Company Law

Lifting Or Piercing The Corporate Veil: Clarifying The Two-Step Examination

[By Arunoday Rai] The author is a student of National Law School of India University.   Introduction The doctrine of lifting or piercing the corporate veil is fundamental to the company law. This doctrine acts as an exception to the concept of a company being a separate juristic entity. It allows the court to treat the rights and liabilities of the corporation as the rights and liabilities of its shareholders. The courts in India have recently tried to expand the horizon of this doctrine to pay regard to the new economic realities behind the evolving corporate structure in the modern era.  This article contends that such an expansion of this doctrine has been on a misplaced understanding of Supreme Court (SC) precedents. The courts in India have failed to provide a sound legal basis to expand the contours of this doctrine and have failed to differentiate between various attitudes with which SC has lifted the veil in different cases. It argues that SC has used this doctrine in two types of situations: the first type involves peeping behind/lifting the veil, whereas the second type of cases involves penetrating/piercing the veil. The author sheds light on the confusion caused by the interpretation of the doctrine by the courts due to their lack of understanding of the above-mentioned two-step examination.  The Two-Prong Test   It is essential to understand what is meant when the courts lift the veil of the company. The doctrine is generally been used to impose liability on the shareholders or alter ego of the company by lifting the veil. However, the two-stage analysis in this post highlights that such a view of the doctrine is incomplete. The act of lifting the veil is not always detrimental to the shareholders/alter ego of the company but can be beneficial at times.   Peeping Behind/Lifting the Veil  The first stage in the analysis involves the least discussed act taken by the court, where it merely lifts the veil of the company. At this stage, the court lifts the veil of the company to gather information such as shareholding patterns, shareholders, control, etc. It pulls down the veil once such information is gathered and the company is treated as per the information gathered during the inquiry done by the court at this stage. For instance, the statutory lifting of the veil provided in Sections 2(46) and 2(87) of the Companies Act, 2013 is a classic example of this stage.   The SC in the case of Renusagar had to adjudicate on the issue whether Renusagar was a power plant owned by Hindalco. If both these entities were considered to have no separate existence, then Hindalco would be entitled to certain exemptions on electricity duty by the State government. The SC lifted the veil to hold that both industries had no independent existence and were inextricably linked up together. The judgment by the SC eventually benefitted the Petitioner’s company as the veil was lifted only to investigate the relationship between both entities involved in this petition.  SC has also provided certain prerequisites that need to be fulfilled before the veil is lifted or peeped into. The apex court in LIC v. Escorts had held that a veil can be lifted in various situations such as fraud or improper conduct, evasion of taxing or a beneficent statute, public interest, effect on parties, etc. It did not provide a straight jacket formula but listed broad illustrative situations where the veil could be lifted. However, it went ahead to say that in the present case, no such lifting of the veil is necessitated beyond the governing statutes involved as it is not necessary to the case.  Therefore, it should be noted that this stage only involves the court lifting the veil and is a condition precedent to the next stage of penetrating the veil where a court after gathering information may make an order against the company imposing liability on them or refrain from imposing any liability.   Penetrating/Piercing the Veil  This stage involves the imposition of liability upon the shareholders for the company’s acts through the piercing of the veil. Such liability can be seen through Section 36 of the Companies Act, 2013 where a person who knowingly or recklessly induces persons to invest money can be held liable for action under Section 447 of the Act. This provision is an example of the statutory piercing of the corporate veil where liability is imposed on a person for committing a prohibitive act.  The standard for piercing the corporate veil has been subject to contradictory judgments in India. While some courts have held that fraud is a sine qua non for piercing the veil, other courts have held to the contrary. This article supports the former view by underscoring the importance of demonstrating impropriety or evasion of legal obligations as a prerequisite for piercing the veil.  It has upheld such a view by recognizing that the law does not allow for imposing liability on mere commonality or interlocking shareholding or common directorships. The requirement of fraud or evasion of a legal obligation is essential to protect the fundamental precept that every company is a distinct legal entity. However, various courts have agreed to the latter view as they have conflated the standards to be used during the two-stage analysis while applying this doctrine.  The Confusion  Several courts in India have held that the contours of this doctrine cannot be restricted to the requirement of fraud/sham/façade and could be extended to situations where justice, equity, public interest, and convenience so required. The courts that have taken this view have tended to rely on judgments of the SC in LIC v. Escorts and Renusagar which has been interpreted to enlarge the standard of piercing the corporate veil.   For instance, the Bombay High Court in Bhatia International has held that the doctrine is no longer restricted to the cases of tax evasion but also pertains to cases that are opposed to justice and convenience. It goes ahead to state that once the court

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Decoding MCA’s move allowing Direct Listing of Indian Securities on Foreign Exchange

[By Anand Vardhan & Piyush Raj Jain] The authors are students of Gujarat National Law University.   Introduction   The Ministry of Corporate Affairs has enforced section 5 of The Companies (Amendment) Act, 2020, through a notification dated 30th October, 2023 . This has led to an addition to section 23 of The Companies Act 2013 . It is a welcome move as it seeks to boom the Indian Economy by opening the routes for Indian Companies to raise funds by directly listing their equity on foreign stock exchanges and also opening a million-dollar Indian market for foreign Investors. There is a need for diversification of investors across the Indian economy given ongoing evolution and internationalization of capital market across the globe.   As foreign competitiveness being the need of the hour for our corporate culture, this post analyzes the earlier regime, present amendment and its analysis along with our suggestions for the proposed framework by uncovering the lacunae in the proposal and the regulatory framework needed to address such lacunae.  Earlier regime  Under the existing framework, if an Indian company wished to access the global market to list its equity capital, it can only get listed through the American Depository Receipts (ADR) and Global Depository Receipts (GDR). These depository receipts acted as a security certificate representing a certain number of a share of a company of other country, not listed on stock exchange of that country, which can be purchased by investors. Further, an Indian company can directly list its debt securities on foreign stock exchange through Foreign Currency Convertible Bonds (FCCB), also known as masala bonds, and foreign currency exchangeable bonds, which are issued by companies in currencies other than the domestic currency of the company issuing it.   Present Amendment   The new provision allows direct listing of the public companies registered in India on foreign stock exchanges as permitted by the government. The added provision also empowers Central Government to exempt certain classes of public companies from following the procedural requirement prescribed in the Companies Act to get listed on the stock exchange, which may include declaration by beneficiary to the company share, filing return of significant beneficial owners of the company, punishment on non-payment of dividend etc.  Analysis  Implications  One of the most important implications and benefits which this amendment would provide to Indian Companies, especially startups is the option of a new jurisdiction to raise funds. Further, this will also help the companies in increasing their valuation. The option for companies incorporated in India to list their shares on Foreign Exchanges will enhance and diversify their sources and pool of capital as well as provide them with a larger and diverse base of investors. This will help the Indian Companies to trade their securities in major currencies across the world, like Euro, Dollar, or Renminbi.   As discussed earlier, for raising funds overseas in the earlier regime, ADR and GDR were used to list in the foreign exchanges, but it required a complex procedure even a complex restructuring such as externalization, but this amendment may do away with any such requirements by providing an alternate route to raise funds overseas. Further, this will even allow companies incorporated in India to access foreign funds at a lower cost. In the earlier regime, Indian companies had to invest cost and time for accounting in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) for ADR and GDR respectively, but the direct listing will allow Indian companies to prepare accounts in Indian Accounting Standards (IndAS) only which will help them to reduce the cost and time involved as IndAS is now globally accepted.   The implications that this amendment will have on the Indian Economy are threefold, i.e., it will lead to the spreading of the strength of the “India” brand across the globe. Along with it, the amendment will also lead to boost competitiveness for Indian Companies which will further lead to boost efficiency and growth for Indian Economy.   This amendment to the Companies Act will also contribute to the development of a clear and advanced legal regime for reverse-flipping the holding structure of companies incorporated in India by allowing the shifting of such holdings’ domicile to India.   Lacunae  There are certain lacunae concerning the amendment. These need to be clarified by the MCA at the earliest through detailed rules and regulations so that the companies incorporated in India can get the benefits of listing in a foreign exchange and explore the foreign market.  Certain points which need to be clarified by MCA at the earliest are that which kind of securities can be listed in the foreign exchanges, in which foreign exchanges could the listing be done and by which class of companies it can be done.  The amendment even talks about the power of the Central Government to exempt any class of public companies from procedural requirements under the Companies Act, but it doesn’t talk about what kind of exemptions and the procedure to give those exemptions along with the eligibility of the companies to avail those exemptions.   The other lacunae that revolve around these amendments are will the investors give the valuation same to the company listed on foreign exchange same as that they would have provided in India and also what will be the commercial benefits of the listing of a company incorporated in India on a Foreign Exchange.   There are other legal challenges, mainly related to the disparities between the compliances required by the companies in the Indian regime vis-à-vis the securities regime of the overseas countries where the company intend to be listed.   The implementation of the amendment will also require the amendments to the current legal regime governing the listing of securities on stock exchanges and foreign exchanges, namely FEMA, Companies Act and SEBI Regulations.   Suggestions for Proposed Framework  In order to do away with the above-discussed lacunae, the MCA could take its route through the following proposed frameworks.  The main question before the MCA being the criterion to choose the

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