Friday, October 21, 2016

Withdrawal of Open Offer: A Debate Rekindled?

[The following post is contributed by Saumya Bhargava & Prateek Suri, who are Associates at AZB & Partners, New Delhi. Views expressed are personal.]

[In an earlier post dated August 5, 2016, we had discussed an order relating to the open offer of Jyoti Limited in the context of circumstances under which an open offer is allowed to be withdrawn in India]

Public announcement of an open offer often leads to a frenzy in the securities market. Stock prices are likely to surge and investors are seen closing strategic transactions. However, not all open offers end up being successful. In the last three years, India Inc. has witnessed the failure of some open offers and attempts at withdrawal of some others. Instances of the latter have led to unique consequences as the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“2011 Regulations”) provide for very limited circumstances under which an open offer may be withdrawn. The rule is that open offers are sacrosanct except in exceptional circumstances, like death of an acquirer or refusal of statutory approvals, which are situations specifically carved out in the 2011 Regulations.[1] This is because such withdrawals have an adverse impact on the market and on the interest of investors. The securities market regulator, Securities and Exchange Board of India (“SEBI”), with its twin objectives of protection of interests of investors and promotion of growth of the securities market, has residual discretionary power under the 2011 Regulations to decide which cases merit withdrawal.

The Supreme Court of India and the Securities Appellate Tribunal (“SAT”) have consistently taken the view that the exercise of such discretionary power is restricted to cases similar to the specific exceptions in the 2011 Regulations and the 1997 Regulations (like the ones enumerated above) which fall under the ambit of “impossibility”. SEBI has followed such interpretation in its order issued on August 1, 2016 in the case of Jyoti Limited. Such an interpretation may have harsh ramifications on the atmosphere for mergers and acquisitions in India. The interpretation forces acquirers to bear risks attached with an open offer despite occurrence of circumstances beyond its control, for example, discovery of fraud after the public announcement, which appears to have transpired in the case of Nirma Industries Limited (in 2013), where the Supreme Court did not permit withdrawal. Such an interpretation also effectively leaves acquirers stranded, when the objectives of proposed takeover offer become futile, owing again to reasons outside the control of the acquirer, like delay caused by SEBI in granting approval required for the open offer to succeed. This has especially proved true in cases of voluntary offers. In this context, this post discusses the legal position adopted by the Supreme Court in its interpretation of sub-regulation 27(1)(d) of the 1997 Regulations (and its parallel, being sub-regulation 23(1)(d) of the 2011 Regulations), which deal with SEBI’s discretionary power to approve withdrawals of open offers.

In the matter of Jyoti Limited, SEBI has squarely applied the Supreme Court’s interpretation expressed in the case of Nirma Industries Limited (in 2013) and Akshya Infrastructure Limited (in 2014) (which relates to the 1997 Regulations) to the matter of Jyoti Limited (which relates to the 2011 Regulations). The fundamental question is whether situations where circumstances beyond the control of the acquirer render the offer meaningless can be considered by SEBI under the umbrella of “such circumstances which in the opinion of SEBI merit withdrawal”? For instance, in the case of Pramod Jain decided by SAT (in 2014), SEBI had delayed the approval of the draft letter of offer by two years. During such period, not only did the health of the company decline significantly (which could have been possibly revived by a timely takeover as pointed in the minority opinion of SAT), but the promoters of the target company also squandered its valuable assets and siphoned funds. Another example is the case of Nirma Industries Limited where, after the public announcement for takeover was made by the acquirer, a brazen fraud was discovered by a special investigative audit, which arguably could not have otherwise been discovered by the acquirer. In both these situations the objectives of the acquirer(s) behind making the offers were rendered meaningless, leading to a virtual defeat of the proposed offer.

However, the Supreme Court (Nirma Industries Limited and Akshya Infrastructure Limited), the SAT (Pramod Jain) and now SEBI (Jyoti Limited) refused withdrawal of the respective open offers. They reasoned that such situations would not be covered by the sub-regulation because of a statutory rule of interpretation, ejusdem generis, which essentially means that when a general word/phrase follows a list of specific words/phrases, the general word/phrase would be interpreted to include only items of the same class as those listed before it, unless there is an indication of a different legislative intent. If there is such an indication, the principle is not applicable. The Supreme Court, in Nirma Industries Limited, observed that the first two sub-regulations of the 1997 Regulations form a common genus of impossibility: i.e. (i) the statutory approval(s) required have been refused and (ii) the sole acquirer, being a natural person, has died. The Supreme Court therefore reasoned that the principle of esjudem generis applies and consequently the expression in the sub-regulation was construed to be restricted only to situations that make it impossible for the acquirer to fulfill the public offer.

The Supreme Court may have failed to take note of the possibility of a different legislative intent behind Regulation 27. The Regulation 27 (as part of the 1997 Regulations) was amended in 2002 pursuant to a recommendation to delete a sub-regulation 27(1)(a) (that permitted withdrawal of an open offer consequent upon a competitive bid) by the Bhagwati Committee to ensure effective protection of interest of the shareholders. It is well settled that, before applying the principle of ejusdem generis, the whole text must be taken into consideration to scrutinize any possibility of a different legislative intent. If one considers Regulation 27 as it originally existed prior to the amendment, it would be clear that a common genus of impossibility did not exist in the sub-regulation. This is because the deleted sub-regulation does not qualify the criteria of “impossibility” so as to indicate existence of a common genus of impossibility in the regulation. Therefore, the application of the principle of ejusdem generis to this sub-regulation dealing with SEBI’s residuary power (to approve withdrawal of open offer) seems to be misguided. Such interpretation adopted by the Supreme Court also contradicts another well settled rule of statutory interpretation which states that, where two interpretations are possible, that interpretation ought to be taken which would not render any provision of a statute otiose. In conclusion, such a restricted interpretation through the application of ejusdem generis renders the sub-regulation granting power to SEBI effectively meaningless.

As a result of the restriction imposed on SEBI’s power to grant approval for withdrawal of open offers, acquirers are forced to assume full risks related to open offers and delays caused by SEBI or fraud by promoters of the target company are not recognized as valid grounds for withdrawal of open offers. Even if a fraud is discovered by way of a special investigative audit after public announcement of an open offer, a request for withdrawal may be rejected on the pretext of improper due diligence by the acquirer. The current position of law continues to cause prejudice to the business interests of the acquirers/ investors, whose interest is also required to be taken care of by SEBI.

Frivolous withdrawal of open offer can lead to severe consequences for investors and the securities market. However, a balance must be achieved such that SEBI is able to consider situations where, due to change in circumstances beyond the control of the acquirer, the open offers may be permitted to be withdrawn to protect the interests of the acquirer. Therefore, from a commercial perspective, it makes sense to not restrict the exercise of discretion by SEBI. SEBI must freely form its opinion about the merits of every case, which is a power that is also granted to SEBI for exempting open offers in a takeover. In conclusion, it can only be hoped that the Supreme Court reconsiders the issue afresh and the roadblocks for India Inc. relating to ease of business are effectively eliminated.

- Saumya Bhargava & Prateek Suri

[1] Withdrawal of offers was previously governed under Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“1997 Regulations”) as well.

Wednesday, October 19, 2016

Companies Mediation and Conciliation Rules: An Update

[The following post is contributed by Bhushan Shah and Neha Lakshman from Mansukhlal Hiralal & Company. The views expressed are personal]

Section 442 of the Companies Act, 2013 ('Act') empowers the Central Government to constitute a panel of experts to mediate and settle disputes pending before the National Company Law Tribunal (‘NCLT’), National Company Law Appellate Tribunal (‘NCLAT’) or the  Central Government (each a 'Tribunal'). The Ministry of Corporate Affairs ('MCA') through a notification issued in September enacted the Companies (Mediation and Conciliation) Rules, 2016 ('Rules') which prescribe the procedural aspects of mediation and conciliation in respect of the aforesaid matters.

In this post, we summarise some of  the important provisions under the Rules as follows:

- Constitution of Panel of Mediators or Conciliators: The Regional Director is empowered to constitute a panel of persons to act as mediators / conciliators, from persons who are:

(a) former judges of the Supreme Court, High Court, District Court;

(b) former member or registrar of a tribunal constituted at the national level under any law for the time being in force;

(c) former members of the Indian Corporate Law Service or Indian Legal Service with fifteen years experience;

(d) those who are qualified legal practitioners for not less than ten years;

(e) those who have been professionals for at least fifteen years of continuous practice as Chartered Accountants or Cost Accountants or a Company Secretaries;

(f) former Members or Presidents of any State Consumer Forum, or

(g) experts in mediation or conciliation who have successfully undergone training in mediation or conciliation.

- Procedure for mediation and conciliation: The parties are free to appoint a sole mediator or conciliator of their choice. If, however, the parties are unable to arrive at a mutual decision, the forum in which their litigation is pending may direct each party to appoint a mediator / conciliator of its choice or appoint a person from the panel of experts to act as the mediator/conciliator. The NCLT may also suo moto refer a dispute, pending before it to mediation / conciliation if it deems fit.

- Duty of mediator/conciliator to disclose certain facts: It shall be the duty of a mediator or conciliator to disclose to the NCLT/ Central Government, as the case may be, any circumstances that may give rise to a reasonable doubt as to independence or impartiality in carrying out functions.

- Mediator and Conciliator not bound by the provisions of the Indian Evidence Act and CPC: The mediator or conciliator shall not be bound by the Indian Evidence Act, 1872 or the Code of Civil Procedure, 1908 while disposing the matter, but shall be guided by the principles of fairness and natural justice, having regard to the rights and obligations of the parties, usages of trade, if any, and the circumstances of the dispute.

- Role of the mediator/conciliator: The mediator/conciliator shall facilitate a settlement between the parties and attempt to arrive at a mutual consensus. However, the mediator/conciliator shall not and cannot impose any settlement nor give any assurance that the mediation or conciliation shall result in a settlement and the mediator or conciliator shall not impose any decision on the parties.

- Time limit for mediation or conciliation: The process for any mediation or conciliation shall be completed within a period of three months from the date of appointment of expert or experts from the Panel. However, in any mediation in relation to a proceeding before the NCLT, it may on the application of mediator or conciliator or any of the party to the proceedings, extend the period for mediation or conciliation by such period not exceeding three months. If a party fails to attend a session or a meeting fixed by the mediator or conciliator deliberately or wilfully for two consecutive times, the mediation or conciliation shall be deemed to have failed and mediator or conciliator shall report the matter to the Tribunal, as the case may be.

- Communication between mediator or conciliator and the Tribunal: In order to preserve the confidence of parties in the Tribunal, and the neutrality of the mediator or conciliator, there shall be no communication between the mediator and the Tribunal, in the subject matter. However, if any communication between the mediator or conciliator and the Tribunal is necessary, it shall be in writing and copies of the same shall be given to the parties or their authorised representatives. Further communication between the mediator and the aforesaid authorities can only be limited to the topic stated in the rules.

- Expenses of the mediation/conciliation: At the time of referring the matter to the mediation or conciliation, the Tribunal shall fix the fee of the mediator or conciliator and, as far as possible, a consolidated sum may be fixed rather than for each session or meeting. The expenses of the mediation or conciliation shall be borne equally by the various contesting parties, unless otherwise directed.

- Bar on initiation of judicial or arbitral proceedings during pendency of mediation/conciliation: The parties shall not initiate, during the mediation or conciliation, any arbitral or judicial proceedings with respect to the same matter, except that a party may initiate arbitral or judicial proceedings where, in its opinion, such proceedings are necessary for protecting its rights.

- Matters which shall not be referred to for mediation/ conciliation: The following matters shall not be referred to mediation or conciliation:

(a) the matters relating to proceedings in respect of inspection or investigation, matters which relate to defaults or offences for which applications for compounding have been made by one or more parties;

(b) cases involving serious and specific allegations of fraud, fabrication of documents forgery, impersonation, coercion etc;

(c) cases involving prosecution for criminal and non-compoundable offences;

(d) cases which involve public interest or interest of numerous persons who are not parties before the Tribunal.

Comment: The notification of these rules and establishment of the panel of mediators and conciliators is a necessary step, which shall hopefully translate into an increase in the use of mediation and conciliation for commercial disputes and reduce the burden on the NCLT.

- Bhushan Shah and Neha Lakshman

Saturday, October 15, 2016

NCLT: Revolutionizing the Realm of Corporate Litigation

[The following post is contributed by Shruti Khetan, who is a student at the West Bengal National University of Juridical Sciences]

After a decade-long wait, the National Company Law Tribunal (‘NCLT’) and its appellate body, the National Company Law Appellate Tribunal (‘NCLAT’) have finally been constituted under sections 408 and 410 of the Companies Act, 2013 (‘Act’) with effect from June 1, 2016. Such a setup heralds a new era for resolution of corporate law disputes in India and provides for a beneficial consolidation of corporate litigation.  The NCLT has been endowed with all such powers as were being exercised by the erstwhile Company Law Board (‘CLB’), the High Court and the Board for Industrial and Financial Reconstruction (‘BIFR’). In effect, the CLB stands dissolved; however, the High Court and the BIFR continue to exercise jurisdiction over the matters which have not yet been notified.[1]

1.         Historical Developments and Constitutional Hurdles

The origin of the NCLT can be traced back to the report of the Eradi Committee on Laws on Insolvency and Winding up of Companies which endorsed the need for setting up a National Tribunal to deal with matters pertaining to revival, rehabilitation[2] and winding up of companies.[3] It also recommended the composition of, and the extent of powers to be exercised, by the proposed tribunal.[4] Acting upon the recommendations, the Government enacted the Companies (Second Amendment) Act, 2002 providing for the establishment of NCLT and NCALT to replace the CLB, the BIFR and their appellate bodies.[5] However, owing to the constitutional challenges, the provisions could not be notified. Later, the J. J. Irani Committee in 2005 echoed similar concerns.

The constitutional validity of the NCLT was challenged before the Madras High Court in Thiru R. Gandhi v. Union of India for being violative of the doctrine of separation of powers and independence of the Judiciary. The Court found certain defects as to the qualification of the members of the Tribunal in the impugned provisions which offended the basic structure of the Constitution. Partly upholding the constitutionality, the Court remarked that unless these provisions are appropriately amended by removing the defects, it would be unconstitutional to vest the jurisdiction in NCLT and NCLAT. Both the parties appealed before the Constitution Bench of the Supreme Court in Union of India v. R. Gandhi[6] (‘R. Gandhi’), which affirmed the position taken by the High Court. The Court laid down guidelines, inter alia, for correction of qualification and selection criteria of technical members. Pursuant to these observations, the necessary changes were incorporated in the new Companies Act, 2013 (‘2013 Act’). However, the legal hurdles did not stop there.

The Supreme Court, once again in 2013, considered the questions of constitutionality by examining whether the new legislative regime did in fact adhere to the reflections made in R. Gandhi. The ruling in Madras Bar Association v. Union of India dismissed the grounds of encroachment of separation of powers and upheld the legislative competence of the Parliament to confer jurisdiction of the tribunal. However, the provisions on qualification of ‘technical members’ were invalidated on same rationale and Parliament was directed to take remedial measures by amending the provisions in conformity with the prescribed guidelines.[7]

Resultantly, Sections 411 to 414 under the Act dealing with qualification of members have not been notified. The Companies (Amendment) Bill, 2016, which is pending passage in the Parliament, addresses the changes that have been propounded by the Court.

2.         Revisiting the Provisions Concerning the Tribunal

i.    Vested Powers in NCLT

Twenty-nine sections of the 2013 Act relating to the NCLT have been notified by the Ministry of Corporate Affairs (MCA), which not only transfer the power from other judicial fora to NCLT, but also prescribe additional powers. The tribunal has been conferred with the power, amongst other things, to direct immediate inspection of books;[8] act upon removal of directors or auditor;[9] order investigations into the affairs of the company;[10] call for annual general meeting or members meetings;[11] and order reopening of the financial accounts.[12] The NCLT is also entitled to award damages to the investors for loss arising out of any of the specified fraudulent acts of the company. This power extends to holding the responsible officer personally liable. Sections 241 & 242 have empowered the tribunal to pass necessary orders in cases of mismanagement, oppression and class action suits.[13] Conversion of a public company to a private company,[14] and issuance of fresh redeemable shares in case of failure to pay the dividend[15] require the approval of the tribunal.

In accordance with section 434, all the pending proceedings before the CLB initiated under the Companies Act, 1956 (‘1956 Act’) are to be transferred to the tribunal.[16] The provisions providing for transfer of cases from BIFR and the High Courts are pending notification. Upon the relevant provisions coming into effect, the NCLT will eventually take over the functions of BIFR and the High Court.

ii.   Structure and Working

At present, there are 11 Benches set up in different locations across the country. The tribunal comprises a President and such number of judicial and technical members as prescribed, who are appointed for a term of five years. The provisions set out in detail the requirements pertaining to qualification and manner of selection. With respect to the working of the tribunal, it has the discretion to regulate its own procedure as long as it does not contravene the principles of natural justice or the provisions of the Act and the Rules made therein. It has the same powers as a civil court including summoning a person, receiving an evidence, ordering document production and inquiry. Any order passed has the same force as that of a suit decree; however, the procedure laid down in Civil Procedure Code is not binding on it.

iii.  The Appeal Mechanism

Corresponding to Section 10FQ of the 1956 Act, section 421 envisages an appeal mechanism. It establishes an Appellate Tribunal to which any person aggrieved by the order of NCLT may seek an appeal within a span of 45 days, which may be extended on sufficient cause being proved. Section 423 further provides for an appeal against the order of the Appellate Tribunal to the Supreme Court within 60 days from the date of receipt of the order. However, no appeal would lie from an order made by the tribunal with the consent of the parties.

Under the erstwhile provision, the right to appeal was restricted only to questions of law. Whereas the present appeal structure reflects the first appeal provisions under Section 96 of the Code of Civil Procedure and thus, NCLAT is empowered to hear appeals on questions of both fact and law. Besides, the 1956 Act allowed the decisions of the CLB to be challenged before the High Court and then the Supreme Court. In contrast, appeals from NCLT are provided before the Appellate Tribunal and then to the Supreme Court. This eliminates the impediment of conflicting High Court judgements and helps attain uniformity in the position of law on a particular subject, thereby, ensuring greater justice. 

3.         Significant Changes

i.    Single Forum for All Corporate Litigation

With the constitution of the NCLT, the jurisdiction of company law matters, which were spread over different for a, would integrate into a single body. Disputes concerning share reduction, merger, amalgamation and winding up were adjudicated by the High Court whereas CLB exercised its control over issues such as oppression and mismanagement, refusal to transfer of securities, and the like. Upon becoming fully functional, the NCLT will become the sole grievance redressal body for company law matters. The enactment of the Insolvency and Bankruptcy Code, 2016 has further vested in the NCLT the jurisdiction in respect of all insolvency matters. This major development addresses the concerns of multiplicity of litigation and provides a more robust form of protection. This would also reduce the burden of the High Court and the civil courts to a great extent.    

ii.   Speedy and Effective Recourse to Justice

Section 422, by mandating an expeditious disposal mechanism, comes as a harbinger of hope to the litigants who suffer due to long drawn out civil actions. It directs the tribunals to endeavour to dispose off the matter within three months from the date of presentation of application. Any departure from the stated time frame must be explained in writing and, in any case, should not exceed 90 days.[17] Further, a greater number of benches is in place to assure timely disposal.[18]

By providing for a simplified dispute adjudication process, India’s reputation as a destination for doing business will also be enhanced. Small investors who have deposited their hard-earned money in companies are safeguarded against prolonged civil actions.

iii.  Class Action and Oppression and Mismanagement

Under Section 245, the provision for class-action suits has been incorporated. It enables one or more plaintiffs to represent the rights and interests of a larger class of people by filing and prosecuting a suit on their behalf before the tribunal. The relief sought may extend to restraining the company from performing any act contrary to any resolution passed, its charters or the provisions of the Act. The tribunal can also award damages for any fraudulent, unlawful act of the company, its auditor or any other person associated with it.

Another important function of resolving disputes concerning oppression and mismanagement has been conferred upon the tribunal. The eligibility norms for invoking the jurisdiction of the tribunal under Section 241 in oppression cases have been relaxed by allowing a member below the eligibility criteria to apply with the permission of the tribunal. Further, the tribunal has been empowered to waive any or all such requirements on an application made to it. Therefore, the members who do not meet the criteria can still proceed against oppressive acts and mismanagement of affairs without getting authorisation from the Central Government as was required under the 1956 Act.

4.         The Road Ahead

There still remain certain considerations which are unsettled. The fate of the cases pending before BIFR and its appellate body, especially the ones which are at final stages, is shrouded in ambiguity. It appears that fresh applications would be required to be filed before NCLT or NCLAT, as the case maybe. At the same time, the manner and the time period within which the matters are to be transferred from the CLB have not been specified. There is also no clarity about the functioning of the tribunal, as the rules have yet not been notified. Integration of jurisdiction poses a heavy burden upon the tribunals and the actual transfer of files to the tribunal will suffer implementation challenges.

Having regard to the wide powers and immense responsibility entrusted to the NCLT, the quality of justice should not be compromised. Adequate training to the members of the tribunal and proper infrastructure are the need of the hour. Pending notifications must be enforced without much delay to avoid the complexities of multiplicity of fora. A strong administrative mechanism has to be in place specifically for matters dealing with transfer of cases.

The constitution of the NCLT is undoubtedly a welcome measure. Taking another step towards tribunalization of justice, this move has paved way for speedy and more effective dispensation of justice. What remains to be seen is whether the provisions will be implemented in letter and spirit.

- Shruti Khetan

[1] The provisions concerning compromises, arrangements, amalgamations and winding up of companies have yet not been notified.

[2] The jurisdiction was originally entrusted to the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985.

[3] The High Court exercised powers relating to winding up of companies.

[4] Chapter 5, Report of The High Level Committee Law Relating to Insolvency and Winding Up Of Companies (2000).

[5] Section 6, Companies (Second Amendment) Act, 2002. The provisions relating to NCLT and NCLAT were incorporated under Part 1B and 1C of the Act.

[6] [2010] 11 SCC 1.

[7] Section 409(3) & Section 411(3) were held to be invalid. The Court pronounced that only officers who are holding the ranks of Secretaries or Additional Secretaries alone are to be considered for appointment as technical Members of the NCLT.

[8] Section 119(4), Companies Act, 2013.

[9] Sections 169(4) & 140.

[10] Section 213.

[11] Section 97, 98 & 99.

[12] Section 130.

[13] Sections 241 & 242.

[14] Section 14(1) & (2).

[15] Section 61(1)(b).

[16] Section 434 (1)(a)(b) & (2).

[17] Section 420.

[18] Under the Old law, CLB operated through five benches, whereas NCLT has 11 benches as of now. More are proposed to be set up.