Vicarious Liability of Non-Executive Directors - A Case for Reform of Law

Context:

The vicarious liability provisions have been evolving ever since the evolution of law of torts. “Offence by companies” is a standard vicarious liability provision in most statutes, which is often used to fasten the liability on directors for the acts and omissions of the company. These vicarious liability provisions are borrowed from colonial-era laws and incorporated in our domestic legislations. As a rule, there is no concept of vicarious liability in criminal law. Such provisions imposing liability on directors for acts/ omissions of the company are present in most statutes.

The vicarious liability provisions have a standard language providing that the person-in-charge of and responsible for the conduct of the business of the company at the time of the commission of the offence, as well as other officers are liable for that offence. However, those provisions do not make a distinction between Managing Directors (“MDs”)/ Executive Directors (“EDs”) and Non-Executive Directors (“NEDs”)/ Independent Directors (“IDs”).
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Striking off Name of a Company - The Jurisdictional Issue

Jurisdiction is not given for the sake of the judge, but for that of the litigant

– Blaise Pascal

Recently the Delhi High Court in Money Market Services (India) Private Ltd. v. Union of India held that an order passed by Registrar of Companies (ROC) striking off the name of a Company can be challenged by way of writ petition only before the High Court, which has territorial jurisdiction over the said ROC.[1]
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ESOPS as Managerial Remuneration - Do Regulators Need to Revisit Regulatory Architecture

Employee Stock Option Plans (ESOPs) are a well-recognised method of compensating employees and attracting and retaining the best talent. Compensation in the form of equity shares helps in creating a sense of ownership in the mind of employees. Benefit schemes for employees, including ESOPs, have gained popularity, especially in technology start-ups that have limited financial resources in the initial years, but want to attract the best talent. ESOPs are the option or a right, but not an obligation, which is offered by a company to its employees to purchase its shares at a pre-determined price in the future. ESOPs align the interest of the employees with long term interest of the companies and play a vital role in retaining employees at the growing stage of the company.

Section 2(37) of the Companies Act, 2013 (“Act”), defines ‘employees’ stock option’ as the option given to directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price. The Act expressly prohibits ESOPs for Independent Directors[1] as the law makers believe that it compromises the ‘independence’ of such Independent Directors. Section 62(1)(b) of the Act provides for the approval of shareholders by a special resolution. Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014, lays down the legal framework for issuance of ESOPs for unlisted companies. Listed companies having ESOP plans are required to comply with the SEBI (Share Based Employee Benefits) Regulations, 2014 (“ESOP Regulations”).
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The SEBI Board in its meeting held on June 25, 2020, has approved  providing listed companies with a time-bound temporary option of undertaking preferential allotments at a possibly more investment-friendly pricing, by choosing to utilise the higher of the two weeks or the 12 weeks formula price (i.e. based on the average of the weekly high and low of the volume weighted average price quoted on the stock exchange – the pricing formula) instead of the existing norm of higher of the two weeks or the 26 weeks formula price. Given the current market conditions, which has seen a significant stock price drop since the second half of March, 2020, this option is bound to result in lower and arguably more favourable pricing for potential investments.


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Introduction

The EdTech sector is seeing significant investments and expenditure by governments, schools, universities, students and professionals globally. By 2030, it is expected that global EdTech expenditure will grow to USD 10 trillion[1]. The growing popularity of online learning, further necessitated due to the nationwide lockdown, has provided a major push to the sector in India, which is expected to grow at a CAGR of 52% to become a USD 2 billion industry by 2021[2]. The key growth drivers propelling EdTech in India are the ability to serve a large audience at significantly lower costs compared to traditional in-classroom learning, significant growth in internet and smartphone penetration across India, steady rise in disposable income of the Indian households, and a large consumer base with over 37% of India’s around 1.35 billion population falling in the 5-24 age bracket.


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The most valuable commodity I know of is information.

– Gordon Gekko, Wall Street

Over the past few weeks, the Securities and Exchange Board of India (SEBI) has passed three orders[1] (SEBI Orders) in the infamous ‘WhatsApp leak’ saga that has been in the news since November 2017[2]. Holding the impugned perpetrators guilty of violating insider trading regulations, the regulator has taken significant steps in pushing the boundaries of the concepts of insider, UPSI and insider trading.


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The provisions of the Companies Act, 2013 (the Act), and the rules framed thereunder, mandate companies to file requisite documents, including annual returns and financial statements, with the concerned Registrar of Companies (RoC) of their jurisdiction. Non-adherence to such provisions and non-filing of the requisite documents is an offence, exposing non-complaint companies and its directors to severe penal consequences, including fines and prosecution.

However, the records of the Ministry of Corporate Affairs (MCA) and the National Company Law Tribunals (NCLT) would clearly reveal that a lot of companies have been non-compliant with their filings. This non-compliance has been a menace to all the stakeholders involved, including, inter alia, (i) the companies and directors who have to face penal consequences for such non-compliances; (ii) the MCA and its administration who are engaged in the process of updating the records; (iii) the public/ shareholders who do not get access to the records of the companies; and (iv) the NCLT and the office of Regional Directors, which are burdened with compounding cases.


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Claw back clauses in Employment Contracts - A new tool to fight corporate misfeasance

The 2008 financial crisis made it possible to revisit contractual clauses of employees, especially those governing remunerations of executives in financial institutions. One of the clauses that gained prominence was the clause pertaining to ‘clawback’. Broadly speaking, clawback clause refers to an action for recoupment of a loss. It means the refund or return of incentive or compensation after they have been paid. The purpose of such a clause is to claim back unfair enrichment that has happened to an employee. Such a clause acts as a form of insurance and was originally applied in cases of misstatement of financial results or fraudulent acts by employees, but over time, the scope of this clause has gradually expanded.
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DISCLOSURE OF COVID-19 IMPACT BY LISTED ENTITIES - FINDING THE RIGHT BALANCE

Across India, each subsequent phase of the lockdown has permitted a responsible increase in economic activity. As companies re-start their operations, they continue to assess the impact of Covid-19 pandemic on their businesses and operations, which is rapidly and continuously evolving. Listed entities are particularly conscious of their disclosure obligations, more so after the Securities and Exchange Board of India (“SEBI”) issued a circular on May 20, 2020 (the “Circular”), that outlined the relevant considerations for companies in relation to the disclosures on the impact of Covid-19 on their businesses, performance and financials. The Circular is not only a restatement of the current principle-based disclosure regime, but is also indicative of the regulatory expectation on disclosures going forward in relation to impact of Covid-19 pandemic as it evolves.
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Rights Issue - Regulatory to and fro on renunciation

On April 27, 2020, the Central Government notified the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2020 (“FEMA NDI Amendment”). The FEMA NDI Amendment seeks to modify the position on pricing of rights issue – in case of renunciation of rights in favour of a non-resident by a resident, pricing guidelines will apply. We have analysed the implications of the FEMA NDI Amendment on rights issue of securities in this blogpost.

Why Rights issue?

Rights issue has been a preferred mode of raising capital from the existing shareholders of a company as there are no prescriptive conditions on issue price. Companies have the flexibility to determine issue price in case of rights issue under company law as well as SEBI regulations (applicable to listed companies). This gives companies much-needed flexibility to structure a capital raise from existing investors, especially in times of need.
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