Bimonthly Legal Tablet
Volume 1, Issue 1, November 1, 2011
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Law & Policy
The Consolidated FDI Policy (Effective from October 01, 2011)
The Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India (‘DIPP’) has issued a ‘Consolidated FDI Policy’ (‘FDI Policy’) vide Circular No. 2 of 2011 dated September 30, 2011, which came into effect on and from October 01, 2011. The FDI Policy subsumes and supersedes all Press Notes, Press Releases, Clarifications and Circulars issued by DIPP, which were in force as on September 30, 2011.
Highlights:
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Types of instruments which can be issued by Indian companies [Paragraph 3.3]
- Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations.
- Pursuant to deletion of Paragraph 3.3.2.1 of the FDI Policy, equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, having built-in options, may be issued/ transferred to non-residents.
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Import of capital goods/machinery/equipment and pre-operative/pre-incorporation expenses [Paragraph 3.4.6(iii) (I) & (II)]
- Any import of capital goods/machinery etc., made by a resident in India, has to be in accordance with the Export/Import Policy and applications for conversion of import payables for capital goods into FDI have to be made within 180 days from the date of shipment of goods.
- Payments to be made by foreign investor for pre-operative/pre-incorporation expenses can now be made directly to the company or through the bank account opened by the foreign investor, as provided under FEMA Regulations.
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Escrow [Paragraph 3.4.4(iii)]
- AD Category-I banks have been given general permission to open Escrow account and Special account of non-resident corporate for open offers/exit offers and delisting of shares.
- AD Category-I banks have also been permitted to open and maintain, without prior approval of RBI, non-interest bearing Escrow accounts in Indian Rupees in India on behalf of residents and/or non-residents, towards payment of share purchase consideration and/or provide Escrow facilities for keeping securities to facilitate FDI transactions, subject to terms and conditions specified by RBI.
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Pledging of Shares [Paragraph 3.5.7]
- Promoter of an Indian company, which has raised ECB, may pledge the shares of the borrowing company or that of its associate resident companies, for the purpose of securing ECB raised by the borrowing company, provided a no-objection for the same is obtained from an authorized dealer.
- FDI in Limited Liability Partnerships [Paragraph 3.2.5] – FDI in LLPs is allowed subject to certain prescribed conditions.
- Inclusion of ‘Apiculture’ in ‘Agriculture & Animal Husbandry’ [Paragraph 6.2.1] – 100% FDI under automatic route allowed in Floriculture, Horticulture, Apiculture and Cultivation of Vegetables and Mushrooms under controlled conditions.
- Additional condition introduced for ‘Single Brand Product Trading’ [Paragraph 6.2.16.4] – The FDI Policy requires the foreign investor to be the owner of the brand.
- Clarification regarding Financial Services – Foreign investment in other financial services, other than those specified in the FDI Policy, would require prior approval of the Government.
- Increase of foreign investment in Terrestrial Broadcasting/FM Radio from 20% to 26% – The FDI Policy has enhanced the limit to 26% under approval route.
- Foreign investment in Construction-Development Sector [Paragraph 6.2.11] – Exemption from several conditions has been granted for construction development activities in education sector and old age homes.
- Inclusion of ‘Basic and Applied R&D on Bio-Technology, Pharmaceutical Sciences/Life Sciences’ as an ‘Industrial Activity’ – Definition of ‘Industrial Activity’ has been expanded to include the ‘basic and applied R&D on bio-technology, pharmaceutical sciences/life sciences’.
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
Vide Notification dated September 23, 2011, Securities Exchange Board of India (SEBI) has notified the much awaited New Takeover Regulations namely SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 which will replace the existing Takeover (SAST) Regulations, 1997. The new Regulations shall come into force on the 30th day from the date of their publication in the Official Gazette i.e. w.e.f. October 22, 2011, any acquisition or sale of shares of Listed Company shall be governed by provisions of SEBI (SAST) Regulations, 2011.
Highlights:
- Definition of “Control” modified [Regulation 2(1)(e)] – New definition of Control has been introduced.
- New Definitions Introduced [Regulation 2(h), (zb), (zc) and (zd)] – Enterprise Value, Volume weighted average market price, Volume weighted average price and Weighted average number of total shares.
- Increase in Initial Threshold Limit from 15% to 25% [Regulation 3(1)] – The Initial Threshold limit provided for Open Offer obligations is increased from 15% to 25% of the voting rights of the Target Company.
- Creeping Acquisition Limit raised from 15%-55% to 25%-75% [Regulation 3(2)] – A single and clear creeping acquisition bracket.
- Open Offer Trigger Point based on Individual Holding [Regulation 3(3)] – Individual Acquirer Shareholding shall also be considered.
- Change in Control [Regulation 4] – No acquirer shall acquire control unless public announcement of an open offer is made.
- Detailed provisions relating to Indirect Acquisition [Regulation 5]
- Detailed provisions for Voluntary Open Offer [Regulation 6]
- No Exemption in case of acquisition from other competing acquirer [Proviso to Regulation 6(2)]
- Increase in Offer Size from 20% to 26% [Regulation 7(1)]
- Frequently Traded Shares [Regulation 7(2) and Regulation 7(5)]
- New Provisions in case of increase in shareholding beyond the maximum permissible non-public shareholding due to Open Offer [Regulation 7(4) and (5)]
- Abolition of Non-compete fees [Regulation 8(7)]
- Provisions relating to Exemption from Open Offer modified [Regulation 10]
- Revision in SEBI fees [Regulation 16(1)]
- Recommendation on the Open Offer by the Board of Target Company [Regulation 26(7)]
- New Formats Introduced for PA, LOO, Disclosures, Exemptions and Recommendations.
NOTE: Simultaneously with the amendment in SEBI (SAST) Regulations, 2011, the format of disclosure of shareholding as provided under Clause 35 of the Listing Agreement has been replaced for Promoter and Promoter Group, Public holding more than 1%, and Public/PAC holding more than 5%.
The Draft Lokpal Bill
The draft Lokpal Bill proposes to establish a central government anti-corruption institution, i.e., ‘Lokpal’, supported by Lokayukta at the state level. Lokpal is intended to be completely independent of the government and free from ministerial influence in its investigations. Members are to be appointed by judges, Indian Administrative Service officers with a clean record, private citizens and constitutional authorities through a transparent and participatory process.
The National Manufacturing Policy
The first National Manufacturing Policy aims at bringing about a quantitative and qualitative change with six objectives including increasing manufacturing sector growth, creating 100 million additional jobs by 2022, creating skill sets, increasing domestic value addition, enhancing global competitiveness and ensuring environmental sustainability.
- Liberalization in labour and environment regulations.
- Single window clearance for all issues related to industrial units.
- Setting up of national investment and manufacturing zones.
- Special purpose vehicle created to develop infrastructure on public-private-partnership mode.
- Incentivisation of green technology.
- Financial and tax incentives to small and medium enterprises.
The Companies Bill, 2011
The Cabinet on October 25, 2011 has deferred a decision on the Bill following objections by the finance and law ministries. The objections were related to provisions regarding corporate social responsibility norms. Jurisdictional issues with regard to the role of SEBI, CBDT and certain statutory provisions under the proposed Bill were also contentious matters.
Legal Pronouncements
Yograj Infrastructure Limited v. Ssang Yong Engineering and Construction Company Limited
The Supreme Court held that where parties specifically agree that the law governing arbitration would be a law other than the proper law of the agreement, parties cannot contend that the proper law of the agreement would apply to arbitration proceedings.
M/s Delhi International Airport Private Limited v. Union of India
The Supreme Court held that Delhi International Airport Private Limited is a contractor of Airport Authority of India under the Contract Labour Act, 1970, and the notification dated July 26, 2004 was binding on DIAL.
Suraj Lamp and Industries (P) Ltd. v. State of Haryana
The Supreme Court reiterated that immovable property can be legally and lawfully transferred only by a registered deed of conveyance. GPA sales or SA/GPA/WILL transfers do not convey title and do not amount to transfer, except to the limited extent of Section 53A of the Transfer of Property Act.
Aica Kogyo Company Limited and Asia Laminates India Private Limited
The Competition Commission of India held that given the presence of a large number of players with fragmented market shares in the surfacing/decorative laminates business in India, the proposed combination is not likely to have an appreciable adverse effect on competition in India.
Analysis
Analysis of the Competition Act, 2002 v. the Petroleum and Natural Gas Regulatory Board Act, 2006
The Competition Commission of India is a special national level expert body created under the Competition Act, 2002 to monitor and regulate competition across all markets in India and protect the interest of consumers in India.
There are various laws enacted to regulate specific sectors and create sector specific regulatory bodies. The Petroleum and Natural Gas Regulatory Board Act, 2006 created the Petroleum and Natural Gas Regulatory Board to regulate refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas.
There are certain provisions of the Petroleum and Natural Gas Regulatory Board Act, 2006 that can potentially overlap with the functions of the Competition Commission. These provisions provide for protecting consumer interest through fair trade and competition but do not have a detailed legal framework to determine whether competition principles have been violated.
The Competition Act provides the extensive legal framework for determining competition issues. Further, the policies of the Petroleum Regulatory Board seek to identify a problem in the beginning and create an administrative machinery to address behavioural issues before the problem arises, whereas competition policy addresses the problem afterwards in the backdrop of market conditions.
In view of the observations highlighted above, it is clear that the Competition Commission of India is the main statutory authority regulating and evaluating competition issues in all markets in India and ensuring that no practice develops that has an adverse effect on competition in all sectors. The Petroleum and Natural Gas Regulatory Board in relation to competition issues should be allowed to refer matters to the Competition Commission of India.
Business News
Business News for September and October, 2011
September 06, 2011 – Cabinet clears Land Acquisition Bill. It may be passed in the winter session.
September 07, 2011 – The Nuclear Safety Regulatory Authority Bill 2011 will establish a legal framework to regulate nuclear and radiation safety.
September 10, 2011 – Government would like to introduce the Companies Bill 2011 in the winter session of Parliament.
September 13, 2011 – FIIs can invest up to 5 billion dollars in infrastructure bonds. Environment Minister releases environmental clearance norms for projects requiring forest land.
September 14, 2011 – Supreme Court says it is not for judiciary to repeal or amend capital punishment law. Delhi High Court stayed order against Yahoo India. IRDA issues final guidelines; mediclaim portability starts in October.
September 15, 2011 – Supreme Court directs Delhi International Airport Limited to abolish contract labour system. UPA government is drafting Right to Service Delivery and Grievance Redressal Bill.
September 21, 2011 – Draft on new SEZ rules soon. Supreme Court on Majithia wageboard award. Central Bank directed banks to improve fraud risk management. TDSAT sets aside DOT demand on Idea.
September 24, 2011 – Supreme Court split on black money recall directive. US Internet rules to take effect from November 20, 2011.
September 27, 2011 – SEBI proposes self-regulatory body for investment advisors.
September 28, 2011 – SEBI plans to tighten IPO rules. IRDA may allow insurers to invest in derivatives and commodity fixtures in gold and silver.
September 30, 2011 – Cabinet approves new Mining Bill for sharing profits and royalties with local communities.
October 2011
October 1, 2011 – Mining Bill cleared. Government amended FDI rules regarding instruments with in-built options.
October 5, 2011 – SEBI amends clauses on equity listing, DR, SME listing. RBI unveiled infrastructure debt fund.
October 6, 2011 – PAN must for premium above Rs. 50,000 in cash. SEBI makes disclosure of promoters’ shares mandatory.
October 8, 2011 – Government will allow companies to use their own accounting terms in the new reporting format.
October 9, 2011 – RBI relaxed foreign exchange facilities for NRIs and persons of Indian Origin.
October 10, 2011 – Competition Appellate Tribunal registered appeal by DLF against Rs. 630 crore fine. Kapil Sibal to unveil Draft National Telecom Policy 2011.
October 11, 2011 – 100% FDI regime in pharmaceuticals to continue, with takeover scrutiny. Companies Bill, 2009 expected in winter session.
October 12, 2011 – Government considering raising FDI cap in single brand retail. “Tweet” to become a registered trademark of Twitter.
October 14, 2011 – Cabinet approves Enforcement of Security Interest and Recovery of Debt Laws Amendment Bill, 2011. Cable Networks to switch to digital set-top boxes from March 2012.
October 15, 2011 – Supreme Court suggests fine in cheque bouncing cases.
October 16, 2011 – Supreme Court held that a person facing criminal cases cannot be considered for government service unless acquitted.
October 20, 2011 – National Housing Bank banned pre-payment penalty. RBI said NRIs can hold non-resident accounts in any fully convertible currency.
October 25, 2011 – RBI deregulates savings account interest rates. Government clears National Manufacturing Policy.
Bills to be cleared in the Winter Session
- Land Acquisition Bill
- The Nuclear Safety Regulatory Authority Bill, 2011
- The Companies Bill, 2011
- Right to Service Delivery and Grievance Redressal Bill
- New Mining Bill
- Draft National Telecom Policy, 2011
- Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Bill, 2011
- National Manufacturing Policy
