Company Law

[By Siddhi Bhosale] The author is a student of Maharashtra National Law University, Mumbai. I. Introduction: Under the Alternative Investment Funds (‘AIF’) Regulations, 2012, AIFs can be classified into Category I, II and Category III AIFs. This categorisation is essentially based on the investment objectives and the overall impact a specific Category of AIF has on the broader economy at large. In this regard, Category III AIFs occupy a unique position as it employs diverse and complex trading strategies for investing in listed as well as unlisted securities. Moreover, Category III AIFs can use leverage and trade in derivatives, distinguishing them from Category I and II AIFs. Pre-IPO (‘Initial Public Offerings’) placements have increasingly become a familiar investment strategy for Category III AIFs, wherein the subscription monies are often placed in the escrow pending the allotment of shares. In a pre-IPO transaction, the subscription monies acquired from AIF are transferred to and blocked in an escrow account before the underlying shares are allotted, thereby the funds remain locked pending IPO completion, with the securities passing only upon the allotment. This lacuna vis-à-vis timing raises an important compliance question: does the breach of Regulation 15(1)(d), i.e., of ten per cent concentration limit crystallise on the date the subscription funds are committed and blocked in escrow, or on the date the shares are actually allotted to the AIF? This article examines the semantics revolving pre-IPO escrow arrangement by taking into account Regulation 15(1)(d), and the manner in which the concentration limit breach effectuate in such transactions. The timing of the breach is relevant as the concentration limit is calculated as a proportion of an AIF’s scheme, particularly the scheme’s investable funds, as stipulated in the proviso to Regulation 15(1)(d) and Regulation 2(1)(p) that defines what are “investable funds”.  The investable funds might fluctuate between the commitment of funds and the allotment of securities. Determining the timing is significant for open-ended schemes, where redemptions may reduce the investable funds during this intervening period that lies in between. For instance, a scheme with investable funds of ₹ 100 crores that commits ₹9.5 crores to a pre-IPO placement, it would initially remain within the prescribed ten percent threshold. However, if redemptions of ₹10 crores occur before allotment, the same commitment would represent approximately 10.56 per cent of the reduced investable funds of ₹90 crores. Consequently, the scheme would remain complaint if the concentration limit were assessed on the date of escrow funding, but would exceed the prescribed threshold if assessed on the date of allotment. The determination of the relevant date is therefore critical, as it directly affects the assessment of compliance under Regulation 15(1)(d) and the extent to which fund managers must anticipate and manage concentration risk before the securities are allotted. II. Regulatory Framework: Under Regulation 15(1)(d) of the AIF Regulations, 2012, Category III AIFs are subjected to a concentration limit which mandates that they are prohibited from investing more than ten per cent of their investable funds in a single Investee Company, directly or through investment in units of other AIFs. The ‘proviso’ to Regulation 15(1)(d) further allows Category III AIFs to calculate the concentration limit for investments in listed equity on the basis of either investable funds or the net asset value (“NAV”) of the scheme. This becomes relevant while assessing the applicable concentration limit and the timing of a potential breach in pre-IPO placements. This regulation is thereby intended in order to regulate the concentration of an AIF’s investments in a single company and prevent excessive exposure to one Investee Company. When a large value fund for accredited investors is set up, an exception has been provided as the concentration limit is capped at twenty per cent. Herein, an “Investee Company” is essentially the company in which the AIF makes or proposes to make an investment, either directly or through units of another AIF and “investable funds” entails the corpus of the scheme of AIF net of the expenditure for administration and management of the fund. Thereby, the ten per cent threshold consequently requires the amount invested in a particular Investee Company to be assessed against the investable funds of AIF.  The Regulation also gives rise to a distinction between an active breach and a passive breach of the concentration limit. An active breach arises where the AIF makes an investment which exceeds the prescribed limit at the time of investment. Whereas, a passive breach, on the other hand, may arise where an investment that was initially within the prescribed limit subsequently exceeds it owing to the changes in the value or composition of the underlying investment that was made. This distinction assumes significance in determining the point at which the obligation under Regulation 15(1)(d) is triggered. The concentration limits serve as an important measure for the protection of Limited Partners (‘LP’), and thereby compliance with the prescribed threshold forms an integral component of the regulatory framework for fund managers governing Category III AIF investments. III. Pre-IPO Escrow Mechanics: A pre-IPO placement generally begins with the execution of a subscription agreement between the AIF and the issuing company. Pursuant to the subscription, the escrow arrangements are undertaken wherein the AIF transfers the subscription monies to the escrow account, and the amount remains blocked pending completion of the conditions for allotment. The funds are therefore contractually committed towards the proposed investment and remain unavailable for other purposes, while also not being immediately released to the issuer. The subsequent steps involve the issuer completing the necessary corporate and regulatory formalities, allotting the underlying securities to the AIF and crediting them to demat account of the AIF as directed under the SEBI circular. Upon the allotment, the subscription monies are released to the issuer. Until that point, the AIF possesses a contractual right to subscribe to the securities, however, it does not hold legal title to the securities. As a result, there is a distinction between a contractual commitment to invest and the legal acquisition of the underlying securities. The SEBI (Issue

[By Dewansh Raj] The author is a student of National Law University Odisha (NLUO)   Introduction The Security and Exchange Board of India (“SEBI”) as a significant move,introduced a new consultation paper which provides for bringing substantial change to the Related Party Transaction (RPT) framework. Related-party transactions encompass commercial arrangements between a company and connected entities, including subsidiaries, entities controlled by directors or significant shareholders, and businesses associated with board members or senior management. Although such transactions are not necessarily improper, they present risks of conflict of interest and misuse. Their permissibility depends on compliance with the arm’s length and ordinary course of business criteria; otherwise, prior approval of the Board or shareholders is required as per statutory thresholds under Section 188 of Companies Act 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”). The main objective of RPT is to prevent conflicts of interest, protect minority shareholders, ensure transparency, and strengthen corporate governance through mandatory disclosures, approval requirements, and restrictions on voting by interested parties. While the present paper addresses various aspects of related party transactions, the most notable is the proposal for a scale-based threshold. This blog examines the recommendations in detail and evaluates whether the scale-based approach is likely to achieve its intended benefits. Proposed changes The consultation paper aims to bring the following changes- The flat materiality threshold for related party transactions (₹1,000 crore or 10% of turnover) will be replaced with a scale-based system linked to the listed entity’s turnover, with an upper cap of ₹5,000 crore. For subsidiaries, audit committee approval will be required for transactions above ₹1 crore that exceed the lower of the parent’s new materiality threshold or 10% of the subsidiary’s turnover if it has at least one year of audited financials, or 10% of its net worth or share capital plus securities premium if the net worth is negative and it does not have one year of audited financials.. The threshold for providing reduced “minimum information” for RPT approvals will rise to the lower of 1% of turnover or ₹10 crore, while retaining the ₹1 crore exemption for very small transactions. Omnibus shareholder approvals for material RPTs will be valid until the next AGM which can be for a maximum period of 15 months or for one year if approved in other general meetings. The retail purchase exemption will apply only to directors, key managerial personnel, and their relatives, removing employees from its scope. The holding–subsidiary exemption will be clarified to apply only when the holding company is listed and the subsidiary’s accounts are consolidated. The Scale based approach is a step in the right direction The new proposed threshold creates three brackets according to the annual consolidated turnover of the company and accordingly creates different thresholds for each bracket. The primary and most apparent benefit is the significant reduction in compliance burden, particularly for larger entities. Under the current framework, these organizations were mandated to obtain shareholder approval for all transactions meeting the threshold, regardless of their materiality or strategic significance. The paper demonstrates this impact quantitatively, highlighting that over 60% of transactions currently requiring shareholder approval would be exempt under the revised framework, thereby streamlining corporate governance processes while maintaining appropriate oversight for truly consequential matters. However, a more crucial impact of this change is the enhanced flexibility it provides SEBI to adjust RPT thresholds for specific entity categories without requiring a comprehensive overhaul of the entire regulatory framework. This modular approach enables targeted regulatory refinements based on market conditions, entity size, or sector-specific requirements, allowing for more responsive and nuanced governance without disrupting the broader system architecture. The Indian economy, particularly the stock market, has experienced tremendous growth over the past decade, necessitating continuous evolution of the RPT framework. This regulatory dynamism is evidenced by the frequency of modifications the current consultation paper represents the third major revision this year alone. Such regulatory volatility creates market uncertainty and escalates compliance costs for companies, who must continuously adapt their governance structures and processes to meet changing requirements. The SEBI could now bring a change in the RPT framework for the companies falling in one particular bracket without altering the same for other companies ensuring consistency and in turn improving the ease of doing business. Over reliance on the turnover Although the consultation paper offers promising improvements, the proposed framework continues to depend exclusively on company turnover as the criterion for classifying transactions as related party transactions, which presents significant limitations. A turnover-based threshold for determining material related party transactions has two key problems. Firstly, it opens the door to manipulation. Companies can artificially inflate their turnover often through low-margin, high-volume sales, premature revenue booking, or circular transactions so that the numerical threshold for requiring shareholder approval rises. For example, a company with a turnover of ₹9,000 crore would face a 10% threshold of ₹900 crore, meaning any RPT above that amount would need approval. If it boosts turnover to ₹11,000 crore, the threshold becomes ₹1,100 crore, allowing a ₹1,000 crore transaction that was previously “material” to slip under the limit and avoid scrutiny. Secondly, this approach is disadvantageous to low-turnover but high-value businesses, such as infrastructure or real estate firms, whose balance sheets are large but annual sales are relatively modest. For such companies, even routine, proportionate transactions can easily exceed the turnover-based limit. For instance, an infrastructure company with ₹300 crore turnover but assets worth ₹2,000 crore would have a materiality threshold of just ₹30 crore under the turnover rule, so a ₹200 crore land purchase normal for its scale would require shareholder approval, causing unnecessary delays and compliance costs. In both scenarios, turnover alone fails to reflect the true economic significance or risk of a transaction. A need for more holistic framework While the introduction of the scale-based framework is definitely a step in right direction there is a need to look beyond threshold. This is where models like the UK’s multi-test approach offer valuable lessons in creating a more comprehensive framework. In

[By Ayush Singh Verma] The Author is a student of Hidayatullah National Law University   Introduction Recently, the Department for Promotion of Industry and Internal Trade released Press Note No. 2 (2025 Series) (PN2), which clarified the position regarding the issuance of bonus shares by Indian companies operating in Foreign Direct Investment (FDI) restricted sectors to their pre-existing non-resident shareholders. However, the position regarding pre-existing non-resident (PE NR) shareholders under the FDI policy regime remains uncertain, giving rise to the grandfathering dilemma. This article will explore the nuances of grandfathering under the FDI regulatory landscape in India by highlighting a gap in the framework regarding the permissibility of PE NR shareholders to hold stakes in companies operating in FDI-restricted sectors, especially the tobacco industry. Background to Grandfathering When new laws or regulations are enacted in a regime, they can be detrimental to a certain class of businesses or individuals who complied with the existing regime. Grandfathering seeks to resolve this issue by allowing such parties to function usually without any change being applicable to them. This is usually done by a grandfather clause, which provides that a section of rules or law would only be applicable to new businesses or activities. It was first introduced in the 1890s as a device to deny suffrage to African-Americans, as it conferred the right to vote only to those who had enjoyed the same before 1866-67. Foreign Direct Investment is defined under the Consolidated FDI Policy Circular 2020 as “investment through capital instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company” With regard to existing investment, the PN2 clarified that an Indian company engaged in FDI prohibited sectors or activities are permitted to issue bonus shares to its pre-existing non-resident shareholders. This provision is based on the condition that the shareholding pattern of such pre-existing shareholders should not change after the issuance of shares. The clarifications also provide that this provision will become effective from the date of issue of the applicable Foreign Exchange Management Act (FEMA) notifications. Although this move is much appreciated, the rules still do not clarify whether PE NR shareholders can continue to hold shares in companies engaged in the FDI restricted sector. Gaps in Existing Framework The regulatory gap lies in the fact that while the press note clarifies the position on the issuance of bonus shares, the regulatory framework is silent on the permissibility of holding shares by non-resident companies in restricted sectors. For instance, DPIIT via Press Note 2 of 2010 series changed the position regarding ‘Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes’ where earlier, FDI in these activities were permissible for 100% under the Government Approval route. However, after the aforesaid press note, this sector was brought under the prohibited/restricted sector for FDI. Regardless, what would happen to the non-resident shareholders already holding shares in tobacco manufacturing companies was not clarified. The best case in this regard is that of Godfrey Philips India Ltd. (GPI), which used to be a wholly owned subsidiary of Philip Morris International Inc. (PMI), a United States (US) based company, which is a leading cigarette manufacturer. In 2011, Modi Group acquired the majority stake in GPI, reducing the shareholding of PMI to 21%. Currently, GPI continues to hold a 25% stake in PMI despite its operations in an FDI-prohibited sector. This is a classic case of grandfathering, however, without any regulatory sanction or approval. Similarly, British American Tobacco Company (BAT) continues to hold 25% shares in ITC Ltd., another leading cigarette manufacturing company in India. A notable mention of grandfather-like clause in FDI restricted sector is evident from Paragraph 1.2 of the Master Direction – Foreign Investment in India which provides that “An investment made by a person resident outside India in accordance with FEMA or the rules or the regulations framed thereunder and held on the date of commencement of NDI Rules i.e. October 17, 2019, shall be deemed to have been made in accordance with NDI Rules and shall accordingly be governed under it.” However, it still does not clarify the position with respect to investments made before 2010, when the tobacco sector was not restricted from FDI. These grandfathering instances, in light of the recent PN2, create a dilemma in ascertaining the position of such PE NR shareholders, where on one hand, they have investment in FDI restricted sectors, and on the other hand, there does not exist any grandfather clause under the FDI policy to allow such holdings. In the absence of a formal grandfather clause, circumvention can occur through mechanisms such as indirect control, proxy shareholding, or routing investments through layered corporate structures, enabling foreign entities to maintain de facto ownership or influence despite the formal FDI restrictions. This has the effect of circumventing FEMA provisions and increase the scope of illegal foreign investment in the tobacco industry. Way Forward The aforesaid gap in the regulatory framework justifies the need for including a grandfather clause in the FDI policy, which can determine the position of PE NR shareholders in FDI-restricted activities. For instance, a grandfather clause was introduced by the Finance Act of 2018 for investments made in or before 31 January 2018 in equity shares or an oriented mutual fund. This was done to exempt any income arising from the transfer of long-term capital assets of the same nature on which Securities Transaction Tax (STT) was already paid. In State of Manipur v. Surajkumar Okram, The Supreme Court ruled that “While repealing a statute, the Legislature is competent to introduce a clause, saving any right, privilege, liability, penalty, act or deed duly done and any investigation, legal proceeding or remedy arising therefrom, under the repealed statute.” This reasoning can be supplemented to conclude that the legislature is well within its powers to introduce a grandfather clause or saving of any right, even when it is substituting

[By Arjun Kapur & Sameep Baral] The authors are students of Maharashtra National Law University Mumbai. Introduction What does it really mean for a workplace to be “safe”? Is it the lack of complaints or a culture where employees feel comfortable raising issues? In India’s fast-changing corporate world, where investor expectations, public scrutiny, and employee voices unite, companies discover that silence is not always beneficial. The Ministry of Corporate Affairs (MCA) has recently pushed for more transparency and accountability, particularly regarding workplace behaviour. A clear example appeared in September 2023 when the Registrar of Companies in Karnataka fined Ceeta Industries for not revealing the structure of its Internal Complaints Committee (ICC) in the Board’s report. Introduced in 2013 after the Supreme Court’s Vishaka judgment, the POSH Act requires employers to keep a workplace free from sexual harassment and to set up formal ways to address complaints. For example, every organization needs an ICC, with at least half of the members being women. Over the past ten years, the law has become stricter and broader, including requirements for regular training, applying to more types of businesses, and setting tighter deadlines. For businesses, following POSH has shifted from a moral choice to a legal necessity within corporate governance. In this context, the MCA’s 2025 amendments indicate a significant change in the reporting requirements under POSH law for corporate entities. By requiring detailed POSH disclosures in the Board report, regulators expect companies to go beyond basic compliance. This blog discusses the regulatory shift from the 2025 MCA amendments, discussing its practical effects on corporate POSH compliance. It also identifies issues in compliance and suggests fundamental reforms to rethink workplace safety as part of corporate governance, rather than just a legal requirement. Understanding the 2025 MCA Update One can see this enforcement trend in the landmark Ceeta Industries case. In September 2023, the Karnataka Registrar of Companies penalized Ceeta Industries for not including the required Board Report statement on its POSH ICC. The company faced fines in several lakhs of rupees, and its key officers were also penalized. This case highlighted that even minor procedural lapses under the POSH framework can lead to strict enforcement. By law, any default in reporting can lead to a penalty of up to ₹3 lakh on the company and ₹50,000 on each defaulting officer per year. This underscores the financial stakes of POSH compliance. Building on this, the MCA’s Companies (Accounts) Second Amendment Rules, 2025, effective July 14, 2025, represent an apparent policy shift. Unlike the previous compliance regime, which simply confirmed the ICC’s structure in the annual report, the new rules require detailed data-driven disclosures. Under the amended regulations, every company must now report the number of sexual harassment complaints received during the year, how many were resolved in that year, and how many are pending beyond 90 days. The Board’s Report must also state that the company has met the POSH Act’s requirements regarding its ICC formation. This increase in disclosure turns POSH compliance into a performance measure. Companies must carefully track and record case data since these figures will become part of public filings. The data-driven approach raises the stakes, many unresolved or pending cases can indicate governance problems and damage a company’s reputation, while mistakes or missing information in reporting can lead to legal and financial penalties. This update effectively transforms POSH reporting from a simple formality into a significant corporate responsibility and risk management source. Why This Update Signals a Governance Shift By requiring transparency on workplace harassment statistics, the 2025 rules bring POSH into the spotlight. Annual reports will now feature POSH disclosures alongside financial results and governance statements. This change allows the independent directors, auditors, and investors to identify trends in the data. For instance, an increase in complaints or many pending cases may raise questions about oversight or company culture. Board members might actively seek explanations when POSH figures do not meet expectations, turning a previously hidden issue into a key topic of corporate governance. Annual board reports are usually public documents, making each metric visible to stakeholders and the media. For institutional investors and ESG analysts, these disclosure numbers become the new social metrics. Poor outcomes or unresolved cases could impact a company’s social rating and reputation. Leading governance frameworks consider worker safety a vital issue. Companies are now providing standardized data in this area. Because these reports are public, a pattern of low complaints or numerous backlogs will be noticed. This visibility creates a feedback loop. Companies must review their own processes and culture. Boards may require a closer look at delayed case resolutions or rethink ineffective training programs. Rather than being hidden in the Human Resources (HR) files, POSH has become part of regular corporate reporting. The 2025 update marks a significant step in governance, acknowledging that employee safety and respect are essential for a company’s integrity and performance. Corporate Blind Spots in POSH Despite the POSH law and its roots in the Supreme Court’s Vishaka judgment, many Indian companies view compliance as just a simple checklist. It is common to find ICCs that do not function well. For example, they may meet only occasionally, lack diverse representation, or fail to conduct proper training and awareness programs. Some organizations meet the requirement for the number of women and include an HR nominee, but they do not give the ICC the authority to act independently. Employees often do not know their rights or fear backlash, leading to many incidents going unreported. Poor record-keeping and documentation mean that even submitted complaints may go unnoticed. HR departments that manage ICCs can create conflicts of interest when investigations involve their managers. Employees may wonder if an HR-led committee can handle the case fairly if the accused is a supervisor. In some cases, victims perceive the process as biased, which fosters a culture of silence. From a governance perspective, a reported count of zero complaints in a year can be just as concerning as a backlog. This may reflect fear or

[By Dhiren Gupta] The author is a student of Rajiv Gandhi National University of Law.   Introduction Evolution of the Indian corporate structure has gone through several stages. From the Companies Act of 1956 to the economic reforms of 1991, which underscored the need for greater corporate transparency and accountability, which was addressed by bringing in the Companies Act, 2013. A plethora of changes were bought in by the new legislation which imposed additional compliances on the companies, but the issue of shareholder litigation persists due to the sophisticated growth of corporate malpractices for which the current legal system seems increasingly ill-equipped. There has been a large number of cases pertaining to corporate mismanagement and fraud, where the shareholders, especially the minority, have suffered due to Sections 241, 242 and 245 being riddled with procedural flaws leading to an excessive burden of proof on the shareholders. In this piece, the author will discuss the shortcomings of shareholder litigation in India and how improvements can be made while analysing different jurisdictions and how they deal with derivative and double derivative suits. Shortcomings of the Indian Shareholder Litigation System The inclusion of Sections 241, 242 and 245 was a step forward for corporate litigation in India which theoretically aligning them with other jurisdictions. However, the practical approach reveals the actual issues. Section 245, which deals with class action suits, empowers the shareholders to move against companies, directors, auditors and other associated persons against their deleterious effects on the company or shareholders. This section was formulated to provide support to the minority shareholders. But it soon became an underutilized legal tool as most of the shareholders were unaware that they possessed such an entitlement within the Act. Additionally, structural complexities, like the minimum number of applicants required to institute a suit is difficult to attain – especially in companies where the shareholding is diffused with minority shareholdersbeing present. Lastly, it only covers harm caused by direct actions of a company and excludes any indirect harm that may be caused by the actions of a subsidiary or the parent company. Section 241 lets shareholders approach the National Company Law Tribunal (NCLT) if they feel the company is being run poorly or in a way that harms the company or its members. Section 242 gives the NCLT the power to take corrective action, which can include serious steps like removing directors or even shutting down the company in severe situations. However, the success of either of these sections has been limited because of the disproportionate burden of proof on the shareholders. The essential of providing substantial evidence to prove oppression against the minority shareholders is complicated, as the management may act elusive and take decisions which might not seem wrong on paper. Additionally, the implementation of these sections extends to the company where the shares of the person lie and not when the harm is done to a subsidiary, leaving a significant gap in corporate governance remedies. Therefore, these provisions of the Companies Act, 2013, reflect a sincere effort to strengthen shareholder protection. A large number of procedural impediments, coupled with ineffective judicial operations and labyrinthine of corporate structures, will frustrate the aforementioned  provisions in law that protect shareholders’ rights and prevent oppression, which is worse in case of minority shareholders. In India, a multitude of companies operate through highly complex holding structures, often involving a large number of minority shareholders. When such multilayered parent-subsidiary frameworks exist, the key concern becomes identifying those minority shareholders who are unable to establish their locus standi at the subsidiary level. This point therefore highlights the urgent need for a complete overhaul that shall transform litigation processes and offer relaxation in evidentiary requirements, along with policy changes to truly ascertain that these laws protect shareholder rights and enforce corporate responsibility. The Absence of Double Derivative Suits in Indian Law The exclusion of double derivative suits from the Companies Act creates a significant legislative gap, especially given India’s complex corporate structures. Such provisions would empower shareholders of the parent company to sue the holding company on behalf of the subsidiary. Governance and ownership structures often become opaque because subsidiaries can have other subsidiaries beneath them. Minority shareholders of the parent company find themselves unable to do anything when a wrong occurs at the subsidiary level and the parent company chooses not to act. This creates an accountability vacuum, which allows for misconduct in the subsidiaries to run amok. The absence of double derivative suits thus aggravates the plight of minority shareholders, practically leaving them bare to any kind of corporate malpractice, whilst reiterating the inherent weaknesses within the corporate governance system of India. The Case for Introducing Double Derivative Suits While layered corporate structures in India allow conglomerates to administer operational flexibility and incorporate risk management benefits, they also pose significant challenges to shareholder oversight and accountability. By allowing deals that may amount to fraud or mismanagement to take place at the subsidiary level, shareholders of the parent company, with no direct holding in the shares of that particular subsidiary, become deprived of any meaningful remedy regarding the wrongdoing. In order to redress such imbalance, it is pertinent that India include provisions for double derivative suits, i.e. suits wherein the shareholders of the parent firm are entitled to sue a subsidiary on whose behalf they have a substantial interest. Such provisions shall not only be useful for providing remedy but would also act as a deterrent against such corporate malpractices. Wrongdoers exploit the separation of parent and subsidiary companies to shield themselves from liability, knowing that normally only the direct shareholders of a subsidiary can avail this right. However, in the light of modern corporate governance, particularly in India’s rapidly changing economy, it is increasingly clear that double derivative suits are more a matter of necessity than some legal novelty. While layered corporate structures grant large conglomerates increased operational flexibility and help in managing risks, they also create significant hurdles for shareholder oversight and accountability. When mismanagement or fraud

[By Bhuwan Sarine] The author is a student of National Law School of India University, Bengaluru.   Introduction On 30 April 2024, the Securities and Exchange Board of India (“SEBI”) held the Independent Directors (“IDs”) of Manpasand Beverages Ltd. (“MBL”) liable for not performing their duties diligently.  To provide a brief background, independent directors of a company are directors other than the managing or whole-time directors. They are not involved in the day-to-day operations of the company, and are there to ensure that the company is run in a way so as to protect the interests of the shareholders. Section 149(6) of the Companies Act, 2013 (“the Act”) defines them as having relevant expertise and not sharing any material relationship with the company. The order in Manpasand was pursuant to allegations of financial mismanagement in MBL wherein the IDs had to be diligent in assessing its financial statements. SEBI noted that while the IDs claimed lack of access to MBL’s documents, they did not furnish evidence to establish that they tried to obtain them. In summary, the SEBI applied the diligence test to impose liability on the IDs. The standard for liability of IDs is provided under s. 149(12) of the Act . While Manpasand decided on the diligence test, the SEBI and SAT have used the knowledge test solely in the recent past. This paper uses those case laws to argue that the same is an incomplete interpretation of s. 149(12) and contradictory to the role IDs are supposed to play in the company. To that end, Part I sheds light on the two prongs of s. 149(12), Part II shows the incomplete reading of s. 149(12) of late, Part III explains why the same is erroneous, and the final part concludes. I. The Two Prongs of Independent Directors’ Liability Under the first part of s. 149(12) of the Act, an ID can be held liable if the acts of the company occurred with his knowledge and consent or connivance. The knowledge should be attributable to Board processes. The latter part of the sub-section imposes liability when the ID has not acted diligently. It is to be noted that the knowledge and diligence requirements are joined by ‘or,’ which means that both are separate standards[1] and IDs can be held liable if they fail to meet the threshold of any of them. While knowledge has to be in relation to the board process, diligence is over and above this requirement. To meet the latter, IDs need to be generally vigilant, apply their mind, and try to get the information from sources other than board meetings. The standard of diligence required depends on the facts in question. In OSPL Infradeal Pvt. Ltd., the SEBI held the ID liable for approving loans to entities with negative net worth. It noted that the ID did not exercise caution while approving the loan, and hence due diligence was not met. Here, acting hastily was the reason diligence requirement was not met, and it could not be argued that since the ID was not part of the board meetings, he is not liable. Again, in Madhav Sapre and Ors., SEBI called the IDs to evaluate the records and documents before them independently, and not just to rely on the face value of the information provided in the meetings.[2] Since this was not done, they failed to discharge their role with the diligence required.[3] From these instances, it is clear that diligence requirements are not dependent on board processes. Even if the IDs show that they had no knowledge of the mismanagement going on, they can still be held liable if the circumstances warranted taking proactive measures. In fact, the Bombay HC touched this aspect precisely in Sunny v. State of Maharashtra.[4]  It was pointed out therein that the IDs can be held liable under two situations (first is having knowledge of the acts of omission/commission by the company, and second is failure to act diligently), and both are joined by ‘or,’ implying that liability is attracted if they fail to satisfy either of them.[5] However, recent interpretations have not been in consonance with the wording of the sub-section. They have been prompted by the assumption that knowledge requirement is a sine qua non, in the absence of which due diligence cannot even be assessed. II. Incomplete Reading of S. 149(12) of Late Having set out the components of s. 149(12), this section will examine the approach followed by the SEBI and SAT in the recent past. It is to be noted that even before the enactment of the Companies Act, 2013, the knowledge requirement was treated on a higher standing than the diligence requirement.  In December 2004, an expert committee on company law (composed of experts drawn from trade and industry associations, professional bodies, institutes, chambers of commerce etc.) under the chairmanship of Dr. J. J. Irani was constituted to advise the government on the proposed revisions to the Companies Act, 1956. While the committee’s report elaborated on the modalities of the knowledge test, it did not mention anything related to due diligence. The following cases will illustrate the erroneous interpretation of s. 149(12) of the Act. In MPS Infotechnics Ltd. v. SEBI, the SAT held that since the ID was not involved in the day-to-day affairs of the company’s management, he was not liable. It was premised on the view that the offence happened without the ID’s knowledge. Here, the SAT completely ignored the second standard, failing which IDs could be held liable. Going ahead, the SEBI, in the matter of M/s Global Infratech and Finance Ltd., applied the knowledge test solely. The case related to approval of allotment of preferential shares in a manipulative scheme. It absolved the IDs of liability because there was no evidence of them being involved in the board processes. While the SEBI required executive directors to be careful and diligent, there was no mention of the same expectation from the IDs. In this case, it appeared

[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.