corporate law cell newsletter "pocketcorp" volume 1 issue 1 2011

8/6/2019 Corporate Law Cell Newsletter "PocketCorp" Volume 1 Issue 1 2011

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PocketCorpJULY2011 VOLUME 1 ISSUE 1

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Message from Editors

Greetings to all our readers! We are pleased to bring out theCorporate Law Cells newsletter PocketCorp. Through thisnewsletter we endeavour to communicate the latest developments inthe corporate world in an easy to read capsule. We hope you enjoyreading it, as much as we have enjoyed working on it.

Happy Reading!!!

In a Nutshell

The week that was . Page 2

Court Watch... Page 3

VodafoneEssar buyout dealYet another tax pickle?.....................................Page 4

Cloud Computing and IT LawsA new Paradigm?.......................................... Page 7

Legal Status and Issues relating to Poison Pill Defence. Page 10

The Fog Surrounding Enforceability of Options..Page 12

Lawyered - the legal quiz......................................................................................Page 15


2/16

The week that was..

A recap of all the action, fuss and drama over the last week in

corporate world and courts

Top Editorials

Our choice of top editorials this

week.

Multi Brand Retail to open soon

by Sarika from mylaw.net(http://mylaw.net/Article/Multi_b

rand_retail_to_open_soon/)

The real springboard by Richa

Ishita from mylaw.net

(http://mylaw.net/Article/The_rea

l_springboard/)

Stimulus, Recovery and Exit

policy: G20 experience and

Indian Strategy by S. Mundle,

MG Rao, NR Bhanumurthy,

EPW, Volume No. 46, 2011

(http://epw.in/epw/user/viewAbstr

act.jsp)

Corporate Law Cell

Announcements

Group Presentation of E

Commerce and IT Laws on 27th

July (Wednesday) @ 1.15 P.M.

in Hall No. 11

MCA issues Voluntary Guidelines onEnvironmental Social GovernanceThe Ministry of Corporate Affairs this week issued the NationalVoluntary Guidelines on Social, Environmental & Economic

Responsibilities of Business, which represents a significant and

substantial effort in enhancing the protection of stakeholderinterests in the corporate sector.

Comment called for New Microfinance(Development and Regulation) Bill, 2011 byFinminThe said Bill is designated to make RBI the umbrella authoritythat shall regulate microfinance institutions and it gives detailsof powers exercisable by RBI over MFIs.

UK Bribery Act, 2010 to have significant effecton Indian CosThe Act came into force on 1st July, 2011. As per the Act anyIndian commercial organization, which has a demonstrablebusiness presence in the U.K., should be taking steps now toreview or implement anti-bribery procedures and policies.

Indias radio industry all set for a makeoverGovernment approves plan to allocate new radio licensesthrough e-auction and increased foreign investment limit of26%.

Research Idea of the WeekDo the Information Technology(Intermediaries Guidelines) Rules violate Constitutional Rights?

a ure s s mp y e oppor un y o eg n aga n,this time more intelligently

- Henry Ford
http://mylaw.net/Article/Multi_brand_retail_to_open_soon/http://mylaw.net/Article/Multi_brand_retail_to_open_soon/http://mylaw.net/Article/Multi_brand_retail_to_open_soon/http://mylaw.net/Article/The_real_springboard/http://mylaw.net/Article/The_real_springboard/http://mylaw.net/Article/The_real_springboard/http://epw.in/epw/user/viewAbstract.jsphttp://epw.in/epw/user/viewAbstract.jsphttp://epw.in/epw/user/viewAbstract.jsphttp://epw.in/epw/user/viewAbstract.jsphttp://epw.in/epw/user/viewAbstract.jsphttp://mylaw.net/Article/The_real_springboard/http://mylaw.net/Article/The_real_springboard/http://mylaw.net/Article/Multi_brand_retail_to_open_soon/http://mylaw.net/Article/Multi_brand_retail_to_open_soon/


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COURT WATCH

Eland Fashion Holdings v/s SEBI (May 24, 2011)The SAT set aside the SEBI order which directed elandfashions to include the non-compete fee paid to its promotersin the offer price. It held that payment of non-compete fee isbased on strong business rationale and is in the interests of thetarget company as well as its continuing shareholders and thusshall not be included in the offer price.

Fuerst Day Lawson v/s Jindal Exports (July 8, 2011)A division bench of SC held thatLetter of Patent Rules is not

a maintainable ground to challenge enforcement of a foreignaward thus, settling the contrary stance taken by Delhi HighCourt and Calcutta High Court with respect to the above pointof law. In the process it also pointed out that Arbitration andConciliation Act 1996as a consolidating legislation

Patni Computer System v/s DCIT (July 11, 2011)The assessee, Patni Computer System had engaged Mc Kinsey & Co to submit a report on

organizational restructuring. The Transfer Pricing Officer (TPO) held that Associated Enterprise

(AE) also derived specific and identifiable benefit on account of Mc Kinseys study and

accordingly allocated part of consultancy fees to Patnis AE. Pune bench of ITAT held that

Transfer Pricing adjustment on mere presumption of accrual benefit to AE, not sustainable.

DLF Limited v/s Punjab National Bank (May 27, 2011)In a recent decisionthe Delhi High Courthas dealt with two important issues in relation to

prepayment fees being charged by Indian banks, that is, (i) whether in the absence of a provision

in the loan agreement, a borrower is entitled to prepay the loan amount; and (ii) in case of a

prepayment, can the bank charge a prepayment fee unless such fee is specified in the loan

agreement? The Judgment of the Delhi HC could be summarised as follows: - (i) that in the

absence of specific contractual obligations, a borrower has an inherent right to prepay a loan; and

(ii) that unless the loan agreement specifically allows for the same, a lender is not entitled to

charge a prepayment penalty.


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Editorials

A collection of the choicest articles and writeups!

VodafoneEssar buyout

dealYet another tax

pickle?*

This article deals with the

latest Vodafone Essar

buyout deal and the matter

being prematurely withdrawnfrom AAR.

Just when everyone thought all the drama surrounding Vodafone Hutch Essar deal for transfer of shares amounting to 67% in Hutch Essar to Vodafone had died down as the matter is now pending in SCdue to an appeal filed against the judgment of the Bombay HC infavor of the Tax departments claim, Vodafone has run into trouble

with the IT department yet again and for the same reason. This timethe matter arose when Vodafone decided to exercise its option to buy33% stake belonging to Essar in Vodafone Essar Limited (VEL) JV.The latest deal was valued at $ 5 Billion. The matter arose when aVodafone entity in Mauritius had approached AAR to determine theapplicability of TDS u/s 195 of Income Tax Act on consideration for22% share transfer. The question raised by Vodafone in its AARapplication is listed below

Whether based on law and facts transfer of shares of VEL,India by two Mauritius entities (of Essar group) who have tax

residency certificate of Mauritius is chargeable to income

tax in India having regard to the provisions of India Mauritius tax treaty?

If the answer to the above question is negative, will theApplicant be required to deduct tax at source under section195?

If the answer to question 1 is in affirmative, whether deductionof tax at source is required since applicant does not have apresence in India?

Whether tax at source is to be made on net value of capitalgain or gross value consideration?

(To have a better understanding a scheme of the Vodafone EssarDeal has been presented below in a schematic fashion.)


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Vodafone Essar Limited(VEL)

Essar Group 33% stake inVEL

Essar directly

holds 11%

stake in VEL

Two Mauritian Entitiestogether have 22% stake in

VEL

Vodafones Indian Armhas the remaining 67%

stake in VEL

Vodafone Group holds

Vodafone Indian

Subsidiary in its entirety

Vodafone Mauritian Entity

held by Vodafone Group

in its entirety

Essar owns both the Mauritian

Entities via Entites owned in

Cayman Islands

Vodafone Mauritian

Entity buys Essar

Mauritian Entities

After a whole two month of court drama in the AAR proceedings, Vodafone withdrew its AAR applicationwithout citing any specific reasons. Vodafone had relied heavily on the ruling of the SC in Azaadi BachaoAndolan to support their argument that the present transaction is covered by the Indo Mauritian tax treatyand hence not taxable. Essar the other party to the transaction also heavily relied on the SC ruling in AzaadiBachao Andolan to seek shelter under Indo Mauritian tax treaty, it also rebutted the contentions of ITdepartment as to dual residence, further it was also contended that as per section 6(3) of IT Act, the burden

of proof was on the IT department to establish Essars Mauritian entities were wholly controlled and managed


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in India. The IT department for its part argued that present case was a unique case of dual residency relying

on the fact that Essar group was head quartered in Mumbai, India and that investment decisions were made inIndia. Further notable arguments made by IT department included that the present transaction was a classiccase of structuring transaction to avoid tax, and same was hit by section 93 of IT Act which gives taxauthorities to tax a transaction whereby a resident transfers stake to non resident for the purpose of avoidingtax. Within hours of withdrawing the AAR application Vodafone, issued a press release stating that itcontinues to believe no tax is due on transfer, but it was viewed prudent to pay tax without prejudice to themain matter pending before the SC. It has been commented by some that withdrawal of AAR applicationmight have a negative influence on the matter pending before the SC. In conclusion, it could be stated thatwith the latest turn of events after battering ram rounds of arguments that tax deduction at source is idealin case of transaction involving transfer of assets in India via offshore corporation, save for a dramatic turn ofevents the SC might declare the original Vodafone matter in favour of IT department thereby upholding the

judgment of Bombay High Court and not so much to the pleasure of companies planning to make inroads intoIndia via acquisitions.

*Oscar Abraham of IV BSL, LLB


7/16

Cloud Computing & IT LawsA new Paradigm?*

This Article deals with cloud computing and its effect on law and policy governing IT.

Cloud Computing or simply referred to as Cloud is the next big

thing thats going to revolutionize the way people share,

communicate and store vast quantities of data. In a world where

storage comprises of bulky devices and where speed and portability

is of the the essence, cloud is set to cause few ripples. Cloud

technology uses multiple server computers via digital network as

they were one computer. In other words any person may access his

/ her personal files using the existing localized hardware, via digital

cloud which shall contain all the digital belongings of any person,

without the actual need to carry any device on their person i.e.

laptops etc. Though this technology may take some time before itbecomes the yardstick, drastic changes would be required in the

existing laws especially the IT Laws. Changes in law are primarily

required because processing and the related data are not stored in

the same physical environment as it is now. There is a Host Client

relationship where the host happens to be the service provider and

performs tasks as and when demanded from the client. Apart from

the above issues there are privacy issues, security issues which

affect various provisions of IT Act as it stands today.

The IT Act, 2000 (Act) was aimed to address the existing lacunae in laws with respect to legal recognition

of electronic documents, digital signature etc. Recently under the ITAA, 2008 more emphasis has been

provided to Information Security and giving governmental authorities wide sweeping powers under the act.

With the change in network architecture of such magnitudes, activities such as taking electronic evidence in

criminal / civil investigation will be affected. Logic that could support such an assumption could be found in

how cloud operates i.e. Client could access his / her documents via World Wide Web by accessing his / her

online account in the host server by using any localized hardware at their disposal. Since the processing of

data and data which is processed occurs in two different locations authenticity of documents might be

questioned, thereby leaving sections 65A and 65B of Evidence Act, 1872 redundant in future, as operation of

these sections as to admissibility of electronic records is based on data being stored, recorded or copied in

Our industry is going through quite a wave of innovation and it's being powered by a phenomenon which is

referred to as the cloud. India will not only see a surge in cloud computing services but companies all over the

world will look to India to support their transition to cloud computing. .... Steve Ballmer (C.E.O Microsoft)


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optical / magnetic media, but since that not being the case here, the same is left to interpretation.

Another issue that needs to be examined is the Host-Client model necessary to utilize cloud services creates a

relationship analogous to network service provider i.e. Internet intermediaries as found u/s 79 of the Act. S.79

which for the first time coined the duties of network service providers under law in the said Act, was later

modified in 2008 amendment to the said Act in light of the judgment inAvinash Bajaj V/s State(Baazee.com

Case) among other things, has left much to be desired. The present S.79 demands a host of duties and

obligations from the intermediaries, proviso 1 to s.79 states that for intermediaries to qualify under the

exemptions provided under proviso 1, they are subject to proviso 2 and 3, proviso 2 to s.79 demands that

intermediaries merely remain conduits to data transmitted and temporarily stored, further intermediaries are

required not to initiate the transmission, select the receiver of such transmission and select or modify the

information of the transmission. Among other things it is also required that intermediaries observe due

diligence while observing duties under the Act and proviso 3 in effect incorporates Notice and Takedown

procedures as found in US DMCA. S.79 as it applies today would qualify service providers of cloud services

under the definition of intermediaries, but albeit exceptions thus leaving them in quite a pickle. Provision 2 to

S.79 requires intermediaries to remain as conduits for temporary storage of data, but in case of cloud service

providers they are conduits for permanent storage of data. Another plausible hard hitting provision for the

cause of cloud service providers is what is contained in proviso 3 of section 79, in the form of Notice and

Takedown as takedown of content would not be possible as same would violate privacy laws as cloud service

providers act only as online hard drives and they are not aware ofthe content being stored.

The newly notified intermediary guidelines under Information Technology Rules is another plausible cause

of cold sore to cloud service providers, these guidelines mandate certain due diligence to be observed by

intermediaries. The observance of these duediligence mandated by the guidelines require intermediaries to

inform users (client) through rules and regulations, terms and conditions or user agreement not to host,publish, transmit, upload or modify certain content, and since any policing on part of cloud service provider to

carry out due diligence would mean breach of privacy as users of cloud services store data online as an

alternative to storing data on physical hard drives. Thereby lending credible support to the theory that such

blanket restrictions without distinction between user of cloud service and user of other online service services


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would in effect defeat the purpose of cloud technology in its entirety. Other concerns include privacy of datastored as wide sweeping powers under the Act given to governmental agencies mean they have an option of

flouting privacy of users in the name of national security. Security of data in cloud is another cause for

concern, but as there is lack of clarity in this regard it could form a moot point in another discussion at a later

point in time. Finally, considering that Indian exchequer stands to earn revenues in the form of taxes from

enterprises dealing with cloud services, it is only rightful that a new classification be adopted to accommodate

cloud service providers. In conclusion it must be said that list of issues dealt in this article are not exhaustive,

it is merely to provide a starting point for discussions as to how cloud computing will affect IT Laws and vice

- versa in India.

*Kirthi Srinivas G of IV BSL, LLB


10/16

LEGAL STATUS AND ISSUES RELATING TO POISON PILL DEFENCE*

This article aims at understanding legal position and issues relating to poison pill as defence in takeover bid.

INTRODUCTION

The Poison Pill was invented by noted Mergers and Acquisitionslawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz, in1982, as a response to tender-based hostile takeovers. Poison pillis an anti-takeover tactic which tends to make the takeover soexpensive that any attempt to take control over the managementwill be abandoned. It basically tries to halt the hostile takeover byinflating the price of the shares.

POISON PILL

Poison Pill protects the target company from a hostile takeover.By opting for poison pill the corporations shifts the burden on theboard of directors and the acquiring company is forced toapproach the board of directors instead of the shareholders as aresult of inflation of share prices. Thus, the objective of ashareholder is to force a bidder to negotiate with the target'sboard and not directly with the shareholders.

TYPES OF POISON PILL

The five types of common poison pills are as follows:

Preferred Stock Plan; Flipover Rights Plan; Ownership Flip-in Plan; Back-ends Rights Plan; and Voting Plan.

BENEFITS OF POISON PILLS

The benefit of a poison pill is that it offers the target company three enviable options even in the criticalsituation of a coercive takeover:

a) Allow the target to successfully ward off an unwelcome bid;


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b) In case the target company is considering going ahead with the deal, it makes the raider negotiate and buystime for the target company to get a proper evaluation of the offer and thereby maximizes the takeoverpremium;c) The target company gets a much-needed opportunity to investigate other alternatives such as locating awhite knight or exploring better takeover options.

ISSUES RELATING TO POISON PILL

Following are some of the issues related to poison pill defence:(a) Firstly, these defences tend to block all hostile takeovers without weighing out its merits. An unsolicited

bid may sometimes cause the stock prices to shoot up and may have vast potential to increase shareholderwealth.(b) Secondly, as was seen in Japan and U.S.A., poison pills tend to shield managers of dismally performingcompanies from the pressures of the stock market as well as from the threat posed to its incumbent

management by a better offer.(c) Thirdly, in an era of economic liberalization, economic growth is but a function of foreign investment.Thus adoption of extreme defence measures by domestic companies creates the impression of a closed marked,thereby waning foreign interest in that country.

LEGAL STATUS IN INDIA

Under Indian law, if a predator sought to acquire shares in India, the moment he reaches a 15 percent level ofshareholding, he has the obligation to make an open offer to buy a minimum of 20 percent additional shares.At this point, the Board of Directors of a company cannot issue additional shares without taking the consent ofshareholders. Thus, for practical purposes, a poison pill cannot be used by the Board to perpetuate its positionin the company, unless the same is approved by the shareholders. In India, the law pertaining to takeovers isembodied in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, commonly calledthe Takeover Code and the SEBI (Disclosure & Investor Protection Guidelines), 2000. Apart from these,various provisions of the Companies Act, 1956 need to be referred to as and when required. The SEBI(Substantial Acquisition of Shares and Takeovers) Regulations 1997, commonly referred to as the TakeoverCode, makes it difficult for the hostile acquirer to sneak up on the target company. It forewarns the companyabout the advances of an acquirer by mandating that the acquirer make a public disclosure of his shareholding

or voting rights to the company if he acquires shares or voting rights beyond a certain specified limit.


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However, the Takeover Code does not present any insurmountable barrier to a determined hostile acquirer.One of the advantages of the poison pill strategy is that there is no rigid structure to it and it can be tailored tosuit the particular needs of a company. Therefore, for the poison pill strategy to work best in the Indiancorporate scenario certain amendments to the prevalent legal and regulatory framework are required.

*Parth Tiwari of V BSL, LLB


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THE FOG SURROUNDING ENFORCEABILITY OF OPTIONS*

This Article deals with lack of clarity relating to enforceability of options in securities contract.

An Option gives the option holder the right (erroneously thought of as an obligation) to buy (in which case itwould be a call option) or sell (in which case it would be a put option) securities at a specified price and ona specified date or within a specified period of time. Options clauses are a common occurrence in commercialdeals. It has become a customary practice for companies to include restrictions like ROFRs and call/ putoption clauses in their agreements. The enforceability of such options in case of public companies (outside theexchange) has always been a question of considerable debate, due to the highly ambiguous provisions of theSCRA, 1956 and the notifications issued thereunder which declare that no person in the territory to which theAct extends, shall, save with the permission of the SEBI, enter into any contract for the sale/ purchase ofcontracts other than spot delivery contracts outside the stock exchange. The SCRA is applicable only tomarketable securities and thus, private companies are excluded from its purview.

Recently, in the Cairn-Vedanta deal, Cairn Energy had entered into an agreement to sell 51% out of the62.23% that it holds in Cairn India (a subsidiary of Cairn Energy) to Vedanta Resources. Vedanta alsoacquired an ROFR and put/call options as regards the remaining 10.63% held by Cairn Energy in Cairn India.SEBI brought about a new twist in this whole matter, by insisting that the call/put option clause in the sharepurchase agreement be removed stating that it was violative of the Section 16(1) of the SCRA and NotificationNo S.O. 184(E) dated March 1, 2000 as it was neither a spot delivery contract nor a listed derivative that couldbe exempted under Section 18A of the Act.

Many scholars seem to think that this sudden surprising stance of the SEBI could have flowed from theBALCO-Sterlite arbitration order, wherein the parties had inserted a call/put option in the share-purchaseagreement. When Sterlite exercised the call option, the Government drew back quoting the clause to be void in

the light of the notification No. S.O.184 (E) dated March 1st

2000. (Interestingly this clause was inserted at thebehest of the Government in order to facilitate disinvestment at a later stage!)

The SEBI also took a similar stand in September 2010 while passing the order in the case of buy-backarrangements by promoters of MCX. SEBI stated that the promoters and their associates had arrangementswith three shareholders of MCX- SX Punjab National Bank, IL&FS and IFCI -- where the sale of sharesbetween the parties were based on buyback offers at or within a specified time in the future and thus held thatthese arrangements were violative of the SCRA.

Just when the business community was wondering whether SEBIs stance in the Cairn- Vedanta deal was hereto stay, in May, 2011, it made clear the path it intended to go down as regards the enforceability of such

option clauses. An informal guidance was sought by Vulcan Engineers Ltd. (VEL), to obtain SEBIs opinionon whether preferential allotment of 13.789% shares of VEL to SIMEST SpA would make it a Person Acting


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in Concert (PAC) with TERRUZZI (both SIMEST and TERRUZZI being Italian companies) which wouldhold 58% of VELs share capital. SIMEST is desirous of executing an agreement with TERRUZZI underwhich it would hold a put/call option with respect to the shares in VEL held by it. The guidance was sought ona point of law under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, but theBoard went off on a tangent and instead, gave its opinion on the point of the enforceability of the call/putoptions in respect of the SCRA, 1956 and held the put/call options to be invalid in the light of the SCRA.

Thus the market regulator seems to be adamant upon taking a stance of holding put/call options in a SharePurchase Agreement as speculative in nature and thus violative of a very archaic section of the SCRA. Thisopinion of the Board stands to have vast repercussions on the amount of investment that could flow into thecountry and thus the ambiguity should ideally be cleared as soon as possible by an order of the Securities

Appellate Tribunal (SAT).

*Lakshmi Krishnan of V BSL LLB


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Lawyered - The Legal Quiz

Q.1 In a recent case of cyber squatting, this very famous senior advocate of the SC was the victim of the

attack. Who is he? And name the website.

Q2. This logo has been alleged to be infringing the trademark of well name chain

of hotels. Guess their name.

Q3. This famous personality has recently been in the news for his $twelve billion bid to buy complete control

of the satellite giant British Sky Broadcasting. Identify him.

Q4. This high-profile deal between two energy giants has recently been cleared by the Cabinet after a lot of

objections raised by the market regulator, SEBI. Identify the companies.

Q5. This is a practice to capture the price differential between two or more markets to earn a risk-free profit.

For example- one can buy shares of Company XYZ in the cash market at Rs. 100 and at the same time, sell a

future contract of equal number of shares at Rs. 105. What is this practice called?

Q6. What are the names of the two famous copyright societies established in India under the Copyright Act

which have recently been in news for their alleged financial irregularities?

Q7. Which country tops the Global Innovation Index?

Q8. This famous fish of India is ready to get a geographical indication tag. Guess which is it?

Q9. Identify the country which has recently got the lowest credit rating by Fitch, a credit rating company.

Q10. Who is the Minister for Corporate Affairs after the reshuffling of the cabinet?

(Answers to this quiz shall be provided in the next edition)

This quiz has been prepared by Mrinali Kaul of V BSL LLB


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PocketCorp is the initiative of Corporate Law Cell of ILS Law College. PocketCorp is conceptualised, designed, and edited by: -

Please post your views and comments at corporate law cell blog (www.ilscorporatecell.blogspot.com)

For submission and enquiries regarding submission of articles, write to us at [email protected]

Respective Authors. 2011

Editorial Oversight Committee

Lakshmi Krishnan (V BSL LLB)

Mrinali Kaul (V BSL LLB)

Reuben Perumal ( V BSL LLB)

Kirthi Srinivas G (IV BSL LLB)

Disclaimer: The views and opinions expressed by the contributors are personal and do not in any way reflect or represent the

opinion and views of Corporate Law Cell of ILS Law College, Pune.
http://www.ilscorporatecell.blogspot.com/http://www.ilscorporatecell.blogspot.com/mailto:[email protected]:[email protected]://www.ilscorporatecell.blogspot.com/

corporate law cell newsletter "pocketcorp" volume 1 issue 1 2011

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