Company Law

[By Manvi Sahni] The author is a student of National Law School of India University, Bangalore.   Introduction On 23 February 2024, MIH Edtech Investments B.V (“MIH”) and other investors filed a petition under Section 241 and Section 242 of the Companies Act, 2013 (“the Act”) against Think and Learn Private Limited (“T&L”) and its directors, alleging oppression and mismanagement. This was claimed on the ground of several corporate governance violations such as unreasonable delay in completion of R1’s statutory audit, regulatory probes by the Ministry of Corporate Affairs and Enforcement Directorate, and serious allegations of siphoning of funds (para 5).  The petition also sought an interim stay on the operation of a Letter of Offer for rights issue of shares, which refers to issue of further shares by a company to its existing equity shareholders in order to increase its subscribed capital. This was done because the petitioners claimed that allotment of shares under rights issue should not occur until an Extraordinary General Meeting is conducted where all the modalities regarding the rights issue, such as purpose behind it and subsequently utilisation of funds raised, are decided. The National Company Law Tribunal (“NCLT”) issued an order preventing any allotment of shares without increasing the authorised share capital (para 11). Despite this, the respondents proceeded with allotment of shares under the first rights issue and proposed a second rights issue. This led to an appeal before the Karnataka High Court, which remanded the matter to the NCLT while temporarily restraining the respondents from further allotting shares (para 6.4).  As the NCLT’s adjudication on the rights issue is pending, this paper argues that the NCLT was justified in staying the second rights issue and maintaining the status quo of shareholding until the case is resolved. To this end, it first, analyses how the first rights issue has violated Section 62 of the Act. This has been illustrated by contesting T&L’s submission stating that preference shares are included within the scope of Section 62(1)(a) and in turn highlighting the non-passing of a special resolution in the present case for issuing of further shares on a preferential basis. Second, it examines how the respondents’ conduct is oppressive to the petitioners as per the standard proposed in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., thereby substantiating their claim of oppression and mismanagement under Section 241.  Violation of Scheme of Section 62 due to Preferential Allotment of Shares This section aims to highlight how the respondents have violated the conditions specified in Section 62 of the Act and thus, the allotment of shares under the first rights issue must be set aside. To this end, this article first, establishes how the respondents are legally incorrect in claiming that preference shareholders are included within the ambit of Section 62(1)(a). Second, it argues that the non-passing of a special resolution in the present case is violative of the scheme outlined in Section 62(1)(c).  Non-inclusion of Preferential Shareholders within Section 62(1)(a) Section 62 of the Act provides for stipulations that are to be followed when a company proposes to increase its subscribed capital through issue of further shares. In this context, the respondents argued that Section 62(1)(a) has not been violated by issuing further shares to preference shareholders as this section does not expressly bar preference shareholders from participating in rights issue (para 11). They relied on Article 43 of the Articles of Association (“AoA”), along with a Shareholders Agreement, to argue that T&L had also permitted its preference shareholders to participate in the rights issue under Section 62(1)(a) (para 11). According to the NCLT Order dated 27.02.2024, no extension was granted with respect to closure date of first rights issue (para 11). The implication of this argument then would be that if the shareholders decline to subscribe to additional shares, directors could use their discretion under Section 62(1)(a)(iii) to allocate unsubscribed shares on a preferential basis, even to preference shareholders.   This argument is not legally sound because, firstly, the language of Section 62(1)(a) expressly provides that further issues of shares shall be offered to all ‘equity shareholders’. This is relevant as Section 43 of the Act creates a distinction between ‘equity capital’ and ‘preference capital’ as preference shareholders are entitled to preferential rights in context of payment of dividend and repayment in cases of winding up. Additionally, Section 62(1)(c) permits the issue of further shares to anyone, whether an equity shareholder or not, only if authorised by a special resolution. Upon comparing this with the language of Section 62(1)(a), the explicit mention of ‘holders of equity shares’, and not ‘shareholders’, in the latter indicates towards the legislative intention to exclude preference shareholders from the scope of Section 62(1)(c) and to provide for issue of shares to preferential shareholders under Section 62(1)(c). Hence, the respondents cannot be permitted to circumvent the requirement of a special resolution in Section 62(1)(c) by including preference shareholders under Section 62(1)(a).   Secondly, Section 6 of the Act states that the provisions of the Act will override the AoA, in case of a conflict. In the present case, Article 43 of the AoA, by including preference shareholders under Section 62(1)(a), contradicts the scheme of Section 62. Hence, since Section 62 will override Article 43 of the AoA, hence in the present case, preference shareholders are not included within Section 62(1)(a).  Therefore, the rights issue in question by T&L is liable to be set aside as preference shareholders are not included in the scope of Section 62(1)(a) of the Act.   Non-passing of Special Resolution Section 62(1)(c) provides that further shares shall be offered to any person, if  authorised by a special resolution. This qualifies as a preferential offer, which refers to issue of shares by a company to select persons or group of persons on a preferential basis, as defined in Rule 13 of the Companies (Share Capital and Debentures) Rules 2014. It specifically excludes scenarios where shares are offered through public issue, rights issue, or employee stock option scheme.  

[By Srinjoy Debnath] The author is a student of National Law School of India University (NLSIU).   INTRODUCTION Corporate Democracy, similar to sovereign democracy works as per the will of the majority. A company is fairly independent as far as decisions are concerned unless they violate a law. However, the Central Government has the power to intervene in the management of a company if the operations of the company are being conducted in a manner prejudicial to the public interest. Such an intervention has to be approved by the National Company Law Tribunal (“NCLT”) which has the power to pass “such order as it thinks fit”. The words like “Public Interest” and similar terms in s241 and s242 provide wide discretion to the Central Government and the NCLT under the provisions. The wide discretion under sections 241 and 242 gives rise to concerns about whether the discretion has any restrictions. In the case of UOI v. IL&FS, the Central Government had approached the NCLT u/s241(2) and asked for the removal of directors.i and the imposition of a moratorium on IL&FS and its 348 group companies.ii The NCLT granted the prayer for the removal of directors but rejected the prayer for the imposition of a Moratorium. However, on appeal, the NCLAT imposed a moratorium on IL&FS and its 348 groups until further orders. At this juncture, the question arises as to whether the NCLAT has the power to impose a moratorium against a company and its group companies u/s242 of the Act. The impugned order is under challenge before the Supreme Court and is pending on the date of writing this paper.iii  The NCLAT while passing the order for a moratorium has noted that there is no explicit provision other than s14 of the IBC that provides NCLT/NCLAT the power to impose a moratorium. However, in the opinion of the NCLAT, the powers u/s242 of the Companies Act are wider than the powers under the IBC. The court did not provide any reasons in support of such a position. In this article, the author shall argue that the order of moratorium is bad in law as, first, an order u/s242 of the Companies Act cannot be contrary to any other legal provision; second, even if the provision of moratorium was borrowed from IBC, other safeguards and procedures under the code were not followed; and, third, a blanket moratorium against a group of companies goes against the principle of Separate Legal Personality.  ABSENCE OF NON-OBSTANTE CLAUSE: S242 HAS OVERRIDING POWERS? A moratorium as was imposed in this case was essentially an injunction on any suit in any court or arbitration in the same terms as is mentioned in section 14(1) of the IBC. An order of this sort is in direct conflict with section 41(b) of the Specific Relief Act which bars anti-suit injunctions for a superior court. The Supreme Court in Cotton Corporation of India had held that a court is barred from granting an injunction that restrains a person from instituting any proceeding in a coordinate or superior court. The Supreme Court had observed that access to courts is an indefeasible right and the principle flows from the Constitution. The only way in which access to justice can be curbed is when a superior court injuncts suit in a subordinate court. This is an exception carved out by the legislature itself. Barring any suit in any court would also cover the Supreme Court which means an anti-suit injunction against a superior court. The rationale of the NCLAT that the powers u/s242 are wider than the powers under the IBC seems untenable as the IBC contains a non-obstante clause while neither the Companies Act nor s242 contains a non-obstante clause. Therefore, an anti-suit injunction can only be passed against a subordinate court or through the provisions of the IBC. This proposition is also supported by the observation of the Supreme Court in Cyrus Mistry where the court had held that a remedy u/s242 cannot be in contravention of any other law.  PROCEDURE UNDER THE IBC OR OF THE UNION OF INDIA? The IBC contains streamlined provisions that take into consideration all creditors and ensure that their rights are adequately protected. However, in this case, even though the moratorium was imposed on the same terms as s14 of the IBC, other procedures under the IBC were not followed. For example, the watershed mechanism u/s53 of IBC was not followed and instead, they went with a pro-rata distribution, as proposed by the Central Government. In the opinion of the court, following the procedure u/s53 IBC, in this case, would be against the public policy as a lot of public money through the investment of LIC, SBI, and other public entities have gone into the shareholding of IL&FS group of companies. Following the watershed mechanism in this case would mean that the shareholders will come much later in priority and will lose out on money.   The appeals filed against this order have also not been taken up by the Supreme Court on time and that has also caused prejudice to multiple creditors of different subsidiaries of IL&FS. Under the IBC, resolution of the corporate debtor is a time-bound process and has to be completed within 180 days. The moratorium passed u/s14 also ceases to have effect with the end of the resolution process. However, in this case, no time limit was attached to the continuation of the moratorium period. The cutoff date for submission of claims was kept as 15th October 2018. However, the effect of the moratorium continued. This has prejudiced the creditors whose claims arose after 15th October 2018 who could not institute any suit or arbitration. The Courts in some cases have noted the difficulties of the creditors whose claims arose after 15th October but refused to interfere with the order of the NCLAT as it has not been stayed by the Supreme Court.iv In effect, what happened in this case was that neither the principles under the IBC nor

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

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

[By Ishita Chandra] The author is a student of Dr. B.R. Ambedkar National Law University, Sonepat.   INTRODUCTION The liquidation of a corporation denotes the cessation of its activities, business endeavours, or existence upon its incapacity to settle its debts or obligations, owed to its creditors. Section 230 of the Companies Act empowers the liquidator, in the event of a company undergoing liquidation under the Insolvency and Bankruptcy Code 2016 (IBC), to propose a Scheme of Compromise and Arrangement. Such a scheme enables companies to reorganize their operations through mergers, demergers, acquisitions, or other forms of restructuring. This may include reorganizing the company’s share capital by consolidating shares of different classes or dividing shares into distinct classes. Nevertheless, this article endeavours to explain why, in a liquidation proceeding under IBC, a Scheme for Compromise and Arrangement should not be permitted particularly while dealing with a company that is entirely unviable and the operations of which are economically unfeasible.  INSOLVENCY PROCEEDING  – A CONSCIOUS STEP THAT IS UNDERGONE AFTER CONSIDERING THE SCOPE OF COMPROMISE AND ARRANGEMENT When a corporate debtor defaults on its debts, a legal process called the Corporate Insolvency Resolution Process (CIRP) gets initiated under IBC, with the objective of addressing the insolvency of corporate entities. It becomes imperative to note that the CIRP gives adequate time for resolution of insolvency. Statutorily, the CIRP should be completed within a period of 180 days from the date of admission of the application seeking to initiate CIRP proceedings. An additional one-time extension of 90 days may be provided by the Adjudicating Authority. The resolution process, including the time taken in legal proceedings, must be completed within a total of 330 days, failing which, liquidation proceedings will be initiated against the corporate debtor as per Section 33 of the Code. The aforementioned provisions uphold the spirit of the IBC expressed through its Preamble which aims to maximize the value of assets, in a time-bound manner. The time allowed by the IBC to conclude the resolution process is more than sufficient to arrive at a viable resolution plan to save a viable company from corporate death. Thus, a Scheme of Compromise and Arrangement essentially leads us to understand that a mere extension provided for the proposal of a scheme of compromise and arrangement adds no value to the resolution process of an unviable business and merely prolongs it incessantly.   Generally, parties resort to insolvency proceedings under the IBC only after exhausting all other potential avenues for resolving disputes between debtors and creditors, leaving no further options for resolution. Hence, it is evident that both the debtor and creditors must have previously considered the possibility of a Scheme of Compromise and Arrangement before resorting to the IBC. Consequently, the initiation of CIRP should be regarded as a deliberate and well-considered action. However, permitting a compromise scheme during the liquidation process of an unviable company undermines the gravity of such a decision.  PROLONGED LITIGATION – A CHALLENGE FOR UNVIABLE BUSINESSES Allowing schemes of arrangement during liquidation proceedings, allows for a never-ending cycle towards resolving an entity as such schemes are time consuming processes, whereas the focus of the Code is to create time-bound processes. For proposing a Scheme of Compromise and Arrangement, Section 230 mandates convening gatherings of both creditors and members, further outlining a comprehensive voting procedure for endorsing a scheme that necessitates agreement from a majority representing three-fourths in value of said creditors, members, or a specific class among them. The convening of a creditors’ meeting as required by Section 230 of the Companies Act can be waived if creditors representing 90% in value provide their approval for the arrangement through affidavits. This underscores that a creditor who refuses to cooperate can disrupt the fair allocation of assets or hinder the adoption of a viable resolution that serves the company’s best interests. Creditors might choose to contest a settlement plan, leading to prolonged legal disputes that impede the ultimate timeline of a liquidation process, causing further setbacks in the form of erosion of the value of the assets. Thus, if the promoters and ex-management of an unviable business are allowed to present schemes in liquidation on the basis of Section 230 of the Companies Act, 2013, this would result in prolonged litigation under the Code.   Furthermore, an entity under the auspices of IBC gets multiple chances of proving its viability. A viable business should ultimately find success through CIRP proceedings. Therefore, pressing for an additional chance through a “scheme” might indeed prove to be ineffective in case a company is completely unviable.   A major obstacle to business restructuring can arise from a system that practically prevents the efficient dissolution of a viable entity. Placing excessive focus on revival while disregarding the reality that, in certain instances, liquidation is the optimal approach for value maximization, could potentially result in the erosion of the value of the assets. Schemes of compromise or arrangement may not always be feasible, or economically viable once a decision to liquidate the corporate debtor has already been made, following the failure of the CIRP. Further, repeatedly attempting revival, through schemes of arrangement or otherwise, even where the business is not economically viable is likely to result in value-destructive delays, and was identified as a key reason for the failure of the regime under the SICA (Sick Industrial Companies Act, 1985), by the BLRC in its Interim Report.  HOW OVER-EMPHASIS ON REVIVAL MAY LEAD TO VALUE EROSION It is crucial to recognize that the value of assets and the duration of insolvency resolution are inversely related. As the delay in insolvency resolution persists, it becomes increasingly probable that the liquidation value will decline over time, given that several assets (especially tangible assets like machinery) suffer from substantial economic depreciation overt ime. Therefore, in cases where companies are entirely unviable and economically unsustainable, excessive emphasis on revival through a Compromise and Arrangement Scheme (which would lead to further delay of approximately 3 months) could lead to unnecessary erosion of value due

[By Zoya Farah Hussain & Vasundhara Mukherjee] The authors are students of National Law University Odisha.   INTRODUCTION  The volatile nature of the Indian securities market has effected various changes in the regulations overseeing the sector but despite the existence of this structured mechanism, there are numerous trading methods undertaken by investors for profit maximisation. In light of the recent announcement by SEBI, we aim to analyse the phenomenon of one such method, called, short-selling.  In a scenario where an investor borrows shares from  someone else, sells them at the current market price, and then buys them back later at a lower price,  he can pocket the difference as profit. It’s like betting against a stock’s performance, and it can help bring balance to the market by reflecting both positive and negative sentiments. This is called short-selling. But  there is a riskier version called   naked short-selling whereinstead of borrowing shares, investors sell stocks they don’t even own. It’s like promising to deliver something you do not have — a practice that can introduce chaos and uncertainty into the market. This creates a potential for abuse and market manipulation, as it generates counterfeit shares that don’t exist.  Short-selling, when done responsibly, can improve market efficiency by reflecting true market sentiment. It adds liquidity and helps in price discovery, but when things get out of hand — especially with naked short-selling — it can wreak havoc. Excessive short-selling can lead to wild swings in stock prices, erode investor confidence, and even destabilize the entire financial system. Here, we understand the possible implications of the recent announcement by SEBI regarding short-selling.  UNDERSTANDING SEBI’s GUIDELINES  SEBI initiated discussions on short-selling in 1996 through a committee chaired by Shri B.D. Shah who defined short-sale as the sale of shares without physical control until settling prior purchases or countering ongoing deliveries. The ban on short-selling was short-lived, as SEBI introduced a Securities Lending and Borrowing (SLB) framework later in December 2007, following recommendations from the Secondary Market Advisory Committee, permitting both retail and institutional investors to engage in short-selling again, with certain conditions.  The Adani-Hindenburg saga unfolded against the backdrop of, Hindenburg, a US-based financial research agency, who short-sold some shares of Adani Group accusing them of engaging in deceptive practices and inflating the value of its companies. Consequently, the ED carried out an investigation directed by the apex court of India which observed that no substantive losses were faced by the investors, implying that SEBI regulations were well in place, but keeping in view the current rise in the stock market trend of price manipulation, SEBI being an independent regulatory authority was directed to formulate further guidelines to ensure a proper framework for short-selling activities so that no investor is at a risk of being victim to violation of market practices.  Making Room for Everyone  This new framework opens the door for a wide spectrum of investors.  but with the doors wide open, we also need to be more careful. Novice retail traders entering this complex arena face the risk of exacerbating market volatility and becoming susceptible to manipulative tactics. To ensure a fair playing field for all, SEBI must prioritize comprehensive investor education and diligent monitoring.  This step could include understanding the investing capacity and the trading intention of new investors and equipping them with the requisite knowledge of the operations of the market and official financial information of the listed companies, by registered securities educators or mentors, enabling them to make an informed decision.  Cracking Down on Risky Business  SEBI has put in place an important rule: if you’re selling shares you borrowed, you’ve got to deliver those shares. This is meant to stop naked short-selling  which is a risky move that can mess with stock prices, just like when Porsche tried to short-sell Volkswagen in 2008. When Volkswagen’s price shot up, Porsche could not deliver the shares it owed, causing a lot of problems for hedge funds and making the market go crazy. SEBI’s mandatory delivery requirement aims to prevent similar scenarios by promoting responsible short-selling and curbing predatory behaviours.  Being Transparent About Trades  SEBI has also mandated transparency through disclosure requirements. Institutional investors have to disclose upfront if they’re making a short sale, while regular retail investors like us have to make a similar disclosure by the end of the trading day. Additionally, brokers have to keep track of all the short-selling positions for each stock and upload this data to the stock exchanges before the next trading day commences.  IMPACT OF THE ANNOUNCEMENT  It’s undeniable that the most recent SEBI short-selling rules have two sides. One may argue that naked short-selling is a good thing for the financial markets. Additionally, they opine that it may enhance the way the securities markets for borrowing and lending operate. The primary contention is that the issue of who serves as the lender is the sole distinction between covered and naked short sales. In contrast to naked shorting, when the lender is the new buyer, covered shorting involves the lender as the present owner of the stocks. It’s possible that this will not have a big impact on determining the fair price, but they also present the counter-argument that the new buyer might not be aware of it and will not voluntarily enter into the lending relationship he/she will not even get paid for it. Nonetheless, the new buyer is in a secure position and may even profit from the interest on the money that is held until the assets are delivered, thanks to the clearing houses’ centre-counterparty arrangement and the option to start the buy-in process.  The suddenness of the share price drop invites investors involved in naked short selling to sell even the unborrowed shares to benefit from it at least in the short-run. This creates competition in the market for security lending by allowing a new buyer to provide the service of being owed the share rather than allowing only the current owner to do so.  Naked short-selling may be good for the financial markets

[By Pulkit Rajmohan Agarwal & Anaya Nandish Shah] The authors are students of Gujarat National Law University, Gandhinagar.   Introduction  Recently, in the case of Eastern India Motion Pictures Association & Ors. v. Milan Bhowmik & Anr., the division bench of the Calcutta High Court affirmed a peculiar ruling by the single judge bench, favouring two minority members of a company. The members approached the court challenging the election of the executive committee, which was allegedly conducted in violation of the articles of association and the election rules of the company. The said circumstance falls well within the realm of remedies stipulated under the Companies Act 2013 (the Act), one of them being oppression and mismanagement under Section 241 of the Act. However, the members opted for a recourse through the civil court, a forum that is expressly prohibited under Section 430 of the Act, thereby circumventing the jurisdiction of the National Company Law Tribunal (NCLT).  This blog analyses the question of whether statutory provisions prescribing and prohibiting rules can be bypassed, and whether courts are free to adopt alternative approaches. In the light of Sections 241, 244, and 430 of the Act, it scrutinizes whether the bench appropriately affirmed the ruling of a single judge bench, and explores the scope for interpretation regarding the object, powers, and discretion of the NCLT.  Legal Framework For Oppression And Mismanagement Cases  Eligibility for O&M under the Companies Act.  Section 241 of the Act pertains to applications alleging oppression and mismanagement. If minority shareholders can demonstrate to the tribunal either that: a) the company’s activities are being carried out in a manner prejudicial to its interests or those of its members, or contrary to the public interest; or b) there has been a material change and the company’s operations are being conducted in a manner detrimental to its interests. In furtherance, Section 244 of the Act talks about members who have a right to file a petition for oppression and mismanagement. According to the Section, in companies with share capital, a minimum of one hundred members or one-tenth of the total members, whichever is less, are eligible to submit an application. Conversely, for companies without share capital, as is the case herein, a minimum of one-fifth of the members is mandated. The object behind this restriction is to safeguard the company from frivolous petitions and ensures that only people holding requisite interest in the company can file petition. However, it is pertinent to note that the proviso to Section 244 explicitly mentions that these aforementioned conditions can be waived off upon an application to the NCLT. The underlying rationale is to protect the minority shareholders from dismissal of serious allegations of oppression and mismanagement solely on the grounds of insufficient shareholding.   There have been a plethora of cases illustrating several grounds upon which NCLT has waived off the criterias mentioned under Section 244 of the Act. Some of them include principles of natural justice, when it is in the substantial interest of the company, or when there is a dilution in shareholding because of oppression, etc. Further, NCLAT in Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd., laid down certain principles regarding grant of waiver, along with inclusion of exception circumstances as one of the grounds. On the lines of these principles, NCLAT in one of its orders pertaining to an application under Section 241 of the Act, granted such a waiver to two minority shareholders.  Opting For Civil Remedy Over NCLT’s Jurisdiction   In the present case, an application to declare the election of the committee and the subsequent meetings null and void fall within the purview of oppression and mismanagement, as enumerated under Section 241 of the Act.   As per the mandate of the law, they failed to meet the eligibility requirement of at least 1/5th members. Hence, they should have approached NCLT with a waiver application under Section 244. Contrastingly, they resorted to civil court without initially exhausting the remedies mandated by the Act. The single judge of the High Court remarked “The argument made by the applicants relying on the proviso to Section 241(1)(b) that the plaintiffs are required to exhaust the remedies before NCLT before approaching this Court is not tenable.”, further in the context of waiver application the court opined “That apart and in any event a considerable period will elapse for NCLT to first decide whether to allow an applicant to maintain an application without requisite membership qualification.” Reaffirming the same, the division bench reiterated, “I would like to add that if the plaintiffs approached the tribunal for dispensing with the eligibility criteria, there was no guarantee that the tribunal would allow the application. In the event the tribunal rejected the application the plaintiffs would have to approach the civil court.” The Hon’ble High Court anticipated a probable denial by the NCLT for the waiver petition, along with the prospect of delay, and thus approved bypassing NCLT’s jurisdiction, thus deviating from the established framework.  Evaluating the jurisdictions  Section 430 of the Act restricts the jurisdiction of civil courts for matters designated to be adjudicated by the tribunals established under the Act. The Supreme Court, in context of Section 430 stated that jurisdiction of civil court is completely barred when powers have been explicitly conferred upon NCLT by a statute. Delhi High Court in the case of SAS Hospitality Ltd v. Surya Constructions Ltd. stated that the NCLT has sole jurisdiction over matters falling within the domain of Section 242 of the Act, which provides for the powers of tribunals in case of oppression & mismanagement.   The present case pertains to the operation & mismanagement which is exclusively under NCLT’s jurisdiction. While acknowledging the NCLT as the appropriate forum for adjudication, the division bench noted the contingency in NCLT accepting application, with the possibility of rejection leading to significant time wastage. In light of this, it becomes pertinent to refer to a recent order passed by NCLT Kolkata bench, wherein in similar circumstances where a few members (4 out

[By Vaibhav Mishra] The author is a student of Hidayatullah National Law University.   INTRODUCTION In the Union Budget session of 2017-18, Parliament passed the Finance Act 2017 [Act] to lay down the legal framework for the ‘Electoral Bonds Scheme (EBS)’. The scheme sought to create a new model of electoral financing in the country.  The Act carried out inter-related amendments to company law, income-tax law, and electoral laws to legally operationalize this scheme. The most crucial characteristics of the scheme were brought through amendments in Section 182 of the Company Act 2013 (Section 182). The implications of the amendment were two-fold, viz, first, removal of the upper-cap limit on the corporate funding, second, information disclosure requirement. The scheme raised various concerns like voters’ right to information, transparency, corporate influence on elections, etc. Therefore, amidst such concerns, the scheme was challenged in the Supreme Court as being violative of the Constitution.   Recently, the Supreme Court in its judgment has declared the EBS scheme as violative of the constitution. The Supreme Court invoked two principles – the principle of manifest arbitrariness to test the vires of unlimited corporate funding and the principle of double proportionality for the removal of information disclosure requirements in the context of voter’s right to information.  In light of the above, the article analyses the judgment with a focus on the two most crucial aspects of this financing model viz, unlimited corporate funding and removal of disclosure requirements along with their implications. It also highlights the importance of addressing both issues for creating any viable electoral financing model in the future. Furthermore, it also delves into the UK’s model to suggest possible changes in the Indian model of electoral financing.   ANALYSING SECTION 182: EXAMINING EFFECTS POST-2017 AMENDMENT Section 154 of the Act amended Section 182 which regulated corporate funding to political parties. In the pre-amendment position, Section 182 gave a three-fold requirement to regulate corporate funding – 1) upper-cap of 7.5% of the average net profit of three preceding financial years; 2) authorization of the board of directors; and 3) information disclosure requirements. In this framework, the upper limit on corporate donations was supposed to keep a check on any undue influence of big corporations on elections. Furthermore, transparency and accountability were promoted through obligations of information disclosure and consent of the board of directors.    However, the 2017 amendment to Section 182 for laying the legal framework of EBS, removed the upper limit on corporate funding and disclosure mandates. Therefore, as a result of amendment, EBS  was characterized by two key elements viz, 1) anonymity of the donor company & recipient 2) unlimited corporate funding.   Therefore, the new electoral financing model created by EBS as noted above, was now plagued with a lack of transparency & accountability having several implications, as discussed below.   VIRES OF UNLIMITED CORPORATE FUNDING & POTENTIAL IMPLICATIONS   In this case, Section 154 of the Act which amended Section 182, was challenged as violative of Article 14. There was uncertainty concerning the applicability of the principle of manifest arbitrariness under Article 14 in deciding the constitutionality of unlimited corporate funding. The court analysed the complex jurisprudence that evolved over this principle to decide its applicability in the present context. The majority opinion of Justice Faiz Nariman in Shayara Bano v Union of India proved to be a deciding factor [Para 187]. He had opined that vires of legislation could be challenged solely on the grounds of the principle of manifest arbitrariness as it is a constitutional infirmity in itself. Therefore, the court invoking this principle, held the scheme as violative of Article 14.    The unlimited corporate funding in elections strikes at the heart of the democratic process by violating the principle of free & fair elections. Therefore, its presence in the electoral financing model could have several implications. The wording of the provision in clause (1) of Section 182 after the 2017 amendment, i.e., the deletion of the proviso stipulating donation limits based on net profits, suggests that the provision fails to create a distinction between profit and loss-making companies. If we consider the possibility of a loss-making company giving donations, the purpose could not be other than having quid-pro-quo arrangements with the government which could unduly influence the electoral process. Furthermore, this structure creates the possibility of the creation of a shell company solely to make donations.   Therefore, the potential consequences of omitting an upper cap for corporate donations in any future model can’t be ignored. An analysis of recent data released by ADR, an electoral watchdog in India, suggests that corporate donations in India have increased by 974% between FY 2012-13 and FY 2018-19. A similar trend had been observed in the US after the Supreme Court’s decision in Citizens United v FEC in 2010. The judgment held the upper cap limit on independent corporate expenditure as violative of the First Amendment – which protects free speech. However, the judgment failed to anticipate the potential influence of big corporations in elections as a consequence. The data suggests a 900 % increase in corporate donations in American elections between 2008-2016. Therefore, any future financing model in the Indian scenario should address the issue of unlimited corporate funding.   IMPLICATIONS OF SECTION 182(3): REMOVAL OF INFORMATION DISCLOSURE REQUIREMENT  The presence of information disclosure mandates from donors is crucial in a democratic electoral financing model. However, EBS eliminated such disclosure mandates for companies and political parties. Therefore, EBS was challenged as being violative of Article 19(1) (a) of the Indian Constitution, i.e., voter’s right to information. In this context, Section 182(3) of the Company Act, 2013 was also challenged as it changed the pre-amendment position that mandated a donor company to reveal particulars of its donation in a P&L account. The information disclosure was instrumental in identifying any potential quid pro quo arrangements or corruption in the transactions [Para 172]. The removal of such a mandate impeded a citizen’s right to exercise an informed vote. Furthermore, the amendment also altered the original purpose of the