Thursday, January 19, 2017

NCLT Denies Itself the Power to Dispense With Meetings in an Amalgamation

Hitherto, schemes of arrangement were carried out under sections 391 to 394 of the Companies Act, 1956 and the jurisdiction for sanction of the schemes was exercised by the relevant High Court. At the initial stage, the role of the High Court was to call for the meetings of various classes of shareholders and creditors to seek their approval to the scheme. It had been common practice for High Courts to dispense with meetings of classes of either shareholders or creditors if an overwhelming of number of members of the class had already granted their consent to the scheme in writing, which was presented before the court.

With effect from 15 December 2016, the provisions of sections 230 to 233 and 235 to 240 of the Companies Act, 2013 were notified, thereby conferring jurisdiction upon the National Company Law Tribunal (NCLT) to oversee and accord sanction to schemes of arrangement. In one of the first schemes to be considered by the NCLT, the Principal Bench thereof passed an order on 13 January 2017 on the question of whether the NCLT is empowered to dispense with the meeting of a class of shareholders if the members thereof have granted their consent in advance. The NCLT answered in the negative in JVA Trading Pvt. Ltd. and C&S Electric Limited.

This case involved a scheme of amalgamation of JVA Trading with C&S Electric. JVA Trading had only four shareholders, all of who had granted their consent to the amalgamation. Hence, the question was whether the shareholders’ meeting of JVA Trading could be dispensed with. Here, after analysing the provisions of the Companies Act, 2013, the NCLT held:

In relation to the dispensation of the meeting of the equity shareholders of the Transferor Company is concerned we are not inclined to grant dispensation taking into consideration the provisions of the Companies Act, 2013 and the rules framed there under both of which expressly do not clothe this Tribunal with the power of dispensation in relation to the meeting of shareholders/members. On the other hand reference to Section 230(9) of the Companies Act, 2013 … discloses that the Tribunal may dispense with calling of a meeting of creditor or class of creditors where such creditors or class of creditors, having at least ninety per cent value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement and does not provide for the dispensation of the meeting of members.

Further, the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 more specifically Rule 5 which provides for directions to be issued by this Tribunal discloses that determining the class or classes of creditors or of members meeting or meetings have to be held for considering the proposed compromise or arrangement; or dispensing with the meeting or meetings for any class or classes of creditors in terms of sub-section (9) of section 230.

Keeping in view the above provisions, dispensation of the meetings of members of the company cannot be entertained.

This effectively means that the NCLT can never dispense with the holding of a meeting of a class of shareholders or creditors (except under section 230(9)) even if such a meeting turns out to be an empty formality. This will certainly add to the costs and inefficiencies in effecting a scheme of arrangement. Under the Companies Act, 1956, courts did regularly grant dispensation despite the absence of any express provision in that legislation or the accompanying rules. It is not as if the affected minority shareholders are without any recourse. It is always possible for them to raise their objections when the scheme is taken up for consideration by the NCLT after the requisite classes of shareholders and creditors have approved it.

From a legal perspective, the NCLT does have general powers that it is at liberty to exercise in order to give effect to a scheme, for example in rule 24(2) of the rules pertaining to compromises and arrangements. However, the NCLT seems to be constrained by the existence of sub-section (9) of section 230, which expressly provides for dispensation of creditors’ meetings so long as they have been consented to by 90% of the creditors in value. The NCLT’s position is that this is only dispensation possible, and no other.

This order prompted me to briefly revisit the legislative drafting of the Companies Act, 2013, and some indications suggest that it might be consistent with the rather narrow view adopted by the NCLT in the present case, although the legislative history lacks full clarity. The Companies Bill, 2009 did not have any provision relating to dispensation with class meetings of either shareholders or creditors. It was only during the deliberations of the Parliamentary Standing Committee on Finance that such a proposal was made for dispensation with meetings not only of creditors, but also of shareholders so long as there was adequate support. In its 2010 report, the Standing Committee recommended that it “needs to be clarified if written consent is received from the requisite number of members or creditors, the requirement to hold a meeting could be dispensed with, as the meeting proposed in the clause is, in effect, to obtain the approval of the members or creditors”. Clearly the intention was to allow dispensation for both shareholders’ and creditors’ meetings if the scheme was adequately supported. Interestingly, the provision that culminated in section 230(9) was introduced in the ensuing Companies Bill, 2011 to include references only to dispensations for creditors’ meetings and not for shareholders’ meetings. It appears this is not a case of oversight. For example, a subsequent report in 2012 clearly indicates that the Ministry of Corporate Affairs differed with the suggestion of the Standing Committee regarding dispensation because “meeting should be held so that the information about the merger, amalgamation should be there in the knowledge of the members.”

What is unclear though is that if this logic should apply for shareholders, why should it not apply to creditors as well? Is there any reason why shareholders must be treated differently (without dispensation) as opposed to creditors (with dispensation) while the protection of minority interests may hold equally good in both cases, especially since schemes of arrangement could be entered into between a company and its shareholders (e.g. amalgamation) or between a company and its creditors (corporate debt restructuring). Hence, while the legislative history suggests keenness on the part of the Government to preserve corporate democracy through the requirement of meetings, there less clarity on why a distinction has been made between shareholders’ and creditors’ meetings. Moreover, although the intention of sub-section (9) is to facilitate corporate debt restructuring (and hence the emphasis on creditors’ meetings), its current wording is broad enough to include other types of schemes. For example, it might result in curious situations, such as where in an amalgamation, a shareholders’ meeting cannot be dispensed with even if 100% of the shareholder consent, but a creditors’ meeting in the same amalgamation can be dispensed with if only 90% of the creditors consent. Surely, this cannot have been intended. In such a context, the reliance by the NCLT on sub-section (9) that applies to creditors in order preclude itself from granting dispensation to a meeting of a class of shareholders may not be beyond doubt.

Despite the legal niceties involved, the interpretation adopted by the NCLT is likely to cause considerable practical issues, and might hamper genuine transactions that could have been carried out efficiently where shareholders may have approved the transaction up front. This may require further reconsideration either on the part of the NCLT or through appropriate amendments to the relevant Rules.

Wednesday, January 18, 2017

SEBI Enhances Oversight on Schemes of Arrangement

Since 2013, the Securities and Exchange Board of India (SEBI) has exercised oversight in respect of schemes of arrangement proposed by listed companies, including schemes such as amalgamation, demerger, reduction of capital and the like (see here and here). Such oversight has now been enshrined in regulations 11, 37 and 94 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. By virtue of this, SEBI and the stock exchanges possess and exercise the power of reviewing schemes of arrangement in order to ensure that they comply with the appropriate securities and listing regulations. Such a power was expressly provided for in view of previous uncertainties in case law that questioned the jurisdiction of SEBI over schemes of arrangement that are otherwise implemented under the Companies Act.

In a more recent development, the board of SEBI extended its oversight to schemes arrangement such as mergers and demergers between listed companies and unlisted companies. Furthermore, SEBI has sought to impose additional conditions on schemes of arrangement between listed and unlisted companies. The motivation behind the enhanced jurisdiction of SEBI is largely to prevent backdoor listings by unlisted companies through mergers with listed companies in a manner that might adversely affect the interests of the public shareholders of the listed companies.

In this regard, the board of SEBI has proposed various measures as follows:

1.          In the case of the merger of an unlisted company with a listed company, the unlisted company is required to comply with the requirement of disclosing material information as specified in the format for abridged prospectus. This is essentially to ensure that unlisted companies do not circumvent the disclosure requirements (and attendant legal risks and liabilities) that accompany an initial public offering (IPO) of such a company.

2.        Following the merger, the public shareholders of the listed entity and the qualified institutional buyers (QIBs) of the unlisted company must together not less than 25% shares in the merged company. This is to ensure that the shareholding following the merger is widespread, and would accordingly prevent the merger of a very large unlisted company into a small listed company.

3.        The merger would have to ensure that the listed company is listed on the stock exchange having nationwide terminals. 

4.        The issue of shares as part of the scheme of arrangement must comply with the pricing formula prescribed under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. This is to prevent select groups of shareholders from receiving undue benefits under the scheme.

5.         Lastly, public shareholders have been given additional rights whereby their approval through e-voting must be obtained in the following cases:

a.        Where an unlisted company is merged into a listed company, which results in a reduction of the shareholding percentage of the pre-scheme public shareholders to less than 5% of the merged entity;

b.        Where the scheme involves the transfer of whole or substantially the whole of the undertaking of a listed company where the consideration is provided in a form other than listed equity shares;

c.        Where the scheme involves the merger of an unlisted subsidiary with a listed holding company and the shares of the unlisted subsidiary have been acquired by the holding company from the promoters.

The above three scenarios involve transactions that might impinge upon the rights and interests of public shareholders, and hence the requirement for obtaining their specific approval.

In all, these efforts by SEBI would enhance the scrutiny of reverse mergers such as those between unlisted companies and listed companies that are carried out with a view to achieving a backdoor listing of such unlisted companies. In several jurisdictions, these issues are dealt with specifically through stock exchange listing rules. It is somewhat surprising that the situation remained exposed in the Indian context, but at least now it has received specific treatment, both from the perspectives of securities regulation generally and minority shareholder protection specifically.

Sunday, January 15, 2017

NALSAR Student Law Review Vol. XII: Call for Papers

[The following announcement is posted on behalf of the NALSAR Student Law Review]

The NALSAR Student Law Review (NSLR) is now accepting submissions for its upcoming Volume XII. NSLR is an annual, student-edited, peer-reviewed law review that is the flagship publication of NALSAR University of Law, Hyderabad, India.

Submissions may be in the form of Articles (5000-8000 words), Notes (3000-5000 words), Case CommentsLegislative Comments or Book Reviews (1500-2500 words). The word count is inclusive of footnotes. Submissions are required to be in Times New Roman font, double-spaced and word-processed compatible with Microsoft Word 2003 and 2007. The main text should be in font size 12 while footnotes in font size 10. Please use only footnotes (and not end-notes or other forms of citation) in the submission. All submissions must conform to the Bluebook (20th edition) system of citation. Finally, all submissions are required to carry a 250 word abstract that encapsulates the gist of the paper.

Submissions are to be emailed to under the subject heading ‘Volume XII - NSLR Submission’. The email should indicate which category the paper is intended for. Further, it should also contain the name of the author, qualifications, title of the manuscript and contact information. Please do not include any information that could identify the author in the manuscript itself. Co-authorship is allowed, provided that all authors are students at the time of submission of the manuscript. The deadline for submissions is May 14, 2017. All submissions must be submitted electronically.

Saturday, January 14, 2017

Measuring outputs v. outcomes: Did the restriction on foreign investment in local debt achieve the intended outcome?

[The following guest post is contributed by Anurag Dutt, Arpita Pattanaik and Bhargavi Zaveri, who are researchers at the Finance Research Group at the Indira Gandhi Institute of Development Research, Mumbai.]

A good policymaking process requires significant regulatory capacity. Before the policy is enacted, the State must (a) identify a market failure and an appropriate intervention to address it, (b) conduct a cost benefit analysis of the intervention, and (c) conduct an effective public consultation where the public knows about (a) and (b). Even after the policy is enacted, the policy by itself is merely an 'output'. After allowing for a reasonable lag for transmission, the State must identify whether the intended outcome of the policy has been achieved. For example, the intended outcome of the Insolvency and Bankruptcy Code (IBC) is to improve the debt recovery rates in India. The IBC was enacted in May 2016, and most of its provisions were notified in November 2016. The IBC is an output. Allowing a medium term horizon for the impact to play out, an impact assessment exercise will be due in November 2020 to assess whether the debt recovery rates have improved. The impact on debt recovery rates would be the outcome.

In the field of capital controls in India, we find that State interventions are almost never accompanied with the steps mentioned above (Burman and Zaveri (2016)). An ex-post impact assessment of interventions in this field is unheard of. We wrote an article measuring the impact of a regulatory intervention in February 2015, which banned Foreign Portfolio Investors (FPIs) from investing in onshore bonds with a maturity period of less than three years. Our findings of this research are summarised below.

The intervention

On 3 February 2015, the Reserve Bank of India (RBI) prohibited FPIs from investing in (a) debt instruments with a maturity period of less than three years (such as corporate bonds with less than 3 years maturity and commercial papers), and (b) money market and liquid mutual fund schemes (as these schemes invested in corporate debt with less than 3 years maturity). In this post, for ease of reading, we call the onshore bonds with a maturity period of less than three years "prohibited instruments", and onshore bonds with a maturity period of at least three years "permitted instruments". The restriction was effective from 4 February 2015. However, FPIs were allowed to continue holding the prohibited instruments that they already held on 4 February 2015. Also, no lock in period was imposed on instruments acquired by FPIs after the date of the intervention, that is, FPIs could invest in and sell bonds with a maturity period of at least three years, well before they matured.

The RBI circular did not specify what the market failure was or what the intervention was intended to achieve, except that the intervention was to bring consistency between the rules for FPI investment in corporate bonds at par with FPI investment in Government securities. It was not accompanied with a cost benefit analysis of the intervention, and it was not preceded by a public consultation process. We are not aware if RBI or the Central Government proposes to undertake an ex-post impact assessment of this measure.


Due to the absence of a specific desired outcome in the RBI circular, we relied on statements made by RBI to the press. These statements, as well as our conversations with RBI employees on public forums since the intervention, indicate that the intervention was intended to 'nudge' FPI investment in long-term debt in India. Our analysis is, therefore, limited to the following questions:

Question 1: Whether the regulatory intervention led to an increase in FPI investment in the permitted instruments?

Question 2: Whether the regulatory intervention led to any change in the behaviour of FPIs in relation to the permitted instruments?


We use the daily holdings data from NSDL to identify the kind of debt instruments held by FPIs from January 2014 until March 2016. With this data, we identify the change between (a) the percentage of permitted instruments held by FPIs during 12 months before the intervention; and (b) the percentage of permitted instruments held by FPIs during 14 months after the intervention. We take a long time-frame for the study, which helps in filtering out the effect of other macroeconomic conditions and monetary policy changes that could have caused short term fluctuations in FPI participation in the Indian corporate debt market. Our findings, on the basis of this data and methodology, are summarised below:

Question 1: We find that after the intervention, there is a marginal increase of 0.47% in the annual average FPI investment in the permitted instruments.

Question 2: We find that there is no change in the behaviour of FPIs in relation to their holding of permitted instruments, before and after the intervention. From anecdotal conversations with market participants, we know that FPIs do not hold their local currency debt until maturity, especially where such debt is of a long-term nature. We notice this finding even in our data. We observe that even after the intervention, they continue to sell-off the permitted instruments held by them shortly after listing.


An ex-post impact measurement exercise measures whether an intervention has achieved the intended outcome. It helps analyse whether any changes must be made to the intervention or the manner of its implementation, to make it more effective. For example, if an ex-post impact assessment of the IBC in 2020 shows that there has been no improvement in the debt recovery rates in India, it should be a sufficient ground to re-visit the design of the law. It is to facilitate such an exercise that the Indian Financial Code drafted by the Justice Srikrishna-led Financial Sector Legislative Reforms Commission requires every regulation to be reviewed three years after its enactment.

Our ex-post impact analysis of the intervention of restricting FPI investment in corporate debt with a maturity period of less than three years finds no evidence of having achieved its intended outcome of channelising foreign capital from the short to long end of the corporate bond market. We find that neither do FPIs increase their participation in long term bond holdings as a result of the intervention nor do they alter their behaviour by holding the long term corporate debt securities until maturity.

We find that an attempt to centrally plan the allocation of foreign capital inflows did not have the intended effect on at least one occasion. On the other hand, the intervention withdrew foreign capital from the most liquid part of the Indian debt market. Pandey and Zaveri (2016) show that a substantial proportion of the bond issuances in similarly placed economies, such as Indonesia and South Korea, belong to the maturity bracket of one-three years. None of these economies prohibit foreign portfolio investment in local currency debt of this maturity bracket. In India too, before the intervention there was significant FPI interest in the bond market with a maturity profile of less than three years. This is evident from the rapid utilisation of the debt limits for CPs. The reason for this is simple. It is easier to price currency and credit risk in debt of this maturity profile. For small to mid-sized Indian companies which are not known to foreign investors, it is easier to raise debt in this maturity profile from foreign investors. Globally, being able to raise foreign debt in local currency is a boon for debtors, as the currency risk is taken by the foreign investor. At a time when India is struggling to set up its corporate bond market, the intervention has resulted in depriving the relatively more liquid part of the market of significant participation.

- Anurag Dutt, Arpita Pattanaik & Bhargavi Zaveri


Regulatory Responsiveness in India: A normative and empirical framework for assessment, Anirudh Burman and Bhargavi Zaveri. IGIDR Working Paper IGIDR Working Paper WP-2016-025, October 2016.

Radhika Pandey and Bhargavi Zaveri, Time to inflate economy's spare tyre, Business Standard, 18 April 2016.