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2014: Year Of Constant Change

Published on Tue, Dec 30,2014 | 21:39, Updated at Tue, Dec 30 at 21:39Source : 

By: Abhijit Joshi, Veritas Legal

2014 has been an exceptional year, which has given us a new government, potentially significant new policies and perhaps a new approach to governance. Whilst one would not have expected many legal changes in such a politically active year, there have in fact been a fair amount of important changesin 2014 to various laws that affect corporate India. The intent of this is article to provide a very brief snapshot of some of the key legal changesof 2014, and not to undertake a detailed discussion on all of the legal issues arising out of the changes.

The most widely discussed legal topic of the year has undoubtedly been the Companies Act, 2013. In addition to the notification of a substantial portion of the operational provisions of the Companies Act, the legal fraternity was also kept busy in 2014 with a plethora of rules, circulars and clarifications, some of which have resulted in more interpretative ambiguity than clarity!

A large number of sections of the Companies Act were brought into with effect from April 1, 2014. Amongst particular interest was the bringing into effect of the provisions relating to loans and investments by companies, as also related party transactions, which, amongst other things, contains a very broad definition of “related parties” and requires aspecial resolution of the non–related shareholders for approval of related party transactions for the specified types of companies or transactions.A later circular of the MCA clarified that the term “related party”, for the purposes of the shareholder resolution, refers only to any such party as may be considered a related party in the context of the specific contract or arrangement for which the special resolution is being passed; and that transactions arising out of amalgamations/court schemes dealt will not require compliance with Section 188 of the 2013 Act(failing which one of the implications would have been that promoters would not have been able to vote on intra-group mergers/court schemes).

2015 promises more fruitful action (and hopefully lesser interpretation) for corporates, with the impending Companies Act amendment bill (approved by the Lok Sabha in December 2014), which includes amendments to: (i) empower the Audit Committee to give omnibus annual approvals for related party transactions; (ii) include exemptions for loans to wholly owned subsidiaries, and for guarantees/securities on loans taken from banks by subsidiaries; and (iii) exempt related party transactions between holding companies and wholly owned subsidiaries, and to require an ordinary resolution (instead of a special resolution) for approval of related party transactions by non–related shareholders.

On the securities laws front, some of the main changes notified bySEBIduring the year include the notification of the SEBI (Real Estate Investment Trusts) Regulations, 2014, which govern the setting up and operations of real estate investment trusts (trusts set up under the provisions of the Indian Trusts Act, 1882, and registered with SEBI under the REITs Regulations);as well as the SEBI (Infrastructure Investment Trusts) Regulations, 2014.

SEBI has also introduced changes to the Listing Agreement for the purposes of harmonizing the listing agreement with the provisions of the Companies Act, 2013and to provide for greater clarity on the disclosure regime for price sensitive information.

SEBI has also approved updated insider trading regulations that containa broader definition of “insider”, and include "connected persons" with access to unpublished price sensitive information (“UPSI”) including immediate relatives of directors, employees etc, as alsopersons connected on the basis of being in any contractual, fiduciary or employment relationship. A shift has been made in the burden of proof, and if such connected persons undertake trades, they will be required to establish that they were not in possession of UPSI at the time of trade. Further, connected persons and insiders who wish to trade a stock would be able to do so only by disclosing trading plans in advance to the stock exchange. Lastly, advance disclosure of UPSI at least 2 days prior to trading has been made mandatory in case of permitted communication of UPSI.

SEBI also implemented the much-awaited harmonization of the multiple regimes for foreign institutional investors, sub-accounts and qualified foreign investors into a single investor class – foreign portfolio investors (“FPI”) and has provided a single window clearance through designated depository participants. This was followed by a detailed notification by the RBI, which amended the regulations pertaining to foreign investment in India on similar lines.

The key changes in foreign exchange laws introduced by the RBI in 2014 included the RBI finally attempting to provide clarity on its position on ‘options’– and in particular put options in favor of non-resident shareholders. The pertaining to FDI have been amended to expressly prohibitthe issuance of any equity shares, convertible preference shares or convertible debentures carrying “optionality” rights (such as a put option) and which assure returns, to a foreign investor.

In another significant development, the RBI also revised its norms for pricing for unlisted companies (in case of a transfer from a resident to a non-resident, or vice versa) from the DCF methodology to any internationally accepted pricing methodology on arm’s length basis,as duly certified by a chartered accountant or a SEBI registered merchant banker. The pricing for the issue and transfer of shares of listed companies continues to be as per the SEBI guidelines.

Whilst the impact and nuances of these changes applicable to incoming FDI may be debated for a long time, a positive development for overseas direct investments by Indian companiesis that the limit under the automatic route for such investments was reinstated to 400% (from 100%) of the net worth of the company as per the last audited balance sheet, with the caveat that any financial commitment exceeding USD 1 billion in a financial year will require prior RBI approval.

This year has also seen the Competition Commission of Indiafirmly establishitself as an active watchdog over all sectors of business. In addition to the numerous cases in which the CCI has scrutinized anti-competitive behavior in various sectors, the CCI also appears to be growing keener to examine the “substance” of a transaction while assessing pre-notifications for M&A transactions. This is reflected in an amendment to the regulations pertaining to M&A activity, which now provides that any ‘structure’ of the transaction(s) comprising a notifiable ‘combination’, that has the effect of avoiding notice in respect of the whole or a part of the combination, shall be disregarded; thereby suggesting that if an M&A transaction consists of a series of smaller individual transactions and one or more of these smaller transactions do not require notification on a stand-alone basis, these smaller steps can no longer avail of any exemptions to avoid notification.
A discussion of the year’s landmark legal developments will be incomplete without reference to the judgment of the Supreme Court (‘SC’) in Manohar Lal Sharma v. The Principal Secretary & Ors.where the SC examined writ petitions challenging the legality of coal block allocations and held that 214 coal block allocations made during the period 1993 to 2010 by the Central Government were illegal and arbitrary, thereby cancelling all coal block allocations made during this period, except for allocations made for Ultra Mega Power Projects and to Central Government public sector undertakings not having any joint ventures.

With 2014 having witnessed significant changes, both in quantity and in substance, as discussed above, it is hoped that 2015 will be a year of measured but progressive changes to Indian laws including the FDI policy and Companies Act, and more importantly, a year that would mark the commencement of consistency and certainty in the implementation of regulations.


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