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2013: Corporate Law Wrap!

Published on Thu, Jan 02,2014 | 21:51, Updated at Thu, Jan 02 at 21:51Source : 

By: Ramesh Vaidyanathan, Managing Partner, Advaya Legal


Harvard professor and author Harvey Cox famously said ““Not to decide is to decide”! I may not be alone in not dismissing this as misplaced sarcasm in the Indian governance context. While there were occasions when the corporate world waited with great anticipation for light at the end of the tunnel, it was more often a fast approaching train with a clueless driver!

The corporate law scorecard for the Government of India for 2013 may not look too bad for some, but could have easily looked far prettier for most. Having said that, to suggest that it was gloomy all over and all throughout may be compelling, but will not be fair to some monumental moments of silver-lining. I have sought to cull out these moments in this year-end round up.    


The much awaited new Companies Act (‘New Act’)finally made it past the post when it received Presidential assent on August 29, 2013. The New Act introduced certain key provisions on class action suits, corporate governance, corporate social responsibility (‘CSR’), cross-border mergers, One Person Company, etc. The concept of class action suits is among one of the many novelties introduced by the New Act. Although the concept per se is not new but in Indian context it has found statutory recognition and enforceability now only by means of the New Act. The first time class action suits came to the spotlight in the context of securities market was when the Satyam scam broke out in 2009. At that time, the Indian investors in India couldn’t take any legal recourse against the company while their counterparts in the USA filed class action suits claiming damages from the company and the auditing firm. Good governance was one of the other important areas that needed immediate attention. The concept of independent directors introduced by SEBI has now been incorporated in the New Act and a code of conduct has been prescribed for independent directors. The mandate to appoint a lady director on the board of certain companies was another welcome step. CSR has been recognised for the first time under the New Act and certain percentage of the revenue needs to be mandatorily spent on the welfare of the society, coordinated through a CSR committee. Even though mandatory spending on CSR has been criticised by some corporate houses, the initiative has been largely welcomed. Cross border mergers, both ways, i.e., a foreign company merging with an Indian company as well as an Indian company merging with a foreign company, has now been permitted. However, given the number of aspects that need to be considered before such mergers are undertaken, corporates are expected to tread cautiously. Another welcome move undertaken is the introduction of One Person Company. Many foreign investors wanting to set up a wholly owned subsidiary were finding it difficult to have a nominal second shareholder as mandatorily required under the Companies Act, 1956. It’s a blessing to them as now they can set up a company with one shareholder and that too with less of compliances.


The consolidated FDI policy released in April 2013 introduced certain key changes including allowing 49% shareholding by foreign airlines in the capital of Indian companies operating scheduled and non-scheduled air transport services. In an attempt to boost investor confidence, the Cabinet Committee on August 2, 2013 decided to ease the overseas investment norms. As per the revised FDI guidelines, the government relaxed norms for multi-brand retail trading and eased the mandatory 30% local sourcing norms. 100% FDI in single-brand retail was allowed, of which 49% is through the automatic route. To calculate total FDI (direct & indirect) in the Indian company, the much awaited clarification on the definition of ‘Control’ was notified. As per this, “control means the right to appoint a majority of directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements." The tighter definition of control was to ensure that foreign investors do not acquire indirect control in sectors where FDI is prohibited or capped at 49%. The government also raised FDI limit in telecom to 100%, allowed more than 26% FDI on case to case basis in the defence sector, and put several sectors in which the FDI cap is 49% on the automatic route.


The ‘Nirbhaya movement’ helped expedite the enactment of the much awaited Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (‘the Act’), a step up from the Supreme Court’s directions in the landmark Vishaka judgment. More than a decade ago, the apex court had directed employers to provide a mechanism for redressal of grievances pertaining to sexual harassment at workplace.

The Act for the first time recognizes sexual harassment as a violation of fundamental rights of a woman under the Constitution. It prescribes criminal penalty and prosecution for any offender or any person aiding or abetting in such offence. Whereas until now the Supreme Court judgment was seen as providing broad guidelines as to how sexual harassment at workplace should be handled, the new legislation prescribes policies and procedures that every employer must implement to prevent and redress sexual harassment within the organization.


In a landmark judgment, the Supreme Court of India rejected the patent application by Novartis AG for the beta-crystalline form of imatinib mesylatecancer, a compound that is used to treat chronic myeloid leukaemia and is marketed under the name ‘Glivec’.  The Apex Court ruled that Glivec lacked novelty, was not innovative and did not satisfy the criteria mandated under Section 3(d) of the Patents Act, 1970, which provides that inventions that are a mere ‘discovery’ of a ‘new form’ of a ‘known substance’ do not result in increased efficacy of that substance and are not patentable. The decision in the seven-year legal battle was keenly awaited by the two most interested parties— originator pharmaceutical companies and health aid groups — with both sides vouching that the outcome will set a precedent with far-reaching consequences for the future availability of the drugs.


Financial inclusion being the overall objective of the present bank licensing policy, RBI has now considered granting permission to corporate houses for setting up banks while simultaneously adopting various safeguards. RBI, in my view, is rightly betting on the ability of large business houses to use their deep pockets to finance capital and technology-intensive projects would help boost financial inclusion.

RBI has proposed a non-operative financial holding company (‘NOFHC’) structure with a view to ring-fence regulated financial service entities of the corporate group, including the bank, from other group businesses. With a view to mitigate the conflict of interest and avoid self-dealing, the new banks will not be permitted to take any credit and investments exposure on the promoters or promoter group entities or individuals associated with the promoter group or their NOFHCs. The above prudential norms coupled with adequate safeguards are expected to ring-fence the banking entity and ensure effective implementation of the Central Bank’s new bank licensing policy.


As corporate India kicks off 2014, their level of despair is perhaps directly proportionate to the level of anticipation in an election year. Suffice to say, arguably, that it can’t go down further from here!

(Ms. Anumeha Iyer and Avinash Poojari, both associates at Advaya Legal, contributed to this article)


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