Company Law

[By Anurag Shah and Vijay Nekkanti] The authors are students at Christ (Deemed to be University), School of Law Introduction The Ministry of Corporate Affairs (MCA), Government of India, has brought into effect the eagerly anticipated and much-required sub-sections (11) and (12) of Section 230 of the Companies Act, 2013.[i] These provisions pertain to the takeover of a company via squeezing out the minority shareholders under a scheme of compromise/arrangement. While the whole Chapter XV of the Act pertaining to compromise, arrangements, and amalgamations were notified in the year 2016, it took MCA approximately 3 (three) years to notify these two sub-sections. To align these provisions with the company law MCA also had to make consequential revisions to the National Company Law Tribunal Rules, 2016 and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. These revisions would streamline the procedure given under the new sub-sections. Squeeze out implies the compulsory acquisition of equity shares of a company from the minority shareholders of that company through fair cash compensation.[ii] Prior to this notification, it was done under Section 235. The method under Section 235 was enshrined to ensure that shareholders holding 90 percent or more shareholding in a company can acquire shares from minority shareholders during a takeover. The rationale behind such a provision was to ensure smooth takeovers of a company once the majority has consented to it. However, the minority shares should be bought at a fair value and this is what forms the crux of this method and the Courts have enumerated its importance time and again. In the case of Sandvik Asia Limited v. Bharat Kumar & Ors[iii], the Bombay High Court was of the view that if a fair price is being paid to the non-promoter shareholders, and at no point, the same is challenged; the Court should not withhold the sanction to the transaction. This shows the intent behind the method. Section 230(11) and (12) of the Companies Act, 2013 The provisions notified by MCA would now enable the majority shareholders holding 3/4th of the concerned company’s shares to make a takeover offer and to acquire all or a part of the shares. This can be done through an application before the NCLT. The term shares for the purpose of these provisions would include equity shares and securities that vest the holder with the power of exercising voting rights. The application for such an offer should be accompanied by a report disclosing the detailed valuation of the shares proposed to be acquired. Adding to this, the acquirer is also required to deposit a sum of not less than 50% of the total consideration for the offer into a separate bank account. The offer should ensure that fair value is being paid to the minority shareholders. The fair should be computed by taking into account the highest price paid by any person or group of persons for the acquisition of these shares during the last 12 months. Other factors such as the return on net worth, book value, and Earning per Share (EPS) should also be considered. Section 230(12) read with the amended NCLT rules provides for the raising of grievances by the minority shareholders in front of the NCLT which shall act as a quasi-judicial body for this whole procedure. These provisions provide for another formal route for the minority to squeeze out from a company. Earlier known routes were selective reduction under Section 66 of the Act and squeeze out under Section 235 and 236. However, these provisions have been introduced in consonance with the jurisprudence related to the issue of squeeze out of minority shareholders. Now it would be important to see the role NCLT would play in presiding over these transactions, given the view of the Court in the landmark case of Miheer H. Mafatlal v. Mafatlal Industries Ltd[iv], wherein it was stated that the Courts do not have the expertise, time or the means to sit over the wisdom of such a transaction, and the Court should only concern itself with the question as to whether the valuation report is demonstrated to be so unjust, unreasonable and unfair that it would lead to inequity or injustice to the minority shareholders. Analysis of the provisions from an acquirer’s perspective Analyzing from the acquirer’s perspective, unlike the erstwhile regime under Section 235 that mandated 90% of control so as make an offer to the dissenting shareholders or initiate squeeze out, under the current provisions a 3/4th majority would suffice to move such a resolution. On the face apparent, although this particular relaxation might seem to be very liberalistic, one needs to understand in the context of private companies that, under the erstwhile Sections 235 and 236 albeit having acquired 90% of the shareholding, many acquirers were confronted with problems allied with various restrictions imposed on the transfer of shares by the private companies through various instruments such as Pre-Emptive Rights, etc. Thus, although it is easier to reach the threshold of 75% to make an offer, one has to understand that the new provisions amidst the herculean restrictions imposed by private companies have only burdened the acquirers with an additional 15% of shareholders to surpass. Further, in the case of AIG (Mauritius) LLC v. Tata Tele Ventures[v], the Hon’ble Delhi High Court interpreted Section 395 of the Indian Companies Act of 1956 (corresponding to Section 235 of the 2013 Act) in a way that justice is meted out to the minority shareholders, and had inter alia held that: “90% majority must comprise of different and distinct persons and only in that event this will fall within the rationale of this section a justify the overriding of the interests of the dissentients……………. the offeror should be substantially different to the majority” Although this judgment had imported the ideals of Shareholder Democracy within the Indian corporate jurisprudence, when applied in toto to all kinds of companies, it had posed several anomalies for the closely-held private and unlisted companies. Thus, the current provisions by providing

[Shagun Singhal] The author is a second year student of National Law Institute University, Bhopal and a member of CBCL. Background Recently in March 2020, the Union Cabinet approved certain amendments (“Companies Act Amendment, 2020” or “the Amendment”) put forth by the Injeti Srinivas Committee (“the Committee”) in November 2019 (“Srinivas Committee Report, November 2019”). The Srinivas Committee Report built upon another report that had been submitted by the same Committee in August 2018 (“Srinivas Committee Report, August 2018”) which was formed to review offences under the Companies Act, 2013 (“the Act”). Among the other recommendations, the Committee suggested decriminalization of minor offences involving either procedural or technical lapses under the Act.[i] The objective behind the inclusion of these amendments is to unburden the National Company Law Tribunals (“NCLT”) by decreasing the amount of cases concerning minor offences directed towards them; and thereby facilitating ease of doing business in India. For doing so, two main propositions were suggested. First, include an in-house adjudication mechanism with regional directors presiding over them and Second, lay down the plan of compounding minor offences from fines or imprisonments to penalties.[ii] This blog post focuses on the second proposition and analyses the disadvantages of imposing fixed penalties. It further lays down certain suggestions by which the amendment can be implemented without any pit-falls. Difference between ‘Fine’ and ‘Penalty’ Fines and penalties are often used interchangeably; however, the two are altogether different concepts. While the former (i.e. fines) are imposed when a petition is filed in a court of law, the latter can be imposed by any authority, not necessarily a court or tribunal, when any law, rule or regulation is broken.[iii] Penalties are usually fixed, whereas fines have a range. Referring to the current scenario, this can be explained through an example. Under the pre-amended Companies Act, 2013, cases of non-filing of resolutions and agreements by a company would cost them a fine ranging between 5,00,000 to 25,00,000 INR.[iv] However, after the 2020 Amendment, non-violation of the same compliance would directly lead to an imposition of a fixed penalty of 1,00,000 INR by a Regional Director (“RD”) under the Ministry of Corporate Affairs (“MCA”). Moreover, repeated contravention of the same would lead to an additional penalty of 500 INR per day up to the limit of 25,00,000 INR.[v] Drawbacks of the Amendments It is pertinent to refer to the case of Adamji Umar Dalal v. the State of Bombay,[vi] wherein the Hon’ble Supreme Court of India held that circumstances related to an event should be taken into account while deciding a certain penalty for a particular offence. If not, there can be cases with exceptional circumstances, which if not considered would lead to an excessive penalty being imposed, thereby causing irreparable harm to the person. Thus, the author contends that the imposition of ‘fixed’ penalties by regional directors might have certain drawbacks, as elaborated below. 1. Fixed monetary penalties are biased towards companies with large turnovers It is well established that different companies have different turnovers, from anywhere between 50 thousand to 50 thousand crores.  Hence, the imposition of fixed penalties for all companies can have varied consequences on them, as for some, it may cost them their entire annual earnings and for the others, it shall only serve as a “fee” to earn their desired profits. A penalty can only be effective if it carries the repercussions of “punishment” for committing a particular offence. This can be understood by the following example; if a company has an annual turnover of 1 crore INR, a penalty of 50,000 INR would have no value to them, in fact, if the particular offence leads to a profit of 20 lakhs, it shall only act as a ‘fee’ to earn the desired profit. However, the same penalty shall lead to overspilling for companies with lesser turnovers who shall face chronic cash shortages and hence leave them with no incentives to save the firm. Moreover, the penalties for repeated offenders also remain fixed, thereby incentivizing the large firms to plan their ‘fines’ beforehand for their desired profits. Furthermore, as held in the Adamji case, there can be exceptional situations influenced by external circumstances which lead to the causation of an offence. In such cases, small companies shall suffer huge financial losses for no fault of their own. Hence, it is of paramount importance to take into consideration the turnovers of companies while deciding the penalties rather than fixing one for all regardless of their size. 2. Penalties directed towards a ‘company’ fails to distinguish between the lawbreaker and the innocent victim The principle of a company being a distinct legal entity from its shareholders, promoters and directors was originated by the English Court in the case of Saloman v. Saloman and it has been followed by the Indian courts ever since.[vii] This principle reinstates that a company is an artificial ‘person’ and can hold its own assets, make deals etc. In spite of the incorporation of this principle, the fact that it is run by an association of persons who are its real beneficiaries cannot be disregarded.[viii] In several instances, these beneficiaries driven out of their own underlying motive commit offences to gain a larger profit. In order to ensure that they do not hide behind a company’s envelope and face appropriate punishments, the doctrine of “lifting of corporate veil” was introduced which affirmed holding the corporate personalities liable instead of the companies itself. The current amendment riddles with this concept as it imposes liabilities on companies along with the officers. For example, if a company defaults in filing the return of allotment within a prescribed period the ‘company’ along with its promoters and directors are liable to pay a penalty of 10,000 INR. Moreover, disregard of this doctrine by the imposition of a fixed penalty towards a ‘company’ directly targets the value of shares, the economic brunt of which has to be borne by the innocent shareholders. It might be argued that the shareholders, while buying stocks

[Guest Post by Gaurav Pingle] The author is a practicing Company Secretary and runs his own CS firm, Gaurav Pingle & Associates, Pune. Background Section 23 of the Companies Act, 2013 (“the Act”) relates to ‘public offer and private placement’. According to the said provision, a public company may issue securities to public through prospectus (i.e. Initial Public Offer/Further Public Offer) or through private placement[i] or through rights issue[ii] or bonus issue[iii]. In addition to this, a public company can also issue ESOPs or debentures[iv]. However, the question for interpretation arises when a public company issues securities and such issue falls under two or more provisions of the Act. The requirement of valuation is different for rights issue, private placement or public offer of securities. In addition to this, the Act read with the Companies (Share Capital and Debenture) Rules, 2014 has significantly enhanced the compliances, disclosures, documentation and reporting for such issue of securities. Section 42 of the Act, which relates to issue of shares on private placement basis was entirely substituted by the Companies (Amendment) Act, 2017[v]. However, irrespective of substitution, the underlying theme has not changed i.e. offer and issue of securities to certain investor(s) only i.e. ‘select group of persons’. In the recent case of Canning Industries Cochin Ltd. v. SEBI[vi], decided on 28 January 2020, Securities Appellate Tribunal (“SAT”) has interpreted the provisions relating to private placement of securities. This article analyses Section 42 of the Act along with the said SAT judgment. Facts of the case Canning Industries Cochin Ltd. (“Company”), an unlisted public company (having 1,929 shareholders) passed a special resolution[vii] for issuing 1,92,900 unsecured Fully Convertible Debentures (“FCDs”) of Rs. 250/- each to its 1,929 shareholders at the rate of 100 FCDs, with no right to renounce the offer to any other person. The debentures were issued for a period of 5 years i.e. every FCD would be compulsorily converted into equity shares on maturity or earlier if the call option is exercised by the Company itself. However, the Company was able to raise funds only from 335 members. One disgruntled shareholder filed complaints before SEBI and NCLT alleging that the Company has made public issue of securities without complying with the provisions of the Act. The Company contended that the same was neither rights issue as issue was not made on a proportionate basis, nor was it private placement as no ‘select group of individuals’ were identified for the issue in question. It however claimed the issue to be made on preferential basis under Section 62(1)(c) of the Act. Issue for consideration Whether the said issue of FCDs would be deemed public issue under Section 42 of the Act? Observations of SEBI SEBI in its Order dated 18 March 2019[viii], observed that an offer to 335 persons is a ‘deemed public issue’ as it violates the provisions of Section 42(1) of the Act. SEBI also observed that the Company was required to comply with the relevant IPO related provisions and was required to make an application to one or more of the stock exchanges for listing, which the Company failed to comply. Observations of SAT On appeal, SAT observed that Section 42 of the Act is not applicable to the offer of FCDs as it is not ‘private placement’ of securities. SAT observed that ‘private placement’ means an offer to subscribe securities to a ‘select group of persons’ by a company. The term ‘select group of persons’ though not defined in the Act, indicates a specified number of persons limited to aggregate 200 in a financial year. It was observed that since the offer was made to 1929 shareholders, the offer of said FCDs cannot be termed as an offer to a ‘select group of persons’. SAT observed that “the expression ‘select group of persons’ is not a technical expression but has to be understood in its ordinary popular sense, namely, an offer made privately such as to friends and relatives or a selected set of customers distinguished from approaching the general public or to a section of the public by advertisement, circular or prospectus addressed to the public.” SAT further observed that restriction of subscription of shares to 200 persons or more is not applicable in the instant case as it is not a ‘private placement’. SAT also observed that section 62(1)(c) of the Act is not applicable as it is not a case of issuance of shares/securities on preferential basis. Analysis of SC Order in the Sahara case Before we analyse the said SAT order, let us refer to some important and relevant observations of Supreme Court (“SC”) in Sahara India Real Estate Corporation v. SEBI[ix]. In this case, an offer was made to public under the garb of private placement of securities[x]. SC observed that Section 73(1) of the Companies Act, 1956[xi] casts an obligation on every company intending to offer shares or debentures to the public to apply to recognised stock exchange for listing its securities. SC further observed that if an unlisted company expresses its intention, by conduct or otherwise, to offer its securities to the public by the issue of a prospectus, there arises a legal obligation on the company to make an application on a recognized stock exchange for listing. Even though the overall principle was laid down by SC under the Companies Act, 1956, it is still noted and referred by SEBI in many cases dealing with public issue of shares or securities, and stands valid under the provisions of Companies Act, 2013. Interestingly, provisions relating to private placement of securities have been introduced with an objective to avoid Sahara-like events in future i.e. offer to public under the garb of private placement of securities. Analysis of SAT Order FCDs were offered to 1,929 persons, however all the offerees were existing shareholders. Also, the right of renunciation was not part of the offer. Issue is whether such offer is rights offer or public offer or an offer that violates the provisions of

[By Anchit Jasuja and Preksha Mehndiratta] The authors are second year students of Gujarat National Law University, Gujarat. The sanction of a scheme or arrangement under the Companies Act, 2013 (“Act”) cannot be done without the sanction of the National Company Law Tribunal (“NCLT”) under its supervisory jurisdiction. However, if a shareholder or creditor has any grievance with respect to the scheme, he may approach the NCLT to file the objections provided that he has the requisite qualifications. Though the Act is clear as to who may file objections against the scheme, there remains ambiguity as to the stage at which objections, if any can be filed. Who can file? The Act only allows the filing of objections by shareholders and creditors if they meet the requisite criteria laid in the proviso of Section 230(4)[i] which is at least 10% of the shareholding for shareholders and at least 5% of the outstanding debt for creditors. Even when the Companies Act, 1956 was in force and there was no statutory criteria for locus standi, the courts have recognized in cases such as Indian Metal and Ferro Alloys Ltd. [ii]that a person, who has no interest in the company as a shareholder or a creditor, cannot file objections before a company court. With the coming of the Act, provision for locus standi was added. However, the proviso and rather the entire act is silent about the time of filing such objections. Judicial approach to appropriate time for filing objections The confusion with respect to the appropriate time to file objections is evidenced by contradictory judgements given by courts of law. In the case of Landesbank Badenurttemberg v. Nova Petrochemicals Ltd., [iii]which predates Section 230(4) of the Act and its proviso, when the issue raised was alleged non-disclosure of material interests and objections, the Gujarat High Court held them to be premature and ordered them to be raised up at the floor of meetings. The court reasoned that since the objections could be raised at the meeting or even when the application to the court was filed for sanction, therefore, there is no reason for the court to consider objections at the stage when the meeting has not been convened. In a contrary view, the Gujarat High Court in another case allowed objections to a scheme even before the court passed orders for the conduct of meetings of shareholders and creditors. [iv] When a case with similar facts came before the Supreme Court in Rainbow Denim Ltd. v. Rama Petrochemicals Ltd. [v], the court did not allow the appeal from the order of the supervisory court and directed it to reject the objections until the meeting has been convened, thus, implicitly rejecting the objections for being filed at an early stage. Though what must be noted is that none of the cases on the issue explained the legal basis for either rejecting or accepting the objections against a scheme before convening the meeting of the shareholders and/or creditors. Legislative intent and analysis Since the power to file objections has been given in a proviso to Section 230(4), therefore it has to be seen and read in the context of that proviso. Firstly, it has to be noted that the proviso cannot be disconnected from the enactment it follows and has to be read together with it. In other words, a proviso does not travel beyond the provision for which it is a proviso.[vi] This is because it is assumed that the legislature would not have added a proviso under a Section if that proviso had nothing to do with the Section. Therefore, since the proviso in Section 230(4) follows the procedure for voting, the proviso cannot be disconnected from the voting procedure. Secondly, the proviso is made as an exception to something out of the enactment or to qualify something enacted therein which would otherwise be outside the purview of the enactment.[vii] Furthermore, it has been stated that the cardinal rule of interpretation of a proviso is that the proviso only operates in the area of law encompassed by the main provision. It creates an exception to the main provision under which it operates and no other.[viii] Therefore, it is only natural to interpret that the main enactment, i.e., the voting procedure is to be followed in most cases, but in special cases when that voting procedure fails to address the concerns of the shareholders or creditors, then objections may be filed. Thirdly, the proviso cannot swallow the general rule. [ix] Which means that even if there is an exception to the voting procedure, i.e., filing of the objections, that exception cannot be used to wholly subvert the procedure established to get a scheme approved by a meeting of creditors or shareholders. The scheme that emerges from the interpretation of the locus standi provision is that a voting procedure has to be adopted, which would be a tool to address concerns of shareholders and creditors for which they might object and when that procedure fails to achieve its purpose of addressing the concerns, then special circumstances arise where objections may be filed before the NCLT. Additionally, since the proviso cannot swallow the main enactment, thus the power to file objections is to be read as a power which does not exist as a right and can only be materialized when the main enactment fails its purpose, i.e., when voting fails to address the concerns of the shareholders and creditors. Such an approach would also be in line with expediting the process of approval of a scheme or compromise, since it would eliminate any possibilities of the involvement of the NCLT in addressing the concerns of the shareholders and creditors, when that can be done by the company itself. This would not only benefit the company, but would also reduce the burden on the tribunals. This approach would also synchronise the legislative policy with regard to filing of objections since the NCLT regularly takes into account the chairman’s report of the meeting of

[By Prakhar Khandelwal] The author is a third year student of National Law Institute University, Bhopal. The National Company Law Appellate Tribunal’s (“NCLAT”) order dated 18 December 2019 (an appeal against which is pending before the Supreme Court) directed Tata Sons to reinstate Mr. Cyrus Pallonji Mistry as their Executive Chairman of the Board and as a director on the boards of Tata Sons and other group companies. Under Section 244 of the Companies Act, 2013 (“Act”), a waiver for an application under Section 241 of the Act was granted to Mr. Mistry, on account of Shapoorji Pallonji Group’s investment of Rs.1,00,000 crores out of total investment in Tata Sons’ of Rs. 6,00,000 crores. Subsequently, the application was accepted under Sections 241 and 242 of the Act alleging prejudicial and oppressional acts of the majority shareholders (The Tatas). Mr. Mistry then moved the NCLAT, Delhi Bench against National Company Law Tribunal’s (“NCLT”) order pronounced in favour of the Tata Sons. The Board of Directors (“BoD”) of Tata Sons includes 9 directors (1 Executive Chairman, 3 Nominee Directors nominated by Tata Trusts and 5 independent directors), which takes decisions by the way of a majority. The Tribunal adjudicated on various points of contention: A.       Legitimate Expectations The counsel for Mr. Mistry (Appellants) contended that there has been a pre-existing relationship for over 50 years, based on mutual trust and confidence between SP Group and Tata Group, on business as well as personal levels. Such a non-formal relationship, which is a result of “factors outside of pure economic factors”[i], results in a “legitimate expectation of being treated in a mutually just & fair manner.”[ii] The Tribunal concurred with Tata’s contention that the concept of ‘legitimate expectation’ is not recognized under Sec.241 and 242 of the Act and therefore not applicable to the instant case. B.       Affirmative Voting Power akin to Veto Right  The appellants further contended that Articles 121 & 121A of the Articles of Association (AoA) of the company confer affirmative voting power to the Nominee Directors on the Board, subject to the condition that such a decision is required to be taken by a majority of the Board. This, in essence, gives veto power to the Nominee Directors, and indirectly to Tata Trusts in every decision of the Board.  Before the Tribunal, even Mr. Ratan N. Tata and Mr. N.A. Soonawala themselves took a specific plea that Articles 121 and 121A mandated a ‘prior consultation’ and ‘pre-clearance’ from them.[iii] The Tatas contention that a mere affirmative right, which is permissible by law, does not constitute veto Power as it does not confer any special rights to ensure Board approval was discarded by the Tribunal on account of their vote’s indispensability in all matters. C.       Reasons for Removal The removal of Mr. Mistry was inter alia linked to his alleged lack of performance which had never been deliberated upon by the BoD prior to his removal, as evidenced by the minutes of various meetings placed on record. Three months prior to his removal, the Nomination and Remuneration Committee(“NRC”)formed under Section 178 of the Act which also included a nominee director of Tata Trusts to the Board had lauded his performance and recommended a pay hike to Mr. Mistry. The recommendation was unanimously endorsed by the BoD. The Appellants contended that sudden removal of Mr. Mistry on the alleged ground of ‘lack of performance’ was a result of Mr. Mistry’s inquiries into legacy hotspots and the subsequent decisions made by him for the benefit of Tata Sons, instead of the Tata Trusts (held by the Tatas). The NCLAT accepted the submission that Mr. Mistry’s alleged lack of performance had indeed never been discussed or deliberated upon prior to his removal. D.       Lack of independent judgement Under Section 166 of the Act, the Directors are under a fiduciary duty to be independent in their judgement. The Tribunal held that a stark change in the Board’s opinion pertaining to the performance of Mr. Mistry within three months from the recommendation of the NRC clearly shows that the judgement was influenced by the majority shareholder i.e. Tata Trusts. The Tribunal also recognised the existence of a lack of clarity in the decision-making process of the Board as was evident from the email exchanges between Mr. Mistry and Mr. Tata. E.       Public to Private Company The Tribunal held that before the filing of the instant appeal, the conversion of Tata Sons from a public to a private company in accordance with General Circular No. 15/2013 dated 13.09.2013 and Notification dated 12.10.2013 cannot override the substantive provisions of Section 14 of the Act mandatorily requiring Tribunal’s approval for such conversion from public to private company. Thereby, such fiction of ‘deemed conversion’ was held to be illegal and in contravention with law. Analysing the decision of NCLAT A.       Corporate Democracy vs. Corporate Governance The Supreme Court of India in LIC of India v. Escorts Ltd. upheld the sovereign prerogative of the company along with its shareholders to appoint or remove a director from office without an obligation to provide reasons for their removal under ‘Corporate Democracy’.[iv] It further upheld the ratio in Ebrahimi case[v] wherein the Supreme Court recognised the absolute right of general meeting to remove the directors.[vi] Under principles of Corporate Governance, the Board is accountable to the shareholders. Corporate Governance is, therefore, corollary to the concept of corporate democracy. The procedure followed for removal of Mr. Mistry was in compliance with the provision of the AoA of Tata Sons. Such a decision by the BoD and shareholders of the Company regarding its matters of internal corporate affairs are governed by principles of ‘Corporate Democracy’ and cannot be superseded by the way of judicial interference B.       The supremacy of Articles of Association A company’s AOA definesa company’s nature, objective and forms part of the company’s constitution along with the MoA. In World Phone India Pvt case, the Shareholder’s Agreement conferring affirmative rights was held to be non-binding on the company and its shareholders