Thursday, March 26, 2015

SEBI Amends Delisting, Takeovers and Buyback Regulations

[The following post is contributed by Yogesh Chande, who is an Associate Partner with Economic Laws Practice, Advocates & Solicitors. Views of the author are personal.

SEBI has with effect from 24 March 2015 amended the following regulations:

(a)    SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”);

(b) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”); and

(c) SEBI (Buy-Back of Securities) Regulations (“Buy-Back Regulations”).

Following are the highlights of the amendments to the Delisting Regulations:

i. A promoter or promoter group cannot propose delisting of equity shares of a company, if any entity belonging to the promoter or promoter group has sold equity shares of the company during a period of six months prior to the date of the board meeting in which the delisting proposal was approved in terms of Regulation 8(1B).

ii. Prior to granting its approval to delisting, the board of directors is obliged to:

(a) make disclosure to the recognized stock exchanges that the promoters/acquirers have proposed to delist the company;

(b) appoint a merchant banker to carry out due-diligence and make a disclosure to this effect to the recognized stock exchanges;

(c) obtain details of trading in shares of the company for a period of two years prior to the date of board meeting by top twenty five shareholders as on the date of the board meeting convened to consider the proposal for delisting, from the stock exchanges and details of off-market transactions of such shareholders for a period of two years, and furnish the information to the merchant banker for carrying out due-diligence.

iii. The board of directors of the company while approving the proposal for delisting has to certify the following after taking into account the due diligence report of the merchant banker:

(a) the company is in compliance with the applicable provisions of securities laws;

(b) the acquirer or promoter or promoter group or their related entities, are in compliance with Regulation 4(5) which broadly deals with them adopting any fraudulent or unfair or manipulative practice;

(c) the delisting is in the interest of the shareholders.

iv. The merchant banker appointed by the board of directors of the company is obliged to carry out due-diligence upon obtaining details from the board of directors of the company. The merchant banker can also call for additional details from the board of directors of the company for such longer period as may be deemed fit.

v. The report of the merchant banker should contain following details:

(a) the trading carried out by the entities belonging to acquirer or promoter or promoter group or their related entities was in compliance or not, with the applicable provisions of the securities laws; and

(b) entities belonging to acquirer or promoter or promoter group or their related entities have carried out or not, any transaction to facilitate the success of the delisting offer which is not in compliance with the provisions of Regulation 4(5).

vi. The stock exchange is now required to issue the in-principle approval for delisting within five working days, as against thirty working days.

vii. The public announcement should now be made within a period of one working day of the receipt of in-principle from stock exchange.

viii. No entity belonging to the acquirer, promoter and promoter group of the company can sell shares of the company during the period from the date of the board meeting in which the delisting proposal was approved till the completion of the delisting process.

ix. The letter of offer should be dispatched to the shareholders within two working days of the date of the public announcement, as against forty five working days.

x. The bidding period should now open within seven working days from the date of the public announcement.

xi. Tendering of shares in a delisting offer and settlement will now have to be facilitated through the stock exchange mechanism.

xii. The bidding period should remain open for a period of five working days.

xiii. The floor price for delisting will have to be now determined in terms of regulation 8 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

xiv. A delisting offer shall now be considered successful only if following conditions are satisfied:

(a) the post offer promoter shareholding (along with the persons acting in concert with the promoter) taken together with the shares accepted through eligible bids at the final price determined as per Schedule II, reaches ninety per cent of the total issued shares of that class excluding the shares which are held by a custodian and against which depository receipts have been issued overseas; and
(b) atleast twenty five per cent of the public shareholders holding shares in the demat mode as on date of the board meeting referred to in Regulation 8(1B) had participated in the Book Building Process.

This requirement [mentioned in xiv (b) above] shall not be applicable to cases where the acquirer and the merchant banker demonstrate to the stock exchanges that they have delivered the letter of offer to all the public shareholders either through registered post or speed post or courier or hand delivery with proof of delivery or through email as a text or as an attachment to email or as a notification providing electronic link or Uniform Resource Locator including a read receipt.

In case the delisting offer has been made in terms of regulation 5A of the Takeover Regulations, the threshold limit of ninety per cent for successful delisting offer will have to be calculated taking into account the post offer shareholding of the acquirer taken together with the existing shareholding, shares to be acquired which attracted the obligation to make an open offer and shares accepted through eligible bids at the final price determined as per Schedule II of the Delisting Regulations.

xv. Across the Delisting Regulations, the term “promoter” has been replaced with the term “promoter/acquirer”.

xvi. The post-offer public announcement now needs to be issued within five working days of the closure of the offer, as against eight working days.

xvii. SEBI has now been conferred with powers to relax strict enforcement of the Delisting Regulations, subject to certain conditions.

xviii. The pre-requisites for delisting a “small company” have been modified.  

xix. Certain disclosure requirements in schedule I (contents of the public announcement) have also been amended to reflect the aforesaid amendments to the Delisting Regulations.

xx. As regards schedule II, para 1 to 11 shall not be applicable in respect of book building process where settlement is carried out through stock exchange mechanism.

The notification amending the Delisting Regulations is available at -

Following are the amendments to the Takeover Regulations:

i. Subject to the acquirer declaring his intention upfront to delist the target company at the time of making the detailed public statement, the target company can be delisted in accordance with the Delisting Regulations (“Delisting Offer”).

ii. In case of failure to delist the target company, the acquirer will have to make an announcement within two working days in respect of such failure and will have to comply with all applicable provisions of the Takeover Regulations. The acquirer will have to accordingly file the draft letter of offer with SEBI within five working days of the announcement.

iii. The shareholders who have tendered shares in the Delisting Offer will be entitled to withdraw such shares tendered, within 10 working days from the date of the announcement of failure to delist.

iv. The offer price shall stand enhanced by an amount equal to a sum determined at the rate of 10% per annum for the period between the scheduled date of payment of consideration to the shareholders and the actual date of payment of consideration to the shareholders. “Scheduled date” means the date on which the payment of consideration ought to have been made to the shareholders in terms of the timelines in the Takeover Regulations.

v. Delisting of the target company is not permitted where a competing offer has been made.

vi. The acquirer will have to facilitate tendering of shares in an open offer by the shareholders and settlement of the same, through the stock exchange mechanism.

vii. In case of a Delisting Offer, the completion of the acquisition of shares which triggered an open offer can be completed by the acquirer only after making the public announcement regarding the success of the delisting proposal.

The notification amending the Takeover Regulations is available at -

Following is the amendment to the Buy-Back Regulations:

The acquirer or promoter will have to facilitate tendering of shares by the shareholders and settlement of the same, through the stock exchange mechanism.

The notification amending the Buy-Back Regulations is available at -

- Yogesh Chande

Wednesday, March 25, 2015

SEBI’s Restraint Order: Impact on Joint Accounts

[The following post is contributed by Yogesh Chande, who is an Associate Partner with Economic Laws Practice, Advocates & Solicitors. Views of the author are personal.

The author discusses a recent SEBI order regarding the scope of a restraint passed by it earlier on a noticee from dealing in securities. By now clarifying that joint accounts too are within the purview of the prohibition, it has the effect of expanding the scope of the restraint order, but at the same time it may be considered necessary to prevent a circumvention of the restraint.]

In a recent order, the Whole Time Member (“WTM”) of SEBI refused to grant relief to two daughters of a noticee to allow operation of their two separate beneficiary demat accounts which were frozen on account of a restraint imposed by the interim order of SEBI on their mother, who happened to be the second holder with the daughters in their respective demat accounts. As per the submissions made by the daughters, the mother was made the second holder of the demat accounts only for convenience.

Earlier, based on a preliminary examination in the trading of the scrip of a particular listed company, SEBI, by its ad interim ex-parte order dated December 04, 2013 (interim order), had restrained certain entities including the mother from accessing the securities market and further prohibited them (including the mother) from buying, selling or dealing in securities in any manner whatsoever, until further directions.

It was also submitted by the daughters that no restraint has been placed on them from buying, selling or dealing in securities as per the interim order. Restraint, if any, is on their parents. Therefore, operations in the aforesaid beneficiary demat accounts may be permitted.

The WTM however refused to grant relief on the following grounds:

(a) The daughters claimed that the securities lying in the beneficiary demat accounts have been purchased using funds from their respective bank accounts, which are also held by them along with their mother as the joint holder; however, the daughters failed to substantiate this claim on the basis of any evidence. No material was brought on record before the WTM to prove that the securities lying in the aforesaid beneficiary demat accounts were purchased by both the daughters using their own funds.

(b) The contract notes produced by the daughters before the WTM only showed the purchases made from the respective trading accounts and were not considered sufficient proof of ownership of securities lying in the respective beneficiary demat account of the daughters.

(c) The copies of income tax returns submitted by the daughters only showed the income/ capital gains or losses made by them and the same did not reflect the beneficial owner of the securities lying in their demat accounts.

(d) The WTM also observed that the first holder (each of the daughter) is the joint beneficial owner of the securities lying in the joint account with the second holder i.e. the mother in terms of section 2(i)(a) of the Depositories Act, 1996. Thus, the legal presumption that the mother is joint beneficial owner of the securities lying in the aforesaid beneficiary demat accounts cannot be rebutted merely on the basis of a certificate issued by a chartered accountant.

The WTM concluded by stating that, if the request of the daughters is acceded to, it is likely that the said beneficiary demat accounts would be used by the mother for sale or purchase of securities, thereby defeating the purpose of the interim order and ongoing investigation.

- Yogesh Chande

Tuesday, March 24, 2015

Role of the Regional Director in a Scheme of Arrangement

Mergers, demergers and other forms of corporate restructuring are usually effected through a scheme of arrangement that not only requires the approval of different classes of shareholders and creditors, but also the sanction of the relevant court of law. The provisions of the Companies Act, 1956, specifically sections 391 to 394, contain an elaborate framework to give effect to such schemes of arrangement. This framework has functioned quite well, and it has been used extensively by the corporate sector in India. Although many other countries in the Commonwealth too have similar provisions in their corporate statutes that deal with schemes of arrangement, a broad survey of corporate law in various countries would suggest that the utilization of these legal provisions in India to effect M&A transactions far exceeds that in those other jurisdictions. The Indian courts too have played a pioneering role in developing the jurisprudence on schemes of arrangement, by clearly laying down the parameters within which such schemes of arrangement may be initiated, approved by classes of shareholders and creditors and then accorded the sanction of the court.

One of the specific requirements of a scheme of arrangement is that under section 394A of the Companies Act, 1956, the court shall take into account any representations made by the Central Government before passing any order. This power of the Central Government is exercised by the Regional Director, Ministry of Corporate Affairs.

The precise role of the Regional Director in making representations, particularly on matters pertaining to income tax, came up before the consideration of the Bombay High Court in Casby CFS Pvt. Ltd., with the judgment being rendered on March 19, 2015. The judgment gives rise to a number of issues pertaining to schemes of arrangement in general, and hence requires discussion.

Brief Facts

The scheme involved an amalgamation of Casby CFS Private Limited (the transferor) into Casby Logistics Private Limited (the transferee). Upon filing of the scheme before the court and during its consideration by the court, the Regional Director filed objections on several issues, which were followed up by objections from the Income Tax Department. More specifically, the scheme carried a retrospective appointed date of April 1, 2008. The issue in question was whether the transferor was a subsidiary of the transferee as on that date.

The companies suggested that such a parent-subsidiary relationship existed as on that date because certain individuals were holding shares in the transferor as nominees of the transferee. On the other hand, the Regional Director disputed the existence of such a nominee relationship between the transferee and those individuals. In essence, the existence and establishment of the nominee relationship was crucial to determine whether the transferor was a subsidiary of the transferee. The Regional Director alleged that not only were relevant facts suppressed by the companies, but also that the scheme and the retrospective appointed date were devised so as to engineer tax benefits that otherwise did not exist. In otherwise, it was alleged that the scheme was motivated for the purpose of obtaining undue tax advantages. All of these were countered by the companies.

After considering all the factual allegations as well as legal arguments, a single judge of the Bombay High Court allowed the scheme to stand (with suitable modifications), but imposed costs on the companies.

In this post, I discuss some of the rulings of the court on key legal issues and their implications on M&A practice involving schemes of arrangement.

Role of the Regional Director

One of the contentious issues raised before the Court related to the role of the Regional Director, and particularly whether he was entitled to raise objections pertaining to income tax. Moreover, the objections of the income tax authorities were raised belatedly. In addressing this issue, the court first considered the role of the Regional Director generally:

31. Further, the right/duty of the Regional Director to make a representation and offer his comments in respect of a scheme has received statutory recognition in Sections 394 and 394A of the Act. Both these provisions postulate that the Regional Director is required to examine the scheme and offer his comments and views thereon, which are required to be considered by the Court. It is therefore clear that the legislature intended that the Regional Director will examine a scheme from all aspects and place his observations and views before the Court and the Court will consider the same before sanctioning the scheme. It is obvious that the Regional Director, while making his observations and comments is entitled to consider the scheme from all aspects and is not restricted in any manner. He is entitled to consider the effect and implications of the scheme on any law and place his views before the Court if he finds that the scheme violates any law or prejudicial to public interest or to the interests of the shareholders of the company or companies involved. In fact, it is the duty and obligation of the Regional Director to consider every scheme in the aforesaid manner and place his views and observations before the Court. To hold otherwise would be to defeat the intention of the legislature as reflected in Sections 394 and 394A of the Act.

The more detailed legal issue pertained to the interpretation of the Ministry of Corporate Affairs’ (MCA) Circular of January 15, 2014 (previously discussed here). According to this Circular, the Regional Director is required to invite comments from the Income Tax Department within 15 days of receipt of notice before filing his response to the Court. If the Income Tax Department does not respond within the said 15-day period, then it is to be presumed that the Income Tax Department has no objection to the scheme. In the present case, the Income Tax Department failed to respond within the stipulated time-period, and hence the question was whether the Court can entertain the Department’s objections made belatedly.

On this issue, the Bombay High Court refused to be drawn into the technicality of the Circular. It found that the provision of the Companies Act conferring powers on the Regional Director were wider than those specified in the Circular. Hence, “a circular cannot fetter or restrict the rights of the Regional Director conferred and imposed on him by statute. The Circular must yield to the statutory provisions and cannot be construed to override the statutory provisions.” On this basis, the Court concluded that it was entitled to take on board the objections raised by the Income Tax Authorities as represented before it by the Regional Director.

Appointed Date

It is quite customary in schemes of arrangement to assign a retrospective appointed date to which the scheme would relate back. This is primary to indicate that the financial statements of the companies involved would disclose the effect of the transaction from the appointed date. However, in this case, the validity of choosing an appointed date of April 1, 2008 was challenged. Not only was this a retrospective appointed date, but it also related back a number of years. This was because the income tax returns of the two companies involved would have to be amended from the appointed date so as to give effect to the scheme.

Specifically, the choice of appointed date was challenged on the ground that it contravened section 139(5) of the Income Tax Act. Under that provision a revised income tax return can be filed only if the conditions stipulated therein are satisfied, i.e. (i) that the assessee discovers any omission or wrong statement in the income tax return already filed, and (ii) the revised return is filed before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. In the present case, it appears these conditions were not satisfied. The question therefore is whether the use of the appointed date mechanism amounts to circumvention of section 139(5).

On this issue, the Court decided as follows:

50. … Prima facie, I am satisfied that there is some substance in the contentions of the Regional Director. It is clear from the various decisions cited by the Regional Director that revised income tax returns can be filed only if the conditions prescribed by Section 139(5) are satisfied. It would appear that by virtue of the retrospective appointed date, the Petitioners may file revised income tax returns with effect from 1st April 2008 without satisfying the conditions. … Accordingly, in my view it would be better to leave it to the Income Tax Department to decide whether the revised income tax returns, if filed, would be valid or would be violative of Section 139(5) of the Income Tax Act.

51. … In the circumstances, in my view, it would be proper to direct that the Income Tax Department shall not be bound by the appointed date fixed under the scheme while carrying out pending and/or future assessments of the Transferor and Transferee companies whether on the basis of the income tax returns already filed or revised returns, if any, that may be filed or otherwise and shall carry out such assessments without being influenced by the observations made herein.

Although the Court left the issue somewhat open-ended, the observation clearly put paid to the use of the “appointed date” mechanisms by raising some doubts regarding its use.

Role of the Court in a Scheme of Arrangement

This issue has been expounded quite clearly in two landmark decisions of the Supreme Court, Miheer Mafatlal[1] and Hindustan Lever[2], which have acquired the status of jurisprudential folklore in M&A. However, the precise role of the courts was again raised in the present case wherein the Bombay High Court adopted the following view:

30. … It is an undisputed proposition that the court can interfere with the decision/commercial wisdom of the shareholders if the Court is satisfied that the scheme has been framed with the intention of contravening the provisions of any law. It is also well settled that the Court can interfere with the decision/commercial wisdom of the shareholders if the Court is satisfied that the scheme as framed in fact contravenes the provisions of any law, albeit unintentionally. There can be again no disagreement on the issue that the shareholders of companies are free to choose any date as an appointed date in their commercial wisdom. However, if the Regional Director nurtures any doubt qua any of the clauses in the scheme, including the date chosen as the appointed date, and finds that the same is contrary to law or apprehends that on the strength of such a clause contained in the scheme, the Company, after obtaining sanction from the Court, may use or misuse the same for contravention of any law including the provisions of the Income Tax, he is entitled to voice his doubt/apprehension before the Court, at the time the Court considers the grant of sanction to the scheme and it is always open to the Court to consider the doubt/apprehension expressed by the Regional Director and pass necessary orders either rejecting the scheme or sanctioning the same with/or without necessary clarification. I also do not agree with the argument advanced by the Petitioners that the Regional Director cannot object to the scheme on the ground that the same violates the provisions of the Income Tax Act and it is only the Income Tax Authorities who may raise an objection and that too only within the specified period stipulated in the circular dated 15th January 2014. Since this Court is required to ensure that a scheme of amalgamation does not contravene any provision of law, in my view, the Regional Director is not only entitled to but is duty bound to bring to the attention of the Court any provision in the scheme which may contravene/circumvent the provisions of any law including the law pertaining to Income Tax. This is to ensure that a company does not obtain sanction of a scheme and thereafter use the same as a shield to protect itself from the consequences arising out of the contravention of provisions of law.

Thus, the Court is clear in its jurisdiction to ensure that the scheme is not in contravention of any law, and more specifically, the Income Tax Act.

Finally, the Court also made some observations regarding non-disclosure by the companies.

Despite raising a number of issues and expressing strong views on matters relating to the scheme, the Court nevertheless sanctioned the scheme based on the facts of the case. However, this was subject to deletion of clause 6.2.1 of the scheme relating to filing of revised tax returns. Moreover, the Court left it open to the Income Tax Department determine the tax liability of the companies without being influenced by the judgment. In doing so, it was clarified that the Department would not be bound by the appointed date of April 1, 2008.


Although there are number of decisions of Indian courts relating to schemes of arrangements, in the last few years there has been greater uncertainty in dealing with objections to scheme on grounds of taxation. Schemes have previously been rejected (but some upheld on appeal). The contribution of the Bombay High Court in this case has been the attempt to introduce some level of clarity. At the same time, the effect of this judgment leaves several issues open for debate.

First, although the MCA circular of January 14, 2014 was intend to bring about clarity to objections on taxation grounds, that has been effectively disregarded by the Court. This may require the MCA to reexamine the process for objecting to schemes. If the Regional Director or the Income Tax Departments are allowed to raise objections belatedly, that will make the process for sanctioning the scheme uncertain and inefficient.

Second, the judgment seems to question the fundamental premise and very purpose of “appointed date” in a scheme. While the concept has been used in the past with judicial blessing, the present judgment raises some issues regarding its viability, especially when tax filings are to be revised. Although the Court’s observations towards such an appointed date mechanism have been rather negative, it did not decide on the merits of the issue by leaving it open for examination by the Income Tax Department.

Finally, there is yet some room for debate regarding the role of the court in a scheme of arrangement, particularly on tax matters. Arguably, the Bombay High Court has assumed a more interventionist role in the scheme, and more so than set forth by the Supreme Court in its landmark judgments.

In all, the judgment epitomizes some of the complexities that may arise in implementing schemes of arrangement in India. Although efforts are being made constantly by the legislature and the executive arms of the government to streamline the process, several questions remain.

(I would like to acknowledge a reader who brought this judgment to our attention)

[1]        Miheer H. Mafatlal v. Mafatlal Industries Limited, (1996) 87 Comp. Cas. 792 (SC).
[2]        Hindustan Lever Employees’ Union v. Hindustan Lever Limited, AIR 1995 SC 470.

Monday, March 23, 2015

The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015

In the Budget Speech 2015, the Finance Minister outlined certain broad themes surrounding the tax proposals. The “first and foremost pillar” was stated to be “to effectively deal with the problem of black money”. To that end, the Government has introduced the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 in the Lok Sabha. A copy of the Bill can be downloaded here

The charging mechanism is provided under s. 3 and 4: the charge is in respect of an assessee’s “total undisclosed foreign income and asset of the previous year”, with a proviso that an undisclosed asset located outside India shall be charged to tax on its value in the previous year in which such asset comes to the notice of the Assessing Officer. “Undisclosed foreign income and asset” is defined to be (a) income from a source located outside India which has not been disclosed in a return filed under the Income Tax Act, (b) income from such sources, in respect of which no return at all is filed under the Income Tax Act, and (c) the value of an undisclosed asset located outside India. Thus, the charge is on foreign income as well as on foreign assets. “Undisclosed asset located outside India” is defined to mean “an asset (including financial interest in any entity) located outside India, held by the assessee in his name or in respect of which he is a beneficial owner, and he has no explanation about the source of investment in such asset or the explanation given by him is in the opinion of the Assessing Officer unsatisfactory.” The charge on the asset would be computed by taking the fair market value of the asset in the year in which the asset is noticed by the Assessing Officer.

The highlights of the Bill have been noted in a press release by the PIB, available here. The PIB has noted the salient features of the Bill as under:

Scope – The Act will apply to all persons resident in India. Provisions of the Act will apply to both undisclosed foreign income and assets (including financial interest in any entity). 

Rate of tax – Undisclosed foreign income or assets shall be taxed at the flat rate of 30 percent. No exemption or deduction or set off of any carried forward losses which may be admissible under the existing Income-tax Act, 1961, shall be allowed. 

Penalties – Violation of the provisions of the proposed new legislation will entail stringent penalties. 

The penalty for non-disclosure of income or an asset located outside India will be equal to three times the amount of tax payable thereon, i.e., 90 percent of the undisclosed income or the value of the undisclosed asset. This is in addition to tax payable at 30%.

Failure to furnish return in respect of foreign income or assets shall attract a penalty of Rs.10 lakh. The same amount of penalty is prescribed for cases where although the assessee has filed a return of income, but he has not disclosed the foreign income and asset or has furnished inaccurate particulars of the same. 

Prosecutions – The Bill proposes enhanced punishment for various types of violations. 

The punishment for willful attempt to evade tax in relation to a foreign income or an asset located outside India will be rigorous imprisonment from three years to ten years. In addition, it will also entail a fine. 

Failure to furnish a return in respect of foreign assets and bank accounts or income will be punishable with rigorous imprisonment for a term of six months to seven years. The same term of punishment is prescribed for cases where although the assessee has filed a return of income, but has not disclosed the foreign asset or has furnished inaccurate particulars of the same. 

The above provisions will also apply to beneficial owners or beneficiaries of such illegal foreign assets. 

Abetment or inducement of another person to make a false return or a false account or statement or declaration under the Act will be punishable with rigorous imprisonment from six months to seven years. This provision will also apply to banks and financial institutions aiding in concealment of foreign income or assets of resident Indians or falsification of documents. 

Safeguards – The principles of natural justice and due process of law have been embedded in the Act by laying down the requirement of mandatory issue of notices to the person against whom proceedings are being initiated, grant of opportunity of being heard, necessity of taking the evidence produced by him into account, recording of reasons, passing of orders in writing, limitation of time for various actions of the tax authority, etc. Further, the right of appeal has been protected by providing for appeals to the Income-tax Appellate Tribunal, and to the jurisdictional High Court and the Supreme Court on substantial questions of law. 

To protect persons holding foreign accounts with minor balances which may not have been reported out of oversight or ignorance, it has been provided that failure to report bank accounts with a maximum balance of upto Rs.5 lakh at any time during the year will not entail penalty or prosecution. 

Other safeguards and internal control mechanisms will be prescribed in the Rules. 

One time compliance opportunity – The Bill also provides a one time compliance opportunity for a limited period to persons who have any undisclosed foreign assets which have hitherto not been disclosed for the purposes of Income-tax. Such persons may file a declaration before the specified tax authority within a specified period, followed by payment of tax at the rate of 30 percent and an equal amount by way of penalty. Such persons will not be prosecuted under the stringent provisions of the new Act. It is to be noted that this is not an amnesty scheme as no immunity from penalty is being offered. It is merely an opportunity for persons to come clean and become compliant before the stringent provisions of the new Act come into force. 

Amendment of PMLA – The Bill also proposes to amend Prevention of Money Laundering Act (PMLA), 2002 to include offence of tax evasion under the proposed legislation as a scheduled offence under PMLA. 

SEBI Board Decisions

SEBI announced a slew of decisions taken at its board meeting yesterday, which are excpected to have an impact on the capital markets, both primary and secondary.

International Financial Services Centres (IFSCs)

SEBI’s board has approved the SEBI (International Financial Services Centres) Guidelines, 2015, which will help establish IFSCs such as the proposed Gujarat International Finance Tec-City. The idea appears to be to create an environment for attracting domestic and global players to engender vibrant financial markets. This requires several steps to be taken including upgrading securities regulation to meet the requirements (an effort that SEBI has undertaken with this decision), and several other aspects including capital controls and taxation. As a post by Anjali Sharma on Ajay Shah’s Blog argues, there is still a long way to go in creating the required ecosystem. Nevertheless, SEBI’s changes are an important step in the direction. While SEBI’s press release indicates some of the changes, it would be necessary to await the fineprint before expressing detailed comments.

Conversion of Debt into Equity by Banks and Financial Institutions

The current regime is inefficient in its ability to provide an option to banks and financial institutions (Fis) to convert their loans into equity, especialy when the loans turn bad and the company and the lenders wish to restructure them. This because the terms of the conversion are dictated by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”), which impose minimum pricing requirements based on the past track record of the stock price of the company. This may make it unviable for lenders to convert at such a minimum price, which may not truly reflect the value of the company that is unable to pay its debts. Moreover, any conversion of debt and acquisition of control would possibly attract the provisions of the SEBI (Substantial Acquisitoin of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) triggering a mandatory offer requirement.

In order to overcome these hurdles, SEBI has proposed amendments to the ICDR Regulations and the Takeover Regulations whereby banks and FIs may convert their debt into equity  at a “price being as per a fair price formula prescribed and not being less than the face value of the shares”. Of course, more details are awaited regarding the precise mechanisms, but it is clear that the conversion may be possible at either fair price or face value, whichever is higher. The more onerous pricing norms set out in the ICDR Regulations would not be applicable.

This would confer greater options to lenders facing repayment issues to exercise the right of conversion, and tackle bad loans. It would also create additional options for restructuring by enabling lenders to obtain control over the borrower company, and thereby reduce the moral hazard problems for the borrower’s management.

Continuous Disclosure Requirements

In an ongoing effort to enhance secondary market disclosures and to bring it to the same level of stringency imposed on primary market disclosures, SEBI has set out a list of proposals. For example, every company is required to disclose the outcome of board meetings within 30 minutes of closure of the meeting. Other episodic disclosures are to be made within 24 hours of occurrence of the relevant events. Similarly, there is an express requirement for the company to clarify to the stock exchanges regarding rumours, and also to confirm or deny any reported information to the stock exchanges.

This last requirement makes it important for companies to contain the information with significant transactions are being undertaken (and before they are announced). Any leakage of information would lead to rumours that would cause stock exchanges to confront company managements who need to be prepared to provide updated positions. This is especially cumbersome when the transaction that is the subject matter of the rumour is still in early stages of discussion or negotiation where neither are the details clear nor is there even any level of certainty that the deal will in fact happen. Companies need to be cautious about such information management and must have detailed plans to address such situations.

Municipal Bonds

A few months ago, SEBI had issued a discussion paper on creating a regime for isssue of debt securities by municipal authorities. This is now being operationalized through the proposed SEBI (Issue and Listing of Debt Securities by Municipality) Regulations, 2015. This will likely see another important segment in the securities markets, but its depth and time for evolution is yet unclear.

SEBI’s announcements yesterday include a few other decisions which are contained in SEBI’s press release.

Rule Change for E-Voting

[The following guest post is contributed by Nidhi Bothra and Vinita Nair, Vinod Kothari & Co, Corporate Law Services Group. The authors can be contacted at and respectively]

Under the erstwhile system of holding general meetings, the resolutions were put to vote by way of show of hands or a poll could be demanded. Since only such members who were present at the meeting either themselves or through proxy could vote, the system demanded members to be present themselves or through proxy.

The new refurbished rules however facilitated members to vote on resolutions to be taken up at the general meeting without having to be present themselves. They could now vote from the remotest location in the country if they had internet access and exercise their right to vote.

With the introduction of the e-voting system for specified class of companies, the concept of show of hands becomes irrelevant. Members could vote through e-voting system and at the meeting the Chairman could put the resolution to poll.

The rules on e-voting system posed challenges of the own when introduced last year and the Ministry of Corporate Affairs (MCA) was forced to make it optional considering the barrage of queries and clarifications the rules demanded.  Although the industry was nevertheless beginning to adhere to the rules on e-voting, the MCA amended the rules on e-voting by way of the Companies (Management and Administration) Amendment Rules, 2015 issued on March 19, 2015 (the “new rules”) and the first reading of the amendments has the potential of raising several further queries on the changes. Rule 20 as applicable on e-voting has been substituted by the new provisions as introduced by the amendment of 2015.

Eligibility for applicability of rules

The new rules on e-voting will have to be complied with for all general meetings in respect of which notices are issued after the date of commencement of this rule. That is to say, all notices issued for general meetings after the publication of the rules in the official gazette will have to comply with these rules. 

All companies with equity shares listed on recognised stock exchange or companies having not less than thousand members will have to provide its members the facility to exercise their right to vote on resolutions proposed to be considered at general meetings by electronic means.

The new rule also states that it shall not apply to companies referred to in Chapter XB or Chapter XC of SEBI (Issue of Capital and Disclosure Requriements) Regulations, 2009 (the “ICDR regulations”) along with companies with less than 1000 members. Chapter XB of the ICDR regulations deals with the issue of specified securities by small and medium enterprises and Chapter XC of the ICDR regulations relates to listing on the exchange made possible without bringing an initial public offer by small-and-medium enterprises (“SMEs”).

The rules seem to indicate that the new rule shall not be applicable to listed SMEs. The rationale for this is unclear, although the cost implications of such a requirement are understandable.

The provisions of e-voting will not be applicable to listed SMEs, which means general meetings will be conducted by using means such as show of hands, poll, ballot paper etc.

Concept of Remote e-voting and voting by electronic means

The new rules introduce voting through electronic means and remote e-voting. Voting by electronic means includes remote e-voting. Remote e-voting is where the members can exercise their vote from any remote location, in case they are unable to attend the meeting.

Voting by electronic means is a facility that the company may provide at the general meeting also. Hence, the members can now vote on matters electronically either from the remote location or at the meeting itself.

Sure enough, the rationale for e-voting at the meeting cannot be understood as the member is physically present at the meeting to cast the vote, discuss the resolution and air concerns. One benefit could be saving the cost of polling process. The company needs to have two scrutinizers – one for e-voting and one for poll. The concept of e-voting was introduced with an intent to facilitate the members to vote even if they were unable to attend the meetings. This enabled larger participation of members in resolutions and removing the constraint of physical participation.

The new rule does seem to suggest that is optional for the company to provide voting through electronic means at the meeting. This also means additional cost burden for companies to introduce voting through electronic means for members at the meeting – technologically enabling the meetings to provide for the option and also explaining the modus operandi to the members to put the option to use.

This was seemingly even suggested by Hon’ble Bombay High Court in the matter of amalgamation of Wadala Commodities Limited and Godrej Industries Limited, where Justice G S Patel under Para 24 (a) stated the following:

“All provisions for compulsory voting by postal ballot and by electronic voting to the exclusion of an actual meeting cannot and do not apply to court-convened meetings. At such meetings, provision must be made for postal ballots and electronic voting, in addition to an actual meeting. Electronic voting must also be made available at the venue of the meeting. Any shareholder who has cast his vote by postal ballot or by electronic voting from a remote location (other than the venue of the meeting) shall not be entitled to vote at the meeting. He or she may, however, attend the meeting and participate in those proceedings.”

Concept of cut-off date for remote e-voting

The new rule refers to a cut-off date which is defined to be a date not earlier than seven days before the date of the general meeting for determining eligibility to vote by electronic means or in the general meeting. Assuming the general meeting is on September 30, 2015, the cut-off date cannot be beyond September 23, 2015

Rule 20(4)(v)(e) requires the company to state in the public notice the manner in which the persons who have acquired shares and become members of the company after the despatch of notice may obtain the login ID and password. However, rule 20(4)(f)(D) states that a person whose name is recorded in the register of members or in the register of beneficial owners maintained by the depositories as on the cut-off date only shall be entitled to avail the facility of remote e-voting as well as voting in the general meeting.

Going by the aforesaid language, the Company cannot follow the practice of keeping the same date for determining names of shareholders for despatch of notice as cut-off date for e-voting. Companies will be required to have a cut-off date (or determination date or record date) for despatch of notice, for remote e-voting as well as mode of voting at the meeting and one for dividend.

There would be no question of providing such facility to persons who have become members after the cut-off date. If that were the case, the concept of cut-off date and identification of members of the company for attending the general meeting itself would become completely redundant. In view of the above discussion, it would be a prudent step to have same record date, which is fixed by the Company for the purpose of dividend, to be the record date for the purpose of e-voting and voting by poll too. The agencies offering e-voting platform shall refer the list of shareholders as on record date, upload the same and generate user ID and password for such shareholders. The shareholders as on cut-off date who are unable to vote electronically may attend and vote at the shareholders’ meeting by way of poll or by electronic means, as the case may be.

Modus operandi for remote e-voting and e-voting at general meeting

Rule 20(4)(vi) states that the remote e-voting facility will be open for not less than three days and shall close at 5:00 pm on the date preceding the date of the general meeting. The rule seems to indicate that the remote e-voting facility will be open until a day preceding the general meeting.  Formerly, the rules specified the minimum and maximum number of days for which the facility may be offered. However, considering the cost and complexity, companies may consider keeping open for maximum three days. Assuming the general meeting is on September 30, 2015, the remote e-voting facility may be kept open from September 27 to 29, 2015 thereby complying with both of aforesaid requirements.

The proviso to rule 20(4)(viii) indicates that the remote e-voting facility will be blocked on the day preceding the general meeting. However, if the same electronic voting system is being used for providing voting through electronic means during the general meeting as well, then the said facility shall be in operation until all resolutions are considered and voted upon in the meeting. The facility may be used for voting only by members attending the meeting and who have not exercised their right to vote through remote e-voting.

The rule seems to fail to make distinction between remote e-voting and voting at the meeting through electronic means. Remote e-voting is to cease one day prior to the general meeting at 5 pm; however, where the company opts to provide same electronic voting system will remain operative for voting through electronic means. How will the company create a distinction between those members who have voted from remote e-voting and those who will be exercising the voting through electronic means at the meeting?  Sure enough, the system will have to close for the company to make a note of such members who have exercised the right to vote already. Rule 20(4)(xiii) seems to indicate that there will be a closure period for remote e-voting and before commencement of general meeting for the scrutinizer to make an account of all the shareholders who have exercised their right to vote through remote e-voting. The voting through electronic means shall re-open after the scrutinizer has taken account of the members who have voted through remote e-voting. The company may consider re-opening the same on commencement of e-voting at the general meeting.

Now comes the challenging part. How will the agency ensure that while the e-voting has been allowed at general meeting, no member is accessing the portal through remote e-voting and casting vote at the same time? The agency providing the facility will have to ensure this possibly by de-activating the login IDs of members other than those attending the general meeting as the scrutinizer would have taken record of those who have already voted through remote e-voting.

Issues with amending resolutions

The new rules indicate that resolution cannot be withdrawn where voting through electronic means is provided, but is ambiguous on whether amendment to the resolution is possible or permissible. The rule seems to be silent on the issue.

Voting at meetings

Rule 20(4)(xi) seems to indicate that at the meeting voting through electronic means or using ballot or polling paper will have to be allowed for all those members who are present at the general meeting but have not exercised their voting rights already.

Considering the level of complexity and challenges involved, it seems that the company may opt for the time tested method of providing poll at the meeting, since it will be cumbersome to provide electronic voting booths at the venue. Several shareholders who may not be technologically sound will require guidance. Of course the shareholders’ meeting will turn into a long drawn process.

Announcing results

Oddly, unlike the current practice where the chairman announces whether the resolution is passed or not, in future the results of the resolution will be announced not later than three days from the meeting. Once the scrutinizer gives the consolidated report of the total votes cast in favour or against, within three days from the conclusion of the general meeting, the chairman or a person authorised by him in writing, shall declare results forthwith.

While the results of the voting on resolutions will be announced three days from the general meeting, the resolution will be considered to be passed on the date of the general meeting.This will surely contradict with requirement of clause 35A of equity listing agreement where companies are required to report the voting results within 48 hours of conclusion of general meeting. This, in case of equity listed companies, the results will be needed to be given within 2 days from conclusion of general meeting.


The transformation of law relating to shareholder voting was to be more facilitating and in harmony with the global developments such that companies could carry out their governance activities with greater ease. At this point of time, however, it appears that the legislative inteniton is primarily to address loopholes in the existing system. Any change in law has to have a vision as it has not a momentary impact but an one for times to come. 

What could have been the intent of introducing voting through electronic means at the meetings where the members are present themselves to express their opinion on matters? Corporate houses with this amendment certainly feel the burden and the pressure of costs for introducing voting through electronic means at the meeting.

-          Nidhi Bothra & Vinita Nair