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.
In its first ever order dealing with combinations, the Competition Commission of India recently approved the Reliance Group's proposed acquisition of a 74 percent stake in the Bharti-Axa life and general insurance joint ventures.
The commission's July 26 order notes that the insurance sector in India is highly regulated and fragmented, with 49 private players competing for 30 percent of the country's life insurance business and 40 percent of the country's general insurance business.
The commission found that as the Reliance Group and the Bharti-Axa joint venture insurance companies did not operate in interchangeable or substitutable products there was no horizontal overlap in the proposed combination.
It also found that although the Reliance Group included an insurance brokerage business, this vertical relationship did not present any significant competitive constraint because there are several registered insurance brokers in India, and because insurance regulations restrict the amount of business an insurance broker is permitted to place with an insurance company in the same group during any financial year.
Based on these findings, the commission approved the proposed combination within three weeks of the application for approval being made by the Reliance Group. Hopefully, that response time will be matched in dealing with future applications, and the commission will allay fears of its procedures unduly delaying transactions.
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 Ministry of Corporate Affairs plans to radically simplify India's company incorporation procedures. The Ministry expects that the new procedures will allow a company to be incorporated in just 24 hours.
A press release from the Ministry suggests that the new procedures are expected to be implemented next month (i.e., from August 11), and these procedures will permit applicants to file incorporation documents online, after the documents have been certified by practising professionals. A digital certificate of incorporation will be issued immediately thereafter. There is likely to be an ex post verification of the documents submitted, and applicants providing false information could face penal consequences.
These proposals are welcome and should make the process of setting up new businesses in India a lot easier.
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.
The Reserve Bank of India has now allowed non-resident exporters to and importers from India to hedge their exposure to the Indian rupee in their trade transactions with India, if those transactions are denominated in Indian rupees.
The new rules allow non-resident importers and exporters to either buy forwards or options to hedge their exposure to the Indian rupee. These derivatives can be purchased either directly from authorized banks in India or through banks located abroad (including through foreign branches of Indian banks).
The rules are geared to dissuade speculative hedging. For this reason, the concerned banks are required to obtain undertakings that the same exposure has not been hedged with any other banks in India and that the hedge will be cancelled as soon as the underlying exposure has been cancelled. Even so, it'll be interesting to see whether this facility achieves its stated objective of promoting greater use of the Indian rupee in international trade transactions.
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.
India's Ministry of Corporate Affairs recently revised the rules that apply to the issue of identification numbers to directors of Indian companies and designated partners of limited liability partnerships.
Previously, an individual had to obtain a director identification number (DIN) before becoming a director in an Indian company, and obtain a separate designated partner identification number (DPIN) before becoming a designated partner in a limited liability partnership.
Now, following a recent circular, individuals need only obtain a DIN and this number can also be used as a DPIN in a limited liability partnership. If an individual previously obtained a DIN, the old DIN will now also operate as a DPIN and the facility works the other way too, i.e., a prior DPIN can now also be used as a DIN.
In addition, the circular requires all individuals who have previously obtained a DIN or DPIN to provide the Ministry with their income-tax permanent account numbers by September 30, 2011. Failure to do so could result in the individual's DIN and DPIN numbers being disabled and possible penalties being imposed.
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.
The Reserve Bank of India (RBI) has now permitted Indian companies to raise external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs) if the proceeds are needed to refinance outstanding FCCB obligations.
No prior RBI approval would be required for this refinancing if the amount involved is up to US$500 million, if the refinancing is done more than six months before the maturity date of the outstanding FCCB obligation, and if certain other conditions are met (these conditions relate to maturity periods, all-in-cost ceilings, and end-use restrictions and apply to other generally permitted ECBs as well).
Prior RBI approval would be required if more than US$500 million is being raised or if these conditions are not met.
The Government appears optimistic that this year India's FDI inflows will show a strong, positive trend.
In the first two months of the fiscal year (i.e., April and May 2011) India received just under US$ 8 billion in FDI inflows. That amount represents a 77 percent increase over inflows received in the same period last year.
The Government also believes that some recent mega deals are indicators of not just the positive trend but of continuing investor confidence in India. These mega deals include the proposed tie-up between BP and Reliance, likely to generate over US$ 7 billion in FDI, Vodafone’s purchase of Essar’s stake (a US $ 5 billion transaction), and the recent POSCO and Cairn-Vedanta transactions (a US$ 8-9 billion transaction).