Saturday, January 21, 2017

SEBI Elaborates on Board Evaluation

Along with the considerable enhancement in the duties and responsibilities of boards of directors of Indian companies that was occasioned due to the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, there has been a considerable emphasis on board evaluation as a measure of not only enhancing corporate governance in general, but also as a means of making boards more accountable to various corporate constituencies. Although the legislation and regulation mentioned above carried references to the requirement for board evaluation, they do not contain much details thereof, and it is left to individual companies to implement the same in the manner that is most suitable to them. While some of the leading companies did carry out stringent board evaluations even in the absence of a legal requirement, there tends to be considerable lack of uniformity in the standards and processes for board evaluation across all listed companies, thereby depriving investors and other stakeholders of the ability to compare amongst companies. Moreover, the issues of board responsibility and the performance of directors have been called into question in a recent high-profile episode, which may have had some role in reigniting the discussion surrounding board evaluation.

In this background, the issue by SEBI of what is termed as a “Guidance Note on Board Evaluation" assumes importance. In a lengthy set of parameters and processes, SEBI lays down detailed guidance on how companies may carry out board evaluation. This includes the evaluation of the board as a whole, that of various committees of the board, and also that of individual directors, including inside directors as well as independent directors. Companies that are required to carry out board evaluation may do well to rely upon the guidance note, given its comprehensive nature.

The use of a guidance note approach is interesting, in that it is not intended to operate as a mandatory regulation, but rather “to educate the listed entities and their board of directors about various aspects involved in the board evaluation process and improve their overall performance as well as corporate governance standards to benefit all stakeholders". Hence, it is merely exhortatory in nature. Nevertheless, it signifies the importance of board evaluation from the regulator's perspective, which has also received the attention of SEBI's international advisory board at its recent meeting.

While the above guidance note is an important step in enhancing corporate governance in general and board responsibility in particular, it remains to be seen how seriously Indian listed companies take this guidance. As observed in this quarterly briefing, there continue to be several challenges that befall boarding evaluation in the Indian context. Hopefully, the elaborateness of SEBI's guidance note will help address at least some of those.

Friday, January 20, 2017

Competition Appellate Tribunal Ruling in the Auto Parts Case

[The following guest post is contributed by Harsh Loonker, who is a final year student at the Jindal Global Law School]

The Competition Appellate Tribunal (“Compat”), by way of its order dated December 9, 2016, upheld the order by the Competition Commission of India (“CCI” or the “Commission”) dated August 25, 2014, with minor modifications to the order and a substantial reduction in the penalties levied. Acknowledging that the competition law regime in India and the automotive industry are going through a transitionary process, the Compat reduced the penalty imposed on the appellants, who are car manufacturers.

The CCI had penalised a total of 14 car manufacturers with presence in India, with a blanket 2% penalty on total turnover of their business. This 2% penalty would include their individual turnover from their car sales as well as their spare parts and after-market sales. This was so because the car manufacturers or the original equipment manufacturers (“OEMs”) were considered to be causing anti-competitive effects in the spare parts and after sales and service markets through restrictive agreements. The Informant had filled the information against Honda Siel Cars Ltd., Volkswagen India Pvt. Ltd. and Fiat India Automobiles Pvt. Ltd, none of which were party to this appeal. The Commission, in order to expand its investigation, conducted an inquiry on other OEMs in India and included them in the final order by the Commission. Three aggrieved OEMs, namely Toyota Kirloskar Motor Pvt. Ltd., Ford India Pvt. Ltd. and Nissan Motor India Pvt. Ltd. (“Appellants”), had availed an appeal through statutory appellate process provided in the Competition Act, 2002 (“Act”), while other OEMs had approached various high courts under writ jurisdiction.

The Appellants had preferred the appeal on all findings of the Commission, including in relation to the incorrect expansion of scope of investigation, incorrect determination of abuse of dominance through vertical agreements by and between the individual OEMs and their respective overseas supplier, OEMs and Authorized dealers. The Compat in its order agreed with the Commission and held that the Commission did not exceed its authority in expanding the scope of investigation. The Compat, after a lengthy analysis of the contentions of each side, went on to agree with all the findings of the Commission. In its order, the Compat reflected on the jurisprudence of intellectual property rights (IPR) vis-à-vis competition law and focused on two aspects of the Director General’s investigation on the treatment of agreements under the guise of protecting IPR. The Compat sought to examine if the agreements were in fact protecting company IPR and if these rights as they stood were in fact protected by Indian law.

While assessing the impugned penalty imposed, the Compat decided to adopt a lenient view. The definition of ‘turnover’ was discussed and through references to case law was found to be the turnover of the products subject to inquiry, and not the turnover of the entire multi-product enterprise.  And following the yardstick of relevant turnover, the Compat ordered a revised 2% of average annual turnover for the 3 years immediately preceding the inquiry penalty on the spare parts markets of the OEMs. The Compat directed the Commission to obtain relevant statistics and verify the amount of penalty. This case would therefore provide clarity on matter where the CCI has over-extended its reach while ordering penalty.

Borrowing jurisprudence and practice from mature regulatory jurisdictions, and setting precedent on the scrutiny of vertical agreements/arrangements, this order by the Compat has cleared much of the uncertainty in dealing with vertical arrangements.

- Harsh Loonker

Thursday, January 19, 2017

NCLT Denies Itself the Power to Dispense With Meetings in an Amalgamation

Hitherto, schemes of arrangement were carried out under sections 391 to 394 of the Companies Act, 1956 and the jurisdiction for sanction of the schemes was exercised by the relevant High Court. At the initial stage, the role of the High Court was to call for the meetings of various classes of shareholders and creditors to seek their approval to the scheme. It had been common practice for High Courts to dispense with meetings of classes of either shareholders or creditors if an overwhelming of number of members of the class had already granted their consent to the scheme in writing, which was presented before the court.

With effect from 15 December 2016, the provisions of sections 230 to 233 and 235 to 240 of the Companies Act, 2013 were notified, thereby conferring jurisdiction upon the National Company Law Tribunal (NCLT) to oversee and accord sanction to schemes of arrangement. In one of the first schemes to be considered by the NCLT, the Principal Bench thereof passed an order on 13 January 2017 on the question of whether the NCLT is empowered to dispense with the meeting of a class of shareholders if the members thereof have granted their consent in advance. The NCLT answered in the negative in JVA Trading Pvt. Ltd. and C&S Electric Limited.

This case involved a scheme of amalgamation of JVA Trading with C&S Electric. JVA Trading had only four shareholders, all of who had granted their consent to the amalgamation. Hence, the question was whether the shareholders’ meeting of JVA Trading could be dispensed with. Here, after analysing the provisions of the Companies Act, 2013, the NCLT held:

In relation to the dispensation of the meeting of the equity shareholders of the Transferor Company is concerned we are not inclined to grant dispensation taking into consideration the provisions of the Companies Act, 2013 and the rules framed there under both of which expressly do not clothe this Tribunal with the power of dispensation in relation to the meeting of shareholders/members. On the other hand reference to Section 230(9) of the Companies Act, 2013 … discloses that the Tribunal may dispense with calling of a meeting of creditor or class of creditors where such creditors or class of creditors, having at least ninety per cent value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement and does not provide for the dispensation of the meeting of members.

Further, the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 more specifically Rule 5 which provides for directions to be issued by this Tribunal discloses that determining the class or classes of creditors or of members meeting or meetings have to be held for considering the proposed compromise or arrangement; or dispensing with the meeting or meetings for any class or classes of creditors in terms of sub-section (9) of section 230.

Keeping in view the above provisions, dispensation of the meetings of members of the company cannot be entertained.

This effectively means that the NCLT can never dispense with the holding of a meeting of a class of shareholders or creditors (except under section 230(9)) even if such a meeting turns out to be an empty formality. This will certainly add to the costs and inefficiencies in effecting a scheme of arrangement. Under the Companies Act, 1956, courts did regularly grant dispensation despite the absence of any express provision in that legislation or the accompanying rules. It is not as if the affected minority shareholders are without any recourse. It is always possible for them to raise their objections when the scheme is taken up for consideration by the NCLT after the requisite classes of shareholders and creditors have approved it.

From a legal perspective, the NCLT does have general powers that it is at liberty to exercise in order to give effect to a scheme, for example in rule 24(2) of the rules pertaining to compromises and arrangements. However, the NCLT seems to be constrained by the existence of sub-section (9) of section 230, which expressly provides for dispensation of creditors’ meetings so long as they have been consented to by 90% of the creditors in value. The NCLT’s position is that this is only dispensation possible, and no other.

This order prompted me to briefly revisit the legislative drafting of the Companies Act, 2013, and some indications suggest that it might be consistent with the rather narrow view adopted by the NCLT in the present case, although the legislative history lacks full clarity. The Companies Bill, 2009 did not have any provision relating to dispensation with class meetings of either shareholders or creditors. It was only during the deliberations of the Parliamentary Standing Committee on Finance that such a proposal was made for dispensation with meetings not only of creditors, but also of shareholders so long as there was adequate support. In its 2010 report, the Standing Committee recommended that it “needs to be clarified if written consent is received from the requisite number of members or creditors, the requirement to hold a meeting could be dispensed with, as the meeting proposed in the clause is, in effect, to obtain the approval of the members or creditors”. Clearly the intention was to allow dispensation for both shareholders’ and creditors’ meetings if the scheme was adequately supported. Interestingly, the provision that culminated in section 230(9) was introduced in the ensuing Companies Bill, 2011 to include references only to dispensations for creditors’ meetings and not for shareholders’ meetings. It appears this is not a case of oversight. For example, a subsequent report in 2012 clearly indicates that the Ministry of Corporate Affairs differed with the suggestion of the Standing Committee regarding dispensation because “meeting should be held so that the information about the merger, amalgamation should be there in the knowledge of the members.”

What is unclear though is that if this logic should apply for shareholders, why should it not apply to creditors as well? Is there any reason why shareholders must be treated differently (without dispensation) as opposed to creditors (with dispensation) while the protection of minority interests may hold equally good in both cases, especially since schemes of arrangement could be entered into between a company and its shareholders (e.g. amalgamation) or between a company and its creditors (corporate debt restructuring). Hence, while the legislative history suggests keenness on the part of the Government to preserve corporate democracy through the requirement of meetings, there less clarity on why a distinction has been made between shareholders’ and creditors’ meetings. Moreover, although the intention of sub-section (9) is to facilitate corporate debt restructuring (and hence the emphasis on creditors’ meetings), its current wording is broad enough to include other types of schemes. For example, it might result in curious situations, such as where in an amalgamation, a shareholders’ meeting cannot be dispensed with even if 100% of the shareholder consent, but a creditors’ meeting in the same amalgamation can be dispensed with if only 90% of the creditors consent. Surely, this cannot have been intended. In such a context, the reliance by the NCLT on sub-section (9) that applies to creditors in order preclude itself from granting dispensation to a meeting of a class of shareholders may not be beyond doubt.

Despite the legal niceties involved, the interpretation adopted by the NCLT is likely to cause considerable practical issues, and might hamper genuine transactions that could have been carried out efficiently where shareholders may have approved the transaction up front. This may require further reconsideration either on the part of the NCLT or through appropriate amendments to the relevant Rules.

Wednesday, January 18, 2017

SEBI Enhances Oversight on Schemes of Arrangement

Since 2013, the Securities and Exchange Board of India (SEBI) has exercised oversight in respect of schemes of arrangement proposed by listed companies, including schemes such as amalgamation, demerger, reduction of capital and the like (see here and here). Such oversight has now been enshrined in regulations 11, 37 and 94 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. By virtue of this, SEBI and the stock exchanges possess and exercise the power of reviewing schemes of arrangement in order to ensure that they comply with the appropriate securities and listing regulations. Such a power was expressly provided for in view of previous uncertainties in case law that questioned the jurisdiction of SEBI over schemes of arrangement that are otherwise implemented under the Companies Act.

In a more recent development, the board of SEBI extended its oversight to schemes arrangement such as mergers and demergers between listed companies and unlisted companies. Furthermore, SEBI has sought to impose additional conditions on schemes of arrangement between listed and unlisted companies. The motivation behind the enhanced jurisdiction of SEBI is largely to prevent backdoor listings by unlisted companies through mergers with listed companies in a manner that might adversely affect the interests of the public shareholders of the listed companies.

In this regard, the board of SEBI has proposed various measures as follows:

1.          In the case of the merger of an unlisted company with a listed company, the unlisted company is required to comply with the requirement of disclosing material information as specified in the format for abridged prospectus. This is essentially to ensure that unlisted companies do not circumvent the disclosure requirements (and attendant legal risks and liabilities) that accompany an initial public offering (IPO) of such a company.

2.        Following the merger, the public shareholders of the listed entity and the qualified institutional buyers (QIBs) of the unlisted company must together not less than 25% shares in the merged company. This is to ensure that the shareholding following the merger is widespread, and would accordingly prevent the merger of a very large unlisted company into a small listed company.

3.        The merger would have to ensure that the listed company is listed on the stock exchange having nationwide terminals. 

4.        The issue of shares as part of the scheme of arrangement must comply with the pricing formula prescribed under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. This is to prevent select groups of shareholders from receiving undue benefits under the scheme.

5.         Lastly, public shareholders have been given additional rights whereby their approval through e-voting must be obtained in the following cases:

a.        Where an unlisted company is merged into a listed company, which results in a reduction of the shareholding percentage of the pre-scheme public shareholders to less than 5% of the merged entity;

b.        Where the scheme involves the transfer of whole or substantially the whole of the undertaking of a listed company where the consideration is provided in a form other than listed equity shares;

c.        Where the scheme involves the merger of an unlisted subsidiary with a listed holding company and the shares of the unlisted subsidiary have been acquired by the holding company from the promoters.

The above three scenarios involve transactions that might impinge upon the rights and interests of public shareholders, and hence the requirement for obtaining their specific approval.

In all, these efforts by SEBI would enhance the scrutiny of reverse mergers such as those between unlisted companies and listed companies that are carried out with a view to achieving a backdoor listing of such unlisted companies. In several jurisdictions, these issues are dealt with specifically through stock exchange listing rules. It is somewhat surprising that the situation remained exposed in the Indian context, but at least now it has received specific treatment, both from the perspectives of securities regulation generally and minority shareholder protection specifically.

Sunday, January 15, 2017

NALSAR Student Law Review Vol. XII: Call for Papers

[The following announcement is posted on behalf of the NALSAR Student Law Review]

The NALSAR Student Law Review (NSLR) is now accepting submissions for its upcoming Volume XII. NSLR is an annual, student-edited, peer-reviewed law review that is the flagship publication of NALSAR University of Law, Hyderabad, India.

Submissions may be in the form of Articles (5000-8000 words), Notes (3000-5000 words), Case CommentsLegislative Comments or Book Reviews (1500-2500 words). The word count is inclusive of footnotes. Submissions are required to be in Times New Roman font, double-spaced and word-processed compatible with Microsoft Word 2003 and 2007. The main text should be in font size 12 while footnotes in font size 10. Please use only footnotes (and not end-notes or other forms of citation) in the submission. All submissions must conform to the Bluebook (20th edition) system of citation. Finally, all submissions are required to carry a 250 word abstract that encapsulates the gist of the paper.

Submissions are to be emailed to under the subject heading ‘Volume XII - NSLR Submission’. The email should indicate which category the paper is intended for. Further, it should also contain the name of the author, qualifications, title of the manuscript and contact information. Please do not include any information that could identify the author in the manuscript itself. Co-authorship is allowed, provided that all authors are students at the time of submission of the manuscript. The deadline for submissions is May 14, 2017. All submissions must be submitted electronically.