MUNDKUR LAW PARTNERS

At its July 28 board meeting, the Securities and Exchange Board of India (SEBI) approved a host of changes to the takeover code.

Key among these are the following five revisions: (i) the  threshold triggering a mandatory open offer for a target's stock will be increased from 15% to 25% of the target's issued capital; (ii) the minimum size of such open offer will be 26% of the target's issued capital; (iii) all shareholders have to be given the same exit price and there can be no separate provision for non-compete fees; (iv) if competitive offers are made, the successful bidder can acquire shares of other bidders after the offer period without attracting any further open offer obligations; and (v) the target's board of directors will have to make a recommendation on any offer. 

The SEBI board's press release does not go into how these new takeover regulations will operate vis-à-vis the antitrust regulations being administered by India's Competition Commission. During a subsequent press conference, SEBI's chairman did state that the two agencies were working to coordinate the application of their respective regulations, but he did not provide any further details on this coordination.

In addition to the takeover code changes, the SEBI board also approved a host of other changes that will affect documentation under the current 'Issue of Capital and Disclosure Requirements,' the regulation of the mutual funds industry, and the know-your-customer (KYC) procedures that apply for dealings with retail investors. 

All of these changes will need to be incorporated into various revised regulations before they come into effect. 

The Ministry of Corporate Affairs is continuing its drive to ease India's company law procedures. Following up on the recent announcements making company incorporation and director identification simpler, it will soon also be easier for Indian companies to obtain government approval for related party transactions.

Privately held Indian companies with a paid-up share capital of at least Rs. 10 million currently require government approvals to enter into various related party transactions. In practice, obtaining these approvals can take months.

Under the new procedures, which go into effect on September 24, 2011, companies will be required to provide certain types of specific information to their boards and shareholders when seeking board or shareholder approval for these contracts (e.g., on the arms' length nature of the transaction). 

Thereafter, based on the corporate approvals obtained, the company can apply for and obtain government approval online. The companies will be required to submit the supporting documents (contracts and resolutions) online and the veracity of the information contained in the application and documents will have to be certified by a practising company secretary or chartered accountant. (Providing false information could result in penal action.)

These procedural changes are welcome. But even so, one can't help but wonder why such government approval should be required at all. Instead, related party transactions should be subject to stronger disclosure and audit requirements so that boards and shareholders can make informed decisions when approving the transactions and so that the fiscal authorities can ensure that such transactions are not used to dodge taxes. However, changes that dispense with the need for central government approval altogether would require legislative action and, despite years of promising a new law, the proposed companies bill remains a draft that is being discussed by the various government ministries. One only hopes a new companies bill will be taken up by parliament when it reconvenes next month.

The Supreme Court of India recently examined the validity and effect of an arbitration clause contained in an unregistered and unstamped lease deed. 

In its judgment of July 20, 2011 (in SMS Tea Estates v. Chandmari Tea Co.), the Court held that an unregistered lease deed cannot affect the underlying immoveable property if the lease is of a kind that is compulsorily registerable under Indian law. (In other words, if a lease is required to be registered and is not registered, the result is as good as if the lease did not even exist.)

However, the Supreme Court found that the validity of an arbitration clause in such unregistered lease deed would remain unaffected. The Court reasoned that the arbitration clause was a collateral term relating to dispute resolution, and was "unrelated to the transfer or transaction affecting the immoveable property." (Emphasis in original.) 

This said, the Court went on to point out that the surviving validity of the arbitration clause would be of little value—"[a] party under such a deed may have the luxury of having an arbitrator appointed, but little else." 

The Supreme Court held that because of provisions in India's Registration Act of 1908, the lease deed cannot affect the underlying property. In addition, the lease deed cannot be admitted as evidence of any transaction affecting the property. 

As a result, the arbitrator would not be able to entertain any claim to enforce the lease. The Court also explained that an arbitrator is effectively prevented from entertaining any claim to recover amounts spent in connection with the lease. 

With regard to non-payment of stamp duty on the lease deed, the Supreme Court noted that the consequences were different—the non-payment of stamp duty affected both the property transaction and the arbitration clause. 

The Court pointed out that under provisions of the relevant stamp duty law, if a court or a person in charge of a public office or even a private arbitrator comes across a document on which the required stamp duty has not been paid, then such person is required by law to impound the document and the document cannot be acted upon. 

The Court ruled, however, that once the defect of non-payment is cured (e.g., by payment of the stamp duty and a penalty) the document might be subsequently acted upon by an arbitrator or court.

This judgment is likely to have wide practical application; not just for arbitrations connected with various property transactions but in other transactions too, where the documents require registration or the payment of stamp duty. Moreover, the judgment highlights the importance of ensuring that all such documents are properly registered and duly stamped. 

In a judgment dated July 8, 2011, a two-judge bench of India's Supreme Court restricted the ability of litigants to appeal against foreign arbitration awards. 

Addressing a batch of five cases, the bench ruled (in Fuerst Day Lawson Ltd., et al v. Jindal Exports Ltd., et al) that the Indian Arbitration and Conciliation Act, 1996 (the Arbitration Act) is a 'self-contained code' covering matters relating to arbitration proceedings, the making of awards and the enforcement of awards. 

Therefore, the Court concluded, the Arbitration Act excludes appeals against the enforcement of foreign arbitration awards being made by invoking or relying on the  appellate jurisdiction conferred on India's High Courts under other laws. 

Specifically, as a result of this welcome decision, it is now clear that litigants cannot appeal against the enforcement of foreign arbitration awards by invoking the appellate jurisdiction conferred on India's High Courts under their respective Letters Patent (i.e., the charter documents that established these High Courts). 

The only grounds for appeals against orders made to enforce foreign arbitration awards are those set out in the 'self-contained code' that is the Arbitration Act.

The Ministry of Finance has invited public comment on a proposed law to regulate microfinance institutions in India. The draft bill charges the Reserve Bank of India (RBI) with a duty to promote and ensure orderly growth of the microfinance sector. The bill contains a number of welcome provisions in this regard—at least, in three key areas. 

First, on regulating the sector: the bill will allow the RBI to supervise and regulate the financial health of the sector as a whole and the financial health of different classes of microfinance institutions. The RBI will be able to do this through rules that are similar to those applied to regulate the financial health of banking and non-banking financial institutions today, e.g., capital adequacy rules, asset allocation rules, provisioning requirements and reserve requirements. 

Second, on protecting customers: if the bill becomes law, the RBI will be able to protect individual customers from the various abusive practices that have plagued this industry in the past. To this end, the bill allows the RBI to prescribe maximum lending rates and permissible margins for institutions, and it also allows the RBI to penalize non-compliance. 

Third, on regulating individual microfinance institutions: the bill will also allow the RBI to supervise individual microfinance institutions through specific registration and regular reporting requirements. More importantly, if needed, the RBI will even be able to direct special audits of these institutions. 

A law along these lines is long overdue. Enacting a national law will prevent a fragmented state-wise regulation of the sector. The bill's approach of placing supervision and regulation in the hands of the RBI is sensible, since the RBI is without doubt the agency that is best placed to address this issue. One hopes the bill will be enacted into law soon.