The Corporate & Commercial Law Society Blog, HNLU

Category: Company Law

  • Mandatory Dematerialisation of Securities: Unveiling the new MCA Amendment

    Mandatory Dematerialisation of Securities: Unveiling the new MCA Amendment

    BY TARUN THAKUR, A SECOND-YEAR STUDENT AT NLUO, CUTTACK

    Introduction

    In an interesting move recently, the Ministry of Corporate Affairs (MCA) vide notification on 27 October 2023 introduced the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. Now, this amendment has inserted Rule 9B which stipulates that securities issued by private companies must be in a dematerialised form, and further mandates that both issue and facilitation of its existing securities should necessarily be in dematerialised form. This is a major leap as now securities can now only be in dematerialised form. After this amendment, with effect from 30 September 2024, a private company has to comply with the new rules.

    This amendment does not come as a huge surprise to the private companies as there were already discussions in the market from a long time that soon it will become mandatory that securities must be held in dematerialised form. Securities and Exchange Board of India (SEBI) in its report titled – Report of the Group on Reduction of Demat Charges that was released in early 2004 highlighted the risks involved when dealing with physical shares and SEBI also stated that it is playing an important role in in nurturing the growth of dematerialisation of securities in the country. So, from the report it is very coherent that even SEBI was in favour of dematerialisation at that time and was also working to achieve it. Moreover, the CLC working committee report was released last year in March 2022 which also hinted towards the new amendment that has been done to the Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS rules), as it noted the advantages of dematerialisation and also proposed that the Companies Act, 2013 (CA) should be amended and issue, transfer and facilitation of securities should be done only in dematerialised form.

    Tracing the origins of dematerialization

    Now before moving forward with the intricacies and challenges that this amendment poses it is crucial to know about dematerialisation and its inception. The term “dematerialisation” simply means converting physical shares and securities into electronic form and it was first introduced in the Depository Act, 1996 (DA 1996), as section 9(1) of the Act states that all securities pertaining to a depository shall be dematerialised.

    This was the inception point when securities facilitation and storage started in dematerialised form.  It is also noteworthy that Section- 29 of the CA broadened the scope of dematerilization as it mandates that the issuance of securities should only be in dematerialized form, thus complimenting the DA.  

     Understanding the rationale behind mandatory dematerilisation

    The main contention revolves around the rationale behind making dematerilisation mandatory for the private companies  Earlier in 2018, MCA amended the PAS Rules (2018 Amendment) which inserted Rule 9A and made it mandatory for the public companies to issue and facilitate existing securities in dematerialised form. The same Rules have been applied to the private companies via the new amendment with minor differences.

    Dematerialization combats back-dated transactions and improves transparency of the system. Backdating is the practice of changing a document’s date to an earlier one but when the documents pertaining to shares will be in an electronic form than backdating cannot be done, hence transparency will get bolstered.  Furthermore, dematerialization assists in real-time monitoring of any non-compliance of rules that has been done by any company due to its electronic nature and strict regulatory oversight.

    Challenges Ahead: Examining the Transition to Dematerialisation

    The current amendment exempts only small and government companies from mandatory dematerilisation in contrast to its previous 2018 Amendment, which in addition to small and government companies, also exempted Nidhi companies and wholly owned subsidiaries from mandatory dematerilisation. The reason cited for this was that these type of companies have limited number of shareholders. This gives rise to a pertinent question – why is there a diversion from the previous 2018 amendment, and what is the rationale behind not exempting Nidhi companies and wholly owned subsidiaries in the current amendment?

    One justification for non-exemption might be to fill in the gaps that existed in the 2018 amendment. An additional and more convincing rationale could be that the government is rapidly approaching dematerialization and any exemption granted to any company will eventually run its course. As a result, soon there will be no company that will be exempted from dematerialization. To maintain a cohesive framework, MCA must address the concerns of the stakeholders.

    Further, while extension of the dematerialized realm to private companies seems like a bold move, the compliance timeline given to the private companies is only 18 months i.e. till 30 September 2024, after which issuance and transfer of securities can only happen in demat form.  In India, there are 24,61,937 private companies that are currently registered. . All of these companies will be filing applications in the NSDL and CSDL for the conversion of securities. Consequently, the main concern is whether both these systems have the requisite digital infrastructure and technology to not only facilitate this conversion of securities, but also facilitate them in a fast and smoother way as massive amount of applications may pose operational challenges to both of them.

    Another  obstacle is that a private subsidiary company cannot qualify as a small company.  In case of subsidiaries of private foreign companies, they will also need to adhere to the new rules that have been notified. This will be cumbersome for both, the government and private foreign companies, as they will need to open a demat account with SEBI which requires them to complete a comprehensive Know Your Customer (KYC) process and also obtain a permanent account number (PAN).  This will be taxing for the government as there will be an influx of foreign entities trying to obtain PAN. Moreover, the private foreign companies will also face a challenge as even after obtaining PAN after a comprehensive process, they will have to incur a recurring cost to maintain their demat account.

    Course of Action for Private companies

    In order to comply with the new regulations, private enterprises will need to take a few steps as a result of this amendment. Initially, in order to facilitate the dematerialisation of securities, a private company must get the International Securities Identification Number (ISIN) for each security. Subsequently, the company must notify its shareholders of this information. A private company’s securities should only be issued and transferred in dematerialised form once its share capital has been dematerialised. Additionally, the dematerialisation of the securities held by the company’s directors and promoters should be required. The amendment does not provide for any penal sanctions for non-compliance but on non-compliance a private company will not be able to facilitate transfer of securities and if a there is any grievance a security holder has then it will be resolved by the Investor Education and Protection Fund Authority (IEPFA).

    Concluding thoughts

    This amendment though has some issues but this is a major transformation from the conventional system where the transfer and issuance of securities was done in physical form. Dematerialization shall help in  bringing more efficiency and transparency into the system. Further, from the regulators point of view, this will help them in tackling and mitigating benami transactions and theft by incorporating this new technology driven digital system. It is still debatable whether there is adequate infrastructure to sustain this paradigm shift. The government has to ensure that intact systems are placed so as to regulate and facilitate changes that this new amendment will bring.

    Electronic form of securities also helps in tracking real time market movements and see if there is any suspicious activity which cannot be done in the case of physical securities. While a company has to bear printing expense in case of physical securities, a much lower cost is involved in managing electronic securities. Also, the stringent KYC norms posed by this amendment give an overriding benefit to the government as it will help them to maintain a comprehensive database which would further help in bringing more transparency in the system and make it more robust.

    In the end, it can be stated that this is a major progressive reform but there are some concerns that needs to be addressed by the MCA.

  • Regulating Through Litigating: Quandary of SEBI

    Regulating Through Litigating: Quandary of SEBI

    BY ANSH CHAURASIA, A THIRD-YEAR AT RMLNLU, LUCKNOW

    Introduction

    Recently, the securities market regulator Securities and Exchange Board of India (‘SEBI’), equipped with broad powers, had difficulty defending its quasi-judicial orders. For instance, the Supreme Court (‘SC’) rejected SEBI’s appeal against the order of the Securities Appellate Tribunal (‘SAT’) in the matter of Apollo Tyres. SEBI was reprimanded by the SC for imposing a penalty for violation of SEBI (Buy Back of Securities) Regulations, 1998, but only after the show cause notice was issued to the respondent after more than a decade in 2014 for a cause of action that arose way back in 2003. SEBI passed the order imposing the maximum penalty in 2016, which was set aside by the SAT on grounds that it was not justified in imposing the maximum penalty. Subsequently, the revised penalty was quashed by SAT, against which SEBI approached the apex court. The SC affirmed the decision of SAT on the grounds of inordinate delay, a point of law entirely overlooked by the SEBI during the whole proceedings, right from the commencement of the investigation in 2014 to its appeal before the court on 4 December 2023. Although the SEBI Act has no limitation period per se for the issuance of show cause notice or the completion of the adjudication proceedings, the court’s earlier decision settled the position that such exercise of power must be done within a reasonable time.

    The aforementioned failure of SEBI in appealing before SC is part of a larger trend. At the heart of this regulatory struggle lies the legally untenable orders of SEBI and consequential litigation before SAT and SC. The redundancy of SEBI’s regulatory role resulting from such orders being litigated and decided against affects its credibility and has far-reaching implications for the key market regulator.

    The detrimental litigation

    The legislative history and precedent of the SC lucidly point to the cases appropriate for the appeal. The unamended Section 15Z, the appellate remedy to the High Court, was provided on any question of law or fact. After the amendment in 2002, the appellate court was changed from the High Court to the Supreme Court, and the grounds for appeal were limited to only questions of law, making it the current position. The SC interpreted the phrase ‘question of law’ in the backdrop of Section 15Z to arise when there is either erroneous construction or interpretation of the legal provisions of the statute or the general principles of law. The court also held that the power under Section 15Z has to be exercised while keeping in mind the sectorial laws and policy evolved by the tribunal acting under Section 15T through its interpretation of the Acts, Rules and Regulations. Therefore, the scope of the appeal and criteria of the cases appropriate for appeal are settled propositions of law.

    In its attempt to enforce its order, SEBI has appealed multiple times to the apex court despite a clear scope. In WhatsApp leaks case, SEBI imposed a penalty upon noticees for forwarding messages containing information about financial results. However, the order lacked any finding with respect to the originator of the message. SEBI’s order completely overlooked the fact that noticees merely forwarded the messages with sensitive information, which resulted in SAT overturning the order and vindicating SAT’s finding by the SC.

    In Tata Steel case, SEBI appealed to SC after its order to impose a penalty was set aside by SAT. SC refused to interfere because the order of SAT clearly established that the show-cause notice did not impute any charge upon the noticees. Consequently, the penalty was set aside. SC also remarked whether SEBI appealed only because their ‘ego was hurt’.

    In NSE Dark fibre case, SEBI appealed to SC after a setback from SAT when the disgorgement order for Rs 625 crore with interest was quashed due to a lack of nexus between the disgorgement order and the wrongdoing as required under Section 11B. Another order of fine was set aside by SAT in this case due to inadequate reasons to impose a maximum fine under Section 15J. Consequently, SAT reduced the quantum of the penalty. The move of SEBI demanding a stay on SAT’s order delineates an approach centred on recourses to enforce its orders rather than introspecting on its quasi-judicial adjudication process. Frequent dismissals in appeals whose fate could have been easily determined pinpoints the obdurate nature of the regulator.

    The ramifications of SEBI donning a litigator’s mantle

    The inefficiency of the adjudicatory process becomes apparent when shortcomings in SEBI’s order are pointed out by SAT and vindicated by SC. This directly dents the investor confidence that SC regards to be directly dependent upon the effectiveness of the regulatory mechanism. In SEC v Zandford, investor confidence was held to be the key objective behind the introduction of the Securities Exchange Act. Investors should not perceive the market as a system stacked against them. The Sisyphean undertones in SEBI’s approach to taking the case to the apex court, which has now been frequently falling to the ground, negate the fundamental credibility that the legislature intended to imbibe in the eyes of the investors.

    The SC interpreted the statutory right of appeal incorporated under Section 15T as scrutiny of SEBI’s broad power and emphasised the crucial role of the tribunal in the structural and consistent evolution of sectorial laws. Overlooking the shortcomings pinpointed by the order of SAT or requesting a ‘stay’ on its order before the apex court erodes the parliamentary intent and development of sectorial law.

    Against this backdrop, the problem of complying with basic technicalities is also a glaring issue. A lackadaisical approach in passing orders without providing adequate and sound reasons and bypassing the jurisprudence enunciated by SAT decisions is concerning.

    However, at the outset, SEBI incurs a financial burden every time it decides to go against an order of SAT, and the imposition of a similar burden on the opposite party is problematic. Justice Madan B. Lokur lamented this approach of government agencies litigating for the sake of litigating in a 2018 judgment. SEBI itself passed a proposal in 2019 mandating the appellants before SAT to deposit 10 per cent of the penalty so it could curb the appeals solely aimed at delaying the execution of its order. Therefore, SEBI does acknowledge the hardened mindset to resort to appeal, if not within itself yet among the parties aggrieved by its order, and it rightly points to the consequences of such an approach.

    The ripple impact of this approach is now perceptible as affecting institutional integrity. The SC reprimanded SEBI in the Suzlon case, asking the regulator to ‘regulate rather than litigate’. Although the SC granted the relief to SEBI, clarifying that the contested order would not be treated as precedent, it proceeded to remark. In Apollo Tyres case, SEBI was criticised for appealing against every order that went against them and directed to submit an affidavit of appeals they have filed.

    Conclusion

    The SEBI is a unique statutory body that has the role of regulating, investigating, adjudicating, and deterring the offender. We see an amalgamation of executive, legislative, and quasi-judicial functions within the SEBI. The broad powers conferred upon it have to be exercised to protect the interest of the investors and inspire confidence among the public. SEBI ought to weigh the above considerations before moving to the apex court. SEBI brought itself into this position where it has been reprimanded multiple times for ascertaining the cases only to meet the on-paper requirements. However, the situation requires adherence in spirit. This obstinacy on the part of SEBI is a Faustian bargain where it is giving up institutional credibility for no change in consequences and further losing an opportunity to look into regulatory mechanisms. Any decision to appeal must pass the muster of the requirements of appeal irrespective of the fact that SEBI has been aggrieved at the hands of the SAT.

    The striking similarity in all cases challenged before SC and quashed before SAT is SEBI’s failure to substantiate its allegations and insistence on enforcing its order. Changes in its regulatory and investigatory mechanism can lower the recurrence of these defects. Recently, the SC expert committee constituted to investigate the Adani-Hindenburg made significant suggestions for the prudent and effective exercise of the broad power at SEBI’s disposal. It suggested an ‘effective enforcement policy’ to lay down criteria by which SEBI must decide whether to initiate the proceeding either to impose a monetary penalty, to take a remedial action, or to take a punitive action. Such criteria should be clear and non-arbitrary. Laying down criteria would delineate an objective requirement of specific conditions to initiate proceedings, consequently leading to a proportionate exercise of regulatory powers.

  • SEBI’s Plan to Amend Material Disclosure Mandates: Needless Escalation of Compliance Burden?

    SEBI’s Plan to Amend Material Disclosure Mandates: Needless Escalation of Compliance Burden?

    BY HARSHIT SINGH AND AKSHATA MODI, THIRD-YEAR STUDENTS AT GNLU, GUJARAT

    A.   Introduction

    A robust and continuous disclosure mechanism for listed entities is quintessential to ensure transparency and timely dissemination of material information and events. Such a mechanism is necessary to maintain the efficiency of capital markets. A strong disclosure regime also helps to reduce any information asymmetry among market participants and enables them to be levelled at the same footing. Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 [“SEBI LODR Regulations” or “Regulations”] governs the disclosure of material events and information by listed entities to stock exchanges. Disclosures under this regulation are classified into compulsory disclosures and discretionary disclosures. 

    Under Regulation 30(2) of the SEBI LODR Regulations, events specified in paragraph A of Part A of Schedule III are deemed to be material events and are mandatorily required to be disclosed by listed entities. Such events include matters related to mergers and acquisitions, insolvency, capital structuring and outcomes of the board of directors’ meetings, among others. At the same time, disclosure of events listed in paragraph B of Part A of Schedule III is discretionary and is determined by the materiality policy of the companies. 

    To review and strengthen the disclosure requirements of listed entities, the Securities & Exchange Board of India [“SEBI”] has recently issued a consultation paper [“Consultation Paper”], proposing drastic changes to Regulation 30 of the SEBI LODR Regulations. The Consultation Paper comes against the backdrop of several complaints received by SEBI in the past about delayed, inaccurate and misleading disclosures being done by the listed entities. Through this article, the authors aim to discuss the key changes proposed by the consultation paper and analyse their probable impact on the compliance burden of listed entities. 

    B.    Key changes proposed in Regulation 30 of the SEBI LODR Regulations

    1. Setting up a quantitative criterion for determining materiality 

    The Regulations currently prescribe for events and information falling under paragraph A of Part A of Schedule III to be classified as material events, and for their disclosure to be mandatory. However, disclosure of events falling under paragraph B is discretionary and would be determined based on the ‘materiality policy’ of the entity, as provided under Regulation 30(4).  Presently, the regulation stipulates for a listed entity to consider the following criteria while determining the materiality of events:

    1. the omission of an event will or is likely to result in alteration or discontinuity of information already publicly available, or
    2. the omission of an event is likely to cause a significant market reaction if such omission comes to light later.

    As per the current norm, events or information falling into either of the categories shall be deemed to be material. 

    Regulation 30(4)(c) confers upon the board of directors wide discretionary powers for determination and disclosure of material events. Through the Consultation Paper, SEBI proposes to move towards an objective, quantitative and non-discretionary threshold for determining the materiality of events and information. The proposed changes aim to bring uniformity to the materiality policy across all listed entities and limit the discretion conferred upon the board for disclosure of events specified under para B. SEBI has suggested the three below-mentioned minimum thresholds for determination, upon fulfilment of any one of which, an event or information would be considered material [“Materiality Test”]. 

    1. Two per cent of turnover as per the last audited financial statements;
    2. Two per cent of net worth as per the last audited financial statements;
    3. Five per cent of the average profit or loss of the past three years. 

    The Consultation Paper proposes to add these thresholds to Regulation 30(4)(i) and accordingly, make it mandatory for the materiality policy of all listed entities to provide for these triggers. Furthermore, dilution of these thresholds by the entities would be prohibited, and strict adherence would be prescribed for the determination of materiality. 

    2.     Reduction in disclosure making timeframes 

    Regulation 30(6) presently mandates all listed entities to disclose events or information falling under Part A of Schedule III to stock exchanges no later than twenty-four hours from the occurrence of such event or information. However, SEBI has recorded several instances in the past whereby the entity made the disclosure at the last hour after such information had already been publicly circulated through media. To address this delay in disclosure, the Consultation Paper has proposed to reduce the twenty-four-hour disclosure time limit to twelve hours. Further, it has also been recommended that the disclosure of events or information emanating from the board of directors’ meetings should be made within thirty minutes from the end of such meeting. 

    3.     Verification of rumours

    Presently, Regulation 30(11) provides that a listed entity on its own, may refute or confirm any rumour or reported market information; however, the same is not obligatory. SEBI believes it to be essential to verify rumours in order to avoid any false market sentiment leading to widespread speculation and price manipulation. As a result, through the Consultation Paper, SEBI has proposed to make it mandatory for the top 250 listed entities (by market capitalisation) to verify “any market rumour, or reported event or information which may have a material effect on such entity”.

    C.   Analysis

    1.     Rigidity in the quantitative disclosure criteria and potential overflow of information

    Setting up quantitative criteria for determining the materiality of events significantly reduces the discretion of listed entities for the disclosure of events and information. It creates a more objective disclosure regime, resulting in better clarity for investors and for the listed entities. However, establishing the Materiality Test may lead to the disclosure of wide-ranging events and information to the public. Such disclosures may be redundant and may not be having any significant or material impact on the entity’s operations or business. An overflow of information about a listed entity could lead to a greater degree of speculation in the market, thus, sharply affecting the stock prices of such an entity. Additionally, the proposed materiality threshold is too low and might result in a company disseminating a large volume of superfluous information through its disclosures. Most of all, it gives rise to a greater probability of crucial disclosures being bypassed by investors amidst an overflow of information to the public, which potentially makes the disclosures counter-productive.

    2.     Verification of market rumours could lead to premature disclosure of sensitive information 

    Verifying any information or event reported in print or digital media may be challenging for companies. Such challenges arise because while conforming or refuting any rumour, the listed entity will have to take a stance on a matter, whichcould be premature and might not have crystallised into a disclosure requirement otherwise. Verifying all rumours reported by media could be particularly challenging for companies undergoing mergers and acquisitions [“M&A”]. In public M&A transactions, price certainty and success of a deal are contingent on the deal’s confidentiality. This is because these transactions must take place above the floor price prescribed by SEBI, and this floor price largely depends on the historical price movement of the stock. As per the proposed changes, if there is any rumour in the media about the M&A transaction, the company would be compelled to confirm such speculation and be forced to divulge details of a half-baked deal. Such disclosure would drive the stock prices too high and jeopardise the deal’s commercial viability. 

    3.     Potential disclosures of incomplete Unpublished Price Sensitive Information

    Another concern is the premature disclosure of Unpublished Price Sensitive Information [“UPSI”], which could prove to be counter-productive to the public interest. SEBI (Prohibition of Insider Trading) Regulations, 2015 mandates for UPSI to be disclosed upon becoming concrete and credible. Disclosure of UPSI at the correct time is essential to ensure information symmetry in the market and to minimise price speculation. However, the Consultation Paper proposes to make it mandatory for a company to disclose and confirm information regarding any market rumours, even on deals which are currently in progress and are not yet confirmed. There will be sharp reactions in the market to any such disclosures, and the shareholders consequentially might lose if the deal falls through. Furthermore, by verifying market rumours, the company might disclose an incomplete UPSI, which would not be in the best interest of the investors.  

    D.   Conclusion

    The proposed changes by SEBI would substantially increase the compliance burden of listed entities. It could lead to a tsunami of disclosures and overburden investors with needless information which may not carry any material impact on the entity’s operations. The consultation paper further proposes for the top 250 listed companies to corroborate market rumours. This would make disclosures considerably onerous and would require companies to beef up their existing capacities to track and reply to all media reports. On implementation, the proposed amendments could cause companies to reconsider their listing plans. It could also potentially inhibit the growth of capital markets. Therefore, it is the view of the authors that SEBI should reconsider the changes proposed in the Consultation Paper and attempt to strike a balance between protecting investors’ interests and the compliance burden of listed entities. 

  • Zee vs Invesco: Shareholder Activism or Struggle for Power?

    Zee vs Invesco: Shareholder Activism or Struggle for Power?

    By Monika Vyas and Ayushi Narayan. Monika is an associate at Khaitan & Co. Ayushi is an associate LexInfini.

    Shareholders Activism inter alia includes a situation wherein the shareholders of a company use their equity stake in the company to try and make governance decisions by influencing or controlling the actions of the directors of the corporation. Such structural changes or an attempt to improve the corporate governance are made by the shareholder activists to improve their returns on the investments made in the company. Recently, there has been a trend of rising shareholder activism in the Indian equity market. This article will discuss the recent trend of shareholder activism in India in the wake of the recent case of Zee Entertainment Enterprise Limited and Invesco Developing Markets Fund. The Bombay High court order is analysed in relation to the recent treatment of shareholder activism in India.

    Rise in shareholder activism

    Few examples of shareholders activism in the recent years are that of Cyrus Mistry being removed as the director of Tata Sons by an EGM held on February 2017. In March 2020, during market crash, Vendanta Ltd. was a company which wasunsuccessful in delisting itself from the stock exchange as it received resistance from its shareholders. Further its institution shareholder Life Insurance Company, tendered its share at a high price which forced the promoters to withdraw the offer. Puneet Bhatia, head of TPG Capital Asia was removed from the board of Shriram Transport Finance Corporation Ltd (“STFC”), as the minority shareholders voted against a resolution to re-appoint him as a member of the board due to his lack of sufficient attendance in board meetings. Interestingly, just after a week of Bhatia’s removal from the board of STFC, he was renamed to the board vide a press release from STFC.

    Facts of the case 

    One of latest examples of shareholders activism in India has been that of Invesco Developing Markets Fund (“Invesco”) against Zee Entertainment Enterprises Limited (‘Zee”). As a way of background, it may be relevant to note that Invesco which along with OFI Global China Fund LLC, hold a 17.88% stake in Zee, was interested in Zee to strike a deal with Reliance Industries Ltd. However, the discussions between Zee’s CEO and Reliance Industries didn’t turn out to be fruitful. On the other hand, Zee has now finalised merger with Sony Group Corporation’s India Unit, after conducting three months of due diligence. The dispute arose when Invesco requisitioned the board members of Zee to call for an extraordinary general meeting (“EGM”), for the purpose of making structural changes in the company by revamping the board and removing the managing director and Chief Executing Officer and suggesting six new independent board members.

    Zee rejected the proposal made by Invesco with respect to the change in board of members of the company and cited legal infirmities in Invesco’s request. As Zee denied Invesco’s request to revamp the board, Invesco sent a requisition notice to Zee for removal of the managing director and CEO Punit Goenka and to further appoint six new independent board members identified by Invesco. As per the provisions of the Companies Act, a shareholder holding more than 10% stake in a company can seek an EGM. In the event the board declines, the shareholders as per Section 100 of the Companies Act, can convene the EGM itself. Upon Zee’s denial to act upon the said notice, Invesco considered ZEE’s behaviour to be oppressive and filed an appeal before National Company Law Tribunal (“NCLT”) to direct ZEE to act upon Invesco’s notice for EGM. While the said matter was pending before the tribunal, Zee filed an appeal before the Bombay High Court for an injunction against Invesco’s notice for EGM. In the said appeal, Zee stated the notice to be illegal and that it could not implement the same. Further, Zee’s refusal to implement the said notice was within the purview of law and justified.

    analysis of the issues

    Issue of Requisition of EGM

    The issues in this case are quite complex and leads to different outcomes based on the interpretation. The first issue is, whether Zee is obligated to call EGM upon a valid requisition. The court issued the injunction whereby the requisition for the EGM was not granted based on the rationale that objections of Zee were justified and resolutions were illegal. It observed that if the Board itself cannot act call for EGM on such resolutions, then there’s no way that the shareholders would be kept at higher pedestal.

    Opinion- Section 100(2)(a) of the Companies Act, 2013 empowers the Board to call for EGM on requisition of minority shareholders. It reads as thus: the Board shall, at the requisition made by, in the case of a company having a share capital, such number of members who hold, on the date of the receipt of the requisition, not less than one-tenth of such of the paid-up share capital of the company as on that date carries the right of voting, call an extraordinary general meeting of the company within the period specified in sub-section (4). We should interpret the word ‘shall’ in Section 100 of the Companies Act, 2013 to find the legislative intent behind this section. The choice of word ‘shall’ indicates that is must to call the EGM. However, the literal interpretation can sometimes overlook the intent of the legislation. By giving the alternative route in Section 100(4) itself of conduction of the EGM lest the Board shall fail to act, the word ‘shall’ should not be used as ‘must’. It reads as thus: If the Board does not, within twenty-one days from the date of receipt of a valid requisition in regard to any matter, proceed to call a meeting for the consideration of that matter on a day not later than forty-five days from the date of receipt of such requisition, the meeting may be called and held by the requisitionists themselves within a period of three months from the date of the requisition. 

    Thus, we can say that the Board is well within its right to use discretion otherwise it can always be held hostage to the whims of the shareholders who intend to misuse the provisions. Having said this, it is also unclear why this in-built remedy of shareholders proceeding to hold the meeting was not granted to Invesco by the Court. 

    Issue of Legality of Propositions in the Resolutions

    This brings us to the next issue of whether the proposed resolutions were legal for requisition of EGM. For this, interpretation of the word ‘valid’ in section 100(4) of the Act was made the issue. The shareholders are allowed to hold the EGM themselves in case the Board fails to act within the stipulated time provided the requisition is valid. The court concluded that there was no question of interpretation of word ‘valid’ but only of the illegality of the resolutions proposed. It was established that the represented matters by the shareholders were illegal and hence could not be implemented. It held this based on the following reasoning:

    • Non-compliance of Ministry of Information and Broadcasting (“MIB”) guidelines, SEBI (Substantial Acquisition of Shares and Takeovers) (“SAST”) Regulations, 2011 and Competition Act, 2002

    The guidelines of MIB require that before effecting any change in CEO/Board of Directors, its prior approval must be taken. Approval of Competition Commission of India (“CCI”) is also required in the eventuality that Invesco is in control if it succeeds in appointing majority of directors. It also attracts the provisions of SEBI SAST Regulations, 2011 which provides for such regulatory approvals. In this case because the approval was not taken from either of them, the resolution was termed illegal by the court on grounds of non-compliance with the guidelines and the statute.

    Opinion-It is unclear whether the word ‘change’ applies to only fresh appointments or its scope covers resignations/removals too as in this case. The guidelines cannot be meant to stop someone from quitting. 

    Secondly, one must also question if the mere non-compliance with the guidelines and statutes would amount to illegality. As it is, the passage of resolution is contingent upon the approval of MIB and CCI. One cannot term it illegal when it is in its nascent stage and yet to fulfil the conditions for its acceptability. If, at all, it is inconsistent, the same would be declined by the regulatory body and need not be decided by the court. Thus, terming the resolution illegal when it is still premature cannot be held in good faith. Also, it would be Invesco who would be responsible for the consequences of not having the approval of competition commission. Hence, on this ground one cannot term the resolution illegal. 

    • Violation of SEBI LODR Regulations and Section 203 of Companies Act, 2013

    Invesco proposed six independent directors to be appointed named by it in the resolution. This is violative of Regulation 17 of SEBI LODR which states that the company should have optimum numbers of executive and non-executive directors processed by the nomination and remuneration committee. Further, the court was of the view that the proposition to remove the managing director and CEO infringed upon section 203 of the Act which envisages that every company must have CEO, managing director or manager.

    Opinion-While SEBI LODR talks about appointment through nomination and remuneration committee, it also envisages situation where appointments are initiated by the board of directors. Thus, the court through its order has created the situation of polarisation between the Companies Act, 2013 and SEBI LODR Regulations. Further, the violation under Section 203 of the Act is curative in nature meaning whereby it can be cured within six months of the removal of CEO.

    Concluding remarks

    There is no doubt that the order of the court is detrimental to the shareholder activism in India. From the above analysis, we can see that Invesco is not entirely in the wrong. However, Invesco has stepped on its feet by not being transparent about the issues why it wants to remove the CEO. The intention of Invesco is not clear as to whether the proposed resolutions are on account of bad governance issues of Zee or to exercise control by appointing independent directors, the names which it has not justified for appointment. Earlier, this year, it had also approached Goenka, CEO with the proposalto merge Zee with media entities of Reliance Industries Ltd. which failed. It is not clear why it did not approach the Board directly. However, the court could have been lenient in its interpretation of the provisions since the order wards off the shareholder activism which could have been for the benefit of the company. However, as Invesco has contested the Single Bench decision and the case has now been taken up by the Division Bench of Bombay High Court, one can be hopeful that the decision ushers in towards welcoming this concept. It would be especially interesting to see how the case unfolds in light of the recent merger with Sony which has facilitated the continuation of post of CEO being held by Punit Goenka.

  • Recent Trends: Measures taken by SEBI to Regulate the Indian Capital Market

    Recent Trends: Measures taken by SEBI to Regulate the Indian Capital Market

    By Nivedita Rawat, fourth-year student at AMity law school, noida

    Securities Exchange Board of India [“SEBI”] acts as a watchdog for the Indian Capital Market. The Board enacted by The Securities and Exchange Board of India Act, 1992 (“the Act”) has been accorded with comprehensive powers under the Act. The preamble of the Board describes its functions as to “protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto”. In addition to the intent behind the establishment of the Board, Section 11 of the Act lays down the functions of the Board that clearly illustrate “it shall be the duty of the board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit”. This provision exemplify that SEBI has been authorized to take any such measures that in its opinion would protect the interest of the investors and would aid to regulate the market. It’s the reason SEBI keeps on revising and updating by formulating new measures or directions that make securities market conducive, safe and friendly for all kinds of investors that include retail or institutional investors. In the past few months, during and after COVID-19 lockdown times, there have been some key instrumental measures that have been taken by SEBI, such as:

    1. Introduction of UPI and Application through online interface for Public Issue of Debt Securities

    SEBI, in its circular dated November 23, 2020 announced the introduction of Unified Payments Interface [“UPI”] Mechanism and application through online interface for public issue of debt securities. This system has already been in existence for issue of public shares since January, 2019 but is now made available for public debt securities through this circular issued by SEBI under Section 11 of the Act. The said mechanism is in addition to an already existing specified mode under Application Supported by Blocked Amount [“ASBA”]. It would be available for securities opening up for issuance from January 1, 2021 for applications up to a limit of 2 lacs. The concerned entities include National Payments Corporation of India [“NPCI”], UPI and the Sponsor Bank. 

    Analysis: The measure taken up by SEBI is extremely upright as it will make the process of subscribing to debt securities simple for the retail investors, will increase the investor base as the investors will have an option to use UPI interface to block their funds for debt securities during an issue through their brokers/intermediaries. Investing into debt instruments would be as similar as subscribing to equity initial public offerings [“IPO”] as it is now less time consuming and more digitalized. Although the initiative is bound to enlarge the responsibilities of the stock exchange, intermediaries and the sponsor bank, but the prevailing times call for such action as a physical process of issue of debt securities is not only a traditional approach but also make the process cumbersome altogether. Moreover, with the availability of UPI mechanism for subscription of debt securities, enhanced participation by the retail investors is anticipated. It is mainly because until now, the debt instruments had usually been subscribed by the high net investors and institutions, but such a measure by SEBI might change up the things and intends to encourage household investors to be a part of debt market as well.

    • Increased Efficiency of E-Voting mechanisms for Meetings 

    The Companies Act, 2013 mandates a company to provide e-voting facility to the shareholders. Section 108 of The Companies Act, 2013 along with Rule 20 of the Companies (Management & Administration) Rules, 2014 provide for such a facility. Additionally, regulation 44 of the SEBI (Listing and Obligatory Disclosure Requirement) Regulations, 2015 also contains provision to this regard.

    On Dec 09, 2020, SEBI released a circular directing the listed entities to provide e-voting facility to its shareholders. The mechanism called for a system wherein the shareholders will have an option to forecast their votes directly through their Dematerialized [“DEMAT”] accounts with the depositories which’ll forward their votes to the E-voting service providers [“ESP”]. The process would take place in two phases. First phase, wherein the shareholders can cast their vote either through the depository’s website or their DEMAT account. After which, the depositories will give the confirmation of the votes to the shareholders once received from ESP’s. In the second phase, the depository will set up an OTP system for login. For this new and much efficient mechanism, SEBI has also asked the Depositories and the ESP’s to provide helpline services to shareholders, whereas ESP’s have been directed to provide links for disclosures by the companies and the report of proxy advisors for investor’s awareness. 

    Analysis: The entire proposed mechanism aims to ease out the task of casting a vote for the shareholders. Elimination of registration with ESP’s and authentication from the point of depository will ensure security and legitimacy of the votes of shareholders. This is unlike the earlier mechanism in which the shareholders had to visit the ESP’s website to cast their votes with distinct usernames and passwords that created the voting procedure tedious and not very simple. The mandatory updating of key details of shareholders regularly by the stock exchange will also help the entities to be in contact with their users for one stop communication. Additionally, the initiative of providing the link for the disclosure by the entities and links to proxy advisor’s website etc.’ would guide the votes of the investors based on sound rationale, and would also enhance the participation in the e-voting process by the non-institutional shareholders or retail shareholders. 

    • Reclassification rules of promoters as public shareholders and disclosure of their shareholding pattern

    Rules for reclassification of promoters have been mentioned in Regulation 31A of SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015. On 23rd of November, 2020, SEBI released a consultative paper on the same that proposed a few amendments to the existing rules pertaining to promoter reclassification. It composed of the following proposed amendments:

    1. Promoters with shareholding up to 15%, seeking to reclassify should be allowed with shareholding’s status quo maintained.
    2. One-month duration for meeting between board & shareholders and for reclassification request to be put up before exchange.
    3. Promoters seeking reclassification pursuant to an order/direction of government or regulator should be exempted like reclassification pursuant to resolution approved under Insolvency and Bankruptcy Code, 2016. 
    4. Promoters seeking reclassification pursuant to an offer should be exempted from the reclassification procedure where intent for reclassification is mentioned in the offer letter which needs to be in accordance with SEBI Substantial Acquisition of Shares and Takeover [“SAST”] Regulations and Regulation 31A(3)(b) and 31A(3)(c) of SEBI(LODR) Regulations, 2015. 
    5. Pursuant to an offer, where the former promoters aren’t traceable by the listed entity or not cooperative towards it, exemption from reclassification procedures should be given if erstwhile promoters aren’t in control of the company and diligent efforts have been made by the listed company to reach out to them.
    6. Mandatory disclosure of promoters.


    Analysis: SEBI after having acknowledged the shortcomings of the existing process of promoter reclassification, has proposed amendments which seeks to bring orderliness in the procedure of promoter or promoter entity reclassification. There have been instances where a person is tagged as a promoter of a company in spite of having zero shareholding, this not only influences the choices of the investors but also makes the functioning of a company strenuous. The application of one-month deadlines between shareholder and board meetings and for putting up reclassification request by entity in front of exchange has been done with the intent to Fastrack the whole process and not to have any undue delay. The exemptions made for promoters pursuant to an offer have been proposed keeping in mind the procedural formalities which can be set aside in case where the stance of a promoter has already been clear or when it had been impossible to reach out to them. The disclosure of shareholding pattern by a promoter even in case of zero shareholding is a proposed amendment that aims to curb the companies from misusing the law due to existing loopholes. 

    Conclusion

    Additionally, SEBI has been looking forward to revamp the grievance redressal system for the stock exchange, for which the regulator issued directions to the Bombay Stock Exchange regarding the clients of the defaulting trading members. All inclusive, SEBI keeps on making endeavors to structure the capital market in the interest of the investors, listed entities or any stakeholders that form a part of the capital market. The recent measures have been taken keeping into account, the shortcomings of the laid down procedures or regulations of investing in share market. The Indian capital market should essentially avail the benefit of the rise in fintech like any other sectors of the economy. Depository participants such as Zerodha, Angel broking, Motilal Oswal Financial Services etc. have reported massive increase in the newly opened DEMAT accounts. It thus becomes imperative to have stringent securities law in place at the moment, especially when the number of retail investors have leapt up to record high numbers throughout the period of lockdowns in the country.

  • Proxy Advisors: A Look at the Growing Intermediary & Increasing Regulations

    Proxy Advisors: A Look at the Growing Intermediary & Increasing Regulations

    BY ABHIRAJ DAS, FOURTH YEAR STUDENT AT GNLU, GANDHINAGAR

    In the past few years, there have been some striking recommendations and red-flags being given by “proxy advisors” regarding corporate-governance of some of the leading incorporates of India. A few instances can be red-flagging the 35-years-long tenure of RIL’s auditors, or recommendation in the Tata-Mistry skirmishes. Very recently, in Crompton-Greeves Power, a huge value depreciation for minority shareholders owing to the issues of corporate governance & conflict of interest of independent director was highlighted.

    What are Proxy advisory firms? 

    Proxy advisory firms are independent analyst offering analysis and voting recommendations to the institutional shareholders and investors. Securities and Exchange Board of India (SEBI) defines proxy advisors as “a person who provides advice in relation to the rights of the shareholders and investors including recommendations on public offer or voting on agenda items.” The term “proxy-advisory” originates from the concept of “proxy voting” where shareholders authorizes other person to vote on his/her behalf, and offer services related to proxy-voting by aggregating-and-standardizing information.

    Roles/impact

    It is a gospel truth that shareholders do not pay much attention to the voting in the AGMs or EGMs. In large public listed companies, public shareholders have relatively small stakes and there remains a collective-action problem and “shareholder-apathy” which lead them to vote as per the vox populi, and institutional investors like mutual funds, banks, DFIs, insurance companies, etc. cannot possibly make an well informed decisions in such voting owing to the huge-number of stocks they handle. Proxy advisory firms (PAF) undertake heavy-data researches and analyse the major agendas which are subjected to voting, providing detailed reports on voting to strengthen the corporate governance within the company.

    The recommendations by these independent and expert firms have tendencies of de-stabilising (or re-stabilising) management and raise corporate governance standard as these advisories may be related to voting against re-appointment of independent directors, auditor’s appointment, M&A and corporate structuring where there seem possibilities that public shareholding might erode, and thus, have become important corporate intermediaries. While proxy advisories in India are still at nascent stage, the American ISS deal with around 44,000 meetings in 115 markets yearly to execute more than 10.2 million ballots representing 4.2 trillion shares. A recent study has shown that around 83% of ‘vote against’ recommendations include mainly “reappointment of non-executive directors” and “remuneration of statutory auditors”.

    Issues concerning the PAF

    In addition to the potentially huge impacts these firms have, there are several downsides as well. Sometimes, simultaneously these firms also offer voting advices to the shareholders of the same companies to whom they provide corporate governance recommendations which leads to conflict of interest. There are conflicts also when the key managerial persons of proxy firms hold important positions in the subject companies. Another major concern is that these advisory firms are not subjected to fiduciary duty to show that their recommendations are in the best interest of shareholders and the corporations. Independent study has shown that ratings used by these firms do not accurately foretell subject’s performance. Further, there have been diametrically opposite opinions on the same issue. Concerns are also there that they sometimes provide distorted recommendations to further their own interests. Another issue is that even when any error is highlighted they have not always been rectified.

    Recent Regulatory Developments in the US

    The Concept-Release of 2010 by the US Securities and Exchange Commission had raised concerns inter alia regarding the influence proxy advisors had over their clients “without appropriate oversight” or “an actual economic stake in the issuer”. Amendments have been adopted by SEC allows investors utilising proxy voting advice to receive “more transparent, accurate, and complete information on which to make their voting decisions.”

    In July 2020, Exchange Act Rule 14a-1(l) has been amended to include if a person (includes entity) offers proxy advises, it shall constitute as “solicitation” under s. 14a and that such persons shall be generally required to file and furnish information regarding definitive proxy statements. Further, paragraph ‘A’ is inserted to Rule 14a-1(I)(1)(iii) clarifying that the terms “solicit” and “solicitation” include any proxy voting advice.

    Addressing the issue of conflict-of-interest, amendment has been made to Rule 14a-2(b) which now obligates that proxy-voting recommendations includes the conflicts-of-interest disclosure specified in new Rule 14a2(b)(9)(i). Further facilitating informed decision-making by the clients of such advisors, a new Rule 14a-2(b)(9)(ii) has been adopted which requires that “proxy voting advice business” adopt and publicly disclose written policies and procedures. This new term provides flexibility to cover future business models which may engage in type of advice the rules aims to address, and does not merely base upon the businesses which presently provide such services. It has also been provisioned that the registrants i.e. the subject companies shall also be provided with the report of the voting-recommendations under Rule 14a-2(b)(9)(ii)(B). Para ‘E’ has been inserted to Rule 14a-9 to define the scope of ‘misleading’ which means “the failure to disclose material information regarding proxy-voting-advice, such as the business’s methodology, sources of information, or conflicts-of-interest.” Adoptions of these amendments addresses the different concerns with the proxy firms.

    Recent Regulatory Developments in India

    SEBI brought SEBI (Research Analyst) Regulations, 2014 within a few years of the advent of the industry in India. The Regulation requires such entities to register with SEBI and lays down internal policy, and also imposes a fiduciary duty to offer detailed disclosures if required. Further, firms must proffer unbiased advice based on reliable information. Under regulation 23, they are also required to disclose the reasoning to the public. An eight-point Code-of-Conduct for firms and their employees has been adduced which broadly covers honesty & good faith, diligence, conflict of interest, insider-trading or front-running, confidentiality, professional standards, compliance, and responsibility of senior management. Recently, SEBI has introduced Procedural Guidelines for Proxy Advisors and Grievance Resolution between listed entities and proxy advisors. These circulars are the result of SEBI Working Group which recommended improvements through disclosures of conflict-of-interests, voluntary best practises, setting up code-of-conduct which are to be followed by proxy advisors on “comply or explain” basis. One of the remarkable procedures required is that the firms must also share the recommendation to the subject company as well and to include company’s response thereto as addendum. This will allow subjects to clarify on any aspect which it considers have not been completely regarded while extending the proxy recommendations.

    It is very much evident that the circulars issued by SEBI are similar to the US SEC issued Rule Amendment for Proxy Voting Advice 2020 in various terms such as affording subject companies a copy of the recommendation, client access to company response, conflict of interest disclosure norms, etc. However, given the fact that Indian industry for proxy advisors is still at nascent stage, and the US market is relatively aged, it was prudent only on the part of the regulator to consider the US model. The advisory firms are required to disclose the recommendations on their website and are mandated to devise policies for voting advices including the situations when voting-recommendations are not to be offered. These policies are required to be reviewed at least once a year.

    It is pertinent to note that there is no specific mention about foreign proxy-advisory-firms in either of the circulars, thus it will be interesting to observe how the code-of-conduct, as was recommended by the Working Group, are applied to them. Another interesting aspect is that compulsory disclosures of revenue models, key income-sources, clientele have not been provisioned. Since there is a possibility of conflict-of-interest in situations where the firms may retaliate against the incorporates who didn’t avail their services by way of aggressive advices to their clients, though proxy advisors are required to disclose and mitigate any “potential” conflicts, the disclosures of the clientele could have offered reassurance against such recommendations. However, in case of any grievance the listed entities are at liberty to approach SEBI which shall investigate the matter considering non-compliance with regulation 24(2), which provides for Code-of-Conduct, r/w regulation 23(1) of SEBI (Research Analyst) Regulations, 2014 or the procedural guidelines circular recently issued. If any contravention is established, it can lead to inter alia suspension/cancellation of the registration under SEBI (Intermediaries) Regulations, 2008.

    Conclusion

    Shareholder’s votes have the potential of wide consequences on corporate decisions and governance of a company which in turn affects the market and economy ultimately. Therefore, there lies a fiduciary responsibility upon the institutional investors, who represent large number of shareholders, to vote in the best interest, and attributes a huge relevance to the recommendations made by the proxy-voting advisors. The extensive impact such recommendations may have and the possible conflict-of-interest which may arise are the major reasons for regulating these proxy-advisors.

    Having higher standards of transparency and oversight will certainly enhance the quality and credibility of this intermediary. These various aspects would require that investors take the ultimate decision based on the proxy advices and the company’s responses thereto, which would lead to more-informed exercise of voting rights and at the same time ensure that proxy advisors do not ‘control’ the voting. This sector needs nurturing at the hands of regulators & this could prove to be a major step. But time will only tell how these rules perform.

  • Getting the nod: Intersection of Companies Act & RERA

    Getting the nod: Intersection of Companies Act & RERA

    BY BODHISATTWA MAJUMDER, FIFTH YEAR STUDENT AT MNLU, MUMBAI

    Winding up of companies have been dealt by the company law tribunals jointly under the Companies Act, 1956, (“Former Act”), Companies Act, 2013 (“Act”) and Insolvency and Bankruptcy Code 2016 (“IBC”). In order to avoid jurisdictional disputes and for the speedy disposal of pending proceedings, the Tribunal has been given various powers under the legislations to oust the jurisdiction of other civil courts. One of them being Section 279 of the Act (formerly Section 446 under the former Act) which makes the leave of the tribunal mandatory for commencement/pendency of ‘any suit or legal proceeding’, after passing of an order of winding up or appointment of a liquidator in case of a new suit. However, there have been various instances of conflict between jurisdiction of the Tribunal and other specialised courts. These disputes have been brought due to the conflict between the Companies Act and other specialised legislations of niche subject areas such as Admiralty Law, Insurance Law or other Bankruptcy Laws.

    In the same vein, there arises a question of law regarding the requirement of leave of the Tribunal to commence or continue legal proceeding when placed against the authorised brought by the Regulation and Development) Act, 2016 (“RERA”). This article delves in the above question of law in the context of Kuldeep Kaur v. MVL (“Kuldeep Kaur”) where the same issue had been dealt summarily. This article strives to provide detailed analysis on the subject, based on the issues of law which may arise when the appeal is made against the Kuldeep Kaur ruling.

    RERA vis-a-vis Companies Act – A Comparative Approach

    Under the principles of statutory interpretation, a later statute always abrogates an earlier statute (leges posteriors priores contraries abrogant). However, the exception to this being that a special statue always prevails over a general statute (generalia specialibus non derogant). A specialized act operates in a limited field and its application is over a limited nature, as decided by the legislation while drafting the law. The Parliament while passing a specialized statute devotes it complete consideration over a subject and passes the statute tailor-made for achieving a specific purpose. In cases where there exists a conflict between two specialized legislations, with each having the non-obstante clause to override any other legislation, the conventional method of interpretation cannot be considered. In these cases the Court bases its decision on the consideration of policy and purpose behind the acts needs to be understood along with the language of the legislature.

    Time and again it has been argued that the Companies Act also operates in a specific area of law (Company law), and hence should be treated in par with the specialized legislations. However, the case laws have majorly maintained the stance against Companies Act that the Companies Act is an act relating to companies in general, thus being a general law. Be it against the RDDB Act in Allahabad Bank, Negotiable Instruments Act in Indorama Synthetics, or Admiralty Act in Raj Shipping. The RERA Act came into effect on 1st of April, 2016 for the purpose of laying a structure related to real estate sector and protection of consumers by speedy disposal of cases. It contained no provisions as such which provided for seeking leave of company law tribunals under §446 of the Companies Act, 1956. The proceedings under RERA stands in a different footing keeping the interests of homebuyers/promoters which does not allows or requires being influenced by the Companies Act. Hence, it can be reasonably assumed that in all possible scenarios of interpretation that the RERA shall prevail over the Companies Act due to being a later and special legislation.

    Existence Of Special Forums Oust Jurisdiction Of Company Court By Necessary Implication

    The Legislature may entrust a special tribunal or body with a jurisdiction which includes the jurisdiction to determine whether the preliminary state of facts exists as well as the jurisdiction, on finding that it does exist, to proceed further or to do something more. The Legislature shall have to consider whether there shall be an appeal from the decision of the tribunal as otherwise there will be none. In cases of this nature, the tribunal has jurisdiction to determine all facts including the existence of preliminary facts on which exercise of further jurisdiction depends. In the exercise of the jurisdiction the tribunal may decide facts wrongly or if no appeal is provided therefrom there is no appeal from the exercise of such jurisdiction. By the virtue of Section 79 of the RERA Act, the jurisdiction of all civil courts in respect of matters dealing with the RERA Act has been barred. This exclusion by the virtue of a provision in a statute presents itself as a textbook example of an expressed legislative intent.

    Hence, in cases of RERA matters, the jurisdiction of civil courts will be ousted by the RERA Authority by necessary implication. Similar stance was taken in Damji Valji Shah, where the court referred to Section 41 of the LIC Act which provided  that no civil Court shall have jurisdiction to entertain or adjudicate upon any matter which a Tribunal is empowered to decide or determine under that Act. The court held that it is undisputed that the Tribunal had jurisdiction to entertain the application of the Corporation and thereby given the exclusive jurisdiction over this matter.

    Section 446 and its influence on RERA: Analysis in context of Kuldeep Kaur Case

    In Kuldeep Kaur, the Rajasthan RERA Authority faced the similar question of law when a complaint was filed under Section 31 of RERA. These complaints were filed in a stage where there already been an appointment of the liquidator. The RERA Authority was faced the impediment of leave under Section 446 of the Act, and the matter dealt with the obligation of authorities under RERA.

    In order to understand the brief ruling provided in the 7-paged order of the authority, it is essential to understand why the dispute erupts in the first place. The genesis of the dispute arises due to the wide wording of the Section 446, which prohibits any commencement or continuation of any “suit or other legal proceeding” once a winding up order has been passed or a liquidator has been appointed. However, despite the liberal wording of the statute it has been held that this provision should be invoked judiciously and not include every legal proceeding. The courts of law while making an interpretation should decide upon each case at hand keeping the intent of the conflicting legislations and decide which forum will be ‘appropriate’. It must be kept in mind if a later legislation is enacted with an overriding provision, the legislating body drafted the same keeping in mind the previous legislations.

    Hence, the courts should refrain from construing a wide ambit and including forums which are not intended to be included. In Kuldeep Kaur, the bench rightly moved with the ruling of Damji Valji Shah, and concurred that as RERA is a later act and a specific one, it will prevail over the Act. The Court opined in this ruling that as the proceedings are pending under the RERA Act, which is a special act in this case. It was emphasised in Kuldeep Kaur that the RERA Act is a special act which has established specific forums for speedy disposal of the matters before it.

    Concluding remarks

    The Companies Act is general law for companies, and has been classified by judicial rulings when placed in contrast with other legislations. However, even if it is regarded special act for the sake of it along with RERA, the latter act consisting of non obstante clause shall prevail over the former. In Kuldeep Kaur’s case it was rightly observed that RERA Act is a special Act as it was enacted with a special purpose of regulating and promoting the real estate sector, with a specialised forum for the same. Its special nature is also borne out of Section 89 which is a non-obstante clause along with Section 79 of RERA further shows that it is a self-sustained code.

    The intention of RERA is to bring the complaints of allottees before the specified Authority to simplify the process, and that is indeed difficult if it is made to seek the leave of the company courts in the first stage. The Rajasthan RERA authority held in clear stance that it shall prevail over all earlier laws as well as general laws including Companies Act 2013. The final nail on the coffin was laid when the Court emphasized that arguendo, it was an older or general law, still, by the virtue of Section 89 would prevail over all general laws such as Companies Act. The ruling of Kuldeep Kaur represents the persisting problem of  conflict of jurisdiction which have arisen frequently due to the improper wording of the section. Despite the enactment of the Code, it is evident that the impediments in swift winding up of companies still remain at large.

  • Section 69 (2) Of The Partnership Act – High Time For a Definitive Interpretation

    Section 69 (2) Of The Partnership Act – High Time For a Definitive Interpretation

    BY SHAGUN SINGHAL, THIRD-YEAR STUDENT AT NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

    Introduction

    The Partnership Act, 1932 (“Act”) was enacted after repealing certain provisions of the Indian Contract Act, 1872. Under this Act, the registration of partnership firms has been given due relevance under Schedule VII. The same, however, has not been made mandatory by law. Even though registration under the Act is not compulsory, the absence of the same can lead to certain disadvantages. One of these disadvantages has been laid down in Section 69(2) (“Section”) of the Act. The Section states; “no suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.” Although this Section has been heavily relied upon over the years, it suffers from some glaring ambiguities. In this blog post, the author, first, lays down the uncertainties in the Section and thereby asserts that the Courts, have, till date, not been able to solve these conundrums and second, concludes that the only way to reach an unambiguous solution is by amending the wording of the Section altogether.

    Applicability of Section 69(2) of the Partnership Act on insolvency proceedings

    Recently, in the case of M/s Shree Dev Chemical Corporation v. Gammon India Limited, the National Company Law Tribunal (“NCLT”) answered the question of applicability of the Section on insolvency proceedings. While rendering its decision, the NCLT stated that procedures under the Insolvency and Bankruptcy Code, 2016 (“IBC”) are, undisputedly, ‘proceedings’ under law. Hence, relying on the strict interpretation of the Section, it opined that since suits and proceedings are different in nature, the bar under this Section can only be applicable to the former i.e. suits.

    In another case of M/s NN Enterprises v. Relcon Infra Projects Limited, the NCLT, while considering the same question of law, held that the absence of the term “proceedings” in the Section itself indicates the intention of the legislature. In addition to these interpretations, the tribunals have also been of the view that Corporate Insolvency Resolution Process (“CIRP”) is not a term arising out of a contract. Rather, it is a statutory right that accrues to the IBC. Therefore, as per these cases, the bar envisaged in this Section cannot, in any case, be applicable to the insolvency proceedings.

    However, in contrast to the aforementioned judgements, Section 69(3), which is read in conjunction with Section 69(2), distinctly mentions the applicability of the bar to “other proceedings”. It states, “the provision of Section 69(1) and (2) will apply to a claim of set-off or ‘other proceedings’ to enforce a right arising out of a contract”. Earlier, the term “other proceedings”, as construed in this Section, was understood to be in relation to a claim of set-off. However, the Court, in the case of Jagdish Chander Gupta v. Kajaria Traders (India) Ltd adjudged otherwise. It asserted that the word “other proceedings” should receive its full meaning, which should not be limited to a claim of set off. Hence, as per this judgement, it is clear that the instant Section can be made applicable to insolvency proceedings. Therefore, presently, there are two differing opinions of the Courts for matters pertaining to this issue.

    However, to add on to the already existing conundrum, the Court, in the case of Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited and Another, while considering the application of Limitation Act on IBC, held that cases filed under the latter are applications and not suits. Hence, it would only attract Article 137 of the Limitation Act, 1963. By adjudging this, it ruled out the relevancy of Article 100 of the same Act, which, distinctively, is applicable to “other proceedings”. If this decision is related to the instant issue, the bar in the section cannot, in any situation, be applicable to the insolvency proceedings. Further, in case it is not applicable, no Court has provided a justification citing the reasons for the same, thereby making its exclusion to be arbitrary in nature.

    In furtherance to these complications, it might be contended that this issue, even if resolved, would only matter if the right arises out of a contract. Thus, to prove that CIRP is a right arising out of contract, it is pertinent to refer to the landmark judgement of Swiss Ribbons Pvt. Ltd. v. Union of India. The Court in this case explicitly affirmed that the creditors can ‘claim’ for CIRP when a debt is due, in the case of an operational creditor and when it is ‘due and payable’, in the case of a financial creditor. In any case, claim, as defined under the IBC, arises in cases of a breach of contract, when such breach gives rise to a right to payment. Hence, since the initiation of a claim is through a contract itself, it cannot be understood as a right accruing solely to a statute.

    Interpretation of the term “persons suing”

    The Section, as mentioned, has vaguely used the words ‘persons suing’, without acknowledging its applicability in certain situations. For instance, in a circumstance wherein a change in the partnership takes place, does it become imperative for the new partner(s) to submit their names to the Register of firms before initiating a suit ?

    The Punjab High Court in the case of Dr. V.S. Bahal v. S.L. Kapur & Co. answered this question in the affirmative. In this case, the firm was initially run by three partners. However, one of them eventually retired and a new partner had to replace him. The name of this partner, while filing the suit, had not been submitted to the Register of Firms. Accordingly, while considering the aforementioned question of law, the Court held that since all partners names were not registered, the suit, as per Section 69(2), cannot be maintainable in law. In addition to this, the Court in the case of Firm Buta Mal-Dev Raj v. Chanan Lal & Ors, asserted that the ascertainment of the word “persons” in the impugned section is deliberate in nature. This is because, singular, in certain cases, can imply plural, but it is never the other way round. In conjunction to this, it further went on to state that the plural form, in this instance, implies that all partners should be registered while filing a suit. Therefore, relying on these cases, the Courts have affirmed that the registration of all partners (new or old), while filing a suit, is mandatory in law.

    While Punjab High Court has ruled on the non-maintainability of such suits, the Patna High Court, in the case of Chaman Lal v. Firm New India Traders, has adjudged otherwise. Similar to the aforementioned case, three new partners had joined the firm, whose names were yet to be registered. Taking the same question of law into consideration, the Court held that the non-registration of their names had no effect on the maintainability of the suit. The view taken by the Punjab High Court, according to the author, is erring for several reasons. First, the Section nowhere mentions that all names of the partners have to be registered at the time of filing a suit. Hence, adjudging the same would amount to reading imaginary words into the applicable law, which thereby shall contravene the general rule of interpretation. Moreover, usage of word “persons” cannot necessarily imply all partners at the time of filing a suit. It could mean partners when the cause of action arises, or partners when the firm was formed. Hence, relying on grammar alone could result in an incorrect interpretation of the Section in toto. Second, Order XXX Rule 1 of Civil Procedure Code (“CPC”), which lays down the procedure of such suits, permits two or more of the partners to sue, as long as they represent the firm. Therefore, relying on the legislature’s wordings in this provision, the Punjab High Court’s decision, as per the author, is contrary to the law in force.

    Conclusion

    This Section, even though modelled after the English Statutes of 1916 and 1985, has used several vague terms. Due to this ambiguity, the Judges, since its enactment, have had the discretion to interpret the terms, based on their own individual understanding. It is only because of this reason that the Courts, till date, have not been able to finalise the impugned words definite reasoning. Hence, the author is of the opinion that the only way to arrive at an unambiguous position is by changing the wordings of the Section altogether. This can be implemented in two ways, first, the words “proceedings” and “applications” can be added to Section 69(2) itself. Through its addition, the Courts will be certain that the bar, as envisaged in this Section, can be made applicable to suits, proceedings as well as applications. This will further remove the irrationality behind it being made applicable only to suits, when the others, similarly, are initiated to pursue a remedy. Second, a proviso can be added, which clarifies that the non-registration of new partners will have no bearing on the maintainability of a case, as long as the original partners are registered. However, it should mention that their registration must be filed, along with the suit. The reasoning behind this is that registration in usual circumstances can take around two weeks or more, which in certain instances, can unnecessarily delay the filing of a suit. Therefore, in such situations, the non-registration of certain members should not serve as a bar for initiating a court procedure. The author thus concludes that these alterations should be made, for the long-standing conundrum to end. Otherwise, the Courts shall continue to base their interpretations on their own psyche, which ultimately shall result in unjust decisions being rendered, time and again.

  • Section 68 of FERA: Liability Of Directors For Offences Committed By Companies

    Section 68 of FERA: Liability Of Directors For Offences Committed By Companies

    BY RISHABH KUMAR, FOURTH-YEAR STUDENT AT NATIONAL LAW UNIVERSITY, JODHPUR

    The Liability of people acting on behalf of companies, for offences committed by companies, has been a very widely debated topic under the law of corporate governance. The general rule in the cases involving criminal liability stands against vicarious liability. This means that no one can be held criminally liable for offences committed by others. However, this general rule is overridden by specific provisions, provided by statutes, extending liability to others. An example of one of such provisions can be found under the Foreign Exchange Regulation Act, 1973 (‘FERA’). Section 68(1) of FERA provides that, in case of contravention of any of the provisions of the act by a company, a person in charge of, and responsible to the company for, the conduct of the business of the company has to be deemed guilty. Recently,in the case of Shailendra Swarup v. The Deputy Director, Enforcement Directorate, a bench of the Hon’ble Supreme Court dealt with the question of liability for offences under FERA, committed by a company, and the procedure for attributing such liability to persons acting on behalf of the company. 

    Facts

    A show cause notice was issued by the Enforcement Directorate against all the directors of a company named Modi Xerox Ltd. (‘MXL‘) for alleged violation of FERA provisions.  The appellant, Mr.Shailendra Swarup was a practising advocate of the Supreme Court and only a part-time non-executive director of MXL. He replied to the show cause notice stating that he was a part-time non- executive director for MXL and that he was not in the employment of the company nor he played any role in conducting the affairs of the company. Irrespective of this, the Enforcement Directorate went on to conduct a hearing, implicating the appellant and imposed a fine of Rs. 1,00,000/- on all the directors including the appellant. On appeal, this order was upheld by the appellate tribunal as well as the High Court resulting in an appeal before the Supreme Court.

    Judgment

    It was held by the court that, the adjudicating officer was wrong in imposing a penalty on the appellant and, the same was wrongly upheld by the appellate tribunal as well as the High Court. Moving further on, the court held that, for holding a person liable under the provisions of FERA, the active involvement of such person in company affairs must be looked into rather than just superficially taking into consideration the designation they are accorded. The court, to come to this conclusion, heavily relied on the ratio of judgments involving section 141 of the Negotiable Instruments Act, 1881 (“NIA”).

    Ratio

    The court said that, section 68(1) of FERA contains a legal fiction, i.e. “shall be deemed to be guilty” which is qualified by certain conditions that have to be fulfilled in order to establish liability under the provision. The conditions as mentioned in the provision require a person to be in charge of, and responsible to the company for, the conduct of the business of the company for them to be liable for any contravention of the section. In N. Rangacharivs. Bharat Sanchar Nigam Limited, the apex court had observed that, although a person in the commercial world transacting with a company is entitled to presume that the directors of the company are in charge of the affairs of the company, the court has held that such a presumption is rebuttable. The provision cannot be interpreted in a manner so as to implicate each and every person who was a director of the company at the time the offence was committed. Therefore, if a person is to be proceeded against and punished for any contravention, necessary ingredients as required by section 68 have to be fulfilled.

    Since the appellant was just a part-time non-executive director and was neither in charge of nor responsible for the conduct of the business of the company, the ingredients under Section 68 are not fulfilled in order to hold  him liable for the contravention.

    Relevance of Section 141 of the Negotiable Instruments Act, 1881

    In view of the court, section 68 of FERA is pari materia to Section 141 of NIA, 1881. Section 141 of NIA imposes the liability of a company, for the dishonour of cheques, on a person who at the time of such dishonour was in charge of and responsible for the conduct of the business of the company. Therefore, the ratio of judgments involving liability under section 141 of the NIA, 1881 are of considerable importance while interpreting section 68 of FERA.

    The ratio of the following two judgments have been referred by the court, while deliberating upon the present case:

    S.M.S Pharmaceuticals Ltd. vs. Neeta Bhalla and another

    Since section 141 of the NIA creates criminal liability, the conditions provided thereunder have to be strictly complied with. What is required is that the persons who are sought to be criminally liable under section 141 should be, at the time the offence was committed, in charge of and responsible to the company for the conduct of the business of the company. The condition requires so because a person in charge of and responsible for the conduct of the business of the company is supposed to know the purpose behind the issuing of a cheque and the reasons for its dishonour. Furthermore, a complaint under section 141 must contain specific averments disclosing the facts that fulfil the conditions under the provision. If facts making a person liable under the provision are missing from the complaint, the conditions as required by the provision cannot be said to have been satisfied.

    N. Rangchari vs. Bharat Sanchar Nigam Limited

    Reiterating the principle given in Neeta Bhalla (supra), the court held that, besides mentioning in the complaint that the person implicated is a director of the company, it is important to specifically allege that they were in charge of and responsible for the conduct of the business of the company at the time of the commission of the offence. Otherwise, a complaint may be found unsustainable.

    Referring to the above mentioned case laws, the court has laid down a due procedure for proceeding against a director under section 68 of FERA.

    Due procedure for conducting proceedings under the FERA

    The court has laid down that, even though FERA is silent on filing of written complaints, while proceeding under section 51, the person who has to be proceeded against shall be informed of the contravention for which penalty proceedings are to be initiated against them. This flows from section 51 which imposes an obligation on the adjudicating officer to give a reasonable opportunity to a person to be proceeded with for making a representation in the matter. The requirement under section 51 envisages due communication of the allegations of contravention and requires fulfilment of the ingredients of the offence under section 68. If this due procedure is not followed, the reasonable opportunity, as contemplated by section 51, cannot be said to have been given to the person to make representation in the matter. After a reasonable opportunity to make representation is granted in true sense, the adjudicating officer shall hold an inquiry and if on such inquiry he finds the person guilty of the alleged contravention he may impose the requisite penalty in accordance with section 50.

    Conclusion 

    The general notion that persists in the corporate world about non-executive directors is that, they are not involved in the day to day affairs of the company, i.e. they are not in charge of, or responsible for the conduct of the business of the company. Although, by virtue of this, they may not be held liable for various offences or contraventions committed by the company, it doesn’t provide them with blanket immunity. As held in Chaitan M. Maniar vs. State of Maharashtra, they can still be held liable for those contraventions in which their active involvement is shown. The judgment in the present case has furthered this standing. While settling the law as to the liability of directors under FERA, it has also laid down a due procedure for establishing such liability. Moreover, the court, by widening the scope of the phrase “reasonable opportunity for making representation” under section 51, has ensured that the principle of audi alteram partem is duly adhered to under FERA. The judgment shall act as a good precedent, while determining the corporate criminal liability of directors of companies in future.

  • COVID-19 and M&A: Reshaping The Deal Making Process

    COVID-19 and M&A: Reshaping The Deal Making Process

    BY HARSH KUMRA AND HARSH MITTAL, FIFTH-YEAR STUDENTS AT AMITY LAW SCHOOL, DELHI (GGS IP UNIVERSITY)

    COVID-19 has strongly affected the M&A scenario in India. Corporates are facing difficulties in going through deals due to various factors led by economic deterioration by lockdown. Some of the thrusting factors for business decisions regarding such transactions are changes in business sentiment, valuation concerns as well as liquidity constraints due to reduced lending by banks especially after suspension of IBC. For April 2020, Grant Thornton India’s deal tracker reported a 37% fall in aggregate M&A volumes and 22% fall in aggregate Private Equity deals compared to April 2019 and March 2020. However, the deal activity across different industries such as Telecommunications, Healthcare and Consumer Staples has carried on despite lockdown restrictions and COVID-19 will give rise to more opportunities in M&A sector.   

    This article addresses certain key issues and concerns that the companies have had to focus on due to the ongoing pandemic and it looks at the future of deal making process.

    Deal Considerations

    An important concern here would be to decide the kind of deal the companies are willing to enter into. Several factors will play a role in coming to this decision – valuation concerns, lending ability of banks and financial institutions, liquidity crunch faced by the company etc. In India, it is the inveterate mindset of companies to opt for a cash deal, given the fact that they are easier and offer lesser hurdles as compared to its counterpart. However, the times have changed substantially, and on this verge, companies have had to use their cash reserves on a number of other operations and to keep their business going. While cash-rich companies have been able to enter-into M&A transactions easily, the same has not been the case for most companies who require external financing. Additionally, in light of the recent changes and amendments, the lending capacity of banks and financial institutions has been impaired to some extent. The Insolvency and Bankruptcy Code, 2016 has been suspended and the RBI announced a special COVID-19 Regulatory Package through which –  it allowed rescheduling of payments; lenders have been permitted to defer the recovery of interest in respect of cash credit and overdraft facilities and lenders were allowed to give a three month moratorium on term loans.

    With this being said, the companies would try to rely more on stock deals and the buyer would be able to keep its cash reserves for other operations. This will also help the companies and its shareholders in saving the tax component in the sense that they may save on payment of transfer taxes. Companies might also consider investing using hybrid instruments featuring both cash and stock. The market is likely to see new forms of hybrid instruments. In the deal of JSW Energy, acquisition of Jindal Steel and Power witnessed such a structure combining both asset sale and share acquisition. However, the deal was called off by JSW Energy before it could be closed. A report published by the International Financial Law Review states that such hybrid structures provide the necessary balance between the regulatory constraints and commercial objectives.

    Further, some companies might prefer slump sale to avoid the extra hassles of due diligence and approvals from minority shareholders. This could be beneficial for buyers as the exposure to unknown liabilities is comparatively lesser and hence, the buyer need not expend much time on due diligence.

    Regulatory Framework

    With the ongoing pandemic still in place, India has seen regulators stepping in time and again to do their best to limit its impact on the economy. If we look at the measures that have been taken, we could say that the regulatory environment of our country is trying to facilitate the deal making process.

    The regulators such as Securities and Exchange Board of India (‘SEBI’), Ministry of Corporate Affairs (‘MCA’), Reserve Bank of India (‘RBI’) and Competition Commission of India (‘CCI’)have made relaxations and exemptions in terms of compliances and taxations. They have stepped up to facilitate e-filing procedures of applications, ultimately easing the transaction process for companies.

    As a major relief for corporates, the MCA has eased the rules with respect to the way the Board Meetings are conducted. In March, an amendment was introduced to the Companies (Meeting of Board and its Powers) Rules, 2014 and directors of the companies were allowed to participate in the Board meetings through video conferencing or other audio-visual means, for issues such as Approval of the matters relating to amalgamation, merger, demerger, acquisition and takeover. Additionally, it also allowed companies to hold Annual General Meetings through video conferencing for the entire year.

    Apart from this, SEBI asked all listed companies to make endeavors to ensure that investors are provided with timely and adequate information with respect to the impact of the pandemic on the company’s financial statements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. This will help the investors in making decisions in terms of company’s financials and will give the right valuation of the companies.

    Valuation

    The pandemic has created an atmosphere of uncertainty and volatility, leading to ambiguities in terms of company valuations. For deals that were initiated before the COVID-19 outbreak, buyers and sellers are back to the negotiation tables to deliberate upon the valuation of the buyer. For the companies who just began negotiating the deal, they are likely to face difficulties in reaching at an appropriate valuation. In the former case, buyers would try to reconsider and renegotiate the valuation, while in the latter; they would attempt to leverage the lower valuation of the target company. Additionally, both the parties would want to bridge the time gap between signing and closing the deal in order to lessen the impact of volatility on the deal.

    Due Diligence & Representation and Warranties

    This aspect of transaction is going to face deviations since there is a lesser scope of physical inspection and more reliance on virtual due diligence and video conferences for discussions on Seller’s financial statements and analysis of all material aspects to search for financial risk indicators and compliance lapses, operating results and cash flows, seller’s default on key contracts and leases, termination rights under various contracts, data protection concerns etc. The Representation and warranties (R&Ws) hold the seller to the confirmation provided regarding the Buyer’s due diligence findings, audited and unaudited financial statements, seller’s liabilities & obligations, and material contracts. If the R&Ws are misleading, the buyer may terminate the acquisition and may even entitle them to post-closing indemnities. Although it is impossible to predict the long-term effects of the pandemic, due diligence process could be altered in such a way that it facilitates quicker transactions rather than causing hindrance through engaging advisors as early as possible, preparing for the reality of dealing with more unknown factors than usual and appropriate measures in planning.

    Mitigation and Allocation of Risks

    Once the Memorandum of Understanding (‘MOU’)/ letter of intent, term sheet, Non-Disclosure Agreement (‘NDA’) and other non-binding preliminary agreements are entered, the next step is to work towards a definitive agreement. Pandemic driven provisions should be added to address closing risk and closing certainty. Although each agreement is specifically tailored to transaction’s structure, several clauses can be common such as R&Ws, covenants, and conditions which mutually address the allocation of risk in such transactions. R&Ws regarding ownership, contractual arrangements of Intellectual Property (‘IP’) as well as non-infringement of IP rights are some of the most significant clauses.

    Material Adverse Change (‘MAC’) is another important clause which now includes the events such as pandemics, lockdowns, and interruption of international trade in the transaction and functions between the signing of acquisition agreement and closing of the deal. This clause transfers the risk to the seller and therefore they push for a lenient MAC clause. Furthermore, the central government declared the COVID-19 outbreak as a “natural calamity” and directed that delays on account of the pandemic be treated as Force Majeure; however the direct effect of this on private contracts is absent. Although, the Force Majeure clause is common in conventional commercial contracts, the same cannot be said in case of M&A transactions as this provision is relatively rare in such agreements. Considering that the courts have expansively interpreted Force Majeure clauses and are not going to apply the defenses available outside of the terms of contract, the Force Majeure clauses could be included and tweaked to specifically address the threshold for invocation, methods of invocation, list of included events and consequences thereof.

    Conclusion

    While the world economy has taken a hit due to the pandemic, it has affected all the sectors in a very different manner. The deal making as a process is likely to see a new face and will emerge in a very different shape and manner. There are sectors like hospitality and tourism, that are fighting to keep their place, and then there are sectors like e-commerce and e-pharmacy that have shown ample amount of growth. It is most likely that in each sector, fewer players will survive. We will see an enormous amount of M&A with the buy side being influenced by ambition and the sell side by its stress and survival instincts.

    This being said, India is going to experience a fundamental shift in the M&A landscape. The companies will have to adjust with certain realities that have become the new normal for the country. The unpredictable nature of COVID-19 has made it difficult for companies to evaluate the targets accurately and they will have to come up with ways to make adjustments accordingly.

    The companies would want to go for acquisition as the mode of structure instead of schemes of compromise or arrangement, since they require NCLT approvals which are bound to delay the process further. Additionally, the time taken to complete the entire process might also get prolonged due to various other unresolved regulatory and technical hurdles.