insight newsletter (vol. ix, issue 3) 2...corporate veil, the sat order contemplates “lifting”...

INSIGHTVol. IX Issue III l

July 01, 2017 – October 26, 2017

FOREWORD

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Welcome to this issue of Insight.

In this issue of Insight, as the lead article, we have covered the SAT order on SEBI’s power of lifting the corporate veil in order to protect the interests of the investors.

This issue also covers the key changes under the Consolidated FDI Policy, 2017, including the changes in the foreign investment framework following abolition of the Foreign Investment Promotion Board, and consolidation under the policy of recent amendments to the foreign exchange management regulations.

Apart from the above, in this issue, we have also captured the key developments relating to the notifications and orders issued by the Ministry of Corporate Affairs in relation to the Companies Act, 2013 as well as circulars and notifications issued by the RBI and SEBI, during the period under review.

Any feedback and suggestions would be valuable in our pursuit to constantly improve Insight and ensure its continued success amongst readers. Please feel free to send a n y f e e d b a c k , s u g g e s t i o n s o r c o m m e n t s t o [email protected].

Regards,

CYRIL SHROFF Managing Partner Cyril Amarchand Mangaldas

Phone: +91-22-2496 4455/ 6660 4455 Fax: +91-22-2496 3666Email: [email protected]

INSIGHT (Vol. IX Issue III) lJuly 01, 2017 – October 26, 2017

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TABLE OF CONTENTS

PAGE NO.PARTICULARS

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• SAT Order on SEBI’s Power of “Lifting the Corporate Veil”

• Key Changes under the Consolidated FDI Policy, 2017

COMPANY LAW UPDATE

Amendments

• Amendments to the Companies (Meetings of Board and its Powers) Rules, 2014

• MCA Corrigendum on Exemptions to Private Companies

• Companies (Amendment) Bill, 2017 as passed by the Lok Sabha

• Amendments to the Companies (Incorporation) Rules, 2014

• Regional Rural Banks exempted from notifying mergers and acquisitions to the CCI for 5 years

• Amendments to the National Company Law Appellate Tribunal (NCLAT) Rules, 2016

• MCA notifies certain provisions of Section 212 of the 2013 Act on Serious Fraud Investigation Office and the Companies (Arrests in Connection with Investigation by Serious Fraud Investigation Office) Rules, 2017

• Nationalized Banks exempted from notifying mergers to CCI for 10 years

• MCA exemption to unlisted public companies from appointment of independent director and related clarification

• MCA Clarification on Ind AS Compliance Obligation of Holding Companies having Subsidiaries operating as Payment Banks/ Small Finance Banks

• MCA notifies Companies (Acceptance of Deposits) (Second Amendment) Rules, 2017

• MCA notifies proviso to Section 2(87) and Companies (Restriction on number of Layers) Rules, 2017

• Corporate Anti-Bribery Code issued by the ICSI

• Amendments to the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016

• MCA notifies Section 247 of the 2013 Act and the Companies (Registered Valuers and Valuation) Rules, 2017

• MCA issues Order for Removal of Difficulties under the 2013 Act

FOREIGN INVESTMENT AND RBI UPDATE

• DIPP Discussion Paper on Formulation of New Industrial Policy

• DIPP proposes amendment to the definition of ‘Start-up’ under the Draft Patent (Amendment) Rules, 2017

• Revision of FPI investment limit in Central Government Securities and State Development Loans

• Draft Electronic Trading Platform (ETP) Directions, 2017 issued by the RBI

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SECURITIES LAW UPDATE

Amendments and Circulars

• Amendment to the SEBI (Debenture Trustees) Regulations, 1993

• Online Filing System for Real Estate Investment Trusts and Infrastructure Investment Trusts

• Amendment of the SEBI (Depositories and Participants) Regulations, 1996

• Action against exclusively listed companies and their promoter/directors pending exit offer to shareholders

• Amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

• SEBI drops the proposal of adopting ‘bright line’ test for determining ‘control’

• Provisions of the Scheme Circular aligned with requirements for exemption under Rule 19(2)(b) of the Securities Contracts (Regulation) Rules

• Disclosures by listed entities of defaults on payment of interest / repayment of principal amount on loans from banks, financial institutions, debt securities, etc.

• Non-compliance with the Minimum Public Shareholding Requirements

• SEBI Board Meeting

• SEBI Circular on Block Deals

Informal Guidance

• On the scope of Regulation 26(6) of the Listing Regulations

Consultation Papers and Committee Report

• Consultation paper on Review of the Regulatory Framework for Credit Rating Agencies

• Kotak Committee Report on Corporate Governance

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SAT order on SEBI's power of “Lifting the Corporate Veil”

'Lifting the corporate veil' is an exception to the legal fiction of distinct corporate personality. Whilst the doctrine has evolved through English case law, and has been adopted by Indian courts as well as statues and finds mention in certain provisions of the Companies Act, 2013 such as Section 34 and 35 which attribute liability to the directors and promoters for misrepresentation in the prospectus.

SAT in its order dated July 28, 2017 recognized that the power of lifting the corporate veil is statutorily vested in the Securities and Exchange Board of India (“SEBI”), being a statutory authority, by the Securities and Exchange Board of India Act, 1992 which mandates SEBI to protect the rights of the investors.

SAT's order dealt with an appeal against SEBI's cancellation of the certificate of registration of Sahara Mutual Fund (“Sahara MF”) after concluding that its sponsor i.e. Sahara India Financial Corporation Limited (“Sahara Sponsor”) is not a t and proper person under the SEBI (Mutual Funds) Regulations, 1996 (“SEBI MF Regulations”) on account of the credentials of the promoter – director of Sahara Sponsor i.e. Mr. Subrata Roy Sahara (“Individual Promoter”).

Under the SEBI MF Regulations, for an entity to be eligible to carry out the business of a mutual fund, the sponsor as well as the asset management company need to fulfill the criteria of being t and proper persons. In terms of Schedule II of the SEBI (Intermediaries) Regulations, 2008, in analyzing whether such a criteria is met, SEBI may take account relevant criteria including (i) integrity, reputation and character; (ii) absence of convictions and restraint orders; and (iii) competence including financial solvency and net worth, of the entity as well as its principal officer and the key management persons.

SEBI took this a step forward and held that in respect to a body corporate, the criteria of t and proper should be applicable to the persons who hold responsible positions in it and to those who are in a position to influence the decision making process of such entity. SEBI in its order, stressed on the following points:

1. At the time of registration of Sahara MF, the Individual Promoter had disclosed his designation as the Managing Director and Chairman of Sahara Sponsor and he continued to be so till he resigned in September 2014.

2. The Individual Promoter held around 80% of the total share capital of Sahara Sponsor, and therefore was capable of exercising control and influence over its management. Sahara Sponsor was accordingly an 'alter ego' of the Individual Promoter.

3. The Sahara Sponsor in turn held around 46% of the shares in the Sahara Asset Management Company Private Limited (“Sahara AMC”) and the remaining shareholding was also held indirectly by the Individual Promoter through other group companies.

4. The Individual Promoter was not a t and proper person given (i) the SEBI order in 2011 restraining inter alia the Individual Promoter from associating with any public listed company till such time that the money collected from the public in violation of the securities regulations is refunded; and (ii) other litigations against him including an ongoing contempt proceeding.

5. Accordingly, both Sahara Sponsor and Sahara AMC which are completely controlled by the Individual Promoter, were also no longer t and proper persons as required under the SEBI MF Regulations. And therefore Sahara MF was no longer eligible to carry on the business of mutual funds in India.


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On this basis, SEBI disregarded the existence of a separate corporate entity in order to identify who actually controls a regulated entity and is likely to jeopardize the interests of the investors. On appeal, SAT agreed with SEBI's rationale and held that the significant shareholding of the Individual Promoter clearly establishes his capability to control the affairs of the Sahara Sponsor and implies that the Sahara Sponsor also does not fulfill the t and proper criteria under the SEBI MF Regulations. Therefore SAT held that given the facts and circumstances of the case at hand, lifting of the corporate veil to establish real corporate identity in terms of ownership and control by SEBI cannot be faulted.

This doctrine of lifting the corporate veil to determine whether the person actually controlling an intermediary in the securities market is a t and proper person has previously been adopted by SEBI in SEBI v. C. Mackertich Limited [MANU/SB/0028/2005]. SEBI there had held that a company which is under the all-pervasive control of a person involved in an offence relating to the securities market cannot be allowed to operate in the securities market as a t and proper person.

However, unlike its previous order in C. Mackertich, SEBI in the present case has issued transitional directions rather than ordering an immediate cancellation of Sahara MF's registration. Pending cancellation of the certificate, SEBI has mandated Sahara MF to transfer its business to another mutual fund in order to protect the interests of investors who have subscribed to the units of Sahara MF.

Whilst arguments were raised that the registered entity had not committed any offence under the applicable securities

regulations and that the t and proper criteria is only relevant at the stage of registration, SAT dismissed the appeal and held that the MF Regulations clearly provide for continuing obligations of a sponsor in relation to a mutual fund and the requirement of compliance with the t and proper criteria is not limited to the stage of application.

Surprisingly neither SEBI nor SAT has contemplated a situation where the Individual Promoter transfers his shareholding in the Sahara Sponsor to result in the entity regaining its t and proper status.

Key Takeaways:

1. The SEBI and SAT orders reinforce the principle that persons barred from functioning in the securities market would not be allowed to access the market indirectly through companies controlled and managed by them.

2. Unlike SEBI which has used the term “piercing” of the corporate veil, the SAT order contemplates “lifting” of the corporate veil which is in line with the concealment principle laid down in English case law [Prest v. Petrodel Resources Limited [[2012] EWCA Civ 1395] wherein courts lift the corporate veil only to look behind it to discover the identity of the real actors which the corporate structure is concealing. The case also highlights the possibility that other statutory regulators may apply this principle to lift the corporate veil to impose liability on promoters and holding companies in layered structures.


empowered to grant approval for sector specific FDI. Henceforth, applications have to be filed through the Foreign Investment Facilitation Portal (“FIFP”) instead of the FIPB website.

In cases where the Competent Authority proposes to reject FDI proposals or to stipulate additional conditions for the same, concurrence of the DIPP would have to be compulsorily sought.

The 2017 FDI Policy retains the requirement of approval from the Cabinet Committee on Economic Affairs in case of foreign investment involving equity inflow of more than INR 5,000 crores.

Any downstream investment by Indian entities would now have to be notified to the Reserve Bank of India (“RBI”) and the FIFP instead of the FIPB and the DIPP.

2. Approval for additional FDI beyond INR 5,000 crores

Under the 2016 FDI Policy, any additional investment in an entity, if made within the approved foreign equity percentage or into a wholly owned subsidiary, would not require prior approval of the Government. However, under the 2017 FDI Policy such approval will be required if the cumulative amount of investment exceeds INR 5,000 crores.

3. Selling products manufactured in India without Government approval

Foreign Investment in the manufacturing sector continues to be under the automatic route under the

Key Changes under the Consolidated FDI Policy, 2017

The Department of Industrial Policy & Promotion (“DIPP”) has issued the Consolidated FDI Policy Circular (“2017 FDI Policy”) w.e.f, August 28, 2017 in supersession of the erstwhile Consolidated FDI Policy Circular issued on June 07, 2016, and as amended by press notes issued from time to time (“2016 FDI Policy”).

The key changes introduced in the 2017 FDI Policy and the potential implications of the same on foreign investment into India have been captured in our blog post (https://corporate.cyrilamarchandblogs.com/2017/09/india-announces-new-foreign-direct-investment-policy-2017-2018/#more-2152) and are briefly summarized below:

1. Changes to reflect framework post FIPB abolition

The provisions of the 2016 FDI Policy have been amended to reflect the Union Cabinet's decision on May 24, 2017 to abolish the Foreign Investment Promotion Board (“FIPB”) and to entrust the responsibility of granting sector specific Foreign Direct Investment (“FDI”) approval and monitoring compliance to the relevant administrative ministry / department (defined as the “Competent Authority”).

In accordance with the 'Standard Operating Procedure' for processing FDI proposals issued by the DIPP on June 29, 2017 (as covered in detail in Insight Vol. IX Issue 2), the 2017 FDI Policy lists down the sector specific Competent Authority that is now

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2017 FDI Policy. Further, the 2017 FDI Policy retains the permission granted to an Indian manufacturer to sell products manufactured by it in India (through wholesale or retail, including through e-commerce), without prior Government approval. However, the policy does away with the condition that for any entity to qualify as an "Indian manufacturer", it is required to manufacture at least 70% of its products in-house in India, and source at most 30% from other Indian manufacturers.

4. Clarification in relation to FDI in E-Commerce Sector

The 2016 FDI Policy allowed 100% FDI in thee-commerce sector under the automatic route, subject to certain conditions (including that the e-commerce entity cannot permit more than 25% of the sales affected through its marketplace to be from one vendor or its group). The 2017 FDI Policy clarifies that such a threshold to be met is on a per financial year basis.

5. Activities permitted to be undertaken by a wholesale/ cash and carry trader

Under the 2016 FDI Policy, a wholesaler/ cash and carry trader was permitted to undertake 'single brand' retail trading subject to prescribed conditions. The 2017 FDI Policy does away with the reference to 'single brand', thereby implying that a wholesaler/ cash and carry trader can also undertake multi-brand retail trading, while maintaining separate books of accounts and subject to other applicable conditions.

6. Key Amendments under FEMA 20

Further, in line with the consolidation exercise under the 2017 FDI Policy, the following amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (“FEMA 20”) have been incorporated into the policy, as applicable:

(i) Indian pension fund to be owned and controlled by residents under the FEM (Transfer or Issue of Security by a Person Resident outside India) (Sixteenth Amendment) Regulations, 2016 dated November 04, 2016

The 2017 FDI Policy mandates that the ownership and control of an Indian pension fund remain at all times with Indian resident entities as

determined by the Government or the Pension Fund Regulatory and Development Authority.

(ii) Start-ups allowed to issue convertible notes under the FEM (Transfer or Issue of Security by a Person Resident outside India) (Fifteenth Amendment) Regulations, 2016 dated January 10, 2017

The 2016 FDI Policy allowed start-ups to raise FDI from SEBI registered Foreign Venture Capital Investors through issue of equity or equity-linked or debt instruments.

With an intent to make the startup environment more investor friendly, start-ups have been permitted to issue convertible notes (short term debt instruments convertible into equity shares of the start-up company within 5 years) to foreign investors subject to certain prescribed conditions.

(iii) Conversion of LLPs into companies and vice-versa under the FEM (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2017 dated March 03, 2017

LLP operating in sectors where 100% FDI is allowed under the automatic route (without FDI-linked performance conditions) are allowed to convert into a company and vice versa under the automatic route.

(iv) Deferred consideration without prior RBI approval under the FEM (Transfer or Issue of Security by a Person Resident outside India) (Seventh Amendment) Regulations, 2016 dated May 20, 2016

The 2017 FDI Policy permits the payment of deferred consideration in case of share purchase transactions between a resident and a non-resident under the automatic route, subject to compliance with the prescribed conditions.


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COMPANY LAW UPDATE

Amendments to the Companies (Meetings of Board and its Powers) Rules, 2014

The Ministry of Corporate Affairs (“MCA”) has notified the Companies (Meetings of Board and its Powers) (Second Amendment) Rules, 2017 w.e.f. July 13, 2017 further amending the Companies (Meetings of Board and its Powers) Rules, 2014 (“Meeting of Board Rules”) in the manner set out below:

Ø A clarification has been provided in Rule 3(3)(e) that a declaration by a director at the beginning of the calendar year to the Company that he intends to participate in the board meeting through electronic mode shall not debar him from participating in the meeting in person and in which case he shall be required to intimate the company sufficiently in advance of his intention to participate in person.

Ø Rule 3(11)(a) has been amended to provide that draft minutes recorded at the end of discussion on each agenda item (in addition to the Chairperson announcing the summary of the decision taken on such item along with names of the dissenting directors, if any) shall be preserved by the company till the confirmation of such draft minutes in accordance with Rule 3(12) of the Meeting of Board Rules.

Ø Rule 6 has been amended to provide that a company covered under Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 (which prescribes the class/ classes of companies which

require atleast two independent directors) shall be required to constitute an 'Audit Committee' and a 'Nomination and Remuneration Committee of the Board'.

(MCA Notication G.S.R. 880(E)published in the Gazette on July, 13, 2017)

MCA Corrigendum on Exemptions to Private Companies

The MCA had issued a corrigendum w.e.f. July 13, 2017 to th

its notification dated June 13 , 2017 (as covered in Insight Vol. IX Issue 2) pertaining to exemption granted to private companies from certain provisions of the Companies Act, 2013 (“2013 Act”) to effect the following corrections:

Ø The earlier notification provided that private companies either having (i) a turnover of less than INR 50 crores; or (ii) aggregate borrowings of less than INR 25 crores from banks/ financial institutions/ body corporates, were exempt from the requirement of commenting on the company's financial controls system and operating effectiveness in the auditors' reports. The same has been amended to provide that to avail of the exemption such private companies would need to satisfy both conditions in relation to turnover and aggregate borrowings, as mentioned above.

Ø Pursuant to queries from stakeholders, MCA has clarified vide circular dated July 25, 2017 that the exemption shall be applicable for those companies in


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(ii) Section 35 on civil liability for misstatements in the prospectus is proposed to be amended to relieve the directors, promoters and persons authorised to issue the prospectus etc. from any civil liability if such person(s) had relied on a misleading statement made by an expert and he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent required to issue of the prospectus and had not withdrawn it.

(iii) In Section 54, the requirement for one year to have elapsed from the date of commencement of the business of the company before it can issue sweat equity shares is proposed to be done away.

(iv) Section 135 of the 2013 Act on corporate social responsibility (“CSR”) is proposed to be amended as follows (a) the eligibility criteria for the purpose of constituting the CSR committee and incurring expenditure towards CSR is to be calculated based on the net worth/ turnover/ profit of the immediately preceding financial year, as opposed to during any financial year as currently prescribed; (b) the CSR committee of a company not required to appoint an independent director, would be required to comprise of two or more directors; and (c) the Central Government would be empowered to prescribe such sums which shall not be included for calculating 'net profit' of a company.

(v) Sections 194 (prohibition on forward dealings in securities of the company by a director or KMP) and 195 (prohibition on insider trading of securities) are proposed to be omitted.

(vi) Section 197 is proposed to be amended to inter alia do away with the requirement to obtain the approval of the Central Government for payment of remuneration in excess of 11% of the net profits of the company. However, the approval by shareholders for exceeding the remuneration limits for executive and non-executive directors would now be required to be passed by way of a special resolution.

(Bill No. 73-C of 2016)

respect of financial statements pertaining to financial years commencing on or after April 01, 2016, which are made on or after the date of the said earlier notification.

(MCA Corrigendum S.O. 2218(E). published in the Gazette on July 13, 2017 and

MCA Circular No. 08/2017 dated July 25, 2017)

Companies (Amendment) Bill, 2017 as passed by the Lok Sabha

Ø The Companies (Amendment) Bill, 2017 (“the Bill”) that proposes to further amend the 2013 Act to strengthen corporate governance standards, initiate strict action against defaulting companies and help improve the ease of doing business in India, was passed by the Lok Sabha on July 27, 2017. The Bill now awaits the approval from the Rajya Sabha and presidential assent before it takes the form of the Companies (Amendment) Act, 2017.

Ø Some of the key changes proposed in the Bill are set out below:

(i) In Section 2 (Definitions):

(a) In the definition of 'Key Managerial Personnel', such other officer not more than one level below the directors who is in whole time employment and designated as KMP by the Board, is proposed to be included.

(b) The definition of 'related party' is proposed to be amended to include any body corporate which is an investing company or the venturer of the company, which terms mean a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.

(c) The definition of 'small company' is proposed to be amended to increase the maximum paid-up share capital amount which can be prescribed for the purpose of determining a company as a small company.

(d) In the definition of 'subsidiary company' exercise or control by the holding company over one-half of the total share capital is proposed to be substituted with exercise or control by the holding company over one-half of the total voting power either on its own or together with one or more of its subsidiary companies.


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Amendments to the Companies (Incorporation) Rules, 2014

The MCA has notified the Companies (Incorporation) (Second Amendment) Rules, 2017 w.e.f. July 27, 2017 further amending the Companies (Incorporation) Rules, 2014 to specify the documents that need to be filed for change in the registered office of a company within the same state (under Rule 28) and from one state to another (under Rule 30). Forms INC-23 and INC-26 have been appropriately substituted.

(MCA Notication G.S.R. 955(E) published in the Gazette on July 27, 2017)

Regional Rural Banks exempted from notifying mergers and acquisitions to the CCI for 5 years

Ø The MCA has issued a notification w.e.f. August 10, 2017 exempting Regional Rural Banks (“RRBs”), in respect of which the Central Government has issued a notification under Section 23A (1) of the Regional Rural Banks Act, 1976 (“RRB Act”), from notifying mergers and acquisitions to the Competition Commission of India (“CCI”) under Sections 5 and 6 of the Competition Act, 2002, for a period of 5 years from the date of publication of the notification in the official gazette. Accordingly, the said exemption is effective until August 09, 2022.

Ø Section 23A of the RRB Act empowers the Central Government to order the amalgamation of two or more RRBs if it is in public interest, or in the interest of the development of the area served by the RRB, or in the interest of the RRBs themselves. Prior to the notification, the amalgamations, while undertaken pursuant to orders issued by the Central Government, though involuntary, triggered the requirement to notify such amalgamation to the CCI for its prior approval.

(MCA Notication S.O. 2561(E). published in the Gazette on August 10, 2017)

Amendments to the National Company Law Appellate Tribunal (NCLAT) Rules, 2016

Ø The MCA has notified the National Company Law Appellate Tribunal (Amendment) Rules, 2017. w.e.f. August 23, 2017 amending Rule 63 of the NCLAT Rules, 2016.

Ø In terms of the amended rule, the Central Government, the Regional Director or the Registrar of Companies

or Official Liquidator have been empowered to authorize an advocate or an officer not below the rank of Junior Time Scale or company prosecutor as authorised representatives in the proceedings before the National Company Law Appellate Tribunal.

(MCA Notication G.S.R. 1061(E) published in the Gazette on August 23, 2017)

MCA notifies certain provisions of Section 212 of the 2013 Act on Serious Fraud Investigation Office and the Companies (Arrests in Connection with Investigation by Serious Fraud Investigation Office) Rules, 2017

Ø The MCA has notified sub-Sections 8, 9 and 10 of Section 212 of the 2013 Act on investigation into affairs of company by the Serious Fraud Investigation Office (“SFIO”) w.e.f. August 24, 2017, thereby c o n f e r r i n g o n t h e D i r e c t o r / A d d i t i o n a l Director/Assistant Director of SFIO the power to arrest a person, if he has reasons to believe, on the basis of material in his possession, that such person is guilty of an offence punishable under the sections referred to in Section 212(6) which attract the punishment for fraud under the 2013 Act.

Ø Pursuant to this, the MCA has notified the Companies (Arrests in Connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 (“SFIO Rules”) w.e.f. August 24, 2017 specifying certain procedural requirements to be complied with by the SFIO, while exercising such power. Some of the key provisions of the SFIO Rules are as set out below:

(i) The SFIO Director is to be the competent authority for all decisions pertaining to arrest. In case of arrest being made by the Additional Director or Assistant Director, prior written approval of the SFIO Director is to be obtained.

(ii) An arrest to be made in connection with a Government company or a foreign company under investigation shall require the prior approval of the Central Government, along with an intimation to the managing director or the person in charge of affairs of the Government Company, or the Secretary of the administrative ministry concerned (where the person arrested is the managing director/ person in charge of the affairs of the Government Company).


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MCA Clarification on Ind AS Compliance Obligation of Holding Companies having Subsidiaries operating as Payment Banks/ Small Finance Banks

The MCA had received queries from stakeholders in relation to implementation of Indian Accounting Standards (“Ind AS”) in cases where the holding company has payment banks or small finance banks as its subsidiaries, since different roadmaps for Ind AS compliance have been prescribed for the corporate sector and the banking sector by the MCA and RBI, respectively. The MCA has clarified that in case of the holding company being covered by the corporate sector roadmap, it shall follow the same for the implementation of Ind AS and if the company has a payment bank/ small finance bank as its subsidiary, such subsidiary shall follow the banking sector roadmap prescribed by the RBI in its circular dated February 11, 2016 on 'Implementation of Indian Accounting Standards' read with the circular dated October 6, 2016 on 'Operating Guidelines for Payments Banks' and shall provide the Ind AS financial data to its holding company for the purpose of consolidation.

(MCA General Circular No. 10/ 2017 published in the Gazette on September 13, 2017)

MCA notifies Companies (Acceptance of Deposits) (Second Amendment) Rules, 2017

The MCA has notified the Companies (Acceptance of Deposits) (Second Amendment) Rules, 2017 w.e.f. September 19, 2017 further amending the Companies (Acceptance of Deposits) Rules, 2014 in the manner set out below:

Ø Specified International Financial Services Centre (“IFSC”) Public Companies (in addition to private companies) are now permitted, under the proviso to Rule 3(3), to accept deposits from its members not exceeding 100% of the aggregate of paid-up share capital, free reserves and securities premium account, where 'Specified IFSC Public Company' shall mean an unlisted public company which is licensed to operate by the RBI or SEBI or IRDA from the IFSC located in an approved multi services Special Economic Zone set-up under the Special Economic Zones Act, 2005 read with the Special Economic Zones Rules, 2006.

Ø Further, in consonance with the provisions of the exemption notification dated June 13, 2017 (that exempted private companies from applicability of clauses (a) to (e) of the Section 73(2) of the 2013 Act pertaining to conditions for acceptance of deposits by

(iii) The SFIO Rules prescribe the manner in which the arrest order is to be issued, recorded and preserved by the SFIO Director. The provisions of Code of Criminal Procedure, 1973 are applicable mutatis mutandis for every arrest made under the 2013 Act pursuant to the SFIO Rules.

(MCA Notication S.O. 2751(E). published in the Gazette on August 24, 2017

and MCA Notication G.S.R. 1062 (E) published in the Gazette on August 24, 2017)

Nationalized Banks exempted from notifying mergers to CCI for 10 years

The MCA has issued a notification w.e.f. August 30, 2017 exempting nationalized banks from notifying cases of reconstitution, transfer of the whole or any part thereof and amalgamation of such banks under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, under Sections 5 and 6 of the Competition Act, 2002, for a period of 10 years from the date of publication of the notification in the official gazette.

(MCA Notication S.O. 2828(E). published in the Gazette on August 30, 2017)

MCA exemption to unlisted public companies from appointment of independent director and related clarification

Ø The MCA has w.e.f. July 05, 2017 vide the Companies (Appointment and Qualification of Directors) (Amendment) Rules, 2017 exempted unlisted public companies in the nature of joint ventures, wholly owned subsidiaries and dormant companies from the requirement of appointing independent directors.

Ø In furtherance of queries raised by stakeholders on the meaning of 'joint venture' for the purpose of availing the said exemption, the MCA has on September 05, 2017 clarified the same to mean “a joint arrangement, entered into in writing, whereby the parties that have joint control of the arrangement, have rights to the net assets of the arrangement.” It has been clarified that the usage of the said term is similar to that under the Accounting Standards.

(MCA Notication G.S.R. No. 839(E) dated July 05, 2017 and General Circular 09/2017

dated September 05, 2017)


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(iv) Under the Restriction Rules, holding companies (other than exempted companies) having layers in excess of the permissible limit are, after the commencement of the Restriction Rules,(a) required to disclose details in Form CRL-1 to the RoC within 150 days from the date of notification of the Restriction Rules; (b) not permitted to have any additional layer of subsidiaries over and above the existing layers; and (c) not permitted to have such number of layers in addition to the number of layers it has after reduction of one or more layers pursuant to the Restriction Rules/ maximum layers permitted under the Restriction Rules, whichever is more.

(v) Non-compliance with the provisions of the Restrictions Rules is punishable with a fine which may extend upto INR 10,000 for the company and every officer in default, with INR 1,000 for each day of continuing offence.

(MCA Notication G.S.R. 1176(E). published in the Gazette on September 20, 2017

r/w MCA Notication S.O. 3086(E.)published in Gazette on September 20, 2017)

Corporate Anti-Bribery Code issued by the ICSI

The Institute of Company Secretaries of India (“ICSI”) has issued a Corporate Anti-Bribery Code (“Code”). The Code is to be adopted by companies voluntarily. It shall be approved by the board of directors of the company. Some of the key features of the Code are as follows:

Ø The Code shall be applicable to the company and its directors, employees (full time or part-time or employed through any third party contract), agents, associates, consultants, advisors, representatives and intermediaries, and contractors, sub-contractors and suppliers of goods and/or services.

Ø The term 'Bribery' has been defined in the Code as giving or receiving bribe and third party gratication.

Ø As per the Code, the company, either directly or through its employees, directors, agents, associates, consu l t an t s , adv i so r s , r ep resen ta t ives o r intermediaries in the conduct of international business shall not offer, promise or give any undue pecuniary or other advantage, to a foreign public official, for that official or for a third party, in order that the official acts or refrains from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage.

a company) the following classes of private companies have been exempted from having to comply with the abovementioned maximum limit for deposits that are allowed to be accepted from members:

(i) a private company which is a start-up, for five years from the date of its incorporation;

(ii) a private company which fulfils all of the following conditions: (a) which is not an associate or a subsidiary company of any other company; (b) the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or INR 50 crores, whichever is less; and (c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits.

(MCA Notication G.S.R. 1172(E).published in the Gazette on September 19, 2017)

MCA notifies proviso to Section 2(87) and Companies (Restriction on number of Layers) Rules, 2017

Ø The MCA has notified w.e.f. September 20, 2017, the proviso to Section 2(87) of the 2013 Act and the Companies (Restriction on number of Layers) Rules, 2017 (“Restriction Rules”) placing restrictions on the number of subsidiaries a company (other than a banking company, an NBFC, an insurance company or a government company) is permitted to have under the 2013 Act. The key provisions of the Restriction Rules are set out herein below:

(i) The Restriction Rules have limited the number of layers to two layers of subsidiaries. Further, for the purpose of computing the number of layers, one layer consisting of one or more wholly owned subsidiary or subsidiaries shall not be taken into account.

(ii) It has been clarified that the above limit shall not affect a company from acquiring a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country.

(iii) It has been further clarified that the provisions contained in the Restriction Rules are not in derogation of the proviso to Section 186(1) of the 2013 Act, which places a similar restriction on the number of layers of investment companies and which is already in force.


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Ø It requires companies to set up a whistle blower mechanism and also directs companies to put in place an annual Code awareness- cum-training program for all its employees, agents, associates, advisors, representatives, intermediaries, consultants, contractors, sub-contractors and suppliers.

(Issued by the Institute of Company Secretaries of India on October 04, 2017)

Amendments to the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016

The MCA has notified the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) (Second Amendment) Rules, 2017 further amending the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 (“IEPF Rules”). The significant amendments to the IEPF Rules are set out below.

Ø Transfer of shares by the companies to the fund shall be deemed to be transmission of shares and the procedure to be followed for transmission of shares shall be followed by the companies while transferring the shares to the fund.

Ø Any amount required to be credited by the companies to the fund as provided thereunder shall be remitted into the specified account of the IEPF Authority maintained in the Punjab National Bank.

Ø Every company which has deposited the amount to the fund is now required to nominate a nodal officer for the purpose of coordination with IEPF Authority within 15 days from the date of publication of these rules and the company shall display the name of nodal officer and his e-mail ID on its website.

(MCA Notication G.S.R. 1267(E) published in the Gazette on October 13, 2017)

MCA Notifies Section 247 of the 2013 Act and the Companies (Registered Valuers and Valuation) Rules, 2017

Ø MCA w.e.f. October 18, 2017 has notified Section 247 of the 2013 Act and the Companies (Registered Valuers and Valuation) Rules, 2017 which provide for registration of valuers under the Companies Act, 2013.

Ø The rules provide for registration of different category of valuers and lay down the requirements on their eligibility, qualifications and experience. Individuals,

partnership entities and companies rendering valuation services under the Companies Act have to be registered with the Insolvency and Bankruptcy Board of India (“IBBI”) by March 31, 2018. Moreover, the IBBI has been established as the authority with respect to registration, recognition and ancillary matters related to valuers.

(MCA Notications S.O. 3393(E) and G.S.R. 1316 (E) published in the Gazette on October 18, 2017)

MCA issues Order for Removal of Difficulties under the 2013 Act

Ø Section 247(1) of the 2013 Act provides that where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities, it shall be valued by a registered valuer.

Ø In terms of the Companies (Removal of Difficulties) Second Order, 2017, Section 247(1) has been amended to provide that the valuation shall be made by a registered valuer being a member of an organisation recognised, in such manner, on such terms and conditions as may be prescribed.

Ø Separately, the MCA has issued a notification whereby the powers and functions vested in the Central Government under Section 247 of the 2013 Act have been delegated to the IBBI subject to the condition that it may revoke such delegation if in its opinion such a course of action is necessary in the public interest. This notification will come into effect on the date of its publication in the Gazette.

(MCA Notication S.O. 3400.(E). published in the Gazette on October 23, 2017 and MCA Notication

dated October 23, 2017)


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FOREIGN INVESTMENT AND RBI UPDATE

DIPP Discussion Paper on Formulation of New Industrial Policy

The DIPP has released a discussion paper on formulation of a new industrial policy. Some of the key thoughts proposed by the paper are as stated below:

Ø The paper looks into the key challenges that have restricted industrial growth in the past and notes that restraints like inadequate infrastructure, restrictive labor laws, complicated business environment, slow rate of technology adoption, low productivity etc. have been simultaneously contributing towards incrementing the costs of goods and services. The paper emphasizes upon the need to break the interoperation of all of these factors in order to ensure a spin-off in the positive direction;

Ø The paper aims at formulating a comprehensive, actionable, outcome oriented industrial policy that will enable the industries to deliver a larger role in the economy;

Ø Aimed at formulating an industrial policy that provides a direction for a globally competitive Indian industry, the paper discusses the following points to be incorporated in the new policy:

(i) a clear vision, strategic objectives and intent in order to promote sectoral objectives and provide an overarching umbrella policy framework;

(ii) facilitating greater technology transfer, establishing global linkages and promoting innovation to ensure that global brands are created out of India;

(iii) enhancing industrial competitiveness by reducing the cost of infrastructure and for this the central role of technology in next generation bus iness has to be acknowledged and appropriated;

(iv) employing gainfully, a growing workforce;

(v) ensuring sustainability and responsible industrialization in light of policies on utilisation of natural resources; and

(vi) enabling ecosystem for technology adoption and innovation, by adopting right models of technology transfer to ensure that the transferred technology is enhanced and customized for Indian conditions.

(DIPP Discussion Paper dated August 29, 2017)

DIPP proposes amendment to the definition of 'Start-up' under the Draft Patent (Amendment) Rules, 2017

The DIPP has released a notification dated August 30, 2017 re-defining ‘start-ups’ by way of further amendment to the Patents Rules, 2003. The amendment proposed by way of Draft Patents (Amendment) Rules, 2017 is as set out below.

Ø ‘Start-up’ as it currently stands defined has elaborate eligibility criteria that requires an entity to be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership in India and should not be more than seven years (ten years in case of start-ups in biotechnology sector) from date of its incorporation/ registration to qualify as a 'start-up'.


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Draft Electronic Trading Platform (ETP) Directions, 2017 issued by the RBI

RBI has released draft directions for authorizing Electronic Trading Platforms (“ETPs”) for financial market instruments regulated by the RBI. The ETP means any electronic system or facility, other than a recognized stock exchange, that facilitates buying and selling of eligible instruments (securities, money market instruments, foreign exchange and derivatives). The following are the highlights of the draft directions:

Ø No entity shall operate an ETP to trade any instrument covered under Section 45(W) of the RBI Act, 1934 without the RBI's prior authorisation. Existing electronic trading platforms would also be required to obtain authorisation under these directions, within6 months from the date of issue of these directions.

Ø An ETP operator shall fulfil inter alia the following eligibility criteria:

(i) It shall be legally incorporated in India with full managerial and operational control exercised within India. Entities incorporated outside India are required to operate through subsidiaries set up in India.

(ii) It shall have minimum paid up equity capital of INR 25 crores which shall be maintained at all times.

Ø An ETP operator is required to put in place a comprehensive risk management framework covering all related aspects of its operation to ensure that risks associated with its operations are properly identified and managed prudently.

Ø Further, the turnover for any of the financial years should not have exceeded INR 25 crores since its incorporation/registration and that the entity should be working towards innovation, development or improvement of products or processes or services, or should be a scalable business model with a high potential of employment generation or wealth creation.

Ø The definition has now been broadened to mean an entity in India recognised as a start-up by the competent authority under the Start-up India Initiative. Further, in case of a foreign entity, it has been defined to mean an entity fulfilling the criteria for turnover and period of incorporation/registration as per the Start-up India Initiative and submitting declaration to that effect.

Ø The draft rules further clarify that while calculating the turnover, reference rates of foreign currency of RBI shall prevail.

(DIPP Notication G.S.R. 1124(E). published in the Gazette on August 30, 2017)

Revision of FPI investment limit in Central Government Securities and State Development Loans

RBI has revised the limits for investment by Foreign Portfolio Investors (“FPI”) in the following Government Securities with effect from October 03, 2017 for the quarter October-December 2017:

(I) Limit for investment in Central Government Securities (“G-secs”) has been enhanced (i) for general G-Secs from INR 187,700 crores toINR 189,700 crores and (ii) for long term G-Secs from INR 54,300 crores to INR 60,300 crores; and

(ii) Limit for investment in State Development Loans (“SDLs”) has been enhanced (i) for general SDLs from INR 28,500 crores to INR 30,000 crores and (ii) for long term SDLs from INR 4,600 crores to INR 9,300 crores. ��

(RBI Circular A.P. (DIR Series) Circular No. 7 September dated September 28, 2017)


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Ø An ETP operator, offering clearing and settlement services, shall seek authorization from RBI under the Payment and Settlement Systems Act, 2007.

Ø The operator shall put in place adequate information and data security infrastructure and follow high standards of information security and adhere to norms/guidelines prescribed by RBI or any other public authority.

Ø An ETP operator shall maintain confidentiality of all data related to trades. No data shall be exported outside India without prior RBI permission. The

SECURITIES LAW UPDATE

director or key managerial personnel or an employee of the company or its holding, subsidiary or associate company, (iii) it is beneficially entitled to money from the issuer company other than remuneration, (iv) is indebted to the company or its subsidiary, holding or associate company, (v) has furnished any guarantee in respect of the principal debts secured by the debentures, (vi) has any pecuniary relationship with the issuer company amounting to 2% or more of its gross turnover or total income or INR 50 lakh or such high amount as may be required, whichever is lower, during the two immediately preceding financial years or during the current financial year. However, these restrictions will not be to debenture trustees where guarantee is issued by state or central government.

(iii) Schedule IV (Contents of Trust Deed) has been omitted and the debenture trustee is required to accept the trust deeds which contain matters as specified in Section 71 of the Companies Act, 2013 and Form SH 12.

Amendments and Circulars

Amendment to the SEBI (Debenture Trustees) Regulations, 1993

SEBI has notified the SEBI (Debenture Trustees) (Amendment) Regulations, 2017, which came into force on July 13, 2017, whereby SEBI has introduced the following key changes:

(I) Harmonised the existing provisions of the SEBI (Debenture Trustee) Regulations, 1993 with the applicable provisions of the 2013 Act, as amended, and rules made thereunder (as appropriate). It modified the definitions of terms associate, body corporate, change in control, debenture, debenture trustee, insurance company, issue, principal officer and recognised stock exchange.

(ii) Further restrictions on the appointment as a debenture trustee have been added. Now, a person cannot be appointed as a debenture trustee if (i) it beneficially holds shares in the company, (ii) is a promoter,

operator shall report transactions to one or more reporting platforms or trade repository or any other entity specified by the RBI and shall make available data/information to any approved authority.

Ø If an authorised ETP operator intends to terminate operations, it shall do so with prior RBI approval and abide by the timing and date of termination of operations, and any other condition stipulated by RBI.

(RBI Press Release 2017-2018/1017 dated October 12, 2017)


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Action against exclusively listed companies and their promoter/directors pending exit offer to shareholders

In order to ensure that an exit option is provided to the public shareholders of exclusively listed companies (“ELCs”) that are non-compliant with the provisions of the SEBI circular dated October 10, 2016 and that have not submitted a plan of action to the designated stock exchanges by the specified date and in order to protect the interest of investors in ELCs on Dissemination Board, SEBI has directed that until the non-compliant ELCs provide an exit option to minority shareholders in compliance with October 10, 2016 circular:

(i) Depositories shall not effect transfer, by way of sale, pledge, etc, of any of the equity shares and corporate benefits such as dividend, rights, bonus shares, split, etc shall be frozen for shares held by the promoters or directors of such non-compliant ELCs.

(ii) The non-compliant ELCs, their directors, promoters and the companies which are promoted by any of them shall not be eligible to access the securities market for the purposes of raising capital.

(iii) The promoters or directors of non-compliant ELCs shall not be eligible to remain or become directors of any listed company.

(SEBI Circular SEBI/HO/MRD/DSA/CIR/P/2017/92 dated August 01, 2017)�

Amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

SEBI has notified the SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2017, which came into force on August 14, 2017, whereby the following key changes have been made with respect to Regulation 70 (Chapter VII (Preferential Issue) not to apply in certain cases) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the “ICDR Regulations”):

Ø Modied Regulation 70(5): Chapter VII will now not apply if the preferential issue of 'specified securities' is made to 'lenders' pursuant to conversion of their debt, as part of a 'debt restructuring scheme' implemented in accordance with the guidelines specified by the RBI, subject to certain modified conditions. These modified conditions include inter alia (i) conversion price to be determined as per the RBI guidelines and shall be in

(iv) The duties of the debenture trustees have been modified.

(v) A debenture trustee will also be liable under the SEBI (Intermediaries) Regulations, 2008 if it fails to furnish relevant information or periodic returns, furnishes information that is false or misleading, does not cooperate in any enquiry or fails to resolve complaints or give satisfactory replies.

(SEBI Notication No. SEBI/LAD-NRO/GN/2017-18/011dated July 13, 2017)

Online Filing System for Real Estate Investment Trusts and Infrastructure Investment Trusts

With the aim to ease the process of application for registration, reporting and filing with respect to the SEBI (Infrastructure Investment Trusts) Regulations, 2014, as amended (the “SEBI InvITs Regulations”) and the SEBI (Real Estate Investment Trusts) Regulations, 2014, as amended (the “SEBI REITs Regulations”), SEBI has introduced an online system for filings. The online system is now mandatorily required to be used for registration as Real Estate Investment Trusts (“REITs”) or Infrastructure Investment Trusts (“InvITs”) and to file, submit or apply for any request, as may be required under the provisions of aforesaid regulations and circulars issued thereunder.

(SEBI Circular No. SEBI/HO/IMD/DF1/CIR/P/2017/83 dated July 24, 2017)

Amendment of the SEBI (Depositories and Participants) Regulations, 1996

SEBI has notified the SEBI (Depositories and Participants) (Second Amendment) Regulations, 2017 w.e.f. July 25, 2017 which amends Regulation 58(3) of the SEBI (Depositories and Participants) Regulations, 1996 (“DP Regulations”) pertaining to the application for creation and recording of a pledge by the depository. Regulation 58(3) of the DP Regulations formerly required the depository to obtain confirmation from the pledgee that the securities are available for pledge with the pledgor prior to creation and recording of the pledge. Under the amended DP Regulations, the depository can create and record the pledge, after concurrence of the pledgee through its participant, within such period and in such manner as prescribed in the DP Regulations.

(SEBI Notication SEBI/ EBI/LAD-NRO/GN/2017-18/013 dated July 25, 2017)


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defining “control” including assessing various protective rights offered under contractual agreements as also prescribing a numerical threshold by defining “control” as the right or entitlement to exercise at least 25% of voting rights of a company, irrespective of whether such holdings give de facto control and/ or the right to appoint majority of the non-independent directors of the company.

Ø While SEBI received responses in support of the idea for a bright line test, terming it a substantial step towards ease of doing business, key stakeholders including the MCA have recommended against it on the grounds that changing the current definition may reduce the regulatory scope and may be prone to abuse, and that it would be more appropriate to retain the current definition and decide on a case-to-case basis.

Ø The same is in re-iteration of the recommendations of the Justice Bhagwati Committee (constituted in the year 1995 to review the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994) which had recommended a broad definition of “control” and to leave it to SEBI to decide whether there had been an acquisition of control based on the facts of each case. The Takeover Regulations Advisory Committee had also reiterated the views of the Justice Bhagwati Committee in its report dated July 19, 2010.

Ø After intensive examination of the relevant issues and in view of the aforesaid comments received and the current regulatory environment, SEBI has decided not to adopt the bright line tests and to continue to allow the determination of the acquisition of “control” to be as per the extant definition under the Takeover Regulations on a case to case basis.

(SEBI Press Release No.: 56/2017 dated September 08, 2017)

compliance with the 2013 Act, and certified by two independent qualified valuers (i.e. a person registered under Section 247 of the 2013 Act and the relevant rules framed thereunder, or an independent merchant banker registered with SEBI or an independent chartered accountant in practice having a minimum experience of 10 years till such time the said section or rules made thereunder come into force); (ii) lock-in period of one year from the 'date of allotment' (subject to exception); (iii) lock-in period of equity shares allotted pursuant to conversion to be reduced to the extent the convertible securities have already been locked-in; and (iv) compliance with requirements of the 2013 Act including passing of special resolution.

Ø Substituted Regulation 70(6): Chapter VII will now not apply if preferential issue of specified securities is made to a person at the time of lenders selling their holding of specified securities or enforcing change in ownership in favour of such person pursuant to a debt restructuring scheme implemented in accordance with the guidelines specified by RBI, subject to certain conditions. These conditions include inter alia(i) issue price to be determined as per the RBI guidelines and shall be in compliance with the 2013 Act, and certified by two independent qualified valuers; (ii) lock-in period of three years from the date of allotment; (iii) lock-in period of equity shares allotted pursuant to conversion to be reduced to the extent the convertible securities have already been locked-in; (iv) special resolution to be passed by shareholders prior to the preferential issue; and(v) certain additional specified disclosures to be made about the proposed allottee in the explanatory statement to the notice for the general meeting proposed for passing the special resolution.

(SEBI Notication No. SEBI/LAD-NRO/GN/2017-18/016 dated August 14, 2017)

SEBI drops the proposal of adopting 'bright line' test for determining 'control'

Ø SEBI had, in March 2016, issued a discussion paper seeking public comments on the adoption of a bright line test for determining the acquisition of “control” under the SEBI (Substantial Acquisition of Securities and Takeover) Regulations 2011 (“Takeover Regulations”). The bright line test proposed a different approach from the Takeover Regulations for


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non-convertible and redeemable preference shares. Disclosures (in specified formats) are now required to be made to the stock exchanges (within one working day from the date of default at the first instance of default and within seven days from the end of quarter (if there is any outstanding amount under default as on the last date of such quarter)) in case of non-payment of interest or principal amount on the pre-agreed date. This circular was proposed to be implemented on October 01, 2017, however, it has been deferred until further notice.

(SEBI Circular no. CIR/CFD/CMD/93/2017 dated August 04, 2017 and SEBI Press Release no. 59/2017

dated September 29, 2017)

Non-compl iance wi th the Minimum Publ ic Shareholding Requirements

In order to maintain consistency and uniformity of approach in the enforcement of the Minimum Public Shareholding (“MPS”) requirements mandated under Regulation 38 of the Listing Regulations, the following procedure has been prescribed to be followed by the recognized stock exchanges / depositories, as applicable with respect to non-compliant listed entities, their promoters and directors:

Ø Compliance with the MPS requirements are to be reviewed by the recognized stock exchanges based on shareholding pattern / other filings and notices are to be issued to such non-compliant entities within 15 days from the date of observation.

Ø On observation of non-compliance, the following actions may be taken: (i) imposition of fine of INR 5,000 per day of non-compliance and till the date of compliance; (ii) freezing of the entire shareholding of promoter and promoter group till date of compliance; and/or (iii) barring all promoters, promoter group and directors of such defaulting listed entity from holding a new position as director in any other listed entity till the date of compliance.

Ø On continuance of non-compliance for a period more than one year, apart from the point (iii) above, the following actions may be taken: (a) imposition of fine of INR 10,000 per day of non-compliance and till the date of compliance; and/or (b) freezing of all the securities held in the demat account of all promoter and promoter group till date of compliance.

Provisions of the Scheme Circular aligned with requirements for exemption under Rule 19(2)(b) of the Securities Contracts (Regulation) Rules

Ø The SEBI dated March 10, 2017 (“Scheme circularCircular”) lays down the framework for schemes of arrangement by listed entities and for relaxation under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”).

Ø Clause III (A)(1)(b) of Annexure I of the Scheme Circular provides that at least 25% of the post-scheme paid up share capital of the transferee entity seeking relaxation from Rule 19(2)(b) of the SCRR (requirements for listing of securities on the stock exchanges) is required to comprise of shares allotted to the public shareholders in the transferor entity.

Ø SEBI has amended the abovementioned Clause, with a view to align the same with the requirements under Rule 19 (2)(b) of the SCRR, to provide that in the event the transferee entity seeking relaxation is unable to comply with the 25% public shareholding requirement, such entity may satisfy the prescribed conditions (including at least 10% of the post scheme paid-up share capital of the transferee to comprise of shares allotted to public shareholders of the transferor, and the requirement to increase the public shareholding to 25% within 1 (one) year from the date of listing of the securities etc.) to avail of the relaxation under Rule 19(7) of the SCRR.

(SEBI Circular No: CFD/DIL3/CIR/2017/105 dated September 21, 2017)

Disclosures by listed entities of defaults on payment of interest / repayment of principal amount on loans from banks, financial institutions, debt securities, etc.

While the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (the “Listing Regulations”) requires disclosures to be made in matters such as delay / default in payment of interest / principal on debt securities, similar disclosures are currently not prescribed with respect to loans from banks and financial institutions. As in the current times, corporates are primarily dependent on loans from the banking sector, SEBI seeks to address this gap, through this circular applicable to all listed entities which have listed any of the following: specified securities (equity and convertible securities), non-convertible debt securities and


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The recognized stock exchange may also consider compulsory delisting of the non-compliant listed entity. The recognized stock exchange is required to periodically disclose on its website the details of the non-compliant entities, actions taken against such entities and status of compliance. The recognized stock exchange may keep the action in abeyance or withdraw the action if appropriate exemption has been obtained in accordance with applicable laws.

(SEBI Circular no.: CFD/CMD/CIR/P/2017/115 dated October 10, 2017)

SEBI Board Meeting

Ø SEBI, in its board meeting held in Mumbai on September 18, 2017, made the following decisions in relation to amendments to the SEBI InvITs Regulations and the SEBI REITs Regulations

(i) permitted REITs and InvITs to raise debt capital by issuing debt securities;

(ii) introduced the concept of strategic investor for REITs and permitted single asset REIT (both on similar lines of InvITs);

(iii) permitted REITs to lend to underlying holding company / special purpose vehicle (the “SPV”); and

(iv) amended the definition of valuer for both REITs and InvITs. �

Ø Further consultations to be held on a proposal for permitting REITs to invest at least 50% of the equity share capital or interest in the underlying holding company / SPVs, and permitting holding company to invest with at least 50% of the equity share capital or interest in the underlying SPVs.

(SEBI Press Release No. 57/2017 dated September 18, 2017)

SEBI Circular on Block Deals

SEBI has in the past prescribed guidelines for execution of block deals (i.e. large trades executed through a separate trading window). As per the current framework, block deals are allowed during a 35-minute window between 9.15am and 9.50am.

SEBI has now revised the framework w.e.f. January 01, 2018. The following are the key changes:

(i) The Morning Block Deal Window shall operate between 08:45 AM to 09:00 AM. The reference price for execution of block deals in this window shall be the previous day closing price of the stock.

(ii) Afternoon Block Deal Window shall operate between 02:05 PM to 2:20 PM. The reference price for block deals in this window shall be the volume weighted average market price of the trades executed in the stock in the cash segment between 01:45 PM to 02:00 PM.

(iii) The minimum order size for execution of trades in the block deal window shall be INR10 crore (up from the present INR 5 crore size).

(iv) Every trade executed in the block deal windows must result in delivery and shall not be squared off or reversed.

(v) The stock exchanges shall ensure that all appropriate trading and settlement practices as well as surveillance and risk containment measures, as applicable to the normal trading segment, are made applicable and implemented in respect of the block deal windows as well.

(SEBI Circular No.: CIR/MRD/DP/118/2017 dated October 26, 2017)


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creditworthiness and repayment ability in a timely manner. Further, it is proposed that the submission of annual consolidated financial statements shall be mandatory for issuer of listed debt.

Ø Restrictions on CRAs: It is proposed that a CRA shall not be allowed to hold more than 10% of shareholding or voting rights (directly or indirectly) in another CRA or to have representation on the board of another CRA, as such crossholdings may give rise to conflict of interest. Additionally, it is further proposed that (i) acquisition of shares and/or voting rights in a CRA resulting in change of control shall require prior approval of SEBI, and (ii) a person holding 10% or more shares and/or voting rights in a CRA shall not hold 10% or more shares and/or voting rights (directly or indirectly) in other CRA (exceptions prescribed). Further, it is proposed that a CRA shall not be permitted to undertake activities apart from that of rating of financial instruments and economic or financial research. Any other activities such as rating / grading of non-financial instruments / projects shall be hived off as a separate entity.

Ø Appeal against ratings Ratings provided by CRAs:shall be heard by a rating committee of CRA different from the rating committee that had assigned the rating and shall comprise a majority of independent members to ensure fairness and transparency. Further, SEBI proposes to allow withdrawal of ratings if the CRA had rated that instrument for a continuous period of five years / 50% of the tenure, whichever is higher.

Ø Details of ratings Disclosure requirements for CRAs:that are not accepted will be available on the website of CRA for a period of only six months.

(SEBI Consultation Paper dated September 08, 2017)

Kotak Committee Report on Corporate Governance

With the view to enhance the standards of corporate governance of listed entities in India, SEBI formed a committee on corporate governance in June 2017 under the Chairmanship of Mr. Uday Kotak. The committee came out with its report on October 05, 2017 inviting public comments. The recommendations seek to bring out amendments in the Listing Regulations in order to address certain issues which are currently not addressed. For key highlights please refer to the 'Insight – Special Edition'dated October 13, 2017.

(Report of the Committee on Corporate Governance dated October 05, 2017)

Informal Guidance

On the scope of Regulation 26(6) of the Listing Regulations

Pursuant to an application made by MAPE Advisory Group Private Limited in respect of payment of amounts by Hewlett Packard Enterprises Company (“HPE”, a company incorporated under the laws of State of Delaware in the United States of America) to eligible employees of wholly owned unlisted foreign and Indian subsidiaries (the “Eligible Subsidiaries Employees”) of Mphasis Limited (an entity listed in India), SEBI clarified that employees of the subsidiaries of an entity listed in India would fall within the scope of the Regulation 26(6) of the Listing Regulations and therefore, the payments made by HPE to the Eligible Subsidiaries Employees will fall within the scope of the Regulation 26(6) of the Listing Regulations.

(SEBI Informal Guidance no. SEBI/CFD/FACPR/OW16838/1/2017

dated July 19, 2017)

Consultation Papers and Committee Reports

Consultation Paper on Review of the Regulatory Framework for Credit Rating Agencies

Pursuant to various representations and suggestions from market participants and stakeholders in relation to the regulatory framework for Credit Rating Agencies (“CRAs”) for the purpose of augmenting the effectiveness of the rating process, SEBI had released a consultation paper for public comments, on September 08, 2017. The consultation paper provides proposals with respect to inter alia the following:

Ø Enhanced requirements: It is proposed that the minimum net-worth requirement be increased to INR 50 crores from the existing INR 5 crores to ensure that CRAs have adequate financial capabilities. In addition to this, if a CRA is promoted by a company / body corporate (exceptions prescribed), such promoter needs to have a sound track record of carrying on business in financial services for at least five years.

Ø Disclosure requirements for issuers of listed debt: It is proposed that issuers of listed debt be required to disclose statement of profit and loss on a quarterly and year-to year basis and statement of asset and liabilities / balance sheet on a half yearly basis (each in prescribed format) in order to better assess their


LIST OF CONTRIBUTORS

YASH [email protected]

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DEVAKI [email protected]

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This newsletter has been sent to you for informational purposes only and is intended merely to highlight issues. The information and/or observations contained in this newsletter do not constitute legal advice and should not be acted upon in any specific situation without appropriate legal advice.

The views expressed in this newsletter do not necessarily constitute the final opinion of Cyril Amarchand Mangaldas on the issues reported herein and should you have any queries in relation to any of the issues reported herein or on other areas of law, please feel free to contact us at the following co-ordinates:

Bengaluru201, Midford House, Off. M. G. Road,Bengaluru - 560 001, India.Tel.: +91 80 2558 4870 Fax: +91 80 2558 4266Email: [email protected]

Hyderabad8-2-622/5/A, 3rd Floor, Indira Chambers,Road No. 10, Banjara Hills,Hyderabad - 500 034, Telangana, India.Tel.: +91 40 6730 6000 Fax: +91 40 6730 6002Email: [email protected]

Chennai2nd Floor, ASV Chamiers Square, 87/48, Chamiers Road, R. A. Puram, Chennai - 600 028, India.Tel.: +91 44 6668 4455 Fax: +91 44 6608 3490Email: [email protected]

AhmedabadShapath -V, 1304/1305, Opp. Karnavati Club,S.G. Road, Ahmedabad - 380 051, IndiaTel.: +91 79 49039900 Fax: +91 79 49039999Email: [email protected]


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