A Round Up of 2011
Our second year end round up is here already! Before we bid adieu to 2011, here is an attempt to round up a handful of important developments in the Indian corporate law and business, with a humble request to excuse any significant exclusions.
Earlier this year in the month of May, the Ministry of Corporate Affairs (“MCA”) has permitted companies to hold their board meetings and general meetings via video conferencing i.e. audio-visual as a part of its “Green Initiative in Corporate Governance”. This has been seen as an attempt to increase participation by making it convenient for directors and shareholders to participate and bring down costs. The prescribed conditions, amongst others, require the meeting notices to state the availability of the facility and the necessary instructions to access the same. In case of board meetings, it should also seek a confirmation from the concerned director if he or she would participate through video conferencing. The Chairman and the Secretary are required to ensure that the proceedings via video conferencing are carried out properly i.e. the integrity of the meeting proceedings via video conferencing is safeguarded. Further, certain other responsibilities in respect of procedural compliances have been announced for the Chairman and the Secretary to comply with. In the same month, the MCA had also authorised National Security Depository Limited and Central Depository Services (India) Limited to conduct e-voting in general meetings of companies. The initial circulars led to confusion whether video conferencing facility was required to be offered mandatorily to directors and shareholders. Following this, the Ministry clarified in a circular dated June 6 of this year that the facility need not be offered mandatorily for board meetings. However for shareholders’ meetings in listed companies, it said that making the facility available will become mandatory from 2012-13. Due to further representation from the industry, the Ministry announced on December 27 that offering video conferencing facility at general meetings shall not be mandatory for listed companies as well. Therefore read together, the circulars are only enabling in nature rather than a compulsion. Further, in the same circular the MCA also announced that e-voting could be conducted by any agency that would obtain the requisite certificate from the Department of IT.
Much has been talked about FDI in retail making it the biggest controversy (or atleast the second biggest after Lokpal) in Indian affairs this year. Without getting into the background (which you can find here as well as here), this year end round-up aims to summarise the latest on the issue. In the end of November this year, the world almost assumed (only to be disappointed) that FDI in multi-brand retail was finally permitted when the cabinet approved FDI in multi-brand retail upto 51% with certain conditions. The cabinet had also announced removal of foreign investment cap in single brand retail although it was not clear what conditions were likely to be attached. Due to a logjam in the Parliament on permitting FDI in multi-brand retail and various protests, the Government of India has now suspended the decision of allowing FDI in multi-brand retail. However, Mr Anand Sharma has now said that the Government intends to go ahead with its decision with regard to allowing 100% FDI in single brand retail. A notification to that effect can now be expected.
In another development in early October this year, the Department of Industrial Policy and Promotion shocked the corporate world by sneaking in an apparently innocuous clause in the Consolidated FDI Policy Circular of end of September 2011. The said clause said that only “equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI. Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant ECB guidelines.” For a few days during the month, many private equity deals were suspended by investors due to increased concern over enforceability of rights of first refusal, call and put options and the like. Suspected reason for such a drastic move? Apparently, RBI was unhappy over the fact that in the past many real estate companies (where debt was not accessible) used options to give fixed return exit to investors. Realising the wide spread consequences of the clause which were even not intended, DIPP issued a corrigendum deleting the clause from the original Policy Circular in the end of October.
Close to three years from the enactment of the Limited Liability Partnership Act, 2008, which was thought to be extremely beneficial to professional firms to accommodate their drastic expansion in the last few years, Indian law firms are still not sure whether they could use this form of organisation for their activities. Until now, 4 law firms in the National Capital Region have gone ahead and registered themselves under the LLP Act. But in late October, the Bar Council of Delhi warned these law firms through a letter of a possible misconduct under the Advocates’ Act, 1961 since these LLPs have not been enrolled as advocates with the council. Two weeks later, the Bar Council issued a statement that the aforementioned letter was sent by its Chairman without proper authority from the Bar Council and hence was “deemed to be withdrawn”. Appropriate clarification in this respect from the Bar Council of India is the need of the hour. However, the Bar Council of India has now passed the buck onto the Ministry of Corporate Affairs. It is worth a mention that some other professions seem to be meeting the same fate as law firms. Though, chartered accountants have been permitted by the Institute of Chartered Accountants to operate as LLPs, architects might find a hurdle with the Architects’ Act, 1972.
And finally, the new Companies Bill, 2011 was cleared by the cabinet at the beginning of the winter session of the Parliament but unfortunately it could not see the light of day. It will now have to wait for the budget session of the Parliament. Amongst other important developments, the Bill now seeks to limit the number (or “layers” as the Bill calls it) of subsidiary companies in prescribed class or classes of companies as may be determined by the rules made thereunder. Generally, a company will now be prohibited from having more than two layers of investment companies unless required by law or unless permitted by the law of the relevant country where investment is made. Under several provisions like change of objects in case there is any unutilised amount from a public offer or terms of contract referred to in a prospectus are proposed to be changed or in case of a compromise or arrangement, dissenting shareholders will be afforded an opportunity to exit the company at such terms as may be prescribed by the rules. Further, a new proviso has been added to the long debated clause of ‘free transferability’ of shares of public companies. It states that any contract or arrangement between two or more persons with respect to transfer of securities shall be enforceable. Although it does provide some relief, it does not specifically state that rights restricting transferability shall be enforceable. Now a fixed amount would be prescribed in the rules alongwith the number of persons to whom a private placement may be made by companies, failing which it shall be deemed to be a public offer. And finally, an Indian company will now be able to merge into a foreign company through a scheme or arrangement.