Indian Mutual Funds – New M&A Rules! Anu Tiwari (Partner), Ritu Sajnani (Senior Associate), Utkarsh Bhatnagar (Senior Associate) and Karthik Koragal (Associate) The Securities Exchange Board of India (“SEBI”) carried out a regulatory revamp exercise of SEBI (Mutual Funds) Regulations, 1996 (“MF Regulations”) and various circulars issued under it by way of a circular on mutual fund(s) (“MF”) issued on March 4, 2021 (“MF Circular”), effective from March 5, 2021, thereby streamlining a robust regime governing the reporting, compliance and disclosure requirements applicable to asset management company(ies) (“AMC”) and the trustee(s) of such AMCs. Reporting requirements strengthened Currently, the MF Circular requires an AMC to furnish the complete details of any indirect change in its control/ promoters of the sponsor(s) to SEBI and also notify details of a proposed change in control (whether direct or indirect) to the unitholders, by way of an email (in addition to publishing the same in newspapers. Similarly, in case of any proposed change to the fundamental attributes of a MF scheme, trustees are now mandated to obtain comments from SEBI, prior to effectuating such change. With an intent to ensure better compliance, SEBI has also expanded the scope of ‘key personnel’ of an AMC to include chief investment officer, chief risk officer, chief information security officer, chief operation officer, compliance officer, sales head, investor relation officer(s), etc. in addition to the erstwhile list of key personnel, which included the chief executive officer, fund manager(s), dealer(s) and head of other departments of the AMC. Hence, inter alia these new key personnel who are also now prohibited from carrying on self-dealing or front running activities, in addition to meeting the prescribed eligibility criteria. The revised reporting requirements extends SEBI’s regulatory prowess to monitor and bring more transparency in relation to the indirect change in control of the AMCs’ process. Relaxations and scrutiny go hand-in-hand In order to facilitate innovation in the MF space, SEBI has introduced certain relaxations like permitting employees of AMCs to participate in private placement of equity by any company, has allowed trustees to delegate its function(s) to declare/ fix a record date and decide the quantum of dividend, etc. to AMC officials. Further, trustees are now mandated to report to SEBI the MF securities dealt by them, only if a transaction exceeds INR 5 lakhs (vis-a-vis the previous threshold of INR 1 lakh). The regulator has also classified investment in non-convertible preference shares (“NCPSs”) as a ‘debt instrument’ and accordingly, limitation of a MF scheme to invest not more than 10% of its net asset value in debt instruments will also include NCPSs. The trustees now being required to obtain SEBI comments before effecting a ‘change in in the fundamental attributes of a MF scheme’ seems burden-some, as the regulator’s role, and oversight, already guarantees for the requisite checks and balances to govern the MF scheme, including for MF scheme transfers, through separate regulations and circulars in this behalf. Above is likely to add another layer to M&A deal-making, with already many layers involved, impacting deal costs and timelines, especially if a ‘new sponsor’ application may be involved, from a process, governance and unit holders’ standpoint. Albeit above ties into SEBI’s increasing focus on MF trustee’s accountability, which has hitherto been an overlooked area, given the nature and composition of MF trustee boards. Though, done with noble regulatory intent, one would have to see whether the above changes, including expansion of key personnel, further ‘spook’ trustee directors, especially independents - already an onerous position, with few upsides, especially after Calcutta High Court’s Order in the ITC / JPMorgan MF Trustees case, and SEBI’s approach qua Franklin Templeton trustees in 2020, expand the scope of potential SEBI show-cause ‘noticees’ from the current list of 7 (!), and shoot MF M&A in the knees, which was given a new lease of life recently via SEBI dropping the ‘3/ 5’ profitability criterion in Regulation 7, MF Regulations.

The Securities Exchange Board of India (“SEBI”) carried out a regulatory revamp exercise of SEBI (Mutual Funds) Regulations, 1996 (“MF Regulations”) and various circulars issued under it by way of a circular on mutual fund(s) (“MF”) issued on March 4, 2021 (“MF Circular”), effective from March 5, 2021, thereby streamlining a robust regime governing the reporting, compliance and disclosure requirements applicable to asset management company(ies) (“AMC”) and the trustee(s) of such AMCs. Continue Reading FIG Papers (No.4 : Series – 2): Indian Mutual Funds – New M&A Rules!

Vocal for Local - Overview of the Haryana State Employment of Local Candidates Act 2020

Introduction

The Haryana State Employment of Local Candidates Bill, 2020 (“Bill”), which was passed by the Legislative Assembly of Haryana on November 5, 2020, received the assent of the Governor of Haryana on February 26, 2021. The Haryana State Employment of Local Candidates Act, 2020 (“Act”), has been published for general information in the extraordinary gazette of Haryana on March 2, 2021, and will come into force, once it is notified by the Government of Haryana (“Haryana Government”). The Act is applicable to (i) all companies, societies, trusts, limited liability partnerships, partnership firms, (ii) persons employing 10 (ten) or more persons and (iii) any entity as may be notified by the Haryana Government and will be operational for a period of 10 (ten) years from the date of its commencement. The Act does not apply to the Central or the State Government or any organisation owned by either of them. The draft rules under the Act are currently awaited. Continue Reading Vocal for Local: Overview of the Haryana State Employment of Local Candidates Act, 2020

Transfer of Shares of an Insurance Company - The much-needed clarifications

The Insurance Regulatory and Development Authority of India (“IRDAI”) issued a circular (“Circular”) on July 22, 2020 to all CMDs and CEO of insurance and re-insurance companies with a view to bring more clarity on issues relating to the transfer of shares of insurance companies and the creation of pledge over shares of insurance companies Set out below is a brief summary of the clarifications provided by the Circular in relation to transfer of shares of an insurance company:

 A. Clarification on IRDAI’s guidelines for transfer of shares of listed companies Continue Reading Transfer of Shares of an Insurance Company: The much-needed clarifications

 

Computation of ‘net profits’ for Managerial Remuneration – Has this provision outlived its utility

Introduction

Section 198 of the Companies Act, 2013 (‘2013 Act’), prescribes a special method for computation of ‘net profits’ of a company in a financial year — which has different rules for arriving at net profit than the one prescribed under Accounting Standards.

The special methodology for computation of net profits prescribed under Section 198 is used for two purposes – (i) for determining managerial remuneration under Section 197 and Schedule V; and (ii) for determining the minimum CSR amount to be spent by the company in a financial year, under Section 135(5) of the 2013 Act. Continue Reading Computation of ‘net profits’ for Managerial Remuneration – Has this provision outlived its utility?

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Cross-border ESOP Structures

Employee stock options (“ESOPs”) have been used as an effective retention tool globally. Cross-border ESOP structures can be considered by a variety of global businesses with existing Indian presence and by investors that propose to set up greenfield presence or acquire operating businesses in India. Moreover, Indian companies can also issue ESOPs to employees of their foreign holding, subsidiary or joint venture companies. This article discusses various cross-border ESOP structures and identifies key considerations arising under Indian corporate, foreign exchange and taxation laws.  Continue Reading Cross-border ESOP Structures

Evidentiary value of Parliamentary Committee Reports 

In Kalpana Mehta v Union of India (‘Kalpana Mehta judgment’)[1], a Constitution Bench of the Supreme Court (‘SC’) pronounced a detailed judgment on whether Courts can place reliance on the Report of a Parliamentary Standing Committee (‘PSC’). The SC also examined whether the factual observations made in a PSC Report can be contested or challenged by the parties, during a judicial proceeding.

This decision arose from a referral order issued by a two-judge bench of the SC. The two-judge bench took the view that this was a ‘substantial question of law’ – that should be adjudicated by a Constitution Bench in accordance with Article 145(3) of the Constitution. While the Constitution Bench took a unanimous view, three separate concurring opinions were issued by Justice Dipak Misra, Justice Dr. D Y Chandrachud and Justice Ashok Bhushan. Continue Reading Evidentiary value of Parliamentary Committee Reports

Indian Mutual Funds – M&A Wave

The Securities and Exchange Board of India (“SEBI”) recently approved amendments to the SEBI (Mutual Funds) Regulations, 1996 (“MF Regulations”) at its December 16, 2020 board meeting, notified on February 4, 2021 through the MF Regulations by way of the SEBI (Mutual Funds) (Amendment) Regulations, 2021, with effect from March 5, 2021.

Currently, a Mutual Fund (“MF”) ‘sponsor’ is required to have a ‘sound track record’ i.e. having profits  in 3 out of the last 5 years, including the fifth year. Recognising the role of emerging tech/ fintech companies in the Indian financial services space and to facilitate MF innovation/ geographic penetration, SEBI relaxed the above profit criterion for sponsors. Going forward, MF sponsors who do not meet the above, would still be eligible to, either set up a new, or acquire an existing, MF asset management company (“AMC”) and trustee company, if it has a minimum net-worth of INR 1 billion as contribution towards the AMC’s net-worth, which is required to be maintained till the sponsor makes profits for 5 consecutive financial years. Continue Reading FIG Papers (No. 3: Series – 1) : Indian Mutual Funds – M&A Wave!

IRDAI’s Approach to ‘Fit and Proper’ Assessment in light of the Sahara Life Saga

Introduction

An issue of significant relevance to financial regulators world-over is the fitness and propriety of key shareholders of financial entities. The objective of this blog is to analyse IRDAI’s approach to assessment of ‘fit and proper’ status of significant owners of insurers, especially in light of the order passed by the IRDAI in the matter of M/s Sahara India Life Insurance Company Limited (“Sahara Life”) on December 30, 2020 (“IRDAI Order”). Before we delve into IRDAI’s approach in this regard, it is important to trace the chronology of events, leading to the IRDAI Order. Continue Reading IRDAI’s Approach to ‘Fit and Proper’ Assessment in light of the Sahara Life Saga

One-Sided-Contractual-Terms-Constitute-Unfair-Trade-Practice-Under-Consumer-Law-in-India

INTRODUCTION:

A three-judge bench of the Supreme Court, in Ireo Grace Realtech Pvt. Ltd. v. Abhishek Khanna and Ors.[1], has inter alia held that developers cannot compel apartment buyers to be bound by one-sided contractual terms. Finding such one-sided agreements oppressive, the Court has held that the same would constitute an unfair trade practice under the consumer laws in India. Continue Reading One-Sided Contractual Terms Constitute Unfair Trade Practice under Consumer Law in India

 

Serious Fraud Investigation Office – Keeping a close watch on frauds in India Inc

The Serious Fraud Investigation Office (‘SFIO’) is an organisation established under the aegis of the Ministry of Corporate Affairs (‘MCA’) – for investigation and prosecution of white-collar crimes. The SFIO was constituted in July 2003 following the recommendations of the Naresh Chandra Committee. In 2002, the Naresh Chandra Committee had recommended setting up a ‘Corporate Serious Fraud Office’, to uncover corporate fraud, and supervise prosecutions under various economic legislations. Continue Reading Serious Fraud Investigation Office – Keeping a close watch on frauds in India Inc