insight nl (vol. ix, issue 2) new2 … · insight vol. ix l issue ii april 01, 2017 – july 11,...

INSIGHTVol. IX Issue II l

April 01, 2017 – July 11, 2017

FOREWORD

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Welcome to this issue of Insight.

In this issue of Insight, as the lead article, we have covered the obligations of independent directors under the corporate governance framework, and the circumstances in which the liabilities of independent directors are mitigated, in light of SEBI's recent order in the Zylog Case.

This issue also covers the recent abolition of the foreign investment promotion board (FIPB) and the standard operating procedure that has sought to replace the FIPB approval mechanism, as well as the key highlights of the cross border merger regime.

Apart from the above, we have also captured developments relating to the notications and orders issued by the Ministry of Corporate Affairs in relation to the Companies Act, 2013 as well as circulars and notications issued by the RBI and SEBI, in the last quarter.

Any feedback and suggestions would be valuable in our pursuit to constantly improve Insight and ensure its continued success amongst readers. Please feel free to send a n y f e e d b a c k , s u g g e s t i o n s o r c o m m e n t s t o [email protected].

Regards,

CYRIL SHROFF Managing Partner Cyril Amarchand Mangaldas

Phone: +91-22-2496 4455/ 6660 4455 Fax: +91-22-2496 3666Email: [email protected]

INSIGHT (Vol. IX Issue II) lApril 01, 2017 – July 11, 2017

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TABLE OF CONTENTS

PAGE NO.PARTICULARS

Guarding the Guardians – Liabilities of Independent Directors and Limitations

Abolition of the FIPB – Reinforcing the ‘Maximum Governance, Minimum Government’ Policy

Cross Border Mergers – Easing the Boundaries around doing Business in India & Overseas

COMPANY LAW UPDATE

• Amendment to the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016

• Amendments to the Companies (Acceptance of Deposit Norms) Rules, 2014

• Amendments to the Limited Liability Partnership Rules, 2009

• Amendments to the exemptions to Private Companies, Section 8 Companies and Government Companies

• Amendment to the Companies (Audit and Auditors) Rules, 2014

• Notications pertaining to the Companies (Transfer of Proceedings) Rules, 2016

• Clarications relating to transfer of shares to IEPF Authority

• Amendment to the Companies (Appointment and Qualication of Directors) Rules, 2014

• Amendment to the National Company Law Tribunal Rules, 2016

Competition Law

• Exemption to Vessel Sharing Agreement of Liner Shipping Industry from Section 3 of the Competition Act, 2002

• Exemption to ‘combinations’ from the notication requirement under the Competition Act, 2002

FOREIGN INVESTMENT AND RBI UPDATE

• RBI modies directions relating to IFSC Banking Units

• RBI permits Banks to invest in units of REITs and InvITs

• RBI Notication in relation to Asset Reconstruction Companies

• Government broadens the denition of ‘Start-up’

• RBI Circular on issuance of Rupee denominated bonds overseas

• IRDA asks insurers to follow RBI’s pricing rules in case of put or call options in JV agreements

SECURITIES LAW UPDATE

Amendments and Notications

• SEBI amends the disclosure requirements for mutual funds and asset management companies in relation to executive remuneration

• SEBI lays down framework for listing of NCRPS and NCDs issued pursuant to schemes of arrangement by listed entities

• SEBI permits options in commodity derivative markets

• SEBI imposes restrictions on issuance of ODIs

• SEBI prescribes disclosure requirements for the issuance and listing of Green Debt Securities

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TABLE OF CONTENTS

PAGE NO.PARTICULARS

• SEBI amends the denition of qualied institutional buyers and modies requirements in relation to monitoring issue proceeds

• SEBI Press Release on formation of committee on corporate governance

• SEBI imposes penalties for non-compliance of certain provisions of the ICDR Regulations

• SEBI prescribes continuous disclosure and compliance requirements for listing of debt securities by municipalities

• Minutes of SEBI board meeting

• PSUs get another year to comply with minimum public shareholding

• SEBI reviews the offer for sale through stock exchange mechanism to encourage employee participation

• SEBI revises the limits for investments by FPIs in Government Securities

• SEBI prescribes guidelines for issuance of ODIs, with derivatives as underlying, by the ODI issuing FPI

• Modication of the guidelines for participation/ functioning of Eligible Foreign Investors and FPIs in IFSCs

Informal Guidance

• Acquisition of 4.99% stake by promoter group by way of private placement (beyond existing 25%) will not trigger an open offer obligation.

• Transfer of shares amongst promoter group pursuant to a scheme of amalgamation, without a change in control or ownership, will not trigger an open offer obligation.

• Lock-in period for pre-preferential allotment shareholding in case of unlisted CCDs to be reckoned from 'Date of Allotment'.

Consultation Papers

• Review of electronic book mechanism for issuance of debt securities on private placement basis

• Amendments and clarications to the SEBI (Investment Advisers) Regulations, 2013

• Proposal for easing of access norms for investment by FPIs

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Guarding the Guardians – Liabilities of Independent Directors and Limitations

The framework for corporate governance in India lays great emphasis on the role of independent directors as the guardians promoting a culture of transparency and accountability in companies. However, in light of the liabilities cast on directors under the Companies Act, 2013 (the “Act”) and the applicable SEBI regulations, independent directors are perhaps validly apprehensive of the risks and liabilities attendant to their role.

The recent order of the Securities and Exchange Board of India (“SEBI”) in a matter relating to Zylog Systems Limited (“Zylog”), in which SEBI has had the occasion to deal with the question of independent directors' liability for statutory infractions by the company, should allay some of their concerns.

In this issue of Insight, we have covered the issue of liability of independent directors and limitations thereto in the context of the recent SEBI order.

Role and Duties of Independent Directors

In contrast to the erstwhile reliance on common law principles of 'duciary duty', the Act (in Section 166) codies the duties of directors. These duties are applicable to all directors, including independent directors. These duties are couched as positive covenants - such as the duty to act in good faith to promote the objects of the company and its stakeholders, and exercise of due and reasonable care, skill and diligence, and negative covenants - such as avoiding a conict of interest and proteering at the company's expense.

The directors are also entrusted with certain other responsibilities such as devising proper systems to ensure compliance with applicable laws.

In addition, independent directors are specically mandated under the Act and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) to adhere to a statutory code of conduct which envisages an enhanced role and responsibilities for independent directors. This code requires them to, inter alia, contribute to the board discussions on strategy, performance, risk management and bring their independent judgement to the board's deliberations.

Liability of Independent Directors

The liability of a director under the Act may be civil or criminal, and accordingly attract nes, monetary penalties, and may even extend to imprisonment. Such liability can be imposed on the directors for dereliction of duty as well as for contraventions by the company of its statutory obligations. Directors of a company may also be liable under various other legislations (such as environmental laws, tax laws and food safety laws) for violations by the company.

Under the Act, liability for contraventions or non-compliance by a company of its obligations is cast on an 'ofcer who is in default' which includes, inter alia:

(a) a whole-time director i.e. a director who is in the whole time employment of the company and is engaged in the day-to-day operations of the company; and

(b) every director who is aware of such contravention by virtue of knowledge (through receipt of board

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proceedings) or participation in board proceedings without objecting, or where such contravention has taken place with his consent or connivance.

Limitation of Liability

As a general principle, the Supreme Court has held in various instances (see S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla [(2007) 4 SCC 70], K.K. Ahuja v. V.K. Vora [(2009) 10 SCC 48] and Pepsico India Holdings Pvt. Ltd. v. Food Inspector [(2011) 1 SCC 176]) that a director of a company will not be prosecuted for non-compliances by the company, unless it is shown that:

(a) such person was in fact the person in charge of the business of the company and was charged with being responsible for the conduct of its day-to-day business; or

(b) the contravention was committed with the consent or connivance of, or is attributable to the negligence of such person.

Further, under the Act and the LODR, the liability of independent directors is limited to acts or omissions of the company which occur:

(a) with their knowledge (attributable through board processes);

(b) with their consent or connivance; or

(c) where they have not acted diligently.

The inclusion of a knowledge criterion and the need for independent directors to act diligently provides a wide scope for them to be held liable for the acts and omissions of companies and requires them to act carefully in order to avoid liability.

However, the Act confers the power on courts to grant relief to ofcers of the company in certain proceedings (other than fraud). The rationale for providing this leeway being that directors should not be penalized in instances where they have acted honestly and reasonably.

The recent SEBI order in Zylog is a case in point. It dealt with an instance of non-payment of dividend, wherein all directors (including independent directors) were sought to be held liable. However, in determining liability, the SEBI whole-time member observed that:

(a) the independent directors were not involved with the day-to-day activities of the company;

(b) upon receiving notice of such default, strong stands were taken by them (as evidenced from the minutes of the subsequent audit committee and board meetings) to convince the company to comply with its obligations; and

(c) upon failure by the company to comply, they resigned from the company's board.

Since the default occurred without the knowledge or consent of independent directors, who upon becoming aware of the same, used their best efforts to ensure compliance, the independent directors were not held liable.

Key Takeaways

The role of independent directors in balancing the interests of various stakeholders while simultaneously ensuring that the business of the company is carried out smoothly, can only be fullled efciently in an atmosphere where they are not hamstrung by apprehensions of potential liability. Despite the high threshold for limitation of liability, sufcient safeguards have been built into the law to insulate independent directors from liability so long as they have been acting diligently and in good faith.

In view of the above, in order to be able to demonstrate the exercise of due care and diligence on their part, measures must be adopted by independent directors on a continuous basis, including review of documents, seeking clarications in writing and external professional advice in circumstances that warrant such inputs.

As evidenced from the order in Zylog, active participation in discussions at meetings of the board and board committees (including raising relevant questions, concerns or objections at such meetings) and ensuring that the objections together with the reasons therefor are properly recorded in the relevant minutes can go a long way in helping independent directors limit liability.

The provisions of the Act and the SEBI regulations are aimed at ensuring that independent directors are actively involved in playing an effective role in the implementation of corporate governance standards. While such liabilities may appear to be excessive, the safeguards currently provided in the Act along with other risk mitigation strategies should signicantly alleviate concerns that current or prospective directors may have. In this light, independent directors should consider their statutory liabilities not as a hindrance but as a roadmap for their role in ensuring good corporate governance.

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The New Framework further places an embargo on the Competent Authority to replicate an inter-ministerial body for granting approval for FDI, and any consultation with any other ministry requires full justication and approval from the concerned Secretary.

Ø Investments requiring Security Clearance: Concerns regarding FDI proposals from politically sensitive jurisdictions (Pakistan and Bangladesh), or in sectors requiring security clearance (such as broadcasting, telecommunication, private security agencies, defence, etc.) have been appropriately addressed by requiring MHA clearance. Such proposals shall be processed by MHA either independently, or by the relevant Competent Authority in consultation with MHA, depending upon whether the FDI falls under the automatic route or the approval route.

Ø Time Limits and Transparency: The New Framework has mandated explicit timelines for clearing FDI proposals and allows for exibility only in specic circumstances. Applications not requiring MHA approval will need to be cleared in 8 weeks and applications that require MHA approval will need to be cleared in a cumulative time period of 10 weeks. The scope for consulting the DIPP has been limited to matters requiring clarications from an FDI policy perspective. Further, comments on an FDI proposal will be required to be uploaded on the foreign investment facilitation portal. The New Framework also provides that in case the Competent Authority and other regulatory bodies do not provide their comments

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Abolition of the FIPB – Reinforcing the 'Maximum Governance, Minimum Government' Policy

The phasing out of the foreign investment promotion board (“FIPB”) was rst announced in the Union Budget 2017 as part of the nancial sector reforms. The FIPB – an inter-ministerial body housed in the Department of Economic Affairs (“DEA”), consisting of representatives from different ministries, served as a single window mechanism for processing foreign direct investment (“FDI”) applications under the approval route by liaising and coordinating with various ministries in obtaining such approvals. The proposal was put forth in the wake of progressive liberalisation to India's FDI policy which has resulted in most sectors being under the automatic route for FDI into India. Presently, only 11 sectors (such as mining, defence, broadcasting, etc.) fall under the approval route under the FDI regime.

The decision to disband the FIPB was approved by the Union Cabinet on May 24, 2017. It was subsequently followed by the 'Ofce Memorandum' dated June 5, 2017, and 'Standard Operating Procedure' for processing FDI proposals dated June 29, 2017 (“New Framework”).

Following is a snapshot of key changes implemented through the New Framework:

Ø Ministry based Approval: Under the erstwhile framework, a sector specic FDI proposal required approval from different ministries which led to red tapism and delays. Under the New Framework, the relevant administrative ministries/departments (“Competent Authorities”) have been entrusted with power to clear FDI proposals in sectors requiring government approval, except for certain matters (such as proposals by NRIs, proposals relating to issue of equity shares under the approval route for import of capital goods/ machinery (excluding second hand machinery), etc.), which shall continue to be handled by the Department of Industrial Policy and Promotion (“DIPP”). Thus, once an application is led, the DIPP shall transfer the same to the relevant Competent Authority for processing, and also to the Reserve Bank of India (“RBI”), Ministry of Home Affairs (“MHA”), Ministry of External Affairs and Department of Revenue for information and comments (as applicable).


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on a proposal, not requiring MHA approval, within 4 weeks of the receipt of the same, it would be presumed that the concerned authorities do not have any comments on such proposal.

Additionally, the Competent Authority has been mandated to require concurrence of the DIPP in case it proposes to reject an FDI proposal, or impose conditions in addition to the conditions stipulated in the FDI Policy or sectoral laws. Additional time of 2 weeks has been given to DIPP for considering such proposals.

Ø Continuous Monitoring: Regular monthly and quarterly inter-ministerial review of pending foreign investment proposals have been mandated. This will ensure consistency in views of Competent Authorities with regard to any foreign investment related issues.

While the erstwhile FIPB offered a single window clearance, the need for inter-ministerial co-ordination on a case-to-case basis resulted in delays. As such, delegation of the decision-making responsibility to the Competent Authorities, as well as circulation of FDI proposals simultaneously to other relevant bodies for comments will reduce the need for inter-ministerial coordination, facilitate quicker processing and less red tape.

The reform is intended towards greater deregulation, relaxation of controls, transparency, and freeing up of the market for foreign investment inows. While it remains to be seen whether this move will serve as a catalyst for further FDI proposals and increase in foreign investment, the reform comes as a logical step to promote India as an investor-friendly jurisdiction and pave the way for further economic reform.

Cross Border Mergers – Easing the Boundaries around doing Business in India & Overseas

The period under review (I.e. April 01, 2017 to June 30, 2017) has seen signicant changes in relation to the regime of Cross Border Mergers. The following is a snapshot of the changes:

Notication of Section 234 of the Act

The Ministry of Corporate Affairs (“MCA”) has recently notied (w.e.f. April 13, 2017), Section 234 of the Act which deals with the merger or amalgamation between a company (as dened under the 2013 Act) and a foreign company.

Under Section 394 of the Companies Act, 1956 (“1956 Act”), the merger of a foreign company (as the transferor company) with an Indian company (as the transferee/ resultant company) was permitted. However, by limiting the denition of 'transferee company' to a company incorporated under the 'Companies Act', the section restricted the merger of an Indian company (as the transferor company) into a foreign company (as the transferee/ resultant company) – the intention being that the surviving entity should not be a foreign company outside the purview of the Indian regulatory authorities.

(MCA Notication No. S.O. 1182(E)published in the Gazette on April 13, 2017)

Rule 25A of the Companies Amalgamation Rules

The notication of Section 234 of the 2013 Act has the effect of permitting, for the rst time, cross border amalgamations of both foreign companies into Indian companies and vice-versa. The MCA has, in parallel, also amended the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Amalgamation Rules”) by inserting Rule 25A which inter alia mandates the prior approval of the RBI for any such cross-border merger and amendment to this rule would require prior consultation of the RBI.

The other key compliances prescribed under Rule 25A, subject to the fulllment of which the National Company Law Tribunal (“NCLT”) will proceed to consider and approve of cross-border amalgamation schemes, include inter alia ensuring that (i) the foreign transferee companies belong to certain approved jurisdictions (viz. FATF compliant jurisdictions in which the securities market regulator is a signatory to the MoUs with either IOSCO or SEBI, or whose central bank is a member of the Bank of International Settlements); and (ii) the valuation of the foreign transferee companies is conducted in accordance with internationally accepted principles on accounting and valuation, by valuers who are members of a recognised professional body in the jurisdiction of the transferee company.

(MCA Notication No.G.S.R. No. 368(E)published in the Gazette on April 13, 2017)


Draft FEMA Cross Border Merger Regulations

In light of the notication of Rule 25A, the RBI had, vide press release dated April 26, 2017, issued draft guidelines in the form of the Foreign Exchange Management (Cross Border Merger) Regulations (“Draft Regulations”).

The Draft Regulations broadly classify cross border mergers as 'Inbound Mergers' (where the resultant company is an Indian company) and 'Outbound Mergers' (where the resultant company is a foreign company) and prescribe the relevant provisions of the Foreign Exchange Management Act (“FEMA”) and its rules and regulations that are required to be adhered to by the amalgamating companies.

Since schemes of amalgamation/ mergers broadly involve (i) the issuance of securities of the resultant company to shareholders of the transferor company; (ii) the transfer of assets and liabilities of the transferor company to the resultant company; and (iii) the transitioning of the day-to-day business operations, third party and service provider contracts, and employees of the transferor companies to the resultant companies, the Draft Regulations contemplate the various compliances and approval requirements under the extant FEMA regulations for each of the abovementioned underlying transactions occurring between Indian and foreign companies in such cross border mergers.

In this regard, the Draft Regulations contain a deeming provision pursuant to which transactions underlying the scheme, if undertaken in accordance with the Draft Regulations, shall be deemed to approved by the RBI under Rule 25A of the Amalgamation Rules, and no separate prior approval of the RBI for the scheme, under applicable FEMA regulations, would be required.

Based on a review of the Draft Regulations, in order to comply with the regulations upon their notication from a practical perspective, applicants would need to inter alia:

(i) Carry out a detailed due diligence of the nature of capital account and current account transactions underlying Inbound and Outbound Mergers, in order to assess the applicability of the Draft Regulations;

(ii) Consider the manner of transfer and acquisition of permitted assets between Indian and foreign transferor and transferee companies, and the divestiture and sale of restricted assets by resultant Indian and foreign companies in line with FEMA;

(iii) Examine the treatment of overseas borrowings of foreign transferor companies once transferred to resultant Indian companies in the case of Inbound Mergers, as well as the manner of repayment of borrowings in Indian rupees by the resultant foreign companies under the scheme in case of Outbound Mergers, potentially involving negotiations by the resultant companies with lenders on release of security, interest payments, tenors, compliance with nancial covenants, prepayments etc.; and

(iv) Continue to ensure compliance with various reporting requirements applicable to individual transactions underlying the cross border merger, as prescribed under the applicable laws, along with and in addition to the approval requirements.

For a detailed analysis of the key highlights of the Draft Regulations and the takeaways from the same in relation to the proposed cross-border merger regime, please refer to our blog post dated May 24, 2017.

http://corporate.cyrilamarchandblogs.com/2017/05/new-dawn-indias-cross-border-merger-regime/

(RBI Press Release 2016-2017/2909 dated April 26, 2017 and the draft Foreign Exchange Management

(Cross border Merger) Regulations, 2017)

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COMPANY LAW UPDATE

Amendment to the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016

MCA has amended the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016, whereby it has prescribed a new format for the public notice to be published by the Registrar of Companies for removal of name of a company for failure to commence its business within one year of its incorporation or not carrying on any business or operation for a period of 2 immediately preceding nancial years.

(MCA Notication No. G.S.R. No. 355(E) published in the Gazette on April 12, 2017)

Amendments to the Companies (Acceptance of Deposit Norms) Rules, 2014

The MCA has amended the Companies (Acceptance of Deposits) Rules, 2014. In terms of the amended rules:

Ø Any amounts received by a company from an infrastructure investment trust (“InvIT”) registered with the SEBI in accordance with the regulations made by it, are exempted from the denition of 'deposits'.

Ø Companies are permitted to accept deposits without a stdeposit insurance contract till the 31 March, 2018 or

till the availability of deposit insurance product, whichever is earlier.

(MCA Notication No. G.S.R. No. 454(E)published in the Gazette on May 11, 2017)

Amendments to the Limited Liability Partnership Rules, 2009

Ø The Limited Liability Partnership (“LLP”) Rules, 2009 have been amended to provide the following:

· an LLP which is defunct for one year or more and has made an application for striking off its name from the register of LLPs shall le overdue returns in the formats provided in Form 8 (Statement of Account and Solvency) and Form 11 (Annual Return of LLP) up to the end of the nancial year in which the LLP ceased to carry on its business or commercial operations; and

· the application for striking off the name from the register of LLPs shall also enclose prescribed documents (viz. statement of account disclosing nil assets and liabilities, afdavit of designated partner, acknowledgement of the later income tax return led, copy of initial LLP agreement).

Ø The format for the application to the Registrar of LLPs for striking off the name (Form 24) has been substituted with a new format.

(MCA Notication No. G.S.R. 470(E)published in the Gazette on May 20, 2017)


Amendments to the exemptions to Private Companies, Section 8 Companies and Government Companies

The MCA has issued notications providing certain additional exemptions and modications to the provisions of the Act in their applicability to Private Companies, Section 8 Companies and Government Companies, to enable their ease of operation. Pursuant to these notications:

Private Companies

Ø A small company, dormant company and a start-up company (a private company which is recognised as a start-up in accordance with the notication issued by the DIPP) is not required to include a cash-ow statement in its nancial statements.

Ø Restrictions relating to acceptance of deposits have been relaxed for:

· a start-up company, for 5 years from its date of incorporation; or

· a private company which fulls certain specied conditions viz. such company (i) not being an associate or subsidiary of another company; (ii) not having borrowings from banks/nancial institutions or other body corporates equal to or more than twice of its paid up share capital or INR 50 crore, whichever is lower; and (iii) no default having been committed in repayment of such borrowings at the time of accepting deposits.

Ø The annual returns for a small company are required to specify only the aggregate amount of the remuneration drawn by directors, as opposed to the details of such remuneration for each director or key managerial personnel.

Ø The annual returns of a start-up company are required to be signed by the company secretary, or if there is no company secretary, by the director of the company.

Ø The auditor's report for specied companies (viz. one person company, small company, a company with turnover less than INR 50 crores and aggregate borrowings from banks, nancial institutions or other body corporates at any point of the nancial year less than INR 25 crores) is exempt from the requirement of commenting on the company's nancial controls system and their operational effectiveness.

Ø Start-up companies are required to hold one board meeting in each half of a calendar year, with a minimum gap of 90 days between such meetings.

Ø Interested director of a private company shall be counted as part of the quorum for the board meeting after disclosure of his interest under Section 184 of the Act.

Section 8 Companies

Ø Section 8 companies would now be exempted only from the restriction on having more than 15 directors and the requirement of a special resolution, in case more than 15 directors are to be appointed.

Ø The restriction on a company from giving a loan at a rate of interest lower than the prevailing yield on government securities of similar tenor, would not be applicable to a company in which 26% or more of the paid-up share capital is held by the Central Government or one or more State Governments, in respect of loans given by such company for funding industrial research and development projects in furtherance of its objects stated in its memorandum.

Government Companies

Ø Relaxations have been made for Government companies in relation to the place of holding of its annual general meeting and provisions relating to retirement of directors by rotation would.

Ø Additionally, Sections 230-232 of the Act (relating to compromises, arrangement and amalgamations) are now applicable to Government companies, with the term 'Tribunal' being replaced by the 'Central Government'.

Additionally, the benet of all (existing and new) exemptions, modications and adaptions has now been restricted to those private companies, section 8 companies and Government companies which have not committed a default in ling their nancial statements or annual returns under Section 137 and Section 92 of the Act, respectively.

(MCA Notications No. G.S.R. 582(E), G.S.R. 583(E) and G.S.R. 584(E) dated June 13, 2017 and the

corrigendum by MCA dated July 13, 2017 (not published in the Gazette as on date))

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Amendment to the Companies (Audit and Auditors) Rules, 2014

The MCA has amended the Companies (Audit and Auditors) Rules, 2014 to limit the applicability of the restriction under Section 139(2) of the Act on appointing an individual auditor or an audit rm for more than one or 2 terms of 5 years each, respectively, to private companies with a paid up share capital of INR 50 crores or more (as opposed to the earlier threshold of INR 20 crores).

(MCA Notication No. G.S.R. No. 621(E)published in the Gazette on June 22, 2017)

Notications pertaining to the Companies (Transfer of Proceedings) Rules, 2016

Ø The MCA has notied the Companies (Removal of Difculties) Order, 2017 (“Order”) to include a new proviso to Section 434 of the Act providing that pending proceedings for voluntary winding up shall continue to be dealt with under provisions of the 1956 Act and the Companies (Court) Rules, 1956. The Companies (Transfer of Pending Proceedings) Rules, 2016 (“Transfer Rules”) have also been amended accordingly to give effect to the Order.

Ø Further, the amended Transfer Rules also provide that, in relation to transfer of petitions for winding up under Section 433(e) of the 1956 Act (i.e. on grounds of inability to pay debts) which are pending before the High Court, but have not been served on the respondent,:

· all information required under the relevant provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”), to be submitted by the petitioner for admission of the petition being transferred to the “NCLT” shall be led by July 15, 2017, failing which the petition will stand abated;

· parties to such abated petitions will be eligible to le fresh petitions under the Code; and

· where a petition for winding-up of a company has not been transferred and remains in the High Court, and there is another petition under Section 433(e) of the 1956 Act for winding up of the same company pending on December 15, 2016, such other petition shall not be transferred to the NCLT, even if the same has not been served on the respondent.

(MCA Notication Nos. G.S.R. 732(E) and S.O. 2042(E) published in the Gazette on

June 29, 2017 and June 30, 2017 respectively)

Clarications relating to transfer of shares to IEPF Authority�Ø The MCA had earlier this year provided for the

transfer of shares and benets thereon (bonus, splits, consolidation, fraction shares, etc.) directly to a demat account of the Investor Education and Protection Fund (“IEPF”). This was a departure from the earlier framework which contemplated a suspense account held with a depository.

Ø Pending the opening of the special demat account of the IEPF Authority, the MCA has indenitely extended the due date for the transfer of shares to the IEPF Authority in relation to shares where the 7 year period provided under Section 124 (5) of the Act is completed during September 7, 2016 to May 31, 2017.

Ø The MCA has further claried that since the transfer of shares to the IEPF Authority under Section 124(6) of the Act takes place on account of operation law, duplicate shares are not required to be issued (in case of transfer of physical shares) and the procedure followed during transmission of shares may be followed for transfer of shares to the IEPF Authority.

(MCA General Circulars No. 06/2017 and 07/17 dated May 29, 2017 and June 05, 2017, respectively)

Amendment to the Companies (Appointment and Qualication of Directors) Rules, 2014

Ø The MCA has amended Rule 4 of the Companies (Appointment and Qualication of Directors) Rules, 2014 (“Appointment Rules”).

Ø The amendment provides that the following classes of unlisted public companies: (i) joint venture; (ii) a wholly owned subsidiary; and (iii) a dormant company shall not be required to have a minimum of 2 directors as independent directors in line with Rule 4(1) of the Appointment Rules.

Ø Separately, MCA has also amended Schedule IV of the Act setting out the Code for Independent Directors and the following changes have been introduced:

(i) An independent director who resigns or is removed from the board of the company shall be replaced by a new independent director

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within 3 months (which earlier was 180 days) from the date of such resignation or removal;

(ii) The independent directors of the company shall hold at least one meeting in a “nancial year” (earlier read “year”), without the attendance of non-independent directors and members of management; and

(iii) Certain parts of the code shall not apply in the case of a Government company, if the requirements in respect of matters specied in these paragraphs are specied by the concerned Ministries or Departments of the Central /State Government and such requirements are complied with by the Government companies.

(MCA Notication Nos. G.S.R. 839(E) and S.O. 2113(E) published in the Gazette on July 06, 2017)

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Amendment to the National Company Law Tribunal Rules, 2016

The MCA has vide the National Company Law Tribunal (Amendment) Rules, 2017 introduced rule 87A relating to ling an appeal or application under sub-sections (1) and (3) of Section 252 of the Act. Section 252 of the Act deals with appeals/applications by parties aggrieved by the removal of the name of company from the register of companies by the Registrar. The rule sets out the manner in which the appeal is to be preferred, as well as the procedure to be followed after the name of the company is restored back by the NCLT.

(MCA Notication Nos. G.S.R. 840(E) published in the Gazette on July 06, 2017)

Competition Law

Exemption to Vessel Sharing Agreement of Liner Shipping Industry from Section 3 of the Competition Act, 2002

The MCA has exempted vessel sharing agreements of the liner shipping industry from the provisions of Section 3 (Anti-competitive Agreements) of the Competition Act, 2002 for a period of one year from June 20, 2017 in respect of carriers of all nationalities operating ships of any nationality from any Indian port provided such agreements do not include concerted practices involving xing of prices, limitation of capacity or sales and the allocation of markets or customers.

For a detailed analysis of the notication, please refer to our blog post dated June 29, 2017.

http://competition.cyrilamarchandblogs.com/2017/06/relief-shipping-industry-indian-vsa-exemption-extended/”

(MCA Notication No. G.S.R. 1933(E) published in the Gazette on June 16, 2017)

Exemption to 'combinations' from the notication requirement under the Competition Act, 2002

Ø The MCA has done away with the mandatory 30 days deadline, post the trigger event, for lings notications with the Competition Commission of India (“CCI”), for transactions involving a 'combination' in terms of Section 5 of the Competition Act, 2002.

Ø Henceforth, transacting parties may choose to le at any time, after the trigger event – the only obligation being to receive the approval from the CCI, prior to completion/consummation of the transaction.

For a detailed analysis of the notication, please refer to our blog post dated July 03, 2017.

http://competition.cyrilamarchandblogs.com/2017/07/indian-merger-control-30-day-ling-timeline-ceases-exist/]

(MCA Notication No. SO. 2039(E) published in the Gazette on June 29, 2017)


http://competition.cyrilamarchandblogs.com/2017/06/relief-shipping-industry-indian-vsa-exemption-extended/

http://competition.cyrilamarchandblogs.com/2017/06/relief-shipping-industry-indian-vsa-exemption-extended/

http://competition.cyrilamarchandblogs.com/2017/07/indian-merger-control-30-day-filing-timeline-ceases-exist/

http://competition.cyrilamarchandblogs.com/2017/07/indian-merger-control-30-day-filing-timeline-ceases-exist/

FOREIGN INVESTMENT AND RBI UPDATE

RBI modies directions relating to IFSC Banking Units

Ø RBI has amended certain provisions of its directions relating to IFSC Banking Units (“IBUs”) issued vide Circular dated April 01, 2015 to provide for the following:

· IBUs may undertake derivative transactions including structured products that the banks operating in India have been allowed to undertake as per the extant RBI directions after obtaining approval of their board of directors. Prior RBI approval will be required for offering any other derivative products.

· Certain new provisions in relation to: (i) acceptance of xed deposits; (ii) becoming a trading member of an exchange in the IFSC; and (iii) issuance of bank guarantees and short term loans have been introduced for IBUs.

(RBI Circular No. DBR.IBD.BC.59/23.13.004/2016-17, dated April 10, 2017)

RBI permits Banks to invest in units of REITs and InvITs

Ø With a view to expand the investment scope of banks and attract more institutional investors to invest in real estate investment trusts (“REITs”) and “InvITs”, RBI has permitted banks to invest in REITs and InvITs.

Ø The investment is required to be within the overall ceiling of 20% of the bank's net worth permitted for direct investments in shares, convertible bonds/ debentures, etc., and subject to the following conditions:

· Banks should formulate a board approved policy on exposures to REITs/ InvITs.

· Banks shall not invest more than 10% of the unit capital of an REIT/ InvIT.

· Banks should ensure adherence to applicable RBI regulations, such as the prudential guidelines, Basel III Capital requirements for Commercial Real Estate Exposures and Large Exposure Framework, etc.

(RBI Circular No. DBR.No.FSD.BC.62/24.01.040/2016-17, dated April 18, 2017)

RBI Notication in relation to Asset Reconstruction Companies

Ø With a view to enable Asset Reconstruction Companies (“ARCs”) to resolve stressed assets and in light of the recent regulatory changes governing sale of stressed assets by banks to ARCs, RBI has decided to x the minimum ‘Net Owned Fund’ (“NOF”) requirement for ARCs at INR 100 crores.

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Ø ARCs already registered with RBI and not having the revised minimum NOF as on date shall achieve the minimum NOF of INR 100 crore by March 31, 2019. ARCs shall periodically submit a certicate from their Statutory Auditors as evidence of compliance with this requirement.

(RBI Notication No. DNBR. PD (ARC) CC. No. 03/26.03.001/2016-17, dated April 28, 2017)

Government broadens the denition of 'Start-up’

Ø In order to promote entrepreneurship in the country, the Government of India has amended the denition of a Start-up, and has included the following changes:

· An entity shall be considered a 'start-up' for a period of up to: (i) 10 years in case of start-ups in biotechnology sector; and (ii) 7 years in case of start-ups in other sectors, from the date of its incorporation/ registration (up from the earlier 5 years period).

· No le t ter of recommendat ion f rom an incubator/industry association shall be required either for recognition or tax benets.

· The scope of business has been broadened to include scalability of business model with potential of employment generation or wealth creation.

(Ministry of Commerce & Industry Press Release dated May 25, 2017)

RBI Circular on issuance of Rupee denominated bonds overseas

Ø RBI has revised the provisions in respect of maturity period, all-in-cost ceiling and recognized lenders (investors) of Rupee denominated bonds overseas (“Masala Bonds”) as follows:

Ø Maturity - 3 years for Masala Bonds raised period upto USD 50 million equivalent in INR per nancial year.

- 5 years for Masala Bonds raised above USD 50 million equivalent in INR per nancial year.

Ø All-in-cost 300 basis points over the ceiling prevailing yield of the

Government of India securities of corresponding maturity.

Ø Recognised - Entities permitted as investors investors under the provisions of paragraph 3.3.3 (Recognised Investors) of the ECB Master Direction.

- Such an entity should not be a related party as dened in Ind- AS 24 (Accounting Standard – Related Party Disclosures).

(RBI Circular No. A. P. (DIR Series)Circular No.47, dated June 7, 2017)

IRDA asks insurers to follow RBI's pricing rules in case of put or all options in JV agreements

Ø RBI had permitted the optionality clause (put and call options) in contracts vide its notication dated November 12, 2013. IRDAI has now vide its Circular dated July 05, 2017 claried that any agreement with “options” entered into prior to November 12, 2013 is in contravention of Regulation 2(ii) of FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

Ø Moreover, as per the circular, all existing contracts should be in compliance with the pricing guidelines issued by the RBI under the FEMA regulations and all insurers who have Joint Venture Agreements with foreign entities, having option clauses therein, should ensure that they are in compliance with the FEMA regulations, including those regarding pricing.

(IRDAI Circular No. IRDA/F&A/CIR/GLD/156/07/2017 dated July 05, 2017)

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SECURITIES LAW UPDATE

Amendments and Notications

SEBI amends the disclosure requirements for mutual funds and asset management companies in relation to executive remuneration

SEBI has modied the provisions of its Circular on Mutual Funds (“MFs”) dated March 18, 2016 in relation to the Disclosure of Executive Remuneration (required to be made by (MFs) and asset management companies (AMCs) within one month from the end of each nancial year) which was intended to promote transparency in remuneration policies so that executive remuneration in aligned with the interests of investors.

Ø MFs/ AMCs are now required to disclose (in addition to the other disclosures pertaining to a nancial year and to be made on the MF/AMC website under individual heads) the name, designation and remuneration received by top 10 employees in terms of remuneration drawn for that nancial year.

Ø Further, the thresholds beyond which details of the remuneration of every employee of the MF/AMC are required to be disclosed, have been increased from:

(i) INR 60 lakhs and above to INR 1.02 crores and above, per nancial year, of annual remuneration; and

(ii) INR 5 lakhs a to INR 8.5 lakhs, in the aggregate, of monthly remuneration, in cases of employees who are employed for a part of the nancial year.

(SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2017/35 dated April 28, 2017)

SEBI lays down framework for listing of NCRPS and NCDs issued pursuant to schemes of arrangement by listed entities

Ø SEBI has supplemented the framework laid down in its circular dated March 10, 2017 (compliance requirements for the listing of equity and warrants issued pursuant to schemes of arrangement undertaken by listed entities, dealt with in detail in Insight Vol. IX, Issue 1) (“Scheme Circular”) to provide for additional conditions to be complied with by listed entities seeking the listing of Non-conver t ib le redeemable preference shares (“NCRPS”) and Non-convertible debentures (“NCDs”) issued in lieu of the equity and convertible securities (“specied securities”) of such listed entities pursuant to schemes of arrangement undertaken by such entities.

Ø The conditions required to be complied with prior to submission of the scheme for sanction by the NCLT are summarized below:

(i) Eligibility: the listed entity seeking listing of the NCRPS/ NCDs must be part of such scheme and only the NCRPS/NCDs issued to holders of the specied securities of the listed entity will be eligible for listing. For instance, in the case of issuance of NCRPS/ NCDs to the holders of the specied securities of a listed entity as consideration by another entity into which (a) a unit of the listed entity has been demerged; or (b) the listed entity has merged and the NCRPS/ NCDs are being issued by the amalgamated entity.


(ii) Tenure: the NCRPS/NCDs shall have a minimum tenure of one year.

(iii) Credit Rating: of the NCRPS/ NCDs to be provided by a SEBI registered credit rating agency in the manner specied for the public issue of NCRPS/ NCDs under the applicable SEBI Regulations.

(iv) Valuation Report: valuation of the underlying NCRPS/ NCDs to be issued pursuant to the scheme in line with the existing framework under the Scheme Circular.

(v) Disclosures in the scheme: disclosures to be made in the draft scheme of details including face value & price, dividend and coupon, tenure/ maturity, redemption etc.

(vi) Miscellaneous Conditions: the listed entity would also be required to inter alia ensure compliance with relevant provisions of the Act, and applicable SEBI Regulations unless otherwise provided for.

Ø The format of the compliance report to be submitted along with the application for relaxation of the conditions prescribed by SEBI under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957 for the listing of the NCRPS/ NCDs has also been provided and SEBI may, while granting such relaxation, stipulate any other conditions requiring compliance in the interest of investors and the securities market.

Ø The above mentioned conditions shall be applicable to all draft schemes led with the stock exchanges on and from the date of the SEBI circular.

(SEBI Circular CIR/IMD/DF/50/2017dated May 26, 2017)

SEBI permits options in commodity derivative markets

Ø SEBI has notied the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Third Amendment) Regulations, 2017 pursuant to which the denition of a ‘commodity derivative exchange’ has been amended to include a recognized stock exchange which assists, regulates or controls the business of buying, selling or dealing in option in securities, with the prior approval of SEBI. Corresponding changes have also been made to the denition of ‘national commodity derivatives exchange’, to facilitate trading in options.

(SEBI Notication No. SEBI/LAD-NRO/GN/2017-18/003 dated May 29, 2017)

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SEBI imposes restrictions on issuance of ODIS

Ø SEBI amended the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 to restrict the issuance or transfer of offshore derivative instruments (“ODIS”) to persons who are resident Indians or non-resident Indians and to entities that are benecially owned by resident Indians or non-resident Indians.

(SEBI Notication No. SEBI/LAD-NRO/GN/2017-18/004 dated May 29, 2017)

SEBI prescribes disclosure requirements for the issuance and listing of Green Debt Securities

Ø In addition to the requirements prescribed under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, SEBI has also provided for certain disclosure requirements as set out below, in relation to the public issue and listing of Green Debt Securities and listing of privately placed Green Debt Securities.

Ø For the purposes of such provisions, debt securities may be considered as 'Green Debt Securities' if the funds raised through their issuance are to be utilized for projects or assets falling under inter alia such categories as renewable and sustainable energy, or clean t ransportat ion, or sustainable water management, or energy efciency etc.

Ø The issuer of Green Debt Securities is required to make inter alia such disclosures as the environmental objectives of the issue of Green Debt Securities and details of system/ procedure to be employed for tracking the deployment proceeds of the issue. Additionally, certain continual disclosure obligations such as report of an external auditor (to be submitted along with half-yearly and annual nancial results) verifying utilisation of proceeds, internal tracking method and allocation of funds, as well details of unutilised proceeds, have also been cast on the issuer.

(SEBI Circular CIR/IMD/DF/51/2017 dated May 30, 2017)

SEBI amends the denition of qualied institutional buyers and modies requirements in relation to monitoring issue proceeds

Ø SEBI has notied the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2017, pursuant to which, the SEBI (Issue of Capital and Disclosure Requirements) Regulations,


2009 (“ICDR Regulations”) were amended, whereby systemically important non-banking nancial companies, being non-banking nancial companies registered with the RBI and having a net-worth of more than INR 500 crore in terms of their last audited nancial statements, have been classied as qualied institutional bidders.

Ø SEBI has also modied the requirements for monitoring the use of proceeds pursuant to a public or rights issue. In the event the size of an issue, excluding any offer for sale by selling shareholders exceeds INR 1,000 crore, such issuer is required to appoint a monitoring agency, being a public nancial institution or a scheduled commercial bank. However, such requirement is not applicable to an issue by a bank or a public nancial institution or an insurance company.

Ø SEBI has also modied the format for disclosures required to be made by such monitoring agency, and such report is required to be submitted to the issuer on a quarterly basis, until at least 95% of the proceeds of such issue and amount raised for general corporate purposes, have been utilized.

Ø The issuer is required to upload such report on its website and submit the same to the stock exchange(s) on which its equity shares are listed, within 45 days from the end of each quarter.

Ø SEBI has relaxed the applicability of certain provisions with respect to preferential allotment to a MF registered with SEBI or an insurance company registered with IRDAI or a scheduled bank in terms of the Reserve Bank of India Act, 1934 or a public nancial institution as dened in the Act.

Ø The prohibition of preferential allotment not being made to a person who has sold any equity shares of the issuer during the 6 months preceding the relevant date and the requirement for lock-in of the entire pre-preferential allotment shareholding of the allottees, from the relevant date up to a period of 6 months from the date of trading approval, shall not be applicable if an allottee is any of the abovementioned.

(SEBI Circular No. SEBI/LAD-NRO/GN/2017–18/006 dated May 31, 2017)

SEBI Press Release on Formation of Committee on Corporate Governance

Ø SEBI has set up a committee to advise on issues relating to corporate governance under the

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chairmanship of Mr. Uday Kotak, Executive Vice Chairman and Managing Director of Kotak Mahindra Bank and the other members of this committee include representatives from the corporate sector, stock exchanges, professional bodies, investor groups, chambers of commerce, law rms, academicians and research professionals and SEBI. With the aim of improving standards of corporate governance of listed companies in India, this committee shall make recommendations to SEBI on the following issues: (i) ensuring independence of independent directors in spirit and their active participation in functioning of companies; (ii) improving safeguards and disclosures pertaining to related party transactions; (iii) issues in accounting and auditing practices by listed companies; (iv) improving effectiveness of board evaluation practices; (v) addressing issues faced by investors on voting and participation in general meetings; (vi) disclosure and transparency related issues; and (vii) other matters pertaining to corporate governance in India, as the committee deems t.

(SEBI Press Release dated June 2, 2017)

SEBI imposes penalties for non-compliance of certain provisions of the ICDR Regulation

Ø In line with the provisions of Regulations 111A and 111B of the ICDR Regulations, which prescribe the actions which may be taken by stock exchanges against listed entities for contravention of the provisions of the ICDR Regulations, SEBI has prescribed the penalties which may be imposed by stock exchanges on such listed entities for certain specic non-compliances.

Ø A penalty of (i) INR 20,000 per day of non-compliance till the day of compliance; and (ii) an additional ne of 0.01% of the paid-up capital of the entity or INR 1 crore, whichever is less, in case of continuing non-compliance for more than 15 days, has been prescribed for the following non-compliances. It may be noted that for the purposes of computing such penalties, 'paid-up capital' shall be the paid-up capital of the listed entity as on the rst day of the nancial year in which the non-compliance occurs:

(i) Delay in Completion of Bonus Issue – in case of delay by the listed entity in implementing bonus issue within 15 days or 2 months (where shareholders' approval is required) from the date of the meeting of the board approving the issue, as


applicable, in the manner prescribed under Regulation 95(1) of the ICDR Regulations. The date of commencement of trading shall be considered for the purposes of treating the bonus issue as implemented.

Further, in case of such delay, while the stock exchanges shall grant trading approvals for bonus shares allotted to persons other than promoters in the interest of investor protection, approvals for promoters' bonus shares shall only be granted upon payment of the requisite penalties.

(ii) Delay in allotment of shares upon conversion of convertible securities within 18 months – in case of delay by the listed entity in allotting shares to subscribers of convertible securities following the expiry of the 18 month tenure of such convertible securities from the date of their allotment under Regulation 75 of the ICDR Regulations.

(iii) Delay in approaching the stock exchanges for listing of equity shares within 20 days from date of allotment – in case of delay by the listed entity in making an application to the stock exchanges for listing of the equity shares within 20 days from the date of their allotment in the manner prescribed under Regulation 108(2) of the ICDR Regulations.

Ø The stock exchanges shall disclose, on their websites, the names of the non-compliant listed entities (including details of the nes imposed and/ or received etc.) and shall issue notice to the non-compliant listed entity requiring payment of ne within 15 days of such notice.

Ø The penalties/ nes realised by the stock exchanges for the abovementioned non-compliances shall be credited to the 'Investor Protection Fund' of the respective stock exchange.

(SEBI Circular CIR/CFD/DIL/57/2017 dated June 15, 2017)

SEBI prescribes continuous disclosure and compliance requirements for listing of debt securities by municipalities

Ø SEBI issued a Circular dated June 19, 2017, which prescribes continuous disclosure and compliance requirements by issuers, pursuant to the SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015.

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Ø Such issuers are required to, among others, enter into the simplied listing agreement notied by SEBI on October 13, 2015, disclose nancial information and annual reports, in the manner, frequency and for the time period as specied, make necessary intimations and disclosures to the stock exchanges, including with respect to price sensitive information, avail and review credit rating as applicable, establish a mechanism for redressal of investor grievances and appoint a compliance ofcer for such purpose.

(SEBI Circular No. CIR/IMD/DF1/ 60 /2017 dated June 19, 2017)

Minutes of SEBI board meeting

SEBI, in its board meeting held on June 21, 2017, made the following decisions:

Ø Restructuring in stressed companies: In order to facilitate easier turnaround of distressed listed companies, SEBI has permitted relaxation from compliance with certain preferential allotment requirements under the ICDR Regulations and from open offer obligations under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”), for lenders undertaking restructuring through the strategic debt restructuring scheme, in terms of the guidelines issued by RBI. SEBI has decided to extend such relaxation to the new investors acquiring shares in distressed companies as well, pursuant to such restructuring schemes and other similar restructuring schemes implemented by the RBI, subject to certain conditions.

Ø SEBI has also approved the proposal to exempt plans approved by the NCLT in terms of the Insolvency and Bankruptcy Code, 2016, from the requirement of open offers in terms of the Takeover Regulations.

Ø Extension of lock-in-relaxation to category II alternative investment funds (“AIFs”): SEBI has approved the proposal of extending the relaxation of lock-in provisions to Category II AIFs in case of an IPO.

Ø Offshore Derivative Instruments: SEBI has decided to levy a regulatory fee on each ODI subscriber, to be collected and deposited by the relevant foreign portfolio investment (“FPI”) issuing such ODIs, once every 3 years, with effect from April 1, 2017.


Ø SEBI has also decided to prohibit ODIs from being issued against derivatives, except where such ODIs are used for hedging.

(SEBI Board Meeting dated June 21, 2017)

PSUs get another year to comply with minimum public shareholding

Ø The Government has notied the Securities Contracts (Regulation) (Third Amendment) Rules, 2017 amending the proviso in sub-rule (1) of Rule 19A (Continuous Listing Requirement) to the Securities Contracts (Regulation) Rules, 1957. Accordingly, any listed public sector company will need to raise its public shareholding to minimum 25% by August 21, 2018 in the manners specied by SEBI. This gives listed public sector companies another year to comply with the 25% public shareholding requirement.

(Notication No. G.S.R. 664(E) dated June 27, 2017)

SEBI reviews the offer for sale through stock exchange mechanism to encourage employee participation

SEBI issued a Circular on June 27, 2017 to further streamline the process of offer for sale through the stock exchange mechanism (“OFS”), to encourage participation by employees, and made the following changes:

Ø The promoters of eligible companies would be permitted to sell shares within a period of 2 weeks from the OFS to the employees of such companies and such offer would be considered a part of the OFS.

Ø The promoters may at their discretion offer such shares to employees at the price discovered in the OFS transaction or at a discount to such price.

Ø The promoters are required to make necessary disclosures in the OFS notice to the stock exchange, including number of shares offered to employees and any discount.

(SEBI Circular No. CIR/MRD/DP/ 65 /2017dated June 27, 2017)

SEBI revises the limits for investments by FPIs in Government Securities

Ø In line with RBI's Circular dated July 3, 2017, the limits for investments by FPIs in the following Government securities have been revised with effect from July 4, 2017 for the quarter of July-September, 2017, as below:

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(i) limit for FPIs in Central Government Securities has been enhanced to INR 187,700 crores from INR 184,901 crores;

(ii) limit for Long Term FPIs viz. Sovereign Wealth Funds, Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks in Central Government Securities has been enhanced to INR 54,300 crores from INR 46,099 crores; and

(iii) the debt limit category of State Development Loans (“SDL”) has been divided into two sub-categories, viz. (a) SDL-General (available for investment on tap for all categories of FPIs); and (b) SDL-Long Term (available for investment on tap for only Long Term FPIs). The limits for investment by FPIs in SDL-General has been enhanced to INR 28,500 crores from the former limit for investment in SDL of INR 27,000 crores, and for SDL-Long Term the limit has been set at INR 4,600 crores.

Ø It has been prescribed that future increases in the limit for FPI investment in Central government securities will be allocated in the ratio of 75% for the Long Term category of FPIs and 25% for the General category of FPIs. Future increases in SDLs would also be in the ratio of 75% for SDL-Long Term and 25% for SDL-General category of FPIs, in order to harmonize the approach to FPI investment in SDLs with that of Central government securities.

Ø The practice of transferring unutilised limits of the Long-Term category to the General Category of FPIs shall be done away with.

Ø The other existing terms and conditions, including security-wise limits, investment of coupons being permitted outside the limits, and investments being restricted to securities with a minimum residual maturity of 3 years, shall continue to apply.

(A.P. (DIR Series) Circular No. 1 dated July 03, 2017 and SEBI Circular

IMD/FPIC/CIR/P/2017/74 dated July 04, 2017)

SEBI prescribes guidelines for issuance of ODIs, with derivatives as underlying, by ODI issuing FPIs

In furtherance of its decision at its board meeting held on June 21, 2017 (as covered hereinabove) to prohibit ODIs from being issued against derivatives, except where such


ODIs are used for hedging, SEBI has prescribed the following guidelines to ODI-issuing FPIs:

Ø The exception for ODI issuing FPIs being allowed to issue ODIs with derivative as underlying, shall be for those derivative positions that are taken by the ODI issuing FPI for hedging the equity shares held by it, on a one-to-one basis, where the term “hedging of equity shares” means taking a one-to-one position in only those derivatives which have the same underlying as the equity share.

Ø For existing ODIs which have been issued by the ODI issuing FPIs with derivatives as underlying, in all other cases except as set out above, the ODI issuing FPI would be required to liquidate such ODIs latest by (and endeavor to liquidate prior to) the date of maturity of the ODI instrument or by December 31, 2020, whichever is earlier.

Ø In the case of issuance of fresh ODIs with derivatives as underlying, the compliance ofcer of the ODI issuing FPI shall be required to certify that the derivatives position, on which the ODI is being issued, is only for hedging the equity shares held by it, on a one-to-one basis, and which certicate shall be required to be submitted along with the monthly ODI reports.

(SEBI Circular No. CIR/IMD/FPI&C/76/2017 July 07, 2017)

Modication of the guidelines for participation/ functioning of Eligible Foreign Investors and FPIs in IFSCs

SEBI had in its guidelines for participation/ functioning of Eligible Foreign Investors (“EFIs”) and FPIs in IFSC issued pursuant to the Circular dated January 04, 2017 (dealt with in Insight Vol. IX, Issue 1) provided that in case of participation in an IFSC by EFIs not registered with SEBI as FPIs, a trading member of the recognised stock exchange in the IFSC could rely upon the due diligence of such EFI carried out by a bank (permitted by the RBI to operate in the IFSC) during the account opening process of the EFI. SEBI has further modied the guidelines to permit the trading member to carry out and rely on its own due diligence of such EFI for the purpose of permitting the EFI to participate in the IFSC.

(SEBI Circular No. HO/CIR/P/2017/79 dated July 11, 2017)

Informal Guidance

Acquisition of 4.99% stake by promoter group by way of private placement (beyond the existing 25%) will not trigger an open offer obligation

Ø Informal guidance was sought from SEBI in relation to whether the acquisition, by individual promoters and certain promoter group entities (“Promoter Group”) of the target company, of equity shares being issued by the target company through a private placement basis would trigger the open offer requirement under Regulation 3(3) and Regulation 4 of the Takeovers Regulations.

Ø The acquisition by the Promoter Group of the shares being issued by the target company would not result in the aggregate shareholding of the Promoter Group in the target company exceeding 5% (i.e. increase from 67.03% to 72.02%, being 4.99% increase) in the relevant nancial year.

Ø It may be noted that Regulation 3(3) of the Takeovers Regulations provides that the obligation to make an open offer for acquiring shares of the target company would be triggered if the individual shareholding of the acquirer exceeds the prescribed thresholds of 25% or more of the voting rights in the target company, and more than 5% of the voting rights in the target company once the acquirer already holds 25% or more of the voting rights, and where the difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional acquisition (to compute the 5% threshold).

Ø Regulation 4 of the Takeovers Regulations provides that the open offer requirement would be triggered in case the acquisition results in direct or indirect control over the target company.

Ø SEBI claried that the proposed transaction, of acquisition by the Promoter Group entities of shares issued by the target company on a private placement basis, would not trigger the open offer requirement under Regulations 3(3) and 4 of the Takeovers Regulations.

(SEBI Informal Guidance SEBI/HO/CFD/DCR1/OW/P/2017/3795/1,

dated February 17, 2017)

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Transfer of shares amongst promoter group pursuant to a scheme of amalgamation, without change in control or ownership, will not trigger an open offer obligation

Ø Informal guidance was sought from SEBI in relation to whether the transfer and vesting of shares amongst the promoter group of the target company pursuant to a scheme of amalgamation would trigger an open offer obligation under the Takeovers Regulations.

Ø As per the facts of the case, 10 out of 11 entities which formed part of the promoter group of the target company (and cumulatively held 54.08% shares in the

thtarget company) would merge into the 11 entity (holding 0.01% shares in the target company) (“Transferee Company”) with the approval of the High Court pursuant to the proposed scheme of amalgamation, and following which, the shareholding of the Transferee Company in the target company would increase from 0.01% to 54.08%.

Ø Since all 11 entities were controlled by a trust, post-amalgamation, the trust (through its trustees), directly or indirectly, would have control as well as benecial economic ownership of all 11 promoter group entities involved in the proposed merger, as the Transferee Company would issue equity shares to the trust in consideration of the proposed merger.

Ø As a result of the same, there would be no change in the trustees or beneciaries of the trust and accordingly, there would be no change in control or economic benecial ownership of the Transferee Company.

Ø SEBI claried that the promoter group entities would be exempt from the open offer obligations by virtue of regulation 10(1)(d)(iii) of the Takeovers Regulations (General Exemptions), subject to the approval of the scheme of amalgamation by the High Court.

(SEBI Informal Guidance SEBI/HO/CFD/DCR1/OW/P/2017/6637/1

dated March 24, 2017)

Lock-in period for pre-preferential allotment shareholding in case of unlisted CCDs to be reckoned from 'Date of Allotment'

Ø In relation to the allotment of certain compulsorily convertible debentures (“CCDs”) by the target company to an investor on a preferential allotment

basis in accordance with Chapter VII of the ICDR Regulations, informal guidance was sought from SEBI on whether the lock-in period applicable to the pre-preferential allotment shareholding of the investor, as prescribed under the ICDR Regulations, would commence from the relevant date and end on the expiry of 6 months from the date of allotment of the CCDs.

Ø The clarication was sought in light of the provisions of Regulations 78(2) and 78(6) of the ICDR Regulations which refer to the “date of the trading approval” (and not the date of allotment) as the reference date for determining the mandated lock-in period.

Ø SEBI, in referring to the denitions of “specied securities” and “convertible security” and the provisions of Regulation 78(6) of the ICDR Regulations, re-iterated its position in an earlier informal guidance issued on September 12, 2016 and provided that where the requirement for trading approval is not applicable to the convertible (i.e. where the holder of CCDs does not intend to list the CCDs within 18 months from the date of allotment), the lock-in period would commence from the relevant date and end on the expiry of 6 months from the date of allotment of the CCDs.

(SEBI Informal Guidance CFD/ DIL-2/ NR/ 2017/ OW/ 13045/ 2017 dated June 7, 2017)


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Consultation Papers

Review of electronic book mechanism for issuance of debt securities on private placement basis

SEBI has proposed changes to the Circular dated April 21, 2016 (w.e.f. July 01, 2016) on electronic book mechanism for issuance of debt securities on a private placement basis. The consultation paper, for which comments were due by June 21, 2017, proposed that:

Ø Electronic book building would be applicable to all private placements of debt securities of issue size of INR 50 crores and above, from the existing issue size limit of INR 500 crores

Ø Participation by investors either directly or through arrangers/sub-arrangers would be based on the bid amount thresholds specied

Ø Optional use of the electronic book mechanism where allotment is made to a single investor, would be permitted only when such debt securities allotted to such single investor is locked-in for 60 days from the date of allotment

Ø Changes in the roles and responsibilities of an arranger/sub-arranger

Ø Mandatory open bidding should be followed by all issuers, subject to certain conditions including without disclosing the names of the participants

Ø To make the allotment of debt securities on yield priority basis

Ø Electronic book mechanism would be extended to structured products / market linked debentures / municipal bonds / non-convertible preference shares and others

Ø Standard operational guidelines would be provided by SEBI for electronic book mechanism

(SEBI Consultation Paper dated May 22, 2017)

Amendments and clarications to the SEBI (Investment Advisers) Regulations, 2013

SEBI issued a consultation paper on June 22, 2017 to amend certain provisions of the SEBI (Investment Advisers) Regulations, 2013. SEBI has proposed that there shall be a clear segregation between the investment advisory activities and distribution/execution services. The key proposals include:

Ø An entity offering investment advisory services shall not be permitted to offer distribution/execution services. Investment advisers who provide holistic advice/nancial planning on nancial products across

multiple categories, including securities, insurance, pension, deposits, need to obtain permission from the specic regulator and comply with the regulations of the respective regulators, if any.

Ø Further, to ensure clear segregation between investment advisory services and other services, SEBI has proposed that all the intermediaries receiving separate identiable consideration for investment advisory services shall need to register with SEBI as an investment adviser.

Ø Pursuant to registration as an investment adviser with SEBI, they shall not provide any distribution / execution services.

(SEBI Consultation Paper dated June 22, 2017)

Proposal for easing of access norms for investment by FPIs

Ø SEBI issued a consultation paper on June 28, 2017 with respect to proposed amendments to the FPI Regulations, where public comments are invited until July 27, 2017.

Ø The proposals by SEBI inter alia include (i) the expansion of eligible jurisdictions for grant of FPI registration to category I FPIs by including countries with diplomatic tie-ups with India and that are compliant with the requirements of the Foreign Exchange and Management Act, 1999, (i i) rationalization of the t and proper criteria, (iii) modication in encumbrance obligations to address statutory and regulatory requirements, (iv) simplication of the broad based requirements where in case an FPI applicant having a bank (or other institutional investors like sovereign wealth funds/ pension funds/ insurance companies) as an underlying investor, then such FPI shall be deemed broad based for the purposes of the FPI regulations, and (v) discontinuance of requirements for seeking prior approval from SEBI in case of change in local custodian, among others.

(SEBI Consultation Paper dated June 28, 2017)


LIST OF CONTRIBUTORS

YASH [email protected]

RAMGOVIND [email protected]

DEVAKI [email protected]

SHATARUPA [email protected]

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