have exercised control over the inventory of a seller, if more than 25% of the purchases of such seller are from the Marketplace Entity or its group companies.
- Removal of restriction on single seller not selling more than 25% of sales on the marketplace: Prior to PN2, a single seller (including its group companies) could not have sold more than 25% of the sales value on the marketplace. With the introduction of PN2, this restriction that limits sales made by a seller (or its group companies) to 25% of the total sales on the platform, appears to have been removed.
- Sellers having equity participation by the Marketplace Entity or its group companies are not permitted to sell products on such marketplace: A seller entity that has equity participation from the Marketplace Entity (having FDI) / its group company or whose inventory is controlled by the Marketplace Entity/ its group company, is not permitted to sell products on such platform run by the Marketplace Entity. In this context and by way of the PN2 Clarification, the DIPP has clarified that that PN2 does not impose any restriction on the nature of products which can be sold on the marketplace, including any private labels.
- Non-discriminatory treatment to sellers in similar circumstances: Apart from the existing condition on Marketplace Entities to not, directly or indirectly, influence the sale price of goods or services and the obligation to maintain level playing field, PN2 contemplates that services may be provided by the Marketplace Entity or other entities in which the Marketplace Entity has direct or indirect equity participation or common control, to the sellers on its platform. Such services will include, without limitation, fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing. However, these services are required to be provided at arm’s length and in a fair and non-discriminatory manner. In this regard, PN2 further states that provision of services to a seller on terms which are not made available to other sellers in similar circumstances will be deemed to be unfair and discriminatory.
- Cashbacks: PN2 now expressly requires that cashbacks provided by group companies of the Marketplace Entity to the buyers should be fair and non-discriminatory.
- Exclusivity: PN2 requires a Marketplace Entity not to mandate any seller to sell any product exclusively on its platform only.
- Reporting obligations: Pursuant to PN2, the Marketplace Entity will be required to furnish a certificate, along with a report of the statutory auditor, to the Reserve Bank of India confirming its compliance with the conditions stipulated under PN2. This certificate is required to be submitted on an annual basis, by the 30th of September each year for the preceding financial year.
- PN2 only applies to Marketplace Entities: PN2 Clarification also clarifies that PN2 is only applicable to Marketplace Entities and that FDI in other sectors continue to be governed by the specific provisions pertaining to them under the extant FDI policy. For instance, there is no change in the FDI policy on food product retail trading, which permits upto 100% FDI under approval route, including through e-commerce, in respect of food products manufactured and/or produced in India.
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.
SEBI (Depositories and Participants) Regulations, 2018
SEBI has, on October 3, 2018, issued the SEBI (Depositories and Participants) Regulations, 2018 (‘New DP Regulations’), replacing the SEBI (Depositories and Participants) Regulations, 1996 (‘Old DP Regulations’) introducing amendments largely related to structuring, shareholding and governance of depositories. Some of the key aspects are set out below:
(i) Structuring: Under the New DP Regulations, a SEBI registered depository has been permitted to carry on any other activity (whether involving the deployment of funds or otherwise), after obtaining prior SEBI approval, as against the Old DP Regulations as per which depositories were only permitted to undertake other activity which were incidental to the activity of the depository. Moreover, the New DP Regulations now expressly provide that the prior approval of SEBI shall not be required in case of treasury investments, if such investments are as per the investment policy approved by the governing board of the depository. Similar to the position under the Old DP Regulations, the New DP Regulations permit the depository to carry out an activity not incidental to its activities as a depository through the establishment of strategic business unit(s) specific to each activity as may be assigned to the depository by the Central Government or by a regulator in the financial sector (through deployment of funds or otherwise).
(ii) Shareholding: Under the New DP Regulations, the maximum prescribed shareholding in a depository, directly or indirectly, either individually or together with persons acting in concert has been retained at 5% of its paid-up equity share capital with the newly introduced exception of both Indian and foreign stock exchanges, Indian and foreign depositories, Indian and foreign banking companies, Indian and foreign insurance companies, public financial institutions, a foreign commodity derivatives exchange and a bilateral/multilateral financial institution approved by the Central Government, which may acquire or hold up to 15% of the paid-up equity share capital of such depository. An ‘applicant’ who proposes to establish a depository under the New DP Regulations is now locked in for a period of five years from the date of registration and can only hold up to 15% of the share capital of the depository, whereas under the Old DP Regulations, the sponsor was required to hold at least 51% of the equity share capital.
(iii) Governance: Under the New DP Regulations, the number of public interest directors cannot be less than the number of shareholder directors on the governing board of a depository. The requirement under the Old DP Regulations for at least one public interest director to be present in the meetings of the governing board to constitute the quorum, has been replaced with the requirement of the public interest directors not being less than the number of shareholder directors to constitute the quorum. The New DP Regulations has now specifically included the managing director in the category of shareholder directors and provide for voting on a resolution of the governing board to be valid only when the number of public interest directors that have cast their vote on such resolution is equal to or more than the number of shareholder directors who have cast their vote on such resolution, with a casting vote in favour of the chairperson of the governing board. Subject to prior approval of SEBI, the chairperson will be elected by the governing board from amongst the public interest directors. Lastly, no foreign portfolio investor (‘FPI’) will have any representation on the governing board.
Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018
SEBI, on October 3, 2018, has issued the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (‘New SECC Regulations’), effectively replacing the erstwhile Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 and the circulars issued thereunder, to regulate the recognition, ownership and governance in stock exchanges and clearing corporations. Some of key features of the New SECC Regulations are:
(i) For valid quorum at a meeting of the board of stock exchanges and clearing corporations, the number of ‘public interest directors’ should not be less than the number of ‘shareholder directors’ at such meeting. The managing director is to be compulsorily categorized as a shareholder director.
(ii) The voting on board resolutions shall be valid only when the number of public interest directors who have cast their vote on such resolution is more than the number of shareholder directors who have cast their vote on such resolution.
(iii) The directors and key management personnel should be ‘fit and proper’ persons at all times, as per the criteria have been specified in the regulations as well as the disqualifications in this regard.
SEBI approves the Framework for Institutional Trading Platform
SEBI, on October 26, 2018, had released the ‘Consultation Paper to Review the Framework for Institutional Trading Platform’, with the objective of proposing changes to the regulatory framework for institutional trading platform, under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’). Subsequently, at its meeting held on December 12, 2018, SEBI approved the proposals for amendments to the ICDR Regulations pertaining to the platform. The platform will be renamed the ‘Innovators Growth Platform’ (‘IGP’). The key proposals approved by SEBI in relation to listing on the IGP are set out below:
(i) 25% of the pre-issue capital of the issuer company should have been held for at least a period of two years by qualified institutional buyers, family trusts with a net worth exceeding INR 500 crores (approx. US$ 72 million), certain regulated entities (including Category III FPIs) and/or certain ‘Accredited Investors’ (who should not hold more than 10% of the pre-issue capital).
(ii) The requirement that no person (individually or with persons acting in concert) should hold 25% or more of the post-issue capital of the issuer company will be removed;
(iii) The minimum application size and trading lot of INR 10 lakhs (approx. US$ 14,000) will be reduced to INR 2 lakhs (approx. US$ 2,900) and in multiples thereof;
(iv) The minimum reservation of allocation to any specific category of investors will be removed;
(v) The minimum number of allottees will be reduced from more than 200 to 50; and
(vi) The minimum net offer to the public will be required to be in compliance with the minimum public shareholding norms of SEBI and the minimum offer size to be INR 10 crores (approx. US$ 14 million).
SEBI Circular on Participation of Eligible Foreign Entities in the Commodity Derivatives Market
SEBI, by way of its circular dated October 9, 2018, has permitted participation of eligible foreign entities (‘EFEs’) in the commodity derivatives market in India. Prior to the issue of this circular, foreign entities were not permitted to directly participate in the Indian commodity derivatives market, even if they imported/exported various commodities from/to India. EFEs’ participation has not been allowed in contracts having an underlying commodity which has been termed as a ‘sensitive commodity’, in terms of SEBI Circular dated July 25, 2017, on Position Limits for Agricultural Commodity Derivatives or by any other stipulation by SEBI, which are disclosed on the websites of recognized stock exchanges having commodity derivatives segment (‘CDS Exchanges’). Key eligibility conditions have been prescribed by SEBI for participation of EFEs in commodity derivatives market in India.
The Circular also specifies certain other compliance requirements to be met by EFEs including, inter alia, the know your client requirements, position limits, documentation and other applicable conditions, risk management; monitoring of limits and physical exposure, etc.
SEBI Circular on Fund Raising by Issuance of Debt Securities by Large Entities
With the purpose of deepening the access to the bond market and with a view to operationalise the Union Budget announcement for 2018-19, SEBI issued a circular on November 26, 2018 (‘Circular’), mandating ‘Large Corporates’ to meet one-fourth of their financing needs from the debt market. ‘Large Corporates’ refers to listed entities (except Scheduled Commercial Banks), which as on last day of the financial year (‘FY’) have:
(i) specified securities / debt securities / non-convertible redeemable preference shares listed on recognised stock exchanges in terms of the Listing Regulations;
(ii) an outstanding long term borrowing (with original maturity of more than one year, and excluding external commercial borrowings and inter-corporate borrowings between a parent and subsidiaries) of INR 100 crores (approximately US$ 14 million) or above; and
(iii) a credit rating of “AA and above”, in accordance with specified criteria.
A Large Corporate is required to raise not less than 25% of its incremental borrowings, during the FY subsequent to the FY in which it is identified as a Large Corporate, by way of the issuance of debt securities, as defined under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008. For FY 2020 and FY 2021, this requirement will be required to be met on an annual basis and from FY 2022 onwards, the requirement will be required to be met over a continuous block of two years. The Circular also requires Large Corporates to make the stock exchange disclosures (certified by both the Company Secretary and Chief Financial Officer) with respect to identification as a Large Corporate and the details of the incremental borrowings made during the FY.
The Circular will become effective from April 1, 2019 (except for those entities which follow the calendar year as their financial year, in which case the Circular shall become applicable from January 1, 2020).
SEBI Circular on ‘Guidelines for Enhanced Disclosures by Credit Rating Agencies’
SEBI, by way of a circular dated November 13, 2016, has prescribed enhanced disclosures to be made by Credit Rating Agencies (‘CRAs’) to bring about greater transparency. The disclosures, inter alia, include:
(i) CRAs to include rationales in the ‘analytical approach’ and ‘liquidity’ sections of the press release, when the rating either relies on support from group companies/ parent company and to highlight parameters like liquid investments or cash balances access to unutilized credit lines, liquidity coverage ratio, adequacy of cash flows for servicing maturing debt obligation etc.;
(ii) CRAs to analyze the deterioration in the liquidity conditions of the issuer and also take into account any asset-liability mismatch while monitoring repayment schedules;
(iii) CRAs may treat sharp deviations in bond spreads of debt instruments vis-à-vis relevant benchmark yield as a ‘material event’;
(iv) CRAs to publish information about the historical average rating transition rates across various rating categories; and
(v) CRAs to bi-annually furnish data on sharp rating actions in investment grade rating category to stock exchanges and depositories for disclosure on their respective websites.
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.
SEBI notifies the SEBI (Settlement Proceedings) Regulations, 2018
On November 30, 2018, SEBI issued the SEBI (Settlement Proceedings) Regulations, 2018 (‘New Settlement Regulations’) which are effective from January 1, 2019, on the basis of the report of the High Level Committee chaired by Justice Dave and have replaced the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 (‘Old Settlement Regulations’). The key changes introduced by the New Settlement Regulations are as follows:
(i) Definition of ‘securities laws’ has been widened to include all laws administered by SEBI. The Old Settlement Regulations merely covered the SEBI Act, 1992, the Securities Contract (Regulations) Act, 1956 and the Depositories Act, 1996. Similarly, the definition of ‘specified proceedings’ has been expanded to include proceedings pending before any forum, and not just SEBI.
(ii) The ‘cooling-off’ period of 24 months prescribed under the Old Settlement Regulations between the date of the last settlement order and an application for a new settlement has been done away with. Further, the restriction on applying for a settlement, if the applicant has received two settlement orders in the past 36 months, has also been removed.
(iii) Under the Old Settlement Regulations, violation of laws pertaining to insider trading, communication of unpublished price sensitive information, fraudulent and unfair trade practices having market-wide impact (such as front-running, mis-selling to an investor, violation of internal code of conduct in insider trading), could not be considered for settlement, as these were considered ‘serious offences’. The New Settlement Regulations remove any such restriction, subject to the qualification that SEBI may not consider any such specified proceeding, where the alleged default tends to have a market-wide impact, cause losses to a large number of investors or affect the integrity of the market.
(iv) A person cannot apply for a settlement if he is classified as a willful defaulter, a fugitive economic offender or a person who has defaulted in payment of any fees due or penalty imposed under any securities law.
(v) The New Settlement Regulations additionally grant SEBI the discretionary power to settle a proceeding confidentially, in order to benefit applicants who agree to provide ‘substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or ongoing, against any other person in respect of a violation of securities laws’. The applicant’s identity and any information, evidence or documents provided by the applicant will be kept confidential in such a case.
The New Settlement Regulations have introduced a new concept of ‘settlement schemes’, by way of which SEBI will specify the procedure and terms of settlement of specified proceedings under a settlement scheme for any class of persons involved in respect of any similar defaults specified. A settlement order issued under such a settlement scheme will be deemed to be a settlement order under the New Settlement Regulations.
New SEBI Order in the Satyam Matter
SEBI order dated November 2, 2018 (‘New Satyam Order’) modified its previous orders in the matter of Satyam Computer Services Limited (‘Satyam’), in respect of B. Ramalinga Raju, B. Rama Raju, B. Suryanarayan Raju, and SRSR Holdings Private Limited (collectively, the ‘Satyam Noticees’). In the previous orders, the Satyam Noticees had been restrained from trading in the stock market for a certain period and had been directed to disgorge wrongful gains made by them, inter alia, by falsifying financial statements of Satyam and committing insider trading in Satyam’s shares.
The key legal issue involved in the New Satyam Order was whether the benefit of ‘intrinsic value’ can be given to the Satyam Noticees while computing the disgorgement amount (by deducting the ‘intrinsic value’ of shares from the receipts from sale of such shares in order to arrive at the illegal gain). SEBI, relying on its previous decisions, held that the Satyam Noticees should not be given the benefit of discounting the intrinsic value, as it would amount to conferring undeserving benefits and may act as a moral hazard rather than as a deterrent. Therefore, only the acquisition cost and statutory dues were deducted from the sale proceeds to arise at the disgorgement amount.
SEBI also considered the point in time from which interest may be levied on the disgorgement amount. Relying on a previous decision of the Supreme Court (‘SC’) on this question, SEBI reiterated that interest could be levied right from the inception of the cause of action (i.e. date of commission of the fraudulent actions). However, SEBI did not interfere with its previous orders in this matter which had levied interest on the disgorgement amount from January 7, 2009, being the date on which Mr. Ramalinga Raju confessed that he had committed fraud with respect to Satyam’s books of accounts.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 – Key Considerations for a Selling Shareholder in an IPO
The Securities and Exchange Board of India (‘SEBI’) notified the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR 2018’) on September 11, 2018, which came into effect on November 10, 2018, thereby rescinding and repealing the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR 2009’).
These regulations primarily govern the process of an initial public offering (‘IPO’), which is an offer of specified securities by an unlisted issuer to the public for subscription for the first time. An IPO consists of either or both of the following components:
(i) a primary component, being a fresh issue of securities by the issuer,
(ii) or a secondary component, being an offer for sale by existing shareholders of the issuer (‘OFS’).
Some of the key changes brought about by and salient features of ICDR 2018 along with existing practices, more specifically provisions which are relevant from a private equity investor’s perspective vis-à-vis IPOs are summarized below:
1. Selling Shareholders
(i) ICDR 2018 has introduced a definition of ‘selling shareholder(s)’ which is defined as any shareholder of the person who is offering for sale the specified securities in a public issue. Consequently, the definition of ‘issuer’ has also been amended to mean a company or a body corporate authorized to issue specified securities under the relevant laws and whose specified securities are being issued and/or offered for sale in accordance with the provisions of ICDR 2018 (‘Issuer’). Therefore, the ambiguity under ICDR 2009 on whether a selling shareholder would amount to an Issuer, has been clarified.
(ii) Pursuant to the inclusion of the aforesaid definitions, corresponding provisions for disclosures / confirmation requirements have been provided, which, inter alia, include the following:
• Statement by the selling shareholder on the cover page of the draft offer document/ offer document stating that it accepts responsibility for, and confirms, the statements made by it in the offer document to the extent of information specifically pertaining to it and its portion of the offered shares and that such statements are true and correct in all material respects and not misleading in any material respect;
• Aggregate pre-issue shareholding of the selling shareholder as a percentage of the paid-up share capital of the Issuer;
• Weighted average price at which specified security was acquired by the selling shareholder in the last one year;
• Average cost of acquisition of shares for the selling shareholder;
• Pre-IPO details (if applicable);
• A confirmation that the selling shareholder is not prohibited from accessing the capital market or debarred from buying, selling or dealing in securities under any order or direction passed by SEBI or any securities market regulator in any other jurisdiction or any other authority/court; and
• A confirmation that the selling shareholder is in compliance with the Companies (Significant Beneficial Ownership) Rules, 2018.
(i) Some of the changes introduced in respect of the eligibility requirements for promoters, directors and selling shareholders for an IPO are set ou below:
• The debarment of selling shareholders from accessing the capital markets has now been made an eligibility condition. However, ICDR 2018 clarifies that this restriction will not apply to a person or entity whose period of debarment has expired as on the date of filing of the draft red herring prospectus (‘DRHP’) by the Issuer with SEBI.
• Further, none of the promoters or directors of an Issuer should be fugitive economic offender (as defined under the Fugitive Economic Offenders Act, 2018).
(ii) Additionally, the following amendments were introduced in respect of financial information linked to eligibility:
• The condition that the size of the IPO, including any previous issues in the same fiscal year, must not exceed five times the net worth of the Issuer, has been done away with.
• It has been clarified that the net tangible assets, average operating profits (with operating profit in each of these preceding three years), net worth and revenue of the Issuer has to be calculated on a restated and consolidated basis.
(iii) It has also been clarified that the offered shares arising from convertible instruments may now be converted prior to filing the red herring prospectus (‘RHP’).
3. Group Companies
(i) Group companies have been defined to include: (a) companies with which the Issuer has had related party transactions during the past three fiscal and stub periods (as appearing in the audit report and financial statements), and (b) other companies considered material by the board of directors of the Issuer.
(ii) Promoters and subsidiaries have been excluded from the definition of group companies.
4. Definition of Promoter
(i) The definition of ‘promoter’ has been aligned with the definition provided under Section 2(69) of the Companies Act, 2013. Accordingly the following persons can be classified as promoters: (a) persons named as such in the offer document or identified by the Issuer in the annual return; (b) persons who have control over the affairs of the Issuer, directly or indirectly whether as a shareholder, director or otherwise; and (c) persons in accordance with whose instructions the board of the Issuer is accustomed to act (except a person acting in a professional capacity).
(ii) The threshold of shareholding which exempts a person from being categorized as a promoter has been increased from 10% to 20%. Further, venture capital funds, alternate investment funds (‘AIFs’), foreign venture capital investors (‘FVCIs’) and insurance companies have been added to the list of investors who (in addition to financial institutions, scheduled commercial banks, foreign portfolio investors other than Category III foreign portfolio investors, mutual funds) will not be deemed to be promoters merely because they hold 20% or more in the Issuer. Consequential changes have been made in various provisions, including, the definition of promoter group.
(iii) Persons instrumental in formulation of a plan or programme of the offer have now been excluded from the definition of promoter.
(iv) The proviso under the definition of ‘promoter’ under ICDR 2009 in relation to a financial institution, scheduled commercial bank, foreign portfolio investor other than Category III foreign portfolio investor and mutual funds, continuing to be deemed promoters of the subsidiaries or companies promoted by them or mutual funds sponsored by them has been done away with.
5. Minimum Promoters’ Contribution, its Eligibility, Pledging and Certification
(i) In addition to the promoters of an Issuer, certain regulated entities such as AIFs, FVCIs, scheduled commercial banks, public financial institutions (‘PFIs’) or insurance companies registered with Insurance Regulatory and Development Authority of India (‘IRDAI’), are now permitted to contribute in a manner which would enable meeting the shortfall (if any) in the minimum promoters’ contribution, subject to a limit of 10% of the post-issue capital (without being identified as promoters).
(ii) Ineligibility conditions have now been extended to securities which are contributed towards promoters’ contribution by the additional regulated entities identified above, i.e., securities acquired by promoters, AIFs, FVCIs, scheduled commercial banks, PFIs or insurance companies registered with IRDAI, during the preceding one year at a price lower than the offer price of the IPO.
(iii) As per ICDR 2018, promoters’ contribution and other securities held by the promoters (and locked-in) can also be pledged with systemically important non-banking financial companies and housing finance companies, in addition to scheduled commercial banks and PFIs.
(iv) In line with ICDR 2009, ICDR 2018 provides that lock-in on minimum promoters’ contribution is effective for a period of three years from the latter of the date of allotment in the IPO or the date of commencement of commercial production. However, the definition of the term ‘date of commencement of commercial production’ has been amended to mean the last date of the month in which commercial production of the ‘project’ in respect of which the IPO proceeds are proposed to be utilized as per the DRHP/ offer documents, is expected to commence.
(v) Statutory auditors are mandatorily required to certify the amount paid as well as credited to the Issuer’s account by each of the promoters.
6. Pre-IPO / Restriction on Further Capital Issues
For further capital issuances between the date of filing the DRHP and the listing of the specified securities offered in the IPO, the Issuer is required to disclose details of either the number of securities proposed to be issued or amount proposed to be raised in the DRHP/ offer document and not both. ICDR 2018, as was the case in the ICDR 2009, contemplates only issuance of securities.
7. Re-filing of the Draft Offer Document
Pursuant to the amendment to ICDR 2018, which was effective from December 31, 2018, any changes in the draft offer document, as elaborated below, will require re-filing of the draft offer document with SEBI:
(i) in case of a fresh issue of securities, any increase or decrease to the estimated issue size by more than 20%;
(ii) in case of an offer for sale, any increase or decrease in either the number of equity shares offered for sale or the estimated issue size by more than 50%; and
(iii) in case of a fresh issue of securities and an offer for sale, the respective limits set out above will apply.
The aforesaid changes brought about by ICDR 2018 to the regulatory regime governing Indian capital markets transactions will have a bearing on investors in private companies who intend to exit by way of an OFS as part of an IPO. Accordingly, investors may take note of the factors impacting any transactions that are contemplated subsequent to the date of notification of ICDR 2018.
CCI Dismissed Case against NSE Alleging Violation of Section 4 of CA02
On January 7, 2019, CCI dismissed information filed by Jitesh Maheshwari against National Stock Exchange of India Limited (‘NSE’) alleging violation of Section 4. The informant highlighted that the current case ongoing with Securities Exchange Board of India (‘SEBI’), Income Tax Department (‘ITD’) and Central Bureau of Investigation should also be investigated by CCI for contravention of Section 4 of the CA02.
The information pertained to co-location services provided by NSE to traders where the traders availing the service were granted access to confidential information about traded prices of shares ahead of other traders. It was alleged that from the year 2010-2014, NSE abused its dominant position by providing preferential access to some trading members of its co-location services thereby distorting competition with the trading members not availing of such facility.
CCI noted that the case is currently under adjudication by SEBI, and the exact role of NSE with respect to the alleged contravention is being investigated and that the information available against NSE was insufficient to find a contravention of Section 4 of the CA02. Accordingly, CCI ordered the matter to be closed.
 Case Number 47 of 2018.
SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018
SEBI, on October 3, 2018, issued the SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018 (‘APRI Regulations’) to provide for appointment of administrators after attachment of properties of defaulters, by SEBI authorized recovery officers, who are exercising powers under the Securities Contracts (Regulation) Act, 1956 or the Depositories Act, 1956. The APRI Regulations set out eligibility norms for appointment of administrators (including that the administrator is required to be registered as an insolvency resolution professional with the Insolvency and Bankruptcy Board of India and be empaneled by SEBI), the functions, responsibilities and powers of administrators and also deal with matters such as their terms of appointment (including remuneration), procedures for sale of properties and refund of monies.
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.
Amendments To SEBI (Prohibition of Insider Trading) Regulations, 2015 – Key Highlights
On December 31, 2018, the Securities and Exchange Board of India (‘SEBI‘) issued the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 (‘Amendment Regulations‘) amending certain provisions of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) with effect from April 1, 2019. These Amendment Regulations are broadly based on the recommendations in the Report of the Committee on Fair Market Conduct issued on August 8, 2018. Some of the key highlights of the Amendment Regulations are set out below.
- Communication of UPSI for “Legitimate Purposes”
Regulation 3 of the PIT Regulations prohibits, inter alia, communication and procurement of ‘Unpublished Price Sensitive Information’ (‘UPSI’), except for legitimate purposes, performance of duties or discharge of legal obligations. However, the PIT Regulations did not define the term ‘legitimate purposes’. The Amendment Regulations have introduced a new sub-regulation 3(2A) which requires the board of directors of every listed company (‘Board’) to make a policy for determination of ‘legitimate purposes’ as a part of their Codes of Fair Disclosure and Conduct. Further, an explanation has also been added, which provides that the term ‘legitimate purposes’ includes sharing of UPSI in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of the PIT Regulations.
The Amendment Regulations have also introduced a new sub-regulation 3(2B) which provides that any person in receipt of UPSI pursuant to such a ‘legitimate purpose’ would be considered an ‘insider’, and due notice must be given to these ‘insiders’ to maintain confidentiality of such UPSI in compliance with the PIT Regulations.
- Communication of UPSI for Due-diligence
Regulation 3(3) of the PIT Regulations has been amended to provide that in case of sharing of UPSI for transactions involving listed companies (whether or not the transaction attracts open offer obligations under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011), the Board must form an informed opinion that the sharing of such information (and not the proposed transaction, as was the case earlier) is in the best interests of the company.
Further, in case of transactions not attracting open offer obligations, Regulation 3(3) has been amended to provide that cleansing disclosures (i.e. disclosure of UPSI shared in connection with the transaction, that is required to be made at least two trading days prior to the proposed transaction being effected) is to be in such form as the Board of the listed company may determine to be adequate and fair to cover all relevant and material facts.
- Communication of UPSI – Maintenance of Structured Digital Database
The Amendment Regulations have introduced a new Regulation 3(5), which provides that the Board of listed companies must ensure that a structured digital database is maintained containing the names of such persons or entities with whom information is shared under Regulation 3, along with the Permanent Account Number (or any other identifier authorized by law where the Permanent Account Number is not available). Such databases are required to be maintained with adequate internal controls and checks, such as time stamping and audit trails to ensure non-tampering of the database.
- Insider Trading – Presumption based on Possession of UPSI
Regulation 4(1) of the PIT Regulations has been amended to include an explanation stating that when a person who has traded while in possession of UPSI, such trades would be presumed to have been motivated by the knowledge and awareness of such information. This presumption was earlier included in the legislative note to Regulation 4(1), but has now been added as an explanation by SEBI.
- New Defences to Trading while in Possession of UPSI
The off-market inter-se promoter trade defence in the PIT Regulations has been amended to apply to trades inter-se any insiders (i.e. whether promoters or otherwise). Further, the following three defences have been added: (i) block deal window trades between persons possessing identical UPSI; (ii) bona fide transactions pursuant to statutory or regulatory obligations; and (iii) exercise of stock options at a pre-determined price.
However, SEBI has not offered clarity in relation to what transactions would be considered ‘bona fide’ for statutory or regulatory purposes. In this regard, it would be relevant to consider factors such as the timing of the transaction, the nature of the obligation and whether the transaction was the only option available to achieve the obligation. For instance, bona fide trades to ensure compliance with minimum public shareholding requirements may potentially avail of this defence. However, what is not clear is whether such defence is available through the 12 month window provided to achieve minimum public shareholding requirements.
- Trading Plans
Regulation 5(3) has been amended to clarify that pre-clearance of trades is not required for a trade executed as per an approved trading plan, and trading window norms and restrictions on contra trades do not apply to trades carried out in accordance with an approved trading plan.
- Disclosures by Designated Persons
Regulation 7(2) originally required promoters, employees and directors of listed companies to make certain continual disclosures to the company (which were to be passed onward by the companies to the stock exchanges). Regulation 7(2) has been amended to make such requirements applicable to ‘designated persons’ (instead of ‘employees’) and to members of the promoter group (pursuant to a further amendment to the PIT Regulations).
- Code of Conduct – Formulation and Scope
Prior to the Amendment Regulations, the PIT Regulations required the Board of every company and every other person required to handle UPSI in the course of business operations to formulate a Code of Conduct and imposed common minimum standards for all such codes.
The Amendment Regulations have amended Regulation 9(1) to provide that the Board or head(s) of the organisation of every listed company and intermediary must ensure that the Chief Executive Officer or Managing Director formulates such Codes of Conduct adopting the minimum standards in Schedule B (in case of a listed company) and Schedule C (in case of a intermediary). Prior to the Amendment Regulations, the same standards applied in case of listed companies and intermediaries. Separately, Regulation 9(2) requires the Board or head(s) of the organisation of every other person (i.e. other than listed companies and intermediaries) who is required to handle UPSI in the course of business operations to formulate a Code of Conduct governing trading in securities by their designated persons (as identified by the Code of Conduct), adopting the minimum standards set out in Schedule C.
- Code of Conduct – Designated Persons
The Amendment Regulations now require the Board (or analogous authority as the case may be) to, in consultation with the Compliance Officer, specify the persons designated as ‘Designated Persons’ based on their role and function in the organisation and resulting access to UPSI. It further provides that Designated Persons must include, inter alia, promoters of listed companies and promoters who are individuals or investment companies for intermediaries or fiduciaries and the Chief Executive Officer and employees up to two levels below Chief Executive Officer of such listed company, intermediary, fiduciary and its material subsidiaries irrespective of their functional role in the company or ability to have access to UPSI.
- Code of Conduct – Amendments to Minimum Standards
In relation to Codes of Conduct of listed companies, Schedule B (in case of listed companies) has been amended to, inter alia, provide that Designated Persons and their immediate relatives would be governed by the Code of Conduct. Additionally, the minimum standards set out in Schedule B have been amended to provide that:
(i) contra trade restrictions do not apply to exercise of stock options;
(ii) the trading restriction period can be made applicable from the end of every quarter till 48 hours after the declaration of financial results (while this seems to be a recommendation and not a mandatory requirement, the National Stock Exchange of India Limited (NSE) has clarified that, pursuant to discussions with SEBI, in any case, the trading restriction period is required to commence not later than the end of every quarter till 48 hours after the declaration of financial results); and
(iii) the gap between clearance of accounts by the Audit Committee and the Board meeting should be as narrow as possible and preferably on the same day to avoid leakage of material information.
The Amendment Regulations further removed the following requirements from Schedule B:
(i) that trading window restrictions also apply to persons having contractual or fiduciary relation with the listed company (such as auditors, accountancy firms, law firms, analysts, consultants etc. assisting or advising the company);
(ii) the restriction on Designated Persons applying for preclearance if such Designated Person is in possession of UPSI (even if the trading window is not closed); and
(iii) the requirement to maintain a restricted list of securities (to be used as the basis for approving or rejecting preclearance applications).
In relation to Codes of Conduct of intermediaries and fiduciaries, the new Schedule C provides minimum standards which removes the trading window requirements provided for in Schedule B and provides for restricted lists.
Additionally, both Schedule B and C provide for certain incremental compliance requirements, including requiring Designated Persons to disclose to the listed company, intermediary of fiduciary, as the case may be, the names and Permanent Account Number (or any other identifier authorized by law) of (i) immediate relatives; and (ii) persons with whom such Designated Persons share a ‘material financial relationship’.
- Institutional Mechanism for Prevention of Insider trading
The Amendment Regulations have introduced a new Regulation 9A, which provides that the Chief Executive Officer, Managing Director or such other analogous person of a listed company, intermediary or fiduciary must put in place an adequate and effective system of internal controls to ensure compliance with the PIT Regulations.
These internal controls include: (i) all employees with access to UPSI to be identified as “designated employees”; (ii) UPSI to be identified and confidentiality to be maintained; (iii) adequate restrictions on communication or procurement of UPSI; (iv) maintenance of a list of employees with UPSI and execution of confidentiality agreements or notice to be served on all such employees and persons; and (vi) periodic process review to evaluate effectiveness of such internal controls should be conducted.
The Board or head(s) of the organisation of every relevant entity must ensure that the Chief Executive Officer, Managing Director or other analogous person ensure compliance with Regulation 9 and Regulation 9A and the Audit Committee or other analogous body, as the case may be, must review compliance at least once every financial year and verify that the systems for internal control are adequate and are operating effectively.
Every listed company is also required to formulate written policies and procedures for inquiry in case of leaks or suspected leaks of UPSI and to formulate a whistle-blower policy to enable employees to report instances of leak of UPSI. In case of an inquiry initiated by a listed company in case of leaks or suspected leaks of UPSI, the relevant intermediaries and fiduciaries are required to co-operate with the listed company in connection with such an inquiry.
- Additional Obligations on Boards under the PIT Regulations (Pre and Post-Amendment)
|Legitimate purposes||–||The Board of a listed company is required to formulate a policy for determination of legitimate purposes (for communication of UPSI under Regulation 3) as part of the Code of Fair Disclosure and Conduct.|
|Communication of UPSI for due-diligence||UPSI may be shared in relation to a transaction that would (a) attract an obligation to make an open offer; or (b) not attract the obligation to make an open offer, if the Board is of the informed opinion that the proposed transaction is in the best interests of the company.|
In case of a transaction that would not attract the obligation to make an open offer, the cleansing disclosure is required to be made in such form as the Board may determine.
|UPSI may be shared in relation to a transaction that would (a) attract an obligation to make an open offer; or (b) not attract the obligation to make an open offer, if the Board is of the informed opinion that the sharing of such information is in the best interests of the company.|
In case of a transaction that would not attract the obligation to make an open offer, the cleansing disclosure is required to be made in such form as the Board may determine to be adequate and fair to cover all relevant and material facts.
|Structured Digital Database||–||The Board to ensure that a structured digital database is maintained containing the names of such persons or entities, as the case may be, with which information is shared (under Regulation 3) along with the Permanent Account Number or any other identifier authorized by law.|
|Formulation of Code of Conduct – Listed companies and market intermediaries||The Board of every listed company and market intermediary must formulate a Code of Conduct in accordance with Schedule B of the PIT Regulations.||The Board of every listed company and the Board or heads of organization of every intermediary must ensure that the Chief Executive Officer or Managing Director must formulate a Code of Conduct with their approval in accordance with Schedule B and Schedule C of the PIT Regulations, respectively.|
|Formulation of Code of Conduct – Persons required to handle UPSI||Every person required to handle UPSI in the course of business operations must formulate a Code of Conduct in accordance with Schedule B of the PIT Regulations.||The Board or heads of organization of every person required to handle UPSI in the course of business operations must formulate a Code of Conduct in accordance with Schedule C of the PIT Regulations.|
|Ensuring compliance with Code of Conduct and Institutional Mechanism for Prevention of Insider Trading||–||The Board of every listed company, and the Board or heads of the organization of intermediaries and fiduciaries must ensure that the Chief Executive Officer or the Managing Director or such other analogous person ensures compliance with Regulation 9 (Code of Conduct) and sub-regulations (1) and (2) of Regulation 9A (Institutional Mechanism for Prevention of Insider Trading) of the PIT Regulations.|
|Policy for inquiries into UPSI leaks||–||The Board is required to approve the written policies formulated by every listed company with respect to inquiries to be initiated in case of a leak or suspected leak of UPSI.|
- Compliance Officer – Eligibility Criteria
The definition of ‘compliance officer’ in the PIT Regulations provided that such an officer must be ‘financially literate’, but did not explain the meaning of the term. In line with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Amendment Regulations have introduced an explanation to the definition of ‘compliance officer’, which states that ‘financially literate’ means a person who “has the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.”
- New Definition of “Proposed to be Listed”
The prohibitions and restrictions on insider trading and communication of UPSI apply to securities of companies that are listed or “proposed to be listed”. However, the PIT Regulations, as originally enacted, did not define the term “proposed to be listed”. For clarity, the Amendment Regulations have defined “proposed to be listed” to include securities of an unlisted company: (i) if such unlisted company has filed offer documents or other documents, as the case may be, with SEBI, stock exchange(s) or registrar of companies in connection with the listing; or (ii) if such unlisted company is getting listed pursuant to any merger or amalgamation and has filed a copy of such scheme of merger or amalgamation under the Companies Act, 2013.
- Definition of UPSI – Delinked from “Material events”
The illustrations of information that constitute UPSI, as provided in the PIT Regulations, included “material events” in accordance with the listing agreement. The above illustration has been deleted since many of these events might not be price sensitive.
 Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2019.
 An explanation has been added to Regulation 9(2) which provides that professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as “fiduciaries” for the purpose of the PIT Regulations.
 NSE Circular Ref No: NSE/CML/2019/11 dated April 2, 2019.
 For this purpose, an explanation has been added to define “material financial relationship” as a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift during the immediately preceding twelve months, equivalent to at least 25% of such payer’s annual income, but shall exclude relationships in which the payment is based on arm’s length transactions.
CCI Approves Acquisition by Reliance Industries Limited Group Companies of 65.96% and 51.34% Shareholding of Den Networks Limited and Hathway Cable and Datacom Limited, respectively
On January 21, 2019, CCI through a common order, approved the acquisition by Reliance Industries Limited (‘RIL’) group companies, namely (i) Jio Futuristic Digital Holdings Private Limited (‘JFDHPL’), Jio Digital Distribution Holdings Private Limited (‘JDDHPL’), and Jio Television Distribution Holdings Private Limited (‘JTDHPL’) (collectively ‘Acquirers 1’) of 65.96% of the expanded equity share capital of Den Networks Limited (‘Den’) (‘Den Transaction’); and (ii) Jio Content Distribution Holding Private Limited (‘JCDHPL’), Jio Internet Distribution Holdings Private Limited (‘JIDHPL’), and Jio Cable and Broadband Holdings Private Limited (‘JCBHPL’) (collectively ‘Acquirers 2’) of 51.34% of the expanded equity share capital of Hathway Cable and Datacom Limited (‘Hathway’) (‘Hathway Transaction’), respectively. (Den Transaction and Hathway Transaction are collectively referred to as the ‘Proposed Combination’). The Proposed Combination would have triggered open offer obligations under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘SAST’) in relation to Den, Hathway and two listed entities controlled jointly by Hathway and a third party, i.e., Hathway Bhawani Cabletel and Datacom Limited (‘HBCDL’) and GTPL Hathway Limited (‘GTPL Hathway’). (Den, Hathway, HBCDL, GTPL Hathway are collectively referred to as ‘Targets’. Acquirers 1, Acquirers 2 and the Targets are collectively referred to as the ‘Parties’). 
Acquirers 1 and 2 have been recently incorporated and belong to the RIL group. RIL group is broadly engaged in the business of hydrocarbon exploration and production, petroleum refining and marketing, petrochemicals, retail, telecommunications, broadcasting and content creation. Den and Hathway are both registered Multi-system Operators (‘MSO’) under the Cable Television Networks (Regulation) Act, 1995 and categorized as national MSOs by the Telecom Regulatory Authority of India (‘TRAI’). Additionally, both Den and Hathway also provide broadband internet services (‘BIS’), and supply advertising airtime on server based local cable television channels. Further, Den also supplies audio-visual (‘AV’) content (retail) through its online complementary streaming application i.e., ‘Den TV+’ to its cable television subscribers, whereas Hathway supplies server based local cable television channels.
Based on the overlapping business activities of the Parties, CCI identified the following relevant market(s)/segment(s) (‘Relevant Market’/ or ‘Segment’ as the case may be) for the purposes of its assessment. However, CCI did not define the exact market definition, since the Proposed Combination would not have led to any AAEC in India. CCI analysed the competitive scenario in each Relevant Market/Segment for AAEC as follows:
i. Aggregation and distribution of broadcast TV channels to homes through cable TV and direct-to-home (‘DTH’) services: At the outset, CCI excluded Internet Protocol Television (‘IPTV’) and Headend in the Sky (‘HITS’) from its assessment, given that these are nascent technologies, with minimal TV household penetration. Further, CCI observed that cable TV and DTH services may be viewed at par with each other given their; (i) nearly similar pricing (pursuant to digitization of cable TV and provision for cable TV services on a pan-India basis because of national MSOs); (ii) similar end use and quality of services; and (iii) TRAI regulations treat the two to be par with each other. In terms of the geographic scope of this market, CCI considered it to be pan-India, given that both cable TV as well as DTH service providers can operate nationwide. This is in contrast to CCI’s decisional practice of distinguishing between DTH services and cable TV services based on different inter alia packaging, pricing, infrastructure requirements, and the fact that MSOs operate locally state-wise and DTH service providers have a pan-India presence.
In its assessment, CCI observed that the Parties’ post combination market share of 15-20% coupled with the presence of multiple DTH and cable TV service providers would ensure that the Proposed Combination does not cause any AAEC in this market. Additionally, CCI also noted that even within the narrower segment of cable TV only, the combined market share of the Parties would only be 20-25%, recording an increase in the range of 5-10%, which would be insufficient to raise any competition concerns.
ii. Retail supply of AV content in India: CCI noted that Parties to the Proposed Combination distributed AV content either through server based local cable TV channels or over-the-top applications (‘OTT’). Further, it noted that the provision of server based local cable TV services of Den and Hathway was complementary to their cable TV services, respectively. Accordingly, the same was disregarded as an area of overlap by CCI.
As regards the distribution of AV content through OTT, CCI firstly observed that OTT is not substitutable with cable TV and DTH given the price disparity and different modes of distribution. Additionally, it noted that in terms of monthly active users (‘MAUs’), Den had an insignificant share and this Segment comprised various enterprises with large consumer bases and varied content offerings. Thus, CCI disregarded any likelihood of AAEC pursuant to the Proposed Combination in this Segment in India.
iii. Provision for Wired-BIS: At the outset CCI distinguished between Wired-BIS and Wireless-BIS, given their distinctive pricing, speed, data usage and portability. Further, it noted that both Den and Hathway hold a pan-India Internet Service Provider license (‘ISP license’) under the Department of Telecommunications Guidelines for Granting a Unified License (‘DoT Guidelines’) and provide Wired-BIS services in Delhi and Rajasthan. However, Den has optical fiber measuring less than 25,000 kms and Hathway has optical fiber measuring less than 40,000 kms spread across India. In terms of the geographical scope of this market, CCI assessed the market for competition scenario on both pan-India as well as state-wise basis. CCI also observed that the presence of the Parties in the two segments of, business and household (total number of subscribers) may also be viewed separately.
Pursuant to its assessment, CCI noted that the Proposed Combination would not lead to any AAEC in this Relevant Market, given the (i) minimal combined market shares of the Parties at both pan-India, as well as state-wise basis; and (ii) presence of significantly large enterprises such as Bharat Sanchar Nigam Limited (‘BSNL’), Bharti Airtel Limited, etc. CCI also observed that the Parties had insignificant presence in terms of their optical fiber networks as well as in the business and household segments.
iv. Supply of advertising airtime on TV channels: CCI observed that RIL through TV18 provided advertising services on a pan-India basis, as against Den and Hathway, who catered to local audience. There further existed disparity in the services offered by RIL and the Targets, in terms of pricing. In any case, CCI was of the view that given the insignificant increment (as market share of Den and Hathway less than one percent), the Proposed Combination would not cause any AAEC in this market.
CCI also identified certain overlaps between the Parties, namely:
(i) Wholesale supply of TV channels in India (upstream), and aggregation and distribution of TV channels to homes in India (downstream): As per CCI, the Parties did not have considerable market shares either in the upstream or the downstream market. Further, CCI also noted the existing TRAI regulatory regime imposed various obligations on both distribution platform operators (‘DPOs’) and broadcasters, such as ‘must carry and must provide’, publication of tariff breakup on individual websites and so on. Moreover, the maximum retail price for each channel was to be determined by the retailer.
(ii) Licensing of AV content, including licensing of linear feeds of TV channels in India (upstream) and retail supply of AV content (downstream): As per CCI both the upstream and the downstream markets are highly competitive because of the presence of multiple enterprises in this Segment. Further, the increment in the market shares of the Parties, because of the Proposed Combination would be negligible to raise any competition concerns.
(iii) Advertising on TV channels (upstream) and Supply of Advertising Airtime on TV channels (downstream): CCI observed that RIL advertised on Den’s server based local cable TV channels; however, Den earned insignificant revenue from the same. To this extent, the Proposed Combination would not raise any competition concerns
In light of the above, CCI approved the Proposed Combination under Section 31(1) of the Act. However, the approval was subjected to certain voluntary obligations undertaken by the Parties, to ensure that the customers of the Parties do not have to incur the cost of any technical re-alignment which may accrue pursuant to the Proposed Combination.
 Combination Registration No.C-2018/10/609 & C-2018/10/610
 Combination Registration No. C-2016/12/463
Establishment of a Branch / Liaison / Project Office in India
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 (‘Branch Office Regulations’) required prior approval of Reserve Bank of India (‘RBI’) to be obtained for opening a branch office, liaison office or project office or any other place of business in India (‘BO/LO/PO’), if the principal business of the non-resident applicant was within the defence, telecom, private security or information and broadcasting sector(s) (the ‘Relevant Sectors’). RBI, by way of its circular dated March 28, 2019, has notified that:
i. for the opening of a BO/LO/PO in the Relevant Sectors, prior approval of RBI will not be required to be obtained, if the concerned ministry or regulator in India has granted its approval or license or permission regarding such proposal. The circular clarifies that the term ‘permission’ will not include general permission, if any, available under the automatic route in respect of the abovementioned sectors (vis-à-vis foreign direct investment); and
ii. for proposals regarding opening of project offices in the defence sector, a separate reference or approval from the Government of India will not be required, if the applicant has been awarded a contract by, or has entered into an agreement with, the Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings.
Investment by FPIs in Debt
The Securities and Exchange Board of India (‘SEBI’) and RBI had, by way of their circulars dated June 15, 2018, inter alia, introduced a ‘per corporate’ limit, disallowing a foreign portfolio investor (‘FPI’) from having an exposure of more than 20% of its entire corporate bond portfolio to a single corporate (including exposures to related entities of such corporate). In order to encourage a wider spectrum of investors to access the Indian corporate debt market, on February 15, 2019, RBI issued a notification withdrawing the above mentioned ‘per corporate’ limit with immediate effect. The ‘per issue’ limit for FPIs (i.e., an FPI and its investor group may invest in any issue of corporate bonds subject to a cap of 50% of such issue) and the 20% short-term investments limit for FPIs continues to remain in place. This withdrawal is in line with the announcement made in paragraph 10 of the Statement on Developmental and Regulatory Policies of the Sixth Bi-monthly Monetary Policy Statement for 2018-19 of RBI, dated February 7, 2019.
To give effect to RBI’s circular dated February 15, 2019, SEBI similarly withdrew this requirement by its circular dated March 12, 2019, with immediate effect.
Voluntary Retention Route for Investments by FPIs
RBI has, by way of its circular dated March 1, 2019, announced a separate scheme called the Voluntary Retention Route (‘VRR’). Investments under the VRR scheme have been open for allotment from March 11, 2019. The aggregate investment limit by FPIs under this scheme is Rs 40,000 crores (approx. US$ 5.5 billion) for making investments in Government securities (G-Secs, treasury bills and state development loans) and Rs 35,000 crores (approx. US$ 5 billion) for making investments in corporate debt instruments. The minimum retention period for investment under VRR is three years, and during this period, the FPI must maintain a minimum of 75% of the allocated amount in India. The requisite investment amount is required to be adhered to on an end-of-day basis and can include cash holdings in the Rupee accounts used for VRR. Allocation of investment amount to FPIs under VRR must be made on-tap or through auctions. Subject to certain relaxations, FPIs are required to invest the amount allocated, referred to as the Committed Portfolio Size (‘CPS’), in the relevant debt instruments and remain invested at all times during the voluntary retention period. Successful allottees are required to invest 25% of their CPS within one month and the remaining amount within three months from the date of allotment. FPIs that wish to liquidate their investments through VRR prior to the end of the retention period may do so by selling their investments to another FPI. Investments made through VRR are not subject to any minimum residual maturity requirement, concentration limit or single/group investor-wise limits applicable to FPIs for making investments in corporate bonds under the general investor route. FPIs investing through VRR are eligible to participate in repos for their cash management subject to certain conditions. Additionally, FPIs investing under VRR are eligible to participate in any currency or interest rate derivative instrument, whether over-the-counter or exchange traded, to manage their interest rate risk or currency risk.
Format for Disclosure of Details of Significant Beneficial Owners
SEBI had issued a circular on December 7, 2018 (‘SBO Circular’), specifying that all listed entities would be required to disclose details pertaining to significant beneficial owners (‘SBOs’), in the prescribed format. The SBO Circular was based on the Companies (Significant Beneficial Owners) Rules, 2018 (‘SBO Rules’), which were amended by the MCA by way of the Companies (Significant Beneficial Owners) Amendment Rules, 2019. Pursuant to the MCA amendment, SEBI issued a circular on March 12, 2019, and amended the SBO Circular.
The key amendments pursuant thereto pertain to the previous requirement of the number and percentage of shares held being required to be disclosed. The format has been amended to require disclosure of the details of shares, voting rights, rights on distributable dividend or any other distribution, exercise of control and exercise of significant influence held by the SBO. A footnote has been added to clarify that if the nature of the holding/ exercise of the right of an SBO falls under multiple categories (as set out above), multiple rows for the same SBO will need to be inserted for each of the categories.
The amendments to the SBO Circular will come into force with effect from the quarter ended June 30, 2019, and will apply to all listed entities that are reporting companies as per the SBO Rules, as amended.
Establishment of Committees of Market Infrastructure Institutions
SEBI has, by way of a circular dated January 10, 2019, on Committees at Market Infrastructure Institutions (as modified by SEBI circular dated February 15, 2019) (‘MII Circular’), prescribed detailed requirements in relation to the functions and composition of the committees required to be set up by stock exchanges, clearing corporations and depositories (collectively, ‘Market Infrastructure Institutions’ or ‘MIIs’) under the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 and the SEBI (Depositories and Participants) Regulations, 2018, with a view to protect the interests of investors in the securities market and to regulate the securities market.
The MII Circular stipulates the establishment of: (i) functional committees (comprising of member selection committee, investor grievance redressal committee and nomination and remuneration committee); and (ii) oversight committees (comprising of standing committee on technology, advisory committee, regulatory oversight committee and risk management committee). The MII Circular also prescribes requirements in relation to composition, quorum and functions of each of the committees.
Guidelines for the Public Issue of Units of InvITs and REITs
SEBI has introduced amendments to the guidelines for public issue of units of Infrastructure Investment Trusts and Real Estate Investment Trusts (together, ‘Investment Vehicles’) in order to further rationalise and ease the process of public issue of units of Investment Vehicles. Key highlights amongst them are:
i. the definition of ‘institutional investors’ has been updated to refer to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018;
ii. Mutual funds, alternative investment funds (‘AIFs’), FPIs other than category III FPIs sponsored by associate entities of the merchant bankers, insurance companies promoted by, and pension funds of, associate entities of the merchant bankers have been permitted to invest under the category of anchor investors;
iii. Bidding period may be extended on account of force majeure, banking strike or similar circumstances, subject to total bidding period not exceeding 30 days;
iv. Time period for announcement of the floor price or the price band by the investment manager has been reduced from five days to two days prior to the opening of the bid (in case of initial public offer); and
Investment Vehicles are required to accept bids using only the application supported by blocked amount (‘ASBA’) and consequent changes in bidding process have been made.
SEBI Informal Guidance in the Matter of JM Financial Limited
SEBI has, in its informal guidance to JM Financial Limited, stated that the objective of Regulation 15(1)(f) of SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’) is to further the interests of investors with respect to the un-invested portion of investable funds, till deployment of these funds in accordance with the investment objective of the AIF. Accordingly, applying the same rationale, SEBI has clarified that investment proceeds from sale/transfer of investments or returns earned from the investments can be invested in temporary investment instruments specified in Regulation 15(1)(f) of the AIF Regulations pending distribution of investment proceeds to the investors, provided that details of such transactions are disclosed to the investors and the diversification requirements under Regulation 15(1)(c) of the AIF Regulations would be applicable to such investments as well.
SEBI Order on Buy-Back of Securities in the Matter of Wipro Limited
SEBI, by way of its order dated February 15, 2019 (‘Wipro Order’), has granted an exemption to Wipro Limited (‘Wipro’) from the strict enforcement of Regulation 24(ii) of the SEBI (Buy–back of Securities) Regulations, 2018 (‘Buyback Regulations’), which provided that a company cannot make a public announcement of buyback during the pendency of any scheme or amalgamation. Wipro had filed the application on account of a scheme of amalgamation providing for Wipro’s wholly owned subsidiaries with Wipro.
In the application seeking relaxation of enforcement of Regulation 24 (ii), Wipro submitted that there would be no new issue of equity shares or change in the shareholding pattern of Wipro consequent to the scheme of amalgamation with its wholly owned subsidiaries and that the merger is merely an internal re-organization with its group of companies and there will not be any material impact from the perspective of consolidated financial statements of Wipro. SEBI granted the exemption subject to the proposed buyback (if approved by the board of directors of Wipro) being in accordance with applicable laws, and the averments made by Wipro in its application and the scheme of amalgamation intimated to the relevant stock exchanges being true and correct.
SEBI Informal Guidance in the Matter of DSP Merrill Lynch Limited
SEBI issued an interpretative letter on February 8, 2019, to DSP Merrill Lynch Limited (‘DSPML’), a SEBI registered intermediary engaged in activities including stock broking, merchant banking, underwriting and research analysis, and provided guidance under the SEBI (Informal Guidance) Scheme, 2003 regarding the SEBI (KYC (Know Your Client) Registration Agency) Regulations, 2011 (‘SEBI KRA Regulation’) and SEBI’s Master Circular on ‘Guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed thereunder’ dated July 4, 2018 (‘Master Circular’).
DSPML had sought guidance on whether it could rely on the client’s status as ‘verified or registered’ on the KYC Registration Agency (‘KRA’) system while performing due diligence on the client, if certain KYC documents were deficient, obsolete or missing. SEBI clarified that the intermediary is responsible for identifying and verifying its client by using the KYC documents provided and any discrepancies in the documents are required to be informed to KRA for subsequent corrective action.
In this regard, SEBI highlighted various rules / regulations, including the SEBI KRA Regulations, the Master Circular, Frequently Asked Questions (FAQs) on KYC Requirements, and the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’) and stated that the ultimate responsibility to verify and identify the client is cast upon the registered intermediary while commencing an account-based relationship with the client. In case of mismatch in information, the intermediary is required to immediately refer the matter for corrective action to the custodian and KRA, before on-boarding the client.
Therefore, DSPML would not be permitted to rely on documents which are deficient, obsolete or missing, if the KYC status is shown as ‘verified/ registered’ in the KRA system. DSPML, as part of conducting a KYC check is required to do due diligence by seeking the proper KYC documents in accordance with SEBI regulations / circulars and the PML Rules, before onboarding the client.
SEBI Informal Guidance on Investment in Corporate Debt by FPIs
SEBI has issued an interpretative, non-binding letter dated November 28, 2018, to Genpact India Private Limited (‘Genpact’) under the SEBI (Informal Guidance) Scheme, 2003 providing guidance on SEBI (FPI) Regulations, 2014 (‘FPI Regulations’), RBI circulars dated November 17, 2016 and April 17, 2018 and SEBI circular dated February 28, 2017 on Investment by FPIs in debt (collectively the ‘Circulars’).
Genpact had issued certain rated, unsecured, redeemable and non-convertible debentures (‘NCDs’) on a private placement basis to a FPI registered with SEBI (‘FPI Entity’). The NCDs issued had a maturity period of more than three years and were utilized to meet funding requirements for day-to-day operations, downstream investments and general corporate purposes.
Prior to the Circulars, except for infrastructure companies, FPIs were allowed to invest in listed NCDs only. Pursuant to the Circulars, FPIs had been permitted to invest in unlisted corporate debt, subject to a minimum residual maturity of more than one year, and an end-use restriction on investment in real estate business, capital market and purchase of land.
A clarification was sought on whether Genpact is permitted to delist its existing listed NCDs subscribed to by the FPI Entity prior to the date of the Circulars coming into effect and utilize the proceeds of such listed NCDs in making downstream investments on private arrangement basis. In this regard, SEBI was of the view that:
i. There was no violation to the end-use restriction rules for the proceeds raised from the issuance of NCDs as Genpact’s nature of business was in accordance with the said rules; and
ii. On de-listing of NCDs, SEBI was of the view that it depends on the terms of the offer document/private placement memorandum issued by Genpact to the FPI Entity on whether the NCDs are required to be necessarily listed or ‘may be’ listed. If as per the offer document/private placement memorandum, the NCDs have to necessarily be listed, then they should be held till maturity and subsequently de-list in accordance with the procedure set out in Regulation 59 of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015.
SEBI Informal Guidance in the Matter of Infosys Limited
On March 12, 2019, SEBI issued an informal guidance pursuant to certain questions raised by Infosys Limited in relation to SEBI (Share Based Employee Benefits) Regulations, 2014 (‘SBEB Regulations’) and the Buyback Regulations. Infosys had sought the following clarifications:
i. Whether Infosys can issue stock options grant letters (‘Grant Letters’) for issuing stock options (‘ESOPs’) to eligible employees during the ‘buyback period’ in the context of Regulation 24(i)(b) of the Buyback Regulations;
ii. If the equity shares are to be issued by the company, pursuant to exercise of ESOPs granted during the ‘buyback period’, whether the minimum vesting period of one year (as stated in Regulation 18(1) of the SBEB Regulations) is to be computed from the date of grant of such ESOPs or from the date being one year from the expiry of the ‘buyback period’; and
iii. Further, with respect to equity shares to be transferred by the Infosys Employee Benefits Trust to the eligible employees pursuant to exercise of ESOPs granted during the ‘buyback period’ (there being no new equity shares issued by the Infosys upon exercise of such ESOPs), whether the minimum vesting period of one year is to be computed from the date of grant of such ESOPs.
The Buyback Regulations define ‘buyback period’ as the period between the date of board of directors resolution or date of declaration of results of the postal ballot for special resolution of shareholders (as the case may be) to authorize the buyback of shares and the date on which the payment of consideration to shareholders who have accepted the buyback offer is made. Regulation 24(i)(b) of the Buyback Regulations provides that a company must not issue any shares or other specified securities including by way of bonus till the date of expiry of ‘buyback period’. Specified securities under the Buyback Regulations also include ESOPs. Regulation 18(1) of the SBEB Regulations provides that the minimum vesting period for employee stock options will be one year.
With respect to the first query, SEBI noted that the company is not prohibited from issuing Grant Letters to the employees during the buyback period but the ESOPs would convert or vest only after expiry of the buyback period and subject to Regulation 18(1) of the SBEB Regulations (which provides that in case of ESOPs, there should be a minimum vesting period of one year). With respect to the second query, SEBI noted that the minimum vesting period of one year would be computed from the date of the Grant Letters. Further, with respect to the third query, SEBI noted that with respect to equity shares which are to be transferred by the Infosys Employee Benefits Trust to the employees pursuant to exercise of ESOPs granted during the ‘buyback period’, the minimum vesting period of one year should be computed from the date of grant of such ESOPs.
Amendments to SEBI (Prohibition of Insider Trading) Regulations, 2015
SEBI on December 31, 2018 has issued key amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 with effect from April 1, 2019. Please refer to our Client Alert dated April 8, 2019 available at https://www.azbpartners.com/bank/amendments-to-sebi-prohibition-of-insider-trading-regulations-2015-key-highlights, for more details.
RBI (Prevention of Market Abuse) Directions, 2019
RBI has, on March 15, 2019, issued the RBI (Prevention of Market Abuse) Directions, 2019 (‘PMA Directions’), to all persons dealing in securities, money market instruments, foreign exchange instruments, derivatives or other instruments of similar nature as RBI may specify from time to time, with a view to prevent market abuse. The PMA Directions have come into force on March 15, 2019. The key features of the PMA Directions are as follows:
i. Market manipulation: The PMA Directions stipulate that persons transacting or facilitating a transaction in the markets for financial instruments (‘Market Participants’) will not: (i) engage in any transaction or any act of omission or commission which may result in, or seek to convey, a false or misleading impression as to the price of, or supply of, or demand for, a financial instrument, carried out with the intention of making an undue financial gain or any other material benefit. This includes any transaction or action which may result in, or is intended to result in, an artificial price of a financial instrument; and/or (ii) undertake transactions on an electronic trading platform which may disrupt or delay its functioning.
ii. Benchmark manipulation: Market Participants will not undertake and/or initiate any action with the intention of manipulating the calculation and/or influencing a benchmark rate or a reference rate.
iii. Misuse of information: Market Participants will not: (i) use any non-public price-sensitive information (i.e., information which is not publicly available, and which may affect the price of a financial instrument if made publicly available) for any material benefit to itself or to others; (ii) use any price sensitive customer information (i.e., information pertaining to transactions or potential transactions of a customer which is not publicly available, and which may affect the price of any financial instrument if made publicly available) for any transaction on their own account in a manner which adversely affects the outcome for the customer; and (iii) intentionally (i.e., without exercising due diligence as to the veracity of the information) create or transmit false or inaccurate information or withhold timely information which is required to be reported or made public, which influences or is likely to influence the price of any financial instrument.
iv. Monitoring, compliance and reports: Market Participants must report any instance of market abuse or attempted market abuse detected by them to RBI promptly and must provide any data and/or information as may be required by RBI in this regard.
v. Regulatory action for market abuse: Market Participants committing market abuse will be liable to be denied market access in one or more instruments for a period which may not exceed one month at a time. All instances of such action will be made public by RBI.
Revised Framework for Trade Credits
RBI has, pursuant to the circular dated March 13, 2019, introduced changes and rationalised the extant framework for trade credits (‘TC’), with effect from the date of the circular. Some of the key additions and amendments introduced by the circular are set out below.
i. TC can now be raised in any freely convertible foreign security as well as in Indian Rupees.
ii. The circular has increased the limits under which TC could be raised under the automatic route and provides for a higher limit for sectors such as for oil / gas refining & marketing, airline and shipping where the transaction value is generally larger, and has specified the persons who can grant TC depending on the type of TC proposed to be availed.
iii. The circular has aligned the tenure of TC for import of capital goods, non-capital goods and shipyards / shipbuilders with the changes in the minimum average maturity for external commercial borrowings.
iv. The circular has also reduced the all-in cost ceiling for raising TC and borrowers availing TC are now permitted to hedge their exposure created by the TC.
v. The circular now permits change of currency of TC from one freely convertible foreign currency to any other freely convertible foreign currency as well as to Rs, but not from Rs to any freely convertible foreign currency.
In addition to guarantees, the circular now permits creation of security over certain movable and immovable assets for the TC.
Bombay High Court Decides on Enforceability of a Put Option in a Share Purchase / Shareholders’ Agreement
The Bombay High Court in its decision dated March 27, 2019 in Edelweiss Financial Services Limited v. Percept Finserve Private Limited has set aside an arbitral award which had held that a put option provided to Edelweiss Financial Services Limited was void and unenforceable. The arbitral award held that such put option was a forward contract and in any event a derivative contract under the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and therefore illegal under the notifications issued under Section 16 and also contrary to Section 18A of the SCRA. The Bombay High Court set aside the arbitral award on the ground of ‘patent illegality’ and held that such a put option is enforceable as the contract of sale comes into existence only after the exercise of such option. Therefore, such an option is neither a forward contract nor a derivative contract under Section 2(ac) of the SCRA. The Court further held that even assuming the option is a derivative, its illegality must not be borne from Section 18A of the SCRA – which only positively provides for legality and validity of contracts in derivative. The Court has also ruled that cross objections filed by a respondent in a petition under Section 34 of the A&C Act are not maintainable since the provisions of Civil Procedure Code, 1908 are not applicable to proceedings under Section 34 as the A&C Act is a code in itself and Section 34 does not make any provision for filing of cross objections.
 Edelweiss Financial Services Limited v. Percept Finserve Private Limited, Arbitration Petition No. 220 of 2014.
SEBI Notifies Operating Guidelines for AIFs in IFSC – Key Takeaways
In March, 2015, SEBI had issued guidelines for facilitating and regulating financial services relating to securities market in an International Financial Service Centre (“IFSC”) set up under section 18(1) of Special Economic Zones Act, 2005 at GIFT City, Gujarat. While these guidelines provided a broad framework for setting up of Alternative Investment Funds (“AIFs”) in IFSC, the operating guidelines were yet to be notified. SEBI, on November 26, 2018, has issued a Circular  which sets out the Operating Guidelines for AIFs in IFSC. As a background to the Circular, the SEBI and the RBI had vide various circulars put in place a regulatory regime for setting up of AIFs as ‘financial institutions’ in the IFSC, which would be treated as ‘persons resident outside India’ for the purposes of Indian foreign exchange regulations.
• Registration process: a fund set up in IFSC in the form of a trust or a company or a limited liability partnership or a body corporate, can seek registration under the provisions of SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) under the categories mentioned in the AIF Regulations. This would mean that funds set up in IFSC could benefit from the AIF regulatory framework which is conducive to funds having varied philosophies (including VC, PE and hedge funds).
• Eligibility to invest in the IFSC AIF: following investors are permitted to invest in an AIF in IFSC: (i) a person resident outside India; (ii) a non-resident Indian; (iii) institutional investor resident in India who is eligible under FEMA to invest funds offshore, to the extent of outward investment permitted; (iv) person resident in India having a net worth of at least USD 1 million during the preceding financial year who is eligible under FEMA to invest funds offshore, to the extent allowed in the Liberalized Remittance Scheme of the RBI. Further, an investor is required to make a minimum investment of USD 150,000. If the investor is an employee or director of the AIF/manager, minimum investment amount is USD 40,000.
• Investment conditions: AIFs in IFSC shall be permitted to invest in the following: (i) securities which are listed in IFSC; (ii) securities issued by companies incorporated in IFSC; (iii) securities issued by companies incorporated in India or companies belonging to foreign jurisdiction. Thus, such AIFs would be eligible to make investments in a wider range of securities, particularly securities of offshore companies for which non-IFSC AIFs registered with SEBI require specific regulatory approval which is granted on a case-by-case basis.
For making investments in India, AIFs in IFSC can make such investments under the Foreign Portfolio Investor or Foreign Venture Capital Investor or Foreign Direct Investment (FDI) route.
• De minimus requirements:
|Corpus of each scheme of the AIF||3 million|
|Minimum continuing interest in the AIF by the manager/sponsor (not through waiver of management fees)|
Category I and II AIF
Category III AIF
|Lower of 2.5% of corpus or 750,000 Lower of 5% of corpus or 1,500,000|
• Sponsor/Manager of the AIF: Sponsor/Manager of an existing AIF may act as a Sponsor / Manager of an AIF set up in the IFSC by either setting up a branch in the IFSC, or incorporating a company or limited liability partnership in the IFSC. New Sponsor/Manager are required to incorporate a company/LLP in the IFSC.
• The Operating Guidelines also address the requirement to appoint custodians for AIFs and the manner in which Angel Funds (a category of AIFs) can be established in the IFSC.
• Setting up AIFs in IFSC effectively permits fund managers based in India to manage foreign capital without having to set up presence offshore and incur significant costs. IFSC also offers a regulatory platform for fund managers looking to set up funds seeking to make investments in India as well as other jurisdictions.
• These guidelines eliminate the tax risks associated with General Anti Avoidance Rules (“GAAR”), permanent establishment, and Place of Effective Management (“POEM”) that surround any offshore structures put into place by Indian fund managers managing/advising on offshore pool of capital. Such tax related considerations have lead to an increase in costs and efforts for demonstrating genuine commercial substance and activity in offshore fund structures. Having said that, an AIF in IFSC would be treated as an Indian resident taxpayer and would not have access to any benefit under any double tax avoidance agreement. However, the beneficial tax regime available to Category I and II Alternative Investment Funds which accords them a tax-pass through status should also be applicable to AIFs set up in the IFSC.
• Indian fund managers either set up in IFSC or having a branch in IFSC should be able to benefit from the exemption on Goods and Services Tax (which is otherwise applicable at a rate of 18%) on the management fees that the manager charges the AIF for managing the AIF’s pool of capital. Further, such managers should also be eligible for income tax holidays on their fee income i.e. 100% exemption of such income for first 5 years after commencement of business followed by an exemption of 50% of the income for an additional period of 5 years.
• Funds which are focused on making investments in derivatives, including commodity derivatives, listed on stock exchanges within IFSC could enjoy the benefit of being insulated from any currency risk considering that their investments in the AIF as well as downline investments in derivatives listed on such stock exchanges would be denominated in foreign currencies.
• Given that the Operating Guidelines indicate that all provisions of the AIF Regulations and the guidelines and circulars issued thereunder, shall apply to AIFs setting up/ operating in IFSC, then the investment conditions/restrictions applicable to different categories of AIFs will also apply to AIFs in the IFSC. For example:
• An AIF is not permitted to invest more than 25% of its investible funds in a single investee entity. While this condition will apply to AIFs in IFSC, this would not be applicable to an offshore fund investing in India under the extant foreign investment laws.
• A Category I or II AIF may not borrow funds directly or indirectly and shall not engage in leverage except for meeting temporary funding requirements for not more than 30 days, not more than 4 occasions in a year and not more than 10% of the investable funds. While this is a restriction that the AIF in the IFSC will face, a fund set up in offshore can seek leverage without being subject to these conditions.
• The Operating Guidelines indicate that an AIF in IFSC can invest in another AIF (in IFSC and outside) subject to AIF Regulations. This will be useful for structuring ‘master-feeder’ structures for the following reasons: (i) fund managers need not incur significant costs of setting up pooling vehicles offshore; (ii) the management fees and carry can be taken in India by the Manager; (iii) the non-IFSC AIF receiving investment from the IFSC AIF will be permitted to invest in debt instruments which a IFSC AIF will not be able to do under the FDI route without taking FVCI registration and/or FPI registration (both of which have restrictions around investment in debt instruments); and (iv) provides operational flexibility. The points to note however are: (i) unlike an offshore vehicle which can invest part of its capital in a non-IFSC AIF and part directly into portfolio companies, an IFSC AIF (Fund of Funds) will be required to invest its entire capital in the non-IFSC AIF; and (ii) all other restrictions that apply to AIFs under the AIF Regulations, will apply to the non-IFSC AIF which would not be the case if the feeder vehicle is established in an offshore jurisdiction which has ease of doing business.
 SEBI Circular No. SEBI/HO/IMD/DF1/CIR/P/143/2018
 Currently, Indian resident individuals are permitted to remit monies outside India for permissible capital and current account transactions within a limit of US$ 250,000 per financial year per individual
Pallabi Ghosal, Partner
KYC and Beneficial Ownership Disclosures by FPIs
Based on the interim recommendations of the Working Group constituted by the Securities and Exchange Board of India (“SEBI”) under the chairmanship of Shri H R Khan with respect to Know Your Client (“KYC”) requirements for Foreign Portfolio Investors (“FPIs”), SEBI had under their circular dated September 21, 2018 clarified that beneficial ownership criteria will only be relevant for the purposes of KYC of the FPI and not for determining eligibility of the FPIs, and had inter alia provided directions for identification and verification of Beneficial Owners (“BO”) for Category II and Category III FPIs.
As per the said circular, BOs are natural persons who ultimately own or control an FPI and should be identified in accordance with Rule 9 of the Prevention of Money- laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”). The BO of an FPI is required to be identified by way of controlling ownership interest and by way of control. The materiality threshold to be applied for identifying the BO by way of controlling ownership interest would be as provided in Rule 9 of PMLA Rules. The Circular also provides that in respect of FPIs coming from “high risk jurisdictions”, a lower materiality threshold of 10% should be applied for identification of BO and the KYC documentation to be obtained should be as applicable for Category III FPIs. Details of all individuals/ entities above the FPI, holding directly or indirectly more than the materiality threshold in the FPI are required to be disclosed in the BO disclosures. While SEBI has not specified a list of high-risk jurisdictions, the concerned Designated Depository Participant (“DDP”) is required to identify whether the FPI is from a high-risk jurisdiction or not. Interestingly, DDPs have been taking differing views in this regard for certain jurisdictions. Also some custodians have based the 10% threshold solely on the basis of whether the FPI is from a high risk jurisdiction, other custodian banks are applying a lower materiality threshold if the FPI is registered as a Category III FPI whether or not coming from a high risk jurisdiction. In addition to the identification of the BO of the FPI on a controlling ownership interest basis, the FPI is also required to identify the BO on a control basis. The term ‘control’ includes the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.
The materiality threshold to identify the BO is required to be first applied at the level of FPI and next on a look through basis to identify the BO of the intermediate shareholders or owner entity. In the look through basis, the BO and intermediate shareholders or owner entity with holdings equal & above the materiality thresholds in the FPI need to be identified. For intermediate shareholders, or owner entities, the name of such entities and percentage holding is also required to be disclosed in a specified format. In the event the FPI does not identify a natural person as the BO by way of controlling ownership interest or by way of control, then the FPI must identify a senior managing official (“SMO”) as its BO. Further, the exemption provided in Rule 9(3)(f) of PMLA Rules for listed companies is not made available to foreign companies. SEBI has also clarified that, in case of companies or trusts are represented by service providers like lawyers/ accountants, then such FPIs should provide information of the real owners/ effective controllers of the FPI. SEBI has also clarified that these BO disclosure requirements will also have to be followed for Offshore Derivative Instruments.
The Circular further stipulates a periodic KYC review as and when there is any change in material information/disclosure. All FPIs with a Category II or Category III registration from high-risk jurisdiction will be subject to KYC review on a yearly basis. The Circular also reassures that the KYC Registration Agencies (“KRA”) will lock the details provided by the FPI on the BO, including details of the SMO. Such information will only be accessible to intermediaries after authentication and only on a ‘need to know basis’ after the KRA receives confirmation from the FPI, or its Global custodian in this regard.
The Circular is a welcome change from the earlier KYC requirements prescribed by SEBI on April 10, 2018.
Rushabh Maniar, Partner
Sonali Ladha, Associate
Recent amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 – Applicability to companies undertaking IPOs
The Securities and Exchange Board of India (“SEBI”) has recently amended the existing SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) by way the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018, (“Amendment Regulations”), which came into effect from April 1, 2019. Another amendment to the PIT Regulations with respect to the disclosure requirements by the members of the promoter group was brought in through the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2019, which came into effect from January 21, 2019. These amendments were the outcome of the TK Vishwanathan Committee (“Expert Committee”) report on Fair Market Conduct, which was constituted to review the efficiency of the existing legal framework dealing with the market abuse and promotion of fair market conduct in the securities market.
The erstwhile SEBI (Prohibition of Insider Trading) Regulations, 1992, as originally enacted, did not define the term ‘proposed to be listed’. Pursuant to the recommendations from the Justice Sodhi Committee report, the term ‘proposed to be listed’ was introduced in the PIT Regulations. However, the PIT Regulations did not define as to what ‘proposed to be listed’ entailed. Further, in the absence of clarity, the phrase ‘proposed to be listed’ was subject to different interpretations as to when in time a company is deemed to be “proposed to be listed”, resulting in debates and confusion.
The definition of unpublished price sensitive information (“UPSI”) under the PIT Regulations refers to information which on becoming generally available, would affect the market price of the relevant securities. Therefore, the Expert Committee deliberated over the point in time when such information relating to a company proposing to achieve listing would be regarded as UPSI. Pursuant to the same, the Amendment Regulations have defined the term “proposed to be listed” to include securities of an unlisted company: (a) if such unlisted company has filed offer documents or other documents, as the case may be, with SEBI, stock exchange(s) or registrar of companies in connection with the listing; or (b) if such unlisted company is getting listed pursuant to any merger or amalgamation and has filed a copy of such scheme of merger or amalgamation under the Companies Act, 2013. Further, in terms of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, an ‘offer document’ in relation to a public issue, includes a red herring prospectus, a prospectus or a shelf prospectus.
In view of the above, it would appear that the PIT Regulations would become applicable in the context of the securities of a company undertaking an initial public offering process only at the stage when the company registers its red herring prospectus with the registrar of companies, as opposed to when the company files its draft red herring prospectus with SEBI. Ostensibly, this is because at the time of filing the draft red herring prospectus with SEBI, it is still difficult to determine with certainty as to whether the company would be successful in completing the listing of its securities.
SEBI has also set out minimum standards for code of conduct for regulating and monitoring intermediaries and professional firms such as auditors, accountancy firms, law firms, analysts, consultants, bankers, etc. (“Fiduciaries”), while handling UPSI. As per the prescribed minimum standards, the intermediaries and Fiduciaries are required to formulate policy as to how and when an individual is to be brought ‘inside’ a sensitive transaction. It also imposes an obligation on the intermediaries and Fiduciaries to sensitize such individuals about their duties, responsibilities and liabilities, while handling UPSI. The intention of SEBI with respect to these amendments is to bring intermediaries and Fiduciaries under the ambit of PIT Regulations to prevent further leakages of UPSI.
Tripti Pandey, Associate
Clubbing of Investment Limits of Foreign Portfolio Investors
The Securities and Exchange Board of India (“SEBI”) has pursuant to considering interim recommendations of the SEBI Working Group under the chairmanship of Shri H R Khan, issued a circular dated December 13, 2018 (“Circular”) in relation to the clubbing of investment limits of FPIs. Regulation 21 (7) of the SEBI (Foreign Portfolio Investors) Regulations, 2014 (“FPI Regulations”) provides that purchase of equity shares of each company by a single foreign portfolio investor (“FPI”) or an investor group should be below 10% of the total issued capital of the company. In this regard, SEBI had previously, in its circular dated January 8, 2014, provided that where multiple FPIs belong to the same investor group, the investment limits of all such FPIs shall be clubbed at the investment limit as applicable to a single FPI. Under the said Circular SEBI has further clarified that clubbing of investment limit for FPIs will be on the basis of common ownership of more than 50% or based on common control. SEBI has also clarified that in case, two or more FPIs including foreign Governments/ their related entities have direct or indirect common ownership of more than 50% or control, all such FPIs will be treated as forming part of an investor group and the investment limits of all such entities will be clubbed at the investment limit as applicable to a single FPI. The only exemption prescribed to this clubbing rule is in cases whereof (a) the FPIs are appropriately regulated public retail funds; or (b) FPIs which are public retail funds majority owned by appropriately regulated public retail funds on a look through basis; or where (c) FPIs which are public retail funds and investment managers of such FPIs are appropriately regulated. The above exemption would be available only if the stated FPIs have common control and do not have more than 50% common ownership. In this regard, the term ‘control’ has now been defined under the FPI Regulations to include 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 shareholding or management rights or shareholders agreements or voting agreements or in any other manner. Right to control management decisions would also include right to control investment management decisions of the FPI. Hence, if FPIs have a common entity/person which takes investment decisions for such FPIs, then such FPIs would be considered to be a part of the same investor group.
Moreover, where the Government of India has entered into agreements or treaties with other sovereign Governments, recognizing certain entities to be distinct and separate, SEBI may, during the validity of such agreements or treaties also recognize them as such, subject to any conditions as may be specified in such agreements or treaties.
As per the Circular, FPIs in breach of the said investment limit can either (a) divest its holding within 5 (five) trading days from the date of settlement of the trades to bring its shareholding below 10% of the paid up capital of the company; or (b) the FPI investments will be treated as a Foreign Direct Investment (“FDI”) from the date of such breach. To conclude, FPIs should re-assess their ‘investor group’ in accordance with the above criteria and inform the designated depository participants if there is any change in ‘investor group’ details for the FPI, and/or whether the ‘investor group’ FPIs have breached the said investment limits. In this regard please note that SEBI may provide further guidance or clarity on the process to be followed by FPIs who have breached the investment limit and wish to re-classify their investment as a FDI. Also, further guidance is awaited on how this reclassification would be treated including how reclassified FDI holdings would be held in the securities accounts in India, requirements relating to disposal of such holdings, reporting and compliance requirements etc., if any.
Rushabh Maniar, Partner
Nayanika Ruia, Associate