Taxation & Accounting

Category: Corporate Law

Corporate Governance & Shareholder Activism

A Brief Conceptual Background

The discourse on corporate governance has been garnering considerable attention in the public domain in India, mainly due to the introduction of the Companies Act, 2013 (“Actâ€), the steps being taken by the Securities and Exchange Board of India (“SEBIâ€) in promoting governance, and the escalating activism of shareholders and proxy advisory firms (“PAFsâ€) in the public markets.

The corporate governance regime in India has been implemented mostly reactively, thus far. One of the reasons could be the prevalence of the family-owned businesses in India which present a distinct and additional set of governance concerns such as safeguarding the interests of minority shareholders, the fiduciary duty (if any) of the promoter(s) to minority shareholders and the duties of the board of directors in conflict situations. As such, this feature may have effectively prevented Indian regulators from adopting the governance frameworks implemented in more evolved jurisdictions like the UK or the USA. Even Germany, where the corporate ecosystem is comprised of large family-owned businesses like India, could not have an appropriate reference point for Indian regulators, given the board structures there. To elaborate, German corporations have adopted a two-tier board structure whereby representation is mandatorily available to employees on the upper tier (supervisory) board. As such, this prevalence of family owned concerns could have been one of the reasons why the Indian corporate governance regime has largely remained prescriptive and reactive.

What Has Changed

India’s corporate governance regime has evolved significantly in the recent past. This can be attributed largely to the following reasons.

  • The Act & its Push For Stakeholders’ Model

In line with global best practices, the Act has mandated a definitive shift away from the shareholder model of governance to the stakeholder model. In contrast to the shareholder model (which emphasizes the corporation’s responsibility to make profits and enhance shareholder value), the stakeholder model is centred on the principle that the corporation is responsible to a wider set of stakeholders, and companies and directors must work to balance the interests of these stakeholders. This has manifested itself in various provisions of the Act, which we may separately examine in the future. An extension of this principle of stakeholder governance is probably also the introduction of provisions for class action suits under the Act. In effect, this mechanism has sought to create an enforcement mechanism and a stricter framework of accountability with respect to management and operations of companies, enhancement of the quality of financial reporting, and allocation of responsibility.

  • SEBI Initiatives

In the listed company space, SEBI has been regulating corporate governance and has assumed the mantle of being India’s governance watchdog. SEBI brought corporate governance to the forefront of public discourse by constituting two separate committees to examine India’s corporate governance landscape – the Kumar Mangalam Birla Committee (2000) and the Narayana Murthy Committee (2003). The concept of ‘majority of minority’ approval, which also finds place in the Act, was also first introduced by SEBI. SEBI’s influence has also permeated into India’s exchange control regime – the Ministry of Commerce and Industry co-opted SEBI’s definition of ‘control’ into the FDI Policy. Recognizing the uncertainty that industry and stakeholders have been grappling with, SEBI is now considering adding bright-line tests to determine the acquisition or existence of ‘control’, another move aimed at creating transparency in the governance of public listed companies.

Additionally, following the failure of a large number of listed companies to comply with the mandate to appoint women directors on their boards, the stock exchanges have imposed fines on non-compliant companies, strongly suggesting that these organizations have started taking their enforcement role more seriously.

  • The Role of Investors

Traditionally, given the ownership structures of Indian companies, institutional investors have primarily acted as a counterweight to promoter influence. Financial investors today seem more willing to initiate proceedings against the promoters, directors and external advisors in court, be it on allegations of accounting fraud or mismanagement. Two prominent examples in the Indian context in this regard would be (a) the proceedings by India Equity Partners against the promoters of Fourcee Infrastructure on allegations of accounting fraud; and (b) the proceedings by the Children’s Investment Fund against the directors of Coal India for breach of fiduciary duties and failing to perform management functions with adequate skill and care. Equally interesting is the action initiated by Bain Capital against Ersnt and Young for allegedly advising them to invest in Lilliput Kidswear on the basis of financial statements audited and certified by Ersnt and Young. As such, whilst investors become increasingly litigious, one expects that this will raise sufficient concerns within the management of the company and its promoters for ensuring acceptable levels of corporate governance.

  • The Rise of PAFs

PAFs emerged with the greater regulation of institutional investors by the Securities and Exchange Commission (“SECâ€) in the United States. When the SEC made it mandatory for institutional investors to vote on all items in their companies’ proxy statements, PAFs firms stepped in to carry out market research and make recommendations on such proxy proposals. PAFs today remain very influential in the United States and institutional investors are heavily reliant on their recommendations when voting. The sphere of influence of PAFs in India is less apparent but evolving rapidly. Although there is insufficient empirical data to show how adverse recommendations may have influenced decision-making in Indian companies, it is clear that conceptually PAFs play a key role in promoting dialogues on governance, usually by getting companies to respond to negative voting recommendations.

A prominent example of the role of Indian PAFs could be the negative recommendations that Indian PAFs had made regarding Maruti Suzuki’s proposal to procure auto parts from a manufacturing plant owned by Suzuki, instead of manufacturing them for captive use.  Whilst the stakeholder sentiment stood changed when Maruti Suzuki published its rationale for the decision and shareholders approved the proposal with significant majority, the role of the Indian PAF and its recommendations in this context was interesting to note.

What Lies Ahead

Given that one of the main objectives of amending India’s corporate law was to improve corporate governance, compliance under the Indian regulation has taken on a lot more meaning than it used to hold before. The focus on good governance is not going to die out, especially with investors willing to pay a considerable premium for good governance in a competitive investment climate. Given this, companies and strategic investors need to be well-equipped to deal with the new challenges that the public scrutiny and discourse on good governance will inevitably bring. In today’s environment, good governance is a legal and commercial necessity for any company seeking to raise capital or attract meaningful and mature investors.

The E-commerce Press Note – Some Unanswered Questions

Amidst much anticipation, the Department of Industrial Policy and Promotion released Press Note 3 (PN3) in March of 2016 (now incorporated in the Consolidated FDI Policy dated June 7, 2016) to clarify its stand on the subject of foreign direct investment (FDI) in e-commerce. This post is an attempt to highlight certain issues arising out of PN3 in relation to the use of the term ‘services’, which may not only impact the e-commerce players but may also extend to other businesses which utilize electronic platforms.

Through the release of PN3, the Department clarified its stance on two key aspects: (a) FDI is permitted in the ‘marketplace model of e-commerce’ under the automatic route (i.e., without prior approval); and (b) FDI is prohibited in the ‘inventory based model of e-commerce.

By way of explanation,

The term “marketplace model of e-commerce†has been defined to mean – providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.

The term “inventory based model of e-commerce†has been defined to mean – an e-commerce activity where the inventory of goods and services is owned by the e-commerce entity and sold to consumers directly.

The term “e-commerce†has been defined to mean, buying and selling of goods and services including digital products over digital and electronic network.

As such, given the definition of ‘e-commerce’, sale of goods and services over a digital and electronic network by an entity with FDI, will bring it within the purview of PN3, giving it a very wide import. Accordingly, an entity with FDI engaged in sale of goods and services and utilising, for instance, a website or a mobile app, would need to be comply with the provisions of PN3.

Interestingly, whilst sale of services (along with sale of goods) has been included in the definition of ‘e-commerce’ and ‘inventory based model of e-commerce’, in a separate provision of PN3, sale of services through e-commerce has been placed under the automatic route (i.e., without prior approval). This appears to imply that if the sale of services is either along with sale of goods or connected to it, then sale of owned inventory through e-commerce is likely to be prohibited. However, if sale of services is being undertaken on a standalone basis, then the same is likely to be permitted. But no parameters have been prescribed to determine what is a permitted ‘sale of services’ activity and what type of activity will be prohibited. This results in ambiguity in cases where a sale of service requires an incidental sale of goods.

The following examples highlight this conundrum:

• Will an entity providing photography services (and having FDI), which sells services online and owns an inventory of incidental goods/ material required by it to provide the services to its customers (such as album covers for the photographs, photo paper, etc.) be considered to be engaged in an inventory based model of e-commerce, or can it be said that in order for an entity to provide photography services, it is necessary for it to own equipment and material which will enable it to deliver the services along with the photographs/ albums to its customers and therefore the activities described above are merely a sale of services?

• Similarly in the case of an entity with FDI, which sells salon services through an e-commerce platform (such as a mobile app), will such entity be considered to be engaged in an inventory based model of e-commerce if it were to own an inventory of the products it uses during the course of providing services (such as creams, masks, shampoos, etc.), or will such an entity be construed to be engaged only in sale of services, since the sale of goods is merely incidental to its primary function of providing such services?

To take this example a step further, what if the salon entity were to also sell beauty products to its customers on the same platform, would that be considered a permitted activity?

The above are a few examples of many others where there is likely to be an element of sale of goods in a business which primarily engages in a sale of services. Given this ambiguity, there may have to be a case by case analysis to evaluate whether the activity proposed to be undertaken will attract the provisions of PN3.

Conclusively, though well-intentioned, the provisions of PN3 have resulted in some ambiguity on the issue of FDI in e-commerce. It would be interesting to note how the industry practice in this regard evolves in light of the view of relevant authorities in specific matters and issues, going forward.

Employment Issues Faced by Start-Ups in India

From time to time, concerns have been raised by entrepreneurs and various Indian and international surveys about the challenges faced by start-ups and other companies doing business in India. India has also been rated very low on charts concerning ease of doing business.

India is a vast country with several states and union territories, which presents differences in culture, language, faith and food habits. But doing business in India also means complying with a long list of Central (Federal) and State statutes and their varied interpretations. In addition, judicial pronouncements of concerned High Courts and the Hon’ble Supreme Court of India must be taken into consideration.

Regulatory compliance with several laws is time consuming and complicated, adding to the financial and intellectual burden on start-ups. This, in turn, shifts their focus from development and growth of the core business to ensuring compliance with laws.

As a result, laws, rather than acting as a catapult and augmenting the growth of businesses, force several start-ups to reconsider their plans/strategies concerning doing business in India.

Two Types of Labour and Employment Laws

Apart from several tax, environmental and real estate laws, employment laws in India (commonly referred to as Industrial Laws) are a source of great concern for start-ups in India.

In India, various Central and State level labour and employment legislations govern conditions of employment, social security, health, safety, welfare, wages, trade unions and industrial disputes, etc. Several labour and employment statutes become applicable only upon fulfillment of prescribed thresholds, which could be wages of an employee(s), strength of employees in an organisation, etc. Some other statutes, meanwhile, may become applicable to specific/specified industries or to certain types of employees.

This means that a start-up needs to be on a constant vigil regarding applicability of a statute(s) [whether Central (Federal) or State or both], including the stage at which any one or more statutes may become applicable. Some non-compliances may not only pose a limited financial risk but also loss of goodwill and may become a source of continuous inconvenience due to inspections by the concerned authorities and actions as a result thereof.

Difference in Basic Concepts in Legislations

Lack of uniformity in some of the common terms used across labour and employment laws applicable to an organisation pose a practical challenge and inconvenience to start-ups. For example, a large number of labour and employment legislations have different: (i) applicability criteria; (ii) definitions of ‘employee’; (iii) definitions of ‘wages’ and also what is included or excluded from the wages; and (iv) manners of calculation thereof. Some basic aspects, such as the components that need to be taken into consideration while computing wages for the purposes of identifying provident fund contributions, could be different from components taken into account while calculating bonus entitlement of an employee, etc.

There is a real need for laws that allow start-ups to agree short or long-term arrangements/ engagements with individuals, without being worried about the possibility of such individuals making burdensome demands

Relationship Matters

Currently, most start-ups not only hire employees on their own payrolls, but until they are certain of their growth and business needs, also use independent consultants, direct or indirect contract employees and various other vendors, etc., to meet with their manpower needs.

In the absence of labour and employment laws addressing each manpower arrangement, companies depend upon professional guidance to ensure that any such arrangement does not expose it to risk of claims or demands of compensation (severance, etc.) and/or permanent employment.

There is a real need for laws that allow start-ups to agree short or long-term arrangements/ engagements with individuals, without being worried about the possibility of such individuals making burdensome demands.


Recently, realising the above and intending to ease doing business for start-ups,, the Prime Minister of India launched Start-up India Action Plan (Plan), in January, 2016 , to provide a conducive growth environment and a friendly, flexible regulatory regime for business start-ups.

As per the Plan, a start-up is, “an entity, incorporated or registered in India not prior to 5 (five) years, with annual turnover not exceeding INR 250,000,000 (Rupees Two Hundred Fifty Million only) (approximately USD 3,500,000) in any preceding financial year, and working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.â€

The Plan provides for a flexible and less time consuming compliance regime for start-ups. Start-ups are allowed to self-certify compliance with certain identified labour and employment laws. Further, start-ups are exempt from inspections under labour and employment laws for a period of three years unless authorities are in receipt of trustworthy and certifiable complaints of violation, filed in writing and approved by at least one official superior to the level of inspection officer.

While beneficial results of the Plan are yet to be seen, this seems to be a step in the right direction and shows the government’s keen interest in creating a growth focused plan for start-ups.

Nonetheless, to stay focused on core business, start-ups need to set up programmes to attain the minimum knowledge of labour and employment laws that may be relevant to them for their short term to long term business needs. This will not only allow the smooth operation of business but also lead to growth and profitability.

Dealing with Stressed Assets in India – S4A, A Fresh Perspective

The Indian banking system has been riddled with non performing assets (NPAs) for some time now. To help lenders, the Reserve Bank of India (RBI) has introduced a variety of debt restructuring policies, including the flexible structuring of project loans  and the strategic debt restructuring scheme. But these schemes have met with limited success, mostly due to the lack of funds available for promoters to invest, non-cooperation on the part of the borrowers and the sub-optimal levels of operations in the relevant companies.

The lukewarm economic environment has further amplified these woes. As such, ‘bad’ loans across 40 listed banks in India had increased to Rs. 5.8 trillion (approximately USD 85.9 billion) in March 2016 from Rs. 4.38 trillion (approximately USD 64.9 billion) in December 2015. Estimates show that weak assets in the Indian banking system will reach Rs. 8 trillion (approximately USD 118.5 billion) by March 2017.

To provide lenders with additional remedies against this challenge, the RBI, in June 2016, introduced the Scheme for Sustainable Structuring of Stressed Assets (S4A). The S4A provides greater flexibility by allowing the lenders to deal with stressed loans by splitting these into two parts: Part A being sustainable debt and Part B being debt which will be converted into equity or quasi equity instruments (Part B Instruments).

For Part A to be sustainable, an independent techno-economic viability study has to establish that at least 50% of loans (including new funding and non fund facilities crystallizing in the next 6 months) may be serviced at the same tenor and at the current (including the next 6 month) cash flow level.

A few key features of the S4A are as follows:

  • The S4A can be applied only for companies that have started commercial operations and have outstanding debt of at least Rs. 5 billion (approximately USD 74 million).
  • Lenders are required to form a resolution plan with the help of an independent agency, providing for a split in debt and other terms of the S4A. The plan needs to be approved by 75% lenders by value and 50% lenders by number, and ratified by an overseeing committee. The overseeing committee will be formed by the Indian Banks’ Association in consultation with the RBI.
  • For listed companies, the Part B Instruments (equity) are to be marked-to-market and other Part B Instruments/for unlisted companies, would be valued either at break-up value as per the latest audited accounts (i.e. the valuation method where the net value of assets of the company are divided by the number of shares to arrive at the value of each share) or by discounted cash flow method (i.e. the valuation method where the future free cash flow projections are discounted (the discount factor being aggregate of the actual interest rate charged to the company and 3% subject to a floor of 14%)).
  • Asset classification can be retained at ‘Standard’ subject to provisions of the higher of 40% of the amount held in Part B or 20% of the aggregate of the Part A and Part B debt.

The S4A provides respite to lenders after converting part of their debt exposure into Part B Instruments and not having to rush to find a new promoter to divest the Part B Instruments within a specified period to protect their provisioning benefits. Absent any malfeasance, lenders can opt to continue with the existing promoters in the company retaining management and/or control.

While the provisioning requirements for lenders may increase in the next four quarters, over a longer period of time provisions can reduce substantially or completely. This is provided, however, that the Part A debt is serviced satisfactorily and there is no substantial decline in the fair value of the Part B Instruments.

Although the provisions are higher than the 15% requirement for NPAs in the first year, it is less than the 100% requirement over a three year period. Therefore, the S4A aims at a win-win for both promoters and lenders by allowing the current management to continue and reducing the NPAs at the same time. If the promoters continue, they will have to provide personal guarantees and sacrifice equity in the same proportion as lenders.

Nonetheless, the S4A does not allow rescheduling or repricing of debt and applies only to operational projects. Also, the test of sustainability only considers current cash flows and does not look towards the incremental cash flows that may accrue as operating levels or the economic environment improves.

As mentioned above, the S4A contemplates the setting up of an overseeing committee which would lend transparency to the restructuring process by reviewing the resolution plan. This will also comfort the lenders from fears of future scrutiny, a major factor in decision-making for public sector banks. This may increase the time for approval and implementation of the plan, but the benefits outweigh the costs.

At the same time, the 3% addition to the discounting factor for valuation of the Part B Instruments may add strain on the lenders. Further, lenders may not want to convert the Part B Instruments to equity at current share price levels.

Notwithstanding the same, the legislative intent behind S4A is clearly aimed at equipping lenders with the ability to deal with weak assets and to curb NPAs in the near term. As such, they only stand to gain following the S4A, at least for the Part B debt in any event.

Key Changes to India’s FDI Regime Announced Yesterday

Earlier yesterday, the Prime Minister of India announced (Announcement) [1] a number of key changes to India’s foreign direct investment (FDI) policy, as set forth in Consolidated FDI Policy Circular of June 7, 2016 (Policy)[2]. Broadly, these changes pertain to enhancing the limits of foreign investment (FI) and easing of existing conditions regarding FI in some sectors. Through this short update post, we seek to highlight some prominent changes thus announced.

  1. Single Brand Retail Trading: As per the Policy, FI of over 49% was permissible in single brand product retail trading (Single Brand Retail) provided an approval from the Government of India (GOI) was obtained (Approval Route). Additionally, where such proposed FI exceeded 51%, certain additional conditions were imposed, including in relation to sourcing of materials. This specific condition on sourcing mandated that 30% of the value of goods would have to be sourced from within India, preferably from certain GOI-classified micro, small and medium enterprises, cottage industries and artisans /craftsmen. There were additional stipulations as to how such sourcing norm would operate and its compliance. The Announcement has relaxed this sourcing requirement for up to 3 years and has further proposed a relaxed sourcing regime for an additional 5 years for entities indulging in Single Brand Retail provided the said entity possesses state-of-the-art and cutting edge technology.
  1. Defence Sector and Arms and Ammunition: The Policy permitted FDI over 49% in the equity of a company engaged in the defence sector under the Approval Route where the FI was likely to result in access to modern and state of the art technology. As per the Announcement, the requirement of access to state of the art technology would stand deleted. Further, permission may also be granted under the Approval Route for other reasons as may be recorded in writing. Equally importantly, the Announcement extends these limits to entities operating in the manufacturing of GOI-designated small arms[3] and ammunitions. Currently, the manufacturing of such small arms is undertaken by GOI agencies exclusively.
  1. Pharmaceuticals: Currently, FDI is permitted in a brownfield pharmaceutical entity under the Approval Route. The Announcement indicates that for brownfield pharmaceutical entities, up to 74% FDI would be under the automatic route, i.e. no GOI approval would be needed (Automatic Route).
  1. Civil Aviation Sector: FDI beyond 74% for brownfield civil aviation projects is currently under the Approval Route, as per the Policy. As per the Announcement, 100% FDI would be permitted in brownfield airport projects under the Automatic Route. Another key change set forth in the Announcement pertaining to this sector deals with FDI in scheduled air transport service[4] and regional air transport service: FDI up to 49% will now be permitted under the Automatic Route and beyond 49% through the Approval Route. The Announcement also clarifies that foreign airlines would be entitled to invest in the capital of Indian entities operating scheduled and non-scheduled air-transport services up to 49% of their paid up capital and subject to conditions stipulated.
  1. Some Other Sectors: The Announcement further indicates amendments to the following sectors:
  • Broadcasting Carriage Services: 100% FDI permitted under the Automatic Route for specified broadcasting carriage services. However, where (a) an infusion of FI beyond 49% is proposed; and (b) where such FI would result in a change in the ownership pattern or transfer of stake by existing investor to a new foreign investor; and (c) such company has not sought an approval from the relevant Ministry of the GOI (Information and Broadcasting, for instance) thereto, then such FI would be under the Approval Route.
  • Private Security Agency Sector[5]:- FDI of up to 49% permitted under the Automatic Route, FDI beyond 49% and up to 74% permitted under the Approval Route;
  • Animal Husbandry[6]: Under the Policy, 100% FDI in this sector was under the Automatic Route and was subject to the relevant activities being undertaken under “controlled conditions†(i.e. under GOI prescribed conditions only) – this requirement of “controlled conditions†will now be done away with; and
  • Indian-Produced Food Products: 100% FDI under the Approval Route for trading.
  1. Establishment of Certain Offices in India: The Announcement indicates that if the principal business of an applicant is defence/telecommunications/private security or information and broadcasting and if relevant GOI approval/ license/permission has been obtained, then the approval of the Reserve Bank of India (RBI) or separate security clearance would not be required. Currently, the establishment of a branch office, liaison office or project office requires approval of the RBI and as such the Announcement seeks to curb the requirement of multiple approvals.

[1] Pending the issuance of a formal regulation by the Government of India, this information has been sourced from a press release issued by the Prime Minister’s Office on June 20, 2016.  A copy of the said release may be accessed here . Further clarity on these aspects will most likely be provided in the formal regulations once notified.

[2] A copy of the said circular may be viewed here . All other terms and conditions mentioned in the said Policy continue to subsist.

[3] Legislative guidance may be drawn from certain draft rules of the GOI which indicate that the term “small arms†would include revolvers, self-loading pistols, rifles, carbines, sub-machine guns, assault rifles and light machine guns, as well as their parts, components and ammunition. In addition, certain caliber of shotguns and sporting rifles would also be covered under “small armsâ€.

[4] As per the Policy, the term “scheduled air transport service†includes an air transport service undertaken between the same two/more places, which is operated as per a published time table/ recognizably systematic series and which is open to use by public.

[5] The Policy indicates that a “private security agency†would include a person or body of persons, other than a government agency, engaged in the business of providing private security services (i.e. services aimed at protecting or guarding person or property) to any company or any person.

[6] This would also include pisciculture, aquaculture and apiculture.

Recent Changes to Merger Control

We take a look at recent re-notification and revised merger control thresholds to the Competition Act, 2002, and how they will reduce regulatory hurdles for smaller transactions and facilitate ease of doing business in India.

The Competition Act, 2002 (Act), requires mandatory notification to and prior approval of the Competition Commission of India (CCI) for transactions wherecertain prescribed asset or turnover thresholds (Jurisdictional Thresholds) are exceeded. By way of a notification dated 4 March 2011 (2011 Notification), the Ministry of Corporate Affairs (MCA) enhanced the value of asset and turnover as provided in Section 5 of the Act by 50 per cent. In addition to the above, the MCA by way of notification on the same date (including a corrigendum dated 27 May 2011) also introduced a de minimis exemption in case of an acquisition. The said notifications contained a validity period of five years and were set to expire on 3 March 2016.

To facilitate the ease of doing business in India, by way of a series of notifications issued on 4 March 2016, the MCA has re-notified its earlier notifications (with modifications) (2016 Notifications). Importantly, the 2016 Notifications have enhanced the Jurisdictional Thresholds and extended the validity by re-notifying the changes brought about by the 2011 Notification.

Target Exemption: Re-notified with enhanced thresholds

  • Originally, acquisitions involving target entities with assets below INR 250 crores in India or turnover below INR 750 crores in India, would not require prior notification to and approval of the CCI (alternatively referred to as the de minimus exemption). This exemption was introduced for an initial period of five years.
  • On 4 March 2016, the MCA has re-notified the de minimis exemption with enhanced thresholds, set out below:

“In exercise of the powers conferred by clause (a) of section 54 of the Competition Act, 2002 (12 of 2003), the Central Government, in public interest, hereby exempts an enterprise, whose control, shares, voting rights or assets are being acquired has either assets of the value of not more than rupees three hundred and fifty crores in India or turnover of not more than rupees one thousand crores in India from the provisions of section 5 of the said Act for a period of five years from the date of publication of the notification in the Official Gazette.â€

  • Therefore, in addition to extending the term of applicability of the Target Exemption (i.e., until 4 March 2021), the MCA has also increased the asset and turnover thresholds to INR 350 crores and INR 1000 crores, respectively in India, which is expected to result in a reduction of notifiable transactions.
  • The rationale for this re-notification and revised thresholds is essentially to facilitate ease of doing business in India and reduce regulatory hurdles for smaller M&A transactions. This move is in consonance with the Government of India’s proactive stance on fuelling investments /equity participation into start-ups under the aegis of ‘Startup India’. The re-notification will also ensure that the CCI is not unnecessarily burdened with inconsequential merger filings and is able to focus its resources on transactions which truly have a market impact.
  • Pertinently, the benefit of the de minimis notification continues to remain inapplicable to mergers and amalgamations.

Enhanced Jurisdictional Thresholds

  • Earlier, by way of the 2011 Notification, the MCA had increased the Jurisdictional Thresholds set out under Section 5 of the Act by 50%. Pursuant to the 2016 Notifications, the MCA has revised the Jurisdictional Thresholds prescribed under Section 5 of the Act by 100%, to account for inflation. The extract from the 2016 Notification in this regard is provided below:

“In exercise of the powers conferred by sub-section (3) of Section 20 of the Competition Act, 2002 (12 of 2003), the Central Government in consultation with the Competition Commission of India, hereby enhances, on the basis of the wholesale price index, the value of assets and the value of turnover, by hundred per cent for the purposes of section 5 of the said Act, from the date of publication of this notification in the Official Gazette.â€

  • Effectively, all the Jurisdictional Thresholds have doubled, thereby reducing the number of notifiable transactions.

Definition of ‘Group’: Re-notification of the 50% test

  • The MCA has also re-notified the amendment to the definition of group as set out below:

“In exercise of the powers conferred by clause (a) of section 54 of the Competition Act, 2002 (12 of 2003), the Central Government, in public interest, hereby exempts the ‘Group’ exercising less than fifty per cent. of voting rights in other enterprise from the provisions of section 5 of the said Act for a period of five years with effect from the date of publication of this notification in the official gazette.â€

  • By way of background, the MCA had exempted the ‘Group’ exercising less than 50% voting rights in another enterprise from the application of provisions under Section 5 of the Act by way of the 2011 Notification. The current notification extends the validity of the exemption for a further period of five years, i.e. until 4 March 2021. As such, entities exercising less than 50% voting rights in another entity, will continue to not be considered as part of the same ‘group’ for the purpose of Section 5 of the Act. Alternatively, entities exercising 50% or more voting rights will be considered part of the ‘group’.
  • The extension of the validity of this notification will continue to result in fewer instances of intra-group exemptions from notification being available. However, as a positive, for the purpose of calculating Jurisdictional Thresholds, only assets and turnover of ‘group’ entities will continue to be taken into account to determine if a notification requirement arises.
  • The year 2016 marked a sharp increase in the number of notifiable transactions – the CCI passed orders in relation to 29 M&A deals in December last year. In view of the increasing number of transactions which were getting notified to the CCI, the notifications are a welcome move by the MCA to enable the CCI to review only those transactions which have the potential to adversely affect competition in India. This will go a long way in streamlining the Indian merger control regime.

Pricing Guidelines under FEMA – A Historical Analysis

The Early Years

With the creation of the Securities and Exchange Board of India (SEBI) in 1992, the existence of the Controller of Capital Issues (CCI) which was overseeing Indian capital markets was rendered redundant. However, the pricing guidelines issued by the CCI (PG) assumed greater importance despite CCI’s redundancy, given India’s intent to attract foreign direct investment (FDI). This was especially as most FDI transactions were in the unlisted entity space whereas SEBI was regulating listed entities. As such, the PG formulated by the CCI became the guiding principle for various investments into India. As per Reserve Bank of India (RBI) stipulations, the fair value of shares (FV) to be issued/ transferred to non residents (NRs) was to be determined by a chartered accountant (CA), in accordance the PG formula laid down by the CCI.

The rationale behind these stipulations was to garner maximum value and forex for Indian shares and was resultant of the 1991 crisis on balance of payments faced by India. Principles laid down in Press Notes 18/ 1998[1] and 1/2005[2] were also aimed at strengthening Indian promoters. In so far as outgo of currency was concerned, regulatory supervision was exercised to ensure that such outflow would be heavily regulated and minimised. This mindset continued to operate in the new millennium even as substantial liberalisation of sectors took place (in the context of FDI) and even when the context changed from regulation of forex to maintenance thereof.

Methodology Before the Global Financial Crisis

Whilst 2006-2007 saw record FDI inflows resulting in substantial relaxations of the forex outflow regime and tightening of norms to regulate inflows by way of convertible instruments, the ensuing world financial crisis in 2008 effected the move towards fuller capital convertibility. By 2010, most sectors stood liberalised from an FDI standpoint. During this period, the ‘indirect’ foreign investment regime (Press Notes 2[3], 3[4] & 4[5]/2009) and control issues were at the fore. Isolated cases of NRs paying a much higher value than the FV for Indian shares had started to surface, including on accounts of control premium or to ensure economic power, beyond the equity percentage caps.

It was in this background that the pricing regime was reviewed in 2010[6]. The chief argument for such review in the context of the PG was that the PG were inadequate to address valuation of certain non- ‘traditional’ corporates (for instance, IT based enterprises, insurance companies, etc). The change made in 2010 was to enable valuation to be determined by a SEBI registered merchant banker or a CA as per the discounted free cash flow method (DCFM).

The one-size-fits-all approach of DCFM had its own set of problems

A Change in Perspective

While initially welcomed, the straitjacket prescription of the DCFM was questioned on account of its one–size-fits-all approach. Simultaneously, transactions triggered by “put†or “call†options (Options) came up before the RBI. To address this, the internationally accepted pricing methodology duly certified by a CA or a SEBI registered merchant banker (IAPM) was prescribed. When the position regarding the Options was finally cleared by SEBI, pricing guidelines under FEMA were announced by RBI in January 2014[7] to include transactions arising out of such Options, subject to further stipulations. However, the exit of the NR from the equity shares was differentially linked to a price not exceeding that arrived at on the basis of the return on equity as per the latest audited balance sheet.

This differential treatment between equity and convertibles did not go down well with the market and in July 2014[8], the methodology for determining the FV for equity and convertibles was determined to be any IAPM. Further, transactions involving Options were required to have a lock-in of one year or as stipulated in the FDI policy and there was to be no assured return. FEMA also mandated transparency by requiring details of valuation, the pricing methodology followed and details of the certifying agency, to be provided in the balance sheet.

What Lies Ahead

Over the years, the pricing guidelines have thus evolved and have become more liberal and accepted. However some areas of concern items subsist:

  • Differential treatment for transactions involving purchase by a NR (price to be not less than the FV) and the transaction involving purchase by a resident (price to be not exceeding the FV). One suggestion could be that this differential be made uniform or at a 1% variation, either way.
  • Differential pricing from R to NR and NR to R transfers pose challenges when indirect foreign investment transactions are to be priced – the RBI regulations are currently silent on this.
  • Whilst transparency in pricing and valuation is welcome, apart from the RBI circular of July 2014 to authorised dealers, there is no mention under extant and relevant/ applicable regulations regarding this (e.g. FEMA, company law, etc).
  • The statement of the Governor of RBI in the 6th Bi-monthly Monetary Policy Statement of February 2015[9] indicates that in the context of FDI in various sectors, the aim is to “to introduce greater flexibility in the pricing of instruments/securities including an assured return at an appropriate discount over the sovereign yield curve through an embedded optionality clause or in any other manner.â€

As such, whilst there does appear to a possibility of some legislative concession on this matter, the move towards allowing assured returns at a discount to the sovereign yield curve, for foreign investors appears to be currently fanciful. There are cases currently in arbitration on this topic where a downside protection to equity risk is being sought to be defended. Perhaps the outcome of this case would impact any future approaches. Prima facie, any assurance (including downside protection) may have the effect of conversion of the instrument into a hybrid instrument. With the implementation of the Indian Accounting Standards which are at par with IFRS, “assured returns†may impact the balance sheet, as well. As such, it will be interesting to note how the investor community receives this.






[6] A.P. (DIR Series) Circular No. 49 dated May 04, 2010

[7] A.P. (DIR Series) Circular No. 86 dated January 9, 2014

[8] A.P. (DIR Series) Circular No. 4 dated July 15, 2014


The Changing Landscape of Securitisation & Debt Recovery

The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (the Act) received assent of the President on August 12, 2016 and was  published in the Gazette on August 16, 2016. It will come into effect from such date(s) as may be notified by the Central Government. The Act makes far reaching changes to the way securitisation and reconstruction companies are regulated, as well as the category of financial assets and the secured creditors to whom non- judicial remedies and access to debt recovery tribunals are available. We try to examine this through this short post.

Listed Debt Securities

The Act extends the benefit of remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Recovery of Debts due to the Banks and Financial Institutions Act, 1993 (DRT Act) to debt securities listed on Indian stock exchanges. It also revises the definition of financial assets to include, among others, hire purchase, financial lease and conditional sale within its ambit.

Under the Act, the debenture trustee can enforce its security with respect to listed debt securities under SARFAESI in the event of non-payment of debt after 90 days notice of default has been served on the borrower. For this provision to apply, such debt is not required to be classified as a non-performing asset (NPA).

The stated objective of the Act is to facilitate ease of doing business. Admittedly there is a need to deepen the bond market as well as the market for distressed assets – the extension of the SARFAESI remedy to listed bondholders may help in achieving both of these.

However, the inclusion of only listed debt securities and the non-application of the NPA requirement in respect of listed debt securities create certain anamolies. Firstly, the remedies under the SARFAESI Act are not available to other lenders such as those providing external commercial borrowing (ECB) or investing in unlisted debt securities such as alternative investment funds. It is likely that such lenders would seek treatment at par at least with listed bondholders.

Secondly, the Act still retains the requirement that an account should be classified as an NPA before banks and financial institutions enforce their security under the SARFAESI Act. Currently different periods have been prescribed for NPA classification by different regulators (e.g., for certain financial institutions the period is six months) and corresponding provisioning requirements. Although such differences among the banks and financial institutions have been accepted by the Supreme Court in Keshavlal Khemchand  case, it may lead to a scenario where a default in respect of all debts by a borrower will entitle some secured creditors to invoke SARFAESI Act provisions earlier than others .

Non-banking financial companies

The Act does not make any reference to non-banking financial companies (NBFCs) but financial assets such as financial leases and conditional sales are primarily dealt with by NBFCs. In exercise of the powers conferred under the SARFAESI Act, the Central Government has notified certain NBFCs, having assets of rupees five hundred crores and above as per the last audited balance sheet, as financial institutions to which the provisions of the SARFAESI Act apply except that provisions of Sections 13 to 19 (relating to private enforcement of security) only apply for security interest where the principal amount of secured debt equals or exceeds Rs. 1 crore (notification dated August 5, 2016). It may be noted that the remedies under the DRT Act are still not available to the NBFCs. It may also be noted that under the current RBI regulations, asset reconstruction companies (ARCs) cannot acquire financial assets from NBFCs.

Registration Requirements

Registration of security interest with the Central Registry will be mandatory for enforcement of security under the SARFAESI Act and will act as public notice. In order to create a central database for security interest over property rights, the Act also envisages integration of registry systems under different laws with the Central Registry.

Asset Reconstruction Companies

The Act also confers wide powers on the RBI to regulate ARCs including the right to audit, inspect, approve appointment of and, in certain cases, appoint and remove directors. Stiff penalties have been prescribed for non-compliance by ARCs  of RBI directions. Any document executed in favour of an ARC by a bank or financial institution for acquisition of financial assets for the purposes of asset reconstruction or securitisation will be exempt from stamp duty. Besides qualified institutional buyers the ARCs can also offer the security receipts to other institutional investors as specified by the RBI. This will enhance the ability of ARCs to provide working capital to distressed borrowers.

Given the high levy of registration fees  in certain states, a similar exemption from registration fees might have been considered.

Changes to the DRT Act

The most notable amendment in the DRT Act is the requirement of deposit for stay and appeal. Stay on recovery under a recovery certificate (RC) will be granted only if the borrower pays 25 per cent of the debt upfront and gives an unconditional undertaking to pay the balance within a reasonable time. 50 percent of the debt under the RC will need to be deposited for making an appeal against the order of the Recovery Officer. The Act provides that the DRT will make every effort to complete the proceedings in two hearings and shall issue the recovery certificate within 30 days of completion of hearing. When an application is filed for recovery of debt, the Tribunal shall issue summons to the defendant directing it to disclose the properties other than those identified by the applicant. The defendant is restrained from transferring assets except in the ordinary course of business without the prior approval of the Tribunal over which security has been created in favour of the applicant or where the value of the secured assets in not sufficient to satisfy the debt, other assets specified by the applicant or such other assets as disclosed to the Tribunal.

The Act also empowers the Central Government to provide by rules e-filing of applications and written statements, service of summons and notices through electronic form and display of interim and final orders of on the website of the Tribunal and Appellate Tribunal. In view of pendency of cases the Act also provides that the Presiding Officers shall be eligible for reappointment and has increased their age of retirement from sixty two to sixty five years.

The Act is a welcome step towards streamlining procedures and will help in expeditious disposal of recovery cases under the DRT Act. However, in view of the pendency of cases (over 70,000 cases are pending) before DRTs and the likely increase on account of bankruptcy jurisdiction being conferred under the Insolvency and Bankruptcy Code, substantial investment and capacity building will be required at DRTs to achieve the objectives.

Enforceability of Contractual Restrictions on Transfer of Shares

The question of the enforceability of contractual restrictions on transfer of shares of Indian public limited companies (Companies) has been the subject matter of various decisions by Indian courts. The Indian legislature has also examined this aspect, which has resulted in a change in the relevant legislation. Through this post, we examine the position as it stands today.

The debate on the enforceability of shareholder agreements and joint venture agreements governing Companies garnered significant attention in early 2010 when a single judge of the Bombay High Court (Bombay HC) set aside an arbitral award in a 2010 decision in Western Maharashtra Development Corporation Ltd. v. Bajaj Auto Ltd. The judgment indicated that the shares of a Company could not be fettered, were freely transferable and as such, any restriction on free transferability would be a violation of section 111A of the erstwhile Companies Act, 1956 (1956 Act).

Interestingly after the judgment in Bajaj Auto, a division bench of the Bombay HC in Messer Holdings Limited v. Shyam Madanmohan Ruia in 2010 reconsidered this question and pronounced a judgement that was different from the ruling in the Bajaj Auto: it was held that a private arrangement between shareholders of a Company on a voluntary basis, relating to share transfer restrictions (in this case a right of first refusal), would not be violative of Section 111A of the 1956 Act and as such, would be enforceable between the shareholders. The judgement further stated that it was not mandatory for a Company to be a party to such an arrangement and further that that it was not essential to incorporate share transfer restrictions in the byelaws of the Company. The division bench in Messer Holdings also stated that a restriction on the transfer of shares is “enforceable unless barred†by the byelaws of a company. Messer Holdings appealed against this decision before India’s apex court (Appeal).

At the same time, following the division bench decision in the Messer Holdings, an appeal was filed in the Bajaj Auto case before a division bench of the Bombay HC (Bajaj Auto Appeal). The division bench of the Bombay HC pronounced its judgment in the Bajaj Auto Appeal in May 2015 whereby it overturned the judgment of the single judge in this case and agreed with the decision of the division bench in Messer Holdings. The division bench in Bajaj Auto Appeal also held that even if the terms of a private arrangement between shareholders were not permissible under the byelaws of a Company, it would not in any way destroy the enforceability of the agreement between the shareholders.

Foreign investors have shown strong preference for robust contractual rights and certainty over the enforcement of such rights

The Supreme Court delivered its decision on the Appeal in April 2016. The parties, by this time, had entered into a settlement agreement and there was no surviving dispute. Accordingly, the Appeal was dismissed. The Supreme Court also made it clear that it was not deciding on the existence or otherwise of any right or its transferability in the shares in question.  Whilst the Appeal was a welcome opportunity for the Supreme Court to finally decide this question which has been the subject matter of much judicial debate by Indian courts, it was not to be so.

As India looks to attract more foreign investment, foreign investors will want robust contractual rights and certainty over the enforcement of such rights. There has been a fair amount of confusion on the subject matter, given the divergent opinions of the single judge of the Gujarat High Court in Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd. in 1997 and the Delhi High Court in Smt. Pushpa Katoch v. Manu Maharani Hotels Ltd. in 2005 (where the courts adopted the view that there cannot be any fetters, contractually or otherwise, on the right of a shareholder to transfer shares in a company), which were later differed by the division bench decisions of the Bombay HC in Messer Holdings in 2010. The Appeal was also a welcome opportunity to finally decide on the differing views of various High Courts. However, in light of the outcome of the Appeal, this was not to be so. It would be prudent to assume that status-quo continues and the division bench decisions of the Bombay HC in Messer Holdings and the Bajaj Auto Appeal continue to hold good, at least for the time being and would have a persuasive value over the single judge decisions of the Gujarat and Delhi High Courts.

As things stand, foreign investors looking to make investments into companies in India can, despite the requirement of free transferability of shares, potentially still enter into valid private arrangements vis-a-vis other shareholders to restrict the transfer of shares, irrespective of whether such restrictions are incorporated in the byelaws of the Company. However, it would also be prudent to note that this position might change, as and when the issue of contractual restrictions on the transfer of shares comes up before the Supreme Court again.

Challenges Faced by Employers in Addressing Sexual Harassment Complaints

A Brief Background

Sexual harassment at the workplace was first recognized as a violation of basic human rights by India’s apex court, the Supreme Court (SC) in Vishaka v. State of Rajasthan (Vishaka Judgment) in 1997. In its judgement, the SC opined that sexual harassment was violative of the fundamental rights of women guaranteed under the Constitution of India, 1950 including the constitutionally guaranteed rights to life, equality, dignity and to practice any profession/carry on any occupation, trade or business. Accordingly, and in the absence of specific legislation at that time, the SC had enunciated guidelines for the prevention of sexual harassment at the workplace.

Post the Vishaka Judgment, it was judicially observed that the guidelines framed were not being followed in various workplaces and the need for a specific legislative framework on prevention of sexual harassment at work was acutely felt. In December 2013, the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 and the rules therein came into force (collectively, the SH Laws). Among other things, the SH Laws lay down a mechanism for redressal of complaints of sexual harassment at work. The SH Laws have been in force for almost three years and the Ministry of Women and Child Development has even issued a handbook about the same with the intent of such handbook being used as a practical guide. However, employers still face many practical challenges in acknowledging and responding to complaints of sexual harassment. Through this short piece, we examine some more prominent/ prevalent challenges faced by employers in this regard.

  1. Demarcating Inappropriate Behaviour From Sexual Harassment

Many employees are still unclear about whether an incident would constitute sexual harassment or not. Due to this, employees sometimes file complaints even though the behaviour in question may not constitute sexual harassment within the statutory definition of the term (as set forth in SH Laws). This leads to the employer facing a dilemma as to how to process and handle such complaints – whether they should be handled by the internal complaints committee (ICC) constituted under the SH Laws or if the employer should deal with it in accordance with its own internal complaints processes. It would be prudent for the employer in such situations to refer the matter to its ICC so that it can decide whether or not the behaviour in question constitutes sexual harassment as defined under the SH Laws. This might mean that a case of misconduct/ unethical behaviour, which could have been quickly addressed under the employer’s internal policies, takes longer to be addressed given the process/timelines prescribed by the SH Laws. However, it will ensure that the employer remains compliant with  SH Laws.  As an aside, to ensure that employees are aware of the SH Laws and to sensitise employees towards behaviour that constitutes sexual harassment, employers should conduct regular workshops, trainings, role plays, etc. While it may not be possible to cover all possible scenarios, regular employee training would go a long way to handling the practical challenges faced by employees and employers in addressing sexual harassment at the workplace.

  1. Sufficient Evidence or Proof

In most cases of sexual harassment, it is difficult to gather evidence or produce witnesses as instances of sexual harassment or allegations thereof, are based on behaviour that most typically takes place in private. Also, SH Laws do not prescribe the standard of proof in cases of sexual harassment and as such, this adds another layer of complication in so far as evidence is concerned. Judicial precedents that state that the standard of proof in domestic enquiries should be that of preponderance of probabilities and not of ‘beyond reasonable doubt’. That means that a fact can be said to be proved when a deciding authority either believes that it exists or considers its existence to be so probable that a prudent person ought, under the circumstances of a particular case, to act upon the supposition that it exists. Given the standard of proof required and the fact that most of the times, the act/ allegation thereto takes place behind closed doors, sufficient and conclusive evidence is always a challenge, albeit a procedural one.

  1. Name of Complainant and Written Complaint – Whether Necessary to Initiate An Inquiry

The SH Laws require a written complaint of sexual harassment to be made either by the victim or by any other person authorised by such victim. There is no provision under the SH Laws to entertain complaints made on a no-name, anonymous or oral basis. However, there are many instances when complainants prefer to remain anonymous to avoid being identified and/or being subjected to any social pressure and stigmatisation. In such cases, rather than take the view that there is no legal obligation to take any action on the complaint, it is preferable that an employer should make efforts, while retaining confidentiality, to extend comfort to the anonymous complainant and encourage such a person to come forward so that the appropriate process can be initiated. Especially in cases where repeated anonymous complaints are received concerning a particular person, the employer, while taking all relevant safeguards, may want to investigate further.

The Way Forward

In conclusion, with a codified law in hand, we have come a long way in protecting women from sexual harassment in the workplace. But we still have some way to go before we arrive at an efficient and effective mechanism to address these situations. We are headed in the right direction, however, and with time, adherence to global best practices and judicial guidance, we are sure we will overcome these challenges.


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