The Corporate & Commercial Law Society Blog, HNLU

Tag: Company Law

  • Bridging Borders: SCRR Amendment 2024 and India’s Gateway to Global Capital

    Bridging Borders: SCRR Amendment 2024 and India’s Gateway to Global Capital

    BY MANAV PAMNANI AND SHOURYA SHARMA, THIRD-YEAR STUDENTS AT NALSAR HYDERABAD AND JINDAL GLOBAL LAW SCHOOL, SONIPAT

    INTRODUCTION

    The Department of Economic Affairs, Ministry of Finance (‘MoF’), has recently amended the Securities Contracts Regulation Rules, 1957 (‘SCRR’). This Amendment attempts to make it easier for Indian public companies to list their equity shares within International Financial Service Centres (‘IFSCs’) such as the Gujarat International Finance Tec-City (‘GIFT City’), under the framework of Direct Listing of Equity Shares Scheme and the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024. One of the significant changes under the Amendment is the reduction of minimum public shareholding thresholds from 25% to 10% for listing made in IFSCs, making international listings more accessible, especially for start-ups and technology-driven enterprises. This move mirrors the government’s broader commitment towards placing India among the world’s competitive investment-friendly destinations and financial hives. This article attempts to analyse the legal framework of this Amendment, alongside exploring its practical implications for the Indian financial landscape.

    REGULATORY FOUNDATIONS AND LEGISLATIVE DEVELOPMENTS

    The SCRR was notified by the Central Government to help achieve the objectives of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) effectively. The preamble clause of the SCRA states that the objective of the statute is to regulate undesirable transactions in securities by overseeing the dealing in securities and monitoring other ancillary business activities. The Amendment aligns the SCRR with this overarching objective. The legal foundation of this Amendment lies in section 30(h)(A) of the SCRA, which gives the Central Government the power to introduce rules stipulating the specific requirements that companies have to follow to get their securities listed on any stock exchange. The word “any” here has to be given a wide interpretation to align with the framers’ intention which was to bestow supervisory and regulatory authority upon the Government to foster the maintenance of a reliable and efficient securities business framework. Therefore, the regulation of listing of securities on IFSCs squarely falls within the competence and authority of the Government.

    Earlier in 2024, the MoF, through a notification amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’), explicitly enabled the listing of securities of public Indian companies on international exchanges recognized in Schedule XI of NDI Rules. This, termed as the Direct Listing Scheme, governed several intricacies such as permissible investors, compliance with sectoral caps, regulations regarding prohibited sectors, and pricing guidelines. Simultaneously, the Ministry of Corporate Affairs (‘MCA’) had also introduced the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 by virtue of its power under section 23(3) r/w section 469 of the Companies Act, 2013 to regulate the entities that can list and jurisdictions where the listing can take place.

    However, both these enactments, along with the Companies (Amendment) Act, 2020 which prescribed certain similar requirements pertaining to listing in international exchanges, served as mere regulatory tools rather than efficient operational guidelines. They prescribed an overarching framework that has to be adhered to during such listing and discussed the eligibility criteria but failed to provide or clarify points regarding specific thresholds and other operational mechanisms specified under the SCRR.

    LEGAL ANALYSIS

    The recent Amendment fills the void identified above by introducing a few but impactful changes in the securities listing regime, thus reflecting its commitment to fostering a globally competitive and investor-friendly framework while aligning domestic practices with international standards. These international standards include the minimum public float thresholds in jurisdictions like Singapore, the International Organisation of Securities Commissions’ principles of efficiency, transparency and fairness in cross-border listings, the securities regime in the Dubai International Financial Centre, the Financial Action Task Force’s Anti-Money Laundering /Combating the Financing of Terrorism recommendations, and the pricing mechanisms and sectoral compliance thresholds present in the European Union Capital Markets Union and the United States Securities and Exchange Commission Regulations.

    The widespread benefits accruing to investors and other stakeholders through the effectuation of this Amendment not only covers the inflow of higher foreign capital and a more efficient and dynamic securities framework but also extends to direct tax advantages. section 10(4D) of the Income Tax Act, 1961 provides a significant tax exemption on income arising from transactions conducted on recognized stock exchanges within IFSCs, including GIFT-IFSC. This incentivizes participation, reduces transactional costs for investors, and creates a persuasive financial rationale for businesses contemplating listing on foreign exchanges. It is also in line with the numerous Double Taxation Avoidance Agreements (‘DTAAs’) entered into by India to prevent non-resident Indians from being taxed twice, in both, India and their country of residence, thus significantly alleviating their tax burden. Additionally, the Securities and Exchange Board of India (‘SEBI’) has considerable control over listing and transactions in the IFSC, as is evident from the scheme of the SEBI (International Financial Services Centres) Guidelines, 2015. This reiterates the commitment of SEBI to safeguard the interests of investors and other stakeholders, alongside maintaining an effective securities landscape.

    An important caveat to consider with respect to this Amendment is that the reduction of thresholds from 25% to 10% extends only to listings made in the IFSC. This implies that as per domestic subscription requirements, the extent of public shareholding is still fixed at the previous 25%. This distinction creates a dual regulatory framework, potentially leading to compliance complexities for companies seeking listings in both domestic and IFSC exchanges. This may limit the seamless integration of domestic and international listing strategies, requiring companies to carefully navigate the differing regulatory requirements to maximize benefits and avoid potential conflicts. Although the text of the Amendment alters Rule 19(2)(b) of SCRR, which covers domestic listings, the primary intention of the legislature was to effect changes in the IFSC listing framework. This ambiguity necessitates a clarification, which will most likely uphold uniformity by stating that the reduction also extends to listings made on domestic stock exchanges by companies wishing to obtain listing on permitted international exchanges. The importance of such uniformity and standardization is also evident from the two definitions (IFSC and International Financial Services Centre Authority (‘IFSCA’) that have been introduced which do not impose their own requirements but simply suggest an alignment with the definitions incorporated in existing legislations. The Amendment while defining these terms states that an IFSC means an IFSC as defined under section 3(1)(g) of the IFSCA Act, 2019 and an IFSCA means the Authority established under section 4(1) of the IFSCA Act. This significantly reduces complexity and fosters consistency and clarity in the navigation of relevant legalities pertaining to share listing and other compliance requirements.

    PRACTICAL IMPLICATIONS

    This Amendment marks a shift in India’s financial regulatory regime by redefining the entry of companies into global capital markets. In its amplitude, it is not an ordinary technical change but a strategic recalibration of structures of investment. The reduction of public shareholding thresholds from 25% to 10% for foreign listings creates an easier route for start-ups, emerging businesses, and small, mid and large capitalisation companies to access global capital, a phenomenon that is already experiencing an upward trajectory. For example, the gross foreign portfolio investment (‘FPI’) in India was massively estimated at around US$ 41.6 billion in the year 2023-24, which is bound to increase manifold due to this Amendment. The business insights from  companies like Reliance Industries Limited and HDFC Bank Limited, among others, reflect clear examples of corporations successfully accessing large amounts of global capital due to international financial listing. This consequentially places Indian business enterprises in a robust position as reduction in public shareholding compliance requirements is an attractive proposition for investors.

    Interestingly, the lowering of the barriers to international capital access also provides the same growth opportunities to a wider spectrum of sector-specific enterprises, including deep technology, renewable energy and biotechnology. These are crucial sectors requiring large investments. Furthermore, this change may even decentralise India’s economic hubs by allowing international capital to penetrate smaller companies located in tier-2 and tier-3 cities. As an offshoot, regions other than the economically prospering metro cities would witness increased industrialisation and employment generation since more local companies would gain access to foreign investments.

    A research conducted by the International Monetary Fund on emerging markets provides a broader context in which this Amendment fits into a global trend, towards more accessible and flexible capital markets. It represents the benefits of India’s strategic approach to positioning itself as an attractive destination for global investors. Indian firms may be better positioned to raise capital in foreign currencies with a more straightforward pathway to listing abroad while hedge-protecting firms reliant on imports for raw materials or technology from the capricious market exchange rate.

    Contrary to the apprehensions of capital outflow, this Amendment may benefit India’s domestic markets since an international listing enhances reputation of a company, provides international exposure, and encourages investor confidence. Companies will attract a larger pool of sophisticated retail and institutional investors, leading to increased credibility and brand value through such listings. This will enhance liquidity, valuation, expertise, innovation and overall market efficiency.

    However, the opportunity comes with nuanced challenges, particularly for companies that aim to be listed on both domestic and international exchanges. In a dual-listed company structure, the requirement for multi-jurisdictional shareholder and board approvals introduces complexities to decision-making and company operations. This substantially increases audit and compliance costs, necessitating detailed planning and high investments in financial and legal advisory services.

    CONCLUDING REMARKS

    This Amendment is more than a routine regulatory change because it aims to manifest India as a global financial hub by significantly relaxing listing requirements in the IFSC. It serves as a forward-looking measure with the objective of modernising the Indian securities law landscape and aligning it with international best practices by furthering a more inclusive access to global capital markets. With the introduction of this Amendment, the legislature has taken a significant step in the right direction and it will be interesting to observe the future course this Amendment adopts, particularly concerning its effective implementation.

  • SEBI’s Norms For Sharing Real-Time Price Data: Laudable Yet Restrictive

    SEBI’s Norms For Sharing Real-Time Price Data: Laudable Yet Restrictive

    BY SACHIN DUBEY AND SUKRITI GUPTA, THIRD-YEAR STUDENTS AT NLU, ODISHA

    Introduction

    Securities and Exchange Board of India (‘SEBI’), vide circular dated 24th May 2024, introduced ‘Norms for sharing of real-time price data to third parties.’ The circular has been brought to tackle the concerns arising from the unauthorized sharing of real-time price data (‘Price data’) with online gaming platforms and other third parties and to protect the securities market. Price data refers to the current data of information which is made accessible as soon as it is generated. It is used in time-centric applications like stock trading and navigation to have real-time price analytics.

    This restriction was made in the purview of an upsurge in online gaming platforms, virtual trading apps, fantasy stock trading apps, and various other websites. Since the past couple of years, there has been an incremental increase in trading through these virtual platforms which therein invited attention to regulate the functioning of these platforms. It works in a way that provides its users with an illusionary image ofhow stock trading is done by featuring the exact parallel stocks listed on Stock Exchanges and also by citing similar price values and fluctuations. Since they do not fall under the domain of SEBI, they,therefore, become an unregulated fragment. Sharing real-time price data poses a high risk of leakage of sensitive information related to securities in the market. These virtual trading platforms appropriately use the data for their apps and websites to build a real trading atmosphere for their users which in turn fabricates their mind to construe this trading to be an actual stock market trading. This may also create parallel, unregulated platforms which would continue to hamper the trust of its users thus, promoting unfair trading. The sharing of real-time price data also acts as a disruptor in the securities market, because of which the regulator is consistently trying to prioritize the interests of investors above all else.

    The circular also mentions that market infrastructure institutions (‘MIIs’) and market intermediaries such as brokerages are forbidden to share price datawith third parties. However, it comes with an exception that price data can be shared if such information is essential for the systematic functioning of the securities market and regulatory compliances. Further, a written agreement needs to be entered and due diligence is required before transferring price data with third parties so that it will not be put to any illegal use.

    This post delves into the impact of SEBI’s recent circular on investors and virtual stock trading apps, highlighting its broader implications. Additionally, it sheds light on the potential drawbacks of the circular and suggests measures to cure the same.

    REGULATORY GREY ZONES AROUND VIRTUAL STOCK TRADING PLATFORMS

    Hitherto, Virtual stock trading apps operate in an ambiguous regulatory environment. Regulatory officials describe it as a form of Dabba Trading, an unlawful practice which involves placing bets on the movement of the price of underlying assets such as stocks or commodities. In India, Dabba trading activities flout various provisions of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and are subject to punishment under section 23 of the SCRA. 

    SEBI already made its intention clear in 2016 when it issued a warning to investors against various entities offering leagues/schemes/competitions etc. based on the securities data. SEBI stated that these schemes are neither authorized nor endorsed by SEBI or any SEBI-recognized exchanges. It further sought public input on proposed amendments to SEBI Investments Advisers (Regulations), 2013 which included a provision to prohibit anyone from organizing schemes, games, leagues, or competitions related to the securities market. However, it did not forward the proposal and instead prohibited Stock Brokers from participating in games, leagues, schemes, competitions, etc., that involve the distribution of prizes, medals, gifts, etc. SEBI’s recent circular will further force virtual trading stocks to shut down their operations.

    Apart from SEBI, the National Stock Exchange (‘NSE’) vide circular dated 20th April 2023 observed that some market participants are misusing its data for gaming and virtual trading, which undermines fair and transparent trading principles. It reminded trading members that NSE Data should only be used for legitimate trading activities by their clients and not for gaming or virtual trading purposes.

    Therefore, there has never been regularity clarity regarding virtual stock trading apps which made them operate in a regulatory grey area.

    SEBI’s OBJECTIONS AGAINST VIRTUAL STOCK TRADING APPS USING REAL TIME PRICE DATA

    Although SEBI was not concerned with these platforms working as stock market simulators for education or entertainment purposes utilizing price data, the problem arose with the involvement of money. Platforms like India Trading League or Stock Race charge a small entry fee and award monetary rewards tied to the performance of stocks or commodities. This has sparked an addictive interest among users leading to the successful development of their business model.Further, they do not come within the regulatory foothold of SEBI and therefore are not required to provide disclaimers to users regarding the difference between actual trading and virtual trading as well as the risks attached to virtual trading.

    Further SEBI’s concern about restricting price data with these platforms comes from its objective to protect the interest of investors in the securities market. Out of the regulatory foothold of SEBI, these platforms tend to create a virtual, parallel and uncontrolled securities market where there will be no trust among the users.

    Stock Exchanges primarily generate revenue through transaction fees on trades and subscription fees for providing price data. SEBI has explicitly forbidden the creation and operation of games or competitions related to securities and security markets.If a third-party platform acquires price data and uses it to operate subscription-based games, it would undermine the exchanges’ revenue sources and breach SEBI regulations.

     KEY CONCERNS

    The move to regulate the sharing of price data with third parties, including fantasy stock trading games, is commendable for its aim to prevent investors from becoming addicted to these games and getting duped into the fraudulent practices of these platforms.Still, it has certain shortcomings which need to be acknowledged and taken care of.

    To start with, SEBI should not view every such development with suspicion which is beneficial for innovation and the growth of private businesses in the economy. SEBI should promote these business platforms while simultaneously bringing them under its regulatory foothold.

    SEBI should take a proactive approach by establishing a clear framework for these platforms, detailing the rules and regulations related to securities they must adhere to, and specifying the required disclosures for registration. Such measures will not only ensure compliance but also promote transparency and encourage innovation, creating a more dynamic and trustworthy financial ecosystem. It could have also outlined the eligibility criteria for participants, including age limits, net worth, and other intriguing requirements. The Board can take a cue from the Australian Securities and Investments Commission (‘ASIC’) which requires platforms like fantasy stock trading games to obtain a license before starting operation. Licensed platforms which are called binary options providers in Australia ensure protection to investors as they need to make certain disclosures as well as need to fulfil certain obligations imposed by ASIC.

    Further, the circular states that that price data will be provided to investor educational platforms with a delay of one day.If price data is allowed to be shared with educational platforms with lag of one day, then these platforms will be compelled to use delayed data which will not serve the purpose of such learning platforms. Their business model would go in negatives as its whole object of live simulation-based tasks would be affected, offering no monetary incentives. Their contribution in enhancing investment skills and simplifying the investment process for individuals through realistic stock market simulations will be significantly impacted. Therefore, SEBI should consider repealing it from the circular.

    Hence, while SEBI’s plan to issue a circular regulating the sharing of price data with third parties, including virtual trading platforms, is praiseworthy, yet restrictive. This regulation may hinder innovation that aids in the development of investment skills and simplifies the investment process for individuals.

    Conclusion

    Globally, many countries are adapting to digital era due to the rise of various online platforms offering monetary services. With the increase in these platforms, there is a growing concern regarding sharing price data with the third parties. Regulators around the globe are becoming aware of the risks and challenges connected with manipulation of markets, and leakage of sensitive data. So, it has become essential to have rules and regulations to regulate data sharing. Therefore, amidst this, SEBI has brought such norms which restricts sharing price data with third parties to bring credibility and stability in the worldwide stock market. Although it is commendable, SEBI could have implemented regulations to bring these platforms under its regulatory framework while still allowing them to operate. After all, a country’s legislation aim should be to let the private business develop in the country with having certain regulatory control over them.

  • Post Cox and Kings: Delhi High Court Exempts Directors From Group Of Companies Doctrine- Implications And Analysis

    Post Cox and Kings: Delhi High Court Exempts Directors From Group Of Companies Doctrine- Implications And Analysis

    By Shivang Monga and Varun Pathak, Third-Year Students at MNLU, Mumbai

    I. Introduction 

    The Delhi High Court(‘DHC’)on 24 January 2024, in the case of Vingro Developers Pvt Ltd v Nitya Shree Developers(‘Vingro Developers’), delivered an important ruling on the aspect of impleading directors of a company to the arbitration agreement. The court, in this case, excluded directors from the ambit of the group of companies’ doctrine, which the Supreme Court(‘SC’) upheld in the case of Cox and Kings Limited vSAP India Private Limited(‘Cox and Kings’).

    According to this doctrine, an arbitration agreement entered into by one company binds non-signatory group entities under certain circumstances. This doctrine applies only when the circumstances demonstrate the mutual intention of the parties to include both signatories and non-signatories. Consequently, the non-signatory gets impleaded despite not formally consenting to it.

    The DHC judgement brings certain clarity to the doctrine by excluding directors from being impleaded. The exclusion in this case stems from the application of the principal-agent relationship.

    This article seeks to analyse the high court’s verdict in the context of the Cox and Kings judgement, and sheds light on why ‘group of companies’ doctrine should not apply to such scenarios. Furthermore, we broaden our analysis by examining how different international jurisdictions have addressed issues of binding directors and employees within a company to the arbitration agreement.

    II. Binding Directors to Arbitration: Applicability of Cox and Kings

    The Respondent in the above case signed two Builder Buyer Agreements with the Petitioner concerning the Rajasthani Resident Township Project of the Respondent. The Respondent company’s directors were authorised representatives. Director 1 had signed the BuilderBuyer Agreements on the Respondent’s behalf, while Director 2 was a non-signatory. Pursuant to the non-delivery of the possession of flats, the Petitioner invoked arbitration against the Respondent.

    The Petitioner also sought to enforce the arbitration agreement against the company’s directors by invoking the Cox and Kings judgment. It was argued that in light of the said judgement, non-signatories could be impleaded and that the directors cannot be separated from the company. Petitioner argued that as per the said judgement, a joint reading of section 2(1)(h) and section 7 of the Arbitration and Conciliation Act, 1996 would mean that ‘parties’ included signatories and non-signatories. The contention was that one director (signatory) and other director (non-signatory) were not ‘third parties’, but rather ‘non-signatories.’

    However, the DHC underscored that the application of the ‘group of companies’ doctrine, as per the Cox and Kings judgment, hinges upon the common intention of the parties to bind non-signatories to the arbitration agreement. To accurately ascertain this intention, the court emphasized the need to consider the relationship between the parties and the surrounding circumstances.

    In light of the fact that the arbitration agreement was not signed by Respondent 2 in personal capacity but only in representative capacity and the fact that Respondent 3 was not a signatory to the arbitration agreement, the court held there was no intention to bind the directors to the arbitration agreement.The High Court therefore, did not apply the group of companies’ doctrine and allowed arbitration proceedings only against the company and not its directors.

    III.Authors’ Analysis: Deciphering the Common Intention and Corporate Separateness

    In Dow Chemical v. Isover Saint Gobain, the ICC tribunal emphasized that non-signatories could be made a party to arbitration agreement based on the mutual intent of the signatory and the non-signatories. Similarly, in Cox and Kings, the Supreme Court clarified that the group of companies’ doctrine applies only when there is clear corporate separateness among the entities within the group. 

    Applying these principles to such cases, it becomes evident that the directors cannot be bound by the arbitration agreement for two key reasons. Firstly, due to the absence of corporate separateness between the director and the company. Secondly, the crucial element of common intention necessary for enforcing the arbitration agreement is lacking. 

    To establish corporate separateness, there needs to be the involvement of two separate entities, such as a holding company and its subsidiary, each with its own legal identity. However, in such a case, the director’s role as an agent of the company cannot fall within that definition. Consequently, with only one corporate entity at play and the director acting on its behalf to execute the arbitration agreement, the prerequisite of common intention also remains unfulfilled.

    Due to the absence of corporate separateness between a director and the company, the lines between the intentions of the individual director and those of the company becomes blurred. Directors, as agents of the company, are generally seen as integral parts of the company rather than distinct entities. When a director signs an arbitration agreement, it’s typically assumed as an action on behalf of the company, with the intention assumed to be that of the company. Without clear corporate separateness, it becomes difficult to ascertain the intentions of the director and of the company as a whole. This lack of distinction makes it challenging to establish the necessary common intention required for enforcing arbitration agreements. The enforcement of arbitration agreements involving directors also becomes uncertain, as it remains unclear whether the director’s actions truly represent the collective intention of the company or if they’re acting in their personal capacity.

    Therefore, DHC noted in the absence of corporate separateness and common intention the directors cannot be bound by the arbitration agreement in the present circumstances as they were also not acting in their personal capacity.

    IV. Understanding Directorial Exemption: The Role of Agency Principle 

    In addition to addressing the absence of a common intention to bind directors, the court also relied on the agency principle to discern the relationship between the company and its directors. Notably, it was observed that directors acted on the company’s behalf, as specified under Section 182 of the Contract Act. Similarly, Section 230 of the Contract Act clarifies that an agent does not assume liability for principal’s actions unless the agent personally commits to such responsibility. 

    The court’s perspective for not relying on the group of companies’ doctrine in favour of the agency principle is commendable. By emphasizing the fiduciary duties and roles of directors as company agents, the court elucidates a more nuanced understanding of corporate relationships and individual responsibilities within corporate structures.

    V. International Position 

    In light of the High Court’s oversight in considering international jurisdictions, it becomes imperative to delve into global legal perspectives on this issue. International jurisdictions have a mixed view regarding binding non-signatory directors and employees of companies to arbitration agreement. In the USA, in DK Joint Venture 1 v. Weyand it was held that because of the principles of contract and agency law, non-signatory corporate officers and agents of a corporation cannot be bound by the arbitration agreement entered on behalf of the company. The court in Covington v. Aban Offshore Ltd took the same view. Once, an arbitral tribunal in Geneva also held that the arbitration clause should not extend to the directors who have acted under employment.

    Due to the lack of uniformity on this issue in the international jurisdiction, it has also been held in certain cases that employees could be subject to arbitral jurisdiction as per the arbitration agreement signed by the company. This approach is based on the principle of ‘third party beneficiary’. According to this principle, employees could be subject to arbitral jurisdiction based on arbitration agreements signed by the company when they are intended beneficiary to the contract. However, this position is different and does not hinge on the group of companies’ doctrine, as argued before the Delhi High Court.

    It has been held in the case of In re Vesta Ins. Group Inc by Supreme Court of Texas that arbitration clauses apply only to contractual signatories, and the agents or officers of corporates can only be made a party to the dispute if they are enlisted as a third party beneficiary.

    Thus, even in cases where arbitration agreements bind employees, it is not based on the group of companies’ doctrine. The argument that the arbitration agreement must bind the directors by relying on Cox and Kings judgment does not stand as the group of companies’ doctrine in the present case cannot be applied in light of non-existence of separate companies.

    Therefore, the High Court’s decision aligns with the prevailing international stance, affirming that the impleadment of non-signatories to arbitration agreements, as per the Cox and Kings judgment, is contingent upon the common intention and the existence of separate entities within a group of companies.

    VI. Conclusion and Way Forward

    The judgment in Vingro Developers brings some clarity to the application of the Group of Companies Doctrine. By excluding directors from arbitration agreements, it underscores the defined fiduciary relationship within corporate structures. This decision emphasizes the need to consider agency principles and the absence of distinct entities within a group, to ensure a nuanced understanding and application of this doctrine in India. Moving forward, a comprehensive approach is needed to ensure consistency and fairness in resolving disputes involving directors and other employees of the company to ensure trust and efficiency in corporate arbitration proceedings.

  • 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.

  • 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.

  • 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.

  • 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.

  • Employees’ Rights Arising Out Of Mergers & Acquisitions: The Indian Judiciary’s Perspective

    Employees’ Rights Arising Out Of Mergers & Acquisitions: The Indian Judiciary’s Perspective

    By Shauree Gaikwad, fourth-year student at MNLU, AURANGABAD

    Introduction

    Merger and Acquisition (‘M&A’) is an activity undertaken as part of the restructuring of a company. With such M&A activity, the resources which get impacted the most are the human resources of the firm, i.e. the employees of the company. In order to cope up with the M&A activity and see towards it that the company follows fair practices, specific provisions have been laid down by the legislation addressing the rights of the employees. This article shall be discussing the impact of M&A on employees as well as the employees’ rights arising from an M&A.

    Types of Mergers & Acquisitions and its Impact on Employees

    Mergers and Acquisitions are denoted as “combinations” under the Competition Act, 2002 and denoted as “amalgamations” the Companies Act, 2013.

    The Impact of Horizontal Amalgamations on Employees

    When an amalgamation takes place between rival businesses, it is known as a ‘horizontal amalgamation’. As a horizontal amalgamation takes place within the same industry, it is strictly assessed by the Competition Commission of India (“CCI”) under section 6 (1) of the Competition Act, 2002 as the amalgamation of two rival industries narrows down the competition in an industry’s market and reaches closer towards having a monopoly in that industry.

    A result of a horizontal amalgamation is the amalgamation resulting in twin departments, i.e. the same type of department or team is present in both businesses as they are from rivalling industries. A possible negative effect of a horizontal amalgamation on the employees of that amalgamated entity is that they risk losing their jobs if the amalgamated entity decides to only keep either one of the two twin departments. It also increases the stress on the employees to work harder in order to be better than the employee’s counterpart in order to save themselves from being terminated. The answer regarding whether employees shall be terminated after an amalgamation lies in the vision of the company. If it is envisioned by the amalgamated company to increase its volume of work it takes on, it will undertake the corporate strategy of integrating the twin departments with each other so that they can work seamlessly with each other and also towards the goal of the company. This vision is often reflected in the proposed amalgamation plan, which needs to be mandatorily approved by the necessary authorities before it is implemented.

    The Impact of Vertical Amalgamations on Employees

    When an amalgamation takes place between unrelated businesses which do not belong to the same industry, then it is known as a ‘vertical amalgamation’. An example of a vertical amalgamation would be wherein one entity is into the business of making pencils, and another entity would be into the business of making the lead. An amalgamation of these two entities would result in ‘vertical amalgamation’. In horizontal amalgamations, the same kinds of roles or departments are doubled, and hence, in most of these cases, there is a likely chance that the extra set of employees are fired on the basis of select criteria such as preferred branch, experience, adaptability to the amalgamation. The case is not the same in case of vertical mergers wherein two businesses playing different roles in the supply chain amalgamate because there are no overlaps in roles or departments of the businesses. Rather, departments of the businesses would complement each other and the Board of the amalgamated company would work on a corporate strategy integration of all employees to work towards the amalgamated company’s business goals.

    Employees’ Rights arising out of Mergers & Acquisitions: The Judiciary’s Perspective

    In the United States, a federal act, known as the the Worker Adjustment and Retraining Notification Act (‘WARN Act’), 1988, mandates an employer to provide a two month notice to employees if the employer is going to either lay off more than fifty employees or shut down. Therefore, if an amalgamation results in fifty or more employees’ employment to be terminated, a US company shall be obligated to inform the employees two months in advance under the WARN Act. However, there are no other obligations of the employer to inform the employees regarding a merger if the thresholds under the WARN Act are not met.

    In the United Kingdom, the Transfer of Undertaking (Protection of Employees) Regulations, 2006, (‘TUPE Regulations’) mandates the employers to retain all employees during an amalgamation, inform the employees prior to the amalgamation, and also provides the employees a choice to terminate their employment in case the employee objects to being employed by the transferee company. Therefore, the TUPE Regulations in an employee friendly law which aims to safeguard the rights of employees and lay out the obligations of employers during an amalgamation. 

    Meanwhile in India, only one section of the Industrial Disputes Act, 1947 deals with employees’ rights coincidental to an amalgamation. According to section 25FF of the Industrial Disputes Act, 1947, in case the employee is transferred to another company due to an amalgamation resulting in the transfer of management and ownership, then the employee shall be entitled to notice of change and compensation provided that the employee has been working for at least one year, his employment has not become any less favourable than it was earlier, and his services have not been interrupted.

    It should be noted that section 25FF did not originally feature a compensation clause. It was the landmark judgement ofHariprasad Shivshankar Shukla vs. A.D. Divikar in 1956 which led to section 25FF being replaced by a new section altogether by The Industrial Disputes (Amendment) Act, 1957 (Act. 81 of 1957). The amended section 25FF is the one that is still into effect till date. This amended section included the provision of compensation to a worker in case his employment is terminated as a result of a transfer in ownership or management.

    In Maruti Udyog Ltd. v. Ram Lal & Ors., the Supreme Court clarified that “..Section 25FF envisages payments of compensation to a workman in case of transfer of undertakings, the quantum whereof is to be determined in accordance with the provisions contained in Section 25F, as if the workman had been retrenched…”

    In Bombay Garage Ltd. v. Industrial Tribunal, the Bombay High Court held that the employer of the transferee company is bound to recognise and make the payment of gratuity for the services rendered by employees while they were employed by the transferor company.

    When it comes to employees’ consent to an amalgamation, in Sunil Kr. Ghosh vs. K. Ram Chandran, the Supreme Court, held that in case of a transfer of employees as a result of an amalgamation, the old employer needs to take the consent of employees to be transferred to the new employer. In case of employees’ lack of consent to being transferred, he is entitled to compensation under section 25FF of the Industrial Disputes Act, 1947.

    In Gurmail Singh and Ors. vs. State of Punjab and Ors., the Supreme Court interpreted Section 25FF of the Industrial Disputes Act, 1947 as a guarantee to the employees of either compensation from their former employees after termination of their employment, or continuity of service after his transfer, but not both. The Supreme Court stated that “The industrial law, however, safeguarded his interests by inserting Section 25FF and giving him a right to compensation against his former employer on the basis of a notional retrenchment except in cases where the successor, under the contract of the transfer itself, adequately safeguarded them by assuring them of continuity of service and of employment terms and conditions. In the result, he can get compensation or continuity but not both.”

    The Supreme Court’s judgement in the Gurmail Singh case was upheld by the Bombay High Court in Air India Aircraft Engineers’ Association and Ors. vs. Air India Ltd. and Ors. wherein it also reiterated the fact that, in case of an amalgamation, an employee is entitled to compensation or continuity of employment, but not more.

    Conclusion

    As highlighted earlier, unlike the US and the UK, in India, when it comes to mergers and acquisitions, the employees are largely left to have one right given by section 25FF of the Industrial Disputes Act, 1947 and two choices given under it – to get compensation or to get guaranteed continued employment after transfer resulting from an amalgamation. The Judiciary’s verdicts make it clear that an employee can only choose either of the two options provided under section 25FF and not both of them. However, the Supreme Court has affirmed that no employee can be forced to be transferred and the employee’s consent is necessary even if there are no changes to the work environment and responsibilities of the employee as a result of the employee’s transfer. Therefore, a logical step to getting an employee’s consent to transfer would be a notice of change that needs to be given to the employee at least 21 days in advance of the estimated transfer date under section 9A of the Industrial Disputes Act, 1947. Therefore, given the drastic rise of M&A in India and the lack of a law addressing the rights and responsibilities of employees and employers during an amalgamation, a national law similar to the TUPE Regulations of the UK, should be considered to be made by either the Ministry of Corporate Affairs or the Parliament of India.