Company Law

The Oppression & Mismanagement Clause: Exploring The Need For Revision Under The Indian Law

Leave a Comment / Company Law /

[By Rishi Raj & Mehek Wadhwani]  The authors are students at MNLU, Aurangabad.  Introduction The ideal of corporate democracy envisages that a company governs its affairs based on majority voting, with the shareholders voting to decide on the course of action. Under these circumstances, the intervention of law may be required to address the possibility of the majority decision departing from the standards of fair dealing or conducting the company’s affairs in a manner contrary to the public interest or oppressive to any of its members. The Indian law acknowledges this possibility. Consequently, the minority shareholders have the statutory right to bring any action against the majority shareholders to prevent the majority from oppressing and mismanaging the company. As an integral part of corporate governance, these special provisions are contained in Part XVI of the Companies Act, 2013 (hereinafter referred to as the Act). In particular, Section 241 of the Act contains the provision for the prevention of oppression and mismanagement, whereas Section 242 of the Act grants tribunals the power to make an order for the smooth management of the company, and this power can be exercised if the oppressed member (shareholders) fulfils certain conditions. We seek to analyse how the construct of the clause under Section 242 of the Act places an undue burden through the just and equitable standard to substantiate the issue raised in the Tata Consultancy Service Ltd. v. Cyrus Investments Pvt. Ltd. and Ors. Further, we propose certain changes that may be considered while reforming the law. Invoking the oppression & mismanagement remedy: An undue burden on the shareholder The inefficiencies and perils of winding up a company have long been recognized under the company law jurisprudence, leading to the introduction of remedies such as the oppression and mismanagement clause under Section 241 of the Act. The prudent realization that such winding-up would not help the aggrieved minority shareholders led to the inclusion of this clause under the English Companies Act, 1948. Thereafter, the common law countries, including India, adopted the remedy with certain changes. 2.1. Oppression, Prejudice, and Mismanagement (Substantive elements)  ‘Oppression’ is said to be caused when the company’s conduct is opposed to the public interest as well as the principles of fair dealing, including the imposition of new and risky objects by the majority shareholders in an autocratic way. Further, the oppressed shareholder is under a persistent burden to prove the oppressive act, which makes redressal under Section 241  wrongful, harsh, and burdensome. The scope of ‘oppression’ was outlined in  V.S. Krishnan v. Westfort Hi-tech Hospital Ltd., and adopted verbatim in several judgments that followed under the Act. Accordingly, ‘oppression’ entails the absence of probity, good conduct, or an act that is mala fide or for a collateral purpose.  Further, while making winding-up orders, the court may follow rational principles to decide if the conduct is unjust, inequitable or unfair.  Ultimately, this is a question of fact, and accordingly, we have seen several unique positions taken by the courts. Adding to the jurisprudence on the scope of ‘oppression’, in a very recent judgment of Tata Consultancy (Supra) wherein the Apex Court held that the mere removal of a person from the post of Executive Chairman cannot be termed as oppressive and cannot trigger the provisions of Section 242 of the Act. Any single act of oppression cannot enable a Company Law Board (CLB) to intervene; rather,  “the oppression must be the commutative results of continuous acts,” and there must be no scope of debate in the facts of the case. We believe that the existence of undue burden on the aggrieved shareholder owing to their obligation to establish the substantive elements discussed above, along with the conditional limb discussed below, severely restricts the remedy that the law seeks to provide. In the next section, we reflect on this aspect to substantiate our argument that lawmakers must reform the clause in a well-balanced manner to avoid deadlocks. 2.2. Just & Equitable Clause (Conditional Limb) The remedy that the shareholder seeks, requires more than establishing the substantive elements. Section 242 of the Act, which is the conditional limb of this remedy, places a heavy burden on the oppressed members to satisfy the following two conditions: firstly, the affairs of the company must have been conducted in a manner that is prejudicial or oppressive to the members of the company, or prejudicial to the public interests; secondly, even if the winding-up order would unfairly prejudice some members, it would be fair to wind up the company if it is justifiable under the ‘just and equitable clause. In Ebrahimi v. Westbourne Galleries Ltd., the Court ordered the winding up of a company, as the majority was guilty of abuse of power. However, the House of Lords, while reversing the decision, applied the test of (i) bona fide use of power in the interest of the company and (ii) whether a reasonable man could think that the removal was done in the interest of the company. Further, under the “just and equitable” clause, the winding-up order may be made if there is an entire “functional deadlock” or an irretrievable breakdown of “trust and confidence”  raised in the management of the company. For a better understanding of the term ‘just and equitable clause, the Scottish Court of Session in Baird v. Lee observed that the shareholders invest their money on certain conditions which are mentioned in the Memorandum of Association of the company, including that the business shall be conducted in accordance with the principles of commercial administration that assures commercial probity and efficiency. It is noteworthy that only if these conditions are intentionally violated that it would be justifiable to wind up the company. Further, as opined by the Apex court while considering whether to admit an application, the interests of the company’s shareholders as a whole have to be kept in mind. This, however, means that the tribunal can make an order to bring an end to the oppression or prejudice complained of,  only if

The Oppression & Mismanagement Clause: Exploring The Need For Revision Under The Indian Law Read More »

Boardroom Gender Diversity: Are Mandatory Quotas Effective In India?

Leave a Comment / Company Law, Contemporary Issues /

[By Swetha Somu]   The author is a student at Gujarat National Law University.  INTRODUCTION “Women Hold Up Half the Sky.”- Mao Zedong Analogous to this article is the proclamation made by Mao Zedong– to bring out women from domestic work to the professional field. Even today, if you walk inside a boardroom, it’s most likely that you’ll see more men like the Ambanis and Elon Musks than women like Kiran Mazumdar and Indra Nooyi. Through the lens of the law, the initial step was to empower women in corporate settings by imparting gender diversity in boardrooms. This article dives deep into the present scenarios in Indian companies and analyses the drawbacks and deficiencies of the mandatory quotas by discussing various other mandatory quotas imposed by countries around the world. The article seeks to bridge the gap in law so that the intention of the legislators, which is- diversity and inclusivity, is truly achieved. THE START: NORWEGIAN QUOTA The first-ever mandatory quota (40% for women in all listed companies) was legislated by the Scandinavian country- Norway, way back in the year 2006. The percentages jumped from 6% in 2002 to 40% in 2008 after its implementation. Although the percentage change pronounces the success of the law, various researchers have recorded negative effects and adverse changes in companies that had to comply with the quota. Shortly after the quota’s implementation, many companies had delisted from the stock exchange to avoid appointing a woman director. Some companies reduced their board size to easily comply with the quota and the women appointed were mostly for non-executive positions hence there was still no strong decision-making authority. Another research found that although the representation of women increased it didn’t mean many individual women in numbers rather the same woman being appointed in different boards. This is known as the “golden skirt” phenomenon. At the same time, researchers noted that more companies in Norway registered themselves in the UK and not their home country, hence pointing out that they were circumventing the regulations. Countries like France, Italy, and Germany followed Norway’s footsteps in implementing gender quotas in the boardroom. INDIA Since the patriarchal notions in the society are also seen to prevail inside the four walls of Indian boardrooms, the need for breaking this glass ceiling was acknowledged. A hindrance to women’s advancement is the existing gender stereotypes which diminish the scope of taking up high-positions in their professional lives. Hence to tackle this, the government introduced the Companies Act, 2013 in which under Section 149(1)(b) of Chapter XI makes it mandatory for the companies (listed companies, public companies with a minimum paid-up share capital of Rs.100 crores or minimum turnover of 300 crores) to appoint at least one woman director in their boardroom which failing to do so will attract penalties. This is known as a ‘hard quota’ where not following the quota will attract strict punishments unlike ‘soft quota’ which merely is a recommendation which if not followed, the company will only face warnings and negative reports. The second proviso to sub-section (1) Section 149 was inserted to increase the participation of women in key decision-making roles inching closer to the women empowerment goal that India wishes to achieve under the United Nation’s 5th Sustainable Development Goal of Gender equality by empowering women through strong enforcement of various policies and laws like this. After the implementation of the Companies Act, 2013 many companies started to comply with the mandatory quota as per the law. Subsequently, in 2015, the Securities and Exchange Board of India (SEBI) made all its top-500 NSE-listed companies compulsorily appoint at least one independent woman to their board by the year 2019, and the same for the top 1000 NSE-listed companies by the year 2020. According to the research article from the All India Management Association, out of the top NIFTY 500 companies in 2013, 303 of these firms did not have a single woman director on their board- which is roughly 60.6% of the companies that need to comply with the new quota immediately. Across these 303 firms, 82.8% had appointed one woman as one of their board of directors and 13.6% had appointed more than one woman in their boardroom going an extra mile! These huge percentages certainly seem to be promising and good going until we consider the scenario of efficiency after the appointment of the so-called women-in-power. Flaws and failures Though it was an overall success, there were some unpredicted drawbacks to the mandatory quota that India saw. Firstly, the imposed quota prompted ‘tokenism’ where companies appoint a woman director from their own family for the sake of complying with the law and to avoid the penalties. The NSE reported that 1667 of 1723 listed companies had fulfilled the mandatory quota but 425 of the complying companies appointed a woman from their family or promoters’ group. Illustration: Reliance Industries Limited has only one woman director (non-executive)- Mrs Nita Ambani, the CEO of the CEO, Mr Mukesh Ambani. Another company is JSW Steels, which has appointed Mrs Savitri Devi Jindal, the wife of the founder of Jindal Organization. The Raymond Group has appointed Mrs Nawaz Modi Singhania (non-executive director) who is the wife of the chairman. Secondly, there is a lack of skilled women willing to take up challenging positions, such as board members, making it hard for the companies to appoint and retain women at that position. This resulted in India being at the bottom of the table according to Egon Zehnder’s 2020 Global Board Diversity Tracker. Only 17% of the women held senior positions in companies and only 11% in leadership roles. Thirdly, the quota fails to meet what is known as the ‘critical mass’. With the minimum requirement of one woman on the board, the underrepresented gender does not have enough representation nor could make any substantial contribution to the boardroom discussions. A single woman on a boardroom meeting is likely to have a lower voice and is often neglected as it takes at least three

Boardroom Gender Diversity: Are Mandatory Quotas Effective In India? Read More »

Bringing Artificial Intelligence to Boardroom

Leave a Comment / Company Law, Contemporary Issues /

[By Abhinav Gupta] The author is a student at the National Law University, Jodhpur.  Introduction While discussing his book, 21 lessons for the 21st Century, Yuval Noah Harari points out that humans face existential crisis due to technological disruption. In his other book, Homo Deus: A brief history of tomorrow, he highlights the good and bad of artificial intelligence (AI). He believes that AI holds the potential to exterminate mankind. The emergence of cases where algorithms and AI have replaced humans has made this prophecy more increasingly daunting. Algorithms and AI are revolutionizing the way businesses operate. The disruptive effects of such technology have been felt across various business functions. These emerging technologies have the potential to create corporations that are completely autonomous and run by algorithms. At the same time, they can be used to just assist in increasing the efficacy of business operations. Business decisions require comprehending a variety of data and AI has proved its capability to process complex data to reach conclusions. The use of AI in boardrooms can help directors and benefit stakeholders by complementing them, if not substituting, in performing their functions. In this article, the author discusses how AI has the capability to revolutionize the functions of directors and what the operational and legal hurdles are in employing AI at the highest level in corporations. Artificial Intelligence AI has the ability to process huge amounts of data. While human intelligence can process only the seemingly important and related data, AI can process unrelated data as well, which might have a bearing on the decision. There are three kinds of AI, differentiated on basis of decision-making rights allocated to such AI, namely, assisted, augmented and autonomous. Under the assisted AI, the tech merely assists in the process of decision making and does not take decisions itself. The decision-making power continues to rest with the human. Augmented AI shares decision rights with humans and both learn from each other. On the other hand, autonomous AI completely replaces the human and operates independently of human intervention to take over all the decision rights. This distinction between different kinds of AI can be implemented in corporations in order to develop a robust technical environment. Using AI in Corporate Functioning The ability of AI, big data, and machine learning can be exploited to assist corporations in taking strategic decisions, managing risks and ensuring compliance. Moreover, humans are often faced by their cognitive biases which prevent them from considering certain relevant information or flip side of issues. AI, unlike humans, is free of these biases which can greatly affect the functioning of a corporation. AI would help directors in exercising ‘independent judgment’ and become appreciative of various views as each suggestion by AI will be based upon concrete data. AI can be used to channel contrarian views based on such data and reduce the occurrence of ‘groupthink’. Groupthink refers to a situation where an individual tends to agree with the viewpoint of the majority in order to form a consensus, irrespective of the validity or correctness of such viewpoint. Hence, directors will be able to convey dissent in boardrooms which is essential in order to ensure that decisions taken by the board are in the best interests of all the stakeholders rather than just the directors or a select group. AI can also be used for the selection of board members. With more and more information available about directors regarding their qualifications, past experiences, AI should be able to process this data to ascertain the future performance of the candidates in light of the objectives and future plans of the company. It would be easier for AI to comply with the law regarding the qualifications of directors. For instance, Section 149(6)(a) of the Companies Act, 2013 (the Act) provides that independent directors should have the relevant experience and expertise. Moreover, they should not have any pecuniary relationship with the company. Naturally, this would entail going through past transactions of the candidate as well as the company. An AI, which has all such data of transactions, would be much better equipped to determine if the candidate possesses such experience and expertise and whether they have any pecuniary relationship with the company, ultimately helping in compliance. The availability of data allows AI to foresee trends and at the same time handle the data of past and present, efficiently. Thus, AI can assist in the early detection of non-compliance, allowing the company to mitigate penalties and punishment associated with such non-compliance. It has been the approach of corporate law scholars that boards must be monitored in order to uphold the interests of shareholders and prevent self-serving directors from putting themselves before the corporation. The Indian regulator has conformed to such an approach by keeping checks on directors and providing for their duties (see Section 152; Section 166; Section 169; Section 171 of the Act). By keeping a record of all the transactions undertaken by the directors, AI allows keeping a tab on the functioning of the board to ensure compliance with the law. Be it reporting related party transactions (see Section 188 of the Act) or whether directors are complying with their duties under Section 166 of the Act or Schedule IV of the Act. Moreover, AI helps in handling the agency problem. The agency problem refers to the conflict of intentions of a principal and agent. Where the principal expects the agent to work in furtherance of his best interests, the agent would have certain interests of his own and might prioritise them over the principal’s interests. However, AI does not have any agenda of its own. It would operate on the basis of the available information and how it is employed by the directors. AI would act to the best of its capability in the best interests of the stakeholders rather than pursuing its own agenda. Directors authority and Duty to delegate to AI After affirming that AI has the capacity to make informed decisions, one must understand whether

Bringing Artificial Intelligence to Boardroom Read More »

Exploring The Dimension of Unvested Stock Options During Involuntary Termination

Leave a Comment / Capital Markets and Securities Law, Company Law, Contemporary Issues /

[By Pallavi Mishra] The author is a student at the Hidayatullah National Law University.   In recent years, the concept of Employees’ Benefit Schemes in the form of Stock Options has gained popularity for paying compensation to the employees, while also giving them incentives to contribute towards the betterment of the company. The history of discussion on employment schemes in India dates back to 1997, wherein the JR Verma Committee suggested that the guiding principles for the administration of employment schemes in India would be “complete disclosure and shareholder approval.” Presently, the Employee Stock Options for listed companies in India are governed under the Companies Act, 2013 and SEBI (Share Based Employee Benefits) Regulations, 2014 (“SEBI SBEB Regulations”). While briefly discussing the procedure of grant of options, the author in this article delves into examining the bargaining position of an employee who has been involuntarily terminated from service leading to forfeiture of unvested stock options. The article also contemplates amendments that may be brought about in the functioning of the Compensation Committee, required to be constituted for the administration of employees’ stock options in India. Exercise, Grant and Vesting of Stock Options Stock options are usually offered to the employees at a price lower than that prevalent in the market. In order to convert the options into shares and exercise the rights granted, the employees are under an obligation to render their services to the company during the “vesting period”. As per Regulation 18, there is a statutory requirement of a minimum of one year within which none of the stock options can be exercised by an employee in India. It is important to note that in addition to this, a company usually imposes other time-and-performance based stipulations before the employees gain the right to convert options into shares of the company. A combined reading of Regulations 2(j), 2(zi) and 2(zj) lead to the inference that only once the vesting period and conditions are fulfilled can the employee exercise the stock options and receive benefits associated with the grant of shares under the scheme. [i] Unvested Stock Options and Involuntary Termination In the above-mentioned scenario, there may arise an unfair situation wherein an employee has been rendering services to the company for a fairly long period of time but is terminated from the service under unforeseen circumstances. Alternatively, an employee may also be terminated from service in bad faith shortly before the vesting period to deter him from receiving the benefits of his stock options. This scenario assumes immense importance in the current times as many companies across India have been laying off employees and reducing workforce to overcome the losses incurred due to the COVID-19 pandemic. As per Regulation 9, in case of voluntary or involuntary termination of an employee from the service, all unvested shares get forfeited while the employee retains the right to vested shares, which he may be forced to exercise prematurely under unfavorable market conditions. In light of this issue, it is necessary that fair and equitable caveat be introduced within the SEBI SBEB Regulations to improve the position of an employee who has worked hard under the expectation of gaining the right to ownership in the company. Way Forward It is suggested that mandatory provisions for pro-rata vesting be introduced as a proviso to Regulation 9(6) for situations wherein the employee is terminated unexpectedly and/or involuntarily. The theory of pro-rata vesting rests on the assumption that a stock option is a deferred form of compensation for the employee and every day the employee becomes entitled to some percentage of it. In cases of termination of an employee, the SEBI SBEB Regulations must also provide for review by the Compensation Committee (required to be appointed under Regulation 6 for the administration of employment benefit schemes) to assess whether the employee has completed “substantial performance” of the vesting conditions and the time period. The committee could take into consideration factors like whether the employee has performed his duties regularly, his contributions towards the growth of the company, and the time left for the unvested options to become vested. While there is a dearth of jurisprudence in relation to this issue in India, a parallel could be drawn from section 12 of the Specific Relief Act which states that “Where a party to a contract is unable to perform the whole of his part of it, but the part which must be left unperformed by only a small proportion to the whole in value and admits of compensation in money, the court may, at the suit of either party, direct the specific performance of so much of the contract as can be performed, and award compensation in money for the deficiency.” In the case of AL Parthasarthi Mudaliar v. Venkatah Kondiar Chettiah, observations in relation to the performance of a contract were made, wherein it was stated that equity demands specific performance of a contract, where the portion left unperformed in small. Thus, it is a settled principle in law that justice requires the remaining part of the contract to be performed rather than a negation of the entire contract. Assuming that the grant of stock options is a contract between the company and the employee, wherein the employee has performed the contract substantially, there is sufficient ground for him to claim pro-rata vesting of the shares in case of unforeseen and involuntary termination from employment. Reliance is also placed on the Californian jurisdiction case of Division of Labour Law Enforcement v. Ryan Aeronautical Company in which similar observations were made with regard to breach of stock option contract between the employer and the employee, wherein the Court while granting damages to the employee held that substantial compliance could be said to meet the requirements of the vesting obligations under the contract. It is also interesting to note that Rule 12 of the SEBI (Share Capital and Debentures) Rules, 2014 entails any company other than a listed company to comply with several conditions before it can

Exploring The Dimension of Unvested Stock Options During Involuntary Termination Read More »

Did the NCLAT Through IL&FS Case Rejig the Waterfall Mechanism?

Leave a Comment / Company Law, Insolvency Law /

[By Nishita Agrawal and Arth Singhal]   The authors are students at the National Law University Odisha. The Companies Act, 2013 [“the Act”] lays down special provisions with respect to prevention of oppression and mismanagement in order to safeguard the interests of the investors, the minority shareholders, and especially the interests of the public under Sections 241 and 242. In September 2018, the Central Government had filed an application under Section 241(2) of the Act against the Infrastructure Leasing & Financial Services Limited [“IL&FS”] a systemically important core investment Non-Banking Financial Company [“NBFC”]  & its  169 group entities. The provision allows Central Government to make an application to the Tribunal for relief if it is of the opinion that the affairs of the company have been or are being conducted in a manner prejudicial to the public interest. In case of the service provider and its entities, the Central Government was of the opinion that its managerial persons were negligent and incompetent and its affairs were being conducted in a manner detrimental to the public interest.[i] In order to resolve such matters under Section 241, the tribunal is empowered under section 242(1) to make ‘any order’ as it may think fit to end the matters complained of. Sub-clause (2) further provides for an illustrative list of reliefs along with a residuary clause which confers wide powers on the tribunal to pass orders with regard to any matter which, in its opinion is just and equitable.[ii]   This power of the tribunal has been affirmed in the case of Sanjeev Agrawal v. Shri Omkaleshwar Coloniseers Pvt. Ltd.[iii] where the National Company Law Appellate Tribunal [“NCLT”] reiterated the Supreme Court’s [“SC”] decision on the scope of Section 241(2).[iv]   The court stated that “the jurisdiction of the Court to grant appropriate relief … indisputably is of wide amplitude” and that “[r]eliefs must be granted having regard to the exigencies of the situation”. When the affairs of the company are conducted in a manner prejudicial to the public interest, the appropriate tribunals can pass orders relating to change of management or debt restructuring so that there is an inflow of money to restore the trust of the public stakeholders.[v] Pursuant to this power, the NCLAT in Union of India v. Infrastructure Leasing & Financial Services Limited[vi]  on March 12, 2020, allowed for restructuring of IL&FS and its entities by approving the resolution framework proposed by the Central Government. However, NCLAT in the aforementioned resolution framework refused to follow the waterfall mechanism for distribution of proceeds, as laid down under Section 53 of the Insolvency and Bankruptcy Code 2016 [“the code”]. Section 53 of the Code provides for a detailed hierarchical order of distribution of liquidated assets of the Corporate Debtors [“CD”] between the Operational Creditors [“OC”] and the Financial Creditors [“FC”], in case of liquidation. Further, Section 30(2)(b) of the code required that the payment of debts of the OC were to be made in a manner that the board may specify which shall not be less than the amount to be paid to the OC in the event of a liquidation of the CD under Section 53. In India, the code is still in its nascent stages and faces several issues with respect to its applicability and interpretation. There has been a wide array of disagreement as to whether the NCLAT was within its powers to not follow the waterfall mechanism, or not. With this background, however, it is the authors’ opinion that the NCLAT was right in not following the waterfall mechanism due to reasons discussed hereafter: The code remains inapplicable in the present case due to lack of adequate provisions for resolution of such companies; The principles of code are also not binding on the tribunal under Section 424 of the Act or any other provision; and Even if code or its principles were applicable, it would have been impossible to make the ends of justice meet, as public interest is not an exception to the code. Finally, the IL&FS case has no bearing on the settled principles of code, it is not contrary to the Essar Steel judgment[vii] and the commercial wisdom of the Committee of Creditors [“CoC”] still has supremacy. Non-Applicability of the code When IL&FS defaulted on its debts and was exploring its options, the Code did not pose as a viable solution primarily because, it is a Financial Service Provider [“FSP”]  as defined under Section 3(17) of the code, which, until recently,[viii] was excluded from the purview of the code. A financial service provider is a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator[ix]; Although, as per Section 227 of the code, the Central Government had the power to notify FSPs which may be conducted under the Code, but failure to do the same, made a remedy under the code impossible. Furthermore, the code lacks a proper framework for the resolution of Group Companies, which discouraged the resolution of IL&FS under the provisions of the code. In this background where India lacked any specific framework for resolution of corporations to the likes of IL&FS, the Financial Resolution and Dispute Insurance Bill first introduced in 2017 could have posed a viable solution to the issues arising in the present case had it not been withdrawn in 2018. Therefore, the code remained inapplicable in the present case, and the tribunal issued the order of resolution under Section 242 of the Act. Non-bindingness of the Principles of code under Section 424 of Companies Act, 2013 Section 424 of the Act lays down the procedure to be followed by the appellate tribunal while deciding any proceedings under the Act. In broad terms, the section lays down the procedure to be followed by the tribunal/appellate tribunal before passing any order.[x]  It also confers the tribunal with the power to regulate its own procedure in accordance with principles of natural justice and provisions of the Act or rules framed

Did the NCLAT Through IL&FS Case Rejig the Waterfall Mechanism? Read More »

Innovators Growth Platform: NASDAQ of India

Leave a Comment / Capital Markets and Securities Law, Company Law, Contemporary Issues /

[By Shubham Kumar Singh] The author is a student at Amity Law School Delhi. INTRODUCTION India boasts the third largest startup ecosystem in the world, with more than 50,000 startups, out of which more than 9,000 are technology-led startups. (i) India is also a host to more than 800 venture funds and 2,751 angel investors. (ii) In this thriving startup ecosystem, many unicorns like Flipkart, Zomato, Paytm, and its likes are planning for public listing in the near future, but their favourite destination, unfortunately, is not India but outside India. (iii) Given this thriving startup ecosystem, the Securities and Exchange Board of India (SEBI) decided to relax the terms of listing and to provide a different platform for these startups called Innovators Growth Platform (IGP). Experts of the industry have called it a step in making Nasdaq of India. They see a huge potential in IGP as it was there in NASDAQ back in the 1970s. WHAT IS NASDAQ? National Association of Securities Dealer Automated Quotation (Nasdaq) is a US-based global platform to trade securities in a completely computerized manner. In 1971, the National Association of Securities Dealers (NASD) was created to allow investors to buy and sell securities electronically. It was the first of its kind platform in the world for electronically trading securities. It provides a cutting-edge platform for high-tech and startup companies. Therefore almost all big tech giants like Facebook, Google, Apple, Amazon chose Nasdaq in their initial years. Nasdaq exchange boasts 3,800 companies that hold $11 trillion market capitalization, making it a large portion of the global equity market. (iv) INNOVATORS GROWTH PLATFORM (IGP) In the view of the emerging startup ecosystem in India, in 2015, SEBI established a new segment for listing companies besides the main board listing procedure named Institutional Trading platform (ITP). It was to attract startups listing, but it could not generate any result. Therefore in 2018, SEBI reviewed and modified the ITP and launched the modified version with a new name, Innovators Growth Platform (IGP). SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2018 to change the framework of ITP. Even after the modification, IGP failed to garner much interest among the startup community, and still, there are no companies listed on it. (v) SEBI EASES RULES TO ATTRACT STARTUPS LISTING  Even after a complete revamp of ITP and the launch of IGP, startups were rather flying abroad to more attractive destinations like Nasdaq instead of IGP. To make IGP more attractive and competent to listing platforms like Nasdaq, SEBI decided to ease its various rules of listing. On 25th March 2021, SEBI, via its press release (PR no. 15/2021), disclosed the changed rules in the listing policy of the IGP.(vi) SEBI, to make the IGP platform more accessible to the startups, made the following changes to the listing norms via an amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: 1) Listing Eligibility Reduced to One Year In the mainboard listing procedure, the Company that wanted to be listed needed to show a three-year record of operations, profits, assets, net worth, etc.  Whereas under the IGP, the Eligible Investors of the Company were only required to hold 25% of the pre-issue paid-up capital for two years. Now it has been reduced to only one year. This will make a listing in India more lucrative than it was before. 2) Open Offer Requirement Increased to 25% Under the takeover code (The Substantial Acquisition of Shares and Takeover Regulations, 2011), no acquirer can acquire 25% or more shares/voting rights in a listed company without making a public announcement of an open offer. This requirement is to give an option to the existing shareholders to either exit their investment planning. Therefore SEBI has increased this cap to 49% for companies to be listed on IGP. This will give extra room for Startups to raise capital without the burden of an open offer as it is a costly and time-taking affair. Merger and Acquisition is one of the significant concerns of startups in India. Stringent post listing norms force these startups to shift their operation outside India. This amendment would simplify mergers and acquisitions for startups giving them enough flexibility to raise capital post listing. 3) Relaxed Mandatory Disclosures In the case of mainboard listed companies, whenever an acquirer acquires five per cent or more of the shares/voting rights in a target company it has to make some mandatory disclosures as per the takeover code. Furthermore, mandatory disclosure requirements have to be observed whenever there is a change of positive two per cent or a negative two per cent. (vii)These caps are not suitable for startups because their issue size is not that large as that of mainboard companies. Promoters of startups require more flexibility in these disclosure requirements as it is a costly and time taking affair. For the startup companies to be listed on IGP, the new norm has increased the threshold from five per cent to ten per cent and thereafter, fluctuations of 5% are the new threshold rather than the earlier 2 %. 4) Delisting Procedure  Eased a) Approval On the mainboard, a company wishing to delist is required to have a two-thirds majority of the shareholders, but for the startups listed on IGP, the approval needed for delisting must be approved by only a majority of minority shareholders. b) Acquisition Cap On the mainboard, a company considering delisting needs to acquire 90% of the shareholding or voting rights in the company. A startup listed on the IGP only needs to acquire 75% of the total shareholdings or voting rights before considering delisting. c) Price A company wishing to delist from the mainboard needs to calculate the price of the shares through the reverse book building process. Whereas for a company listed on the IGP, the acquirer can quote a price with due justification. 5) Migration Requirements Down to 50% Earlier for a company listed on IGP wishing to migrate to the main

Innovators Growth Platform: NASDAQ of India Read More »

Enforcement of Security Interest during Liquidation: Plight of Joint Charge Holders

Leave a Comment / Capital Markets and Securities Law, Company Law, Insolvency Law /

[By Samyak Jain] The author is a student at NMIMS School of Law, Mumbai. Waterfall mechanism under Insolvency and Bankruptcy Code (IBC or the code) prioritizes secured creditors over other stakeholders when secured creditors don’t enforce the security separately. This acts as an incentive for a lot of them to relinquish their security interest to liquidation estate. However, a situation of deadlock is created when joint charge holders over security are not able to reach a consensus about its treatment during liquidation. Tribunals have been meaning to resolve this based on the type of charge creditors hold over the security. Debtors create interest or lien over their assets to secure repayment of the loan. This leads to the creation of a charge and it is governed as per the contract, the debtors and creditors have entered into. Contracts may allow the creation of further charge over the same security following the procedure prescribed in the contract. The further charge created may be a charge pari passu to the first charge or may hold a different ranking. Creditors often enter into contracts that allow the creation of further charges only on their consent or on the issuance of a No Objection Certificate (NOC). The distinction between both types of charge lies in the priority given to them. Charge on a pari passu basis keeps all the creditors on equal footing, whereas a charge of different ranking gives the highest priority to the first charge holder.[i] Liquidation proceedings pose a challenge for liquidators when joint charge holders are not able to collectively decide about the treatment of their security. Disagreement can exist among charge holders on whether to relinquish their security interest to liquidation estate and enjoy a higher priority in the waterfall mechanism during repayment or separately enforce the security outside the liquidation pool. Tribunals have studied cases of disagreement in both types of charge and have taken diametrically opposite stands. First Charge Holders’ Right Right of first charge holders came to the forefront in the case of JM Financial Asset Reconstruction Company Ltd. v. Finquest Financial Solutions Pvt. Ltd.[ii] (JM Financial case). When Reid & Taylor were undergoing liquidation proceedings, Finquest filed an application u/s 52 of the code seeking leave to sell off the secured asset as they contended exclusive first charge over it. Other secured creditors objected to the contention and claimed a pari passu charge on the asset. Being joint charge holders they demanded relinquishment of security to liquidation estate. They put forth the argument that IBC treats all secured creditors the same and does not distinguish on nature of the charge or on the ranking of respective charge. And therefore, first charge holders are not entitled to special rights. NCLAT perused section 52 of the code to resolve the issue. They emphasized over the process that after setting off the realized amount against the debts due, excess proceeds from the ‘first enforcement’ of security is to be deposited with the liquidator. The wording of the provision allows only single enforcement of the security as per interpretation. Sub-section (4) of the provision[iii] gives power to ‘a secured creditor’ to enforce the security interest through any legal mechanism applicable to it. Based on the reasoning above, NCLAT held that only one secured creditor can enforce security interest to realize its debt and observed that “If one or more ‘Secured Creditors’ have not relinquished the ‘security interest’ and opt to realize their ‘security interest’ against the same very asset, the Liquidator will act in terms of Section 52(3) and find out as to who has the 1st charge”[iv]. NCLAT recognized the right of only first charge holders to enforce the security. An excess amount after recovering the debt of the first charge holder would be required to be deposited in the liquidator’s account. Tribunal denied rights to other secured creditors in case a first charge holder exists. Despite having security to protect their debt, they are treated no different than an unsecured creditor. Also, the decision throws up a challenging question about the treatment of other secured creditors in the waterfall mechanism. What position would other secured creditors enjoy in the waterfall mechanism during distribution is unaddressed by the tribunal. In my opinion, NCLAT has erred in interpreting the provision. It failed to consider the intent of the legislature of prioritizing a secured debt. The statute accords special treatment to secured creditors for obvious reasons that they have security to enforce their debt. If this judgment’s literal interpretation of a provision is enforced, secured creditors other than exclusive charge holders will find their secured debt futile in the IBC regime. Majority Rule among Joint Charge Holders While the above ruling takes away the rights of secured creditors to some extent, NCLAT Delhi has seemingly taken a balanced stand in the issue of pari passu charge in the Mr. Srikanth Dwarkanath vs. Bharat Heavy Electricals Limited[v] (Dwarkanath Case). On the passing of a liquidation order against the corporate debtor, the liquidator filed an application owing to the inability to form the liquidation estate. A liquidator could not commence the liquidation process on account of the deadlock created among secured creditors with respect to relinquishment of security interest. Multiple creditors held charge over the secured asset. Among all, 74% of the secured creditors allowed the secured asset to be a part of liquidation estate. But the liquidator still couldn’t attach the property in his pool on account of refusal from Bharat Heavy Electricals to relinquish the security. Bharat Electricals claimed itself as a superior charge holder. They demanded enforcement of security placing reliance on JM Financial case. However, the court held that the facts of the present case are different from JM Financial owing to the absence of a superior charge over security. With the presence of a charge of equal ranking, NCLAT found it apt to refer to Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI act) to end the deadlock. It specifically

Enforcement of Security Interest during Liquidation: Plight of Joint Charge Holders Read More »

Conclusion of a Corporate Saga: The Tata-Mistry Dispute

Leave a Comment / Company Law /

[By Mansi Avashia] The author is a student at the Gujarat National Law University. Introduction The Tata-Mistry dispute has been one of the most controversial and hostile battles in the corporate sector of India. On March 26, 2021, the Supreme Court brought an end to this longstanding feud by setting aside the 2019 National Company Law Appellate Tribunal [“NCLAT”] order which had restored Cyrus Mistry as the Chairman of the Tata group. In this post, the author analyzes the Supreme Court judgment in detail and highlights why this decision is an important precedent in Indian jurisprudence. Facts Tata Sons was established as a private company in 1913. Over the years, the Shapoorji Pallonji group acquired 18.37% of the total share capital of Tata Sons. In December 2012, Cyrus Mistry was appointed as Executive Chairman of Tata Sons for five years.[i] Cyrus Mistry was ousted by a board resolution passed in October 2016and was removed as a director from Tata’s group companies, i.e., Tata Consultancy Services, Tata Teleservices, and Tata Industries Limited.[ii] Two companies of the Shapoorji Pallonji group, namely, Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, approached the National Company Law Tribunal [“NCLT”], Mumbai alleging oppression, mismanagement, and unfair prejudice by Tata Sons. NCLT dismissed the petitions of Shapoorji Pallonji group companies and hence the matter was appealed before NCLAT.[iii] The NCLAT reversed the decision of the NCLT and found the removal of Cyrus Mistry illegal. The NCLAT also restricted Ratan Tata and the nominees of Tata Trusts from making any decisions that needed majority approval in an AGM or of the board of directors. .[iv] Tata Sons approached the Supreme Court to decide the matter. Issue The questions considered by the Supreme Court were: Whether the company’s affairs were conducted in a prejudicial and oppressive manner and whether the facts justified the winding up of the company on just and equitable grounds? Whether the reliefs granted by the NCLAT particularly with respect to the reinstatement of Cyrus Mistry, were in consonance with the power available under Section 242(2) of the Companies Act, 2013 [“the Act”]? Whether the NCLAT had the power to mute Article 75 from the Articles of Association [“AoA”] of Tata Sons? Whether the affirmative voting rights granted by the AoA were oppressive and prejudicial in nature? Whether the re-conversion of Tata Sons from a public to a private company required approval under the provisions of the 1956 Act and the Act? Findings Oppression and Mismanagement The NCLT in its decision had provided reasoning for all the allegations of oppression and mismanagement including Air Asia dealings, Nano project failure, dealings with Siva Group Company, which were not addressed by the NCLAT in its order. These findings were not appealed by Cyrus Mistry. Hence, the Apex Court considered the NCLT’s decision as final and did not make any determination on these matters. Invocation of just and equitable clause Section 242 requires the Tribunal to decide whether it was just and equitable for the company to be wound up due to oppression and mismanagement. The Court held that the grounds would be fulfilled when there was a mutual breakdown of confidence in a company that operates as a quasi-partnership.[v] In the present case, there was no quasi partnership since Shapoorji Pallonji had acquired shares decades after Tata’s inception. Moreover, some disagreements among the management were not sufficient to invoke the clause. The Court also pointed out that the NCLAT should have considered the feasibility to wind up a company with charitable trusts as its shareholders. Reinstatement of Cyrus Mistry by the NCLAT At the outset, the Court pointed that Cyrus Mistry’s behaviour of leaking confidential emails to the press and sensitive information to the tax authorities was largely responsible for the loss of confidence among the Board of Directors and his subsequent removal. With respect to the reinstatement in the NCLAT order, the Supreme Court’s observation on this finding was three-fold. First, that Section 242 did not provide for the power to reinstate persons in a case of oppression and mismanagement. Second, Cyrus Mistry had not sought reinstatement as a relief in his prayer before the Court. Third, Cyrus Mistry’s tenure had expired as it was for a period of 5 years, from 2012-2017. Thus, the NCLAT had gone beyond its powers by appointing Cyrus Mistry as the Chairman ‘for the rest of his tenure’. Further, the Court also noted that if the removal of Cyrus Mistry was illegal as found by the NCLAT, it was still an effective dismissal and could raise a claim for damages. Further, a contract of personal services could not be enforced by Courts. Thus, the NCLAT finding was found to be incorrect. Abuse of AoA Article 75 Article 75 conferred power on the Company to require any holder of ordinary shares to transfer his shares. This was rendered ineffective by the NCLAT in its order and its use was restrained on the basis of ‘likelihood of misuse’. The Court observed that Section 241 and 242 only provides for past and present prejudicial conduct and not for a future possibility of misuse. [vi]The Article had been a part of the AoA for a long time and Cyrus Mistry was himself involved in amending it. There were no instances of invocation or misuse of Article 75 by Tata Sons. Thus, the NCLAT’s decision was found to be unsustainable. Affirmative Voting Rights Article 121 of the AoA provided that all the matters which required the consent of the majority of directors had to be approved by the nominee directors appointed by the Tata Trusts. Cyrus Mistry wanted these rights to be restricted to certain matters and also be extended to the nominee directors of the Shapoorji Pallonji group. He also contested that these the presence of these rights impeded the nominee directors to make unbiased decisions in the best interests of the Tata companies. The Court held that  affirmative voting rights were commonly found in AoAs of companies all over the world

Conclusion of a Corporate Saga: The Tata-Mistry Dispute Read More »

Corporate Social Responsibility: Choice or Coercion

Leave a Comment / Company Law, Contemporary Issues /

[By Anchal Bhatheja and Chaaru Gupta] Anchal is a student at the National Law School of India University, Bangalore and Chaaru is a student at the National Law University Jodhpur. Section 135 of the Companies Act 2013 (the “Act”) in India provides for mandatory Corporate Social Responsibility (CSR) by corporations. Prior to 31.07.2019, the provision required corporations to merely ‘comply or explain’, that is, if a company did not spend the earmarked CSR expenditure, it had to disclose the reasons in its board report. However, the 2019 Amendment to the Act turned Section 135 into a ‘comply or suffer’ provision. It went a step ahead and provided for a fine, ranging from 5,000 to 25 lakh or imprisonment for 3 years or both. The provisions pertaining to imprisonment had to be removed due to the backlash from companies. Nevertheless, mandatory CSR continues to remain intact. Interestingly, on 22nd March 2021, the Union Minister of State for Finance and Corporate Affairs in India, while responding during the question hour in the Lok Sabha, said that the policies of the central government were not being implemented using the (CSR) funds that come from the companies.. Article 12 of the Constitution of India provides that governance is the State’s responsibility which makes the validity of the question doubtful. In this article the authors aim to discuss the viability of making CSR mandatory in the Indian context, from the perspective of promoting innovation and growth of businesses as well as social justice. There are overwhelming rationales, rooted in law and economics, to shift from CSR to other ideas namely Corporate legal Responsibility (1), Corporate Social Incentives (2), Individual Social Responsibility (3), and Governmental Social Responsibility (4). This is because the burden of social justice cannot be put on the corporates and should be on the government. And if at all it is to be done by a non-governmental entity, it should be individuals who undertake it voluntarily and not out of compulsion. CLR- Corporate Legal Responsibility Milton Friedman argues that the only social responsibility of corporates is to maximize their profits while playing by the rules of the game. They should be made to comply with regulatory laws like the Environmental Protection Act, 1986, The Air (Prevention and Control of Pollution) Act, 1981, Tax laws, etc. while carrying out their businesses, rather than having to mandatorily comply with CSR requirements. Presently, the law is reflective of a paradox. For instance, on one hand, India loses10.3 Billion Dollars or 75,000 Crore Rupees due to tax evasion by corporates on an annual basis. On the other hand, the CSR regulations mandate these corporates to contribute towards Prime Minister’s Relief Fund, Rural Development Projects, skill development projects, and other such government initiatives under Schedule VII of the Act. The paradox in the data suggests the State invests its limited administrative resources in making the businesses run legally before it makes them run ethically. Furthermore, better legal enforcement will lead to more voluntary compliance and would, consequently, increase investor confidence. This would also reduce disputes and litigation in the realm of company law, which presently puts a burden on state resources as well as hampers the growth of businesses. CSI- Corporate Social Incentive Mandatory philanthropy is an oxymoron. Mandating donations defeats the very purpose of philanthropy or CSR. Furthermore, coercing the corporates to engage in CSR will hamper innovation and corporates will allocate funds just out of fear of penalty. This was in fact witnessed when a lot of corporates invested in the construction of the statue of the popular Indian Leader Sardar Vallabhbhai Patel, dubbed the Statue of Unity, to stay in the good books of the government. It is better to positively incentivize corporates to take initiative on their own accord in the sector they are working, instead of coercing them to work in areas that they do not deal in. This will lead to more efficient outcomes as they would have expertise in those specific areas. Further, from a business perspective – it will also help them in improving their image and market base. For example, incentivizing a software company to build accessible software for the differently-abled is more logical and economical than forcing them to build toilets in a nearby village. Therefore, towards this end, the state can offer benefits like preferential clearances and tax abates to the corporates that act upon corporate social incentives in charity, instead of penalizing them for not being “charitable”. ISL -Individual Social Responsibility If CSR is not mandatory, the individual shareholders’ earnings will increase as the expenditure of the company decreases. This encourages the shareholders to engage in charity on an individual level, for a cause that aligns with their idea of social responsibility. Even if elimination of the expenditure of the company which goes into CSR investments does not lead to an increase in the income of an individual, they will be naturally more inclined to engage in charitable activities as compared to a situation where they know that their company is already investing enough of its resources in CSR and there is no need for them to engage in charity on a personal basis. Further, the decisions regarding the areas in which a company will invest, to fulfill its CSR requirements are taken by the Board of Directors (BoD) on the recommendations of the CSR committee which comprises two directors and one independent director. However, it does not mean that the opinion of the BoD necessarily aligns with the opinion of the shareholders. If the law omits the requirement of this coerced social responsibility on the corporates, the shareholders on their personal level will be able to have a free dialogue with their ideas of what social justice means to them and will be able to decide the areas they would want to engage with as philanthropists. Thus, the resultant satisfaction of the transaction will be much higher for the individuals. In fact, EdelGive Hurun India Philanthropy List 2020 suggests that individual philanthropy has just been

Corporate Social Responsibility: Choice or Coercion Read More »

Scroll to Top