Company Law

[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

[By Saket Agarwal] The author is a fourth year student of National Law University, Jodhpur and can be reached at [email protected] Introduction India in the past few years has been a major victim of corporate frauds including the Nirav Modi scam. When it came to affixing liability, one person was found to be negligent in performing his duties in almost all cases, the independent director of the company. However, independent directors have attempted to evade liability claiming lack of knowledge. To fix this issue, the government is planning to conduct compulsory exams to qualify as an independent director.[i] This Blog post aims to assess the feasibility of such proposed examination. Section 149(6) of the Companies Act, 2013 [“Act”] defines independent director as “a director who is not a managing director or a whole time director or a nominee director”. Schedule IV of the Act prescribes the supervisory function of independent directors over board of directors. They are expected to act as internal watchdog over affairs of the company. Their liability under Section 149(12) of the Act is limited to acts or omissions occurring within his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. It appears that the plan of conducting the proposed examination intends to target this aspect of knowledge. The proposed exam will test various facets of an independent director like business ethics, capital market regulations, etc. The proposed exams will ensure that the independent directors do not claim lack of knowledge; where the aspect of knowledge will depend upon the facts and circumstances of each case. However, there exists a basic lacuna in this premise. The argument presented by the government presupposes that lack of knowledge among independent directors is only due to the lack of corporate literacy, which might not happen in every case. Independent directors: a flawed concept in itself The motive behind introducing the position of independent director was to highlight irregularities going on within the company. The duty was considered so crucial that any failure in his behalf could make him personally liable. In the case of Zylog Systems,[ii] the question of liability of independent directors was discussed regarding non-payment of dividend by the company post declaration. The decision was given in favour of independent directors because they registered their protests in the minutes of the meetings and resigned in protest later. This case shows that the independent directors are confined to stage protests against the unlawful actions of the company and to take exit if the company does not relent. They do not have any actual powers to perform their functions for which they were appointed. The author contends that Schedule IV of the Act is a complete enigma on role of independent directors. Therefore, the proposed exams will not ensure ‘independence’ of independent directors. Schedule IV of the Act advocates for strong role of independent directors without any influence.[iii] Further, it asserts that independent directors shall bring objectivity in performance of the board of directors.[iv] However, their re-appointment is subject to their evaluation by board of directors. Moreover, they can be easily removed through an ordinary resolution. Existing provisions on the issue There is nothing new in the proposal of financial literacy for independent directors. Financial literacy is something which was there previously as well in the Act. Clause 49 of SEBI Listing Agreement of 2004 on corporate governance provides for audit committee in a listed company. Such an audit committee should consist of at least three directors where the independent directors shall be two-third of total members. Section 177 of the Act makes it mandatory for all members of the audit committee to be financially literate. The revised Clause 49(II)(B)(7) of Equity Listing Agreement makes it mandatory for the companies to conduct compulsory training of independent directors. The author suggests that intent behind this move might be to ensure that the independent directors are vigilant about their responsibilities in the company. To ensure its compliance, a disclosure was made mandatory in the annual report along with details of such training. If the sufficient provisions are already present to keep a check on their knowledge, then it is futile to bring in another separate provision. The case of Dr. Sambit Patra: independent director of ONGC BJP’s National Spokesperson, Dr. Sambit Patra was appointed as the independent director of Oil and Natural Gas Corporation [“ONGC”] in 2017. His appointment was challenged in the court for his lack of sufficient financial knowledge required in a director of a company. [v] The Court held that there are diverse areas which a corporation needs to take care of when it is operating in a society. The importance of the knowledge in these different areas cannot be ruled out. Moreover, it is mandatory for every company to perform corporate social responsibility [“CSR”]. CSR ensures the inclusive growth of each section of the society which could not keep pace with the rapid industrialization.[vi] Schedule VII of the Act containing CSR activities have a direct impact of the environment and human rights. The court held that relevance of a medical expert in the board of directors in such a case cannot be ignored. Rule 5 of the Companies (Appointment and the Qualification of Directors) Rules, 2014 provide for qualifications of an independent director in one or more fields of finance, law, management, sale, etc. The author feels that such a wide ambit of the above provision was deliberately kept to maintain that the company cannot isolate itself from the society. Therefore, the officials of the company cannot confine themselves to the matters solely related to company. Having a separate examination would therefore be redundant.                       Violation of Article 14 of the Constitution of India The current norms of the regulatory authorities have made the liability of the independent directors at par with the executive directors of the company although they may not enjoy equal powers and remunerations. In the Neesa Technologies case,[vii] an independent additional director was held

[By Jayesh Karnawat] The author is a fourth year student of National Law University, Jodhpur and can be reached at [email protected]. Introduction Prime Minister Narendra Modi in his speech on the 73rd Independence Day of India asserted that wealth creators of the nation must be respected. He further said that these wealth creators must not be eyed with suspicion as they play a pivotal role in building that nation’s economy. However, the recent amendments in the Companies Act, 2013 (hereinafter “the Act”) do not reflect this approach. Through the recent Companies (Amendment) Act, 2019 (hereinafter “2019 Amendment”), a stricter regime for complying with Corporate Social Responsibility (“CSR”) obligations have been put in place. In this backdrop, a Committee headed by Mr Injeti Srinivas, Secretary, Corporate affairs submitted a report on August 14, 2019[i], highlighting the much-needed changes in the CSR regime. However, due to a severe backlash from the big corporations including India Inc.,[ii] the government has decided to take a few steps back and not to proceed with some of the clauses of the CSR amendment [iii] as introduced in the Amending Act. The Recent 2019 Amendment The newly passed 2019 Amendment compels companies to mandatorily spend the CSR funds within 3 years. In case the fund is not spent, the Companies have to mandatorily transfer the unspent funds in an account called “Unspent CSR Funds Account” post which, it will be spent on Schedule VII funds including Prime Minister’s Relief Fund. The Amendment also provides for penalty consequences in form of imprisonment of company officials up to three years and fine ranging from Rs 50,000 up to Rs 25 lakh for non-compliance of its CSR. In the backdrop of the recent 2019 Amendment, the Committee, which was set up to review the existing framework pertaining to CSR and further boosting its objectives, made several recommendations to the Central Government enumerated below. Some Important Recommendations Made by the Committee Are [iv] The Committee suggested that the obligation to comply with CSR norms should include within its ambit, apart from companies, Limited Liability Partnerships (which are also within the purview of MCA) along with Banks registered under the Banking Regulation Act, 1949. Moreover, the Committee mooted for including all the other profit-making entities operating under other specific statutes on mutatis mutandis If this proposal is accepted, it will reduce CSR obligation to be akin to a tax obligation. The Committee also recommended that clarification must be issued for the applicability of CSR obligation on newly incorporated companies. According to the Committee, rule of harmonious construction should be applied while reading sections 135(1) & 135(2) of the Act and therefore the obligation for the company should commence after it has been incorporated for a minimum of three years, which would also be in line with Ease of Doing Business objective of the government. This will give the Companies some breathing space to establish itself in the market. Otherwise, mandatory CSR obligation for new companies will act as a burden on them and hampers their growth. Once again, the Committee stressed on the need of making tax treatment for different activities uniform. It proposed allowing CSR expenditure as a tax-deductible expenditure. This would act as an incentive for the companies to undertake such activities. If this long-awaited recommendation-cum-demand is accepted, it would reduce the outgo on CSR from 2% to 0.67%. [v] Since most of the companies eligible for contributing to CSR activities have a threshold of Rs 50 lakhs, the Committee suggested that in order to reduce operational cost, the mandatory requirement of constituting a CSR committee must be done away with for such companies. The function of the CSR Committee can be performed by the Board itself. This will prove to be a major relief for small companies which do not have large quantum of funds to have a specialized committee to advise and assist in this expenditure. This move would not only save the expenditure incurred by the company on such committees, but also prove to be efficient. The Committee adopted a balanced approach while deliberating upon adequate punishment for non-compliance of CSR provisions. The Committee acknowledged that a mere statement of the reason for non-compliance is not enough, and there must be a substantive justification for the same. However, there must not be any imprisonment for the non-compliance. There can be a penalty which is twice or thrice the amount of default with a maximum cap of Rs 1 crore. In simple words, the offence shall be de-criminalized and shall be made a civil offence. Recently the government had planned to criminalise any default in complying with the provisions of CSR. This approach came in the backdrop of certain statistics which showed that company have slowly started to improve its CSR spending records. Statistics reveal that in last five years, CSE expenditure has increased from 70% to 90%.[vi] However, as stated above, this step of the government faced severe backlash from market players and forced the government to do away with this plan. Discussing the issue of time limit for the completion of the project, the Committee believed that mandating a company to incur CSR expenditure within a year without even considering the financial and technical challenges will not lead to desirable outcomes. It should be based on the nature of projects, gestation period, flexibility of the project. Considering this, the Committee suggested that the unspent amount and the interest thereon be spent within 3-5 years. The Committee recommended that the practice of contributing the amount mandated by CSR obligation to Central Government funds as specified in Schedule VII of the Companies Act be discontinued since it undermines the entire objective of CSR which is to ensure that business efficiencies and innovation could be used to the best interest of the society. The Committee suggested that it should be made mandatory for companies having a CSR obligation of Rs 5 crore or more for a period of 3 preceding financial years to undertake need and impact studies for their CSR activities. It

[By Parth Tyagi and Achyutam S. Bhatnagar] The authors are third year students of NLIU Bhopal and NLU Orissa respectively. Meaning and Provisions of Corporate Social Responsibility The list of activities comprising Corporate Social Responsibility (“CSR”) in Schedule VII of the Companies Act, 2013 (hereinafter “the Act”) is inclusive and not exhaustive as it contains the phrase “such other matters as maybe prescribed”. However it does not give absolute discretion to Companies to include any activity as a part of their CSR policy. The Companies are mandated to adhere to activities mentioned in Schedule VII. An affidavit issued by Ministry of Corporate Affairs in Mohd. Ahmed v. Union of India defined CSR as an activity carried out by a Company covered under Schedule VII, which forms a part of its core business, if not done with a profit motive. [i] CSR as a concept involves an initiative by which, a company evaluates and takes responsibility for its impact on environment [ii] and social welfare. India is one of the few countries to have a law dedicated to CSR. [iii] No other country, except India had given CSR a mandatory legal character. [iv] Section 135 of the Act dealing with CSR makes the compliance of CSR mandatory, if, the Company has a net worth of Rs.500 crore or more, or a turnover of  Rs.1000 crore or more, or net profit of  Rs.5 crore or more during any financial year. [v] CSR Policy and Responsibilities of the Board in Relation to CSR The Companies that fall within the scope of the above three criteria are mandated to set up a CSR Committee with a minimum of 3 directors; with at least one of them being an independent director. In case of an unlisted or a private company, 2 directors are sufficient and there is no need of an independent director.[vi] The law further defines functions of the CSR committee. The committee is required to set up a mechanism regarding CSR and give their recommendations to the Board, indicating suggested CSR activities mentioned in schedule VII for implementation. The amount to be spent upon CSR activities is also decided by way of recommendations to the Board. Additionally one of the important purposes of CSR committee is to oversee the policy and review and revise it if needed.[vii] The Board, by acting as an approving body for CSR policy[viii] also plays an important role in carrying out CSR. The Act also provides for monitoring of the initiatives and projects under the CSR policy. The policy is to be included in the Director’s report [ix] as well as the steps taken in furtherance of it so far.[x] In the case of Meenakshi Textiles v. ROC, Tamil Nadu [xi]the Company was directed to carry out its CSR obligations as it had a net profit of more than 5 crores but somehow represented that it had profits in negative by deducting losses two times. The Tribunal, in its order mentioned that the appellant company was liable for not forming a CSR committee and therefore not carrying out its CSR obligations. The role of the board, as defined under Companies Act goes as far as to ensure the manifestation of the CSR policy on the website of the Company as well as to ensure that the company spends at least 2% of the average net profits made during the 3 financial years immediately preceding in pursuance of the policy (net profits to be calculated as per Section 198).[xii] During the expenditure of CSR funds, local areas should be preferred in the vicinity of the Company. The reasons for not spending the amount, if any should be mentioned in the Director’s report.[xiii] Funds spent on CSR engagements should be disclosed as a note in the profit and loss statement. Implementation of CSR Companies can act directly or through Trusts/ Societies or Section 8 companies operating in India and set up by it.[xiv] They can also enter into collaborations for CSR projects with other companies, provided, the collaborating companies report the CSR activities as per the CSR Rules, 2014. Section 134 (8) of the Act contains provisions for liability in case of non-compliance. In the matter of M/s. Celsia Hotels Private Limited,[xv] a petition regarding compounding of offence under Section 134 (3) (o) of the Act was made. The Tribunal directed the Company and erring directors to pay Rs. 25 lakhs and Rs. 5 lakhs respectively. Similar orders were issued in the matter of matter of Rapid Estates Private Limited [xvi]. Generally, the Tribunal imposes a compounding fee [xvii] rather than ordering imprisonment in case of contravention or non-compliance. The tribunal can also order utilization of CSR funds collected in a previous financial year if not already utilized.[xviii] In Coastal Gujarat Power Ltd. v Gujarat Urja Vikas and Ors.,[xix]wherein the Ministry of Environment and Forest issued a notification according to which companies were supposed to carry out CSR activities irrespective of whether they were making profits or not; Central Electricity Regulatory Commission held that the provisions of Companies Act, 2013 already had rules regarding CSR which mandated that the company had to be in profit to carry out CSR activities. Exceptions Activities or campaigns carried out in exclusivity for families of employees or the employees themselves do not fall under the ambit of CSR, nor does any money contributed towards any political party comprise CSR.[xx] Consequences of the Companies (Amendment), 2019 According to the recent Companies (Amendment), 2019 (“Amendment”), companies are allowed to transfer the money they fail to spend in a year to an “unspent CSR account” from which they can draw within the next three years to spend on CSR activities. If a company is still unable to spend the amount within that period, it can transfer it to a government fund specified under Schedule VII of the Act, such as the Prime Minister’s National Relief Fund, failing which the penal provisions would be invoked.[xxi] The imprisonment clause is the most condemned clause of this new Amendment.  The amended clause provides for imprisonment of every officer of the

[By Deeksha Gabra and Shivam Gupta] Deeksha is a Chartered Accountant and Shivam is a fifth year student of RGNUL, Punjab  1. Background Shares with Differential Voting Rights (hereinafter “DVR Shares”), also known as Dual Class Shares internationally, are shares with rights disproportionate to their economic ownership. The concept of DVR is not new to India. It can be traced back to 2000 when the then Companies Act, 1956 was amended by Companies (Amendment) Act, 2000 to inculcate Section 86, which allowed the Indian companies to issue DVR Shares. The Consultation Paper on DVR Shares released by SEBI categorized DVR into two types: Shares with Superior Voting Rights (hereinafter “SR Shares”) which carry superior voting or dividend rights in comparison to ordinary shares. The minimum votes to share ratio in SR Shares should be 2:1 which can reach up to maximum of 10:1, implying a shareholder holding one share will have 10 votes. Shares with Fractional Voting Rights (hereinafter “FR Shares”) which carry inferior voting rights in comparison to ordinary shares. The minimum votes to share ratio in FR should be 1:2 which can reach up to maximum of 1:10, implying a shareholder holding 10 shares will have one vote. Till 2009, there were only few listed companies that issued shares with differential rights. For instance, in 2008, Tata Motors issued DVR Shares carrying 1/10th voting right and 5% higher dividend on these shares as compared to ordinary shares; and in 2009 Pantaloons Retails (now, Future Enterprises Ltd.) issued DVRs with 1/10th voting rights to the existing ordinary shares and offered 5% additional dividend. Later in 2009, SEBI amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to bar listed companies from issuing DVR Shares with superior voting or dividend rights, meaning that only FR Shares could be issued by listed entities. Since then, the use of DVR Shares in the Indian corporate sector is almost negligible, which can be attributed to various reasons including low awareness about the concept of DVR shares, inadequate corporate governance measures which may lead to minority oppression and lack of legal framework for regulating the DVR Share market. The release of Consultation Paper on DVR Shares by SEBI followed by the hostile takeover of Mindtree by the L&T, being the first hostile takeover in the Indian IT sector ignited a debate in the corporate arena regarding the importance of DVR Shares to avoid such hostile takeovers. Thereafter, SEBI in its Board Meeting on 27th June, 2019 approved the Framework for issue of DVR Shares. This article briefly discusses how DVR Shares would have helped to prevent the hostile takeover of Mindtree and makes an attempt to analyze the new approved framework for DVR Shares and the provisions inculcated therein. 2. Mindtree’s Hostile Takeover The whole mishap can be attributed to the bizarre shareholding pattern of Mindtree. The four promoters of the company held only 13.32% of the shares collectively. The first step taken by L&T was to acquire 20.32% stake held by coffee tycoon, V.G. Siddhartha, in Mindtree. Then L&T further purchased 15% from open market before making an open offer of 31% under the Takeover Code. In the end, L&T gained a control of 60% after it further purchased 10.61% stake from Nalanda Capital. Mindtree tried to prevent the hostile takeover by using various defense mechanisms. The main tactics included proposal to announce increased dividends, raising of a contention that both the companies have dissimilar work culture, proposal for buyback of shares. The last effort made by Mindtree was to facilitate an intervention by its largest institutional investor, Nalanda Capital. However, Nalanda Capital also recoiled by selling its stake after SEBI issued a show-cause notice for acting in concert with the promoters of Mindtree and spurring Mindtree’s public shareholders to abstain from selling their shares at L&T’s offered price. Had there been DVR Shares in place, it could have helped the promoters to defend against the hostile takeover as a large percentage of voting rights would vest in the hands of promoter group. 3. Need for a New Framework The Indian start-up market is witnessing a boom. These start-up companies depend majorly on the promoters/founders for their growth, vision and sustenance. Also, these companies are in requirement of funds/capital frequently which is fulfilled by equity capital. This results in erosion of promoter’s stake, thereby weakening their control. This is particularly significant for new technology firms with asset light models. DVR Shares as a paradigm for procuring capital can tackle this concern meritoriously, consequently operating as a defence mechanism to fight hostile takeovers. 4. New Framework The SEBI Consultation Paper proposed a detailed framework for issue of both SR shares and FR shares. According to the framework, a company with SR shares is permitted to list its ordinary shares by an initial public offer subject to certain conditions prescribed under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009: The company should necessarily be a tech company, i.e. companies that intensively use technology such as information technology, intellectual property, data analytics, bio-technology or nano-technology. The Promoter Group (excluding corporate & non-executive promoters) is only eligible to hold SR shares. The collective net worth of the promoter group should not exceed Rs 500 Cr. (notwithstanding the investment of SR shareholders in the shares of issuer company). A Special Resolution is passed for issuance of SR shares. The SR shares are held by the promoter group for at least last 6 months prior to filing of Red Herring Prospectus (“RHP“). After the listing of the ordinary shares, the SR shares shall also be listed on the stock exchanges. However, SR shares shall subject to sunset clause according to which the SR shares will be converted to ordinary shares. Furthermore, provision relating to lock-in will prohibit the trading/ transfer and creation of encumbrances on the SR shares. The coat tail provision is one of the main highlights of the new framework along with the sunset clause. The coat tail provision provides for the circumstances where the SR