Image credit: Scroll.in, September 26, 2017

This is the fourth blog piece in our series entitled “Those Were the Days”, which is published monthly. We hope you enjoy reading this as much as we have enjoyed putting this together.

The world is becoming corporatised, and the time of the business owner living over his little shop are well-nigh over. The world is also becoming smaller and, as it does, a business’s reach spreads across multiple jurisdictions and through multiple subsidiary or group companies.

In this age of corporatisation, most jurisdictions recognise the concept of a company as a separate juristic person, with an identity distinct and independent of its shareholders, members or directors. This corporate existence separates a company’s identity from that of its promoters or shareholders. It enables the company to contract in its own name, with its shareholders and third parties, to acquire and hold property in its own name, and to sue and be sued in its own name. A company has perpetual succession; its life is not co-dependent with that of its shareholders and it remains in existence irrespective of any change in its members, until it is dissolved by liquidation. The shareholders of a company are not identified with the company and cannot be held personally liable for acts undertaken by, or liabilities of, the company.

This independence or distinction is not a new concept. In the late 19th Century, the judgment in the classic case of Salomon v. Salomon[1] was passed, ruling that a company is a separate legal entity distinct from its members and so insulating Mr. Salomon, the founder of A. Salomon and Company, Ltd., from personal liability to the creditors of the company he founded.

Continue Reading LIC v. Escorts and Beyond – Lifting the Corporate Veil

NCLT Can Reject a Scheme of Arrangement if it is not in Public Interest

In the case of Wiki Kids Limited[1], the NCLAT upheld the order of the NCLT rejecting a scheme of amalgamation, as it resulted in undue advantage to the promoters of the amalgamating company.

Facts

Background

In the instant case, a non-listed company Wiki Kids Limited (Transferor Company), wished to amalgamate with Avantel Limited, a listed company (Transferee Company). For the aforesaid purpose, these entities (collectively referred to as Appellants) had proposed a scheme of amalgamation (Scheme) and approached the Andhra Pradesh High Court, seeking directions with respect to the meetings of the shareholders, and secured and unsecured creditors in the Scheme.

Pursuant to the directions of the High Court, the Scheme was approved by the shareholders of the Transferee Company. In the meantime, in view of a notification of the Ministry of Corporate Affairs dated December 7, 2016, the case was transferred to the National Company Law Tribunal (NCLT). The Appellants, accordingly, filed a second motion before the Hyderabad Bench of the NCLT. The NCLT, on perusal of various documents including the share exchange ratio and the valuation report, rejected the Scheme on the ground that it was beneficial to the common promoters of the Appellants and no public interest was being served.

Continue Reading NCLT Can Reject a Scheme of Arrangement if it is not in Public Interest

Time to Revisit Spectrum Caps and Market Shares

In the initial years of wireless telephony in India, radio spectrum was administratively allotted to licensees. However, following the recommendations of the National Telecom Policy, 2012, and the decision of the Apex Court in the case of Centre for Public Interest Litigation v. Union of India,[1] the Department of Telecommunications (DoT) de-bundled spectrum allotment from the grant of licenses, and adopted an auction-based price-discovery mechanism for spectrum allotment.

Scarce radio spectrum resources have typically been considered as bottleneck assets, and therefore auctions provide an effective means of price discovery, help maximise revenue for the Government, and ensure optimal allocation of spectrum resources. However, excessive reliance on bid markets risks overlooking potential market failures attributable to enterprises attempting to monopolise bottleneck assets such as spectrum.

Recognising the need to ensure that no one operator should be able to monopolise scarce spectrum resources to the detriment of its competitors and consumers, the DoT, in successive Notice Inviting Applications (NIAs) has prescribed ceilings for the amount of spectrum that can be held by any telecommunications operator in a given band within a Licensed Service Area (LSA), as well as a ceiling on the total amount of spectrum that can be held by an operator across all bands in an LSA. Presently, these stand at 50% of any given spectrum band in an LSA, and 25% of the overall spectrum available in such LSA across all bands. These restrictions have also been incorporated into the Mergers and Acquisitions Guidelines of 2014 (M&A Guidelines) as prescribed by the DoT.

Continue Reading Time to Revisit Spectrum Caps and Market Shares

Cabinet Approves Major Changes in FDI Policy

On January 10, 2018, the Indian Cabinet gave its approval to a number of major amendments to the Foreign Direct Investment (FDI) Policy of India, to further liberalise and simplify the same. This is to increase the ease of doing business in the country, and continue to attract much needed foreign capital to fuel India’s growth. In this post, we examine the latest amendments and their impact on the crucial sectors involved therein.

Key Reforms

Single Brand Retail Trading (SBRT)

The latest amendment has brought sweeping changes in FDI norms for SBRT, thereby enticing significant foreign brands into India’s promising retail space.

The current FDI Policy on SBRT allows 49% FDI under the automatic route, and FDI beyond that and up to 100% through the Government approval route. Earlier, a sourcing norm was also attached to such an investment. This meant that investors were required to source 30% of the value of goods purchased for their Indian businesses through local sources. Several investors have had to spend a significant amount of time developing good local suppliers as partners and their inability to procure locally proved a major stumbling block in setting up their business in India.

Continue Reading Cabinet Approves Major Changes in FDI Policy

The M&A Activity Spike Consolidation Among Domestic Players

M&A activity in India has reached USD 46.5 billion in 2017 and is predicted to hit USD 52.8 billion in 2019.[1] There are many reasons for this spike, and one important reason is consolidation among domestic players. The potential opportunities driving consolidation among domestic players are as follows:

  • Expansion of customer base

Post the proposed Vodafone-Idea merger, the combined subscriber count of the merged entity is expected to be around 39 crores with 35% of the market share, making the combined entity the largest operator in India and the second largest in the world.[2] Its nearest competitor, Bharti Airtel, currently has 24.21% of the market share.

The acquisition of BSS Microfinance by Kotak Mahindra Bank led to Kotak’s entry into the micro-lending sector and provided it access to approximately 271,000 customers of BSS.

In the pharma sector, the recent acquisition of Strides Shasuns’ drug brands in India by Eris Lifescience will enable Eris to break into the league of top 25 companies that have a market share of more than 1% in the pharmaceutical sector[3].

Continue Reading The M&A Activity Spike: Consolidation Among Domestic Players

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Tender Offers – 2017 The Year that Was

January to December 2017 saw 56[1] tender offers/open offers made under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations), 41 of which have been completed. This compares to 63 open offers made in the calendar year 2016.

For 2017, the total value of open offers made to the shareholders was Rs. 2,015[2] crores as against Rs. 9,676 crores for 2016. In 2017, no open offers were made by a private equity fund as compared to three made in 2016.[3]

Companies in the non-banking financial companies (NBFCs) space saw a particularly high number of open offers (11 in all). Some of these were open offers for Upasana Finance Limited, Capital India Finance Limited, Dhanvarsha Finvest Limited, Golden Goenka Fincorp Limited, Lark Trading and Finance Limited, Chokhani Securities Limited and TRC Financial Services Limited. However, some of these have not closed, probably due to delays in receiving regulatory approval for change in control of the NBFCs.

Continue Reading Tender Offers – 2017: The Year that Was

The ‘Raja’ & the ‘Praja’ Changing Dynamics in Corporate India

* This piece was first published in the The Economic Times Family Business Forum

Corporate governance has become extremely topical for India Inc. over the last year or so. A few prominent governance and leadership battles contributed to our securities market regulator, SEBI, to convene a senior committee to examine this thorny issue. Interestingly, ‘good’ governance in the Indian context is not a new concept: India had ancient guiding scriptures such as the Arthashastra and the Manusmriti, propounding that the “Raja” (i.e. the King) and his ministers must follow a strict code of discipline which furthers the best interests of their “Praja” (i.e. the subjects). Perhaps history needs to repeat itself.

Today’s competitive and dynamic business environment requires a balanced blend of a sustainable growth model coupled with sound governance. Since the global financial crisis of 2007-2008, Corporate India has accepted this as the “new normal” to survive this period of transition. However, practical reality is far from ideal.

To help fix these governance issues, the Kotak Committee Report on Corporate Governance, released on October 5th, 2017, formed under the chairmanship of Mr. Uday Kotak (“Report”), proposed a slew of far reaching changes, whose impact will be far reaching in the Indian promoter context. This article examines a few changes.

Continue Reading The ‘Raja’ & the ‘Praja’: Changing Dynamics in Corporate India

The Empire Strikes Back Strict Compliance with SEBI AIF Regulations

Taking cue from Yoda, the adjudication officer of Securities and Exchange Board of India (SEBI) has ordained “Do or do not, there is no try”. This means there can be no halfway compliance with SEBI (Alternative Investment Funds) Regulations, 2012 and circulars issued therein (the AIF Regulations).

The November-end order of the SEBI Adjudicating officer (AO) in the case of the SREI Multiple Investment Trust (the Fund) not only provides an insight into the regulator’s interpretation of the AIF Regulations but it is also the first case of imposition of a monetary penalty for breach of the AIF Regulations. This article critically analyses the AO’s order and summarises the learnings from the same.

Continue Reading The Empire Strikes Back: Strict Compliance with SEBI AIF Regulations

SFIO – Putting Corporate Fraudsters Behind Bars

Introduction

The battle against financial fraud and malpractices has significantly intensified over recent years. Globally, governments are establishing stricter regulatory frameworks and compliance standards to combat fraud in commercial transactions. A manifestation of such heightened awareness and regulatory action in India is evident under the provisions in relation to the Serious Fraud Investigation Office (SFIO) introduced under the Companies Act, 2013 (the Act) and Rules thereunder. These provisions bring with them implications for companies, which need to be fully understood and preventative steps taken to avoid any suspicion of fraud and consequent arrests. In the following paragraphs, we have analysed key aspects of the newly introduced Rules and the steps that must be taken by corporates to avoid any adversity under the same.

Under the provisions of the Act, the SFIO has been established by the Central Government as a multi-disciplinary office consisting of experts from diverse fields. The SFIO has been empowered to investigate serious cases of ‘fraud’, as defined under the Act. Furthermore, under the recently notified Companies (Arrests in Connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 (the SFIO Rules or Rules), the SFIO has been empowered to arrest any person if believed to be guilty of fraud. The legislative intent behind these provisions and the wide-ranging powers granted to the SFIO is certainly clear. The power of investigation coupled with the power to arrest any person ‘believed to be guilty of fraud’ indeed equips the SFIO with potent powers to combat the menace of corporate fraud, which is deeply entrenched into and plagues our economy.

Continue Reading SFIO – Putting Corporate Fraudsters Behind Bars

Data Protection Framework for India

On 24 August 2017, a nine-judge bench of the Supreme Court of India (Supreme Court) declared privacy as a fundamental right protected under the Indian Constitution (Privacy Judgment)[1]. The Supreme Court while holding the right to privacy as an intrinsic part of the right to life and personal liberty, and informational privacy as a facet of the right to privacy; highlighted the need for government to examine and enforce a robust regime for data protection.

The Supreme Court suggested balance between data regulation and personal privacy as there are legitimate state concerns (like protecting national security, preventing and investigating crime, encouraging innovation and the spread of knowledge, and preventing the dissipation of social welfare benefits)on one hand and individual interests in the protection of privacy on the other. Appreciating the complexity of all these issues, the Supreme Court (upon being informed of the constitution of an expert committee chaired by Hon’ble Shri Justice B.N. Srikrishna, former Judge of Supreme Court), left the matter for determination by the said expert committee (Expert Committee), which was required to give due regard to what the Supreme Court had held in the Privacy Judgment.

Continue Reading Genesis of (True) Data Protection Framework for India