Wednesday, June 26, 2013

SEBI gives preference shares a new direction – issues regulations for non-convertible preference shares

[The following post is contributed by Nivedita Shankar of Vinod Kothari & Co. She can be contacted at]

In continuation to its press note PR No. 27/2013[1], the market regulator Securities Exchange Board of India (“SEBI”) has notified the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013[2] (“Regulations, 2013”) on June 12, 2013.


Previously, the following two regulations were issued by SEBI for issue and listing of securities:

1. Securities And Exchange Board Of India (Issue and Listing of Debt Securities) Regulations, 2008 which is applicable to non-convertible debt securities which create or acknowledge indebtedness i.e. debentures, bonds;

2. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 which is applicable to convertible securities only.

Thus, there were no regulations to govern the issue and listing of Non-Convertible Redeemable Preference Shares (“Preference Shares”) and with Regulations, 2013, SEBI has tried to fill the gap.


The Regulations, 2013 are applicable to:

1. public issuance of Preference Shares.

2. listing of privately placed Preference Shares issued through public issue or on private placement basis.

3. issuance and listing of Perpetual Non-Cumulative Preference Shares and Innovative Perpetual Debt Instruments by banks. Such instruments shall be made subject to the prior approval and in compliance with the guidelines issued by Reserve Bank of India.

Thus, effectively, the essence of Regulations, 2013 is to:

a. provide for listing of preference shares which are offered to public

b. permit listing of preference  shares which are though privately offered, but may be listed.


Regulations, 2013 define them as:

means a preference share which is redeemable in accordance with the provisions of the Companies Act, 1956 and does not include a preference share which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder”

However, pursuant to Section 87(2)(b) of the Act, in case of non-payment of dividend in respect of a period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of an aggregate period of not less than three years comprised in the six years ending with the expiry of the financial year aforesaid, such preference shares shall attain voting rights. Thus, keeping the Act and Regulations, 2013 in perspective, in case issuing companies fail to pay dividend, such Preference Shares shall carry voting rights, but shall be non-convertible.


Any public company, PSU, statutory corporation

As defined in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

Public issue
Means offer or invitation to public to subscribe which is not private placement

Offer document
Prospectus and includes any such document or advertisement whereby the subscription to non-convertible redeemable preference shares are  invited by the issuer from public;

"Part of the same group" and "under the same management"
As in explanation to regulation 23 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. This is provided in Regulation  4


The Regulations, 2013 has listed down the pre-requisites for making public issue, being listed below:

1. the company has obtained in-principle approval for listing of Preference Shares on the recognized stock exchanges.

2. Credit rating of not less than “AA-“ by a SEBI registered credit rating agency. Such ratings shall be disclosed in the offer document.

3. Minimum tenure of 3 (three) years.

4. Issuer to create a capital redemption reserve in accordance with Companies Act, 1956 (“Act”).

5. Appoint one or more merchant bankers registered with SEBI.

Issuer shall not issue Preference Shares for providing loan to or acquisition of shares of any person who is part of the same group or who is under the same management, other than to subsidiaries of the issuer.


A.            Disclosures in offer document

1. disclosures as in Schedule II of the Act and Schedule I of Regulations, 2013

2. all material disclosures necessary to make an informed decision.

B.             Filing of draft offer document

1. prior to this, due diligence certificate to be issued as per Schedule II of Regulations, 2013

2. draft offer document to be filed by lead merchant banker and posted on the website of designated stock exchange

3. all comments received on draft offer document to be addressed before filing of offer document with Registrar of Companies

4. draft and final offer document to be forwarded to SEBI and designated stock exchange simultaneosly.

C.             Advertisements for public issues

1. Issuer to make advertisement in one English national daily newspaper and one Hindi national daily newspaper with wide circulation at the place where the registered office of the issuer is situated, on or before the issue opening date.

2. The advertisement shall urge the investors to invest only on the basis of information contained in the offer document.

3. Any corporate or product advertisement issued by the issuer during the subscription period shall not make any reference to the issue of non-convertible redeemable preference shares or be used for solicitation

D.            Abridged Prospectus and application forms

It shall be the duty of the issuer and lead merchant banker to ensure that:

1. every application form issued by the issuer is accompanied by a copy of the abridged prospectus;

2. the abridged prospectus shall not contain matters which are extraneous to the contents of the prospectus;

3. adequate space shall be provided in the application form to enable the investors to fill in various details like name, address, etc

The Regulations, 2013 allow issuers to provide the facility of electronic mode for subscription of applications.

E.             Other requirements

1. Price of non-convertible redeemable preference shares may be at a fixed price or determined through book building process.

2. Issuer to decide the amount of minimum subscription. On non-receipt of the same, all application money are to be refunded. Interest shall be levied @15% p.a. in case the application money are refunded after 8 (eight) days from the last day of offer.

3. The issue can also be underwritten and in such a case sufficient disclosures regarding underwriting arrangements shall be made in the offer document.


With Regulations, 2013 prescribing companies to get Preference Shares listed, it opens up additional avenue for listing, not only for Indian residents, but also for foreign investors. However, the extant norms relating to foreign direct investment in India, does not allow Indian companies to issue non-convertible preference shares to foreign investors. In fact para 3.3.2 of the Consolidated FDI Policy issued by Department of Industrial Policy and Promotion effective from April 5, 2013, any issue of non-convertible preference shares shall be taken to be debt and accordingly, norms relating to External Commercial Borrowings shall be applicable.

The Regulations, 2013 prescribe mandatory listing for all issuers making public offer.


1. Preference Shares are in dematerialized form

2. Minimum application size for each investor is not less than Rs. 10 lakhs.

3. Disclosures to be made as specified in Schedule I of Regulations, 2013 like Memorandum and Articles of Association, audited annual reports, date and parties to all material contracts. Detailed information regarding the issuer to be also provided as in Schedule I.


The Regulations, 2013 have also laid down conditions for trading of preference shares whereby, the shares shall be traded and such trades shall be cleared and settled in recognized stock exchanges. In case of OTCs, such trades shall be reported on a recognized stock exchange.


SEBI has been empowered to:

1. To appoint one or more persons to undertake the inspection of the books of account, records and documents of the issuer or merchant banker for purpose such as:

a. Verify compliance with provisions of Act, Securities Contracts (Regulation) Act, 1956, Depositories Act, 1996, Regulations, 2013 and allied rules if any.

b. to inquire into affairs of the issuer in the interest of investor protection

c. issue directions like prohibiting issuer from dealing in securities, direction to sell or divest securities, directing the issuer or the depository not to give effect transfer or directing further freeze of transfer of securities.

2. To issue clarifications or grant relaxations from application requirement.


What is conspicuously missing in Regulations, 2013 is any penal provision. It is thus, understood that penal provisions as in SEBI Act, 1991 will be applicable. In the coming months, we can also expect RBI to come up with its own set of regulations for banks as applicable under Regulations, 2013. The Regulations, 2013 however has given HNIs a reason to rejoice with SEBI giving them one more avenue to invest. With regulations being issued and reports indicating that Indian companies have raised over Rs 25,000 crore through preference share issuance in the last three years[3], this trend can be expected to catch up.

- Nivedita Shankar

Monday, June 17, 2013

Competition Act: Status of Director General’s Finding

[The following post is contributed by Akanksha Mehta, a student of Dr. R.M.L. National Law University, Lucknow, who has an interest in competition law]

One of the major loopholes in the present Competition Act, 2002 seems to have found some judicial clarification through COMPAT’s (Competition Appellate Tribunal) order dated 18th April, 2013.

Section 26 of the Act includes all the orders that the Competition Commission of India (CCI) can pass to carry out the procedure for inquiry under Section 19 of the Act. While this Section explicitly gives CCI the power to direct the Director General (DG) to investigate matters, to close the matter if the DG finds no contravention and to order for a further investigation if the DG finds a contravention in his report, it does not explicitly give CCI the power to disagree with the DG and close the matter even when the DG has found a contravention. Though there have been various cases till now where the CCI has disagreed with the DG and closed the matter therewith but there has also been a dissenting opinion by Member R. Prasad in all these cases stating the inability of the CCI to pass such orders as there is no Section or provision giving CCI such powers. This lacuna in the Act has given rise to ambiguities relating to the powers of the CCI and nature of the DG’s report. Does it remain binding on the CCI? Or is it merely recommendatory in nature?

COMPAT’s latest order in the case of M/S Gulf Oil Corp. Ltd. v. CCI & others has brought some clarity to this vagueness. While determining the question of whether it is mandatory for CCI to pass an order under Section 26(7) for further inquiry after the DG has found a contravention in his report, it stated-

The report of the DG is only recommendatory in nature and it is not binding on CCI in any manner. It is only if the CCI formulates an opinion on the basis of the report that the DG has either not done full investigation or that the further investigation is necessary then it proceeds under Section 26(7) and not otherwise. Therefore, it is not in every case where the CCI disagrees with the report of the DG, it has to proceed under Sec 26(7).” 

Though this Judgment has brought certainty and clarity in determining the nature of the DG’s report, yet it does not provide an answer to the most fundamental questions of CCI’s power to close the matter while disagreeing with the DG’s report which has found contravention. This ambiguity can be resolved by either a legislative amendment in the Act or by a purposive interpretation of Section 26 by the Judiciary.

- Akanksha Mehta

Thursday, June 13, 2013

Petrodel v Prest: Lord Sumption’s Masterly Analysis of the Corporate Veil

When the history of the corporate veil is written, the year 2013 will perhaps be given as much prominence as the year 1897. Today, the UK Supreme Court allowed Mrs Prest’s appeal against the judgment of the Court of Appeal that seven properties in London owned by the Petrodel group of companies are not properties to which the sole controller of the group is ‘entitled, in possession or reversion’. The judgment of Lord Sumption contains a masterly analysis of this difficult area of law and is likely to become the definitive authority on the corporate veil in the years ahead. Along with (and perhaps even more than) VTB Capital v Nutritek Corporation, this is the most important judicial analysis of the corporate veil in recent times. We have commented on the decisions in VTB (Court of Appeal and Supreme Court) and Petrodel, to which readers may refer for an account of the facts and the background. In short, after Mr and Mrs Prest divorced, Moylan J. awarded Mrs Prest a sum of £17.5 million as a fair division of Mr Prest’s assets. In part satisfaction of this sum, the judge ordered three Petrodel group companies to transfer the seven properties in question to Mrs Prest. It was established, inter alia, that Mr Prest was the controller and sole person interested in the Petrodel companies and that he had used the assets of the company to defray personal expenses. The question was whether the court was empowered to grant this order.

At an early stage of his judgment (para 9), Lord Sumption identifies three (and no other) possible bases on which such an order can be validly made against the corporate defendants: (1) ‘piercing the corporate veil’ in order to give effective relief; (2) section 24(1)(a) of the Matrimonial Causes Act, 1973 and (3) the Petrodel companies hold the London properties on trust for the husband (not simply because he is the controller). Our interest here is (1) but we note in passing that Lord Sumption (correctly, it is submitted) rejected the proposition that section 24(1)(a) authorises the court to ignore the corporate entity simply to make a fairer distribution of assets.

Lord Sumption’s analysis of the corporate veil contains so many important propositions of law that it is best to summarise them, and then consider two or three of them in more detail:

  1. The corporate veil has been described as a fiction but it is a fiction which is the whole foundation of the English law of company and insolvency. It also clearly accords with the commercial understanding of companies although, as Goff LJ rightly said, the courts are here “concerned not with economics but with law” (para 8);
  2. In some cases, some rule of law has the effect of attributing to the controller the knowledge of the company, or in some other way treating (without ignoring the separate legal entity of the company) as the act of the company an act of some other person. These are not, and should not be, considered as instances of piercing the corporate veil. That is done only when the corporate personality of the company is disregarded (para 16);
  3. Most advanced legal systems recognise corporate personality but adopt different ways of introducing some limits to its logical consequences. The civil law countries use the doctrine of ‘abuse of rights’ but the common law knows no such general principle: instead, “it has a variety of specific principles which achieve the same result in some cases”, one of which is that the law, in defining the incidents of a legal relationship, assumes that persons who engage it deal honestly with each other: if not, the same incidents may not necessarily apply (para 18);
  4. Much of the case law on the corporate veil “is characterised by incautious dicta and inadequate reasoning”. Many of these cases attribute the doctrine of piercing the veil to the fact that the company is a ‘sham’ or a ‘fa├žade’ but these expressions beg more questions than they answer. In recent times, the law has crystallised around the six principles formulated by Munby J. in Ben Hashem v Shayif, of which the most important is that there must be ‘relevant impropriety’, that is, impropriety in the use of the corporate structure to avoid liability. The one modification made to this by the Court of Appeal in VTB (that the corporate veil can be pierced even if other remedies are available to the claimant) is wrong (para 25);
  5. Although the recognition of the veil was obiter in many of these cases, and those in which it was not can be explained by conventional legal principles, the existence of the doctrine is well-established in the authorities: “I would not for my part be willing to explain that consensus out of existence” (para 27);
  6. Much of the confusion in the case law has arisen from a failure to distinguish between “the concealment principle” and the “evasion principle” (para 28);
    1. The concealment principle is, in fact, not an instance of piercing the veil but is the principle that “the interposition of a company…so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming their identity is legally relevant”.
    2. The evasion principle is the only real instance of piercing the veil. This is done if “there is a legal right against the person in control of the company which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement”.
  7. Lord Sumption illustrates the difference between the concealment principle and the evasion principle by comparing, on the one hand, Gilford Motor Co v Horne [1933] Ch. 935 and Jones v Lipman [1962] 1 WLR 832 with, on the other, Genco ACP v Dalby [2000] 2 BCLC 734 and Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177). In Trustor and Genco, at the risk of over-simplification, a claim was made that a former director of the claimant was liable in knowing receipt by reason of the receipt by a company under his control of funds belonging to the claimant which the controller had procured the company to receive. In both cases, the claimant succeeded apparently on the basis that the veil was pierced so that it could be said that the former director had received the money. Lord Sumption explains that this is a wrong analysis of the cases: correctly analysed, both cases are instances of the concealment principle, not the evasion principle. This is because there was no legal right or liability on the part of the director independently of the company’s interposition: by attributing his knowledge to the company, the company became directly liable to the claimant, but without losing its corporate personality. As Lord Sumption puts it, the result would have been the same if Mr Dalby had caused his uncle to receive the funds with prior knowledge, instead of the company, and there would have been no doubt about his uncle’s separate existence. On the other hand, the order of injunction made against JM Horne & Co can be explained only on the basis that the company was created by Mr Horne for the purpose of defeating the right that his former employers had against him. That liability existed independently of the company (paras 29-33).
  8. This distinction explains why the veil could not be pierced in VTB Capital and indeed in Prest: in VTB, there was no legal right against or liability of Mr Malofeev that existed independently of the role of Nutritek and the other companies. In Prest, there was certainly impropriety, but it had nothing to do with Mr Prest’s obligation to Mrs Prest. This suggests that the result might have been different if Mr Prest had transferred his assets to the companies (beneficially owned by the companies) after the order was made, in order to defeat it (paras 34-36).
  9. The principle is best stated in the words of Lord Sumption, at para 35:
35. I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil.
There are three important points that arise out of this judgment. First, the point left open by the Supreme Court in VTB—whether at all the court has the power to pierce the veil—has now been decided, although Lord Neuberger appears to have done so with some reluctance, considering (rightly) that the doctrine is anomalous. He demonstrates (para 74) that in some eighty years of its existence, the doctrine of piercing the veil has not been successfully and correctly invoked even once. Secondly, Lord Neuberger (para 62) and Lord Sumption (para 35) agree that there is a ‘necessity’ threshold to cross before the veil can be pierced: that is, contrary to what the Court of Appeal decided in VTB Capital, the veil should not be pierced even where the evasion principle applies, if other appropriate remedies are available to the claimant. Thirdly, Lord Neuberger and Lord Sumption differ in their treatment of the important cases of Gilford Motor Co v Horne and Jones v Lipman. To Lord Sumption, these cases illustrate the evasion principle insofar as an order was made against the company; to Lord Neuberger (para 70), these cases wrongly invoked the doctrine of piercing the veil and the order made against the company can be explained on the basis of agency.

It is evident, especially after Petrodel Resources, that the law in India could not be more different: the courts pierce the veil more readily, and do not insist that the fraud or impropriety must be concerned with the use of the corporate structure. However, since the Supreme Court is yet to closely examine this question in the light of recent developments, the scope of the corporate veil remains an open question in India.