Monday, September 26, 2016

Announcement: Essay Competition in Corporate Law

[The following announcement is posted on behalf of the Corporate Law Society, National Law University, Jodhpur]

Corporate Law Society, National Law University, Jodhpur, is pleased to announce the 1st Pranita Mehta Memorial Essay Competition, 2016 in memory of the university's exceptional student, Ms. Pranita Mehta. The Competition is open to all students pursuing under-graduate (three/five year) or post-graduate law degrees from any law school/university/college recognized by the Bar Council of India. 

Interested participants can email his/her ‘Consent of Participation’ to, along with a bona fide certificate from his/her university and the following details:

i. Name of the participant;

ii. Year and Course (UG/PG);

iii. University Name;

iv. Contact Phone Number; and

v. Address (for delivery of the certificate).

No registration fee is required for participation. 


1.         Self-listing of stock exchanges: Should it be permitted?

2.         Fantasy trading and legality thereof

3.         Effects of gender diversification in the Company’s Board of Directors

4.         Amendments to the Indo-Mauritius Double Taxation Avoidance Treaty: A step in the right direction?

Important Deadlines:

Last Date for Registration: November 15, 2016 (11:59 pm)

Last Date for Submission of the Essay: January 15, 2017 (11:59 pm)

Declaration of the results: First week of March 2017


Winners shall be awarded the following prize money:

i.          First Prize: Rs. 15,000/-

ii.         Second Prize: Rs. 10,000/-

iii.        Third Prize: Rs. 5,000/-

Top ten submissions shall be given merit certificates. 

For more details, please see the <>.

Saturday, September 24, 2016

The Inapplicability of Money Lending Laws to Regulated NBFCs

[The following guest post is contributed by Munmi Phukon, who is a Senior Manager in the Corporate Law Division at Vinod Kothari & Co.]


In 2011, a landmark judgment of the Gujarat High Court in Radhe Estate Developers Vs. Versus Mehta Integrated Finance Co. Ltd. and Ors (the ‘Gujarat Ruling’) contested the very fact of applicability of the Bombay Money Lending Act, 1946 (the ‘Bombay Act’) to non-banking finance companies (‘NBFCs’). In general, money lending laws are concerned with protecting the interests of borrowers by imposing a ceiling on interest rates, mandatory licensing requirement for money lenders, and making further and better provision for the control of money-lenders and for the regulation and control of money-lending in the respective States. These laws also place an embargo on the Court’s power to entertain a suit where the money lender is an unlicensed one.

Article 246 of the Constitution empowers the Parliament and Legislatures of the States to make laws in respect to any of the matters enumerated in List-I and List-II in the VII Schedule respectively. List-III in the said Schedule is a concurrent list in relation to which Parliament and Legislatures of the States both have the powers to make law. The matters related to money lending and money lenders are included in Entry 30 of List II. Therefore, the States may enact their own laws related to money lending and money lenders. 

The Gujarat Ruling

The matter contested in the Gujarat Ruling related to the applicability of the Bombay Act to an NBFC which is already regulated by a central law, namely the Reserve Bank of India Act, 1934 (‘RBI Act’).  The Court held that a State Act is always subject to a Central Act. After referring the provisions of Chapter IIIB of the RBI Act, held that the Reserve Bank of India (‘RBI’) has already occupied the field with regard to control over the NBFCs and all types of regulatory measures, including penal action. Therefore, the State law cannot transgress on the field occupied by the law of Parliament. In view of Section 45Q of the RBI Act, the provisions of Chapter IIIB held to be have an overriding effect on the State law.

The Court further noted that there was no notification issued under Section 2(10)(b) of the Bombay Act bringing an NBFC within the definition of ‘money-lender'. The Court therefore held that in the absence of any such notification, the State Government or its authorities have no jurisdiction to take any regulatory or penal measures under the said Act. This was the primary ground for the Court to conclude regarding the inapplicability of the Bombay Act to NBFCs. Therefore, the Gujarat Ruling still left a scope for applicability of the State law to an NBFC if any notification under the aforesaid section comes at a later date.  

Developments Following the Gujarat Ruling

The Gujarat Ruling was decided on April 26, 2011 and thereafter, on May 2, 2011, the new Gujarat Money Lenders Act, 2011 (‘GML Act’) was introduced repealing the erstwhile Bombay Act. Meanwhile, there was another special civil application pending with the Gujarat High Court in the matter of Sundaram Finance Limited & others vs. State of Gujarat, wherein there was a prayer for declaring that the provisions of the GML Act and its applicability to the NBFCs registered with RBI are illegal as ultra vires the Constitution, and unconstitutional in the absence of legislative competence.

It is to be noted here that the GML Act has prescribed the definition of ‘company’ to mean a company as defined under the Companies Act, 1956 and a ‘money lender’ to include a ‘company’. The GML Act also provides for a doctrine of implied registration for the NBFCs registered with RBI. Further, the definition of a ‘loan’ excludes the deposit of money or other property in banks, but not the activities of a company registered under Chapter IIIB of the RBI Act such as NBFCs. Apparently, the enforcement of the new GML Act had created lots of complexity.

The Court held that the new GML Act is ultra vires the Constitution for legislative incompetence of the State Legislature, only to the extent that it seeks to have control over the NBFCs registered under RBI Act in the matter of carrying on their business. The Court held that exercising rights as an NBFC is within the purview of the RBI Act, and therefore they are bound to follow guidance of RBI and that no other State law can interfere with its business activities if it conforms to the provisions of the RBI Act. Thus, within the scope of the activity of an NBFC as provided in the RBI Act, the State Legislation has encroached upon the RBI’s role by imposing its control over it in addition to that imposed under the RBI Act and thereon the direct repugnancy arises.

It is worthwhile noting that the decision of Kerala High Court in the case of M/S. Sundaram Finance Ltd vs State Of Kerala stood contrary to what the Gujarat High Court held in the aforesaid cases. The Kerala High Court held that the Kerala Money Lenders Act, 1958 is not without force, and that both the RBI Act and the provisions of the Kerala Money Lenders Act simultaneously apply to NBFCs.

The Law Operating in West Bengal

In August, 2015, there was a ruling of Calcutta High Court in the matter of M/S. Arjun Shyam & Co. (P) Ltd vs M/S. Sagar Trading Co. & Ors. The matter was primarily based on the question of maintainability of application as also the suit, considering the provisions contained in the Bengal Money Lenders Act, 1940 (BML Act) with respect to mandatory licence requirement for the money lenders. A question was also raised with regard to encroachment upon the activity of an NBFC duly registered with RBI to recover the money lent merely due to the lack of possession of a licence under the BML Act.

The Court held that the NBFCs are not covered by the definition of 'money-lenders' as provided in the BML Act. Similar to the Gujarat High Court, this Court also held that RBI Act has an overriding effect over any law inconsistent therewith for the time being in force or any instrument having effect by virtue of any such law. It was held that once an NBFC holds the licence, it can carry on the business anywhere in the country. Unless a State legislature specifically requires an NBFC to obtain a licence under the State legislation, the claim of an NBFC to realize money cannot be defeated. Even though the decision of the Court was in favour of the petitioner NBFC, however, it still provides a room for ambiguity: for example, what if the BML Act is amended to the effect of including an NBFC under its purview?

In L & T Finance Limited versus M/s. Saumya Mining Ltd. and others, the Bombay High Court relied on the interpretation of the Gujarat High Court in the matter of Sundaram Finance Limited & others vs. State of Gujarat as discussed aforesaid and held that if the laws passed by the Parliament are to operate over the earlier laws made by the State Government, it would be reasonable to hold that the companies which are covered under chapter IIIB of the RBI Act would not be falling under the BML Act, as the term ‘money lending’ under the provisions of the BML Act and the Bombay Act are in pari materia.

Further, there was a special civil application in the matter of Fullerton India Credit Company Limited and Ors. vs State of Gujarat, wherein the writ petitioners have prayed for issue of an appropriate writ, order or direction declaring that NBFCs registered with RBI would not come within the purview of GML Act. There was also a prayer for declaration that the provisions of the GML Act, 2011 and its applicability to the petitioners are illegal and ultra vires the Constitution. The Chief Justice relied on the decision of the same Court in Sundaram Finance Limited & others vs. State of Gujarat declaring the GML Act as ultra vires the Constitution for legislative incompetence of the State Legislature to the extent it seeks to have control over the NBFCs registered under the RBI Act.

While the Gujarat High Court in the later case made it clear, however, the decision of the Calcutta High Court still left a scope for inclusion of NBFCs under the purview of the State law. Therefore, until a notification is brought into place, the registered NBFCs operated in Bengal would remain out of the purview of the BML Act, and accordingly the provisions of the same would not apply to such NBFCs.


It seems that the non-applicability of the provisions of state laws only relates to those NBFCs which are regulated by the RBI by virtue of being registered with RBI. Therefore, those entities which are not so regulated by RBI and carrying on the activities of lending will still get covered under the state laws and they cannot take benefit of the aforesaid decisions of the Courts.   

- Munmi Phukon

Friday, September 23, 2016

Exempted inter-se transfer amounts to ‘sale’

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

In an earlier post on February 18, 2012, Mr. Umakanth Varottil had discussed the informal guidance issued by the Securities and Exchange Board of India (SEBI) to Strides Arcolabs in connection with the company’s eligibility to issue securities to its promoters on a preferential allotment basis. Through its informal guidance dated September 12, 2016 in the matter of KJMC Financial Services Limited (“KJMC”), SEBI has utilized the opportunity to reiterate the legal position on the company’s eligibility to issue securities to its promoters on a preferential allotment basis.

During April 2016, the promoter of KJMC executed an inter-se transfer of equity shares by way of gift to his wife. There was no change in the promoter holding pursuant to the above inter-se transfer and it was a gift without any consideration.

1.     Whether inter-se transfer of shares by way of gift amounts to sale of shares?
 2.     Whether exempted inter-se transfer of shares by way of gift by the promoter(s) will make transferor/promoter(s) ineligible to issue securities on preferential allotment basis in terms of regulation 72(2) of the SEBI (ICDR) Regulations, 2009 (“Regulations”)?

Legal scenario

In terms of regulation 72(2) of the Regulations, where any person belonging to promoter(s) or the promoter group has sold his equity shares in the issuer during the six months preceding the relevant date, the promoter(s) and promoter group shall be ineligible for allotment of specified securities on preferential basis. Further as per section 4 of the Sales of Goods Act, 1930, “sales” means the property in the goods are transferred from the seller to the buyer for a price.

SEBI’s view

The primary intention of the Regulations is not with respect to consideration but with “change in ownership of equity shares”. Accordingly, an inter-se transfer of shares by way of gift will be considered as “sale” as envisaged in the regulation 72(2) of the Regulations, thereby making the promoter(s) and promoter group ineligible for allotment of specified securities on preferential basis.


In terms of the Sale of Goods Act, 1930, a transfer without consideration does not amount to sale. However, for the purpose of regulation 72(2) of the Regulations, a  transfer without consideration even if exempted under regulation 10 of the SEBI Takeover Regulations from making open offer, shall not be eligible for exemption of the application of regulation 72(2) of the Regulations. SEBI’s informal guidance in both these cases clearly indicate that exemptions under regulation 10 of the SEBI Takeover Code are not blanket exemptions from application of all the provisions of securities laws.  

In this context, the issues and concerns raised in the earlier post on this Blog would also operate to the present informal guidance.

- Supreme Waskar

Monday, September 19, 2016

Takeover Regulations and the Banking Sector

Two separate but recent developments underscore the need to treat the banking sector differently when it comes to compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Regulations”). While the first relates to the applicability of the Takeover Regulations to capitalization of banks, the second relates to restructuring debts of borrower companies that might trigger the Takeover Regulations in relation to those companies.

Exemption for Bank Capitalization

By way of an order dated September 12, 2016, the Securities and Exchange Board of India (“SEBI”) granted an exemption to the capitalization of Syndicate Bank (the target) whereby the Government of India (being the controlling shareholder of the target) was dispensed with any obligation to make a mandatory offer to the minority shareholders on account of an increase in the Government’s stake in the target by way of a creeping acquisition.

On April 1, 2016, the Government of India held 65.17% shares in Syndicate Bank. On May 5, 2016, the Government subscribed to additional shares in the target that increased its shareholding to 69.32%. No mandatory offer was required as the acquisition was within the 5% creeping acquisition threshold for controlling shareholders as prescribed in regulation 3(2) of the Takeover Regulations. Now, however, the Government intends to subscribe to additional shares in order to increase its stake to 72.92%. This would constitute an increase of the Government’s stake by more than the 5% creeping acquisition threshold for the current financial year as prescribed in regulation 3(2). Hence, the target preferred an application to SEBI for exempting the Government from the open offer requirements.

SEBI granted an exemption order permitting the Government to acquire shares beyond the 5% creeping acquisition threshold without making an open offer to the minority shareholders. This is essentially because the Government’s acquisition is part of its effort to capitalize all public sector banks to comply with the Basel III norms.

Proposal for Exemption for Distressed Companies

A report in today’s Economic Times indicates that the lending community in India has approached SEBI seeking an addition exemption to enable companies that are in distress to be taken over by potential acquirers thereby resulting in a change of control and management. Currently, the Takeover Regulations permit banks, financial institutions or other secured lenders to convert their loans into equity shares of their listed borrowers without attracting the mandatory open offer requirements. This is by virtue of an automatic exemption under regulation 10(1)(i) of the SEBI Takeover Regulations, a provision that was inserted in May 2015. That only allows for conversion of loans into equity by the lenders, but it does not permit others to take over management of distressed targets. This perceived gap is sought to be filled through the proposal that is before SEBI.

If enacted, the new exemption would allow potential investors to take over the management of distressed companies without making an open offer. This will enhance the possibility of recovery by banks of their monies lent to the target. It will also enable outside investors to take over distressed companies, and infuse funds to turn around the business, rather than to spend monies on providing exit opportunities to minority shareholders through the open offer. This may also have the effect of addressing minority concerns, as they may be better off remaining in the company with a higher chance of enjoying value in due course, as opposed to facing an open offer at relative low prices given the distressed situation faced by the targets.

Although such a mechanism would increase the prospects of recover for distressed companies, it remains to be seen as to what conditions SEBI will impose even if it does decide to introduce the exemption that the lending community has sought for.