Company Law

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

[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

[By Anubhav Patidar & Sarthika Singhal] The authors are students of Narsee Monjee Insititute of Management Studies.   INTRODUCTION  The Indian financial market has witnessed tremendous growth anchored on the principles of transparency and ease of doing business promoted by the Government of India. Historical inefficiencies in the physical aspect of the trading system of the securities market have come to light. Securities and Exchange Board of India (“SEBI”) in its 2004 report titled ‘Report of the Group on Reduction of Demat Charges’1 highlighted the risks associated in dealing with physical shares, i.e., theft, forgery, loss and damage.   Pursuant to the threats posed by physical certificate trading in private, regulators mandated compulsory dematerialization for private companies. In accordance with the powers granted by Section 292 read with Section 469 of the Companies Act, 20133 (“Act”), the Ministry of Corporate Affairs (“MCA”) introduced this amendment to the to the Companies [Prospectus and Allotment of Securities (“PAS Amendment”)] Rules, 2014 on October 27, 2023.   Dematerialization refers to the process through which tangible share certificates of an investor are converted into an equivalent number of securities in electronic format.   This article deals with the intricacies of the PAS Amendment Rules 2023, analyze the background and the rationale behind the amendment, understand its impact on market players and then highlighting certain concerns associated with it.  MCA Notification  Under the amended rules, every private company must compulsorily dematerialize all its securities with immediate effect. The companies are granted an 18 month-timeline from the closure of the financial year in which they cease to be a non-small private company to adhere to this amendment.4 For instance, if a company seizes to be a small company at any time during the financial year 23–24, 18 month-timeline triggers from 31 March 2024, and be complied is required by 30 September 2025.  Two specific categories are exempted from this mandate. First, the amendment does not apply to small companies5, defined as private companies with a paid-up share capital of INR 4 crores or below and a turnover of INR 40 crores or below. Additionally, government companies are excluded6, acknowledging the distinct regulatory framework applicable to these entities.  RATIONALE BEHIND MANDATORY DEMATERIALIZATION  The rationale to implement dematerialization for private companies is to unveil the opaque realms of asset ownership in the private sector. This initiative aims to enhance efficiency, transparency, and security within the private sector, ultimately benefiting both companies and investors.  Private companies, characterized by a restricted shareholder base and minimal regulatory scrutiny owing to their absence from public markets, have long operated under a shroud of secrecy. This opacity has provided fertile grounds for various illicit practices, spanning from tax evasions to financial deceit, often facilitated by the presence of shell companies – with no significant assets or operations.   Transitioning to dematerialization requires a private company to register with one of India’s two depositories and be allocated a securities identification number (“ISIN”) that will be used to track shares and other securities issued by the company. Shareholders will need to open a ‘demat account’ showing identification proof. Demat accounts would have to be compulsorily linked to permanent account numbers (“PAN”), and bank account.7 Any sale or purchase of shares of a private company will reflect in the demat account records. With shares held and exchanged through depository accounts, ownership rights become unequivocally clear, rendering it significantly challenging to engage in fraudulent activities such as clandestine ownership or fabricated transfers.  Further, private company ownership information will come handy to market regulators like SEBI. Regulators can effectively track and scrutinize transactions, facilitating prompt detection and prevention of non-compliance. This heightened level of regulatory scrutiny will act as a deterrent to illicit activities, fostering a more compliant and transparent securities market environment.  Impact on Companies  The financial burdens on the private companies are expected to get fortified since there is a fee component associated with demat accounts. Moreover, Private companies have to hire additional people to look after the compliance of dematerlialization process. Opening these accounts is merely the tip of the iceberg; ongoing expenses like annual maintenance fees add to the burden. Additionally, complying with regulatory requirements, such as upgrading technology and infrastructure, for dematerialization entails additional costs. This requires companies to allocate significant resources to ensure seamless compliance and effectively manage the financial implications of dematerialization.  While the wholly-owned subsidiaries (WoS) of unlisted public companies received exemptions from dematerialization requirements in the 2018 Amendment Rules exempted, the same leniency doesn’t extend to WoS of private companies under the Amended PAS Rules. If a private company subsidiary falls under the umbrella of another private entity, it must adhere to dematerialization regulations. However, if the subsidiary operates under a public company, thereby retaining its status as a deemed public company, it remains exempt from the 2018 amendment to the Rules.  Impact on Foreign Investors  The impact of dematerialization on foreign investors in Indian private companies presents both short-term challenges and long-term benefits. This documentation and procedural requirements may lengthen investment timelines and incur additional costs, posing a potential deterrent to foreign investment. Moreover, shareholders must furnish extensive details regarding their constitution, ownership, and stakeholder agreements, which could raise concerns for foreign funds. Once the demat account is established, the administrative burdens associated with traditional paper-based transactions are eliminated. Dematerialization ensures smoother, safer, and faster transactions for foreign investors, enhancing the efficiency and attractiveness of investing in Indian private companies. Therefore, while the initial setup may pose challenges, the transition to dematerialization ultimately enhances the investment landscape for foreign investors in the Indian market.  AFTERMATH OF AMENDEMENT: CHALLENGES AND WAY FORWARD  Navigating the transition towards mandatory dematerialization in private limited companies presents considerable hurdles, requiring strategic solutions for effective implementation.  Firstly, the technical complexities encountered by shareholders, often acts as a deterrent to the adoption of dematerialization. However, by providing intuitive interfaces and dedicated technical assistance, companies can empower shareholders to navigate the process with enhanced ease and assurance, thereby facilitating a smoother transition.  Moreover, the cybersecurity concerns presents yet another

[By RS Sanjanaa & Sahil Agarwal] The authors are students of Symbiosis Law School, Pune and Government Law College, Mumbai respectively.   [I.] Introduction  The Indian Government has allowed public companies to directly list and issue their equity shares on international exchanges. This move is aimed at bolstering the Indian economy by allowing companies (especially start-ups and technology companies) to access global markets for the purpose of raising foreign capital at favorable valuations.   For the purpose of allowing direct listing of equity shares at international exchanges, the Government has notified the amendment to Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’) and the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (‘LEAP Rules’). In addition to this, Frequently Asked Questions have also been released pertaining to the Direct Listing Scheme.   In this post, the authors aim to explore the intricacies of the new framework, its development, implications on Indian companies, key challenges with the new framework, and recommendations.   [II.] Overview  [II.A.] Background  Direct listing is essentially one of the two ways in which a company can raise capital by listing its shares on an exchange. The other being an Initial Public Offer (‘IPO’). In a direct listing, the company does not issue any new shares and lists the already existing shares allowing the existing shareholders to trade them via an exchange.   Earlier, Indian companies were allowed to raise foreign capital for their shares only via the route of depository receipts (‘DR’). In order to ease the process of raising foreign funds and to allow direct listing, the Government vide Companies (Amendment) Act, 2020 amended Section 23 of the Companies Act, 2013  and allowed public companies to issue securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions. This change was brought into effect on October 30, 2023. In furtherance to the above, the LEAP Rules were introduced and the NDI Rules were amended. In the meanwhile, the Securities and Exchange Board of India (‘SEBI’) is expected to release its operational guidelines pertaining to direct listing of companies already listed in India.  [II.B.] Key Features  [II.B.1.] LEAP Rules   As per the First Schedule of LEAP Rules, GIFT International Financial Services Centre (‘GIFT IFSC’) has been prescribed as the permissible jurisdiction; and India International Exchange NSE and India International Exchange as the two permissible exchanges. The provisions of the LEAP Rules shall apply to both unlisted and listed Indian public companies which shall be permitted to list on the permissible jurisdiction. Further, as per Rule 4(5) of the LEAP Rules, companies are mandated to stay in compliance with  Indian Accounting Standards (in addition to any other accounting standards as may be prescribed by the foreign regulator) even after the shares are listed in  permissible jurisdictions.  Rule 5 of the LEAP Rules prescribes for certain kinds of companies which shall be deemed to be ineligible for the purposes of direct listing such as a Section 8 company, a company limited by guarantee and also having share capital, one having a negative net worth, among others.  [II.B.2.] NDI Rules  As per Schedule XI of the NDI Rules, the investment in Indian companies vide such direct listings shall be considered foreign investment for the purposes of foreign exchange laws and shall be subject to the sectoral caps for foreign investment as provided under Schedule I of the NDI Rules. Furthermore, any person resident outside India shall be a permissible holder of such equity shares. In essence, Indian residents are debarred from trading/investing in shares listed in permissible jurisdictions. These permissible holders shall be permitted to invest up to the limit prescribed for the foreign portfolio investors under the NDI Rules (i.e., 10%).  [III.] Critical Analysis  [III.A.] Assessing the Merits  Prior to this amendment, companies were only allowed to raise foreign currency capital primarily through issuing DR. Now with the government expressing its intent to permit the direct listing of Indian companies on international exchanges, this present move is a welcome change towards achieving that.   This would enhance the valuation of companies that are listed  on the international exchanges. It raises global investor confidence by signaling ambitions of tapping into a new pool of capital and subjecting them to more transparency obligations. For instance, until 2007 Alibaba was only listed on the Hong Kong Stock Exchange. When it decided to list on the New York Stock Exchange (‘NYSE’), the IPO raised $21.8 billion leading to enhanced valuation of $231 billion. This further diversifies the investor base with a broader range of risk appetites and reduced dependence on domestic markets.   The range of motion also increases when it comes to deals such as mergers and acquisitions of foreign companies. For instance, having U.S. dollar denominated shares simplifies any deal with a U.S. business. Additionally, listing on an international exchange also promotes strategic deals or partnerships with foreign firms through greater market recognition.   Sectors such as technology and start-ups will significantly benefit from this especially since FDI in the technology sector witnessed a 336% rise in April-September 2020. When Spotify (a Swedish company) went public on the NYSE, it closed at $26.5 billion on its first day of direct listing at the NYSE and has since grown over $7 billion with several of its majority investors coming from the U.S. such as Morgan Stanley and Universal Music Group. Additionally, it gave the most detailed disclosure a company has ever given about its business owing to higher transparency obligations. Even established companies operating in other sectors will benefit from this existing demand pool of foreign investors.   From the perspective of investors, investing in Indian companies in GIFT IFSC provides immense tax benefits than a DR route including exemptions on capital gains from the transfer of equity shares in GIFT IFSC. Moreover, it eliminates currency risk for the investors as the stocks are traded on foreign currency. This also facilitates easier cross-border investment allowing even non-resident Indians and entities from land bordering countries to invest pursuant to government approval.  Additionally, as stated

[By Rajan Thakkar & Manasvi Verma] The authors are students of Gujarat National Law University, Gandhinagar.   Introduction Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006 imposes a liability on the buyer companies to make the payment to their suppliers within the period mentioned under Section 15[i] of the Act and upon failure of the same, according to Section 16[ii] of the Act, the buyer company is required to pay compound interest with monthly rests on the due amount at three times the bank rate notified by the Reserve Bank of India. However, certain obscurities have surfaced in cases when the buyer company is unaware of the MSME status of the seller and when the supplier fails to raise any claims for the outstanding amount leaving the buyer unaware of the outstanding dues. These ambiguities can leave companies financially drained as a result of supplier oversight. This article analyses the shortcomings of the current regime for delayed payments and presents somewhat of a rough pathway for the companies to safeguard themselves from unforeseen consequences of such situations. Legislative Intent: Ensuring timely Payment to Suppliers To understand the implications of these provisions in such situations, it is important to first examine the intent behind the concerned provisions. The legislative intent at the time of the passing of the act was to make improvements in the Interest Act 1993[iii] and to incorporate its provision in MSMED Act 2006; replacing and improving the then existing 1993 Act. One of the changes that was made was that the maximum period for payment by agreement was reduced (from 120 days to 45 days) in comparison to the Interest Act. It was evident that the legislature wanted to make moves to mandate the buyer companies to make timely payments for goods and services provided by micro and small enterprise suppliers. Such additions were made in Section 15 and the penalty for the default was provided under Section 16. Section 15 mandates that in no case, the agreement for the period of payment can exceed the statutory period. It reads,“…..the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing…..in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days….”. . According to Section 16, the buyer will be liable to pay the compound interest notwithstanding any agreement or any law in force upon a failure to make the payment as mandated under Section 15 of the Act. To simplify this, both the sections are standing glued to each other, and if section 15 falls, so will section 16, and the Hon’ble Supreme Court has also observed in the case of Silpi Industries v. Kerala SRTC[iv] that the MSMED Act is a special legislation and would have an overriding effect over any other statute in force at the time. Therefore, no forces of other statutes or any agreements between the buyer company and the supplier can save the buyer company from this strict liability. This liability often comes as a surprise to the buyer companies due to some lacunas that are left out. No duty of the seller to raise a claim for outstanding dues. There is no default duty of the supplier to raise any claims or send any notices before the right u/s 16 of the actuates. Against this backdrop, the buyers might want to explore avenues to restrict their liability u/s 16 by agreements by requiring the suppliers to raise claims regarding outstanding amounts. However, no such option is left open to the buyer companies under the act since the statutory mandate is to make the payment in the period mentioned under section 15 and upon failure, “notwithstanding any agreement or any other law” in the time being, the interest under section 16 will kick in. No Duty of the seller to Notify the buyer company about the Supplier status. The act doesn’t mandate that the seller is required to notify the buyer companies about their supplier status. Liability can be imposed u/s 15 and 16 merely if the seller company is a supplier under the definition of Section 2(n) of the MSMED Act[v]and therefore, irrespective of the disclosure made by the supplier regarding its status, the liability of the buyer company may arise. To give a practical example of how this problem can materialize, let’s say a buyer company agrees with a vendor at a time when the vendor doesn’t have a supplier status under the MSMED Act and the period for payment for the goods/services exceeds the period described under the section 15. On a later date, the vendor acquires a supplier status under the act and keeps supplying the goods/services to the buyer company under the pre-existing contract without notifying the buyer company about the change in status. Upon default or after the lapse of the statutory period u/s 15, the buyer company might be caught with surprise for having to pay exorbitant statutory dues and finding that the existing contract has been rendered infructuous. Accompanying Liabilities of the Buyer Company upon Non Compliance with the Disclosure Requirements Thus far, we have explored how unforeseen financial burden can be placed on the buyer company in the form of interest rate in cases wherein the buyer company is either aloof of any outstanding dues or the supplier status of the seller. However, the repercussions of this aloofness are far reaching and not confined to the compound interest u/s 16 of the MSMED Act. The buyer company and its executives can have to bear additional penalties upon non disclosure of such unknown/undemanded outstanding payments. The repercussions of such a strict disclosure requirement can be understood by referring to the relevant provisions of the MSMED Act r/w the penalising provision of the Companies Act 2013. Under Section 22 of the MSMED Act[vi], it is mandatory for a buyer company, who engages in the acquisition of goods or procurement of services from a supplier to undergo an

[By Devanshi Shukla] The author is a student of MNLU Aurangabad.   Introduction  Nomination as a process involves selecting another person as a legal nominee or representative by a person during his lifetime in respect of specific assets or properties. In the recent case of Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors, the Supreme Court offered clarification on the status of nominees as nominated under Section 109A of the erstwhile Companies Act, 1956 (‘Act’) in the context of succession laws. The Court emphasized that nomination under the Act should not be viewed as an alternative method of succession. This blog seeks to delve into a comprehensive analysis of the judgment and explore its current implications.  Facts  Jayant Shivram Salgaonkar (‘testator’) had executed a will for the devolution of his properties upon his legal heirs. In addition to the properties mentioned in the will, he had fixed deposits (‘FDs’) and mutual funds (‘MFs’) for which he had made nominations. Following his demise, the legal heirs filed a suit for the administration of his properties. The nominees contested this arguing that the FDs and MFs absolutely vested in them, citing their nomination under the Act. A single judge of the Bombay High Court rejected the contentions put forth by the nominees stating that the appointed nominee retains ownership of the shares/securities in a fiduciary role and is responsible for addressing any claims within the framework of succession law. On appeal, the Division Bench held that the view taken in Harsha Nitin Kokate v. The Saraswat Co-operative Bank Limited and Others was per incuriam and made it clear that nominees were not entitled to the absolute ownership of the properties. Subsequently, the appellants filed an appeal in the Supreme Court.   Issues at hand  The Supreme Court deliberated on the following issues:  What is the aim behind the introduction of provisions concerning ‘nomination’ into the Act?  What is the understanding of the concept of ‘nomination’ under the Act and in relation to the law of succession?  What are the consequences of the term ‘vest’ and the non-obstante clause as employed in Section 109A of the Act and under Bye-Law 9.11.1 of The Depositories Act, 1996?  Observations made by the Court  Object behind the introduction of Section 109A under the Act  The Court observed that the Companies Act, 1956 was introduced to deal with the “incorporation, regulation and winding up of corporations”. Additionally, the primary intent behind introducing Section 109A and 109B by the Amendment of 1999 was to provide momentum to investment in the corporate sector and not to deal with succession. The provision of nomination was introduced to lessen the burden of legal heirs and also to foster a wholesome environment for corporate investment in the country. The Court held that there was lack of any material to show that the Amendment intended to provide absolute ownership of the property to the nominee.   Concept of ‘nomination’ under the Companies Act, 1956 and its connection to the law of succession  The Court referred to the concept of ‘nomination’ as enumerated by various courts under varied legislations (such as the Government Savings Certificate Act, 1959). It was asserted that due to the lack of a universally accepted definition and interpretation regarding the rights and ownership of a nominee concerning the relevant property, the Court would rely on the commonly understood meanings. The Court acknowledged that the Act does not envision a “statutory testament” that supersedes the laws of succession. It does not concern itself with the laws of succession. Nomination under the Act is not put through the same strict requirements as those applicable to the creation and validity of a will under succession laws.  Implications of the term ‘vest’ and the non-obstante clause as used under Section 109A of the Companies Act, 1956 and Bye-Law 9.11.1 of The Depositories Act, 1996   The Court held that the term ‘vest’ can have multiple meanings according to the context in which the word has been used in a provision or legislation and mere usage of the term does not give absolute entitlement over the subject matter. Similarly, it was acknowledged that the non- obstante clause also is to be understood in the context of the object and scheme of the legislation under consideration. Further, the Court stated that the term ‘vest’ has to be understood in line with Section 211 of the Indian Succession Act, 1925. Under Section 211, ‘vest’ does not entitle the administrator or executor with ownership but only entitles him to hold the property until it is distributed among the legal heirs. Section 109A of the erstwhile Act was said to address the vesting of shares or debentures from a holder to their nominee in the event of the holder’s death.. The non-obstante clause temporarily vests securities unto a nominee, to the exclusion of others to help the company in discharging its liability regarding various claims put forth by the successors of the deceased shareholders until the successors have resolved matters and are ready for the transfer of the securities.  Bye-law 9.11.1 under the Depositories Act, 1996 also provides for nomination by shareholders. Similar to Section 109A, the term ‘vesting’ here is used only in a limited context. The non-obstante clause has only been included here to facilitate the depository to handle the securities in the event of the demise of the shareholder.  Analysis & Conclusion  The judgement plays a crucial role in delineating the rights of the nominees as nominated under Section 109A of the Act. The Supreme Court has effectively negated the view held by it in Aruna Oswal v. Pankaj Oswal & Ors. wherein it was stated that the non-obstante clause employed under Section 72(3) of the Companies Act, 2013 which is pari materia to Section 109A makes the vesting of shares unto the nominee absolute. The legal stance taken by the Apex Court aligns the rights of the nominee with those of the heirs in their respective situations, offering a method to facilitate the seamless