Recently, in Neeharika Infrastructure Private Limited v. State of Maharashtra[1] (“Neeharika Infrastructure”) a three-judge bench of the Supreme Court (“SC”) pronounced a detailed judgment on the powers of the High Court (“HC”), while adjudicating a petition for quashing of the FIR – filed under Section 482 of the Criminal Procedure Code, 1973 (“Section 482 CrPC”) and Article 226 of the Constitution of India.
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?
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
Inter-corporate loans granted by a company are regulated under Section 186 of the Companies Act, 2013 (‘2013 Act’). One important pre-condition relates to the interest rate thresholds prescribed under sub-section (7). Section 186(7) of the Act states that – “No loan shall be given under this Section at a rate of interest lower than the prevailing yield of one-year, three-year, five-year or ten-year Government Security closest to the tenor of the loan.”
Section 186(7) effectively prevents a company from giving an inter-corporate loan at a rate of interest lower than the prescribed thresholds, i.e. the prevailing yield of one-year, three-year, five-year or ten-year government security closest to the tenor of the loan. This leads to multiple practical difficulties, especially in situations where a holding company wishes to provide funds to its foreign wholly owned subsidiaries (‘WOS’).
Continue Reading Minimum Interest Rates on loans to foreign WOS – Need for Review
The Reserve Bank of India (“RBI”) has modified the regulatory landscape applicable to core investment companies (“CICs”), as per its circular dated August 13, 2020 (“Revised Framework”), in order to ensure stability of the financial system and address systemic risks posed by inter-connectedness of CICs and their group companies. In contrast to the light-touch regulation issued exactly a decade ago on August 12, 2010, the Revised Framework imposes far more stricter norms.
In furtherance to its announcement in the Statement on Development and Regulatory Policies issued on June 6, 2019, along with the Second Bi-Monthly Monetary Policy for the year 2019-20, the RBI constituted a working group under the chairmanship of Mr. Tapan Ray (non-executive chairman, Central Bank of India and former secretary, Ministry of Corporate Affairs) (“Working Group”) to review the regulatory and supervisory framework applicable to CICs. The Working Group issued its report in November 2019 and the Revised Framework has now been issued based on the recommendations of the Working Group.
Continue Reading Revised Framework for Core Investment Companies – Tightening the Screws?
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”).
Continue Reading ESOPS as Managerial Remuneration: Do Regulators Need to Revisit Regulatory Architecture?
Since overhauling the insider trading regime with the introduction of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), the Securities and Exchange Board of India (“SEBI”) has continually sought to fine tune and tweak the regulations through amendments in 2018 and 2019. On July 17, 2020, SEBI notified the Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2020 (“PIT Amendment”), to introduce further changes to the PIT Regulations.
Continue Reading Recent Amendments to the Insider Trading Regime
The Companies Act, 2013 does not contemplate shareholder meetings being held electronically. However, as social distancing becomes de rigueur and the temporary lockdown has been extended to May 3, 2020, due to the COVID-19 pandemic, it has become difficult, impractical and illegal in many cases for companies to hold shareholder meetings physically. At the same time, companies need to plough through these difficult times, and crucial decisions on matters such as fund raising and restructuring, all of which require shareholders’ approval, cannot be suspended. Responding to this dilemma, the Ministry of Corporate Affairs (MCA) has issued circulars[1] relaxing the requirement to hold physical general meetings and permitting meetings to be held remotely through electronic means.
The MCA has requested companies to hold general meetings to take decisions of urgent nature (other than for items of ordinary business[2] and items where any person has a right to be heard) through electronic voting or postal ballot, according to the procedure under Section 110 of the Companies Act, 2013 (Companies Act) and Rule 20 of the Companies (Management and Administration) Rules, 2014, and the additional measures prescribed under the circulars.
Continue Reading Vote from Home – A Positive Move for Shareholder Meetings
The Central Government recently notified Sections 230(11) and 230(12) of the Companies Act, 2013 (“Act”), which deal with takeover offers in unlisted companies. Section 230 of the Act provides for arrangements between a company and its creditors or members or any class of them, specifying the procedure to be followed to make such a compromise or arrangement. The newly-notified Section 230(11) states that in the case of unlisted companies any compromise or arrangement may include a takeover offer made in the prescribed manner, while Section 230(12) permits a party aggrieved by the takeover offer to make an application, bringing its grievance before the National Company Law Tribunal (“NCLT”). The Ministry of Corporate Affairs has also amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“CAA Rules”) and the NCLT Rules, 2016, corresponding to the above provisions. Sub-rules 5 and 6 have been added to Rule 3 of the CAA Rules, and Rule 80A has been inserted in the NCLT Rules, detailing the manner in which the applications may be made under Sections 230(11) and 230(12), respectively. However, these rules are not applicable to any transfer or transmission of shares through a contract, arrangement or succession, as the case may be, or any transfer made in pursuance of any statutory or regulatory requirement.
Continue Reading Takeover Rules for Unlisted Companies: Minority Squeeze Outs Under Section 230(11) of the Companies Act, 2013
The SEBI has streamlined certain aspects of the rights issue process that is expected to not only reduce the timelines but also provide clarity on the renunciation and trading of rights entitlements. These are welcome changes and will potentially make rights issues a preferred option to raise capital for listed companies.
Whilst rights issues are offerings to existing shareholders, it typically takes 55 to 58 days to complete the process (excluding SEBI review and the time taken for due diligence and drafting the offer document). The process involves (i) a minimum 15-day rights issue application period, (ii) mandatory participation by certain investors only through the non-ASBA process (such as through cheque) and (iii) a seven clear working days intimation prior to the record date. SEBI has addressed some of these concerns through amendments to the SEBI ICDR Regulations, SEBI Listing Regulations (both effective from December 26, 2019) and a circular with effect from February 14, 2020.
Continue Reading SEBI Streamlines Rights Issue Process