Company Law

Regulatory challenges faced by Equity based Crowd-funding Platforms.  [Amala George] The author is a 5th year student of B.A.LLB (Hons.) of ILS Law College, Pune. What is Crowdfunding? With the rise of the Internet, a new method of fund raising has emerged- Crowdfunding. Crowdfunding is the solicitation of funds from multiple investors through web-based platforms.[1] Different kinds of organisations including NGOs, small companies and business ventures use Crowdfunding to raise funds for different activities, expansion, diversification etc. Crowdfunding can be broadly classified into two kinds- donation based and reward based. Donation based crowdfunding involves grants and donations with no expectation or obligation of returns. Reward based crowdfunding can be further classified into- debt based or equity based. In debt based crowdfunding if it is in the form of loans, it is called peer to peer lending and should come under the banking regulator, whereas if it is debt securities based then it would come under the purview of the securities regulator. The subject matter of this article is equity based crowdfunding in which equity shares of the company are issued in lieu of funds raised from investors. It is a popular method of fund raising by start-ups. There are web based platforms which facilitate information exchange and advertising of companies as well as act as intermediaries for fund and equity share transfer. In web-based platforms for equity crowdfunding, investors and companies looking to raise capital through equity have to register with the platforms and pay a registration fee for the same. Start-ups advertise and solicit funding on these platforms and therefore the web-based platforms act as intermediaries or a marketplace for investors and start-ups.  Social media platforms are also often used by start-ups to solicit funds from multiple investors. The need for regulation Traditionally, start-ups raise funding through Venture Capital funds and Private Equity investors who have a high risk appetite. The funding is also at a later stage, after the product/ service becomes commercially viable. However with the advent of crowdfunding platforms, multiple investors with smaller individual investment are tapped into, usually at an early stage. The benefits of crowdfunding are that it is easier, faster and cheaper method of fund raising, requires no mandatory disclosures, and possesses easier and wider access to funding and investors. While the benefits of crowdfunding are manifold for the start-ups, the risk to the investors is high. There is an information asymmetry in the functioning of these crowdfunding platforms as there are no straight jacket regulations on mandatory disclosures which apply to them. These are also characterized as high risk investments and involve a high exposure to retail investors which makes the regulators uneasy. Start-up companies also offer less liquidity and therefore might not be viable for retail investors who do not have the required skills and assessment of risk to invest in such securities. There is a lack of regulatory certainty due to absence of regulations in which these crowdfunding platforms function. Current regulatory framework The applicable laws to Equity based crowdfunding are- 1) Companies Act, 2013- Any issue of securities by a company would come under the purview of the Companies Act, 2013. In relation to issue of securities, there are two recognised modes available to companies under Section 23 of the Companies Act, 2013- Public offer through prospectus and Private placement through an offer letter[2]. 2) Securities Contract (Regulation) Act, 1956, Securities and Exchange Board of India Act (SEBI Act) and Regulations- Under Section 24 of the Companies Act, 2013, Securities Exchange Board of India (SEBI) shall regulate the issue and transfer of securities of listed companies and those companies which intend to get their securities listed. A public offer requires a ‘prospectus’ and there is a list of matters to be disclosed in the prospectus. The prospectus also needs to be filed with the Registrar of Companies (RoC) and SEBI.[3] A private placement offer under Companies Act, 2013 cannot be made to more than 200 people in a financial year.[4] The newly amended Section 42 also stipulates that private placement shall be made only to persons identified by the Board and prohibits public advertisements or utilisation of any media, marketing or distribution channels or agents to inform the public at large about such an issue.[5] Explanation III to Section 42 dealing with offer or invitation for subscription of securities on private placement reads- “If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter”. Therefore the modus operandi of crowdfunding platforms[6] of raising funding through issue of equity shares through the medium of electronic platforms with a number of registered/ member investors would neither meet the stringent regulations for a public offer nor qualify as a private placement under the Companies Act, 2013. There is more similarity to a public offer than a private placement which is on a one-to-one basis. The decision of the Supreme Court in the Sahara judgment[7] concluded that an offer to 50 or more persons constitutes a public issue and will come under the regulatory oversight of SEBI even in case of unlisted companies. In case of crowdfunding, there is no filing of prospectus with the RoC and the disclosures to be made are not complied with, therefore there is a violation of public offer norms. Private Placement under Section 42 (7) specifically bars the utilisation of any media to market and distribute to the public at large about such an issue. The solicitation made to more than 50 persons also makes crowdfunding beyond the scope of private placement. In the opinion of the author equity based crowdfunding platforms are

Sandpapergate: ICC’s Failure to Save the Spirit of the Game from Orchestrated Cheating. [Harshit Anand] Mr. Harshit Anand works at Khaitan & Co, Kolkata and deals with Real Estate and Corporate matters. He may be reached at [email protected]. Introduction In the annals of finance, the promulgation of the Fugitive Economic Offenders Bill, 2018 (“the Ordinance”) is being lauded as another bold step of the government after the Insolvency and Bankruptcy Code of 2016. The intent behind the Ordinance is to target those economic offenders who flee the jurisdiction of India and evade the rigours of the legal process, and impending criminal prosecution. This Ordinance empowers the Government to seize the property of such economic offenders- Benami and otherwise- situated in India as well as in foreign jurisdictions. The Ordinance would, under its purview, deal with cases in which the total amount involved is INR 100 crores or more. As the instances of fraudulent conduct in corporate behaviour pile up day upon day, relevance of this Ordinance cannot be overemphasized. I shall briefly discuss the important provisions and procedures listed under the Ordinance and its potential impact on our economy. Offences under the Ordinance One singular feature of the Ordinance is that it defines significant terms and phrases such as ‘fugitive economic offender’, ‘schedule offence’ and ‘special courts’, amongst others. It makes provisions for presenting an application before such special courts for a juridical declaration that an individual is a fugitive economic offender. Attachment of the offender’s property- which would include their Benami property- situated in India or in some other country is an option explicitly available under the Ordinance. For management and disposal of such confiscated property, the Ordinance provides for the appointment of an Administrator. With the Ordinance in operation, offenders who fit the definition of a ‘fugitive economic offender’ would be tried for all offences listed under the schedule of the Ordinance The Ordinance defines a ‘fugitive economic offender’ as any individual against whom an arrest warrant concerning a scheduled offence has been issued by any Indian court, who has either left India so as to evade criminal prosecution or being abroad, has refused to return to India to face criminal prosecution.[i] In other words, all individuals who have left India in order to avoid criminal prosecution and refuse to return to the Indian jurisdiction would satisfy the text of § 2(1) (f). However, leaving the country to dodge the legal process does not automatically make a person a fugitive economic offender (“FEO”); what is of essential requirement is commission of a schedule offence under the Ordinance. The Ordinance lays down that a ‘Schedule Offence’ would mean an offence specified in the schedule, if the total amount involved in the commission such offence or offences is rupees one hundred crore or more.[ii]  This Section implies that every offence laid down under this schedule would come under the ambit of economic offence and any person indulging in this schedule offence would be tried in special courts established under the Prevention of Money Laundering Act of 2002. The schedule is quite comprehensive, in the sense that it lists offences under a plethora of existing laws such as the Indian Penal Code of 1860, the Prevention of Corruption Act of 1988, the Customs Act of 1962, the Companies Act of 2013, the SARFAESI Act of 2002, the Limited Liability Partnership Act of 2008, the Prevention of Money Laundering Act of 2002 and the Insolvency and Bankruptcy Code of 2016. Authorities under the Ordinance The Ordinance defines certain authorities and accords them functions and some special powers. Three authorities who bear primary responsible for the operation of the Ordinance are: 1.Administrator: 2(a) describes an administrator as one who has been appointed under §15(1). §15 deals with management of the properties confiscated under the Ordinance, and under §15(1), the Central Government may, by notification in Official Gazette, appoint as many officers, as they may think fit not below the rank of Joint Secretary of the Government of India to perform the function of an administrator. An administrator is therefore a subordinate officer or officers of the Central Government, who perform(s) their function on the direction of Central Government. The administrator receives and manages the properties confiscated under the Ordinance. §12 of the Ordinance dictates the administrator to disposes of such property on the direction of the Central Government. Special Courts: A special court under §2(n) of the Ordinance refers to a court of session designated as a special court under §43(1) of the Prevention of Money-laundering Act of 2002. Under the Ordinance, a special court (“Court”) has the right to declare a person as an FEO under §12 of the Ordinance and issue a notice requiring appearance of such person. With the permission of the Court, a property may be attached under §5(1), if with regard to the referred property, there is a reason to believe that the property is a proceed of crime or is a property owned by an individual who is an FEO, and which is being or is likely to be dealt with in a manner which may result in the property being unavailable for confiscation. Director: A director in the Ordinance is one appointed under §49(1) of the Prevention of Money-laundering Act of 2002, which defines a director as a person deemed fit to be an authority for the purposes of the Act and appointed by the Central Government. Under the Ordinance, the director may file an application before the Court if he has reason to believe, or any other material in his possession indicates that an individual is an FEO under the Ordinance. §6 of the Ordinance states that the director shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit in respect of discovery and inspection. Powers of survey, as well as of search and seizure have been given to the Director under the Ordinance, provided he has reason to believe that

Amendment to Section 185 of the Companies Act, 2013 – A Step towards Business Growth [Mr. Arjun Gopalakrishnan] The author is a Legal Manager at ICICI Bank Limited Introduction Section 185 of the Companies Act, 2013 imposes restrictions on a company in relation to advancement of loans to the directors or any other person in whom the director is interested and providing guarantees/securities in connection with the loans taken by the director or such other person. Subsequent to the Companies Amendment Act, 2017[1] and the Ministry of Corporate Affairs (“MCA”) notification dated May 7, 2018[2], Section 185 of the Companies Act, 2013 (“Original S.185”) stands amended (“Amended S.185”). The amendment is intended to relax the restrictions that were originally imposed by the section, consequentially promoting operational convenience. Analysis of the Amendment In order to address the issues in Original S. 185 and to make the section less stringent, the entire section has been substituted by Amended S. 185. The below- mentioned are the important amendments that have been made to Original S.185: Deletion of the non-obstante clause: The text of Original S.185 started with “Save as otherwise provided in this Act” which meant that if there were other provisions in the Companies Act, 2013 that allowed lending, as covered under Original S.185, then such specific provision would prevail over the prohibition under Original S.185. This resulted in a lack of clarity as to whether the specific provision of Section 186 of the Companies Act, 2013 which starts with “Without prejudice to the other provisions” would exclude the prohibition imposed by Original S.185. To bring an end to the ambiguity, the words “Save as otherwise provided in this Act” have been omitted in the Amended S.185. Partly prohibitive and partly restrictive nature of Amended S.185: The restrictions that were placed by Original S.185 have been substantially relaxed vide the amendment. In a scenario where none of the exemptions to Original S.185 are applicable, the section places a blanket prohibition on a company (the “Lending Company“)[3] from providing a loan to or providing security/guarantee in relation to a loan (such loan, guarantee, or security will hereinafter be referred to as the “Assistance”) taken by, a director of the Lending Company or any other person the director is interested in. The expression “any other person the director is interested in” has been defined as: (a) any director of the Lending Company, or of its holding company, or any partner or relative of any such director; or (b) any firm in which such director or relative is a partner; or (c) any private company of which any such director is a director or member; or (d) any body corporate at a general meeting of which 25% or more of the voting power is exercised or controlled by any such director(s); or (e) any body corporate, of which the board, managing director or manager is accustomed to act with the directions or instructions of the board, or any of the director(s) of the Lending Company. The following exemptions are available under Original S.185: (i) The provisions of Original S. 185 do not apply to private companies that fulfil all of the following conditions: (a) no other body corporate has invested in the share capital of such private company, (b) the borrowings of such private company from banks and financial institutions or any body corporate is less than twice its share capital or 50 crores, whichever is lower, and (c) such private company has no default in the repayment of such borrowings subsisting at the time. (ii) The prohibition under Original S.185 will not apply if the Lending Company is providing Assistance to or in relation to a loan advanced to its wholly owned subsidiary (“WoS”) subject to the Assistance being in relation to an activity that forms a part of the principal business activities of the WoS. (iii)The prohibition under Original S.185 will not apply if the Lending Company is providing Assistance to its subsidiary which is not its WoS, in the form of security or guarantee for a loan provided to the subsidiary, subject to the Assistance being in relation to an activity that forms part of the principal business activities of the subsidiary. (iv) The prohibition under Original S.185 will not apply if the Lending Company is providing Assistance to its managing or whole-time director in the form of a loan, as a part of the conditions of service extended by the Lending Company to all its employees, or pursuant to any scheme approved by the members of the Lending Company by a special resolution. (v) The prohibition under Original S.185 will not apply if the Lending Company is one which in the ordinary course of its business provides Assistance, provided an interest is charged in respect of such loans, at a rate not less than the bank rate declared by the Reserve Bank of India (“Ordinary Course of Business Exemption”). Pursuant to the amendment, the definition of “any person in whom any of the directors of the company is interested in” has been modified and in a case where none of the exemptions apply, the prohibition under Amended S.185 would become applicable in the below-mentioned manner: (i) A blanket prohibition under Amended S.185 will apply in relation to an Assistance provided by the Lending Company, to, or in relation to a loan taken by: (a) any director of the Lending Company, or of its holding company, or any partner or relative of any such director (b) any firm in which any such director or relative is a partner (ii) In relation to an Assistance provided to, or in relation to a loan taken by “any person in whom any of the directors of the company is interested in”, the Lending Company is now permitted to do the same subject to the passing of a special resolution in a general meeting with the explanatory statement to the notice of the general meeting clearly disclosing the full particulars of the Assistance provided and the purpose

Strengthening of Foreign Investment in India owing to the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 [Ayush Chowdhury and Rishika Raghuwanshi] The authors are third-year students at Symbiosis Law School, Pune. Until now, it was possible for a foreign company to merge with an Indian company, whereas the vice versa was a challenge within the scope of court-sanctioned merger framework set out under the Indian corporate law. This challenge was finally overcome in April 2017 when the company law provisions brought in regulations governing cross border mergers into force. Following this, the Reserve Bank of India (“RBI”) also issued draft regulations (“Draft RBI Regulations”) wherein it laid down standards of deemed approval from the RBI for mergers across the border. This enabled the companies to merge with foreign companies under specified jurisdictions. With the Draft RBI Regulations being at an elongated halt for nearly a year’s time, the RBI on March 20, 2018 notified the Foreign Exchange Management (Cross Border Merger) Regulation, 2018[1] vide notification No. FEMA 389/ 2018- RB (“Merger Regulations”). In this article, the authors would highlight how the Merger Regulations has brought about a change in the context of cross border mergers and how it would impact the economy by bringing foreign investments. The noteworthy changes brought about by the Merger Regulations are: Issue or Acquisition of Securities Inbound Mergers The Merger Regulations clarified that in cases of inbound mergers i.e. where the company is an overseas joint venture (“JV”) or a wholly owned subsidiary (“WOS”) of an Indian company, there arises a need for such company to comply with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (“ODI Regulations”). This is an additional compliance with a pre-requisite compliance with applicable foreign exchange regulations. Moreover, the winding up related obligations in the ODI Regulations should be assessed by the JV/WOS. Subsequently, in cases of inbound mergers which lead to acquisition of a step down subsidiary of a JV/WOS, such acquisition must comply with the conditions relating to total financial commitment, method of funding etc. as set out in the ODI Regulations. Regulations 6 and 7 of the ODI Regulations are mandatory compliances if the merger with the JV/WOS results into an acquisition. Outbound Mergers The acquisition of securities could be made by a resident of India conforming to the existing regulations relating to investment in a JV/WOS or a liberalized remittance scheme (LRS). Transfer of Assets/ Securities Estopped to be Acquired Inbound Mergers The duration to sell the assets not permitted to be held or acquired under FEMA has been increased from 180 days to 2 years from the date of sanction of the scheme. However, it remains to be tested whether such an elongated duration would be optimum for the sale of foreign assets in light of compliances under foreign laws. The referred resultant Indian company would have to seriously evaluate the provisions of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015 to hold immovable property outside India. The sale proceeds shall be transferred to India immediately through banking channels. Outbound Mergers In case of a company not permitted to acquire or hold any asset or securities in India which is part of an Indian Company under an outbound merger, the foreign company can transfer such assets or securities within a period of 2 years from the date of sanction of scheme and the sale proceeds shall be transferred outside India immediately through banking channels. Borrowings Inbound Mergers The Merger Regulations henceforth provide a period of 2 years from the date of sanction of the scheme to bring overseas borrowings availed by the resultant Indian company. The clarification expressly provides for non-applicability of end-use restrictions under the Foreign Exchange Management Act, 1999 (“FEMA”) to such overseas borrowings. Prior to an inbound merger, if there happens to be any borrowing by the foreign company, it shall become the borrowing of the Indian company after the merger which should be in consonance with external commercial borrowing norms. Nevertheless, no remittance for repayment of such overseas borrowings can be made during the two-year period. Outbound Mergers Pursuant to outbound mergers, while the guarantees or outstanding borrowings of the Indian companies would become the liabilities of the resultant foreign company, the Merger Regulations put down that foreign companies shall not acquire liability in rupees payable to the Indian lenders non-compliant with FEMA; and with reference to this, a No Objection Certificate (NOC) must be availed from the Indian lenders. Acquisition of Assets Inbound Mergers After the inbound merger, the resultant Indian company may acquire or hold any assets or securities outside India which it is permitted to acquire under the RBI Act or the rules or regulations thereof. Outbound Mergers After the outbound mergers, the foreign company may acquire or hold any assets in India which it is permitted to acquire under the provisions of the RBI Act or the rules or regulations thereof. Location of the Office Inbound Mergers Under the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2015, any office of the foreign company outside India shall be deemed as a branch or an office of the resultant Indian company, thereby implying that the resultant Indian company would be allowed to undertake any transaction as permitted to a branch or an office. Outbound Mergers According to the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or Any Place of Business) Regulations 2016, a foreign company may undertake any transaction as permitted to a branch office as any office in India shall be deemed as a branch or an office of the resultant company in India. Other Consideration under the New Regulations In both inbound and outbound mergers, a bank account could be opened for a maximum period of two years, and the valuation parameter shall be applicable for both. Furthermore, in light of cross border mergers, it is deemed that prior approval has been taken and that no separate

The Vague Concept of Public Interest as a Ground for Lifting the Corporate Veil. [Shivang Agarwal] The author is a third-year student at NALSAR University of Law, Hyderabad. He may be reached at [email protected]. The post seeks to assess the application of the ground of public interest by the judiciary in India by commenting on the case of State of Rajasthan & Ors. v. Gotan Lime Stone Khanji Udyog Pvt. Ltd. & Ors., which was decided by a two-judge bench of the Supreme Court of India on January 20, 2016. The primary question that would be addressed by this post through a comparative analysis of English and Indian jurisprudence on lifting the corporate veil is whether the bench was justified in invoking the ground of public interest in order to lift the corporate veil. Facts The Government of Rajasthan had granted a mining lease for extraction of lime stone to the Respondent, M/s. Gotan Lime Stone Khanji Udyog (GLKU), which was a partnership firm. The Respondents moved an application for transfer of the mining lease to a private limited company. The application was allowed as it was a mere change in the form of business of the Respondents and involved no premium, price etc.; further, the partners and the directors were the same. Subsequently, GLKU sold all of its shares to Ultra Tech Cement Limited and became a wholly owned subsidiary of the latter. It was alleged by the state government that the share price which came to be around Rs. 160 crores was nothing but a consideration for the sale of the mining lease. Judgement The bench quashed the impugned transfer of shareholdings. They disregarded the corporate veil by looking through the entire series of transactions. It was established that there were two transactions in the present case. When viewed in isolation, these transactions seemed perfectly legal. However, when viewed as a whole, the illegality became manifest. After a perusal of the “combined effects and real substance of two transactions,” the bench came to the conclusion that GLKU had successfully transferred the mining lease to UTCL by disguising the price charged for transfer of mining lease as the share price for the transaction. The transaction was void because it was in contravention to Rule 15 of the Rajasthan Minor Mineral Concession Rules, 1986, for the mining lease was transferred to UTCL without taking permission from the requisite government authorities. The Court also employed the ground of public interest to lift the corporate veil. The ownership mining rights, which constituted the subject matter of the lease in question, vested with the state and was to be regulated in pursuance of the public trust doctrine. Tracing the English and the Indian Jurisprudence In 2013, the Supreme Court of the United Kingdom delivered a landmark judgement in Prest v. Petrodel.  Lord Sumption engaged in a masterful analysis of past cases wherein the doctrine was applied. He came to a conclusion that the doctrine had more often than not been applied for the wrong reasons by the judges. He established the principle of concealment and that of evasion and called for the corporate veil to be lifted in the latter case only. The opinion of Lord Munby in Ben Hashem v. Ali Shayif that the corporate veil need not be lifted unless its absolutely necessary to do so, because there are no public policy imperatives underlying the course, was affirmed. Moreover, it was also held by Lord Sumption and Lord Neuberger that courts should not take recourse to veil piercing even if the evasion principle applies as long as other remedies are available. Ultimately, Lord Sumption came to the conclusion that lifting of the corporate veil should be confined to situations where “a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.” Henceforth, public interest is not employed as an independent ground to lift the corporate veil in England. Courts have adopted a narrow approach wherein they have limited the application of doctrine to certain grounds only. The philosophical underpinning of this judicial stance is the sacrosance of the independent corporate personality and the treatment of incorporation as a business facilitating activity in England. The Indian position largely differs from the English position as the former is more concerned with balancing the interests of all the stakeholders including third parties which would be affected if the corporate veil is lifted to reveal the persons controlling the company. Thus, Indian courts have been more amenable to lifting the corporate veil and have invoked extensive grounds, one of which is public interest. Each case has evoked different grounds which would suit the peculiar facts which are at issue and cited English authorities without application of mind in order to the buttress their findings.[1]. The ground of public interest has been used here and there by the judiciary without any specific pronouncement as to what would constitute public interest. In many cases, the ground has been employed to lift the corporate veil despite the test for establishing a façade or a sham not being satisfied. Dubious Application of the Doctrine in the Present Case Herein, the bench categorically held that GLKU was formed with the intention of avoiding the statutory requirement of obtaining consent of the government for the transfer of the mining lease to a third party. The underlying motive was to accrue private benefit at the cost of public interest. After a perusal of the judgement, it becomes evident that the bench had lifted the corporate veil rather haphazardly. It is argued that the bench need not have gone into the question of public interest when there was a prima facie violation of the impugned rules. It is also argued that in the absence of any statutory definition of public interest or a judicial pronouncement on its scope and import could mean anything and the ground itself could be molded as per the whims and fancies of the judge. The invocation of the public interest doctrine also militates against the juridical observation

Mitigating Liability of Directors and Officers. [Mincy Mathew] The author is a third-year student at National Law Institute University, Bhopal. The board of directors is the primary management body of any company, and as such, it owes a fiduciary duty to the company and is expected to act in good faith and to promote the best interests of all the stakeholders. The directors are personally liable to pay losses suffered by the company following an act which is wrong, negligent, outside the company’s authority, beyond their power, or which evidences insufficient skill and care in managing the company’s affairs. The liability of the directors, in such cases, is joint and several. Along with the Companies Act, the directors must comply with income tax law, labor laws, and environmental laws, among others. With an increasing role of the directors in ensuring compliance with corporate governance norms, the directors may ask for protection against any future liability. The liability of an “officer in default” is unlimited and the directors would, therefore, seek to protect their personal assets. For mitigating the liability of a director, the Companies Act, 2013 provides certain safe harbor provisions. According to section 463 of the Act, if in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company, it appears to the court hearing the case that the officer has acted honestly and reasonably, and that having regard to all the circumstances of the case, he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it may think fit. In addition, for independent directors, the liability will be “only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.”[1] However, it is important to ensure that there is an additional protection given to the directors, because in certain cases, statutory protection may be inadequate. It may sometimes be difficult to ascertain whether an act was “within the knowledge” of a director or whether a director acted “diligently” and, therefore, such liabilities are difficult to foresee. Accordingly, a company may also provide certain indemnities to its directors for any liability arising out of any act done in his professional capacity, excluding intentional criminal conduct. The Companies Act, 1956 prohibited any indemnity to the director, but there is no corresponding provision in the 2013 Act. The 2013 Act, therefore, may allow greater flexibility to directors to ask for such indemnities from the company especially where no fault could be attributed to them. Such protection may be provided to them by incorporating an indemnity provision in the constituent documents, or by issuing a letter of indemnity to individual directors, as is the case with several companies in India. An indemnification agreement is entered into by a director with the company, which makes good any losses caused by the director to the company, during the performance of his duties. Even though indemnification may be provided in the charter documents, it is advisable that a separate indemnification agreement is entered into between the director and the company. A separate agreement provides the surety that the new management cannot amend the articles to the detriment of the directors and that its scope extends even after his resignation. In addition, a separate agreement, being a bilateral agreement, ensures a more detailed and a better negotiated deal. While negotiating the indemnities, care must be taken to draft it wide enough to cover any complicated corporate transaction, while still excluding dishonest or fraudulent conduct. The indemnification agreement should ideally also include a D&O insurance to provide security in case the company is financially unable to pay for the indemnification. The Companies Act, 2013 recognizes the right of the companies to purchase D&O insurance in section 197. The section provides that: Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel. Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration. D&O insurance provides indemnity to the directors and the officers of the concerned company against costs incurred in defending proceedings instituted against and in respect of any damages awarded to the claimants against them, such as an out-of-court settlement. A typical D&O insurance policy may include three types of coverage: A-side coverage. This part covers directors, officers, and sometimes employees for defense costs, settlement fees, or judgments in situations when they are not indemnified by the company. B-side coverage. This covers the company for the losses incurred by its directors, officers, and employees when the company does indemnify them. C-side coverage. This financially protects the entire corporation, against any loss and is also known as ‘entity coverage’. The company has to have the consent of the board of directors in order to avail itself of a D&O policy. Further, while procuring such policies, it must be ensured that the sameprovide for certain exceptions especially as regards fraud or wilful misconduct. D&O insurance is essential to mitigate the liability of the director, as it ensures indemnification of any loss even if the company is unable to pay. A mitigation strategy adopted by the company cannot decrease the liability of a director acting in complete disregard of his duties and cannot act as a replacement for corporate governance mechanisms. However, it will ensure that the directors feel safeguarded against any unknown liability. Thus, quality personnel stay in the company and are best able to fulfill their professional duties. [1]Section 149(12).

The Fugitive Economic Offenders Bill, 2017- Government’s New Weapon to Curtail “Economic Fraud”? [Shivika Dixit] The author is a fourth-year student at National Law Institute University, Bhopal. She may be reached at [email protected]. On March 1, 2018, the Union Cabinet cleared the Fugitive Economic Offenders Bill, 2017. According to the long title of the Bill it is, “A Bill to provide for measures to deter economic offenders from evading the process of Indian law by remaining outside the jurisdiction of Indian courts, thereby preserving the sanctity of the rule of law in India.”[i] The Bill will be tabled before Parliament and will be debated upon in the next meeting during the presently ongoing budget session. The government on clearing the Bill said that it is expediting the matter for crackdown on defaulters and that the Centre cannot allow people to “make mockery of laws.”[ii] But is this Bill the be-all-end-all of the problem of high value economic fraud in the country? Maybe not. A “fugitive economic offender” defined under section 4(1)(e)[iii] means “any individual against whom a warrant for arrest in relation to a scheduled offence has been issued by any court in India, who: (i) leaves or has left India so as to avoid criminal prosecution; or (ii) refuses to return to India to face criminal prosecution.” A “scheduled offence”[iv] refers to a list of economic offences contained in the schedule to this Bill. Only those cases where the total  value  involved  in  such  offences  is  Rs. 100  crore  rupees  or  more are within  the purview of this Bill.  The Bill is mainly centered on seizure of assets and confiscation of the properties of the fugitive economic offender. The explanatory note[v] to the Bill provides that, in order to ensure that courts are not over-burdened with a floodgate of such cases, the limit is set of Rs. 100 crores. Any class legislation according to article 14 of the Indian Constitution should have a rational nexus between the classification and the object sought to be achieved. However, there is no justification on this point neither in the Bill nor in its explanatory note. There are no parameters to explain why the cap of Rs.100 crores has been set. There is no legal void to try economic offenders fleeing the country before they are apprehended. We have the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Insolvency and Bankruptcy Code, 2016 and the Prevention of Money Laundering Act, 2002. However, according to the government,[vi] the existing civil and criminal provisions in the various laws mentioned above are not adequate to solve the severity of the problem. The  civil  provisions  deal  with  the  issue  of  non -repayment of debt, but there are no special provisions to deal either with high-value  offenders or with those who might have absconded from India when any criminal case is pending. In case of the latter, “proclaimed offenders” under Section 82[vii] of the Code of Criminal Procedure, 1973 can be used and the property of such offender can be attached as provided under section 83[viii] of the Code. However, this poses difficulty if a high value economic offender is involved as there can be multiple cases in various criminal courts throughout the country where his/her property is situated and the disposal of such cases will take considerable time and the person can escape out of the jurisdiction of the Indian courts. Further, the Prevention of Money laundering Act, 2002 provides for the Enforcement Directorate to confiscate the properties of the defaulter on conviction in the trial whereas the Bill adopts the principle laid down in the United Nations Convention Against Corruption which India ratified in 2011.[ix] This Convention recommends non-conviction-based asset confiscation for corruption-related cases. The note explains[x] that all necessary constitutional safeguards in terms of providing hearing to the person through counsel,[xi] allowing him time to file a reply,[xii] serving notice of summons to him[xiii] whether in India or abroad, and allowing an appeal to the High Court[xiv] have been provided for. The Bill also provides for service of notice to the contracting State[xv] where the fugitive economic offender absconded to; this might slightly ease out the difficulties in extradition requests that India faces. There are certain concerns pertaining to the Bill. For instance, the Special Court[xvi] can, on an application[xvii] by the Director[xviii] for declaration of a person as a fugitive economic offender, declare the person as one and will order the Centre Government to confiscate: (a) proceeds of crime[xix], whether or not such property is owned by the fugitive economic offender, and (b) any other property in India, owned by the fugitive economic offender.[xx] Under section 12,[xxi] the Special Court may appoint an administrator who is an insolvency resolution professional under the Insolvency and Bankruptcy Code, 2016 to manage and deal with the confiscated property. Further, the Special Court may, while making the confiscation order, exempt from confiscation any property which is a proceed of crime in which any other person other than the fugitive economic offender has an interest, provided it is shown that such interest was acquired without knowledge of the fact that the property was a proceed of crime.[xxii] Section 10(5) shifts the onus of proof on the person other than the fugitive economic offender to show that the interest in such property was acquired without such knowledge.[xxiii] There is no clarification by the government as to why the existing civil or criminal provisions in various other laws are inconsistent. In such a scenario, the non-conviction based asset confiscation will have a chilling effect. Further, section 11[xxiv] provides that if a person is declared as a fugitive economic offender, any court in India, in any civil proceeding before it, may, in its discretion, disentitle such individual from putting forward or defending any civil claim. This is seemingly barbaric. Moreover, section 19 stipulates that, on coming into force, the provisions of the Bill have an

The Precarious Nature of Earn-out Clauses in Share Purchase Agreements. [Prajoy Dutta] The author is a fourth-year student at Institute of Law, Nirma University. The merger and acquisitions market in India has seen some exceptional activity in the recent years,[1] especially in cases of start-ups. Concerns usually revolve around the valuation of the company, the purchase price that both parties can agree on, and the issue of control over the newly acquired company post the completion of the acquisition. A pertinent legal point that covers both the issue of purchase price and control is the earn-out clause in the share purchase agreement. Structure of Earn-out Clauses An earn-out clause allows the deal to move forward when the buyer and seller cannot mutually agree on the valuation of the target company. The clause stipulates that a portion of the mutually agreeable purchase price shall only be payable contingent on the achievement of certain milestones or the satisfaction of certain conditions[2] by the company, post the transfer of shares. These milestones or conditions may include provisions such as revenue from certain products, cash flow over a defined period of time, EBITDA, market share captured by the company over a defined period of time etc. Thus, in the case of an earn-out, a basic purchase price is paid upfront and a variable purchase price component(s) is paid at a later date, contingent on the fulfillment of certain predetermined performance indicators set out in the earn-out clause. The significance of this is that the seller continues to participate in the economic success of the target company, even after all the risks and rewards have been transferred.[3] The Role of Earn-out Clauses in M&A Deals Earn-out clauses are almost always insisted upon by the buyer. The most pertinent reason for this could be the inaccessibility to private information about the target company at the time of the acquisition[4] which may, as a consequence, result in an incorrect valuation of the target company. Other reasons that could result in incorrect valuations could be uncertainty in the market itself, or that the company’s product or service is too futuristic for the present market. All of these are factors that the buyer must reduce his risk in. An incorrect valuation or measurement of the target’s performance benchmark pre-acquisition could very well be the basis of undesired future litigation, post-acquisition. An earn-outs clause thus provides the best possible solution. Types of Earn-out Clauses The practice of mergers and acquisitions has led to the development of two principal types of earn-out clauses: Economic Earn-outs: Parameters set out in these types of earn-out clauses set down financial thresholds. These might include conditions such as the targets net revenue, net income, cash flow, EBIT, EBITDA, and net equity thresholds.[5] Performance Earn-outs: Parameters set out in these types of earn-out clauses set down non-financial thresholds. Apart from the reason that they may give operational focus to the target, performance earn-outs are usually used in cases of companies that may be difficult to value, mainly due to their high growth rates.[6] Performance earn-outs can include conditions such as the launch of a new product in the market by the target, the existing products capturing a significant portion of the existing market share or even in some cases, the target company receiving a coveted industry award.[7] Important Considerations while Structuring an Earn-out Clause Though an earn-out clause seems like the perfect solution to keep the deal moving forward despite a disagreement over price, it has some inherent disadvantages for the seller. If these disadvantages are not identified and remedied contractually, the seller could stand a chance of being paid a much lower amount than what was mutually agreed upon. This is principally because the variable component of the purchase price stands to be paid post the transfer of shares of the target company and its associated risks and rewards. Further, since the disadvantages and their remedies were not identified in the earn-outs clause itself, the share purchase agreement can very well be interpreted to mean that the seller understood the associated risks of an earn-out but chose to not protect himself against such risk. Therefore, there may be very limited legal remedies for the seller to recover the variable component of the price. Hence, the following major issues are considerations that the seller must keep in mind while structuring an earn-outs clause in the share purchase agreement. Following a Consistent Accounting Methodology – Pre Sale and Post Sale[8] A major concern that arises in most M&A deals is the accounting practice to be followed by the newly created merged entity or the acquired company. Common accounting standards become all the more important in the case of an earn-out due to financial conditions required to be fulfilled in order to receive the variable purchase price component. If the acquired company is required to follow the accounting standards of the buyer, there may arise a situation where the buyer may manipulate the results of the earn-out. Manipulations could potentially include inventory valuation methods, depreciation schedules and reserves for bad debts. Sometimes, the manipulations may occur simply because the target company’s industry is very different from that of the buyer. Should the seller set out a clear methodology of the accounting practices to be followed, the risk of above mentioned manipulations is significantly reduced. Tax Sharing Agreements With The New Parent Company[9] In a case where the earn-out is based upon a before tax indicator, such as EBIT or EBITDA, care should be taken to ensure that tax payable includes payments made under tax sharing agreements with the new parent company. In the event that the earn-out is based upon an after tax indicator, special attention must be paid to how the taxes of the parent holding company are allocated to all the member companies of the group. Special focus must also be given towards certain tax sharing agreements which mandate that the newly acquired company may have to make payments to the new parent company as a consideration of the overall reduction in taxes