This piece was previously published in the Economic Times

Next on the list of dilemmas relating to corporate governance issues for independent directors (ID) of a listed company is Board Evaluations. These are 360-degree reviews of the performance of a board of directors, conducted by the Nomination and Remuneration Committee (NRC). In a formal board evaluation process, each director reviews the other.

Interestingly, based on such evaluation, the NRC has to determine (amongst other things) whether an ID should continue holding his directorship or not. Earlier on, such evaluations were voluntary and some companies have been making generic voluntary disclosures in the annual report stating that the evaluation was conducted and recommendations were absorbed for improvement of board functioning. Going forward, the content of this disclosure will change.

Continue Reading Board Evaluations a Nightmare for Independent Directors?

As per the market regulator Securities and Exchange Board of India’s (SEBI) order dated March 31, 2017, in the Kamat Hotels (India) Limited (Kamat Hotels) case, Clearwater Capital (Clearwater) had subscribed to the foreign currency convertible bonds (FCCBs) of Kamat Hotels. Pursuant to a change in the applicable regulation relating to the conversion price for FCCBs, Kamat Hotels passed necessary resolutions approving the revision in price for conversion of FCCBs. Clearwater entered into an inter-se agreement (Agreement) with Kamat Hotels and its promoters on August 13, 2010. The Agreement expired on July 31, 2014. The Agreement had certain affirmative voting rights as are typical for the private equity (PE) investors to have for protection of their interests. Clearwater decided to convert the FCCBs into equity shares on January 11, 2012. The conversion resulted in increase in the shareholding of Clearwater from 24.50% to 32.23% requiring Clearwater to make an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations).

The open offer was made only under Regulation 3(1) which relates to acquisition of equity shares/voting rights and not under Regulation 4 (relating to acquisition of control). SEBI issued an observation letter on the draft letter of the offer filed for the open offer. SEBI’s letter stated that Clearwater acquired control under the Agreement in the year 2010 itself as certain affirmative voting rights/ protective covenants gave control to Clearwater and therefore, the open offer should have been made under Regulation 12 (relating to acquisition of control) of the 1997 Takeover Regulations. The protective covenants mandated approval of Clearwater before altering the share capital of Kamat Hotels, creating new subsidiaries, entering joint ventures, disposing or acquiring any material assets, lending or borrowing money beyond certain limits, winding up, etc.

Continue Reading SEBI’s Observation on Protective Covenants – Positive, But Law Not Settled Yet

This blog piece is excerpted from a previously published article in the Express Pharma, April 16-30 Issue and addresses the patent jurisprudence and issues in the pharmaceutical industry in India.

Innovation is the root of success in the competitive world of today. Creativity manifests in new ideas and technologies. New technologies when adopted make life easy. This could not be more true than for the pharmaceutical industry. With the Indian pharmaceutical industry en route to becoming a major player in the global market by 2020, there is increased activity in terms of investments in research and development, access to world class healthcare at affordable rates for the public at large and a renewed focus on development in rural markets.

Though patent law in India has existed over the years, jurisprudence related to pharmaceutical patents is still developing. From granting product patents, to specifically identifying patentable subject matter and incorporation of provisions for compulsory licensing, the law has come a long way since its inception. A conscious effort has been made to ensure that our laws are Trade-Related Aspects of Intellectual Property Rights (TRIPS) compliant while supporting a larger initiative to ensure that life saving medicines are available at affordable prices (compulsory licensing, price control etc.).

Courts in India are getting increasingly sensitive to the complex and technical issues that form the pith and substance of complex pharmaceutical patent litigation. Patent litigation turns on opinion of experts and evidence, which are often absent at the preliminary stages of litigation especially the interim injunction stage. As such the practice of passing ex-parte interim injunctions has given way to a more rational and balanced approach, wherein questions of prima facie infringement, balance of convenience and irreparable injury of the parties are weighed, analysed and rationalised along with a larger public interest perspective. The Supreme Court has time and again insisted that patent matters should be handled on an expedited basis especially where issues of public health, access to life saving drugs and commercial interests are involved and that matters should expeditiously head to trial. Courts are thankfully paying heed to this. Times are changing.

Continue Reading Intellectual Property Rights: Building or Stumbling Blocks? – On The Right Track

Foreign investors into India have often found that when they seek to enforce customary contractual rights in investment agreements, such as option rights, guarantees and indemnities, they have been hamstrung by the ability of the Indian counterparty to contend that such rights are in contravention of the Foreign Exchange Management Act, 1999 (FEMA) and the regulations issued by the Reserve Bank of India (RBI).

It is in this context that the recent Delhi High Court judgment in the case of Cruz City I Mauritius Holdings v. Unitech Limited, MANU/DE/0965/2017, is relevant, in that it categorically strikes down the defence that an arbitral award is not enforceable on the ground that certain provisions of the contract pursuant to which the award was issued were allegedly in contravention of the FEMA regulations.

Cruz City 1 Mauritius Holdings (Cruz City) filed a petition in the Delhi High Court for enforcement of an arbitral award rendered under the rules of the London Court of International Arbitration (Award). This required Unitech Limited (Unitech) and Burley Holding Limited (Burley), a wholly owned subsidiary of Unitech, to pay Cruz City the pre-determined purchase price of all of Cruz City’s equity shares in a joint venture (incorporated in Mauritius) pursuant to:

  1. A “put option” exercised by Cruz City against Burley.
  2. A keepwell agreement (which was in the nature of a guarantee) whereby Unitech was to make the necessary financial contribution in Burley to enable it to meet its obligations.

Continue Reading Alleged Violation of FEMA now a Dwindling Defence against Enforcement of Contractual Rights

India has historically been an economy driven by cash. With unique population demographics and modest literacy levels, it is a difficult market to “digitalise”. However, over the past decade, urban India has seen a significant rise in the use of pre-paid cards, mobile banking, internet wallets and e-payment instruments, in their various guises. They have created a relevant market of their own.

However, in the past few months, and as a consequence of the recent demonetisation, India has been witnessing a new wave of financial technology, with the introduction of innovative products and a wider customer base. Increased penetration has also compelled both the regulators and government to renew their focus on this migration to a “cashless” society. Consequently, the regulatory framework governing e-commerce and financial technology has seen various amendments recently.

Payment Systems in India

In India, the payment and settlement systems are regulated by the Reserve Bank of India (RBI), which exercises oversight over this market. Payment systems are required to obtain authorisation from the RBI to enable payment between a payer and a beneficiary; and while effecting such payment, they should provide payment, clearing and/or settlement services. Set out below are the key payment systems covered under the regulatory framework.

Continue Reading Payment Systems – The Digitalisation of Financial Services and its Future

In this day and age of scams, crime by corporate entities throws a lot of challenges at multiple levels. The level of crime may be extraordinary owing to the magnitude, powers and reach of such corporations as opposed to an individual committing any crime. Once it is found that a corporation has committed a crime, the next question is whether corporations can be held guilty of such crimes since they do not have minds of their own.

For a long time, corporations in India were not held liable for criminal offences due to the requirement of mens rea or the intention to commit the offence and inability to award imprisonment or arrest, etc. However, corporations are no longer immune.

Supreme Court on Liability of Corporations and its Officials

The law on this aspect has evolved over time. Now, a corporation can be convicted of offences involving mens rea by applying the doctrine of attribution[1]. Thus, the corporation can be held responsible for offences committed in relation to the business of the corporation by the persons in control of its affairs. The legal position in the US and UK has also crystallised to ensure a corporation can be held liable for crimes of intent. In the UK, the courts have adopted the doctrine of attribution to the corporation liable for acts committed by the directing mind, i.e., the directors and managers.

Continue Reading Criminal Liability of Corporate Officials in India

Over the years, companies have used employee stock option schemes (ESOP Schemes) as an effective method to align employee interests with shareholders, reward their efforts, increase their loyalty towards the company and motivate employees to perform better.

An initial public offering (IPO) and consequent listing of equity shares is one of the critical ways in which employees seek value appreciation in stock options and equity shares held by them. Accordingly, unlisted companies typically align timing of exercise of options under ESOP Schemes with their plans to undertake an IPO.

The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended (SEBI ICDR Regulations), which regulates IPOs, provides exceptions for ESOPs from certain eligibility conditions to be fulfilled by the issuer undertaking the IPO as well as transfer restrictions on equity shares applicable after the completion of the IPO.

However, issuers have faced challenges in the past with respect to eligibility conditions if the options have remained outstanding with individuals who have ceased to be an employee of the issuer.

Further, issuers are being increasingly questioned by such former employees, who continue to hold shares in the issuer but are not offered lock-in exemptions available to existing employees. Additional basis to these concerns is that former employees are treated beneficially under the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 (ESOP Regulations) and the Companies Act, 2013 and similar benefits have not been recognised under the SEBI ICDR Regulations.

Continue Reading Survival of Employee Stock Options through the IPO process: Are former employees stranded?

Do We Really Need the “Approval” Route?

The announcement in the Budget Speech that the Foreign Investment Promotion Board (FIPB) is going to be wound down in 2017-18, has led to speculation amongst consultants, lawyers, foreign investors and the media as to what will take its place. After all, the FIPB, an institution that has been around for more than two decades, epitomises, inter alia, the “government approval” route for foreign investment in sensitive sectors and has been the bedrock of the Foreign Direct Investment (FDI) Policy. It has been the “go-to” body for approvals, clarifications, waivers of conditions and post facto approvals of transgressions, etc.

After successive liberalisations, the “approval route “ now accounts for only 10% or so of the FDI inflows and, therefore, the real question to ask should not be as to how or which agency(ies) will give the required approval for FDI in the sensitive sectors, but whether approval is required at all. Following from my earlier blog piece on “FIPB – The Sunset Year”, I would like to make the case that in the sectors, currently still under the FIPB route as per the contours of the FDI policy, an FDI approval per se is not required at all.

FDI Approval an Additional Layer

First, it may be observed that in the approval route sectors, the FIPB approval forms only one layer of approval, even though the FIPB process is indeed “single window” (in the sense that it brings all the stakeholders to the table). There is another very vital approval required from the administrative ministry, the regulator or the licensor concerned, which gives the operating license/approval. This includes the allocation of the resource (spectrum/ airwaves/mine etc.) as per the laid down procedures. This is true for all the extant FIPB mandated sectors viz. mining, telecom, defence, media, etc, except single brand and multi-brand trading (this has been discussed later). The policy also prescribes follow-on FIPB approvals for changes in ownership, additional capital etc in these “licensed sectors”. The need for engagement by two separate government layers is clearly debatable.

Foreign Ownership is Not a Concern

Second, also as a result of the periodic liberalisation of the FDI Policy, the sectoral cap in nearly all the approval route sectors has gone up progressively along the usual pattern of 26% to 49% to 51% over the years and now stands at 74% or even 100%[1] in some cases. This clearly implies that in respect of these sectors, where the FDI sectoral cap is at 51% or above, there are no real concerns as regards to foreign ownership and control of entities from a sectoral perspective. In such a situation, therefore, the exact percentage of foreign investment in an entity becomes merely a matter of record, rather than one requiring a formal approval from a high powered government inter-ministerial body.

Continue Reading FIPB – The Rites of Passage

The Securities Exchange Board of India (SEBI) has, over the years, undertaken initiatives to align reporting and disclosure requirements for listed companies in India with global standards, including alignment with the principles prescribed by the International Organization of Securities Commissions. On February 6, 2017, SEBI issued a circular on Integrated Reporting by Listed Entities (SEBI Circular) to strengthen disclosure standards of listed Indian companies.

What is Integrated Reporting?

Integrated reporting is a principle-based reporting framework that was developed by the IIRC. Companies in various countries globally including Japan, the United Kingdom and Australia have adopted integrated reporting.

The primary purpose of an Integrated Report is to provide stakeholders with details in relation to the following: (i) functioning of an organisation; (ii) the value created by an organisation over time; and (iii) various external factors that affect the organisation. The Framework sets out certain fundamental concepts and guiding principles that should be considered while preparing an Integrated Report.

Continue Reading Streamlining Reporting Standards

The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was enacted to make special provisions for the timely detection of sick (and potentially sick) companies owning industrial undertakings. The Board for Industrial and Financial Reconstruction (BIFR) was formed under the SICA to determine the sickness of such industrial companies and to prescribe measures either for the revival of potentially viable units or the closure of unviable companies.

With effect from December 1, 2016, the SICA has been repealed by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (“Repeal Act”). This has resulted in the dissolution of the BIFR and other bodies formed under the SICA.[1] Continue Reading Repeal of Sick Industrial Companies (Special Provisions) Act, 1985