Saturday, May 30, 2015

Financial Assets and the Rights of Nominees and Successors

(The following guest post is authored by Sumit Agrawal, who is an Assistant Legal Advisor, Securities and Exchange Board of India at its Head Office in Mumbai. He can be contacted at Views are personal.)

There is a frequent debate as to who will own an investor’s assets (shares and debentures, life insurance, provident fund and gratuity account, PPF, saving account, fixed deposit/recurring deposit account, government savings account, etc.) upon the death of such investor — the nominee or the legal heir?

In the year 2010, in Harsha Nitin Kokate v. The Saraswat Cooperative Bank  (hereinafter “Kokate Judgement”) the Bombay High Court was dealing with right of a nominee versus right of a legal heir in the context of securities while analyzing Section 109A of the Companies Act, 1956 read with Bye Law 9.11 of the NSDL Bye Laws. It had held that intent of nomination is to vest property in shares, which includes ownership rights thereunder in nominee upon nomination validly made as per procedure prescribed.

Therefore, it was held that if procedure prescribed by law for nomination is followed, the nominee would become entitled to all rights in shares to exclusion of all other persons. Accordingly, upon nomination, the nominee would be made beneficial owner and, therefore, all rights incidental to ownership would follow which would include right to transfer shares, pledge shares or hold shares.

For a detailed discussion on Kokate judgement, please see here.

Recently in the matter of Jayanand Jayant Salgaonkar vs. Jayshree Jayant Salgaonkar (2015) (hereinafter “Salgaonkar Judgement”), the Bombay High Court has declared the Kokate Judgement to be per incuriam, and has held that legal heirs and not the nominees will obtain the ownership rights of share certificates. After a detailed analysis of various judgments, it held that a nomination only provides the company or the depository a quittance. The nominee continues to hold the securities in trust and as a fiduciary for the claimants under the succession law. Nominations under Sections 109A and 109B of the Companies Act, 1956 and Bye-Law 9.11 made under Depositories Act, 1996 cannot and do not displace the law of succession. The court also observed that in the Kokate Judgement it had failed to consider many binding judgments of the Supreme Court including the judgment of Sarbati Devi v Smt. Usha Devi (AIR 1984 SC 346).

Therefore, the rights of a nominee to shares of a company cannot override the rights of legal heirs of deceased and therefore the amount received by the nominee can be claimed by the legal heirs of the deceased. 

In the context of securities law, the Salgaonkar judgement is a welcome decision as it resets the balance which was upset by Kokate Judgement. It will also set at rest the frequent controversy whenever a third person, who is not a successor, is nominated for shares and debentures.

However, it is not yet conclusive whether this judgment delivered in the context of securities can be considered to be a law for nominations under laws governing other assets, more so because of the divergent language used in the special statutes governing such assets. For example, in the context of insurance policies it is not conclusive in view of Insurance Laws (Amendment) Act, 2015.

Sections 38 and 39 of the Insurance Act, 1938 as amended by Insurance Laws (Amendment) Act, 2015 have introduced the concept of a beneficial nominee. It limits the beneficial nominees restricted to immediate family members such as spouse, parents and children so that the money secured by the policy shall be paid to the nominee in the event of the death of a policyholder. Therefore, if an immediate family member such as spouse is made the nominee, then the death benefit under the insurance policy will be paid to that nominee, and other legal heirs will not have a claim on the money. 

In view of this, it is arguable that under insurance policies, beneficial nominee’s rights excludes all others’ rights, irrespective of any provision in succession law or other law or even a provision in the will unless it is proved that the policy holder could not have conferred any beneficial title on the nominee. Therefore, how rights of legal heirs would be interpreted vis-à-vis Insurance Act, 1938 remains an issue despite the Salgaonkar Judgement.

- Sumit Agrawal 

Friday, May 29, 2015

Bombay High Court Pronounces on FDI Policy

It is not very often that courts in India have had the occasion to interpret and rule on the Foreign Direct Investment (FDI) Policy of the Government of India. Earlier this month, the Bombay High Court issued its ruling in IDBI Trusteeship Services Ltd. v. Hubtown Ltd., which relates to the legalities of a foreign investment structure that involved compulsory convertible debentures (CCDs) issued by an Indian company to a foreign investor the proceeds of which were in turn used by the Indian company to invest in optionally convertible debentures (OCDs) of two other companies operating in the construction development sector. The specific issues in question relate to the permissibility of assured returns to the foreign investor and the nature of downstream investments. Sandip Bhagat, et. al., discuss the facts, issues and decision in an article on The Firm.

Here, I propose to highlight some of the key implications of this judgment that may be of wider relevance:

1. The Bombay High Court has demonstrated its willingness to view the transaction as a whole by transcending beyond the form and into the substance. In other words, although the transaction involved two stages of foreign investment into a holding company, which in turn invested in two operating companies, the court effectively viewed the transaction as a whole and not in separate parts. The openness to re-characterizing the transaction may cause some amount of uncertainty in structuring foreign investments. Moreover, the reliance of the Court in doing so on judgments of the Supreme Court relating to aspects such as taxation and cases involving fraud leaves the debate somewhat open.

2. The implications of the judgment on downstream investments are categorical in that foreign owned/controlled investment companies in India must follow all aspects of foreign investment regulations (including types of investment instruments such as equity shares or CCDs). This enhances the compliance requirements of downstream investments.

3. In essence, the Court declined to validate the transaction due to the presence of an assured return. This will have to be considered in the context of pronouncements by the Reserve Bank of India (RBI) of its intention to liberalize greater flexibility in the pricing of instruments, including an assured return, in the context of optionality clauses, as discussed here.

In any event, this does not appear to be the final word as the Court was only determining whether there are triable issues in a summary suit that require further adjudication. The hearing in the suit is to follow.

Thursday, May 28, 2015

Companies (Amendment) Act, 2015 Notified

The Companies (Amendment) Bill was passed by the Rajya Sabha earlier this month. We had discussed the broad nature of the changes introduced.

Now, the amendment has become law in the form of the Companies (Amendment) Act, 2015 as it has received the assent of the President and has been notified in the Official Gazette .

Update - May 29, 2015: As some of you have pointed out in the comments, the notification states that the Act has been "published for general information". Moreover, section 1(2) provides that it shall come into effect on a date or dates appointed by the Central Government.

Update - June 3, 2015: The Central Government has notified May 29, 2015 as the date on which the provisions of sections 1 to 12 and 15 to 23 of the Companies (Amendment) Act, 2015 shall come into force. The notification is available here.

(Hat tip: Abhishek Dubey)

Wednesday, May 27, 2015

Designing Executive Compensation for Banks and Financial Institutions

When it comes to banks and financial institutions, there are additional corporate governance requirements apart from those applicable to other types of companies. This is because the operation of banks and financial institutions affect the interests of a constituency other than shareholders, namely deposit holders and other creditors. Hence, executive compensation practices need to take these special issues into account.

In this regard, a recent article in the Economic & Political Weekly (EPW) titled Contingent Convertibles and Bankers' Pay by Mandar Kagade and Aadhaar Verma is instructive. The abstract is as follows:

The compensation practices at large financial institutions are often held as one of the important factors which contributed to the 2007/2008 global financial crisis. Regulators around the world, including India, have therefore moved to enact prescriptions aimed at increasing shareholder oversight of executive pay. Set against this background, the paper makes two novel proposals focusing on the Indian context. First, it nudges the regulators to prescribe creditor-centric compensation rules at banks. The Reserve Bank of India has hitherto focused on pay reforms that will promote incentive alignment between executives and shareholders. This paper argues that such reforms are likely to promote more rather than less risk-taking among bank executives. Second, it argues that the RBI ought to mandate banks to pay a substantial portion of the managerial compensation in contingent capital bonds. The design of these bonds can significantly motivate executives to "think like creditors" and thereby enable avoidance of taxpayer-funded bailouts.

Monday, May 25, 2015

SEBI’s Interim Measure in an Insider Trading Case

[The following guest post is contributed by Supreme Waskar, who is a corporate lawyer]

The securities market regulator, SEBI, has directed Mr. A. Vellayan (Chairman of Coromandel International Limited (“Coromandel”) to surrender unlawful gains along with interest for alleged passing of unpublished price sensitive information (“UPSI”) pertaining to Coramandel’s acquisition of Sabero Organic Gujarat Limited (“Sabero”) to certain persons who traded in the shares of Sabero on the basis of such UPSI.


SEBI conducted a detailed investigation in the matter upon receipt of complaints alleging leak of UPSI pertaining to the acquisition to certain persons, who were acting in concert with the management of Sabero/Coromandel. On May 15, 2011, the representatives of Coromandel (including Mr. A. Vellayan) and Sabero had conducted a meeting to discuss and negotiate the acquisition. Coromandel and Sabero informed the stock exchanges about the acquisition on May 31, 2011 and June 2, 2011 respectively.  Thus, it is SEBI’s case that the UPSI came into existence on May 15, 2011, but it became public only on May 31, 2011. It is the case that certain parties traded in the shares of Sabero in the interim. Further, the share price of Sabero at BSE had increased from Rs. 58 on May 16, 2011 to Rs. 127 on June 9, 2011 after touching Rs. 130.50 on June 6, 2011. The parties share familial relationships in that Mr. A. Vellayan’s grandfather is the brother of Mr. A.R. Murugappan’s mother and Mr. V. Karuppiah is son-in-law of Mr. A.R. Murugappan.

Findings of SEBI’s investigation

- The information relating to the acquisition was a deemed 'price sensitive information' until it was published;

- Tthe trading pattern of certain individuals, Mr. Gopalkrishanan C. and V. Karuppiah (HUF), was unusual compared to their regular pattern. The timings and pattern of the trades of Mr. Gopalakrishnan. C. indicate that he had traded based on the UPSI;

- The prima facie financial links among Mr. Gopalakrishnan. C, Mr. A.R. Murugappan and Mr. A. Vellayan were traced;

- An analysis of the bank statement of Mr. A.R. Murugappan revealed certain transactions with Mr. A. Vellayan.

- Upon a query in this regard by SEBI, Mr. A.R. Murugappan, submitted that the payment to Mr. A. Vellayan was an advance for the purchase of property and as the same did not materialize, the money was returned back to him. Further, the investigation found it was only an arrangement to provide funds to Mr. Gopalakrishnan. C to trade in the scrip of Sabero;

- The trading behaviour of Mr. Gopalkrishanan C. and V. Karuppiah (HUF) in the scrip of Sabero had certain striking similarities, such as both shared personal relationship with Mr. A.R. Murugappan, both had started buying shares of Sabero from May 23, 2011 and both had not traded in the scrip of Sabero earlier;

- The funding to Mr. Gopalkrishnan C. through layered transactions by person connected with Mr. A. Vellayan, prima facie appeared that the trading by Mr. Gopalkrishnan C. and V. Karuppiah (HUF) was based on the knowledge of UPSI and the UPSI had passed on from Mr. A. Vellayan and Mr. A.R. Murugappan.

SEBI’s interim order

As an interim measure, to prevent of Mr. Gopalkrishanan C. and V. Karuppiah (HUF) from diverting the funds and to safeguard the interests of securities market, SEBI vide its interim order dated May 21, 2015, took an urgent preventive step of impounding and retaining the proceeds along with interest at 12% p.a. lying in their bank accounts. SEBI further ordered that, if the funds lying their bank accounts are insufficient to meet the unlawful gains, then the securities lying in the demat account of these persons shall be frozen to the extent of the remaining value.


Mr. Gopalkrishanan C. and V. Karuppiah (HUF) can make their submissions against the order by filing their replies and availing an opportunity of personal hearing before SEBI. Further SEBI’s interim order is without prejudice to take any other actions including adjudication in accordance with law and SEBI is directed to complete the investigation, within 3 months and expedite the process of issuing show cause notice, if any.

- Supreme Waskar

Synchronised Trading: In Sync With the Law? – Part 2

[The following guest post is contributed by Kanwardeep Singh Kapany (5th B.S.L.LL.B) and Mitravinda Chunduru (4th B.S.L.LL.B.), both students of ILS Law College, Pune

This is a continuation of Part 1, which is available here]


What amounts to commission of Illegal Synchronisation had been a moot point for quite a while. However, with the passage of time and development of jurisprudence having taken place on the said subject, not only have factors that point towards the said contravention crystallised but so have the defenses. If successfully pleaded, these defenses will either act as a mitigating factor as they will be taken into consideration for imposition of reduced penalty or in certain situations, if the facts warrant, vitiate the proceedings in relation to Illegal Synchronisation in toto.[1]

Inordinate Delay In Filing Of Show Cause Notices

Expeditious disposal of proceedings wherein allegations of market manipulation are involved should be the foremost concern as this alone ensures that SEBI is carrying out its duty effectively to protect the interest of investors in securities and to promote the development of and regulating the securities market as mandated by SEBI Act.[2] Inordinate delay in conducting inquiries and in punishing the delinquent not only permits market manipulator to operate in the market, it also has demoralizing effect on the market players who are ultimately not found guilty but ‘Damocles sword’ of inquiry keeps hanging on them for years together from the date of starting investigation by SEBI to the date of completion of inquiry proceedings.[3] Time and again Competent Forums have expressed that SEBI must undertake necessary steps to ensure that inquiry proceedings against market manipulators are completed expeditiously and guilty persons are punished in a time bound manner[4] so as to prevent violation of principles of natural justice[5] which occurs when such proceedings are delayed without any fault on the part of Alleged Contravener.

No Access To Documentary Evidence And Or Witnesses

The materials upon which SEBI may rely in order to prove contravention of the Act & Regulations are inter alia details, records and statements such as order logs and trade logs. An Alleged Contravener necessarily would require access to the said materials for presenting an effective defense. Therefore, an opportunity to peruse and inspect the said materials has to be mandatorily provided to the Alleged Contravener.[6] However, if by not providing certain material, which formed basis of an order, the Alleged Contravener is not at all prejudiced, then such an omission will not be fatal to the continuation of proceedings. Also, on certain occasions if testimony of certain individuals has been relied upon[7] to come to a certain finding, in such cases, an opportunity to cross examine such individuals has to be mandatorily provided to the Alleged Contravener.[8]


Differential treatment presupposes discriminatory conduct. When contraveners are meted out different punishments, some with softer and the other with harsher, this is not at all sufficient to establish existence of discriminatory conduct on the part of the Competent Forum. For pleading discrimination what has to be clearly brought out is the factum that the Competent Forum has gone ahead and provided different punishments where the role played by all the Alleged Contraveners is homogeneous. Also, presence of discernible reasons, for reaching a conclusion is considered to be fair and non arbitrary[9] as reason is the heart beat of fair play. Therefore, absence of reasons in an order passed by a Competent Forum wherein similarly placed Alleged Contraveners are treated differently will squarely fall within the ambit of discriminatory conduct.

Merely Carrying Out Directions Of Client

This is a broker specific defense. The broker is expected to carry out the directions of the client such as executing trades for the client.[10] The trading system in place is designed to maintain complete anonymity. Until it cannot be shown that the broker was aware of the intention of the client being to undertake Illegal Synchronisation or that the client and the broker had colluded to do the same, or that the broker had individually undertaken to do the same, merely Legal Synchronisation will not at all be sufficient to hold the broker in contravention of either the SEBI Act or PFUTP Regulations or Broker Regulations.


Illegal Synchronisation is not just an actus reus based contravention, it necessarily requires the presence of mens rea as well. Across the board, Illegal Synchronisation is considered to be a serious offence, “Not all the King's horses and all the King's men' can ever salvage the situation.” The impact of such an adverse finding is wide, more so in the case of a large public company having large number of investors. Therefore, evidence merely raising probabilities and endeavouring to prove the fact on the basis of preponderance of probability is not sufficient to establish such a serious offence. Also, mere conjunctures and surmises are not adequate to hold a person guilty of such a serious offence. What will be required is the presence of reasonably strong evidence.[11]

Another pertinent aspect which is a continuation of the burden of proof aspect is whether merely establishing Illegal Synchronisation is enough or whether it has to be shown that investors were actually influenced by such contravention of the Act & Regulations. When an Alleged Contravener takes part in or enters into transactions relating to securities with the intention to artificially raise or depress the price, innocent investors in the market are thereby automatically induced to buy / sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated, the Alleged Contravener doing so necessarily influences the decision of the buyer / seller thereby inducing them to buy or sell depending upon how the market has been manipulated. Therefore, inducement to any person to buy or sell securities is the necessary consequence of manipulation and flows therefrom.[12] Therefore, SEBI is just burdened with establishing Illegal Synchronisation. Once that is established, it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required.

The market, as already observed, is so wide spread that it may not be humanly possible for SEBI to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose a burden which is impossible to be discharged.[13] While SEBI is drawn to the task of establishing that the Alleged Contravener has indulged in Illegal Synchronisation, by presenting evidence that meets the aforementioned standard, it need not wait for the final outcome of the said lis. SEBI is very well empowered, for the purpose of protecting the interest of investors[14] in securities market, to issue directions[15] as is appropriate in the interests of investors in securities and the securities market and SEBI has made judicious use of the said power on previous occasions.[16]


- Kanwardeep Singh Kapany & Mitravinda Chunduru

[1] In Re: Genus Commu-Trade Limited; In Re: The shares of Birmingham Thermotech Limited, MANU/SB/0105/2009.
[2] Shri Ashok K. Chaudhary v. SEBI, MANU/SB/0126/2008.
[3] Subhkam Securities Private Limited v. SEBI, MANU/SB/0156/2012.
[4] M/s. Prashant J. Patel v. SEBI, MANU/SB/0194/2012.
[5] Libord Finance Limited v. SEBI, [2008] 86 SCL 72 (SAT).
[6] Purshottam Budhwani v. SEBI, MANU/SB/0001/2015.
[7] Ketan Parekh v. SEBI, MANU/SB/0229/2006.
[8] Triveni Managaement Consultancy Services Limited v. SEBI, MANU/SB/0071/2013.
[9] The Constitution of India, 1949, art 14.
[10] Ajmera Associates Limited v. SEBI, MANU/SB/0044/2010.
[11] Sterlite Industries (India) Limited v. SEBI, MANU/SB/0040/2001.
[12] Sebi v. A Nitin Capital Services Limited, MANU/SB/0101/2007.
[13] Iridium v. Motorola Case, AIR 2011 SC 20.
[14] Securities and Exchange Board of India Act, 1992, section 11.
[15] Securities and Exchange Board of India Act, 1992, section 11B.
[16] In the matter of Blessing Agro Farm India Limited and its Directors WTM/SR/CIS-SRO/114/12/2014; Order against M/S Lee Capital Services Private Limited, WTM/RKA/MIRSD/53/2013.