Understand Your Rights. Solve Your Legal Problems
India’s start-up ecosystem continues to be the third largest in the world. With the improvement in digital connectivity and increased level of internet penetration, India presents a tremendous opportunity for the start-ups across the sectors including edtech, healthtech, retailtech, agritech, fantasy sports etc. The governments at the centre as well as at state level have come up with several regulatory relaxations and policy benefits to encourage the Indian entrepreneurs to focus on innovation and technology development. As a result of strong policy support and expansion of institutional support, the investment environment in India for start-ups continues to be positive and the Indian start-up ecosystem continues to grow at an incredible pace.
With the objective of facilitating the listing of new age start-ups on domestic exchanges, the Securities and Exchange Board of India (SEBI) had introduced the Institutional Trading Platform (ITP) in 2015 which was accessible to such companies which were intensive in their use of technology, information technology, intellectual property, data analytics, biotechnology, and nano-technology to provide products, services or business platforms with substantial value addition.
However, since the start-up ecosystem of India was not matured enough at that point of time and some of the listing norms were complex in nature, ITP failed to garner interest from Indian start-ups. Looking at the tepid response of start-ups, SEBI introduced several changes in the ITP framework in 2018 and relaxed various norms with a view to attract the start-ups besides renaming the ITP framework as Innovators Growth Platform (IGP). Despite the relaxations in listing norms, the IGP could not get any traction and no listing has so far taken place on the IGP platform.
A company which is listed on the IGP can migrate to the Mainboard of the stock exchanges provided that such company satisfies the conditions as prescribed under Chapter X of the ICDR Regulations.
IGP Framework
Chapter X of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) sets out the provisions related to the listing of securities on IGP pursuant to an initial public offer or for only trading on a stock exchange without making a public offer. An entity seeking to list its securities on IGP has to fulfil certain specified criteria before it becomes eligible for listing its securities on IGP.
As per the extant framework, at least 25% of the pre-issue capital of the issuer company needs to be held for a minimum period of two years by (a) Qualified Institutional Buyers (QIBs) (such as mutual funds, venture capital funds, scheduled commercial banks, public financial institutions etc.), (b) family trusts with a net worth of more than INR 5 billion, (c) Accredited Investors[1] (AIs) and/or (d) regulated entities (including foreign portfolio investors and pooled investment funds), provided that AIs are not allowed to hold more than 10% of the pre-issue capital of the issuer company.
A company which is listed on the IGP can migrate to the Mainboard of the stock exchanges provided that such company satisfies the conditions as prescribed under Chapter X of the ICDR Regulations.
Consultation paper on review of the IGP framework
Based on suggestions and feedback received from start-ups and market participants, SEBI has, on 14 December 2020, issued a consultation paper[2] to further review the IGP framework and has sought comments from the public and other stakeholders. Set out below are the key changes as proposed by SEBI in the consultation paper.
Comments
SEBI’s consultation paper is yet another attempt to facilitate the listing of start-ups. The consultation paper seeks to harmonise several provisions of the IGP framework with the provisions applicable to the Mainboard of stock exchanges.
While holding above 25% of the pre-issue capital was not a matter of concern for the eligible investors, the two years holding period was difficult to meet for the investors since they just want regular exits from the start-ups.
Due to its size and the endless opportunities in the Indian market, India continues to be a preferred investment destination for many venture capital/private equity investors who are looking to invest in technology based businesses. While the COVID-19 pandemic has hit the start-ups (especially the early stage start-ups) very badly, still the Indian start-ups have managed to attract a large number of investors and secured significant investments in the year 2020.
However, the Indian start-up ecosystem is still developing and there are several hurdles which are faced by the Indian entrepreneurs before their ventures become successful. The governments and the regulatory authorities are taking various steps to help the entrepreneurs and promote the start-up culture in India. The consultation paper issued by SEBI appears to suggest that SEBI understands the struggle of start-ups to go public and provide exits to its investors; hence, it has proposed necessary amendments so as to transform the listing framework for start-ups.
While holding above 25% of the pre-issue capital was not a matter of concern for the eligible investors, the two years holding period was difficult to meet for the investors since they just want regular exits from the start-ups. Another step in the interest of a larger number of minority shareholders is the proposal on the continuation of special rights such as board seat and veto or affirmative voting rights for existing institutional investors. This would not only allow investors to continue their role in matters such as capital allocation, operating frameworks, business model etc., but would be significant in the growth of start-ups. Also, the proposed relaxations in takeover norms and delisting provisions are a welcome step. These proposed amendments, if implemented, should encourage the Indian start-ups to opt for listing on IGP.
Disclaimer: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to herein. This publication has been prepared for information purposes only and should not be construed as legal advice. Although reasonable care has been taken to ensure that the information in this publication is true and accurate, such information is provided ‘as is’, without any warranty, express or implied, as to the accuracy or completeness of any such information.
Authors:
Dinesh Gupta,
Associate Partner
Harshita Arora,
Associate
[1] As per the extant framework, (a) individuals with total gross income of INR 5 million and with a minimum liquid net worth of INR 50 million, or (b) body corporates having net worth of INR 250 million, shall be eligible to be considered as AIs. The persons /corporate bodies who wish to get accreditation for the purpose of IGP would need to approach the stock exchanges or depositories and follow the prescribed procedures.
[2] The consultation paper may be accessed at the following link:
[3] "Category I AIF" invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other AIFs as may be specified.
[4] Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.
The pandemic has also witnessed the judicious use and creation of IP, as well as a paradigm shift towards its generation and management in the virtual world.
On the administrative front, the Intellectual Property Offices in India have issued notices for relaxation of various timelines in order to facilitate IP stakeholders to meet their requirements in these circumstances. On 23 March 2020, the Supreme Court of India took Suo Moto cognisance of the situation and by an order extended the limitation period for filing of suits/appeals/applications and all other documents in all proceedings before any courts/tribunals/authorities in India. As per the order, the limitation period extends from 15 March 2020 till further orders of the Supreme Court. In other words, if the due date for filing any document or taking any action falls on or after 15 March 2020, then that date would be deemed to be extended to the date when the Supreme Court of India passes another order lifting the extension. Moreover, the Indian IP office has also issued a public notice whereby it was notified that all deadlines to file any reply/document, etc. stand extended till further orders of the Supreme Court.
On 24 March 2020, the Ministry of Home Affairs ordered the first round of countrywide lockdown of all establishments pan-India except those providing health care and other essential services. Consequently, all IP Offices in India were asked to close their operations from 25 March 2020. The IP offices have now resumed work in accordance with the gradual lifting of the lockdown and most of the IP applications are being processed at a regular pace. The online filing services of the Indian IP Offices have also remained unaffected and were functional even during the complete lockdown.
It is noteworthy that despite the challenges, progressive steps are being taken by the relevant authorities, keeping in mind the difficulties in the present times, to not only prevent the legal and IP systems from stalling, but to also improve their efficiency and reliability for all times to come.
With regard to holding hearings through video conferencing, the Supreme Court of India on 6 April 2020 issued a number of directions to Courts across the country to facilitate hearing of cases through this mode, a step which the Court said was essential to ensure that court premises do not contribute to the spread of COVID-19. The Indian IP offices and the Intellectual Property Appellate Board have also systematically resorted to conducting hearings through video conferencing in all the matters. The Delhi High Court which also hears and adjudicates on a high number of IP suits decided to resume and restore its own functions and those of the Courts subordinate to it in June, which is observed as summer vacation. This extra step was considered to mitigate the accumulation of pending cases. Most of the courts such as Delhi High Court and Bombay High Court and other courts of India which deal with IP matters are actively taking up IP infringement cases and are regularly issuing orders and judgments.
Although the filing of new patent and trademark applications has largely remained unaffected by COVID-19, patent filing from local industries has increased to some extent. Similarly, filing of the national phase of PCT applications by foreign companies has also almost remained unaffected. There has been an increase in the filing of trademark applications in respect of pharmaceutical, health and hygiene products, but overall the numbers are almost the same as they were in the previous year.
The pandemic led lockdowns, which also resulted in the closure of a majority of physical markets that led to a large number of people in urban and semi-urban areas moving to e-commerce platforms. This caused an increase in the number of sellers enlisting their goods on e-commerce platforms including counterfeits. As such, the enforcement activities have also shifted to the e-commerce space and in the past few months, more such actions in the e-commerce space directed towards health & hygiene products, pharmaceuticals and other related products have been witnessed. The platform owners, however, have been quite cooperative in pulling down the listing of counterfeiters once notified by the rights owners.
It is noteworthy that despite the challenges, progressive steps are being taken by the relevant authorities, keeping in mind the difficulties in the present times, to not only prevent the legal and IP systems from stalling, but to also improve their efficiency and reliability for all times to come.
Manisha Singh (Partner) & Omesh Puri (Partner)
www.lexorbis.com
LexOrbis is a full service Intellectual Property law firm extending IP and Legal services to global corporations, research institutions, technology driven industries and government entities in India and assisting Indian business to procure and protect Intellectual IP Rights across the globe. The firm offers an exceptional capability at the best cost to quality matrix in the region. With over 150 IP professionals including Lawyers and Patent agents, the firm serves IP and legal needs of businesses of all sizes and structures with accuracy, in time bound manner and with creative solutions to most complex legal and techno-legal issues.
While there are various methods for raising capital, preferential allotment has been the most preferred route (especially for listed companies) to raise funds from investors on private arrangement basis as it involves lesser regulatory formalities and helps companies receive investment in a relatively short span of time.
However, listed companies are required to comply with, among others, the pricing norms set out under Regulation 164 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).
The manner for determining the issue price for preferential allotment of equity shares of a listed company depends on whether the company’s equity shares are frequently traded[1] or not.
In case of a listed company whose shares are frequently traded, the issue price cannot be less than the higher of the average of the weekly high and lows of the volume weighted average prices of the related equity shares during (a) 26 weeks or (b) 2 weeks, preceding the relevant date (being the date 30 days prior to the date on which the meeting of shareholders is held to consider the proposed preferential issue).
In addition to the pricing norms, an investor proposing to invest in a listed company has to be mindful of the open offer norms set out under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code) which would trigger in the case of the following acquisitions: (a) 25% or more equity shares or voting rights in a listed company, and/or (b) control of a listed company. Further, acquisition beyond 5% equity shares or voting rights in a financial year by a person holding 25% or more but less than 75% voting rights attracts the open offer requirement.
While several listed companies (especially stressed companies) were looking to raise capital from potential investors so as meet their funding requirements and in some cases, to arrive at a resolution plan with the lenders outside the insolvency and bankruptcy framework, the pricing norms and the mandatory open offer norms were acting as deterrents in the fundraising plans of these listed companies - especially in view of the falling stock prices on account of the economic impact caused by COVID-19.
In order to help listed companies tide over the liquidity crisis created by the COVID-19 pandemic, the Securities and Exchange Board of India (SEBI) has notified a series of relaxations/reforms.
We have, in this article, set out our analysis of various reforms and relaxations announced by SEBI.
On 22 June 2020, SEBI notified the much awaited relaxations in the pricing norms for preferential allotment and the mandatory open offer rules[3].
Increase in creeping acquisition limit for promoters
The Takeover Code permits a person holding 25% or more but less than 75% voting rights in a listed company, to acquire an additional 5% voting rights in a financial year without triggering the open offer requirement. Any acquisition beyond 5% in a financial year by such shareholder would trigger the mandatory open offer requirement.
In order to encourage promoters to infuse capital in listed companies, SEBI amended the Takeover Code[2] to increase the creeping acquisition limit for promoters from 5% to 10% without making an open offer to the public shareholders.
However, additional acquisition (beyond 5% but up to 10%) must be made:
Relaxations for stressed listed companies
On 22 June 2020, SEBI notified the much awaited relaxations in the pricing norms for preferential allotment and the mandatory open offer rules[3]. However, these relaxations are available in respect of investments in such listed companies which qualify the criteria of stressed company (Eligible Stressed Company)[4] as prescribed by SEBI.
A new Regulation 164A has been inserted in the ICDR Regulations to allow an Eligible Stressed Company who shares are frequently traded to make a preferential allotment of equity shares at a price which can be determined on the basis of 2 week average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognised stock exchange.
At the same time, a new Regulation 10 (2B) has been inserted in the Takeover Code to provide an exemption from the open offer norms set out under Regulation 3(1) (i.e., acquisition of 25% or more shares or voting rights) and Regulation 4 of the Takeover Code (i.e., acquisition of control) to investors investing in an Eligible Stressed Company by way of preferential allotment pursuant to Regulation 164A of the ICDR Regulations.
This exemption from open offer would also be applicable to an Eligible Stressed Company with infrequently traded shares provided that such Eligible Stressed Company complies with other conditions set out in Regulation 164A and the price of equity shares to be allotted on preferential basis is determined as per Regulation 165 of the ICDR Regulations (i.e., after taking into account the valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies).
However, the relaxed pricing norms as set out in Regulation 164A (and consequent exemption from open offer rules) has certain riders, including that the preferential allotment cannot be made to the promoters/promoter group entities and/or certain other categories of persons including undischarged insolvent, wilful defaulters and fugitive economic offenders.
Any allotment made pursuant to Regulation 164A shall be locked-in for a period of three years. Additionally, the resolution for such preferential allotment must have the blessings of the majority of minority shareholders (i.e., public shareholders excluding the proposed investor) of the relevant Eligible Stressed Company. In case an Eligible Stressed Company does not have any identifiable promoter, then the resolution must be approved with 3/4th majority of the shareholders.
The proceeds of such preferential issue cannot be used for repayment of loans, if any, taken from the promoters/promoter group/group companies. Further, in order to monitor the use of proceeds, a monitoring agency (which should be a public financial institution or a scheduled commercial bank, not related to such Eligible Stressed Company) would need to be appointed by the relevant Eligible Stressed Company.
The pricing norms for preferential allotment and mandatory open offer requirements have often proved to be roadblocks in the resolution of stressed entities outside the IBC framework.
Relaxations for other listed companies
While SEBI had relaxed the creeping acquisition limit for the promoters (for all listed companies) as well as the pricing norms and open offer rules for Eligible Stressed Companies in case of allotment to non-promoter entities, no relaxation was available from pricing norms in respect of the investments to be made (a) by promoters, or (b) in non-Eligible Stressed Companies.
Keeping in mind the representations received from several stakeholders, SEBI further amended the ICDR Regulations[5] to provide temporary relaxations to all listed companies from pricing norms in case of preferential allotment.
By way of the amendments, SEBI has inserted a new Regulation 164B in the ICDR Regulations which stipulates an optional pricing methodology for preferential issue of shares or specified securities and can be availed in respect of preferential allotment to be made till 31 December 2020.
As per the optional pricing method, listed companies (having frequently traded equity shares) can now allot equity shares on preferential basis at a price being not less than higher of the average of the weekly high and lows of the volume weighted average prices of the related equity shares during (a) 12 weeks (as against 26 weeks stipulated under Regulation 164), or (b) 2 weeks, preceding the relevant date. The listed companies would have the option to determine the issue price either as per the existing pricing norms set out in Regulation 164 or in accordance with the revised pricing norms set out in Regulation 164B.
However, a lock-in period of three years would apply in case the preferential allotment is made using the pricing methodology set out in Regulation 164B of the ICDR Regulations. Further, all allotments arising out of the same shareholders’ approval shall follow the same pricing method.
In this way, the relaxations announced by SEBI for stressed listed companies are likely to enable such entities to find friendly investors.
Our thoughts
In view of the complete ban on the initiation of fresh insolvency proceedings in respect of any default arising on or after 25 March 2020 and six months thereafter (which may be further extended to 1 year), the option for resolution of stressed assets under the Insolvency and Bankruptcy Code, 2016 (IBC) would no longer be available in cases where default arises during the aforementioned period of suspension.
The pricing norms for preferential allotment and mandatory open offer requirements have often proved to be roadblocks in the resolution of stressed entities outside the IBC framework. While SEBI had earlier proposed (in the consultation paper issued on 22 April 2020) to exempt the acquisition of 25% or more shares or voting rights from the mandatory open offer norms, the final amendments have provided an exemption from the open offer requirement in case of acquisition of control as well and thus, paved the way for strategic investments in such Eligible Stressed Companies.
In this way, the relaxations announced by SEBI for stressed listed companies are likely to enable such entities to find friendly investors. This would also promote the friendly resolution of stressed assets outside the IBC framework which would, in turn, help the promoters retain the ownership and control of the stressed company, unlike the IBC where the promoters are removed from the position of control of the distressed entities.
Nonetheless, the relaxations/reliefs announced by SEBI are likely to provide some respite and flexibility to the listed companies in attracting 'white knights' which would, in turn, spur innovative restructuring and M&A activities in listed companies.
Further, SEBI appears to have taken a leaf from section 29A of the IBC since the relaxations from pricing norms and open offer rules for Eligible Stressed Companies would not be available in case the preferential allotment is made to promoters/promoter entities or wilful defaulters, undischarged insolvents etc.
However, in case of listed companies other than the Eligible Stressed Companies, while temporary relaxations have been granted from pricing norms, SEBI has not provided any relief from the mandatory open offer norms set out under the Takeover Code (other than providing a relaxation in the creeping acquisition limit). This would certainly impact the size and terms of investment which a friendly investor can make in such listed companies. Further, the investment made by non-promoter investors pursuant to the optional pricing norms is required to be locked in for a period of 3 years as against 1 year which would be applicable in case pricing norms set out under Regulation 164 are followed. This condition could also throw a challenge for the listed entities in raising funds from investors.
Nonetheless, the relaxations/reliefs announced by SEBI are likely to provide some respite and flexibility to the listed companies in attracting 'white knights' which would, in turn, spur innovative restructuring and M&A activities in listed companies.
Disclaimer: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to herein. This publication has been prepared for information purposes only and should not be construed as legal advice. Although reasonable care has been taken to ensure that the information in this publication is true and accurate, such information is provided ‘as is’, without any warranty, express or implied, as to the accuracy or completeness of any such information.
Authors:
Vineet Aneja
Managing Partner
E: vineet.aneja@clasislaw.com
Dinesh Gupta
Senior Associate
E: dinesh.gupta@clasislaw.com
[1] "frequently traded shares" means the shares of the issuer, in which the traded turnover on any recognised stock exchange during the 12 calendar months preceding the relevant date, is at least 10% of the total number of shares of such class of shares of the issuer:
Provided that where the share capital of a particular class of shares of the issuer is not identical throughout such period, the weighted average number of total shares of such class of the issuer shall represent the total number of shares.
[2] Text of the relevant SEBI notification can be accessed at the following link:
[3] Text of the relevant SEBI notifications can be accessed at the following links:
[4] A listed company would need to satisfy any two of the conditions set out below:
[5] Text of the relevant SEBI notification can be accessed at the following link:
COVID-19 pandemic, apart from the human cost, has had a severe economic impact worldwide. The Indian economy has not been immune from the economic hit and is currently facing one of the worst economic slumps.
In order to combat the economic impact of the pandemic on the Indian economy, the Indian Government recently unveiled various reforms and economic relief packages, and the defence sector has been one of the biggest beneficiaries.
As part of the economic relief package announced by the Finance Minister, the following key measures were announced for the defence sector:
(a) proposal to increase the foreign direct investment (FDI) limit from the existing 49% to 74%, under the automatic route,
(b) notifying a list of weapons/platforms the import of which shall be banned, with year wise timeline,
(c) indigenisation of imported spares, and
(d) separate budget provisioning for domestic capital procurement.
Additionally, the draft of the new Defence Procurement Policy (DPP) 2020, which was launched before the economic reform package was announced by the Finance Minister, provides additional relaxations, primarily in relation to the offset policy1.
It is expected that the reforms announced as part of the economic relief package as well as the proposed amendments set out in the draft of the new DPP 2020, both of which aim at boosting domestic defence manufacturing sector, and reducing reliance on imports as part of the 'Make In India' initiative, will provide much need impetus to the domestic defence industry.
We have, in this article, set out our views on the various reforms announced in relation to the defence sector.
Increase in FDI limit
The extant FDI policy permits 100% FDI in the defence manufacturing sector2. However, while FDI up to 49% is permitted under the automatic route, any FDI beyond 49% requires prior Government approval. Additionally, any investment beyond 49% is subject to the condition that such investment must result in access to modern technology3.
Paying heed to the long pending demand of foreign original equipment manufacturers (OEMs), the Government of India has proposed to increase FDI in defence manufacturing under the automatic route from the existing ceiling of 49% to 74%.
With equity ownership in Indian JVs capped at 49%, the foreign 'OEMs' currently were not able to exercise ‘control’, and therefore, were reluctant to transfer the sensitive and cutting edge technologies to their Indian joint ventures (JVs). However, the revised limit of 74% will now enable foreign OEMs to own and control their Indian JVs. It is expected that the ability to exercise ownership and control will entice major global players to set up a manufacturing base in India.
While this is a welcome step, in case the revised FDI limit will continue to be subject to the sector specific conditionality’s, then the objective of increasing the FDI limit may not achieve the desired result. This is on account of the fact that the requirement of prior Government approval triggers in case of foreign investment in an Indian company (not seeking industrial licence), if such foreign investment results into (a) change in ownership pattern of such Indian company, or (b) the transfer of stake by existing investor to a new foreign investor in such Indian company. Though the details of the proposed amendment in FDI policy are not currently available, it remains to be seen whether the said requirement of prior Government approval would also be applicable in case the foreign JV partners propose to increase their stake in existing Indian JVs up to the revised limited of 74% (resulting into a change in ownership pattern of the concerned Indian JV).
Banning the import of weapons/platforms
While India is the second largest importer of arms and armaments, it occupies the 23rd position in the list of defence exporters. As per publically available reports and statistics, around 60-65% of the country’s military requirements are met by imports. This not only places a huge cost on the exchequer but dependence on import has hampered the growth of the domestic defence manufacturing sector.
Intending to boost the domestic sector, the Government has announced that it will issue a negative import list for weapons/platforms. The list will come with a year wise timeline.
This step is likely to result in two-fold benefits – one, reduction in import bills, and second, encouragement to Indian entities engaged in the manufacturing of defence products to indigenously design, develop and manufacture modern defence equipment.
Indigenisation of imported spares
Another important step towards reducing import cost is the policy announcement regarding the indigenisation of imported spares.
While reducing the ever-growing cost of imports is one of the reasons behind this move, another (and arguably more critical) reason is the fact that since most of the weapon and systems being used by the Indian armed forces are of foreign origin, lack of timely availability of spares is a critical security concern as it impacts maintenance and servicing of the weapons and systems.
In view of the above and to ensure that the operational and battle readiness is not hampered due to lack of spares the Government took the decision to rope in the domestic defence industry to manufacture the spares. The decision to course spares locally is expected to also entice foreign OEMs and suppliers to set up facilities in India for manufacturing and supply of spares to Indian armed forces.
Separate budget provisioning for domestic capital procurement
The Government’s announcement of having a separate budget for domestic procurement, along with a time-bound defence procurement process, is expected to act as a confidence booster to the domestic defence sector by ensuring a demarcated allocation of funds to be used specifically for local procurements.
Key changes proposed in the new DPP 2020
The objective of the new DPP 2020 is to promote indigenous design capacity and ensure higher localisation. The effective implementation of the new DPP 2020 would increase the role of the domestic industry, especially the private sector, in defence production.
The key changes introduced in the draft DPP 2020 are as follows:
(a) Addition of a provision for leasing of weapons and systems – apart from the cost aspects, this new provision will enable the armed forces to acquire weapons and systems the sale of which is prohibited by the Government of the country where the relevant foreign OEM is situated. This will be useful for military equipment not used in actual warfare like transport fleets, trainers, simulators, etc.;
(b) Addition of price variation clause – a new clause, which will be applicable to all cases where the total cost of the contract is more than INR 1,000 crore (approx. USD 132 million) and the delivery schedule exceeds 60 months, would be inserted in procurement contracts to cater to the escalation of price from the last date of submission of bids till the finalisation of the contract;
(c) Hike in the indigenous content ratio – in order to support the ‘Make in India’ initiative, the indigenous content ratio stipulated for various categories of procurement has been increased by around 10%;
(d) Addition of a provision for long term product support – as per this provision, the OEMs would need to provide product support, including the supply of spares and management of obsolescence for the life of the product (minimum 30 years from the date of delivery of the last aircraft by the production agency); and,
(e) Changes to the off-set policy – as per the extant DPP 2016, FDI in JVs with Indian enterprises for the manufacture and/or maintenance of eligible products and provision of eligible services is permitted for offset. However, the new DPP 2020 proposes that investment in defence manufacturing (whether through FDI or direct investment or JVs or through the non-equity route for co-production, co-development and production or licensed production of defence products) would be eligible for offset. Further, DPP 2020 has introduced higher offset multipliers for transfer of technology, and procurements from MSMEs.
Concluding remarks
While the measures announced by the Government have been welcomed, there are a number of other aspects which need to be resolved.
Public sector undertakings (despite their poor track record as regards time and cost overruns, inefficiencies and poor financial performance) have been the preferred suppliers for big-ticket purchases. Confidence would need to be given to the private players that the Government would place firm orders for significant quantities in order to make their investments viable.
Further, a number of changes would need to be made to the DPP so as to align with the changes announced. For example, while DPP 2020 does recognise Indian subsidiaries of the foreign OEMs in relation to 'Buy (Global-Manufacturers in India)', a new procurement category introduced in DPP 2020 to promote 'Make in India', the existing criteria for selection of “Indian vendor”, which is restricted to entities owned and controlled by companies/individuals resident in India, would need to be revised to include Indian subsidiaries of foreign defence manufacturers for other procurement categories also in view of the proposed FDI liberalisation.
Only time will tell how far these reforms go towards achieving the intended objectives.
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Disclaimer: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to herein. This publication has been prepared for information purposes only and should not be construed as legal advice. Although reasonable care has been taken to ensure that the information in this publication is true and accurate, such information is provided ‘as is’, without any warranty, express or implied, as to the accuracy or completeness of any such information.
Gaurav Wahie, Partner Dinesh Gupta, Senior Associate
1 As per the offset policy foreign suppliers of defence equipment are required to invest a percentage of the order value in India, by various options such as capital investment and/or technology transfer.
2Given the sensitive nature of the defence sector, investment from Pakistan is prohibited. Further, pursuant to a recent press note issued on 17 April 2020 (Press Note 3 of 2020), foreign investment (in any sector) from citizens/residents as well as entities incorporated in countries which share a land border with India now require prior approval of the Government.
3There is lack of clarity on whether modern technology would be modern compared to technology available in India or technology available globally.
What are the measures that the Indian Government has proposed to protect workers/ employees in the light of the COVID-19 pandemic?
In a very significant move, the Prime Minister of India on 24 March 2020 announced a 21-day nation-wide lockdown with effect from 00:00 hours on 25 March 2020. The initial lockdown has now been extended up to 3 May 2020 by the Prime Minister, and the Ministry of Home Affairs has directed that the lockdown measures stipulated earlier continue during this period. This lockdown of nearly one-fifth of the world’s population is to ensure effective social distancing to prevent the spread of Covid-19. While the lockdown is undoubtedly essential to contain the pandemic, the impact on businesses and the economy cannot be ignored. In this regard, the Finance Minister, Ms Nirmala Sitharaman, on 26 March 2020 announced a relief package of INR 1.70 Lac Crore, under the Pradhan Mantri Garib Kalyan Yojana, especially for the underprivileged and poor population of the country. This includes the Government contributing both the employer’s and employee’s share of the provident fund contributions for the next three months in respect of the establishments/organisations with up to 100 workers, where a majority of the employees draw a monthly salary of INR 15,000 or less.
Further, the Employees’ Provident Fund Scheme, 1952 has been amended to include pandemic as a reason to allow withdrawal up to 75% of the non-refundable advance standing to the credit of the employees in the provident fund accounts or three months basic wages and dearness allowance, whichever is lower. Medical insurance cover of INR 50 Lacs (per person) has also been provided for every medical professional, health worker including inter alia nurses, doctors, technicians, paramedics, cleaning staff, ASHA workers, sanitation workers etc. State governments have been instructed to utilise the amounts accumulated in the building and other construction workers welfare fund for providing relief and economic support to the workers in light of the Covid-19 crisis.
Are there any employment law issues that should be kept in mind while implementing work from home models?
Given the lockdown, most employers have been asked to have their employees work from home where possible. The key employment law considerations that employers should keep in mind when implementing work from home are:
Hours of Work, Productivity and Performance Testing
The concept of working from home is not specifically regulated or governed by statute. Therefore, in the absence of a specific statute, the employment laws that would otherwise apply to an employee when they are working from the employer's establishment would continue to apply and an employer would have to be mindful that employees do not work beyond their regular working hours and adhere to relevant overtime requirements. In relation to performance tracking and productivity, the employer will now have to adapt the usual methods to work from home. This will include using applications to monitor their employees working remotely and requiring the employees to periodically provide summaries to their managers of the work that they are doing.
Confidentiality and Data Security
One of the primary considerations when it comes to allowing employees to work from home is confidentiality and data security. Therefore, it is recommended that employers take additional data security measures to ensure that their IT infrastructure and resources are protected. Certain employers have resorted to geo-tagging of their devices to ensure that their data security and confidentiality is not breached.
OSP Licences
To facilitate employers to allow employees to work from home, the Department of Telecommunications has, through circular dated 13 March 2020[1], issued certain relaxations in the terms and conditions prescribed for Other Service Providers (OSPs), with respect to the ability of their employees to work from home. The exemptions/relaxations were available until 30 April 2020. This circular inter alia exempts OSPs from the requirement to pay a security deposit and have an agreement to enable work-from-home options or seek prior permission to allow work from home. Further, OSPs have been exempted from the requirement of having a secured VPN from an authorised service provider. OSPs may now use secured VPNs configured using ‘static IP’ addresses by themselves to enable interconnection between the home agent position and the OSP centre with pre-defined locations.
Is India doing enough for the employment sector? What more could be done?
Given the lockdown and the general economic distress globally and in India, employers across various sectors are facing a significant cash crunch due to the lack of production and/or consumption by customers, and the ability to collect payments. This has lead many businesses to examine various cost-cutting measures to ensure that they are able to sustain their business once the lockdown is lifted. These measures would include reduction in their overheads, which includes employee salaries. In this regard, the Central Government and various State Governments have issued directives and advisories encouraging/requiring employers not to terminate their employees and pay full wages to them. While this is a commendable step and would ensure job security during the lockdown, it would have an adverse impact in the long term. Due to these directions and advisories, employers may not be able to undertake any cost-cutting measures in the short term and will have no option but to exhaust their reserves, potentially resulting in drastic steps such as winding-up businesses or looking at major restructuring in the long term. This is hazardous for the economy and employment. Therefore, it would be important for the Central and state governments to provide clarity and uniformity with regard to the directions/ advisories to employers and to allow employers, in a regulated manner, to negotiate and arrive at an understanding with their employees to allow for some short term measures such as a temporary reduction in wages or providing for employees to go on leave to reduce the liability of the company with a longer term view of retaining jobs.
Ms Nohid Nooreyezdan
Senior Partner
AZB House | Peninsula Corporate Park | Ganpatrao Kadam Marg | Lower Parel | Mumbai 400 013
Tel: + 91 22 6639 6880 | Fax: + 91 22 6639 6888 | www.azbpartners.com
As a Senior Partner based out of Mumbai, I have been with the Firm since its inception and head up the Employment Law practice. Being in the profession for over 24 years, I have advised clients from various sectors on the rapidly evolving nuances of Indian employment law.
AZB & Partners is one of few firms in the country with a dedicated Employment Law practice, with a focus on the same for more than two decades. Having witnessed and experienced the impact of globalisation and technological advancement on workforce engagement and workplace dynamics, the Firm has provided pragmatic advice and solutions to clients on the application of India’s complex employment law regime, bearing in mind the organisation’s practices, objectives and culture. In addition to our robust Employment Law practice, our industry-specific experts ensure that our advice is holistic, taking into account the nuances of various sectors. The Firm has strong Litigation, Tax and Intellectual Property practices, which provide the required support to ensure that our advice is thorough and complete. The Firm also has excellent working relations with specialized labour counsels and a Compliance and Investigation practice, bolstering the Employment Law practice, especially with respect to investigations around misconduct by senior management and workplace sexual harassment.
[1] https://dot.gov.in/sites/default/files/Relaxation%20inT%26C%20of%20OSP%2013.3.20.PDF
While sub-section 1 to 10 of section 230 has been operative since 2016, the MCA, after a gap of almost three years, has finally notified some of the key provisions under section 230. These notified provisions pertain to the takeover of unlisted companies by majority shareholders (through squeezing out of minority shareholders) under a scheme of compromise or arrangement. Takeover offers with respect to listed companies in India will continue to be governed by the relevant regulations framed by the Securities and Exchange Board of India.
Section 230(11) provides that any scheme of compromise or arrangement involving unlisted company can include a takeover offer made in a prescribed manner. Further, section 230(12) permits any party aggrieved by the takeover offer to present its grievances with respect to the takeover offer before the National Company Law Tribunal (“NCLT”) by filing an application in a prescribed manner. The MCA, simultaneously with the commencement of sections 230(11) and 230(12) of CA 2013, also notified the consequential amendments in the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“C&A Rules”) and the National Company Law Tribunal Rules, 2016 (“NCLT Rules”) which deals with the procedural aspects of the takeover offer.
As per the C&A Rules, an application for a takeover would need to contain, amongst other aspects, the report of a registered valuer disclosing the details of the valuation of the shares proposed to be acquired by the majority shareholders.
The recently notified provisions allow the majority shareholder(s) holding not less than 3/4th of the total shares (i.e., equity shares of the company carrying voting rights, and includes any securities, such as depository receipts, which entitles the holder thereof to exercise voting rights) in an unlisted company to make a takeover offer for acquiring any part of the remaining shares of the company, through an application for the arrangement to be submitted with the NCLT.
As per the C&A Rules, an application for a takeover would need to contain, amongst other aspects, the report of a registered valuer disclosing the details of the valuation of the shares proposed to be acquired by the majority shareholders. The C&A Rules further provides that the valuation report should be prepared by a registered valuer after taking into account (a) the highest price paid by any person or group of persons for the acquisition of shares of the company during last 12 months, and (b) the valuation parameters including return on net worth, the book value of shares, earning per share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies. It appears that the provisions regarding valuation of shares have been inserted in the rules for the purpose of ensuring a fair exit price to the minority shareholders. However, considering that valuation has always been a debatable issue which depends on a number of factors, including sound judgment of the concerned valuer, it remains to be seen if the above guidelines would be helpful in ensuring a fair exit price to the minority shareholders.
As far as protection of minority interest is concerned, it appears from the C&A Rules that the only protection available to the minority shareholders would be payment of a fair price for the shares held by them in the company.
The C&A Rules also cast an obligation on the majority shareholders proposing to acquire the shares under the takeover offer to deposit a sum equivalent to at least 50% of total consideration amount of the takeover offer in a separate bank account. It is evident that this has been done with a view to secure the consideration to be paid to the minority shareholders. However, considering that substantial time would be involved in the disposal of the application by the NCLT, this may lead to a liquidity crunch for the shareholders proposing to acquire the shares under the takeover offer as the funds would remain blocked in a separate bank account.
It is pertinent to note that the C&A Rules by way of an explanation provides that the provisions of section 230(11) of the CA 2013 including the rules made thereunder would not apply to any transfer or transmission of shares through a contract, arrangement or succession, as the case may be, or any transfer of shares made in pursuance of any statutory or regulatory requirement. Therefore, in effect, any transfer of shares under a private arrangement would continue to be governed as per the contractual terms agreed between the parties and shall be outside of the purview of section 230(11) of the CA 2013.
The CA 2013 also provides other modes through which exit of minority shareholders can be ensured from the company, such as through selective reduction of capital under section 66 of the CA 2013 or through the purchase of minority shareholding under section 236 of the CA 2013.
As far as protection of minority interest is concerned, it appears from the C&A Rules that the only protection available to the minority shareholders would be payment of a fair price for the shares held by them in the company. While section 230(12) and rules made thereunder provides an avenue to the parties aggrieved from the takeover offer to put forward their grievances before the NCLT, it is not clear as to what relief that they would be able to secure from the NCLT except a payment of fair price for their shareholding in the company. This clearly establishes the rule of majority under the CA 2013, whereby the shareholders holding the majority interest in the company would be able to push out the minority upon payment of a fair price. It would therefore now be more important for minority shareholders to have appropriate protective covenants in the shareholders' agreement/ articles of association of the company. This can help in ensuring that the provisions of section 230(11) are not utilised by the majority shareholders for forcefully removing the minority shareholders from the company.
To conclude, it can safely be said that commencement of sections 230(11) and 230(12) and the rules thereunder is a welcome move which will certainly facilitate the purchase of the minority interest in the company.
The CA 2013 also provides other modes through which exit of minority shareholders can be ensured from the company, such as through selective reduction of capital under section 66 of the CA 2013 or through the purchase of minority shareholding under section 236 of the CA 2013. However, the commencement of section 230(11) would certainly provide an additional measure for ensuring the exit of the minority shareholders. Each of the aforesaid modes has its separate process and preconditions, and the mode to be opted out for the purchase of minority interest would need to be decided on a cases to cases basis. The factors which would need to be kept in mind while selecting a mode for acquisition of minority interest in a company would include the timelines for completion of acquisition of the minority interest, the tax implication arising out from the transaction and the stamp duty, if any, to be paid on the transaction value. One of the important aspects which single out the takeover offer under section 230(11) of the CA 2013, is that all other modes for purchase of minority interest are required to be followed as a separate process under the CA 2013. However, the takeover offer under section 230(11) can form a part of a scheme of compromise or arrangement proposed by the company or its members or creditors and is not required to be followed separately.
To conclude, it can safely be said that commencement of sections 230(11) and 230(12) and the rules thereunder is a welcome move which will certainly facilitate the purchase of the minority interest in the company. However, the protection which it will offer to the minority shareholders and the nature of their grievances which would be taken into account by the NCLT while adjudicating upon the application involving takeover offer would only become clear with time.
For any clarification or further information, please contact:
Neetika Ahuja
Associate Partner
E: neetika.ahuja@clasislaw.com
Vikrant Anand
Senior Associate
E: vikrant.anand@clasislaw.com
Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020
On 3 February 2020, the Central Government notified the provisions of Section 230(11) and (12) of the Companies Act, 2013 which has come into force from 3 February 2020. The provisions enable takeover of a company by way of a scheme of arrangement or raise grievances in this relation, pursuant to an application being made to the National Company Law Tribunal (NCLT). In relation to this, the following notifications have also been issued, with respect to the procedural aspects for making the application(s) under Section 230(11) and (12):
Further, in terms of sections 230(11) and 230(12) of the Companies Act, 2013 (now notified), the majority shareholders of a company have another option in addition to options already available (such as reduction of share capital under Section 66 of the Companies Act and purchase of minority shareholding under Section 236 of the Companies Act) to achieve the exit of minority shareholders.
Common Application Form (CAF) for Foreign Portfolio Investors
On 4 February 2020, the Securities and Exchange Board of India (“SEBI”) issued a notification that the applicants seeking Foreign Portfolio Investors (FPIs) registration shall be required to duly fill CAF and ‘Annexure to CAF’ and provide supporting documents with the applicable fees for SEBI registration and issuance of Permanent Account Number (PAN). Further, designated depository participants (DDP) may accept in-transit FPI registration applications, for a period of 60 days from 4 February 2020 as per the form as prescribed in operational guidelines issued on 5 November 2019. This notification was issued in furtherance of the Government of India’s (GoI) earlier notification dated 27 January 2020 notifying the Common Application Form (CAF) for the purpose of:
Micro, Small and Medium Enterprises (MSME) Sector – Restructuring of Advances
On 11 February 2020, the Reserve Bank of India (“RBI”) extended the timeline for a one-time restructuring of existing loans granted to MSMEs classified as ‘standard’, without a downgrade in the asset classification, subject to the following certain conditions:
Companies (Registration Offices and Fees) Amendment Rules, 2020
On 18 February 2020, the MCA, notified the Companies (Registration Offices and Fees) Amendment Rules, 2020 which amends the Companies (Registration Offices and Fees) Rules, 2014, pursuant to which the existing Form GNL-2 (i.e. the form to be filed for submission of documents with the Registrar of Companies, for which no e-form is prescribed under the various rules under the Companies Act, 2013) has been substituted with a revised Form GNL-2.
Companies (Incorporation) Amendment Rules, 2020
The MCA, on 18 February 2020, notified the Companies (Incorporation) Amendment Rules, 2020 (“Incorporation Amendment Rules”) to amend the Companies (Incorporation) Rules, 2020. With effect from 23 February 2020, the Incorporation Amendment Rules has inter alia introduced the following amendments:
Companies (Auditor's Report) Order, 2020
On 25 February 2020, the MCA notified the Companies (Auditor's Report) Order, 2020 (“Order”) in supersession of the Companies (Auditor's Report) Order, 2016. The Order provides that every report made by the auditor under section 143 of the Companies Act, 2013 on the accounts of every company audited by him, for the financial years commencing on or after 1 April 2019, shall additionally contain the matters specified under this Order. The key matters to be included in the auditors’ report are mentioned below:
Companies (Appointment and Qualification of Directors) Amendment Rules, 2020
On 28 February 2020, the MCA notified the Companies (Appointment and Qualification of Directors) Amendment Rules, 2020 (“Appointment Amendment Rules”) which amends the Companies (Appointment and Qualification of Directors) Rules, 2014 (“Appointment Rules”). The Appointment
Amendment Rules have introduced the following key amendments:
However, the Appointment Amendment Rules have introduced an additional exception for individuals who have served as directors or key managerial personnel for a minimum period 10 years, as on the date of inclusion of their names in the Databank, in body corporates listed on a recognized stock exchange. Further, it has been clarified that individuals acting as directors or key managerial personnel in two or more companies or bodies corporate (as opposed to only companies, as provided earlier) at the same time will be counted only once for the purpose of determination of the aforesaid 10 year period.
Clarification on prosecutions filed or internal adjudication proceedings initiated against independent directors, non-promoters and non-KMP/ non-executive directors
On 2 March 2020, the MCA issued a circular clarifying the aspects with respect to the initiation of prosecution against directors of Indian companies, which inter alia provides for the following:
(a) Whole-time director (WTD) and key managerial personnel (KMP) associated with the day to day functioning of the company shall ordinarily be liable for the defaults of the company. In absence of WTD/ KMP, such director or directors who have expressly given their consent for incurring liability (by filing intimation in e-form GNL-3 with the MCA) would be liable for defaults of the company. However, in a case wherein the penal provisions under the Companies Act, 2013 (Act) provides that a specific director, or officer, or any other person would be accountable for the default, in such case prosecution would be initiated by the Registrar of Companies (“ROC”) only against the concerned director, or officer, or any other person accountable for the default and not against the other directors/ officers.
(b) Independent directors or non-executive directors shall not be arrayed in any civil or criminal proceedings under the Act, unless the default has occurred with their knowledge, attributable through board process, and with their consent or connivance or where they had not acted diligently as per the provisions of the Act.
(c) All the instances of filing of information/records with the registry, maintenance of statutory registers or minutes of the meetings, or compliance with the orders issued by the statutory authorities (including NCLT), are not the responsibility of independent directors or non-executive directors. Accordingly, independent directors and non-executive directors would not be ordinarily liable for the default of the company, unless any specific requirement is provided in the Act or in the orders of any statutory authority. However, where there are no WTDs and KMPs in the company, non-executive directors may be liable for the defaults of the company.
At the time of serving notices to the company during an investigation, inquiry, or an adjudication proceeding, necessary documents may be sought by the ROC so as to ascertain the involvement of the concerned officers of the company. In case the lapses are attributable to decisions taken by the board or its committees, all care would need to be taken by the ROC so as to ensure that any proceedings are not unnecessarily initiated against the independent directors or non-executive directors, except in cases where sufficient evidence exists to the contrary.
Cabinet approves the Foreign Direct Investment policy on Civil Aviation
On 2 March 2020, the Union Cabinet approved to amend the extant Foreign Direct Investment (FDI) Policy to permit foreign investment(s) in M/s Air India Ltd by non-resident Indians (NRIs), who are Indian Nationals, up to 100% under the automatic route. As per the present FDI Policy, 100% FDI is permitted in scheduled Air Transport Service/Domestic Scheduled Passenger Airline (up to 49% under automatic route and Government route beyond 49%). However, for NRIs, 100% FDI is permitted under automatic route in Scheduled Air Transport Service/Domestic Scheduled Passenger Airline.
The amendment in FDI policy will permit foreign investment in M/s Air India Ltd at par with other Scheduled Airline Operators i.e. up to 100% in M/s Air India Ltd by those NRIs, who are Indian Nationals. Further, this amendment to the FDI Policy is meant to liberalize and simplify the FDI policy to provide ease of doing business in the country leading to largest FDI inflows and thereby contributing to the growth of investment, income and employment.
The budget for FY 2020-21 is woven around three prominent themes that are - (a) aspirational India (b) economic development, and (c) a caring society.
During her speech, the Finance Minister stated that it is the Government’s intention to make India a five trillion dollar economy by 2024. Towards this end, the Government proposed a number of reforms with a strong focus on investment in infrastructure development, digital economy and employment generation in medium and small enterprises by stimulating growth, promoting digitisation, transparency and simplifying tax administration.
We have set out below the key announcements made during the budget speech.
Regulatory:
Corporate commercial:
Tax concession for foreign investments made by foreign governments:
Start-ups & Micro, Small and Medium Enterprises (MSME):
Banking and Finance:
Education and skill development:
Make in India initiative:
To push the “Make in India” initiative, the following amendments have been proposed:
Trade policy measures:
For any clarification or further information, please contact
Gaurav Wahie
Partner
E: gaurav.wahie@clasislaw.com
Vasudha Luniya
Senior Associate
E:vasudha.luniya@clasislaw.com
Easy payment mechanisms make it convenient for the consumer to access a variety of choices at a click of a button. However, due to the spurt of digitization, there have been certain challenges which required immediate attention and keeping in mind the same, the Indian Government seeks to bring into effect the new Consumer Protection Act, 2019 (“CP Act”). The CP Act would repeal the old Consumer Protection Act, 1986 with the aim to provide timely and effective administration and settlement of consumer’s disputes. Following are the key highlights of the CP Act;-
E-Commerce:
E-commerce has been included in the CP Act. In this regard, The CP Act has also broadened the definition of “Consumer” to include a person who “buys any goods” and “hires or avails any services” through offline or online transactions, such as electronic means or by teleshopping or direct selling or multi-level marketing.
Rights of a Consumer:
The rights of a Consumer have been defined under the CP Act and also include:
The definition of “Complainant” shall extend to parents or legal guardians of a minor who is a consumer.
Product Liability:
Central Agency for regulating the laws on Consumer Protection:
The CP Act is certainly progressive in nature and has been drafted keeping in mind the radical changes in the consumer base and consumer platforms.
Complainant:
The definition of “Complainant” shall extend to parents or legal guardians of a minor who is a consumer.
Filing of complaint:
| Commission | Jurisdiction |
| District Commission | Where the value of the goods or services paid as consideration does not exceed one crore rupees. |
| State Commission | Where the value of the goods or services paid as consideration, exceeds rupees one crore, but does not exceed rupees ten crore |
| National Commission | Where the value of the goods or services paid as consideration exceeds rupees ten crore. |
Alternate Dispute Resolution Mechanism:
The CP Act widens the scope of protection of a consumer. The CP Act is certainly progressive in nature and has been drafted keeping in mind the radical changes in the consumer base and consumer platforms. However, the successful effectiveness and speediness of the functions under the new CP Act will only be seen over the course of time.
For any clarification or further information, please contact:
Varun Pareek
Partner
varun.pareek@clasislaw.com
Sidhant Pandita
Associate
sidhant.pandita@clasislaw.com
The firm, Clasis Law is a full service Indian law firm that is international in vision, scope, experience and capability. The core values of the firm include a high degree of legal expertise, commitment to excellence, efficiency, integrity, focus and client care, all of which guide each member of the firm, be it the partners, associates or staff of Clasis Law in their business dealings on a daily basis. With the in-depth expertise and know-how of the partners, together with highly trained teams, the firm is able to provide clients with bespoke solutions and exceptional service.
The firm, Clasis Law is a full service Indian law firm that is international in vision, scope, experience and capability. The core values of the firm include a high degree of legal expertise, commitment to excellence, efficiency, integrity, focus and client care, all of which guide each member of the firm, be it the partners, associates or staff of Clasis Law in their business dealings on a daily basis. With the in-depth expertise and know-how of the partners, together with highly trained teams, the firm is able to provide clients with bespoke solutions and exceptional service.
The firm, Clasis Law is a full service Indian law firm that is international in vision, scope, experience and capability. The core values of the firm include a high degree of legal expertise, commitment to excellence, efficiency, integrity, focus and client care, all of which guide each member of the firm, be it the partners, associates or staff of Clasis Law in their business dealings on a daily basis. With the in-depth expertise and know-how of the partners, together with highly trained teams, the firm is able to provide clients with bespoke solutions and exceptional service.
On 4 October 2019, the Hon’ble Supreme Court held that section 238 of the Insolvency and Bankruptcy Code, 2016 ("IBC") has an overriding effect over the provisions of the Tea Act, 1953 ("Tea Act"). Accordingly, the prior approval of the Central Government is not required, under the Tea Act, for filing an application under IBC for the commencement of corporate insolvency resolution process ("CIRP"), against a tea company.
In the present case, A.J. Agrochem (operational creditor) filed an application, under section 9 of the IBC, against Duncans Industries Limited (corporate debtor) before the National Company Law Tribunal ("NCLT") on account of default by the corporate debtor in payment of dues against goods supplied by the operational creditor.
The NCLT, however, dismissed the application of the operational creditor on the ground that the operational creditor did not comply with the requirement of section 16G(1)(c) of the Tea Act. As per section 16G(1)(c) of the Tea Act in case the management of, or a tea undertaking or tea unit owned by, a company has been taken over by the Central Government, then no proceeding for winding up of such company or for the appointment of receiver in respect thereof shall lie in any court except with the prior approval of the Central Government.
The operational creditor filed an appeal before the National Company Law Appellate Tribunal ("NCLAT"), wherein the NCLAT held that prior approval of the Central Government under section 16G(1)(c) of the Tea Act is not required for an application filed under section 9 of IBC. The judgement of the NCLAT was based on the ground that section 9 of IBC occupies a different field than section 16G(1)(c) of the Tea Act. Since section 16(G)(1)(c) relates to winding up whereas the application filed under section 9 of IBC is not a proceeding for winding-up but for initiation of CIRP to ensure revival and continuation of a corporate debtor, prior approval of the Central Government is not required.
The Hon’ble Supreme Court upheld the judgement of the NCLAT and observed that the proceedings under section 9 of IBC shall not be limited and/or restricted to winding up and/or appointment of the receiver only. The winding up/liquidation of a company shall be the last resort only when CIRP fails. Therefore, CIRP cannot be equated with winding up proceedings.
The Apex Court held that section 238 of IBC (which is an over-riding clause), shall be applicable and the provisions of IBC shall have an overriding effect over any other law including the Tea Act.
Payment of outstanding tax liabilities for implementation of scheme of amalgamation
(Ad2Pro Media Solutions Pvt. Ltd. v. Regional Director (SER), Ministry of Corporate Affairs & Ors., Company Appeal (at) No. 98 of 2019)
The National Company Law Appellate Tribunal ("NCLAT"), vide its order dated 25 September 2019, reiterated the well settled principle that:
“Once a scheme has been sanctioned by a Tribunal…nothing precludes the Tax Authorities from recovering its legitimate and recoverable outstanding tax dues from the Transferor or the Transferee Company, as provided in the scheme."
Accordingly, the NCLAT modified the scheme of arrangement ("Scheme"), which was approved by the National Company Law Tribunal, Bangalore ("NCLT") subject to the condition that Ad2Pro Media Solutions Pvt. Ltd. (the "Transferor Company") pays the entire outstanding liabilities towards income-tax and service tax before implementation of the Scheme (which provided, inter-alia, for amalgamation of the Transferor Company with Ad2Pro Media Solutions Pvt. Ltd. (the "Transferee Company")).
In the present case, the Transferor Company had certain outstanding liabilities towards income tax and service tax. However, the demand raised by the tax authorities was challenged by the Transferor Company before the competent appellate tribunal. The NCLT, while approving the Scheme, directed the Transferor Company to pay the entire amount of outstanding tax liabilities as per the demands raised by the tax authorities. As a result of this condition imposed by the NCLT, the approved Scheme could not have been made effective till the time the Transferor Company made the payment of the outstanding tax dues to tax authorities.
The NCLAT observed that the Scheme approved by the NCLT provided that post amalgamation all the tax assessment proceedings and appeals shall be continued with the Transferee Company and all or any dues payable in accordance with law shall be paid by the Transferee Company. The NCLAT also noted that the Transferor Company and the Transferee Company had undertaken to satisfy all demands emanating from, and raised by, the competent tax authorities depending upon the outcomes of such proceedings. In view of this, the NCLAT modified the Scheme and held that the approved Scheme shall be implemented without insisting upon compliance of demands of tax authorities.
DPIIT issues Press Note 4 of 2019 series approving reforms in FDI policy
On 18 September 2019 the Department for Promotion of Industry and Internal Trade (“DPIIT”) issued Press Note 4 of the 2019 series approving the Cabinet proposal (announced in the meeting, held on 28 August 2019), for review of the FDI policy in relation to various reforms. The reforms include opening new sectors to FDI and liberalizing FDI related norms in sectors already open for foreign investment. The reforms announced vide the press note no. 4 are:
The Press Note no. 4 shall come into effect from the date of the relevant foreign exchange management (FEMA) notification. The relevant (FEMA) notification is yet to be issued.
Corporate tax rates reduced
On 20 September 2019, the Finance Minister Ms. Nirmala Sitharaman slashed the corporate tax by almost 10%. This is the biggest reduction in 28 years done with an objective to bring corporate tax rates at par with other Asian countries such as China and South Korea.
Highlights
Indian Insurance Companies (Foreign Investment) Amendment Rules, 2019
On 2 September 2019, the Ministry of Finance issued the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2019 to further amend the Indian Insurance Companies (Foreign Investment) Rules, 2015. In terms of these amendment rules:
(i) It should be incorporated as a limited company under the provisions of the Companies Act, 2013;
(ii) At least one from among the Chairman of the Board of Directors or the Chief Executive Officer or Principal Officer or Managing Director of the insurance intermediary shall be a resident Indian citizen;
(iii) It shall take prior permission of the Authority for repatriating dividend;
(iv) It shall bring in the latest technological, managerial and other skills;
(v) It shall not make payments to the foreign group or promoter or subsidiary or interconnected or associate entities beyond what is necessary or permitted by the Authority;
(vi) It shall make disclosures in the formats to be specified by the Authority of all payments made to its group or promoter or subsidiary or interconnected or associated entities;
(vii) The composition of the Board of Directors and key management persons shall be as specified by the concerned regulators.
Green Channel clearance for Merger & Acquisitions
On 19 August 2019, the Competition Commission of India (“CCI”) introduced a “Green Channel” clearance for Merger & Acquisitions which will be effective from 15 August 2019, wherein an automatic system of approval for combinations under Green Channel has been introduced in order to make the M&A filings for approvals faster. Under this process, the combination is deemed to have been approved upon filing the notice in the prescribed format, however, if the CCI later finds that the combination does not fall under the green channel mechanism, the notice given and the deemed approval granted shall be void and the CCI would deal with such combination in accordance with the provisions of the Competition Act, 2002. The Green Channel is aimed to sustain and promote a speedy, transparent and accountable review of combination cases, strike a balance between facilitation and enforcement functions, create a culture of compliance and support economic growth.
