Author name: CBCL

National Security-Centric Outbound Foreign Investment Regulation in India: Lessons from Reverse CFIUS

Leave a Comment / Company Law /

[By Subhasish Pamegam] The author is a student of Gujarat National Law University, Gandhinagar.   Introduction The United States’ recent executive order (EO) regulating outbound foreign direct investments (OFDI) – also known as the Reverse Committee on Foreign Investment in the United States (CFIUS), marks a significant shift in the global landscape for outbound investment regulations. This regulatory mechanism is designed to scrutinize and potentially restrict outbound investments in critical infrastructure, particularly in “countries of concern”, to mitigate risks associated with technology transfers, the dissemination of critical know-how, and the allocation of resources that may enhance the military and intelligence capabilities of these nations. The advent of Reverse CFIUS  reflects growing geopolitical tensions and a heightened focus on national security considerations that are increasingly shaping international investment policies. In light of these developments, this article first, aims to provide a comprehensive analysis of the burgeoning trend of OFDI regulations, with a specific focus on the reverse CFIUS model of the US. Secondly, it will delve into the rationale underpinning these regulations and highlight the insufficiency of existing export control measures to capture national security risks in OFDI. Thirdly, by examining the framework, the article will explore the feasibility and implications of implementing similar outbound investment regulations in India. Finally, it will provide recommendations for crafting a balanced outbound investment regulatory framework that addresses national security concerns while fostering economic growth and international collaboration. Reverse CFIUS on Foreign Outbound Investment Screening The CFIUS is an independent, multi-agency governmental body responsible for reviewing foreign investments in U.S. companies and real estate to determine their potential impact on national security. The traditional CFIUS undertakes a review of inbound foreign direct investments in U.S. companies and real estate to assess potential risks to national security. Whereas the Reverse CFIUS aims to regulate OFDI by establishing a two-tier regulatory structure for its screening. Under this structure, investments in specific less sensitive sectors necessitate a notification to the Treasury Department, whereas investments in highly sensitive sectors are strictly prohibited. The objective is to prevent the inadvertent bolstering of technological and military advancement of “countries of concern” through seemingly benign economic activities such as mergers and acquisitions (M&A), joint ventures (JV), private equity (PE)/venture capital (VC), greenfield investments, and other forms of capital flows. Historically, CFIUS focused on regulating inbound FDI to safeguard national security. However, there was growing emphasis on scrutinizing OFDI to address heightened concerns about the inadvertent transfer of sensitive technologies. The concept of monitoring OFDI was initially introduced in early drafts of the Export Control Reform Act (ECRA) and Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018, specifically for certain types of intellectual property. Although this idea was dismissed at the time because CFIUS traditionally focused solely on inbound investments, recent legislative developments indicate a potential shift. The initiative to screen OFDI emerged when a report by the China Select Committee on US Investments found that firms had invested a minimum of $3 billion in PRC critical technology companies,  offering expertise and other benefits to these companies, many of which support the Chinese military.  In response to these concerns, President Joe Biden issued an EO in August 2023 instructing the Department of the Treasury to create a program aimed at regulating OFDI involving the transfer of sensitive technologies in critical sectors such as semiconductors and microelectronics, quantum computing, 5G and AI in “countries of concern” which include nations like China, Russia, Iran, and North Korea. For instance, semiconductors are essential to all electronic devices and AI has vast implications for defence systems and cyber capabilities, making them vital to national security. Contextualizing Outbound Investment Regulations in India In India,  the Foreign Exchange Management (Overseas Investment) Rules 2022 (FEM Rules) which superseded the almost two decades old framework on OFDI in India under Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 and Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations 2015, imposed certain restrictions on OFDIs into foreign entities. The restrictions were three-fold: i) OFDIs in countries identified by the Financial Action Task Force (FATF) as “non-cooperative countries and territories” were restricted and ii) OFDIs by Indian residents in any jurisdiction periodically notified by the Reserve Bank of India (RBI) or identified by the Central Government under Rule 9(2) of the FEM Rules and iii) Foreign Exchange Management (Non-debt Instruments – Overseas Investment) Rules 2021 barred Indian residents from making overseas investments in foreign entities situated in countries or jurisdictions blacklisted by the Central Government. This included regions not compliant with the FATF or the International Organization of Securities Commissions. At present, the OFDI regulations in India are primarily driven by public policy, cross-border capital flow and exchange control considerations rather than national security concerns.  Neither the FEMA regulations nor the ODI Rules govern OFDI in the context of national security risks to prevent the leakage of advanced and sensitive technologies to countries of concern, which may threaten India’s national security. However, in an increasingly interconnected global economy, where geopolitical risks are dynamic, a comprehensive legislative framework addressing OFDI in countries of concern could provide clearer guidelines and greater flexibility to adapt to emerging threats. Therefore, before implementing a similar regulatory framework like the reverse CFIUS, India needs to collect data on several fronts: (i) the OFDIs made by Indian companies in critical technologies (ii) the potential security risks arising from these transactions; and (iii) the extent to which a national-level policy response at the national level might offer an effective and proportionate remedy to the identified issues. If policy intervention is deemed necessary to address the identified national security risks, India should establish a comprehensive legislative framework. The approaches to establishing an outbound investment regulation framework will be discussed comprehensively in the next section. Challenges in Implementing Outbound Investment Regulations in India Implementing outbound investment regulations in India for national security considerations also presents several challenges which need to be carefully analysed. Increased Operational Costs for Cross-Border Investments Implementation of outbound investment regulation in India

National Security-Centric Outbound Foreign Investment Regulation in India: Lessons from Reverse CFIUS Read More »

Empowering Boards or Undermining Governance? BJR in Social Policy Decisions

Leave a Comment / Company Law /

[By Samrudh Kopparam] The author is a student of O.P Jindal Global University.   Introduction As environmental, social, and governance (‘ESG’) concerns polarize corporate realms, the resulting implications—political reprisal, declining stock values, and unfavourable market positioning—become significant. In response to these developments, it is imperative to implement safeguards for boards when faced with stakeholder pressure to adopt public stances on crucial ESG matters. ExxonMobil’s recent board battle with activist investors over climate-focused proposals further highlights this necessity. In this regard, we contend that the business judgment rule offers a means to reconcile and balance boardroom interests. This rule—essentially a legal presumption—posits that directors act in good faith, in an informed manner, and in the company’s best interests. Against this backdrop, the recent case of Simeone v. Disney sets an important precedent by extending the business judgment rule to protect directors when guiding corporate strategy on social and political issues. By examining the Disney case, this article seeks to examine the tenability of the business judgment rule’s protection in the murky waters of ESG challenges.   Lessons from the Disney Case In February 2022, the Florida House passed HB 1557—dubbed the controversial “Don’t say gay” bill—that limited instruction on sexual orientation or gender identity in Florida classrooms. While Disney was initially silent on the bill, after receiving criticism from employees and collaboration partners, the Disney board convened a special meeting at which it decided to criticize the Bill publicly. This escalated into a public battle between the corporation and the government, with the latter threatening the dissolution of Florida’s Reedy Creek Improvement Act—which granted self-governance and tax benefits to Disney. The public conflict culminated in a sharp decline in Disney’s stock value. In response, shareholders filed a lawsuit, alleging a breach of fiduciary duty and a books-and-records demand.  In denying the books-and-records demand by applying the proper purpose rule, the Delaware Chancery Court also made an important observation on directors’ fiduciary duty. The proper purpose rule mandates that directors must exercise their powers for the purposes for which they were conferred, not for any collateral or personal reasons. This ensures that directors’ actions align with the company’s best interests and prevent abuse of authority. Further, the court opined that Delaware’s business judgment rule vests directors with significant discretion to guide corporate strategy, including social and political issues. This observation is crucial as directors enjoy the presumption of acting on an informed basis, in good faith, and with the honest belief that their decisions on significant social policies serve the company’s best interests. In this manner, a board may take into consideration the interests of non-stockholder corporate stakeholders where those interests are “rationally related” to building long-term value, unburdened by the looming threat of prosecution.   The Double-Edged Sword of the Extended Business Judgement Rule The ruling exemplifies the challenges a corporation encounters when addressing divisive issues, particularly those beyond its core business operations. By extending the business judgment rule to encompass social policy decisions, the ruling empowers boards to consider the interests of non-stakeholders in pursuit of long-term value. This shift enables corporations to evolve from mere profit-driven entities to proactive participants in cultivating a socially responsible corporate culture.   In today’s political climate, issues like reproductive rights and gender identity are increasingly central to corporate identity. The ruling safeguards directors, allowing them to address socio-political interests without the threat of litigation, which, in turn, supports more robust ESG Initiatives. Specifically, it frees directors from the fear of shareholder backlash when pursuing ESG-related strategies. This enables them to consider a broader range of stakeholder interests and societal impacts that prioritize long-term sustainability—such as employee well-being and environmental sustainability—over immediate financial results. This provides a welcomed impetus to the shift from discretionary corporate social responsibility (‘CSR’) to a more integrated ESG approach. Furthermore, the ruling acknowledges that both law and corporate decisions are inherently political. By recognizing this political dimension, the ruling legitimizes the alignment of corporate actions with broader societal interests, reinforcing the role of corporations as active participants in shaping not only economic outcomes but also the social and political landscape. Consequently, corporate engagement in external policy matters creates new opportunities for corporations.   While the judgment serves as a shield to mitigate judicial interference within the boardroom, we argue that its extension to social policy decisions is not wholly appropriate and may be misguided. Doctrinally, the rationale behind the business judgment rule is to restrict the court from extending its domain of expertise to business decisions, which fall within the purview of the board of directors. However, social policy decisions are inherently subjective and often lie outside the directors’ area of expertise. After all, the board of directors consists of business experts, not social sciences experts. The judgment attempts to reconcile this lacuna by treating social policy decisions as ordinary business matters, a conceptualization we contend is flawed. On a similar agency aspect, shareholders typically defer to directors’ decisions in areas where directors have specialized expertise—such as business and management decisions that drive profit maximization. However, this deference is unlikely to extend to areas where directors lack such expertise, particularly in matters concerning ESG and socio-political concerns. This misalignment may foster significant internal conflicts within the boardroom, potentially undermining corporate governance and eroding shareholder confidence.  Moreover, the extension of the business judgment rule blurs the traditional boundaries of fiduciary duty. The duty of care traditionally requires directors to be fully informed before making decisions, with shareholder expectations defining the ‘ends’ of this duty. In the context of social policy issues, however, these ‘ends’ become less clear, as directors may struggle to reconcile diverse and sometimes conflicting shareholder expectations, leading to decisions that fail to fully satisfy any group. Compounding this challenge is the blanket presumption afforded by the business judgment rule, which could lead to abuses of power. Directors might justify almost any decision as being in the ‘best interest’ of the corporation or ‘rationally linked’ to its long-term interests. Further, without clear metrics or sufficient jurisprudence to determine what constitutes a rational link to

Empowering Boards or Undermining Governance? BJR in Social Policy Decisions Read More »

Regulatory Harmonization: Strengthening HFC and NBFC Frameworks

Leave a Comment / Banking Law /

[By Shriyansh Singhal] The author is a student of National Law University Odisha.   Introduction The Reserve Bank of India (‘RBI’) has initiated a new regulation aimed at aligning the regulatory frameworks of Housing Finance Companies (HFCs) with Non-Banking Finance Companies (NBFCs) to ensure greater consistency and financial stability. The RBI decision align with the guidelines stated in paragraph 4 of the dated 22nd October 2020 which recommended gradually harmonizing the regulations governing HFC and NBFC entities over the next two years, for a smoother transition. Changes of significance have been implemented in the following areas; (a) guidelines for receiving deposits that HFC registered certificate holders can receive or retain; (b) guidelines for accepting public deposits by NBFC holding certificate holders; and (c) additional significant directives, to both HFC and NBFC entities.  Rationale Behind the Proposal The Reserve Bank assumed the responsibility of overseeing HFC operations from the National Housing Bank (‘NHB’) starting on 09 October 2019. It had implemented different guidelines treating HFC as a subset of NBFC entities. The rules governing both HFC and NBFC sectors were reviewed to ensure alignment in regulations while considering the features of HFC operations.  After reviewing the current regulations given to HFCs, RBI decided to release updated guidelines. Some of the laws related to NBFCs have also been looked into and a few changes have been made to them and the same will come into force from 1st January 2025. At present, NBFCs and HFCs which are allowed to accept deposits from the public are under higher measures on prudential regulation of deposits. This shift toward a unified regulatory regime is intended to address potential risks, ensure the safety of public deposits, and maintain financial stability.  Introduction of Key Changes Increased Liquid Assets and Safe Custody   Earlier, the HFCs had to maintain 13% of the public deposits in the form of liquid assets as per Section 29B of the NHB Act, 1987. The previous regulations have set this requirement at 10% while the new regulations have increased the same to 15% which is to be implemented gradually by July 2025. This moderated rise starting from 13% on January 1, 2025, and 15% in July is targeted to ensure that HFCs have adequate cash flows to fulfill their obligations. This change aligns HFCs with the NBFC liquid assets regulation and is expected to improve the liquidity profile of the housing finance sector.  The regulation concerning the safety of liquid asset custody has been revised to be comparable to the regulation of NBFCs. It is now compulsory for the HFCs to park their liquid funds with the entities as mentioned in the Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016. This change enhances the definition and safeguards in liquid asset management, ensuring that HFCs have a sound mechanism for protecting the depositors’ funds. According to the new guidelines, HFCs are also required to sustain complete asset coverage for the public deposits that are made.  This stipulation, which was previously enforced for NBFCs, ensures that HFCs possess sufficient assets to support their held deposits, thereby lowering the risk of financial failure. In situations where the asset coverage falls below the required level, HFCs must promptly notify the NHB, enabling regulatory supervision and reducing potential threats to depositors’ funds.  Stricter Credit Rating & Deposit Ceiling  HFCs now must have a minimum credit rating of investment grade to accept public deposits. This explicitly annual review means that a lower rating during the year would render the HFC ineligible to accept any new deposits or renew existing ones until the rating is regained. Through this means, the central bank is ensuring that the firms are of reasonable financial integrity. Since HFCs are public deposit-taking institutions to that extent, the safety aspect of the public’s money is secure. Concurrent with this, the leverage of HFCs has been brought down hugely by not allowing them to take in public deposits in 1995, they could accept up to 300 percent of their net worth in public deposits but by mid-1996 they were forced to cut this limit down to 150 percent.  Terms of public deposits have been reduced from a maximum of 120 months to 60 months. This adjustment is intended to enhance asset-liability management by reducing the long-term interest rate risk on HFCs and achieving a better maturity match between assets and liabilities.  Restriction on Investments in Unquoted Shares  The modified regulations bring HFCs in line with NBFC rules, whereby there were pre-existent limits on unquoted shares that the housing sector lender could invest in. Said investments are also considered a part of the HFC’s overall exposure to the capital market and they need to set their internal limits accordingly. This will ensure that HFCs do not have undue exposure to completely illiquid and volatile investments, putting their financial stability at risk.  The new rules for HFCs have been modified in line with NBFC regulations as there were already limits on unquoted shares an entity could invest, the people said. These investments are also deemed to be part of the overall capital market exposure weathered by HFCs and they must fix internal limits for these as well. This would help HFCs not have full domestic exposure and reduce the chances of them having high levels of completely illiquid (and now volatile) investments that could jeopardize their financial stability.  Impact of the Amendment The convergence of regulations is anticipated to have several effects on the housing finance system and the financial services industry as a whole since the New Depository and Asset cover norms are expected to enhance the liquidity position of HFCs. Aggregated excess liquidity would make HFCs more efficient and well capable of withstanding depositors’ demands as regards funds even during enhanced financial stress.  This will bring a ceiling on the excessive deposit mobilization by HFCs due to reasons such as being able to reduce the end deposit ceiling from three times to 1.5 times the Net Owned Fund (‘NOF’) and the

Regulatory Harmonization: Strengthening HFC and NBFC Frameworks Read More »

Challenges of SEBI’s New Fixed Price Delisting Mechanism

Leave a Comment / Capital Markets and Securities Law /

[By Ojas Singh & Tanuj Goyal] The authors are students of Symbiosis Law School, Pune.   INTRODUCTION On 27 June 2024, SEBI in its board meeting, paved the way for public companies to be delisted through the Fixed Price Offer (FPO), as an alternative mechanism to Reverse Book Building (RBB). The move comes following the release of the consultation paper on 14th August 2023, which included crucial modifications to the SEBI (Delisting of Equity Shares) Regulations 2021 ( Delisting Regulations).   While the RBB model was detected with some irregularities, such as inflated share prices driven by speculative trading and manipulation by some shareholders, a new mechanism is being proposed. The market regulator intends to protect the interests of promoters as well as the shareholders by bringing in a fixed premium and adjusted book value calculations that would reduce market volatility and increase efficiency. However, notwithstanding these intentions, the new framework is not without its share of criticisms and possible pitfalls. This article would consist of a primer on the RBB and the new FPO process, and would then proceed to analyse the benefits and pitfalls of the proposed mechanism.   BACKGROUND The RBB mechanism was introduced in 2003 through the SEBI (Delisting of Securities) Guidelines 2003. In the RBB process, a delisting company is required to ascertain a minimum floor price for the shares of the company. The calculation of the floor price is very similar to the floor price for an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Code). The price was determined based on many aspects including book value, average market price, and future growth potential. Investors would discover the price through bidding, stating the minimum price at which they were willing to sell their shares. A minimum of 90% of the shareholding had to be acquired by the acquirer through this method to ensure successful delisting.   The delisting, when accepted, leads to the purchase of all shares at a price at or below the Delisting Price, at the Delisting Price. This Delisting Price can be further negotiated by the acquirer through the process of ‘counter-offer’.   Because promoters have to agree for the price discovered through RBB to delist, getting enough public shareholders interested in a delisting proposal and the price at which most shares are offered by public shareholders heavily affects the success of a delisting.  A successful delisting can be elusive, as the discovered price through RBB would find itself having an inordinate premium, maybe even above 100% of the Floor Price. For instance as seen in delisting’s such as Brady and Morris Engineering Company Ltd (1128.70%), Universus Photo Imagings Ltd. (164.34%), Shreyas Shipping & Logistics Ltd. (138.35%) and Linde India (517%).  In all these cases, delisting attempts were found unsuccessful as the acquirers were not ready to pay the excessively high discovered prices. For example, in the delisting of Universus Photo Imagings Ltd., it could be noted that the discovered price of ₹ 1,500 (Rupees One Thousand Five Hundred) per share was not consented upon by the acquirers, as it was way above the price offered by them (₹ 568 or Rupees five hundred sixty eight per share). Additionally, in some delisting cases, even having an excessive premium over the indicative price offered by the acquirers may not result it in being successful. As seen in the delisting of Elcid Investments Limited, whose market price per share was ₹ 15 (Rupees Fifteen), but the floor price per share was computed to ₹1,61,023 (Rupees One Lakh Sixty-One Thousand Twenty Three) per share. Despite the premium of around 9,50,000%, the delisting price was rejected initially by the shareholders. This delisting underscores the flaws in the RBB process, where even a huge premium over the market price can fail to secure an approval from the shareholders. This trend of inflated pricing under the RBB process, not only thwarted several delisting attempts but also led to a misalignment between the acquirers and shareholders. Additionally, shareholders who would often hold out to higher prices, would further stall the delisting process. SEBI found that most firms that voluntarily delisted through the RBB process paid premiums with a median value of 125% from 2015 to 2018. This shows the unsustainable financial burden faced by the companies, meanwhile the speculative shareholders were allowed to manipulate the process. This manipulation was further aggravated by the rule that promoters could submit counter-offers only if their post-offer shareholding exceeded 90% of the company’s total issued shares. These concerns were reiterated by the SEBI chairperson, who stated that the companies looking to acquire more than 90%, would find the prices heavily inflated due to certain shareholders who would acquire shares to cross the 10%. Subsequently, counter-offers under the RBB could only be made, if the acquirers post-offer shareholding turned out to be above 90% of the company’s total issued shares. These rules give the shareholders the ability to manipulate and exert control over the discovered price.  SEBI acknowledged these concerns in its consultation paper released on August 14, 2023. Accordingly, the regulatory authority introduced the FPO with an aim to reduce speculative trading and provide a balance between the interests of the investors and the acquirers.   DECODING THE CHANGES Delisting through fixed price offer: As per the modifications under the Delisting Regulations, the delisting price must be at least 15% over the market price of a share. Public shareholders now only need to decide if they want to tender their shares at a fixed price. A delisting is successful, only when an acquirer’s post-offer shareholding exceeds 90% of a company’s total share capital.  Insertion of Adjusted Book Value for the computation of Floor price: Before, the ‘floor price’ was computed based on several factors such as Volume Weighted Average Price (VWAP) of acquired shares during 52 weeks prior to the reference date, VWAP of 60 days preceding the reference date etc. as per Regulation 8 of the Takeover Code. Now, adjusted book value will be used as an additional parameter to

Challenges of SEBI’s New Fixed Price Delisting Mechanism Read More »

Creditor’s Choice: Interplay Between Section 230 and CIRP

Leave a Comment / Company Law /

[By Vanshika Mathur] The author is a student of Institute of Law, Nirma University.   Introduction: In a recent case before the NCLT Bench Mumbai (ICICI Bank Limited vs Supreme Infrastructure India Limited), the issue was whether a section 7 petition under the Insolvency and Bankruptcy Code,  could be filed while a scheme of arrangement was pending under Section 230 of the Companies Act. Here, the Corporate Debtor had filed an application before the Tribunal to hold   the meeting with its creditors to discuss a scheme or arrangement under Section 230. A dissenting creditor filed an application before the Tribunal under Section 7 of the IBC on default of the debt. The Corporate Debtor obtained a stay on Section 7 proceedings and an extension under Section 230. The aggrieved creditor filed an Interlocutory Application in the Tribunal in order to modify the order of Stay. The question before the court was whether such a stay can be obtained while a Section 230 application was pending.   Initiation of CIRP proceedings against a Company requires default in payment of debt. Thus, both proceedings may be initiated simultaneously, one by the company and the other by the creditor. This post analyses the overlap between Section 230 of the Companies Act where the companies try to enter into an arrangement with their creditors, and the initiation of CIRP proceedings by the creditor or the company for debt resolution. The post first examines the statutory overlap between Section 230 and CIRP, analyzes key judicial decisions on the matter, and concludes by proposing a practical approach to balance creditor rights and corporate restructuring.   The Law and the Overlap: Section 230 of the Companies Act allows the creditors or a class of creditors, or members or a class of members to enter into a compromise or arrangement with the Company or its liquidator if the company is being wound up, and make an application to the NCLT to call for a meeting for this purpose. Under sub-section 6, approval of not less than 75% of the creditors or class of creditors is required along with the sanction order by the Tribunal for the compromise or arrangement to be valid on all creditors or class of creditors or members or class of members, the company, and its contributories. Companies often make an application under this section to enter into an arrangement or compromise with their creditors regarding debt restructuring.   Another increasingly popular option is filing an application under the Insolvency and Bankruptcy Code, 2016 which was enacted to provide a unified platform for debt restructuring allowing the Debtor and the Creditors to negotiate terms and revive the Corporate Debtor. The Creditors as well as the Corporate Debtor itself can apply to the Tribunal for initiation of the Corporate Insolvency Resolution Process. The object of the CIRP proceedings is to revive the Corporate Debtor and maximise its assets through a resolution plan. The threshold of default under the CIRP is Rs. 1 Crore making it more readily available for a creditor when compared to the 5% of total outstanding debt requirement under Section 230. CIRP has proven to be fruitful for both creditors as well as the Corporate Debtor as the Code is envisaged to be impartial to all classes of creditors.   Under Section 230 of the Companies Act, an aggrieved creditor can only object to the scheme or arrangement proposed when they have a minimum of 5% outstanding debt of the total outstanding debt. Creditors unable to meet the criteria for objection have the option to resort to initiation of CIRP (as their dues may be more than Rs 1 crore).  Therefore, creditors unable to meet the criteria for objection, resort to initiation of CIRP under the Code. A similar situation arose in the abovementioned cases before the Mumbai Bench of NCLT. As such there is no restriction provided in either act where one proceeding cannot be initiated while another is pending. Thus, there is a clear overlap between the two proceedings.   When the IBC was enacted, the lawmakers anticipated potential overlaps with other proceedings. This foresight is evident from the non-obstante clause under Section 238 which grants an overriding effect over conflicting laws. Due to the overriding effect of the Code, the Code is given precedence in cases of legal conflicts. For example, in Principal Commissioner of Income Tax vs. Monnet Ispat & Energy Limited the Apex Court upheld High Court’s ruling, affirming that the IBC overrides any inconsistencies in other enactments, including Income Tax Act. The primary objective of the IBC is to reorganize and resolve corporate entities, firms, and similar bodies in a timely manner, ensuring the maximization of asset value and balancing the interests of all stakeholders, including adjusting the priority of government dues. Courts have repeatedly emphasized that the legislation’s main focus is on the revival and continuation of the corporate debtor, protecting it from liquidation.   Considering the overlap between laws, the non-obstante clause in Section 238 and Section 14, which prohibits the initiation or continuation of pending suits against the Corporate Debtor, are crucial. Therefore, ongoing proceedings under Section 230 of the Companies Act have to be stayed upon the initiation of CIRP proceedings. The Code’s objectives are designed to serve all creditors impartially and to maintain the Company as a going concern.  Where do the courts stand? The legislative intent behind keeping an objection clause under Section 230 is to protect the interests of the minority. The courts too have been conscious to protect the interests of the dissenting minorities. In the landmark case of Miheer Mafatlal vs Mafatlal Industries Ltd., the Apex Court held that mere approval by a minority shareholder is not enough for the court to sanction a scheme under Section 391 (now, Section 230 of Companies Act, 2013), the court must consider the pros and cons of the scheme to determine whether the scheme is fair, just and reasonable. Mere approval of the majority cannot lead to automatic sanction by the court. Since once approval is

Creditor’s Choice: Interplay Between Section 230 and CIRP Read More »

Navigating the Foreign Exchange Amendments: New Era for Cross-Border Investments

Leave a Comment / Foreign Direct Investment Regulations /

[By Lavanya Chetwani & Shriyansh Singhal] The authors are students of National Law University Odisha.   Introduction The Ministry of Finance through its Department of Economic Affairs has introduced the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (‘Amended Rules’), which signifies a major shift in the regulatory framework in India. The amendments have been issued to somewhat modify the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘Existing Rules’). The announcement in the Union Budget 2024-2025 has led to the introduction of these amended rules.   These changes will enhance India’s legal and regulatory landscape by bringing Indian regulations to align with international standards. A new provision on equity swaps, improved investment regulations, and alterations to some significant definitions are just a few of the important changes made to the rules.   This article examines how the new amendments enable an Indian company to issue or transfer its shares in return for shares from a foreign corporation, facilitating cross-border share exchanges. Altogether, these changes are expected to improve the flow of cross-border M&A deals, help in attracting foreign investments, and allow Indian companies to increase their global footprint effectively.    Interpreting the Amendments (i) Revised Definitions   The amended rules added a new clause, Rule 2(da), which defines ‘control’. According to this provision, the meaning of control is the same as defined in the Companies Act 2013. Section 2(27) defines control as having the power to appoint the majority of directors and exercise control or influence the policy decisions of the company, either directly or indirectly, through shareholding, management rights, voting agreements, or any other means.   Rule 2(da) when applicable to an LLP, defines control as the ability to appoint most of the directors who have the final say in the company’s decisions.   Rule 2(an) of the amended rules has also defined ‘startup company’ as a private company incorporated under the Companies Act 2013 and is identified as a ‘startup’ to make it parallel with the definition given by the Ministry of Commerce and Industry and the Department for Promotion of Industry and Internal Trade.   The objective of bringing the changes is to make the definitions in line with other laws like the Companies Act 2013 and other rules and regulations which several statutory bodies & ministries release from time to time. This ensures consistency in legal frameworks and helps in streamlining regulatory compliance for easier interpretation.    (ii)Refined Rules for improved clarity   The amendments have also brought some clarity over the treatment of downstream investments. The earlier guidelines provided for sectoral caps, prior government approvals and reporting requirements. According to the amended Rule 23(7)(i) explanation, an investment made by an Indian entity that is owned or controlled by non-resident Indians (NRIs), on a non-repatriation basis, would not be taken into account when determining indirect foreign investment (‘IFI’).   Pursuant to this amendment, the investments by entities owned and controlled by OCI(s) will now be treated at par with entities controlled by NRI(s) and will not be considered for the calculation of IFI. It is expected to encourage more OCIs to invest in India through entities owned and controlled by them.   Further, Rule 9(1) Proviso (i) has been amended and it states that for transfer of equity instruments, prior government approval is necessary in all cases where such approval is applicable. Prior to this amendment, approval was necessary if the target company was engaged in a sector that required government approval. Additionally, the amendments have lifted the 49% cap on aggregate foreign portfolio investments, now allowing investments up to the sectoral or statutory cap without needing government approval, provided that such investments do not result in a change of ownership or control of the entity.   A change in the principal rules in Schedule I now permits an Indian company to offer equity instruments to a person residing outside of India in place of a swap of equity capital of a foreign company in compliance to the rules stipulated under the Foreign Exchange Management (Overseas Investment) Rules, 2022 and RBI regulations. These amendments aim to facilitate easier transfer or swap of equity instruments between entities.  All these amendments are directed towards making cross-border swaps easier, expecting that this will lead to more foreign investment in India and will make Indian practices more in line with international practices.  (iii) Addition of rules in relation to equity instruments and equity capital   The introduction of Rule 9A allows the transfer of equity instruments between an Indian resident and a foreign resident through a swap of equity instruments or equity capital. Complying with the rules set by the Central Government and the Reserve Bank of India (‘RBI’) regulations is sine qua non. Strict adherence to the Overseas Investment Rules is required for the swap of equity capital of a foreign company, and Government approval is required in all cases where it is applicable.   Earlier the act did not provide for authorizing swap of equity instruments of an Indian entity with that of a foreign entity. Therefore, by allowing this, the rule encourages more dynamic and flexible investment strategies.  Additions have also been made to Schedule I, where White Label ATM Operations (‘WLAO’) is added to the table of permitted sectors for Foreign Investments. WLA is a term used for ATMs operated by Non-Banking Finance Companies (‘NBFCs’), allowing customers from multiple banks to make various transactions. The cap for foreign investment in this sector is put at 100% and the entry route is Automatic, meaning no government pre-approval is required.   Investors in this sector must meet several requirements. They must have a minimum net worth of hundred crore rupees and comply with minimum capitalization norms if they are involved in other financial services. Additionally, any foreign direct investment in WLAO must adhere to specific criteria and guidelines established by the RBI under the Payment and Settlement Systems Act of 2007.  Decoding the amendments: benefits and drawbacks The amendments will result in the expansion of Indian companies at the global level through mergers, acquisitions, and other strategic initiatives. The new definition

Navigating the Foreign Exchange Amendments: New Era for Cross-Border Investments Read More »

P-Notes 2.0: Analyzing SEBI’s Proposed Ban on Derivative-Based ODIs

Leave a Comment / Capital Markets and Securities Law /

[By Vaibhav Kesarwani & Rudraksh Sharma] The authors are students of Gujarat National Law University, Gandhinagar.   Introduction The issues related to Offshore Derivative Instruments or Participatory Notes commonly known as P-notes have been under discussion in the Indian regulation system for more than a decade and a half now. These instruments enabled the foreign investors to trade in the Indian securities without the requirement of obtaining registration from the Securities and Exchange Board of India. However, this mechanism has also attracted criticisms in terms of regulatory arbitrage, opaqueness, and potentially used for activity for suspicion arousing purposes like manipulation and gambling.  The recent consultation paper released by SEBI in regards to investment by Foreign Investors through Segregated Portfolios/ P-notes/ Offshore Derivative Instruments on 6th August, 2024 points to such issues and recommends stricter measures in this regard. This article delves into the key discussions and proposals made by the consultation paper, specifically the proposed dis-allowance of existing exceptions related to use of derivatives by ODI issuers, including the  use of ODI with derivatives as underlying as well as hedging of the ODIs with derivative positions on stock exchange.  The Evolution of ODI Regulations in India Before SEBI’s circular on Offshore Derivative Instruments under the FPI regulations 2014, Participatory Notes were a common channel for foreign investors to invest in Indian market. However, the absence of registration and associated regulation prior to 2014 raised concerns of abuse, such as round-tripping of funds, money laundering, and tax evasion.   In 2017, SEBI barred the extension of ODIs for the purpose of trading in derivatives for the speculative purposes with an exception in the case of hedging. In 2017, SEBI barred the extension of ODIs for the purpose of trading in derivatives for the speculative purposes with an exception in the case of hedging. Subsequently, in 2019, restrictions were imposed on the issuance of ODIs referencing derivatives by FPIs. ODIs could only be hedged with derivative positions on Indian stock exchanges for two purposes: first, to hedge equity shares held by the FPI on a one-to-one basis; and second, to hedge ODIs referencing equity shares, within market-wide position limits, subject to a 5% limit for single stock derivatives.  Due to these stringent conditions, the total value of ODIs as a percentage of the Assets Under Custody of FPIs has dropped significantly, from 44.4% in 2007 to just 2.1% in the current year i.e. 2024. Despite this decline, the consultation paper has highlighted two major potential loopholes with the regulatory framework which are discussed below:   Firstly, the additional disclosure requirements introduced by the FPI Regulations, 2019, and the SEBI Circular dated August 24, 2023, for large and concentrated investments by FPIs, are not directly applicable to ODI subscribers. This opens up the window for foreign investors to avoid detailed disclosure requirements through taking positions through the ODI channel.   Secondly, that the ODIs are not governed in the same manner as direct investments made by FPIs especially with regards to the disclosure of ownership and control. This divergence opens up a fair amount of scope for regulatory arbitrage and this is something that SEBI seeks to counter with the measures under consideration.   Proposed Regulatory Changes The consultation paper proposes several key changes to the ODI framework to enhance transparency and reduce regulatory arbitrage. These changes, including new disclosure requirements, mandatory separate registration for ODI issuance, and a ban on ODIs with derivatives as underlying, could significantly impact the Indian economy by affecting market liquidity, foreign capital inflows, and the overall growth of the ODI system. The changes are discussed in detail henceforth:  Applicability of Disclosure Requirements to ODI Subscribers: SEBI’s August 2023 circular requires FPIs to disclose ownership and control information if they exceed concentration and size thresholds. These disclosure requirements will now apply directly to ODI subscribers as well. This would involve ODI issuers and their DDPs regulating as well as reporting on the achievement of these criteria at the ODI subscriber level. For concentration criteria, it is recommended that the ODI issuer and the DDP of the issuer should closely monitor each ODI subscriber. The ODI issuer should provide daily reports on the positions taken by the ODI subscriber(s) to the custodian or DDP. In terms of size criteria, monitoring should be carried out by the ODI issuers, their DDPs, and depositories. This should cover ODI subscribers and their related group companies, meaning any ODI subscriber with 50% or more voting rights or control, over such companies. Mandatory Separate Registration for ODI Issuance: In order to facilitate better compliance with the one to one hedging requirement and to enhance monitoring SEBI has suggested that ODIs should be issued only through a specially allotted FPI registration. This registration would not allow for any proprietary investments, thereby eliminating ambiguity regarding the issuance of ODIs and their operation as a distinct activity from FPI.  Prohibition on Issuing ODIs with Derivatives as Underlying: The paper suggests to abolish the current exemptions which have been enabling ODI issuers to issue ODIs with derivatives as underlying. This would mean that ODIs may only make reference to cash equity, debt securities or other acceptable investment and they have to be 100 per cent hedged with the same instrument for the entire life of the ODI. The existing ODIs with derivatives as the underlying are to be closed within period of 1 year from the date of issuance of the proposed framework and the existing ODIs with cash positions as the underlying but hedged with derivatives are to be either closed or hedge with the said cash position on one-to-one basis in a period of 1 year from the date of issuance of the proposed framework.  Although the first two proposals can strengthen the regulatory framework for Offshore derivative instrument and align the Indian regulation with overseas jurisdiction, the proposed prohibition for ODIs with derivatives as underlying is an extreme step that needs to be scrutinized before implementation. Even if it will benefit to prevent regulatory arbitrage, it can have

P-Notes 2.0: Analyzing SEBI’s Proposed Ban on Derivative-Based ODIs Read More »

Unlocking Credit With Digital Payments: Analyizing NPCI’s Proposed Digital Payment Scores

Leave a Comment / Banking Law /

[By Aryan Dash & Debasish Halder] The authors are students of National Law University Odisha.   FROM UPI TO DPS: NPCI’S JOURNEY TOWARDS FINANCIAL INCLUSION India has witnessed a remarkable rise in digital payments over the past decade, facilitated by the National Payments Corporation of India (NPCI). NPCI, an umbrella organization for retail payments in India, has played a pivotal role in developing and promoting digital payment systems such as Unified Payments Interface (UPI), Bharat Interface for Money (BHIM), RuPay cards, and others. These initiatives have significantly reduced the dependence on cash transactions, fostering financial inclusion and digital literacy across the country.  NPCI has recently proposed the concept of Digital Payment Scores (DPS) as a tool for lenders to assess the creditworthiness of borrowers. DPS would analyse an individual’s digital payment behaviour, including factors like transaction frequency, volume, and patterns. This data-driven approach aims to provide lenders with an alternative risk assessment mechanism, supplementing traditional credit scoring models.  This blog examines NPCI’s role in advancing financial inclusion through DPS. It addresses key questions about how DPS can assess creditworthiness beyond traditional models, the necessary legal frameworks for privacy and fairness, and how to mitigate challenges like data security and algorithmic bias while promoting inclusivity in India’s financial landscape.  RETHINKING CREDIT ASSESSMENT BEYOND TRADITIONAL MODELS India’s credit scoring relies heavily on past credit history, leaving rural or underbanked populations without access to loans. Digital payments offer new avenues for creditworthiness assessment. Transaction data reveals income levels, spending habits, and financial stability. Timely bill payments and engagement with savings platforms demonstrate financial discipline. However, using alternative data sources raises privacy and bias concerns, necessitating robust ethical and regulatory frameworks. Fair and non-discriminatory lending practices require careful integration of such data.  LEGAL AND REGULATORY CONSIDERATIONS The implementation of DPS would require a robust legal and regulatory framework to address concerns related to data privacy, consent, and fair lending practices. Authorities would need to establish clear guidelines for data collection, usage, and security to ensure consumer protection and prevent discriminatory lending practices. Additionally, measures would be required to safeguard against potential biases and ensure transparency in the scoring methodology.  Data Privacy The implementation of DPS raises important data privacy considerations, particularly within the framework of the Information Technology Act, 2000, which includes provisions like the Right to be Forgotten. User consent is crucial, requiring clear and informed agreement from individuals regarding the collection and utilization of their digital transaction information. Clear communication regarding the purpose, scope, and potential consequences of DPS calculations is essential. Furthermore, data anonymization is critical to safeguard individual privacy. Robust anonymization techniques should be employed to ensure that transaction data used for DPS calculations undergo thorough anonymization, removing or obfuscating personally identifiable information while preserving relevant behavioral patterns.   To implement DPS effectively while ensuring data privacy, several techniques can be employed. Differential privacy adds randomness to data queries, preventing anyone from inferring personal information even if they know some details about an individual. Synthetic data generation creates fake datasets that replicate real transaction behavior, allowing safe analysis without exposing actual personal information.  Data masking replaces sensitive details with random values, protecting user data from unauthorized access. Pseudonymization substitutes real names with artificial identifiers, making it challenging to link transactions back to individuals while still enabling necessary analysis. Lastly, local suppression and global partitioning control data visibility, minimizing the risk of revealing identities while still allowing for meaningful insights. Together, these strategies enhance privacy protection in the context of DPS.   Additionally, stringent measures for secure storage and processing are imperative to maintain the confidentiality and integrity of the transaction data. This entails implementing strict data security measures, including secure storage, access controls, and rigorous encryption protocols during both data processing and transmission.  Fair Lending Practices The DPS model must be meticulously crafted and audited to mitigate potential biases stemming from factors such as income levels, geographic location, or digital literacy. These biases could inadvertently create unfair disadvantages for specific population segments, thereby undermining the overarching goal of financial inclusion. Transparency and explainability are paramount to ensure equitable lending practices. Thus, the DPS algorithm should be transparent and explainable, providing both lenders and borrowers with clear insights into how scores are calculated and the factors influencing the final assessment.   To reduce bias in the DPS model, several strategies can be employed. First, ensuring diverse data collection is key; datasets should include information from underrepresented groups to promote fair representation. Utilizing bias detection tools helps identify and correct any unfair patterns before they impact lending decisions.  Regular evaluation and monitoring of the scoring model can track fairness across different demographic groups, allowing for timely interventions when biases emerge. Involving human oversight in the development process ensures that diverse perspectives are considered, helping to identify issues that automated systems might overlook. Establishing clear ethical guidelines for data use further promotes responsible practices and compliance with legal standards.  However, legal challenges may arise, particularly if the DPS is categorized as a credit scoring system subject to regulations like the Fair Credit Reporting Act or similar laws in India. Such classification could lead to legal disputes, particularly if the scoring methodology is perceived as discriminatory or lacks adequate consumer protection measures.  Regulatory Framework for Credit Scoring At the heart of credit information regulation in India lies the CIRC Act, a legislative cornerstone that casts a wide net in defining credit information. Its expansive purview encompasses various financial transactions, from conventional loans to digital payment footprints. This broad definition, notably captured in Section 2d, sets the stage for integrating digital transactions—such as utility payments and e-commerce purchases—into the fabric of creditworthiness assessment. However, NPCI, as the vanguard of DPS provision, must tread cautiously, ensuring compliance with registration mandates under Section 5 of the CIRC Act and meticulous adherence to privacy guidelines outlined in the Credit Information Companies (Regulations), 2006.  Navigating the Privacy Paradox: Insights from the DPDP Act Amidst the regulatory tapestry, the DPDP Act emerges as a critical arbiter, safeguarding the sanctity of sensitive personal

Unlocking Credit With Digital Payments: Analyizing NPCI’s Proposed Digital Payment Scores Read More »

An interim Outreach: NUI Pulp and Paper Industries Pvt. Ltd. v. Ms. Roxcel Trading GMBH

Leave a Comment / Insolvency Law /

[By Hamza Khan & Divyanshu Kumar] The authors are students of NALSAR University of Law, Hyderabad.   Introduction In the case of NUI Pulp v. Ms. Roxcel Trading GMBH, the National Company Law Tribunal (“NCLT”) exercised power under Rule 11 of the National Company Law Tribunal Rules, 2016 (“NCLT rules”) to prevent the Corporate Debtor from alienating or encumbering any disputed assets during the pre-admission phase of the Corporate Insolvency Resolution Proceeding (“CIRP”). This effectively established a temporary moratorium until the application of CIRP was either admitted or rejected by the Adjudicating Authority (“AA”). Although the National Company Law Appellate Tribunal (“NCLAT”) affirmed this ruling, the possibility of an interim moratorium during the pre-admission stage remains uncertain.  Through a comment on this landmark case, the authors aim to address two pertinent questions: firstly, whether an interim moratorium in the pre-admission phase is desirable, and secondly, whether the NCLT, under Rule 11 of the NCLT rules, possesses the authority to grant such a moratorium for a Corporate Debtor. In pursuit of answers to these questions, the authors will analyse the reasoning provided in NUI Pulp and look for judicial developments following this case. Subsequently, the authors would examine the reports by the Insolvency and Bankruptcy Board of India (“IBBI”) and recommendations by the Insolvency Law Committee (“ILC”) to determine the necessity of an interim moratorium during the pre-admission period. Finally, the authors will juxtapose Rule 11 of the NCLT with Section 151 of the Civil Procedure Code (“CPC”) to determine whether granting an interim moratorium is within the inherent powers of the NCLT.  Judicial Analysis of Interim Moratoriums in CIRP: NUI Pulp and its Developments In NUI Pulp, the Operational Creditor substantiated its concern with sufficient evidence, demonstrating that the management of the Corporate Debtor intended to sell assets, pending admission of CIRP application, thereby causing wrongful losses to all creditors, including the Operational Creditor. The NCLAT noted that, given the significant threat, the NCLT was justified in issuing an ad-interim order before admitting the application under Rule 11 of the NCLT Rules.  Following this line of reasoning in F.M. Hammerle, the NCLT granted interim injunctions in the CIRP prior to the admission of the application. In Phoenix ARC Private Limited v. Precision Realty Developers Private Limited, the NCLT noted “To make out a case for grant of injunction and that too at the pre-admission stage, the Applicant is required to make out a strong prima facie case,” thus setting a threshold akin to three-pronged test of grant of interim injunction while rejecting the application for want of evidence.   However conversely, in Go Airways, the court noted the absence of provisions empowering the NCLT to grant injunctions at the interim stage. Thus, while there are rare instances of interim moratoriums being granted, these are exceptions rather than the norm and resemble injunctions more than moratoriums. This reflects a lack of clarity in the jurisprudence, requiring a deeper analysis.  Interim Moratorium: The Need of the Hour According to the section 7(4) of Insolvency and Bankruptcy Code (“IBC”), the AA is required to admit an application within 14 days of its receipt, provided it fulfills the necessary criteria. However, in actuality, this process often takes longer due to various factors. A case in point is Asset Reconstruction Company Limited v. Nivaya Steel, where the application for admission into CIRP remained undecided for over a year.   The IBBI’s study revealed that at pre-admission stage of CIRP, due to the lack of imposition of moratorium, there is a high risk of deterioration of value of asset. The ILC report underscored that such prolonged delays could encourage asset siphoning by promoters and induce creditors to enforce debts. Following the UNCITRAL Guide to address this issue, countries like the UK and the US have incorporated the provision of an interim moratorium in their code. Referring to the same, the ILC recommended granting of discretion to the AA to balance the interests of stakeholders, recognizing potential harm to certain creditors by an automatic interim moratorium pending admission. The committee also recommended AA’s discretion to include the ability to modify or withdraw the moratorium order if unjustifiable harm to a creditor is proven.  The introduction of an interim moratorium is critically essential in India, where there is a shortage of judicial manpower to promptly address CIRP admission. This measure would effectively prevent individual creditors from taking action against the Corporate Debtor, thereby safeguarding its chances of revival. It would also deter the Corporate Debtor’s management from siphoning off its assets. Thus, following the ILC report, the IBC should be amended to incorporate provision for interim moratorium in part II of the IBC as well, and NUI Pulp is a welcome step in recognizing the need for interim moratoriums and seeking to preserve the value of the Corporate Debtor by taking such step. The need for introducing such a measure has been previously discussed and highlighted, yet there is no subsequent development regarding the same.  The scope of inherent powers of NCLT While acknowledging that in certain circumstances, grant of an interim moratorium could preserve the value of the Corporate Debtor and thus become crucial for achieving the very objective of the IBC, it is our opinion that the NCLT does not have the power to do so under Rule 11 of NCLT Rules, and the same is untenable in law.  This has been orally remarked by the NCLT in the subsequent case of Go Airways Interlocutory Application (“IA”) praying for interim moratorium. The NCLT stated, “there is no provision in IBC which grants the NCLT the power to impose interim moratorium”.  An in-depth analysis of the inherent powers given to the NCLT under Rule 11 would clearly substantiate the position taken in Go Airways.  Rule 11, which is under contention deals with the inherent powers of the NCLT to make orders in the interests of justice. This is identical to Section 151 CPC which grants similar powers to the civil court to meet the ends of justice and

An interim Outreach: NUI Pulp and Paper Industries Pvt. Ltd. v. Ms. Roxcel Trading GMBH Read More »

Scroll to Top