Company Law

[By Mahak Saxena] The author is a student of National Law Institute University, Bhopal. Introduction The Securities Exchange Board of India (SEBI) has been receiving numerous requests from market participants and stakeholders for an overhaul and review of legal provisions and rules related to the buyback of specified securities. In light of which it floated a consultation paper on a review of existing Buy-back Regulations (“Consultation Paper”) in November 2022. The aforementioned paper is a culmination of all suggestions given by the sub-group headed by Mr. Keki Mistry which includes sweeping reforms of the current provisions and also recommends statutory amendments for some issues. The reforms are directed towards eliminating the inefficiency of certain modes of buy-back, optimization of the deadlines, changes in the statutory limits on buy-back, and discouraging the possibility of manipulation in the market. This article attempts to specifically provide a summary and an analysis of the existing recommendations with respect to the Open Market and Tender Offer Route of Buy- back. Law Governing Buy-Backs in India and Need for Reforms Buy-Backs in India are governed by Section 68 of The Companies Act, 2013 (“the Act”), and the provisions of SEBI (Buyback of Securities) Regulations, 2018. As per the regulations, the methods of Buying back shares are through a Tender offer to existing shareholders, Open market mechanism through Book building process and Stock exchange Purchase of shares from odd-lot holders. If we look at the official numbers from SEBI, Tender Offer is by far the most used method. The reason is its nature of enabling more equitable opportunity for shareholders to reap the benefits of buyback.[1] The reforms are required because the current scheme has unnecessary procedural barriers in form of limits and approvals that lead to inefficient estimation of the price of securities, delay in the overall process, disproportionate loss to the shareholders and reduces the actual benefit that might have accrued to the shareholders from the Buyback. Glide Path for Open Market Buybacks When shares under the Open Market route are brought at the current market price, there is hardly any surety that the shareholders would be able to claim the benefits, therefore, SEBI is proposing to establish a separate window for buyback of shares. Reduction in maximum limit and closure period The main need for reducing the limit stems from the fact that while using the route of stock exchange, there is a probability that one shareholder’s entire trade will get matched with the purchase order of a company, preventing other shareholders from benefitting from the buyback which goes against the fundamental idea of fair and equitable treatment. Currently, as per Regulation 4, the Buybacks through the Open Market route are only permitted if it is less than 15% of the paid up capital and free reserves of the Company. SEBI aims to reduce this limit in a phased manner to 10% and 5% in the next two years and then aims to completely remove the Open Markets route from 2025. The aforementioned 15% limit is also proposed to be applied only to open market buybacks and not to the Book Building Route. However, the open market route should not be completely phased out as it provides more flexibility for selling a higher quantum of shares over a longer period of time due to which the companies as well as investors find it easier to execute. Though the proposal for reducing the current time period of 6 months between the opening and closing of Buyback offer is rational as it addresses the concerns of artificial demand and exaggerated prices of shares and will lead to effective discovery of price. Contradiction in proposals: Utilization of Amount and Restrictions on Volume and price. On one hand, SEBI proposes that the company should achieve the minimum buyback threshold (75% of the buyback size) within a fixed time period; but at the same time, it places restrictions on the volume, price and time (No share purchases to be made in the first and last 30 minutes of the regular trading hours) at which it can buy from the market. Hence, these proposals should be revaluated. Through Tender Offer Route Permission to Revise Offer Price and Removal of SEBI Review Process: A welcome Change Since there is a considerable time gap between the approval of Buy back and the actual opening of the offer, it is a justifiable suggestion that revision be allowed. However, an increase in buyback price will lead to a decrease in the number of securities, which negatively impacts the shareholders. Hence, along with price, the companies should be permitted to increase the aggregate buyback size as well. Presently, Regulation 8 requires a draft letter of offer to be submitted to the SEBI for review. A window is provided to the SEBI to submit its comments which are later incorporated. However, in order to reduce the time and ease the procedure, the SEBI review process is proposed to be removed, though the merchant bankers will be mandatorily required to certify compliance with the regulations in the Letter and to the SEBI before the offers open. Another reasonable proposal is the specification of a time limit of 2 days within which the escrow account has to be opened after the public announcement. Other Major Recommendations Presently, the regulations allow only one Buyback in a 12-month period,[2] however, the sub group recommends reducing the cooling off period to six months for the tender offer route. This is a welcome move as the companies may need to give out surplus cash to the shareholders more than once in a year. However, it is to be noted that such exemptions have been proposed only for companies which are net debt free.[3]The phrase Net Debt Free essentially refers to a company with cash reserves and cash balances that, according to its accounts, as audited by a statutory auditor, exceed its borrowings and contingent liabilities. The reserves here include bank deposits, government securities, units of mutual funds investing in gilt funds.

[By Arham Anwar & Akshay Tiwari] The authors are students of National Law University, Jodhpur. Introduction To fly by night is to pack up whatever you can from the dubious business that you have been carrying and leave under the cover of darkness. So people who have been observing you running your business one day see an empty address with no sign of the business the very next day, leaving behind panicked investors who have no clue about what is happening with the money they had invested into the company. The term fly-by-night is not specifically defined anywhere in the Companies Act per se but according to the Cambridge Dictionary’s definition a fly by night business is “not able to be trusted and likely to stop operating without any notice”. A fly by Night Company is essentially an unreliable or unscrupulous company which is generally short lived, and once it has raised a minimum amount of money through the market it flies away defrauding its investors. The common modus operandi that these types of companies follow to raise funds is to issue IPOs in the primary market and wait for investors. Once they reach the point where a sufficient level of funding has been extracted according to the level and scale of the operations being run, they pack up in the night leaving behind no trace, and thus it becomes difficult for the regulatory authorities to trace back these entities or held them responsible for their acts. According to the definition provided in the MCA website a company is categorised as a vanishing or fly-by-night company the following scenarios. A company fails to file returns with the Registrar of Companies (ROC) for two years. A listed company fails to file returns with the stock exchange for two years. The company doesn’t maintain its registered office at the address mentioned with the RoC. The company’s directors cannot be traced. There has been a surge in the number of these kinds of entities in recent times and the list keeps on increasing, aggravating the agony of the small investors who came in with the motive of earning returns on their investment but are now seen running from pillar to post to get justice and make these fraudulent companies liable. In light of their plight, there have been a growing number of efforts taken by the regulatory authorities in the last few years to curb this menace. In the series of various legislative and policy reforms, there has been this recent amendment of the Companies(Incorporation) Third Amendment Rules, 2022 (Henceforth “2022 Rules”).  Efforts being taken There has been a series of continuous efforts that has been taken in order to solve the problem of fly by night companies right from the beginning. In order to promote and raise the standards of good corporate governance, SEBI established a committee in 1999 Shri Kumar Mangalam Birla, a member of the SEBI Board, served as the committee’s chair. The committee’s main goals were to view corporate governance from the perspective of investors and shareholders and to create a “Code” that would suit the Indian corporate environment In the year 2006 following measures were added to the then Companies Act 1956 by Ministry of Corporate Affairs to check the incident of Vanishing companies: Sections 266A to 266G were added making it mandatory for every existing or prospective director to obtain a “Director Identification Number” so that traceability of the directors is ensured. Sections 153 to 159 of the 2013 Act contain the provisions relating to the Director Identification Number. In case of incorporation of a new company or change of address of an existing company, Ministry has made it mandatory for the professionals verifying its details to personally visit the premises and certify that the premises are indeed at the disposal of the company. Further, in such cases, proof of registered address has also been made mandatory to be furnished at the time of incorporation or change of registered address. Instructions have also been issued to the Registrars of Companies to scrutinise the Balance Sheets and other records of the Companies which raise money through public issue so as to monitor the utilisation of such frauds. Increasing instances of vanishing companies has also led to the formation of Serious Fraud investigation Office (SFIO) which was granted statutory status by the Companies Act 2013. There was a need felt for an organisation which would focus entirely on solving such complex white collar crimes. It is against this backdrop that the Government decided to set up the SFIO. Registered Office Every company is required to keep a registered office that can receive and acknowledge any government notices pursuant to Section 12 of the Companies Act 2013. During a company’s incorporation, the directors of this entity must specify their registered office in their Memorandum of Association and keep certain records there. The location of the registered office becomes significant as the Registrar of Companies to which the applicant must apply for company registration will be determined by the state in which the company’s registered office is located. Any change to the company’s address or location of the registered office must be reported to the RoC within a certain time frame. The Companies Act has been amended vide the Companies (Amendment) Act, 2019 to provide a procedure for physical checks. A Registrar of Companies (ROC ) has the authority to physically inspect a company’s registered office in accordance with Section 12 (9) of the Companies Act if they have sufficient reason to suspect that the company in question is not conducting business for which it was incorporated To further enhance the Companies (Incorporation) Rules of 2014, the Ministry of Corporate Affairs (MCA) has published the 2022 Rules on August 18, 2022. With this modification, the MCA has established a new Rule 25B which pertains to the physical verification of the company’s registered office, i.e., the primary office of the firm, to which all correspondence pertaining to it will be sent by governmental agencies. This new rule will help in curbing the problem as now it will be difficult for these dubious firms to go untraceable as

[By Arham Anwar & Suvanwesh Das] The authors are students of the National Law University, Jodhpur and the National Law University, Odisha. Introduction We have always seen doctor’s job as a noble profession but with changing times new questions of law have evolved and new dynamics have been added to supposedly simple concepts. This article seeks to address the issue of whether consultants like doctors can be issued ESOPs under provisions of Companies Act, 2013. This question is especially pertinent because after the COVID-19 pandemic the world has seen rapid emergence of companies providing health care and pathological services. Thus, new complexities have arisen as to whether doctors employed by these companies can be treated as an “employee” .Also if they come under the ambit of employees then can they be given all the benefits that employees of any company are eligible to. The article will first discuss the legal provisions pertaining to ESOPs and the definition of employee(s) under different legislations andthen  relevant case laws will also be taken into consideration as to whether doctors can come under the ambit of employee(s) and finally conclude with our findings. Legal Provisions Pertaining to ESOPs Employees Stock option is defined under Section 2(37) of the Companies Act, 2013 as an “option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price”. Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 talks about of issue of employee stock options-“A company, other than a listed company, which is not required to comply with Securities and Exchange Board of India Employee Stock Option Scheme Guidelines shall not offer shares to its employees under a scheme of employees’ stock option (hereinafter referred to as “Employees Stock Option Scheme”), unless it complies with the following requirements, namely:-(1) the issue of Employees Stock Option Scheme has been approved by the shareholders of the company by passing a special resolution. Explanation: For the purposes of clause (b) of sub-section (1) of section 62 and this rule ‘‘Employee’’ Means a permanent employee of the company who has been working in India or outside India; or a director of the company, whether a whole-time director or not but excluding an independent director; or an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company but does not include- an employee who is a promoter or a person belonging to the promoter group; or a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company” As per section 62(1) (b) of the Companies Act, an unlisted private limited company can issue further shares to employees under the scheme of Employees Stock Option (“ESOPs”), pursuant to a special resolution. If we look at Rule 12 of (Share and Debentures) Rules 2014 it clearly says that ESOPs can only be issued to an employee and Rule 12(1) goes on to define who can be called an employee. A plain reading of Rule 12 (1)(c) of the same talks about entities which are not to be counted as an employee and after reading all these provisions we can very well conclude that doctors can come under the ambit of employee under Rule 12 of (Share and Debentures) Rules 2014. If we read Rule 1(4) of the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, it specifies that it can be applied to any company whose equity shares are listed on a recognised stock exchange in India ,further Rule 2(i) of the same defines the term “employee “.AlsoRule 4 makes any employee eligible to participate in the schemes of the company as determined by the compensation committee. Here also no bar regarding inclusion of doctors can be observed. In addition to that, SEBI suggested that definition of “employee” should be changed to include non-permanent employees provided that they are designated as employees by their employers and are exclusively working with such company or its group company including subsidiary or its associate company or its holding company in ESOPs benefits as was reflected in SEBI FAQs. It is also important to note that present regulations such as The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 relating to Professional Conduct of Registered Medical Practitioners don’t contain any explicit restrictions that prevent doctor(s) from being engaged as an employee(s). On top of that Union Ministry of Health and Family Welfare launched ICMR/DHR Policy on Biomedical Innovation & Entrepreneurship for Medical Professionals, Scientists and Technologists at Medical, Dental, Para-Medical Institutes/Colleges. According to the policy, medical experts and doctors will be encouraged to explore entrepreneurial endeavours by building start-up firms, accepting adjunct positions in Companies as Non-Executive Directors or Scientific Advisors, or by joining them as Scientific Advisors. The doctors will also be allowed to work alone or through companies on inter-institutional and industry projects, licence technologies to corporations for commercialization, and generate income for their own support as well as the benefit of society. The medical professionals will also be allowed to take a break to translate and commercialise their innovations through the establishment of their start-up companies with the medical institute’s approval in which they may be working. The goal of this policy is to support entrepreneurship growth and the development of Make-in-India products while also promoting interdisciplinary collaboration, innovation, technological development, and skill development. As we look at catena of judgements given by different High Courts, position pertaining to status of doctors as an employee will be clarified. Case Laws In the case of Commissioner of Income Tax (TDS), Pune vs. Grant Medical Foundation, the issue of law which arose was

[By Saaransh Shukla & Isabel John] The authors are the students of the Narsee Monjee Institute of Management Studies. INTRODUCTION As we all know, share capital is the main source of finance for companies. Since companies may need additional amounts of money periodically, they cannot issue shares every time. However, they can raise money from the public. Around the world, companies, organizations, corporations and other entities raise money from different sources for the purpose of financing. As we all know, share capital is the primary source of funding for businesses. Since businesses may require additional funds on a regular basis, they cannot issue shares every time. They can, however, raise funds from the general public. Companies, organisations, businesses, and other entities all over the world raise funds from various sources in order to finance their operations. In this article, one such means of raising capital, i.e., ‘Wimbledon Debentures’ is considered. With the elucidation of the concept of the Wimbledon Debentures, the proposition is further assessed in relation to the Indian debt market. The paper explores if the Wimbledon Debenture model could be inculcated in the different industries in India, whether such debt financing would be useful and the issues that may occur in its practical application. WHAT ARE WIMBLEDON DEBENTURES? It’s Not A Bond, Not A Stock, Not A Ticket – It’s A “Wimbledon Debenture” The word ‘debenture’ has been derived from the Latin word ‘debere’ which means to borrow. The debenture is a written instrument acknowledging a debt under the common seal of the company. The money raised from the public is a loan that is further divided into units of small denominations. Each unit is called a ‘debenture’ and the holder of such units is called a Debenture holder. Even though the cash raised by debentures turn into a part of the organization’s capital structure, it doesn’t get to be share capital. Therefore, debentures are a widely recognized type of long haul credit that can be taken out by a company. These credits are regularly repayable on a date and pay a fixed rate of interest. Generally, debentures are issued for starting new projects, expansion of the company, refurbishments or improvements of the company, mergers, acquisitions, etc. Swen Lorenz, the author of the blog ‘Undervalued Shares’ claimed that the Wimbledon Debenture is a very quirky security and rightfully so. The Wimbledon Debentures are unsecured but still if we see the last trading price of one debenture was 110,600£, that is huge for an unsecured debt. The Wimbledon Debentures have played a significant role in the history of Wimbledon. The money raised from issuing these Debentures funds the improvements in and around the Wimbledon Grounds solely for the benefit of the esteemed guests. By the purchase of each Debenture, the holder is provided with a premium seat on Centre Court or No.1 Court for the Championships for a period of five years. With the increasing popularity of the sport and the ever-burgeoning public demand, the AELTC raised funds via debentures to purchase and expand their grounds. Presently, the Championships from 2021-2025 are covered under the current series of the Centre Court Wimbledon Debentures. Usually, subscribing to an issue of debentures or bonds requires coughing up a cash investment. But with Wimbledon Debentures, one can pay the cash in phases throughout the duration of the debentures and there is no interest rate payment. Technically speaking, the debentures are zero-coupon debt security that comes with the dividend in the form of ‘tickets’. Then the debenture holders receive access to the best sought-after seats for five years with no additional payment, access to exclusive restaurants and bars, car parking, transferable tickets, etc. As a holder, the daily tickets can either be sold privately or can be transferred to anyone at any price. In April 2018, the Centre Court Wimbledon Debentures (2016-2020) were trading at over £100,000 each. The Wimbledon Debentures model is slightly distinct from the usual debt financing carried out by companies. In comparison to the way debentures are normally issued, the Wimbledon Debentures pay no interest over the life of the security, instead, they are entirely in the form of tickets. As per the prevailing laws, the Debentures are also exempt from the Capital Gains Tax.[1] Looking at the success rate of this form of raising funds, it will be interesting to see if some other companies or corporations engage in debt financing similar to the Wimbledon Debentures model. WIMBLEDON DEBENTURES MODEL – INDIAN PERSPECTIVE According to the Companies Act (2013), the term debenture is defined under Section 2(30). Generally, debentures are issued for starting new projects, expansion of the company, refurbishments or improvements of the company, mergers, acquisitions, etc. Firstly, the Wimbledon Debentures fall within the definition of Qualifying Corporate Bonds (QCBs). In layman terms QCBs are exempted from capital gain taxes. In many countries including India, bonds and debentures are used interchangeably but they have certain differences. Bonds are issued generally by government agencies/large corporations but debentures are issued by companies. Bonds are backed by assets and are thus, secured, unlike debentures which may or may not be backed by assets (secured or unsecured). In debentures, the rates of interest are generally higher when compared to bonds. Additionally, the risk factor is lower for bonds and during repayments, bondholders are given priority over debenture holders. It is pertinent to note that the Wimbledon Debentures are unsecured, but people still purchase them. In the Indian market, the Securities and Exchange Board of India (“SEBI”) has made the process of buying and selling secured debentures difficult for the potential holders. Thus, it is assumed that companies may shift to issuing unsecured debentures in the market and making the technical process easier. Under the provisions of the Companies Act (2013) of India, the power to issue debentures can be exercised on behalf of the Company with a meeting of the Board as per Section 179 (3). Section 71 is related to the issuance of debentures along with the penalties for

[By Amarpal Singh & Abhishek Attri] The authors are students at UPES Dehradun. INTRODUCTION A person can be appointed as an additional or alternate director in the company without being a member (“non-member director”) as per Section 161 of the Companies Act, 2013 (“Companies Act”). Further Section 169 of the Companies Act provides the procedure for the removal of directors. In case the non-member director is illegally removed from the company, traditionally, the remedy available to him would have been to approach the civil court.  Au contraire, after the establishment of the National Company Law Tribunal (“NCLT”), it has been conferred with exclusive jurisdiction over all company matters under Section 430 of the Companies Act. Further, the jurisdiction of the civil courts has been barred. In a situation where an application is made by a member under Section 241, provided the requirements stated in Section 244 of the Companies Act must be satisfied, the NCLT has the power to regulate the affairs of the company under Section 242 of the Companies Act.  In case, a non-member director is illegally removed from the company, he cannot approach the NCLT under Section 241 considering he is not a member of the company. In addition, he will be rendered remediless since the jurisdiction of the civil court is barred under Section 430. The above question of law is pending before the Supreme Court of India (“Supreme Court”) in the case of Manish Kumar v. Topworth Urja & Metals Limited. The courts have expressed divergent views on the aforementioned proposition which has led to certain confusion. This article aims to provide an analysis of the above proposition of law.  Facts Two persons were appointed as additional directors of Topworth Urja & Metals Limited. Manish Kumar (“Appellant”) alleged that the appointment of additional directors was done in contravention of provisions of the Companies Act, 2013, and the Article of Association of the company. He alleged that the appointment was done without his knowledge and by passing a resolution at the purported board meeting. Subsequently, the appointment was ratified by passing a special resolution in the Annual General Meeting. The Appellant aggrieved by the irregularities had filed a suit before the civil court seeking the appointment of directors as illegal and void ab initio. The civil court denied the relief claimed by the Appellant along with a direction to approach NCLT in view of Section 430 of the Companies Act.  The Appellant instead of approaching the NCLT had filed an appeal before the Bombay High Court (“HC”). He contended that he cannot approach the NCLT for seeking relief under Section 241 of the Companies Act as the right rightfully available to the member as per Section 242 of the Companies Act. The Appellant did not fall under the definition of the member as prescribed by Section 2(55) of the Companies Act, 2013. Therefore, the following issue arose before the HC.  Issue Whether a non-member director can approach the civil court for seeking relief against the oppressive acts of the company?  Decision The Bombay HC relied on the decision of the Madras HC in the case of Chiranjeevi Rathnam v. Ramesh and held that the word “any member” used in Section 241 of the Companies Act, 2013 should not be interpreted in a confined way as it may lead to abuse in regards to the process of law. Any person who is interested in the management of the company should not be restricted to approach the NCLT because of the words employed in Section 241 i.e., “any member”. Under Section 242, the NCLT is expected to exercise its power upon an application preferred by any member of the company.  It was further held by the Bombay HC that Section 430 of the Companies Act has to be read along with Section 241. Section 430 bars the jurisdiction of civil courts in respect of any matter which the NCLT or the National Company Law Appellate Tribunal (“NCLAT”) is empowered to determine by or under the Companies Act. The word “any matter” used in Section 430 is of the widest amplitude and includes all company matters. Therefore, the HC dismissed the appeal.  ANALYSIS In the case of Jithendra Parlapalli v. Wirecard India (P) Ltd., the same question arose before the NCLT Chennai bench i.e., whether a non-member director can file a petition for oppression and mismanagement. The applicant relied on the decision of Madras HC in the case of Chiranjeevi Rantham v. Ramesh and contended that the word “any member used in Section 241 of the Companies Act should not be read in a confined way. The NCLT distinguished the case of Chiranjeevi by giving detailed reasoning and held that in the case of Chiranjeevi the judgment was passed by the Madras HC by taking into consideration the facts and circumstances of that particular case. Further, it was held that the case of Chiranjeevi included intermingled issues of a member director adopting a non-member director. Consequently, it was held by the NCLT that a non-member director cannot file an application for oppression and mismanagement as the legislature in its wisdom has granted the right to file an application alleging acts of oppression and mismanagement only to the “members” of the company. If non-member directors are allowed to file an application alleging acts of oppression and mismanagement the intention of the legislature will be defeated and it would lead to torrent of litigation. Therefore, due to the divergent views of the courts, the position of law is still not clear leading to confusion. Illegal removal/ appointment of a director is an act of oppression and mismanagement The NCLAT in the case of Vijaya Hospital C. Kity & Resorts & Ors v. Sibi C.K & Ors.,  held that appointment of a Chairman and Managing Director without holding a board meeting is in non-compliance with the provisions of the Companies Act. Therefore, it amounts to an act of oppression. Similarly, in the present case, the appointment of additional directors was done in

[By Unnati Sinha] The author is a student at the Narsee Monjee Institute of Management Studies (NMIMS). Introduction The Consolidated Foreign Direct Investment Policy (Hereinafter as “FDI Policy”) underwent a significant revision as of April 18, 2020, according to Press Note 3 of 2020 (Hereinafter as “PN 3”) published by the Department for Promotion of Industry and Internal Trade (Hereinafter as “DPIIT”). In the past year, there has been a lot of investor interest in the controversial topic of the release of Press Note 3 of 2020. In light of the recent outbreak of the Covid-19 and escalating geopolitical tensions with China, the Indian government has announced that any investment or purchase by a company headquartered in a nation that shares a land border with India, or if the “beneficial owner” of the investment is located in a country that shares a land border with India, would require prior clearance. Even though the wording used was generic in nature and did not specifically mention any particular jurisdiction, the Press Note’s purpose and “target” seemed to be obvious. It was believed to be in response to the People’s Bank of China gradually increasing its stake in HDFC, India’s biggest non-banking mortgage provider, to over 1% via on-market acquisitions. The Press Note also served as the first in a line of actions taken against Chinese investments and investors, which was followed by the banning of several Chinese apps because they were involved in activities “prejudicial to the sovereignty and integrity of India, defence of India, security of the state and public order.” The publication of the Press Note has immense impact on blocking Chinese investment, its primary goal.Some of the most important investments, in addition to Chinese investors, include investors from Hong Kong and Taiwan, who also seemed to get trapped. It was also unclear how the phrase “beneficial owner” should be construed, which further causes more ambiguities. Consequently, authorized dealer banks in India—who serve as the custodians for foreign investment inflows and outflows—adopted their own viewpoints or variations of present rules, which were not ideal for their needs. In the light of the changes in the FDI policy and Press Note 3, the article discusses how India has created a barrier for Chinese investments in India. The “Beneficial Owner” controversy The current uncertainty over the definition of “beneficial ownership” under PN 3 has sparked discussion on the requirements for determining a beneficial owner. Regarding the threshold amounts of investment needed to determine whether an application for FDI needs government approval, multiple opinions seem to prevail at the moment. According to the first viewpoint, a beneficial owner is individual or any entity that owns at least 10% of a company’s stock. This opinion is based on the requirements of the Companies (Significant Beneficial Owners) Rules 2018 when combined with the Companies Act of 2013. The concept of “significant beneficial owner” has been adopted from those provisions. The requirements included in India’s anti-money laundering framework serve as the foundation for the opposing perspective on beneficial ownership. This opinion is based on a provision in the Prevention of Money Laundering (Maintenance of Records) Rules 2005, which defines a “beneficial owner” as a person with either a controlling ownership interest—more than 25% ownership of the entity—or the ability to exercise control over the entity’s management or policy decisions. It may be contended that because Foreign Exchange Management (Hereinafter as “FEM”) rules do not specify a threshold for defining beneficial ownership, a nominal or minor beneficial ownership held by an individual who resides in or is a citizen of a country that borders India could possibly lead to the entire body of funds being prohibited from investment in India under the automatic route. While the government has made it clear that in the realm of public procurement, beneficial ownership is to be understood in accordance with the Prevention of Money Laundering Act, 2002 (Hereinafter as “PMLA”), clarification regarding Press Note 3 is still expected. It is expected that the majority of the pooled investment vehicles have stakeholders, such as limited partners, managers, or donors located in China, notably in Hong Kong, given the commercial prominence of China in general and of locations like Hong Kong in particular. China has recently played a significant role in India’s private equity industry by supporting a number of famous businesses and unicorns. The China ingredient Evidently, the goal of the policy is to avoid a bigger Chinese presence in important Indian industries. There has been at least 26 billion dollars’ worth of Chinese investment in India. When HDFC notified stock markets that the People’s Bank of China had grown its investment in HDFC from 0.8% to 1.01% in mid-April, the warning bells went off in India. As it aggressively sought information on foreign portfolio investments from Asian nations, the Securities and Exchange Board of India (Hereinafter as “SEBI”) subsequently shifted its attention to the quantity of Chinese investments in Indian enterprises. These specifics involve whether Chinese investors control the funds and if investors from these nations have any kind of controlling stake. Chinese state-owned enterprises have large reserves and deep coffers, which raise fears that they may purchase crucial companies whose values have degraded in their own countries. The COVID-19 pandemic has paralyzed the economies of most of the countries, yet the Chinese economy has demonstrated resiliency. Even before the crisis, governments were becoming concerned about global supply networks’ over-reliance on China. The COVID-19 pandemic has raised concerns about the over-reliance on China for global supply networks, including India’s. India and some other nations bought Chinese rapid test kits due to a shortage. However, these kits proved to be unstable. India reportedly canceled the purchase of these kits. A prospective Indian-CFIUS? National security issues are now more prevalent than ever, affecting practically every aspect of life. For any foreign investment, some jurisdictions have a particular screening mechanism that examines the transaction from the perspective of national security. One such interagency organization that examines foreign investments in the US to see if they pose a danger

[By Yagn Purohit and Vishesh Gupta] The authors are students at the Institute of Law, Nirma University. Introduction In India, the directors are bound to call and convene an EGM on requisition made by shareholders under section 100 of the Companies Act, 2013 (hereinafter CA, 2013) if such requisition is compliant with procedural requirements u/s 100.  However, Zee v. Invesco saga has reignited the debate on corporate democracy and has disturbed the already settled legal position laid down by the Hon’ble Supreme Court concerning the validity of requisition made u/s 100 of CA, 2013. Invesco (shareholder of Zee) had filed a requisition for calling an EGM u/s 100 of CA, 2013. The requisition was fulfilling the criteria of 10% as given u/s 100. Zee filed for an injunction against the requisition before the Bombay HC which was granted by the Single Judge (hereinafter SJ). Section 100 of CA, 2013 promotes corporate democracy by establishing the right of shareholders to regulate the working of the company by calling Extraordinary General Meeting (hereinafter EGM) by submitting a valid requisition. The question then is whether there exists a test to determine the validity of a requisition and whether the directors are empowered to refuse such a requisition? In the case of Zee v. Invesco SJ and Division Bench (hereinafter DB) adopted contrasting approaches. This article analyses both the positions to determine their alignment with the existing legal framework in India. Ruling by Single Judge The SJ held that the requisition made by shareholders must be valid from a procedural perspective and the objective of the requisition should be capable of being carried out legally. If the objective of the meeting cannot be carried out lawfully, then such a requisition is invalid and the board has the right to reject it. The court observed that if under Section 100, only procedure, i.e., the numerical threshold of shareholders is considered to deem it to be a valid requisition and mandate the board to convene an EGM of the company, then it would mean that a group of qualified shareholders can propose any sort of resolution, regardless of its legality, and force this to be considered by the general body at an EGM. The court explained this with an example of online gambling. It took a scenario where a group of qualified shareholders could propose that the company take up the business of online gambling. The court applied null hypothesis testing which says that an argument must be tested for falsification or failure, just like any other hypothesis in philosophy. Therefore, SJ granted an injunction restraining the shareholders to hold the EGM. Ruling by Division Bench  The DB overturned the judgment of SJ and held that shareholders cannot be restrained from holding EGM. Court placed reliance on two judgments: LIC v. Escorts and Cricket Club of India v. Madhav Apte to hold that (i) validity means procedural and numerical compliance with the conditions mentioned in Section 100 and not the substance of the requisition (ii) BOD has no discretion to sit in judgment over resolutions proposed by requisitionists, (iii) reason for resolutions are not subject to judicial review and (iv) If requisition complies with the procedure and numerical requirement u/s 100, the board is mandated to call the EGM. The court further noted that Section 100 aids corporate democracy and protects shareholder rights and this intent of the legislature must be taken into consideration for interpreting section 100. Therefore, DB did not grant an injunction as it would have hampered corporate democracy. Analysis  The SJ heavily relied on foreign judgments for interpreting the power of the Board to refuse the requisition made by shareholders. In the author’s opinion, DB was correct in not relying on such judgments. There are two reasons for the same: Firstly, there exists a binding precedent of the supreme court of India, i.e. LIC v. Escorts according to which, directors are bound to call EGM on the receipt of a requisition which is only subject to the numerical requirements provided u/s 100. Whereas, the DB has rectified this by taking a procedure-centric definition of a valid requisition which is in consonance with LIC v. Escorts. DB correctly noted that the purpose-centric definition propounded by the SJ will lead to a string of appeals, opening floodgate of litigation and rendering the corporate democracy nugatory. Secondly, UK Companies Act, 2006 is not pari materia with the Indian CA, 2013 with respect to law on shareholder requisitioned meeting. Section 303(5) of the UK Companies Act, 2006 provides for a ground that if the resolution proposed by the shareholder is ineffective, if passed, then the board has the ground for not moving such resolution in the meeting. Whereas in the Indian CA, 2013, this ground doesn’t exist for repudiating a resolution. To stop a resolution proposed by shareholders, the board must apply to the regional director u/s 111(3) of CA, 2013. Such application can only be filed on the ground that the requisition is for needless publicity for defamation. If valid is interpreted according to the reasoning of the SJ, it would lead to adding words to Section 111 of the CA, 2013. Therefore, foreign laws and judgments should not be preferred over LIC v. Escorts to interpret the validity of a requisition for EGM in India. Further, The SJ has contradicted his observations in the judgment. SJ noted that the requisitionists have been bestowed with the power of the EGM themselves if the board refuses or fails to call an EGM. This power is taken away the moment SJ granted an injunction to Zee restraining Invesco and other requisitionists from calling an EGM of the company. As a result of this injunction, the shareholders have no remedy left, and their statutory right to call an EGM is taken away. The court recognized the shareholder rights with one hand but snatched them away with the other. However, it is important to note that the SJ raised an important issue by taking a purpose-centric approach to a valid requisition.

[By Aditi Sheth] The author is a student at the National Law School of India University. This paper argues that courts must not overrule the explicit intention of parties on the binding value of their term sheet by finding intention in the performance/non-performance of the conditions precedent (“CPs”) clause. It borrows from law and economics jurisprudence to support this claim. Introduction Commercially sophisticated parties enter into term sheets that set out the material terms of the deal before entering into definitive agreements. Term sheets allow them to reach consensus on material terms and reach deal certainty before spending time and resources on due diligence and definitive agreements. Despite this key advantage, some lawyers advise against entering into term sheets because of the risk of uncertainty surrounding their binding value. Courts may find “non-binding” term sheets to be binding and vice versa. In India, the lack of a well-developed jurisprudence has increased this risk. This paper clarifies the muddles surrounding the binding value of term sheets in the context of performance of CPs detailed in the term sheet. Understanding conditions precedent CPs are conditions that must be fulfilled before closing the transaction. Parties may choose to specify these conditions in either their term sheet or their definitive agreements. For instance, the IVCA model term sheet recommends listing CPs directly in the definitive agreements. However, some parties may choose to place CPs that are material to the deal in their term sheet to ensure there is no mismatch of expectations between the parties. The binding value of a term sheet should not be affected if parties were to place CPs in the term sheet instead of definitive agreements. This is because placing CPs in a term sheet does not impact the timeline according to which parties have to perform the CPs. Parties may perform CPs any time before the closing of the transaction, even after the signing of definitive agreements. In other words, parties are free to wait for the performance of CPs till definitive agreements are signed since the only significance of placing CPs in the term sheet is of signalling materiality. However, Indian jurisprudence has viewed it differently. Tribunals have found a term sheet labelled “non-binding” to be binding due to the performance of several CPs (Zostel v. Oyo) and a term sheet labelled “binding” to be non-binding due to the presence of several CPs (GAIL v. Sravanthi). This paper argues against this jurisprudence by using the only two relevant and publicly available cases as test-suites. Zostel v Oyo – “non-binding” term sheet found binding Oyo and Zostel entered into an acquisition term sheet according to which the acquisition was conditional upon performing CPs detailed in the term sheet itself. The dispute arose when Oyo abandoned the acquisition process before the parties executed definitive agreements. Before the arbitral tribunal, Zostel sought specific performance of Oyo’s obligations under the term sheet, while Oyo claimed that the term sheet was non-binding and thus, had no obligation to pursue the transaction. Pertinently, the preamble of the term sheet explicitly stated that it was non-binding. Instead of deferring to the parties’ explicit choice, the Tribunal examined the clause on closing, which mentioned several CPs to determine whether the parties intended the term sheet to be binding. Merely because these conditions were necessary for closing the transaction, the Tribunal held that closing was the “natural and only consequence of compliance of these conditions”. Moreover, the Tribunal explicitly noted that “execution of definitive documents was not independent of the term sheet”, effectively collapsing the distinction between the two. Furthermore, the Tribunal claimed that Oyo could not conduct due diligence of a competitor in the absence of definitive agreements and that without definitive agreements, Zostel had no incentive to comply with the CPs mentioned in the term sheet.  Critical analysis The Tribunal erred on three accounts. First, it failed to realise that despite the performance of CPs, parties do not need to close a deal. They are free to walk away even after the performance of all CPs if there is no consensus on other terms considering the parties intended the term sheet to be non-binding. This understanding is also manifested in clause 7 of the term sheet, which stated that “subject to the conditions set forth in this Term Sheet, the parties shall mutually agree, execute” the definitive agreements. Thus, this term sheet was a mere agreement to agree to a binding contract.  Second, the Tribunal’s claim that Oyo could not conduct due diligence of a competitor in the absence of definitive agreements is patently erroneous. It is customary for parties to conduct due diligence after signing the term sheet and before signing the definitive agreements. The very purpose of conducting due diligence is rendered fruitless if parties have already bound themselves to a deal. This does not change despite them being competitors because all the information provided for due diligence is subjected to strict confidentiality and non-disclosure agreements. Third, it is also not true that without definitive agreements, Zostel had no incentive to comply with the CPs. Contrarily, Zostel may have complied with the CPs to signal its interest and seriousness in the deal to Oyo and consequently, push the deal forward. GAIL v. Sravanthi – “binding” term sheet found non-binding In GAIL v. Sravanthi the parties signed a term sheet for supply of natural gas but failed to later convert the term sheet into a more detailed Gas Sale Agreement. The Electricity Appellate Tribunal had to determine whether the term sheet was binding and could form the basis of restrictive trade practises on part of GAIL. While the court of first instance found that the term sheet was binding, the Appellate Tribunal disagreed with this finding, merely because the term sheet provided that none of the “rights or obligations set out in this Agreement [the term sheet] shall become effective until the date known as CP ‘Satisfaction Date’”. In the Tribunal’s understanding, since the obligations stemming from the term sheet were subject to