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Changes to India's External Borrowing Rules
On September 25, 2011, (a Sunday evening!), the Reserve Bank of India (RBI) notified three sets of changes affecting foreign borrowing constraints that apply to Indian companies. While these changes will, to a limited extent, provide Indian companies with limited access to cheaper funding abroad, most of the changes will only benefit companies engaged in the infrastructure sector.*
Under the first set of changes, Indian companies in the infrastructure sector will be allowed, with prior RBI approval, to use up to 25 per cent of their fresh external commercial borrowings (ECBs) to refinance domestic (rupee) borrowings, provided the domestic borrowings were obtained for capital expenditure of earlier completed infrastructure projects. The remaining 75 per cent of the fresh ECBs have to be used for capital expenditure in new infrastructure projects. All the prior restrictions that applied to ECBs will continue to apply to these new loans (including restrictions that regulate average maturity, all-in cost caps and end-use of the ECBs).
Under the second set of changes, companies in the infrastructure sector will be allowed, again with prior RBI approval, to import capital goods using short-term credits as bridge financing. However, the bridge financing will have to be replaced with longer term ECBs that comply with all other ECB regulations. Moreover, the RBI's prior approval will be needed again when replacing the bridge financing with ECBs.
Finally, under the third set of changes, the RBI has made three modifications to the existing ECB rules—these modifications will have a slightly broader application.
1. The RBI has raised the prior caps that applied to the amount of ECBs Indian companies could raise without having to obtain RBI approval. Companies engaged in the real sector (i.e., manufacturing companies and infrastructure companies) can now raise up to USD 750 million per financial year without RBI approval (up from the previous limit of USD 500 million). On the other hand companies engaged in providing specified services, i.e., hotels, hospitals and software companies, have been allowed to raise up to USD 200 million per financial year without RBI approval (up from the previous cap of USD 100 million)—but, the enhanced ECBs raised by these services companies cannot be used to acquire land.
2. The RBI has also now allowed Indian companies to raise ECBs that are designated in Indian rupees from their foreign equity holders. These ECBs may or may not require prior RBI approval depending on the amount being borrowed and the level of the foreign lender's equity stake in the Indian company.
3. The RBI has now allowed Indian companies engaged in the infrastructure sector to use ECB funds to meet "interest during construction" costs, provided such interest is capitalized and included as part of the project cost.
* For purpose of these ECB rules, a company will only be regarded as engaged in the infrastructure sector if is engaged in any one of the following nine specific fields of activity: (i) power, (ii) telecommunication, (iii) railways, (iv) roads and bridges, (v) sea ports and airports, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects), (viii) mining, exploration and refining, and (ix) cold storage or cold room facilities (including for preservation or storage of agricultural and allied produce, marine products and meat).
New Takeover Code
After promising changes in early August, the Securities and Exchange Board of India (SEBI) has notified a set of new takeover rules that will come into effect on October 23, 2011. Like the old rules, the new rules cover two types of securities transactions: those triggering requirements to make an open offer to purchase shares from the public, and those triggering disclosures to stock exchanges.
Open Offers
Key open offer provisions in the new rules relate to triggers and exemptions, open offer size, price and payment terms, and the open offer process generally. These provisions are summarized below.
Open Offer Triggers: As SEBI promised in August, the new rules have increased the threshold triggering a mandatory open offer. Now a party will be required to make an open offer only if it acquires 25% of a target company's voting rights (up from the earlier 15% level). In addition, if a party already holds at least 25% of the target's voting rights, a mandatory open offer will be triggered if that party acquires (on a gross basis) more than 5% of the target's voting rights in any financial year (April—March).
Open Offer Exemptions: As was the case under the earlier rules, acquisitions resulting from certain types of transactions are exempt from the open offer requirements (e.g., transfers to relatives, the acquisition of shares by invoking a pledge made to a scheduled commercial bank or public financial institution, or under a scheme or arrangement pursuant to a court order). However, the specific exemptions have been modified in the new rules. For instance, the conditions that applied to some of the earlier exemptions have been varied (e.g., by adding prior notification requirements) and in some cases new exemptions have been added (e.g., covering certain types of buy-back related increases in shareholding). Also, as was the case under the earlier rules, SEBI has retained the authority to exempt application of the open offer requirements in particular cases (for reasons to be recorded in writing).
Open Offer Size: Under the new rules, the minimum size of a mandatory open offer is 26% of the target's voting rights. This said, if a party already holds at least 25% of the target's voting rights, that party can make a "voluntary" open offer for just 10% (or more) of the target's voting rights, provided certain additional conditions are met. These additional conditions relate to the party's acquisition of the target company's stock in the preceding 52 weeks, and vary according to the circumstances in which the "voluntary" open offer is made (e.g., if competitive offers are being made). If a conditional open offer is made, and the minimum level of acceptance set out in the conditional offer is not achieved, any agreement triggering the open offer requirement has to also be rescinded.
Price and Payment Terms: The new rules contain extensive provisions that specify the basis on which the minimum offer price for such open offers has to be computed. This basis varies depending on the type of acquisition being undertaken. The offer price can be paid in cash or in specified securities of the acquirer or in a combination of these various forms. However, certain additional conditions have to be met for the non-cash payments to be made. Also, all shareholders have to be given the same exit price and any amounts paid as a control premium or non-compete fees have to be considered when computing the minimum offer price.
Open Offer Process: An independent merchant banker has to manage the open offer process and the process requires the acquirer to open an escrow account to secure performance of its open offer obligations. The new rules also contain detailed provisions with regard to the timing of the open offer and the information that has to be provided with the open offer. Two key changes connected with the open offer process are that: (i) competing open offers have to be made within 15 working days of the detailed public announcement made by the acquirer making the first open offer, and (ii) a committee of independent directors of the target company has to provide reasoned recommendations on each open offer.
Disclosures to Stock Exchanges
The new rules modify the earlier public disclosure requirements to a limited extent.
For example, while the acquisition of 5% or more of a target company continues to trigger a disclosure requirement, new disclosure requirements now apply to the acquisition or disposal of 2% or more of a listed company by any party that already holds 5% or more of that company. (Creating a pledge or similar encumbrance over any shares would amount to an acquisition or disposal for purposes of these public disclosure requirements.) In addition, the annual disclosure requirements now only apply to holdings of 25% or more of a listed company (as opposed to the earlier 15% threshold).
Similarly, if a promoter creates a pledge or similar encumbrance over any shares held by the promoter, the promoter has to make a public disclosure of such encumbrance within 7 working days. This disclosure must be made not just to the company (as was previously the case) but also to the concerned stock exchanges. (Under the earlier rules, it was the company that was required to notify the stock exchange about pledges on promoter holdings.)
Going Back on Earlier Promises
In late July, the Ministry of Corporate Affairs had promised to implement procedures that would allow Indian companies to be incorporated within 24 hours. They said they would do this by relying on compliance certificates from private professionals (accountants and company secretaries). Now, barely six weeks on, the Ministry is going back on its promise.
In a circular issued on September 5, 2011, the Ministry has said that as the current processes in place allow companies to be incorporated within 48 hours, the Ministry will not implement the promised changes that would have permitted companies to be incorporated within 24 hours relying on certificates from practising profesionals.
Supreme Court Limits Challenges to Foreign Arbitration Awards
India’s Supreme Court recently revisited and, in our view, partly modified its earlier judgments on the ability of Indian courts to interfere with commercial arbitration awards that have been made outside India under foreign arbitration rules.
In its September 1, 2011 judgment, a two-judge bench of the Supreme Court considered this issue in Yograj Infrastructure Ltd. v. Ssang Yong Engineering and Construction Co. Ltd. (C.A. 7562 of 2011 arising out of SLP (C) No. 25624 of 2010).
In Yograj Infrastrutcure, an Indian company and a Korean company had entered into an agreement to construct portions of a national highway in India. The agreement was subject to the laws of India but provided for arbitration in Singapore in accordance with the rules of the Singapore International Arbitration Centre (SIAC). The agreement did not expressly exclude the application of any part of the Indian Arbitration and Conciliation Act, 1996 (Indian Act).
Before the matter went to arbitration, both the Indian and Korean parties filed applications before the local district judge in Madhya Pradesh seeking interim measures under section 9 of the Indian Act. The district judge directed the parties to submit the case to an arbitrator in Singapore. A sole arbitrator was then appointed in Singapore and the arbitrator issued an interim award in favour of the Korean company.
The Indian company challenged this award in an appeal before the district judge in India. The appeal was filed under section 37(2)(b) of the Indian Act, which is contained in Part I of the Indian Act. This provision of the Indian Act allows a party to appeal against interim measures awarded by an arbitral tribunal if the arbitation is subject to Part I of the Indian Act.
The Indian company argued that in Bhatia International v. Bulk Trading S.A. (2002) 4 SCC 105 and again in Venture Global Engg. v. Satyam Computer Services Ltd. (2008) 4 SCC 190), the Supreme Court had held that where operation of Part I of the Indian Act is not expressly excluded by the arbitration clause, the provisions of Part I of the Indian Act would apply. It therefore went on to contend that the Singapore award in this case was subject to an appeal under section 37(2)(b) contained in Part I of the Indian Act.
The Supreme Court noted that under the SIAC Rules, if the seat of arbitration is Singapore, the law of arbitration is Singapore’s International Arbitration Act, 2002.
The Supreme Court held that as a result of this mandatory application of the Singapore Act as the "law of arbitration," its earlier judgments in Bhatia International and Venture Global would have no application.
The Supreme Court went on to hold that even though an initial application had been filed by the Korean party under section 9 of the Indian Act (which is also contained in Part I), this was done before the arbitration commenced. The Court ruled that once the arbitrator was appointed and the arbitration proceedings commenced the SIAC Rules (and correspondingly the Singapore Act) became applicable, and this then shut out the right of appeal under section 37 of the Indian Act.
The Supreme Court's recent judgment should be welcomed—it limits challenges to international commercial arbitration awards and, in doing so, dilutes the Bhatia International and Venture Global decisions, which have previously regarded by many commentators as unduly interventionist in arbitration cases.