Author name: CBCL

Analysis: SEBI (Settlement Proceedings) Regulations, 2018

Leave a Comment / Capital Markets and Securities Law /

[ Debayan Gangopadhyay ]   The author is a 3rd year student of ILS, Law College. Introduction Settlement Proceedings in relation to violation of provisions in securities laws have been conducted under a mechanism by the Securities Exchange Board of India (“SEBI”) since 2007. The last legislation on settlement proceedings was stipulated by SEBI in 2014[i]. The said regulations apart from giving SEBI other powers of initiating proceedings on its own, also gave it the power to initiate settlement proceedings. However, to quantify the number of settlement cases more, a committee was set up by SEBI as the Justice Anil Dave Committee (“Committee”). The committee submitted its report in December, 2017 pursuant to which the SEBI notified the SEBI (Settlement Proceedings) Regulations, 2018 (“Settlement Regulations”) on 30thNovember, 2018 which are effective since 1stJanuary, 2019. The Settlement Regulations are the first piece of legislation in securities laws in India solely created for the purpose of regulating settlements in cases. These regulations provide for new scope in different factors of settlement proceedings and if implemented properly, is quite beneficial for the entire procedure. This article will discuss and review certain key highlights of the Settlement Regulations which provide for wider scope and sophisticated methods in settlement proceedings. “Securities Laws” and “Specified Proceedings” re-defined Securities Laws under the previous SEBI regulations on settlement proceedings[ii]had only given scope to the SEBI Contract (Regulations) Act, 1956 and Depositories Act, 1996. These regulations widen the scope by defining “Securities Laws” as: “securities laws” means the Act, the Securities Contract (Regulations) Act, 1956 (42 of 1956), the Depositories Act,1996 (22 of 1996), the relevant provisions of any other law to the extent it is administered by the Board and the relevant rules and regulations made thereunder;[iii] By adding “any other law”, the Settlement Regulations provide for the inclusion of other laws as well in relation to securities laws. There is an explicit recommendation of the Committee in the draft Settlement Regulations to include the contravention of the provisions of any other law (such as Companies Act, 2013) to the extent it is administered by the Board within the definition of ‘securities laws’ in the regulations, in order to settle any matter under the securities laws.[iv]This clause has widely increased the ambit of applicable laws to these regulations. Further, “specified proceedings” in the Settlement Regulations have been defined as: “specified proceedings” means the proceedings that may be initiated by the Board or have been initiated and are pending before the Board or any other forum, for the violation of securities laws, under Section 11, Section 11B, Section 11D, sub-Section (3) of Section 12 or Section 15-I of the Act or Section 12A or Section 23-I of the Securities Contracts (Regulation)Act, 1956 or Section 19 or Section 19H of the Depositories Act, 1996, as the case may be;[v] The definition provides for scope to cases which are pending before the SEBI Board or any other forum which is an effective tool to quantify settlement proceedings. The scope of pending cases has been re-iterated in further regulations of the Settlement Regulations. The Settlement Regulations have further introduced a new term called “settlement schemes”. SEBI shall specify the procedure and terms of settlement of specified proceedings under a settlement scheme for any class of persons involved in respect of any similar defaults specified. A settlement order issued under such a settlement scheme shall deemed to be a settlement order under the regulations.[vi] Also, the terms of settlement may include monetary or non-monetary terms or a combination of the two. This is given under Chapter IV of the Settlement Regulations.[vii]Non-monetary terms may include suspension or cessation of business activities for a specified period, disgorgement on account of the action or inaction of the applicant, exit from the management of the company, submit to enhanced internal audit and reporting requirements, locking – in securities, etc.[viii]  Confidentiality The Settlement Regulations provide for the scope of seeking confidentiality on the proceedings before the SEBI Board. The Committee recommendations in the draft regulations provide for a chapter similar to the practices of securities regulators globally and that provided in the Competition Commission of India (Lesser Penalty) Regulations, 2009 for “settlement with confidentiality” to any person that provides material assistance to the Board in its fact-finding process and proceedings.[ix]The said provisions are given under Chapter IX of the Settlement Regulations. These lay down the factors essential to the entitlement of confidentiality and the procedure thereof. As observed time and again, most of the provisions in SEBI have been adopted from US laws. The insertion of provisions dealing with confidentiality have been adopted though an understanding from the US Securities Exchange Commission and the Competition Commission of India. According to the regulations, such privilege of confidentiality shall be provided to such applicants who agree to provide “substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or ongoing, against any other person in respect of a violation of securities laws”. However, the application herein shall be considered only in cases prior to or pending investigation, inspection, inquiry or audit.[x] Limiting the scope of settlement proceedings There are provisions in the new Settlement Regulations which deny settlement proceedings to certain categories of individuals under Chapter III which talks about the scope of settlement proceedings. Regulation 5 (2) lays down factors affecting which an alleged default will not come under the scope: (2) The Board may not settle any specified proceeding, if it is of the opinion that the alleged default, – has market wide impact, caused losses to a large number of investors, or iii. affected the integrity of the market.[xi] Similar restriction is provided for where the applicant is a wilful defaulter, a fugitive economic offender or has defaulted in payment of any fees due or penalty imposed under securities laws.[xii]The earlier regulations provided that breach of laws governing insider trading, fraudulent and unfair trade practices shall not be considered for settlement. However, in the Settlement Regulations, the scope of the settlement has been limited to

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The Companies (Amendment) Ordinance 2018

1 Comment / Company Law /

[ Priya Udita & Kumar Akshay ]   Priya and Akshay are 3rd year students from SLS Pune and ILS Law College respectively. Introduction Companies Act, 2013 is an important legislation for regulating the corporate world. It includes the provisions from regulating the incorporation of company till the dissolution or strike off of the company. In the wake of scams, the provisions were made burdensome which hampered with the ease of doing business in India. With the increase in the transaction involving mergers, acquisitions and insolvency, there were volumes of pending cases with NCLT. Thus, the need was felt to amend the prevailing provisions in the act.  The ordinance was introduced on 2ndNovember 2018 with the intention to ease the reporting and compliance needed by the companies act, 2013 and promote the ease of doing business in India. The commentary encompasses the changes brought forward by the ordinance under the four headings – (a) Re-categorisation of offences (b) De-clogging of NCLT (c) Tackling shell companies and lastly, (d) In-house adjudication.  The authors discuss the amendments at length and compare it with earlier provision. The intent of the authors is to make ordinance easily understandable. Further, the authors discuss the impact of the ordinance and its inherent benefit. The Companies (Amendment) Ordinance, 2018 received the President’s assent on 2ndNovember, 2018[i]and it came into force at once. The ordinance is in consonance with the Government’s approach to ease the business regulation in India and at the same time tighten the regulations for serious offences. The twin objective of the ordinance is Ease of doing business and better corporate compliance. But firstly, we need to understand why this ordinance was needed. Several committees have observed that the Companies Act, 1956 was very lenient with the offences committed by the companies. The penalties were nominal and offences were easily compoundable. Therefore, in the wake of scams, the legislators came up with Companies Act, 2013 which deliberately made the serious offences non-compoundable. However, due to the overprotective intent, the act introduced cumbersome compliances and onerous reporting which made the business in India a hectic job. It was observed by the committees that there was need to re-categorize the offences in order to de-burden the NCLT, and introduction of online platform for e-adjudication or e-proceedings, thus this ordinance. The Ordinance The aims of the ordinance are (a) Re-categorisation of offences (b) De-clogging of NCLT (c) Tackling shell companies and lastly, (d) In-house adjudication. We need to understand the changes according to these four aims. Firstly, re-categorisation of offences was much needed as the NCLT was burdened with cases. Here, the recommendation laid down in Report of Committee on Review of Offences under Companies Act, 2013 was taken into consideration. The committee analysed the heterogeneous nature of offences and recommended that there should be civil penalty framework for procedural or technical defaults. Therefore, the ordinance makes number of changes in the penal provisions. In some of the cases, the imprisonment part has been omitted such as under Section 53 (Prohibition on issue of shares on discount). In civil penalty framework, the adjudicating officer will levy the penalty and the case will be closed. Secondly, with the introduction of Insolvency and Bankruptcy Code, 2016, the NCLT is now burdened with lots of pending cases relating to insolvency along with company law and merger and acquisition cases. Therefore, the ordinance makes certain changes to remove the load from NCLT. The change has been brought under section 2(41) in which the power to change the financial year of the company has now been vested with Central Government. Under section 14 (Alteration of Article), the power to approve the conversion of private company to public company or vice versa has been vested with Central Government. However, any application pending before the commencement of the ordinance will be done by NCLT according to earlier provision. Last but not the least the pecuniary jurisdiction of Regional Director has been increased from 5 Lakhs to 25 Lakhs. Also the provision in relation to permission of Special Court regarding compounding of offences has been omitted (Section 441 (6)). Thirdly, in order to tackle the Shell Companies and to make better compliance, the ordinance makes following changes. A new section 10A has been inserted. Here, the director needs to file an application to Registrar of Companies (‘RoC’) stating that subscribers of the memorandum of association have paid the value of shares taken by them and the application for registered office has been filed with RoC as required under section 12. This application should be filed within 180 days from incorporation of the company. Also, in case of contravention of the provision, the company will be liable to pay Rs. 50,000 and every defaulting officer will pay Rs. 1000 per day till contravention to the maximum amount of One Lakhs. In the case where the director does not file an application within 180 days and where the Registrar has reasons to believe that the company is not carrying the business, he/she can strike off the name of the company from RoC. Another major change is that now the Registrar under Section 12(9) has the power to physically verify the registered office. The ordinance also makes changes under section 77 (Register of charges) of Companies Act, 2013. Earlier, 300 days were given to the companies for creation and modification of charges; however now the time limit of 60 days (30 days normal + 30 days with additional fees) is given. Additional 60 days can be given after the additional ad-valorem fees. However after 120 days, there cannot be any creation or modification of charges. Also the punishment has been enhanced for contravention of this provision. The ordinance adds another ground of disqualification for the Independent Director wherein if the Independent Director accepts more than permissible directorship, he/she can be disqualified. Fourthly, the changes have been done under section 454 regarding the additional power given to the adjudicating officer. Now the adjudication officer can direct rectification of the default in addition to

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Recalling the witness – Understanding the phenomenon of multiple cross examinations in the context of arbitration

1 Comment / Arbitration Law /

[ Gibran Naushad & Susanah Naushad ]   Gibran Naushad is an Associate at S&R Associates, New Delhi and Susanah Naushad is an Associate at Khaitan & Co., New Delhi. Introduction It is often said that cross-examinations can make or break a trial, a testimony to the importance of the process in the overall scheme of adjudication. There are, however, different ways in which one could approach cross-examination, depending on the nature of the case and the eventual result desired. Given the importance of cross-examinations in trial, situations are bound to arise where a party might want to conduct such examination again owing to its dissatisfaction with the previous cross-examination, amongst other factors. Such multiple cross-examinations are, however, a tricky terrain, and it is not in all cases that such repetition would be allowed. This is particularly true in the context of arbitrations, where the parties would have to primarily depend on the provisions of the Code of Civil Procedure, 1908 to carry out such a process. The authors, through this post, try and explain the practical dimensions of cross examination and the options available to parties in case they are dissatisfied with a cross-examination already conducted. Case laws dealing with the subject would be looked at and an attempt would be made to understand the restrictions imposed on the parties to correct their mistakes or lapses by repeating a process that is germane to any trial. Understanding The Practice Of Cross-Examination Cross examination is one of the most vital constituents of trial. It becomes highly important to question the adversary on crucial facts relating to the matter to establish their falsehood or truthfulness, thereby establishing the credibility of such facts and claims to be taken up during the final arguments in the matter. There is no straightjacket formula for conducting cross-examination. The strategy and method could differ with different counsels. Additionally, the facts and circumstances of different cases along with the eventual result sought to be achieved would require different approaches to be adopted. Certain counsels prefer to attack the witnesses on each and every fact, thereby posing straight questions to such witnesses and subsequently changing the orientation of such questions with each answer so as to direct the witness to their preferred answer. This ensures that the inability of the witnesses to answer correctly and comfortably the questions posed to them on certain facts and claims could be used against them at the time of making the final arguments in the matter. The other approach, however, is a more subtle approach wherein instead of questions, the counsel puts across certain suggestions which follow questions. The suggestions are meant to point towards the insufficiency in the answers to the questions. An example of such a suggestion could be – ‘I put it to you that you are lying about the illegal termination of the contract with Party X’. The aim behind putting such suggestions is to create an adverse inference against the party at the time of final arguments. Therefore, while the former approach is a head-on approach where the answers themselves bring out the adverse inference, the latter approach is a more nuanced approach where the counsel realizes that it would not be possible to extract such answers and it would be better to suggest adverse inferences. In view of the fact that there is no fixed approach for conducting cross-examinations, there is a possibility that post the completion of the cross-examination; a party might feel that it wants to cross-examine its adversary again. The reasons for this could vary, from strategic lapses by the counsel to new facts coming on record which merit putting up the person on stand yet again. However, conducting such cross-examination for the second time is an uncertain proposition, particularly in the context of arbitration, and such strategy might not fly past the arbitrator in most cases. The Arbitration and Conciliation Act, 1996 (the “Act”) does not contain specific provisions for examination of the witnesses. However, Section 19 of the Act does stipulate that the parties are free to choose a procedure for the conduct of the arbitral proceedings.[1] Additionally, in case such procedure has not been agreed upon by the parties, the arbitral tribunal could conduct the proceedings in the manner it deems appropriate.[2] The Act stipulates that the arbitral tribunal would not be bound by the Code of Civil Procedure, 1908 (the “Code”).[3]However, the Bombay High Court decision of Maharashtra State Electricity Board v. Datar Switchgear Limited[4] becomes important in this context. The Bombay High Court, while dealing with Section 19(1) of the Act clearly stated that Section 19(1) of the Act contained words of amplitude and not of restriction.[5] Therefore, though the arbitral tribunal is not bound by the Code, it could draw sustenance from the fundamental principles underlying the Code.[6] Order XVIII Rule 17 is one such provision from where sustenance can be drawn. The provision stipulates that the Court could at any stage of the suit recall a witness who has been examined and put such questions to the witness as the Court thinks fit. Therefore, if the Court is satisfied that there are grounds that exist for the recalling of the witness, cross-examination can be conducted on such witness again. Order XVIII, Rule 17: Discretionary But Limited Scope of Recall Order XVIII, Rule 17 is clearly a provision of the Code which could be used for recalling witnesses in arbitration proceedings. Though the provision stipulates that the Court can recall the witness on its own if it feels the need to do so, the parties could also make applications to invoke this provision and request the Court for such recalling. It has been held by the Punjab and Haryana High Court in the case of Om Prakash v. Sarupa[7] that the court could not only use Order XVIII, Rule 17 of the Code to recall a witness on its own but could also use this provision on an application made by the defendants. Similar views have been held by the

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India Rejects the Internationally Accepted Remedy of Emergency Arbitration: Reasons and Implications

Leave a Comment / Arbitration Law /

[Nitya Jain]   The author is a 3rd year student of Nirma University. Introduction With growing transactions and declining approachability in trade and commerce, disputes inevitably arise. Today, irrespective of whether a dispute is domestic or international, parties prefer an unbiased forum for resolving their disputes. Effectively, Arbitration is the most suited method when it comes to sidestepping the lengthy procedures of court. The capability of parties to achieve a speedy relief is fundamental to any arbitration proceeding. In order to safeguard and further uphold party autonomy, major arbitration institutions develop mechanisms and procedures that eliminate judicial involvement in arbitration proceedings. When a party seeks an interim relief, they either resort to domestic courts or wait for the constitution of the tribunal. Resorting to courts undermined the very purpose of choosing arbitration over litigation and pendency of tribunal formation gravely hampers the expedite procedure.[i]In order to address the aforementioned fallacy international institutions and various countries have developed the concept of Emergency arbitrator. A party appoints an Emergency Arbitrator when it urgently requires a relief that if not granted, will lead to grave loss of asset or evidence. Proceedings of such an arbitration is governed by agreement and consensus of the parties. Emergency arbitrator is not a part of the tribunal in fact, his job ends with the granting of relief and he is not to decide the case on merits. The types of emergency reliefs sought  are broadly categorized in four broad headers- (i) anti-suit injunctions ; (ii) reliefs aimed at restoring status quo of the disputant ; (iii) measured intended at safeguarding enforcement of a future award and (iv) orders for interim payments. A good amount of time has passed since the concept of Emergency Arbitrator has been around. The institutions are continuously introducing provisions and rules as an attempt to improve the workability of the concept of emergency arbitrator. Various countries in their domestic laws have also adopted the concept.  Though the novel concept of emergency arbitrator is highly appreciated in the arbitration community globally, enforcement of the order passed by the arbitrator is still debatable. It eventually boils down to the subjectivity of various national courts and laws of the respective countries as to whether an order passed by an emergency arbitrator is enforceable or not.  Except Hong Kong and Singapore all other national laws are silent on the question of enforceability of emergency arbitrator’s decision. Provisions under Indian Law The Indian law does not expressly recognize the concept emergency arbitrator. In an attempt to abide by the global trend and also to provide statutory recognition to the awards passed under institutional rules like SIAC and ICC, the 246thLaw commission report did recommend the adoption of the concept of emergency arbitrator under sec 2(d) of the Act which stated “Arbitral tribunal” means a sole arbitrator or a panel of arbitrators and, in the case of an arbitration conducted under the rules of an institution providing for appointment of an emergency arbitrator, includes such emergency arbitrator.” However the same was rejected by the legislature while amending the Arbitration and Conciliation Act, 1996 and thereby the concept is not a part of the Arbitration and Conciliation Act, 2015. There is also no express judicial recognition of the awards passed by emergency arbitrator or its enforcement. Till date the Indian courts, for that matter, had no opportunity to test the validity of the same.[ii]Due to the non- recognition of the concept of emergency arbitrator in India the trend has been such that parties after obtaining an emergency arbitrator award outside India, enforce the same in India via seeking interim order under Sec 9 of the Arbitration and Conciliation Act.[iii] The Indian legislature consciously omitted the inclusion of the provision of Emergency arbitration in the amended Indian Arbitration and conciliation Act. The non-acceptability of Emergency Arbitration in India has numerous probable reasons behind it. Firstly, Emergency arbitration fails to address the issues of third party i.e. an emergency arbitrator cannot grant measures against a third party. An emergency arbitrator’s jurisdiction is limited to the signatories and cannot be extended beyond. On the contrary, Indian courts, like courts of other jurisdictions, can grant interim relief against third parties under certain circumstances (for example, where such orders are necessary to protect the subject matter of the arbitration).  Secondly, unlike domestic courts, emergency arbitrators cannot pass ex-parteorders as this would go against the purpose of their constitution – both parties won’t be provided with an equal opportunity. Indian courts, like other jurisdictions, can grant ex parte orders in exceptional circumstances. Ex parte orders become necessary in some special circumstances where if the respondent comes to know about the order he might displace the assets or other similar grounds. Thirdly, an award passed by an emergency arbitrator is to be further scrutinized by the actual tribunal and can also be overturned, this however is not the case with the interim orders passed by the domestic courts. Lastly, enforceability of emergency arbitrator’s award is again a controversial question. The scant judgments passed by the Indian Judiciary only have dealt with the enforceability of the awards passed in Singapore or Hong Kong.[iv]India is yet to clarify its position regarding the enforceability of awards in other jurisdictions. Conclusion However, it is undeniable that Emergency arbitration ensures minimum court intervention which is the need of the hour in order to develop India as a pro-arbitration country. It would a progressive step towards making India a global hub for arbitration, like Hong Kong and Singapore. Often emergency arbitration proceedings are hassle free and ensure efficiency, which eventually develop a set standard of behavior for the parties. Experience also shows that parties are more likely to comply and abide by the orders passed by emergency arbitrators. An emergency award if recognized in India will definitely be beneficial for parties if the parties against whom the claim is made have their assets in a different jurisdiction which recognizes emergency awards. For India to become a pro-arbitration country, it is high time

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Time to Allow SEBI to Wiretap?

Leave a Comment / Capital Markets and Securities Law /

[Karan Yadav]   The author is a 4th year student of GNLU, Gandhinagar Introduction India is seeing a rise in the number of insider trading cases. Even the top blue chip firms are struggling with the leak of such sensitive information by some or the other source. This includes companies like ICICI Bank, Axis Bank, Videocon, Sun Pharma, Tata Motors and many more.  Securities Exchange Board of India (SEBI) was constituted in the wake of the Harshad Mehta Scam in 1992. The powers conferred to SEBI was a result of analysis of different Securities Market Watchdogs all over the world especially the US’s Security Exchange Commission (SEC). However, from the day of its inception, SEBI has been criticized for its failure to investigate and prosecute perpetrators of insider trading in India. If we look at the number, the convictions pronounced in such cases of Insider Trading are very low. This is because of a number of limitations that SEBI is facing in bringing such perpetrators to book. It is known that the white collar crimes often need a solid string of evidences which can prove intention of the wrongdoer. The best way that this can be proved in the cases of insider trading is if the sensitive information being passed on is itself intercepted by the authorities. This tool is a long shot for SEBI as for a number of years, it has been deprived of a number of investigative privileges. The malpractices of insider trading are not new to India, but still SEBI lacks basic powers like the power to call in for phone records. It took a USD 6 billion scam for legislators to realize this and bestow the power to SEBI. Hence, only after the aforementioned Saradha Scam of 2013, Parliament through an ordinance amended the Securities Laws (Amendment) Act, 2014[i]and this certainly was a welcome move in order to bring SEBI’s power at par with other regulators all over the globe. As far as the concept of phone tapping is concerned, in India, as per the Indian Telegraphic Act, 1885, both the Central and State governments have the power to tap phones. When any authority of the governments seek to do so, Home Ministry’s or State Home Secretary’s prior approval is needed. This was challenged in the Apex Court of being violative of a number of fundamental rights, but the court still upheld the legislation citing nation’s security as one of the reasons why it cannot be scrapped off in entirety. Though the admissibility of such records in the courts is still unclear, the Courts have certainly asked the authorities to use the power as a last resort and sparingly. There are a number of authorities such as Crime Bureau of Investigation, Intelligence Bureau, etc. which have such powers in place to collect evidences, but SEBI is yet to be conferred with the same. SEBI has been requesting government to allow it to wiretap in order to improve the conviction rates, but time and again it has been denied to do so. In 2012, the then SEBI Chairman U.K. Sinha requested the government to grant them such powers, but they were denied and informed that SEBI has investigative powers of a civil court and hence does not possess power to wiretap[ii]. More recently in 2018, a SEBI committee headed by Dr. T.K Viswanathan suggested want of sweeping reforms to the watchdog which included powers to intercept calls in order to aid investigations.[iii]The committee has suggested for direct call interception powers akin to the Central Board of Direct Taxes. This will also help SEBI collect strong evidence against repetitive offenders in cases of insider trading, front running or market manipulation. While the committee has realized and mentioned the possibility of misuse of such power, it still asserts that call interception would be an improvement over the present case. We need to draw our attention on the world’s most active securities market regulator in order to better understand the robust approach which should be applied and hence the same has been discussed hereunder. The American Approach – Security Exchange Commission’s Powers The concept of “wiretapping” was discussed by the US Congress for the first time in 1934. Pursuant to this, they enacted the “Communications Act of 1934”. The statute categorically made the activity of wiretapping a federal offence and also inadmissible evidence in the court. But, by the next half of the century, the prosecutors were struggling in proving several offences and hence in 1968, the Congress passed the “Omnibus Crime Control Act”.  The Act deals with interception of communication and it states that for such an interception, an application shall be made in writing upon oath or affirmation to a judge of competent jurisdiction and shall state the applicant’s authority to make such application and it also lays down the specific information that must be included in the application. Earlier, this statute was perceived to be covering certain blue collared crimes until the technology started taking over. As the use of non-interceptable phone calls, e-mails, etc. increased, the authorities concerning white collared crimes were also drawn towards the concept of “wiretapping”. The Securities Exchange Commission has made multiple insider trading crackdowns using this power which includes the high profile conviction of the Indian poster boy abroad- Rajat Gupta and one Rajaratnam. Here, Rajat Gupta was serving as a board member of corporations like Procter & Gamble and Goldman Sachs and he was accused to have passed sensitive information of these corporations to his business partner Rajaratnam who made illicit profits because of this. Though this method has received severe public flak, it still appears to be a necessary one since it aides in obtaining direct evidences in knowing the defendant’s intention to commit such act. The 1968 Act expressly lists out the nature of offences for which wiretapping can be used. This includes mail fraud, wire fraud, kidnapping, money laundering[iv]and a few other offences introduced later by amendments. However, this does not include securities fraud and this question

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PIPE Transactions: A failure in the Indian Scenario?

Leave a Comment / Capital Markets and Securities Law /

[ Arushi Gupta & Durga Prasad Mohapatra ]   The authors are 3rd year students of NLU Odisha. Introduction The concept of PIPE(Private Investment in Public Equity), developed in the US with separate provisions regulating the same. However, Indian law has no such specific regulations which guide the PIPE deals .The PIPE deals in India are regulated by the preferential allotment rules elucidated by SEBI. Considering the fact that the PIPE deals in India are not really developed, the article attempts to draw a distinction between the take of the US and Indian laws by analyzing the relevant provisions. SEBI (Issue of Capital and Disclosure Requirements), 2009 The SEBI (Issue of Capital and Disclosure Requirements), 2009 (“ICDR”)deals with various modes of issuance of securities wherein Chapter VII of the ICDR Regulations lay down the provisions regarding preferential issue of securities. The main area of emphasis with regard to PIPE transactions will be upon Section 72(1)(a) and Section 78(2) of the ICDR Regulations. Section 72(1)(a)[i]lays down the conditions for preferential issue whereby a special resolution passed by the shareholders is a prerequisite in cases of preferential allotment. However, in the US, the shareholder approval[ii]is not mandatory and is guarded by threshold limits. With regards to the NASDAQ, the shareholder approval is not required in case of bonafide private financing. A bonafide private financing[iii]is a sale whereby the issuer sells the securities to multiple investors, provided, that no individual investor would have more than 5% of the shares of the common stock. This is an effective way to avoid dilution of control and may act as a safeguard for the shareholders in the cases where their approval is not taken. The NYSE rules, on the other hand, impose a threshold limit of 20%, whereby shareholder approval is required in cases where the issue would amount to more than 20% of the outstanding common stock. This rule is also shareholder centric as it aims at prevention of dilution of control unless otherwise approved by the shareholders. It can be inferred from the practices in the 2 jurisdictions that ‘control’ as a factor is relevant in case of PIPE transactions and an attempt is made to prevent the dilution of control in both the cases but by the usage of different mechanisms and techniques. Section 78(2)[iv]provides for a lock-in period of 1 year in case of preferential allotment of specified securities being made to persons other than the promoter. A lock in period[v]is basically a time frame within which an investor is forbidden from selling or redeeming shares.Under Section 144, Securities Act 1933,[vi]such securities are restricted in nature but can be resold on the trading market once a registration statement has been declared effective[vii]by the SEC. In case of US, the transaction provides a higher level of liquidity as the statement is declared effective within 45-90 days[viii]of closing of the deal. Liquidity is one of the key factors which make a PIPE deal suitable for investors. PIPE transactions are preferred over other alternatives due to the increased liquidity they offer to purchasers of registered security with the certainty and speed of a private placement.[ix]The problem of liquidity which the Indian law poses in this matter can be cited as one of the reasons for PIPE deals still being at a nascent stage. SEBI (Prohibition of Insider Trading) Regulations, 2015 An area of prime concern with regards to PIPE transactions is that it leaves room for insider trading. A due diligence test[x]i.e. a process by which the investor gathers all the necessary information in order to evaluate the potential risks involved  is conducted by the investor in order to better understand the potential pitfalls associated with the deal . Due diligence is not a concern in law, provided that the process does not lead to dissemination of Unpublished Price Sensitive Information (“UPSI”). UPSI[xi]refers to all such information which is directly or indirectly related to the company and has the potential of affecting the prices of securities of the company. Regulation 6 of Schedule II[xii]deals with disclosure of Price Sensitive Information to institutional investors whereby only public information can be provided to investors by the listed companies. With the recent amendment to the Insider Trading Regulations, any person who while conducting due diligence comes across UPSI would be referred to as an insider[xiii]. Furthermore, such a person is not allowed to deal with the securities of the company even if a confidentiality /non-disclosure agreement has been signed[xiv]between the parties. On the other hand, in US, the disclosures are governed by the Regulation Fair Disclosure[xv]wherein the acquirer of UPSI is allowed to trade in the securities of the company, provided that a confidentiality agreement has been signed between the parties. The disclosure regulations in India are stringent and hence may pose a threat to the investors as they would always apprehend the possibility of a liability being imposed upon them while conducting due diligence and consequently refrain from investing in PIPE deals. Conclusion The aspect of control whereby under the ICDR Regulations, the PE firms willing to invest in public companies have to deal with a lock in period of one year and hence cannot exit the companies even when they face heavy losses. With regards to the questions of insider trading, SEBI has put forth certain conditions such as appropriate confidentiality and non­disclosure agreements which have to be signed before any due diligence process begins as provided under Regulation 3(4) of the SEBI (Prohibition of Insider Trading) Regulations. Further, promoters often do not expect to cede any sort of control to private investors as they do not consider them to be an added source of expertise, they only expect them to be passive investors instead of a genuine source for newer perspective who can provide business guidance. Even though PIPE investments are a quick fix to gain financing especially by smaller companies who want immediate capital for working, the market environment in the country has still to be made conducive to such financing methods as a

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Kotak Committee: Separating the position of the CEO and the Chairman

1 Comment / CBCL - LSPR Series, Kaizen /

[By Binit Agrawal] This Blog is part of a series of posts as a collaboration titled “KAIZEN” between the Centre for Business and Commercial Laws (CBCL), NLIU Bhopal and Law School Policy Review (LSPR). To view this blog on LSPR, please click here. Binit Agrawal is the Founder-Editor of LSPR and a 3rd Year B.A. LL.B. Student at  NLSIU, Bangalore. The Securities and Exchange Board of India has accepted most of the recommendations made by the Uday Kotak led committee on Corporate Governance Reforms. The Kotak Committee was set up as a response to the multiple board room struggles shaking up important corporate houses. These include the struggles within the Tata Group and Infosys. Both these companies saw their chairman being sacked, retired founders forcing their way through board decisions, independent directors being shown the door and allegations of shady dealings marring their reputations. Corporate governance measures were found wanting, leading to the setting up of the committee. One of the most important measures suggested by the committee has to do with the separation of the leader of the company management (CEO) from that of the board (Chairman). The final recommendation on this issue, which has now been accepted by SEBI, was that the posts of Chairperson and CEO/MD be separated for listed entities with more than 40% public shareholding. Further, it was recommended that from 2020 onwards all the listed entities be required to bifurcate the two posts. Quoting the Cadbury Committee on Corporate Governance in the United Kingdom, the Kotak committee wrote, “given the importance and the particular nature of the chairman’s role, it should in principle be separate from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power”. In this post, my aim will be to find out what the reasoning behind such a move is, what the counter arguments are, and what the practical reality is. I will leave the reader with a view that mandating of such separation may not be a prudent move. The controversy over CEOS simultaneously serving as Chairmen The debate on whether or not to separate the two key positions goes back to the very origins of the concept of corporate governance. Berle and Means, who are considered to be the earliest theorists on Corporate Governance, first depicted the phenomenon of large corporations having two different sets of interested parties, the shareholders and the executives. They found that the shareholders, who were the owners of the company, exercised near to no control over how it functioned. Rather it was the managers who exercised complete control over the workings of the company.[1] Instead, the managers had little, if any stake in the ownership of the company. Thus, the interests of the shareholders and managers often diverged, giving rise to the problems of corporate governance. This is theoretically referred to as the problem of agency. The problem of agency arises when the agent (in this case, the CEO) has certain goals which are contrary to those of the principal (in this case, the Board, representative of the shareholders). For example, a CEO who has no financial interest in the company will always be seen to be having goals which are significantly different from that of the shareholders, or entrepreneur CEOs. He will, prima facie, spend more time trying to expand his power and purse, as against rewarding shareholders. This hypothesis has also been found to be the reality in multiple studies.[2] This agency problem can be resolved if the position of CEO is separated from that of the Chairman. The CEO’s job will be to manage the company, while the Chairman and his board oversee the CEO and his team. Here one can clearly spot the benefits of having separate CEO and Chairman. Benefits Given the fact that the board is to oversee the management, a fusion of the leader of the board and the leader of the management presents a typical case of conflict of interest. If the CEO is also the Chairman, he will overlook failures on the part of the management and will be slow to take decisions which go against the interests of the company executives. Thus, he clearly cannot perform the essential functions of hiring, firing, assessing, and regulating remuneration, without keeping aside his personal interests.[3] Consequently, in theory, an independent chairman will give a fillip to the board’s ability to look after the management. By bifurcating the two posts, a corporation clearly delineates and distinguishes the responsibilities of the board and management. As a result, it gives one leader the sole authority of speaking on the board’s behalf and to oversee its meetings. The other leader is given the authority to speak on behalf of the management and be responsible for the operation and strategy of the company.[4] As a consequence of such separation, discords in the areas of performance appraisal, executive remuneration, succession designs, and director recruitment are eliminated. Furthermore, the CEO is also better enabled to concentrate exclusively on strategizing, overlooking operations, and resolving organizational issues.[5] Such separation is also important to avoid creation of all-powerful CEOs, as has been seen in many tech companies. If the CEO and the Chairman are one, such a leader will have immense power over who gets appointed to the board, and will thus be able to manufacture board loyalty.[6] Most of the executive directors in a board owe allegiance to the CEO. Non-executive directors too may feel a sense of gratitude to the CEO as he often plays an influential role in their election, more so when he is also the Chair. It has been found that even though directors may be legally independent, there are social ties and influence, leading to biases. Further, as the Chair, such CEO will have the ability to make committee assignments. This will lead to the creation of an all-powerful centre within the company, who may not act in the best interests of the company at large. Another argument in support of such bifurcation has to do with the flow of information. If the board has better

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Levy of Stamp Duty on Merger Schemes

1 Comment / Company Law /

[ Surbhi Jaju & Hansaja Pandya ]   Surbhi Jaju is an Associate at Lakshmikumaran & Sridharan and Hansaja Pandya is a 3rd year B.A LLB student at Gujarat National Law University. Introduction Mergers and acquisitions are manifestations of momentous growth and are critical tool of business strategy.[i] They are used as instruments to access the market through an established brand, to get market share, to eliminate competition, to reduce tax liabilities, to acquire competence or to set off accumulated losses of one entity against the profits of the other entity.[ii] Every scheme of restructuring a company requires approval from the National Company Law Tribunal (NCLT). Many states in India levy Stamp Duty on orders of the tribunal approving the merger scheme. This has made the cumbersome and court centric process of merger and acquisition more expensive. This article analysis the inconsistency in Stamp Duty Laws and reasons as to why the recent imposition of Stamp Duty laws on consent orders of the NCLT approving mergers scheme, imposed by Tamil Nadu is based on unsound premise and hence invalid. Stamp Duty is the subject matter jurisdiction of both the Centre and the State falling under Entry 91 of Union List and Entry 63 of State List in the Schedule VII respectively. As a result some of the States in India have enacted their own Stamp Acts whereas others have adopted the Indian Stamp Act, 1899 with their respective state amendments. This has resulted in inconsistency in stamp duty regimes of different states inhibiting the process of mergers and acquisitions. The lack of uniformity is largely seen in the definition of the term ‘conveyance’ which entails charge of Stamp Duty. The Indian Stamp Act defines conveyance as – “every instrument by which property, whether moveable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by Schedule I.” Points of Contention The primary point of contention in this regard is whether the scheme of merger sanctioned by NCLT is an ‘instrument’ within the meaning of section 2(14) read with section 2(10) and Article 23, Schedule I of the Indian Stamp Act, 1899. While several states such as Rajasthan, Maharashtra, Gujarat and Haryana etc. have specifically included a court order approving a scheme of merger and amalgamation under the definition of “conveyance”, imposition of Stamp Duty on orders of NCLT approving the scheme of merger of companies vide Circular No. 49282 P1 2018 dated November 20, 2018 (‘Circular’)[iii] by state of Tamil Nadu lies in a grey area as the Stamp Act for the state of Tamil Nadu is yet to receive the assent of the President. Unless the definition of the term ‘conveyance’ in the Tamil Nadu Stamp Act in not amended by the legislature, a Circular cannot by circumventing the act subject consent orders of NCLT approving schemes of mergers to levy of Stamp Duty. Hence the grounds on which the Circular has been introduced are invalid and do not hold any value as on today. The foundation of the levy of Stamp Duty in the Circular is based on the Supreme Court judgement of Hindustan Lever & Anr. v. State of Maharashtra, (2004) 9 SCC 438[iv] the court held that – “the order passed under Section 394 is founded on consent and this order is an instrument as defined under Section 2(1) of the Bombay Stamp Act. The State Legislature would have the jurisdiction to levy stamp duty under Entry 44 List III of the Seventh Schedule of the Constitution and prescribe rate of stamp duty under Entry 63 List II.” The same was reiterated in the case of Li Taka Pharmaceuticals v. State of Maharashtra, (1996) 2 Mah LJ 156[v] and in Hero Motors Limited v. State of U.P. and Ors, AIR 2009 All 93[vi]. The meaning of the term ‘instrument’ was ambiguous and discussed in various judgments. The Bombay High Court in Chief Controlling Revenue Authority and Anr. v. M/s Reliance Industries Limited Mumbai and Anr, AIR 2016 Bom 108[vii], clarified that the term ‘instrument’ includes only the order of the approving authority and not the scheme itself. The court reasoned that a merger is only operative once the approval of the court has been granted without which the scheme would have no effect. Stamp Duty can thus be levied only on the instrument that gives effect to the transfer of assests. Similar reasoning was provided in the decision of Gemini Silk Mills Ltd. v. Gemini Overseas Ltd., (2003) 53 CLA 328[viii] to support the levy of stamp duty on High Court orders approving scheme of merger. However, in 2004, the Division Bench of the Calcutta High Court overruled the above judgment in the case of Madhu Intra Ltd. v. Registrar of Companies, (2004) 3 CHN 607[ix]. The Court held that the transfer of assets and liabilities of a transferor company to the transferee company takes place on an order being made under section 394(1) of the Companies Act without any further act or deed and hence the order of the court sanctioning the ‘scheme’ would not qualify to be an ‘instrument’ as the transfer is purely through operation of law. Madras High Court has also in the cases of, T.T.Krishnamachari & Co v. The Joint Sub-Registrar, (2009) 88 CLA 131[x] and Srinidhi Industries Ltd. v. Sub-Registrar, (2015) 1 CTC 530[xi] categorically held that order of mergers and amalgamations will not be liable to stamp duty. State of Tamil Nadu ought to respect and weigh in the reasoning of the Court while affecting the Stamp Duty laws of the state. Further, the orders of the High Court are binding on all the authorities of the state in absence of any legislative Act and no state authority can act contrary to it.[xii] The Circular effecting stamp duty issued in the state of Tamil Nadu defers with the Madras High Court decisions. The Director General of Registration is bound by High Court order until the Tamil Nadu Stamp Act of 2013, receives presidential assent. The Circular has also

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A Critical Analysis of The Proposed Draft Model Law For Cross-Border Insolvency

Leave a Comment / Insolvency Law /

[Jayesh Karnawat & Kritika Parakh]   The authors are 3rd year students at NLU, Jodhpur. Abstract The globalization of business enterprises has evolved with time, leading to businesses having assets and liabilities which are spread over the globe. This, in turn, has raised complex issues and intricacies pertaining to cross-border insolvencies in different situations. For these situations, ascertainment of the law to be applied, the jurisdiction where the proceedings are to be conducted and enforcement of the orders regarding the assets are crucial for the settlement of the dispute. A uniform cross-border insolvency law in different countries would enable a smooth resolution of these complexities. Therefore, the United Nations Commission on International Trade Law adopted in 1997 a Model Law to assist states in framing their cross-border insolvency law. This article discusses the intended transformation of Indian Cross-Border in consonance with the Model Law.  Introduction To The Indian Cross-Border Insolvency Law The Indian cross-border insolvency matters, which are presently governed by Sections 234 & 235 of the Insolvency and Bankruptcy Code, 2016 [“IBC”] does not provide sufficient and comprehensive legal framework to deal with different types of matters.[i] In order to smoothen the process of cross-border insolvency by increasing the cooperation between the domestic and the foreign courts, and domestic and foreign insolvency professionals, the Insolvency Law Committee[ii] has proposed a draft law which is in consonance with UNCITRAL Model Law of Cross-Border Insolvency, 1997 [“Model Law”]. The adoption of the Model Law in India has been recommended in the past by the Eradi Committee[iii] and the N.L. Mitra[iv] Committee. However, the same has not yet taken the form of legislation. The authors seek to analyse the lacunae in the proposed draft with the hurdles faced by different countries in implementing the Model Law. Urge For A Comprehensive Framework The provisions of IBC regarding cross-border insolvency require bilateral agreements with other countries and issuance of request letters to foreign courts leading to delay and uncertainty. Uncertainty further lies with the implementation of bilateral treaties as well because of varying provisions with different nations, which escalates the burden of Judiciary. Till date neither India has any bilateral agreement with any country, nor there exists any specific provision under the Code of Civil Procedure, 1908 for enforcing foreign insolvency orders (the extant general provisions to recognize and implement foreign judgments and orders on a reciprocal basis given in the Code of Civil Procedure shall apply to insolvency proceedings as well in the interim). A robust framework to deal with cross-border insolvency will lead to ease in doing business resulting into increase in the entry of foreign companies and investment. Hurdles & Lacunae In The Proposed Draft The Model Law provides a framework only for individual companies and not for enterprise groups. With the increase in financial integration in the world and increasing multinational companies, the present model framework is expected to have limited applicability. It is pertinent to note that Part III of the IBC has not been yet notified. This restricts the application of Model Law to corporate debtors only and not to partnerships and individuals. Initially, Singapore had also followed a similar approach. However, in the UK and US, the application of the law is not restricted to corporate debtors. The proposed draft allows the authority to refuse to take action if it is of the opinion that it is manifestly contrary to public policy. A similar approach has been followed by all the other jurisdictions as well. The proposed draft uses the term ‘manifestly’ in order to narrow down the ambit of ‘public policy’. In the absence of any guidelines to exercise this discretion, the same becomes quite vague and gives a lot of discretion to the authority, which indicates a need to monitor its application by NCLT. Section 375(3) (b) of the Companies Act, 2012, deals with the insolvency of Unregistered Companies, which may include in its ambit foreign companies as well. According to this provision, an unregistered company may be wound up if it is unable to pay its debts. In the US, Section 220 of the Companies Act, 2006 (US), deals with the insolvency of all the types of enterprises. However, in the UK there is no such provision and insolvency of every type of enterprise is governed by the Insolvency Law only. This multiplicity of provisions leads to the duplicity of regimes and confusion reigns. There is a need to harmonize these sections by introducing necessary amendments to bring all the insolvency proceedings under a common Section 17 of the proposed draft allows the tribunal to declare moratorium (a legal authorization to debtors to postpone payment) in respect of foreign main proceedings. A foreign main proceeding means a foreign proceeding in the country where the debtor has the center of its main interests, such as its headquarters or its place of incorporation. A foreign proceeding is “non-main” proceeding if it is filed where the debtor has only an establishment or place of operation. The applicability of Section 17 of the proposed draft to foreign non-main proceedings is still a question. Moreover, if not, the committee has not given satisfactory reasoning for the same. The draft proposes to provide foreign representatives with direct access to domestic courts. Here one major issue is that India does not allow foreign lawyers and law firms to practice in India.[v] However, the Committee has proposed that foreign representatives similar in nature to insolvency professionals may form a separate class of professionals. The committee recommended the adoption of the Model Law on the principle of reciprocity. It means that Indian Courts will recognize and execute the foreign court’s judgment, only if that foreign country has adopted similar legislation or entered into a bilateral agreement. However, with subsequent economic development in future and the successful experience of the Model Law’s implementation, this requirement may be withdrawn. Furthermore, neither the US nor the UK has such a requirement of reciprocity. Such provision would limit the application of the Indian law on cross-border insolvency

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