Saturday, January 31, 2009

SEBI notifies amendments for disclosure of pledged shares of Promoters

SEBI has notified here the amendments requiring disclosure of pledged shares of Promoters and persons forming part of the Promoter Group (referred collectively as “Promoters” here). This issue has been the hot topic on and off this Blog and hence much background is not required for this except a few brief following sentences.

The Satyam episode brought to the forefront the concern that Promoters’ may have pledged a substantial quantity of their shares and thus shareholders and others who rely on the holding of the Promoters may be misled of the real Promoters’ stake. There were also concerns of Insider Trading. Whatever the background, SEBI has now finally notified the amendments.

I will post more thoughts in a later post but the following are the highlights of the amendments:-

1.      The requirements have been made through an amendment of the SEBI Takeover Regulations. I had expected that they would also amend the Insider Trading Regulations and the Listing Agreement. I am not ruling this out wholly but, looking at the wording of the amendment, it is likely that this may be the only provision covering this issue.

2.      The amendment is by introducing a new Regulation 8A to the Takeover Regulations.

3.      As expected, though highly debated, the disclosure is required only of the pledged shares of the listed company and not of shares pledged of the holding or investment Company. Though, see also the concern expressed later.

4.      The Promoters have to make disclosure of pledged shares to the Company within 7 working days of the amendment.

a.      What is the date of amendment whether 28th January 2009 being the date of notification or a later date is an area of ambiguity and SEBI should clarify on this specifically, more so when it makes such flash amendments having almost immediate effect. But more on this in a later post.

5.      The Company in turn should inform the stock exchanges within 7 working days of receipt of this information.

a.      There is a cutoff quantity for this discussed later.

6.      The Promoters will continue to inform the Company of further pledges from time to time and the Company will in turn inform the stock exchanges from time to time.

7.      The Promoters have also to inform the Company when the pledge is invoked.

8.      The Promoters have to make disclosures to the Company of all pledges. However, the Company will inform the stock exchanges only if, during a quarter (March, etc.), the cumulative quantity pledged is 25000 or 1% of capital (peculiarly defined), whichever is less.

Some areas of concern that I can immediately highlight are:-

1.      What details are to be given in the disclosures? There is no further clarification on this, nor is any form specified.

2.      What about disclosure of shares removed from pledge from time to time? There is no requirement but obviously there is nothing to stop Promoters from giving such disclosures.

3.      What is pledge of shares? Though this is a common term in law, it is not defined for the purposes of these Regulations. In the context of shares, a definition would have helped.

4.      Does the Company have to inform on a quarterly basis or every time information is received? The words used are just slightly ambiguous.

5.      Is the minimum quantity (25000 or 1%) per person or for the Promoters/Promoters Group taken as a whole?

-       Jayant Thakur

Friday, January 30, 2009

Further Spill-Over Effects Of Satyam

An article in today’s Business Standard mentions the renewed interest the Income Tax Department is taking the compliance of Chartered Accountants with their due diligence obligations. In the case of transactions involving remission of money outside India, the Income Tax Act permits the production of a certificate from the CA stating that the transaction is not taxable in India, as a basis for permission from the RBI for the transfer of funds. However, of late, these certificates are allegedly being obtained by fraud. This has prompted the CBDT to notify the Institute of Chartered Accountants of India (ICAI) about this practice, and has brought such international transactions under further scrutiny by the I-T Department.

Given the pro-Revenue stance being adopted already by the Indian judiciary in the Hutch-Vodafone dispute, this comes as yet another indicator of the difficulty Vodafone is bound to face in avoiding the Indian tax net. The clearly prejudicial comments made by the Bombay High Court in its decision together with this possible presumption against tax avoidance by international transactions seem to have further compounded Vodafone’s problems.

Thursday, January 29, 2009

The Role of the Debt Recovery Tribunal

In the recent past, several important questions have arisen with respect to the role of the Debt Recovery Tribunal [“DRT]. Some of these have been discussed on this blog. An interesting feature of the DRT is that only banks and financial institutions are entitled to invoke its jurisdiction, while borrowers are not. The question that arises in this context is whether borrowers are entitled to approach civil courts independently.

Section 17 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 [“RDB Act”] provides that the DRT shall have jurisdiction to “entertain and decide applications from banks and financial institutions for recovery of debts due to such banks and financial institutions”. ‘Debt’ is defined in s. 2(g) as any liability which is claimed as due by a bank during the course of business activity. Thus, the jurisdiction of the DRT extends not just to debts as traditionally understood, but to any claim of money that a bank makes during the course of business. S. 18 provides that no court except the Supreme Court and the High Court under Art. 226 shall have any jurisdiction in relation to these matters. In 1995, the constitutionality of the DRT was challenged successfully before the Delhi High Court, which held that the Tribunal could not function validly since it did not have any provision for filing counterclaims. Subsequently, the RDB Act was amended and the constitutionality of the amended act was upheld by the Supreme Court. As things stand, borrowers are entitled to file “counterclaims” under s. 19 of the RDB Act.

The question is whether borrowers must choose this remedy or whether they are also entitled to file an independent suit in the appropriate civil court. There are two conflicting Supreme Court decisions on this point, and two others which are ambiguous. In Indian Bank v. ABS Marine Products, (2006) 5 SCC 72, Indian Bank asked for a suit filed by ABS Marine in the Calcutta High Court to be transferred to the DRT. The Supreme Court held that such an independent suit filed by a borrower could not be transferred to the DRT without his consent, since his right to approach a civil court cannot be taken away. This decision raised fears that the jurisdiction of the DRT could be easily evaded by a borrower filing an independent suit in civil court asking for the exact opposite of what the Bank was asking for in the DRT. In SBI v. Ranjan Chemicals Ltd., (2007) 1 SCC 97, the Supreme Court held that its power to transfer a suit did not depend on the consent of the parties. It is difficult to reconcile this decision with ABS Marine, especially since the Court ordered the transfer of an independent suit on the ground that it would avoid duplication of evidence, counsel, expenses etc. The concern that this decision raised is that the DRT may be unable to handle suits which involve complex questions of law or fact, and that the Bank could prevent a borrower from approaching a civil court to resolve these questions by merely filing a claim in the DRT. The DRT has summary proceedings and has traditionally been considered ill-equipped to consider claims like misrepresentation or fraud, which require cross-examination of witnesses. Other decisions of the Supreme Court do not clarify this matter either, for one seems to support Ranjan Chemicals (Industrial Investment Bank of India v. Marshal’s Power and Telecom, (2007) 1 SCC 106) while another seems to favour ABS Marine (Raghunath Rai Bareja v. Punjab National Bank, (2007) 2 SCC 230). Thus, the law on the point is unclear.

This dispute has important implications for the role of the DRT in Indian law and commerce, and the ability of the borrowers to have legitimate disputes adjudicated by the civil court. Equally important, however, is ensuring that the objective of setting up the DRT – expeditious disposal of banking cases – is not hampered by allowing borrowers to frustrate its jurisdiction.