Author name: CBCL

Companies (Significant Beneficial Ownership) Rules, 2018: An Overview

Leave a Comment / Company Law /

[Ishita Vyas and Akash Srivastava]   Ishita & Akash are 5th year students at HNLU, Raipur. Introduction The ‘White Paper on Black Money’ prepared by the Ministry of Finance in May 2012 categorically stated that black money has a “debilitating effect on the institutions of governance and conduct of public policy in the country”[1]. The Govt. of India has been persistently fighting against the menace of black money and corruption. In pursuance of that it had demonetized higher value currency in December 2016. The parliament also amended the Benami Transactions (Prohibition) Act, 1988 in November 2016. Moreover the Securities and Exchange Board of India, via its circular no. CIR/IMD/FPIC/CIR/P/2018/64 dated 10th April 2018, came out with new KYC requirements for ‘foreign portfolio investments’ that ultimately seek to reveal the names of the actual beneficiaries behind a particular investment or security. This step has been taken to check prevention of money laundering and round-tripping[2] of unaccounted income. Misuse of corporate vehicles for the purpose of evading tax or laundering money for corrupt or illegal purposes, including for terrorist activities has been a concern worldwide[3]. Complex structures and chains of corporate vehicles are used to hide the real owner behind the transactions made using these structures.[4] On the same lines, the Ministry of Corporate Affairs (“MCA”) sought to amend the Companies Act in 2017. The Companies (Amendment) Act, 2017 has brought about some major changes to the law governing companies in India. It has introduced the concept of beneficial ownership along with an exhaustive compliance requirement with respect to reporting of the same. Section 89 and 90 deal with declaration of beneficial ownership and registration of significant beneficial owners in a company. In order to supplement the statutory provisions, the MCA has also notified the Companies (Significant Beneficial Ownership) Rules, 2018 on June 13, 2018. Important Definitions Firstly, beneficial interest (“BI”) refers to the right or entitlement of a person alone or together with any person, directly or indirectly, through contract, arrangement or otherwise, to exercise or cause to be exercised any or all of the rights attached to the share; or to receive or participate in any dividend or other distribution in respect of such share[5]. A significant beneficial owner (“SBO”)[6] is an individual who holds not less that 10%[7] of shares in a company or the actual exercising of significant influence or control, over the company, but whose name is not entered into the register of members of the company[8]. It has been further explained that depending on the form of business the method of identification of the Significant Beneficial Owner will vary[9]. In case of a the member being a company, the significant beneficial owner shall be the natural person, who holds not less than ten percent of the share capital of the company or who exercises significant influence or control in the company through other means. In case of the member being a partnership firm, the significant beneficial owner is the natural person who holds not less than ten percent of capital or has entitlement of not less than ten percent of profits of the partnership. Moreover, where there is no natural person identifiable then the person who holds the position of senior managing official will be the SBO.[10] In case of the member being a trust, the SBO would be the author, trustee and the beneficiaries with not less than ten percent interest in the trust and any other natural person exercising ultimate effective control over the trust through a certain chain of control or ownership. Whereas a ‘registered owner’ means a person whose name is entered in the register of members of a company as the holder of shares in that company but who does not hold beneficial interest in such shares[11]. Compliances The compliances can be categorized into three divisions on the basis of applicability. For a registered owner: A registered owner is supposed to make a declaration to the Company specifying the name and other particulars of the person who holds the beneficial interest in such shares, as specified[12]. The rules do not specify any particulars or any particular form which needs to be referred to for this declaration. For a person holding beneficial interest: Holder of beneficial interest must submit a declaration to the company specifying the nature of his interest and particulars of the corresponding registered owner in whose name the shares are held. However, a declaration form has been prescribed only for the declaration of significant beneficial ownership. Such a declaration needs to be made within 90 days[13] of the commencement of the SBO Rules and within 30 days[14] in case of any change is Significant Beneficial Ownership. Such declaration must be made in the prescribed format i.e. Form BEN- 1 For the Company: Whenever a declaration has been made under Section 89 to a company, the company is supposed to make note of those declarations in a separate register.[15] It is also supposed to file a return to the Registrar of Companies (“ROC”) regarding such declarations within 30 days of receiving these declarations. The return needs to be filed the format of Form BEN-2. The register of declarations needs to be prepared in the prescribed format i.e. Form BEN- 3. This register shall be open for inspection during business on every working day as decided by the Board of Directors of the Company. The inspection can only be open for members and for not less than two hours each day. The company can charge fees subject to a maximum of Rs 50.[16] A company shall also have to give notice to any person whom the company knows or has reason to believe to be a significant beneficial owner of the company, or to be having the knowledge of the identity of an SBO or another person likely to have such knowledge or to have been an SBO of the company at any time during the preceding three years from the date of issue of notice and who is not

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P.Radha Bai and Ors. v. P. Ashok Kumar and Anr.: An Interplay of Limitation and Arbitration

3 Comments / Arbitration Law /

[Saara Mehta]   Saara is a 4th year student at NLIU,Bhopal. Introduction A case decided on 26th September, 2018 by a Division Bench of the Supreme Court, P.Radha Bai and Ors. v. P. Ashok Kumar and Anr.[1], is an aid towards understanding how the Limitation Act, 1963 (“Limitation Act”) operates vis-à-vis the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The issue under consideration was whether Section 17 of the Limitation Act could be used to condone the delay in filing an application to set aside the award under Section 34(3) of the Arbitration Act. Under Section 17, the period of limitation begins to run from the time when fraud played against the award debtor is discovered or could have been discovered with reasonable diligence.[2] Factual Matrix and Adjudication prior to the Supreme Court An award was made in February, 2010 by a tribunal adjudicating a dispute between the Appellants no. 1-6 and Respondents no. 1 and 2, all heirs of a common descendent. The award was received within 3 days of its delivery. According to the Respondents, the Appellants entered into a Memorandum of Understanding (“MoU”) with the Respondents in bad faith. They submitted that pursuant to this, the Appellants agreed to give certain properties to Respondent no. 1, which cumulatively were more than what the award stipulated. Further, after entering into the MoU,   the   Appellants   were   required   to   execute   Gift   and Release   Deeds   to   give   effect   to   the   MoU. This execution, allegedly, was delayed intentionally, owing to which the limitation period to apply for execution of the award under Section 34(3) (three months and an extended period of 30 days) expired. On expiry, the Appellants filed an Execution Petition for execution of the award, but the trial court held that this was not maintainable. On appeal, the High Court set aside this order; the trial court was directed to decide the petition on its merits. On realising the intentional delay of the Appellants in executing the gift deed, the Respondents applied under Section 34(3) of the Arbitration Act. They sought to condone the delay in the application on account of fraud by the Appellants. The City Civil Court, Hyderabad, dismissed the application on the ground that it was not empowered to condone delay beyond three months and 30 days, as stipulated in Section 34. Following this, four civil revision petitions were filed by the Respondents before the Andhra Pradesh High Court under Article 227 of the Constitution. The High Court remanded the matter back to the trial court solely for determination of the question of whether Section 17 of the Limitation Act would apply to condone delay in filing an application under Section 34(3) of the Arbitration Act. The Respondents, aggrieved by the High Court’s order, appealed to the Supreme Court in the present case. The Supreme Court’s Decision The Respondents submitted that since application of Section 17 of the Limitation Act had not been specifically excluded under the Arbitration Act, the benefit of Section 17 should not be denied to the Respondents. The Supreme Court, in this regard, took note of Section 29(2) of the Limitation Act, which provides: “Where any special or local law prescribes for   any   suit,   appeal   or   application   a   period   of limitation different from the period prescribed by the   Schedule,   the   provisions   of   Section   3   shall apply   as   if   such   period   were   the   period prescribed by the Schedule and for the purpose of determining any period of limitation prescribed for any suit, appeal or application by any special or local law, the provisions contained in Sections 4 to 24 (inclusive) shall apply only in so far as, and to the extent to which, they are not expressly excluded by such special or local law”.[3] The case of Vidyacharan Shukla v. Khubchand Baghel and Others[4] was relied on to interpret this section. This case provides that Section 29(2) has two limbs. The first limb is that the limitation period prescribed by the special law or local law shall prevail over the limitation period prescribed in the Schedule to the Limitation Act. In the present case, the Supreme Court noted that the Arbitration Act was a special law and thus the period in Section 34(3) would apply to filing objections to the arbitral award. The second limb, identified in Vidyacharan, is that Sections   4   to   24   of   the Limitation   Act   will   apply   for   determining   the   period   of limitation “only in so far as, and to the extent to which, they are   not   expressly   excluded   by   such   special   or   local   law.”[5] Thus, the Court held that Sections 4 to 24 would apply towards limitation period under the Arbitration Act only if these sections were not expressly excluded under the Act. Relying on previous pronouncements, in which Section 12 and 14 of the Limitation Act had been extended to condone delay under Section 34, the Respondents argued that since application of Section 17 had not been expressly excluded by the special law, it could be extended in the same way. Citing Vidyacharan, as well as Hukumdev Narain Yadav v. Lalit Narain Mishra,[6] the Court concluded that “express exclusion can be inferred either from the language of the special law or it can be necessary implied from the scheme and object of the special law”. The Court observed that there existed a contradiction in the language of Section 17 and Section 34(3). The Supreme Court, inter alia, observed as follows. First, Section 17 of the Limitation Act does not extend or break the limitation period. It only postpones commencement of the limitation period till the applicant has discovered the fraud. Besides, Section 34(3) of the Arbitration Act has a limitation provision built in itself. It provides that the limitation period commences from the when a party making an application had received the arbitral award, or from the disposal of a request under Section 33 of the Arbitration Act for correction and interpretation of the Award. Section

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Securities and Exchange Board of India (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018: An Overview

Leave a Comment / Capital Markets and Securities Law /

[Utkarsh Jhingan & Akhil Kumar]   Utkarsh and Akhil are 4th year students of NUALS, Kochi. Introduction Securities Exchange Board of India (hereinafter “SEBI”) vide Notification Number: SEBI/LAD-NRO/GN/2018/39, dated October 3, 2018 notified the Securities and Exchange Board of India (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018, (hereinafter “Regulation”). These Regulations have been made by SEBI in exercise of the powers conferred by Section 30 read with sub-section (1) of Section 11 and Section 28A of the Securities and Exchange Board of India Act, 1992[i] (15 of 1992), Section 23JB of the Securities Contracts (Regulations) Act, 1956[ii] (42 of 1956) and Section 19-IB of the Depositories Act, 1996[iii] (22 of 1996). The Regulation aims to recover investors’ money in cases of felonious collective investment schemes. The provision of this Regulation shall apply mutatis mutandi in respect of the proceedings under the Securities Contracts (Regulation) Act, 1956 or the Depositories Act, 1996. These Regulations are a follow up to an earlier decision by the SEBI to empanel third party workers as receivers for management and sale of assets attached through regulatory orders for recovery of penalties and investors’ money from defaulters who have failed to return monies to the investors. The order in the case of Opee Stock Link[iv] was the first disgorgement order that was passed by the Supreme Court. In this case, shares of Jet Airways Limited and Infrastructure Development Finance Company Ltd. were offered to the public at large. The issue of shares in relation to both the companies had been oversubscribed. However, there were several irregularities that had been committed by certain persons related to both the companies. As a result of these irregularities, the Supreme Court ordered to compensate the retail investors. Further, the passing of these Regulations is a step taken forward by SEBI to seek disgorgement of unlawful gains from the culprits. Applicability The Regulation shall only be applicable in cases where a non-compliant entity of SEBI’s orders is untraceable. In such cases, the Recovery Officer (hereinafter “RO”) can appoint an administrator for the purpose of selling the attached properties and refunding the promoters. According to Provision 5 of the Regulation, only persons registered with Insolvency and Bankruptcy Board of India (hereinafter “IBBI”) as Insolvency Resolution Professionals (hereinafter “IRPs”) are eligible for such appointment. The administrator under Regulation 5(4) has a duty to provide an undertaking to the Board of absence of any conflict of interest with the defaulter, directors, promoters, key managerial personnel and the group entities.[v] Additionally, he should also be a person who is independent/impartial and devoid of any conflict of interest throughout the tenure. It has been provided that any dispute regarding the conflict of interest of the Administrator shall be decided by the RO. Terms of Appointment Regulation 6 provides that both the terms of appointment and remuneration shall be decided on a case to case basis after taking into consideration the amount of work, number of investors and the amount involved. Functions The administrator shall perform his functions as per the directions of the RO. He is empowered to obtain any document regarding ownership and possession of properties, claims of investors, details of amounts raised and the amount of settled debt from the defaulter or any other person. He shall also maintain a record of the properties attached in the process, the bank as well as dematerialized accounts and the value of monies and securities held by the defaulter. Furthermore, he shall also sell the attached properties as per the directions of the RO. The Regulations also empower the Administrator to carry out any act with the prior approval of the RO essential for the purpose of carrying out his duties thereto. In the process of discharging his functions, the Administrator can appoint independent charted accountants to verify the details of amount raised and the quantum of debt already settled. He shall also submit monthly report(s) as and when called by the RO for the purpose of determining the progress made by him.  Sale of properties The process of sale of properties will be undertaken by the Administrator after he conducts an independent valuation of the property. The Administrator also has the option of undertaking the sale of property via e-auction for which he can engage an e-auction agency. The RO after considering the valuation report may put a reserve price on the property. Regulation 9 states that the Administrator shall also issue advertisements in an English and Hindi Newspaper having nationwide circulation for the purpose of inviting claims from the investors. The defaulting company and its officers are also supposed to furnish an undertaking that they shall be liable for payment if any complaint is received in future by the Board from any investor. Cost incurred in Administration and Repayment Process The entire cost that is incurred in relation to the sale of properties, verification, remuneration of the administrator and any other person appointed by him in connection to the repayment process shall be borne by the defaulter. If he fails to pay, then the cost incurred in the administration and repayment process shall be given priority over other liabilities. Furthermore, the cost and expenses incurred should be reasonable, should be directly related to and necessary for the act and purpose mentioned in the Regulations. Priority in Distribution of Sale Proceeds The amount recovered from the sale of properties of the defaulters shall firstly be used for the purpose of adjusting the costs incurred by the Board including the charges to be paid to the administrator and persons appointed under him. Thereafter, the remaining amount shall go to the investors and the penalty/fee due from the defaulter to SEBI in the order of priority. Return of Monies Exceeding the Liability In circumstances where excess monies exist after the completion and payment of all the defaults and the amount due, it shall be paid to the defaulter upon the completion of three years after the completion of the refund process. It is

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Significance of Structuring a Transaction from a Competition Law Perspective: Learnings from the Telenor Order

Leave a Comment / Competition Law /

[Rajat Sharma & Manav Gupta]   Rajat and Manav are 4th year students of NLU, Jodhpur. Introduction: A “merger” or “amalgamation” or “acquisition” [referred to as “Combination” in the Competition Act] involving an enterprise can, inter alia, result in a reduction in the number of competitors, or in the ability of the existing competitors to compete effectively, and therefore raises several competition concerns. In India, the competition law aspect of such combinations is majorly governed by Sections 5 and 6 of the Competition Act, 2002[1] (the Act), read alongside the Competition Commission of India (Procedure in regard to the transaction of business related to combinations) Regulations, 2011[2] (Combination Regulations). The Act empowers the Competition Commission of India (CCI) to exercise adjudicatory authority while deciding whether a certain proposed combination could have an appreciable adverse effect on competition (AAEC) in India. In this regard, section 6(2) of the Act requires the parties involved in such a proposed combination to notify the CCI and seek mandatory approval, before effecting or “consummating” the said combination [if the proposed transaction falls within the thresholds prescribed under section 5 of the Act].  In cases where the parties fail to notify the CCI and ‘consummate’ the transaction without getting prior CCI approval, appropriate penalties are imposed by the CCI under Section 43A of the Act. Such cases constitute a violative action termed as ‘gun-jumping’. In one such recent Order (Telenor ASA, Telenor [India] Communications Private Limited & Telenor South Asia Investments Pte Limited)[3] passed by the CCI in proceedings under Section 43A, the role of structuring a transaction in order to avoid potential conflicts with competition law were highlighted. The Order also re-established jurisprudence on what constitutes ‘control’ within the meaning of the Act, especially in cases of highly complex structured transactions. Relevant provisions: The initial notice was filed by the parties under Regulation 9(4) of the Combination Regulations. Regulation 9(4) pertains to filing of one notice for a series of interconnected transactions, by means of which the ultimate intended effect of the primary transaction is achieved. Other relevant provision attracted in these proceedings was Regulation 4, read with Item 8 of Schedule I of the Combination Regulations, which exempts intra-group asset transfer and intra-group acquisition of shares. The Transaction & Initial Observations: The initial notice under Section 6(2) of the Act was filed in 2012 by Lakshdeep Investments & Finance Private Limited (Lakshdeep). The notice was filed to notify the CCI regarding acquisition of shares of Telewings Communications Services Private Limited (Telewings/Telenor India) by Lakshdeep pursuant to a Share Subscription & Shareholders’ Agreement (SSHA). The SSHA was entered into between Telenor South Asia Investment Pte Limited (Telenor South Asia), an indirect wholly owned subsidiary of Telenor ASA (Telenor Global), Lakshdeep and Telewings. There were a series of steps to be undertaken to complete the intended primary transaction and the combination envisaged Lakshdeep to initially acquire 51% shares in Telewings and ultimately hold 26% shares in Telewings. As a first step, the transaction was contingent on acquisition of spectrum for carrying telecom operations as part of the 2G spectrum auction by Telewings. Once this was done, Lakshdeep would acquire 51% shares of Telewings (Lakshdeep Share Transaction). Next, Telewings would acquire business of Unitech Wireless Private Limited (Uninor Business Transaction) and finally, once approval of the erstwhile Foreign Investment Promotion Board (FIPB) was received, Telenor shall increase its shareholding to 74%, such that Lakshdeep shall hold 26% in Telewings (Telenor Share Transaction- Tranche I). The parties contended that Step-III and Step-IV of the series of transactions are exempted and need not be filed with the CCI, however, the CCI may assess them in the alternative. The CCI, however, while approving the Lakshdeep transaction noted that since Lakshdeep would hold 51% shares in Telewings, the transfer of business from Uninor to Telewings and consequent increase in stake of Telenor in Telewings from 49% to 74% is not an intra-group transaction and therefore, not exempted. In an appeal to the erstwhile Competition Appellate Tribunal (COMPAT), it was noted that Steps III & IV are entirely separate and were diabolically mixed up. The COMPAT also observed that the CCI’s observations on the last two steps were premature in nature. Now, fast forward to 2017 when a separate notice was filed by Bharti Airtel Limited and Telenor India for a proposed transfer of 100% shares of Telenor India to Airtel. Interestingly, when CCI perused this notice, it found out that Telenor consummated the last two steps of the proposed 2012 transaction and even increased its shareholding in Telenor India from 74% to 100% without notifying the CCI of the same. The CCI was irked as it denied the exemption in its earlier notice and since Lakshdeep exercised joint control over Telenor India, the increase of shareholding from 74% to 100% by Telenor meant a change of control from joint to sole and hence, notifiable. On the basis of these, the CCI started proceedings under Section 43A of the Act. Submissions: With respect to the applicability of exemption on Steps III & IV, Telenor submitted that interpretation of the term ‘group’ in accordance with Explanation (b) to Section 5 of the Act becomes relevant while applying the intra-group acquisition exemption, as it stood pre-amendment in 2012 (Old Item-8 exemption). The term ‘group’ under Explanation (b) to Section 5 of the Act states: “two or more enterprises which are, directly or indirectly, in a position to: (a) exercise 26% or more of the voting rights in the other enterprise; or (b) appoint more than 50% of the members of the board of directors in the other enterprise; or (c) control the management or affairs of the other enterprise.” It was asserted that since ‘Uninor’ was already a part of the Telenor Group by virtue of the latter’s 67.25% shareholding in the former, thereby meeting criteria (a) & (c) of the abovementioned definition. Further, irrespective of ,Lakshdeep’s shareholding, Telenor possessed 49% shares in Telewings and had the authority to solely exercise decisive influence

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Commodity Derivative Trading : A Unified Exchange Regime

2 Comments / Capital Markets and Securities Law /

[Vaidehi Soni]   Vaidehi is a 4th year student of NUALS , Kochi Background The Securities and Exchange Board of India (SEBI) announced to have a unified exchange regime from October 1, 2018, wherein stock exchanges would be allowed to offer to trade in commodity derivatives. Pursuant to the said approval, Bombay Stock Exchange (BSE) is set to launch commodity derivatives segments for the delivery-based futures contract in Gold (1 kg) and Silver (30 kg) and later add metals, energy products following by agricultural commodities such as processed/Un-processed farm produce whereas NSE apart from gold and silver will begin with mini gold (100 grams) contracts so as to attract small investors from October 12, 2018. Additionally, considering the fact, Multi Commodity Exchange (MCX) being the market leader, dominates in the trade volumes in non-agricultural commodities derivatives, BSE has decided to waive off the transaction charges for the first year of commodities market operations in order to encourage more participants to join commodity markets. Understanding Commodities market Commodities markets, globally and in India can be broadly categorised into two segments, namely, the market for spot transactions and the market for derivative transactions. The former market deals with the purchase (or sale) of commodities and the settlement of the transaction takes place simultaneously i.e. trade in commodity takes place either on a physical market place or on an electronic platform whereas the latter market deals with the exchange-traded commodity futures markets, which offer a highly standardized platform for trading financial instruments which derive their value from underlying physical commodities including settlement of trade at a future date. The commodity derivative market provides a platform for discovery of future prices of a commodity and also offer an opportunity to the participants in the spot market to hedge themselves against fluctuations in future prices of the underlying commodities. A sound derivative market through hedging delivers price discovery and price risk management by stakeholders including commodity traders, farmers, and market participants. Derivative trading in India takes place either on a separate segment of an existing Stock Exchange or on a separate and independent Derivative Exchange. The settlement & clearing of all trades on the Derivative Exchange/Segment would have to take place through a Clearing Corporation/House, which is unimpeded in governance and membership from the Derivative Exchange/Segment. Legal Framework for Derivative Market The derivatives market is governed by a central legislation, viz., Securities Contracts Regulation Act, 1956 (SCRA) which provides for the legal framework for organized derivatives trading and SEBI acts as the oversight regulator. In pursuance of recommendations made by the commodities derivatives advisory committee (CDAC), vide circular dated September 28, 2016, certain amendments/omissions were made to Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC) so as to enable commodity derivatives exchanges to deal in Options. As per section 2(bc) of The Securities Contracts (Regulation) Act, 1956 (SCRA) a commodity derivatives contract can either be: Physical delivery of goods (not being a ready delivery contract) as notified by Central Government or For differences, which derives its value from prices or indices of prices of such underlying goods or activities, services, rights, interests and events, as may be notified by the Central Government, but cannot have securities. As per section 2(1) (fa) of SCRA, the commodity derivative exchange means a recognized stock exchange which assists, regulates or controls the business of buying, selling or dealing only in commodity derivatives. Since the Commodity derivative exchange cannot deal in any other product except for commodity derivatives, an option contract with commodity futures may not be eligible for trading on commodity derivatives exchanges. To overcome such legal hurdle, multifarious amendments are made including omission of the category of “Commodity Derivatives Exchange” under SECC regulation” with effect from October 1, 2018 so as to enable commodity derivatives exchanges to also organise trading in option contracts with commodity futures and accordingly  all norms issued for commodity derivative exchanges till date shall be applicable to commodity derivative segments of recognised stock exchanges/recognised clearing corporations to the extent of its applicability. Need for Integration of Spot and Derivative Markets With increasing commercialisation and changing demands of consumers, traders and other market participants; BSE’s foray into commodities derivatives The need for integration is more felt for the overall benefit to the primary producers and value chain participants as: Firstly, A comprehensive mechanism for integration would improve cohesion between futures and physical markets. Secondly, in case, the commodity is assayed before trading, it may also lead to lead to the standardization and assurance regarding the quality of commodity to the buyers. Thirdly, on an electronic spot exchange, as the price of a commodity would be determined by a wider cross-section of people from across the country in contrast to the present scenario where price discovery for commodities takes place only through local participation, such platform will bring about efficient price determination and will ensure transparency in price discovery. Fourthly, A single market may also lead to lower operational cost, reduction in timelines, wider market penetration as technological advancement would result in amelioration of accounting of all the transactions that are taking place in the market. Additionally, the Derivative market would achieve better convergence pursuant to development of a regulated electronic spot platform and/or regulated commodity spot exchanges as is evident from the success achieved by the securities market or the commodity derives market after moving to the electronic platform. Since the derivatives market assures that the future and spot price of a commodity converges on the day the derivative contract lapse for settlement, the discovery of real-time spot prices of a commodity on a pan-India electronic spot exchange will unequivocally strengthen the convergence of future and spot prices of a commodity thereby increasing efficiency of both spot and derivatives market. Thus, the functioning of these two markets could help Indian commodity markets improve its efficiencies and enhance the effectiveness of the overall functioning of the commodity ecosystem so as to benefit all the stakeholders.[1] Challenges and Recommendations Such integration poses a

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Analyzing the proposed mandate of SEBI for Large Corporates

4 Comments / Capital Markets and Securities Law /

[Kartikey Kanojiya]   Kartikey is a 5th year student of Institute of Law, Nirma University Introduction Securities and Exchange Board of India (SEBI) by virtue of the consultation paper released on 20th of July proposed an idea whereby they will be making it mandatory for the Large Corporates to raise 1/4th (25%) of their finance through bond markets only. This idea was first proposed by Mr. Arun Jaitley, finance minister of India, during the budget session speech of 2018-2019. He said “SEBI will consider mandating, beginning with Large Corporates to raise 1/4th of the financial need through debt market only.”[1]Subsequently, SEBI took up this issue and finally released a consultation paper. In this article the author analyzes the feasibility of the proposed mandate of raising 25% of finance through bond market only. Applicability By virtue of this paper, the mandate will be applicable only to Large Corporates, which have been defined as: Any entity whose outstanding borrowing is more than 100 Crores; Has a credit rating of AA and above; An entity which intends to finance itself with long-term borrowings (Long term is defined here as any period above 1 year) and; Has listed its securities on any of the stock exchange.   The mandate will be applicable from April 1, 2019 on all the Large Corporates who as on 31st March of any financial year fulfills all four conditions mentioned above. Thus, if any entity as on March 31 of a financial year is identified as Large Corporate then from the next financial year i.e. from April 1, the mandate will be applicable. However, Scheduled Commercial banks as mentioned in Schedule 2 of the Reserve Bank of India Act, 1934 are exempted from this mandate.[2] Compliance Mechanism Under the compliance mechanism it says that the large corporate shall inform the stock exchange about the same. It also creates two blocks of compliances. The First block constitutes first two years of implementation and the second block constitutes the third and fourth year of implementation. Under First block i.e. first and second year of implementation, there is a process of comply and explain whereby, the Large Corporates will try to fulfill the requirements but if they fail to do so they have to explain the reasons for the failure in writing to the authority. Under second block i.e. third and fourth year of implementation it is mandatory for the Large Corporates to meet the mandate and if they fail to do so a penalty of 0.2% to 0.3% of the shortfall will be levied on them. [3] Analysis Trend of Bank v. Bond financing in India. If we look at the prevailing finance market in India, then there is a shift in the borrowing practices followed by the corporates. The data from financial year 2012-13 to 2016-17 i.e. data of 5 financial years shows that the trend line of bond financing is going upwards while the same of bank financing is sloping downwards. In future the trend of Bond Financing will increase because of the enactment of Insolvency and Bankruptcy Code, 2016. If we look at the preference which is given to the bond holders, then they are placed above the government and thus making it easy for the bond holders to recover during the liquidation period even before tax recovery.[4] General benefits of Bond Financing Better Borrowing terms: When a company goes for loan financing the rate of interest is already fixed but in the Bond financing the company can fix the interest keeping in mind the market conditions prevailing during the time and the predicted future of the company. This flexibility gives company an edge to go for Bond Financing.[5] Covenants and Restrictions: When a company goes for loan financing there may be a time where the lender puts some restriction such as that borrower cannot make any material change in the company without the affirmative vote of the creditor and thus making it difficult for the company to enter into any arrangement. In bond financing the only liability the bond issuer has is to repay the principle amount at the time of maturity and to pay interest as per the agreed terms. The bond holders do not get any control in the company as compared to the loan lender.[6] Non Dilution in the shareholding of the present shareholders: As and when new shares are issued to raise finance the shareholding of the present shareholder depletes because of the infusion of the shareholders. For example, I had 25% share in the company and thus, a material stake in the governance matters of the company but due to issuance of new shares and new shareholders entering the company my shareholding is reduced to 20% thus, making my clout in the governance of the company less. This is not the case with bond financing. Preference during the liquidation: After the enactment of Insolvency and Bankruptcy Code, 2016 the preference is given to the bondholders, and they are placed above the government and thus making it easy for the bond holders to recover during the liquidation period. This is a positive step to attract the the investors.[7] Disadvantages of Bond Financing Long and Complicated process: To issue bonds in the market SEBI (Issue and Listing of debt securities regulations), 2008 (“regulations”) are to be followed which makes it a complex process. As per the regulations, merchant bankers are to be appointed which also makes it financially difficult as compared to loan financing. Early Repayment: In bond financing the main issues is of repayment. Even if a company has money after some time they cannot pay the debt and settle it. In Bond financing there is no mechanism of early repayment of the claim and final setoff is done between the company and the bond holder. On the other side, in loan financing the money can be paid back soon after taking loan and there is no bar for doing the same except for a penalty which is levied upon the borrower. Bonds

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Application of the term supply under CGST Act to sale as a going concern

Leave a Comment / Taxation Law /

[Maithry Kini]   Maithry is a 4th year student at School of Law, Christ (deemed to be university), Bengaluru Introduction With the enactment of a new regime for indirect tax certain aspects have become ambiguous. The recent ruling of Karnataka bench of Authority for Advance Ruling (“Authority”)has offered certain clarity with respect to Goods and Service Tax (“GST”) implications on hiving off or demerger transactions. In the application filed by M/s Rajashri Foods Private Ltd[1] (“Applicant”) the question to be determined was whether the transaction of demerger or sale of a unit as a going concern would amount to supply of goods or supply of services or supply of both goods and services. Background of the case The Applicant sought to sell a fully functional unit of the entire business to another distinct person, who would not only benefit from a right over the assets but would take over the liabilities. The facts further convey that the business shall continue as a going concern. On the basis of this fact the Applicant claimed that such a transaction does not amount to supply and that they were exempted from the levy of the tax as under sl. no 2 Notification No.12/2017-Central Tax (Rate) dated 28.06.2017[2] (“Notification”). In order determine the scope and levy of tax it is necessary to examine the meaning of the term going concern and the supply under the Central Goods and Services Act, 2017 (“Act”). Analysis of the term sale as a going concern A going concern is a concept of accounting which implies business as a whole or in entirety. Transfer of a going concern means that the business activities shall continue to be carried out by the transferee as an independent business. This was reiterated in the landmark case of In re IndorRama Textile Limited where the court held that assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future.[3]The Supreme Court in Allahabad Bank v. ARC Holding (“Allahabad Bank Case”) held that if the company is sold off as a going concern, then along with the assets of the company, if there are any liabilities relevant to the business or undertaking, the liabilities too are transferred.[4] Demerger is sale of a business unit as a separate functional unit formulating into a resultant company. The demerger of an undertaking into another separate undertaking is facilitated by transferring the undertaking to a new company on a going concern basis. According to the Income Tax Act, 1971 demerger[5] is defined to be transfer of an undertaking as a going concern. Further the explanation states that there much be transfer of the business as a whole and does not include individual assets of the business. Considering the above explanations with the facts of this case it is clear that the sale of undertaking in this present case amounts to demerger wherein the unit is sold as a going concern and would result into a separate company with distinct identity.   In the present case the Authority while analysing the relevance and scope of the term going concern stated that: “Such transfer of business as a whole will comprise comprehensive transfer of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. It implies that the business will continue in the new hands with regularity and a nature of permanency.”[6] Analysis of the term Supply Section 7(1) of the Act[7] defines supply to include transfer for consideration in furtherance of business.This implies that the activity undertaken is in regular course of the business such as sale or transfer of the asset, should be the effect of transactions in due course of carrying out the business. Therefore the activity to be called as supply should be such that undertaking activity shall amount to “conduct of business or enhancing the business.” Further under Part 4 of Schedule II of the Act[8] referred in the Section states that supply also includesgoods forming part of the assets of a business, transferred or disposed off under the directions of the person carrying on the business. Such assets which are disposed off under such direction or transaction do not part a form of assets of the business. This transaction shall fall under the ambit of supply. It is pertinent to note that there is an exception under the paragraph which specifically excludes business transferred as a going concern to be treated under supply. Therefore, the transfer of a going concern as a whole does not comprise an activity undertaken in furtherance of the business activity. However, the scope of Section 7(1) extends beyond the meaning of the expression in course of furtherance of the business as it further states that it includes imports for consideration with or without any transaction in furtherance of the business. Thus, upon plain reading, Section 7(1) has a wider scope to include even sale as a going concern under the ambit of supply. Further, taking into consideration the Notification that has been relied upon, the table provides for description, rate and condition for levy of central tax. The sl. no. 2 which directly pertains to the subject matter at hand states services by the way of transfer of business. Further the title clearly classifies it as description of services. Irrespective of the provisions under the Act the intention to bring sale of going concern under supply is clear by classifying it under services. Thus the Authority ruled that the sale of business as a going concern amounts to supply and that the Notification shall cover the transaction on the condition that it is sold as a going concern. Conclusion The ruling brings in various excluded transactions under the umbrella of GST regime irrespective of the levy of tax. The Authority in the present case has stepped beyond the provisions of the Act and has heavily relied on the Notification to determine the meaning of supply. Strict interpretation and observance of the provision of the enabling Act must be mandated. Although tax statutes vastly enforce compliance, interpreting

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Data Privacy Protection: Corporate Social Responsibility or not?

Leave a Comment / Contemporary Issues /

[Aditi Jaiswal]   Aditi is a 3rd year student Dr. Ram Manohar Lohiya National Law University, Lucknow What is Corporate Social Responsibility? United Nations Industrial Development Organisation (UNIDO) defines Corporate Social Responsibility (hereinafter “CSR”) as, “A management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.” It is a concept where Companies strive to strike a balance between the financial, social and environmental imperatives, while addressing the expectations of the stakeholdersThe nature of CSR is such that it is not static in nature, rather is ever evolving.[2] With a view to keep the local players at par with the global standards, India became the first country to mandate and quantify CSR expenditure under the Companies Act, 2013.[3] Schedule VII of the Companies Act, 2013 lays down the list of CSR activities and suggests that communities should be kept at the focal point, but the draft rules suggest that the CSR needs to go beyond the concept of philanthropy.[4] Data – a Significant Corporate Asset The present day world can, without a shred of doubt, be called the digital age. The devices like mobile phones, wearable devices and personal computers, with their apps, social media, e-commerce platforms etc. have penetrated our lives and produce large amount of data.[5] Such data today has become a vital corporate asset which proves beneficial in a variety of ways, from identifying potential customers, improving customer services, predicting sale trends to recognizing patterns and reasons leading to performance breakdown in a company. A Pricewater Cooperhouse research points out that the total intangible assets comprise, on an average, some 75% of companies’ value.[6] Rearranging CSR endeavours The Digital India initiative was introduced in 2014 with a vision to transform the nation into a digitally empowered society. But till date, the Government hasn’t come up with a robust regime for data protection. Considering this, the data privacy protection becomes, important as the companies are heavily relying on the personal data of individuals for multifarious purposes and in lack of any law or regulation protecting such data, the Companies owe an ethical obligation to improve the data privacy protection by framing policies. The Indian Companies venturing in the global arena, need to rearrange their Corporate Social Responsibility endeavours and include data protection of their stakeholders in the list. Data privacy protection would majorly be covered under the domain of the social dimension of the Triple Bottom Line approach on which the Stakeholder model of CSR works. Social variable of the Triple Bottom line approach focuses on the social dimensions of the community and includes measurements of education, equity and access to social resources, health and well-being, quality of life, and social capital.[7] In the present times, data privacy protection is also one of the significant societal dimensions, as privacy and autonomy of an individual cannot be overlooked due to unregulated and arbitrary use of data, particularly after the Puttaswami judgement, in which the Supreme Court has recognized the informational privacy as an important facet of the Right to Privacy.[8] Consequences of data breach As already discussed, data plays a very vital role in identification and targeting of the particular consumer group. However, the data collected includes different forms of information which may include habits, financial details, personal details etc. Here it becomes necessary to point out that the effects of any data breach can be multi-faceted. On one hand, a single incident of data breach can harm the consumers psychologically, socially or economically, depending on the type of information leaked. Certain information may be central to the identity of an individual, like their sexuality, etc., which if revealed would affect the person psychologically. Disclosure of some kind of sensitive information, many a times, results in the stereotyping and pre-judging of an individual or lowering his reputation, which affects his social life negatively.[9] Leakage of an individual’s social security numbers or financial details can lead to a huge economic loss for him. On the other hand, companies may lose out trust which people have in them, leading to the existing as well as probable customers switching to another company or service provider. Corporate integrity is ensured by maintaining the brand value and goodwill. A company’s goodwill by breaching the promises of data care, both explicit and implicit, gets contaminated not only in the minds of the consumers, but also the partners, shareholders and all the other stakeholders. This leads to a decrease in the value of its investments in brand identity building by eroding the commercial trust. Attenuation in the goodwill of a Company would diminish the value of a Company’s assets, in turn distressing the Company, thus financially harming the employers, partners, shareholders and other stakeholders at large. According to a study in 2016, 25 percent of the leaders of the largest global companies consider the most serious impact that a cyberattack can have on their organization is the loss of reputation among their customers.[10] Skeptics may argue that keeping in mind the present scenario, investment in privacy protection is nonessential and would lead to swelling of costs of the Company in India. But this criticism comes due to a lack of a proper understanding of the long term negative effects when the privacy of the stakeholders is breached. A Company may face severe consequences, by ignoring the Data Privacy Protection Principles, especially if such a breach leads to a severe privacy violation of a consumer, or some other abuse of confidentiality, then the expenses involved in covering fines, court fees, advocates’ fees, settlement costs, paying damages and other working out other mechanisms further diminish the capital of a Company.[11] Above that, these days the databases of personally identifiable information are becoming a lucrative target for the cybercriminals who use this data for identity theft and even extortion rackets, where they can easily blackmail the Companies to pay the ransom otherwise they would leak the data.[12] These cybercriminals may even threaten with attacks from zombie drones, which could disrupt operations of

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GST Exemptions on Sanitary Napkins is not a Matter of Joy!

Leave a Comment / Taxation Law /

[Anmol Jain]   Anmol is a 3rd year student at National Law University, Jodhpur Introduction Goods and Service tax [“GST”] regime was implemented in India[1] with great hopes and number of positive aspiration, inter alia, removal of cascading effect of multiple indirect taxes, achieving uniform markets, increased regularisation of firms, simplified process.[2] The biggest of the advantage is that it has incorporated the existing indirect taxes imposed by Centre and State Governments on goods and services into a single tax called GST. Also, the compliance burden on businessperson has been eased out under the latest GST Amendment Bills,[3] which was initially pointed out as a disadvantage of the GST regime. Largely, majority of the people support GST for the success it has collected.[4] Further, the absorption of varied indirect taxes into GST has allowed the Government to effectively grant input tax credit[5] [“ITC”] to the manufacturers and businesspersons involved in the supply chain that has led to reduction in tax liability. To illustrate it, Stages Value Addition Tax Rate Tax Payable Final Amount A 100 10% 10 110 B 50 10% 5 165 C 20 10% 2 187   Under the earlier tax regime, the tax was to be paid at the total rate at which the output is being sold and not on value addition. The benefits of ITC are not available to everyone in the market. The law provides for minimum conditions that a businessperson have to fulfil.[6] One such condition is that any businessperson, who is involved in the business of a GST exempted goods, is not eligible for claiming ITC.[7] This provision of law would prove to be instrumental towards the concluding part of this Article. Along the news of successful implementation of GST over the past year came the news of exemption of sanitary napkins from GST.[8] Earlier, GST amount to 12% was levied on sanitary napkins. This development witnessed mixed response from the public. One Section of the society hailed the decision of the GST Council for their progressive outlook and freeing the necessity from the taxing process.[9] On the other hand, people have criticised such tax exemption.[10] I believe that the GST exemption has definitely reduced the cost of the product and therefore, cheering for the lower-priced product does not seem illogical. However, I moot through the course of this article that instead of GST exemption, the tax rate on the product should have been reduced to 5% as exemption brings negative implications on the domestic manufacturers along. Mathematical dig on the Hypothesis During the course of the following calculations, we shall be finding answers for two questions: Does GST exemption reduces the cost of the product? Does GST exemption brings with it evil for the domestic manufacturers in veil of larger social interest? Is GST exemption on sanitary napkins is a viable option to achieve such larger social interest? A Sanitary Napkin [“output”] is a combination of four inputs: Cotton with a GST rate of 5%; Aseptic packing paper with a GST rate of 12% Packaging plastic sheet with a GST rate of 18% Advertisement with a GST rate of 18%. These four inputs are assembled and synthesised together to derive the output. Generally, this industry only encompasses two level supply chain, i.e. one the first level, respective firms supply inputs to the output manufacturer; on the second level, the output manufacturer assembles the inputs to derive the output. To begin with the search for the first question, i.e. does GST exemption reduces the cost of the product, we shall be finding the change, if any, in the cost of the product through calculating the cost of the product in the pre-GST exemption period and post-GST exemption period, wherein the product is produced by a domestic manufacturer. Case 1: Domestic Manufacturer producing at 12% GST (ITC available) Assume that the cost of each input be Rs. 100. Therefore, cumulative input cost be Rs. 400. When such inputs are sold to the output manufacturer, total GST paid is: 5% of 100 (Cotton) = Rs. 5 12% of 100 (Aseptic packing paper) = Rs. 12 18% of 100 (Packing plastic sheet) = Rs. 18 18% of 100 (Advertisement) = Rs. 18 Therefore, TGP = 5+12+18+18 = Rs. 53 Now, assume that the value addition done by output manufacturer during assembling the inputs equals Rs. 47. Therefore, total cost incurred by the output manufacturer equals Rs. 500. Now, if he wishes to sell the product at a profit of 10%, i.e. Rs. 50, the final price [x] of product would be: x = 500 (total cost) + 50 (profit) +12x/100 (GST on output) – 53 (ITC) x = Rs. 565 Therefore, we find that a domestic manufacturer would be ready to sell his output at the cost of Rs. 565 when the output is exempted from GST. Case 2: Domestic Manufacturer producing with GST exemption (ITC not available) If we borrow the costs from the above illustration, Cumulative input cost = Rs. 400 Total tax paid = Rs. 53 Value Addition by the output manufacturer = Rs. 47 Therefore, total cost incurred by the output manufacturer = Rs. 500 Profit = Rs. 50 As there is no GST on the final output, the output manufacturer would not have to add the cost of GST in the final price of the output as well as he cannot claim the benefit of ITC. Therefore, we find that a domestic manufacturer would be ready to sell his output at the cost of Rs. 550 when the output is exempted from GST. If we compare Case 1 and Case 2, it would be safe to conclude that price of the output has decreased when the output was exempted from GST regime. This answers the first question as well that yes, GST exemption reduces the cost of the product. Moving on to the next question, i.e. does GST exemption brings with it evil for the domestic manufacturers in veil of larger social interest, we shall be finding the solution

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