A report released by the UK-based Centre for Economics and Business Research places India as the fifth largest economy in the world. It may even overtake Germany if it surpasses USD 5 trillion in gross domestic product by 2026. One of the key contributors to this target would be the government’s Digital India Programme. In early 2019, the Ministry of Electronics & Information Technology released a report claiming that the digital economy is expected to create upto USD 1 trillion by 2025. Regulatory bodies promoted the digital economy throughout 2019.
Recently, the Reserve Bank of India (“RBI”) issued guidelines for ‘on tap’ licensing of small finance banks in the private sector. Under these guidelines, non-banking finance companies (“NBFC”), microfinance institutions, and local area banks are also permitted to convert themselves into a small finance bank. The RBI also increased the cap of aggregate exposure of a lender on NBFC – Peer to Peer Lending Platform to INR 50,00,000 subject to some conditions. Further, to promote digital retail payments, the RBI has directed all banks to not charge any fee from their saving bank account holders on the use of National Electronic Fund Transfer and Real Time Gross Settlement systems. With the same intent, the RBI has also permitted registered entities to issue a new kind of wallet for the purchase of goods and services. This semi-closed prepaid payment instrument requires less compliance as compared to the currently available prepaid payment instruments. As a precautionary step to liberalising norms, the central bank also increased the reporting requirements of all primary (urban) co-operative banks having total assets of INR 500 crore and above.
Contribution to an economy stands limited without exposing itself to the global market. From recent changes to directions relating to banking units and the notification of The International Financial Services Centers Authority Act, 2019 to regulate financial products, we understand that the RBI may be relaxing norms for setting up and operating banking units in the GIFT city of Gujarat.
Unlike the RBI, the Indian securities market regulator, Securities Exchange Board of India (“SEBI”) has taken a conservative approach to reform. Recently, the SEBI placed restrictions on management and advisory services by asset management companies to foreign portfolio investors. Further, to make institutional investors accountable, it directed all mutual funds and alternative investment funds to comply with the Stewardship Code. SEBI has also passed a circular to all investment advisors restricting them from providing advice on free trial basis without assessing the risk profile of the investor. SEBI has also notified a format for a statement of deviation submitted to stock exchanges every quarter, guidelines for filing of placement memorandum by infrastructure investment trusts, change in jurisdiction of filing of offer documents based on the size of securities proposed to be issued, increasing the procedural requirements in the securities market. A recent op-ed highlighted this shift of approach of regulatory bodies that has compelled companies to seek a second [legal] opinion after hearing from their auditors. SEBI has also established an office of informant protection for receiving and processing information disclosure forms under the SEBI (Prohibition of Insider Training) Regulations, 2015.
In year 2020, overseas joint ventures and wholly owned subsidiaries of Indian companies are expecting regulators to ease the norms relating to foreign direct investments in India leaving no room for suspecting such investments as ‘round tripping’. Under Indian corporate law, the industry’s watchdog is expected to shift the focus from ‘promoter’ to ‘controlling shareholder’. The same was also brought by the current Chairman of SEBI in his speech at OECD – Asia Corporate Governance Roundtable. In Financial Budget 2020, the Indian government may further ease up norms for doing business in India. A pre-budget meeting of the industry stakeholders with the Finance Minister was recently concluded where various suggestions were made to ease up business in India. Additionally, as a part of Budget 2020, MSMEs have expressed their demand for a new law to speed up payment from the government.
From the docket
In the Cyrus Mistry case, the National Company Law Appellate Tribunal (“NCLAT”) held that the removal of Mr. Mistry from his position as Executive Chairman of Tata Sons was not valid under applicable law. It discussed once again, the law on ‘oppression’ and ‘mismanagement’ by majority shareholders under the Companies Act, 2013 (“Act”). Relying on a series of events, including affirmative voting power of the majority shareholders over most of the decisions, change of company from ‘public’ to ‘private’ nature, and the loss suffered by the company due to decisions of the board of directors amongst others, it held that that the majority shareholders acted in ‘prejudice’ to the minority shareholders’ interest. It also clarified that there was no room for ‘legitimate expectations’ under the Indian law when it comes to analysing any action as ‘prejudicial’ or ‘oppressive’.
In G. Vasudevan v. Union of India, the Madras High Court upheld the constitutional validity of Companies (Amendment) Act, 2017 (“Amending Act”) with respect to Section 167(1)(a) of the Act, that is, provisions on the disqualification of directors. The provisions of the Act penalise a director who fails to file financial statements for a continuous period of three years, by disqualifying them to be re-appointed for five years. However, prior to the amendment in 2017, the letter of the law also didn’t allow any new director to be appointed because such company would come under the category of ‘defaulting company’. The Amending Act inserted a provision to cure this anomaly existing under the Act which was challenged on the grounds of ‘unequal treatment’ and having a ‘detrimental effect’.
In Ministry of Corporate Affairs v. Real Image LLP and others, the NCLAT diverted from the settled position of law on merger of an Indian limited liability partnership firm (“LLP”) and an Indian company under the Act. The tribunal held that since there is a provision under the LLP Act, 2008 to convert a company into an LLP and vice versa, the same should be followed by the parties before applying for approval of merger scheme. Further, it noted that the principle of casus omissus cannot be applied while interpreting the text of the law unless there is a ‘clear necessity’ and a reason for it ‘within the four corners of the statute’.
In Income Tax Officer v. M/s. Reliance Jio Infratel, the NCLAT rejected the plea of Income Tax Department and upheld the composite scheme of arrangement through which Jio Digital Fibre and Reliance Jio Infratel were proposed to be demerged. In this case, the Income Tax Department pleaded that the instant demerger involves conversion of preference shares into a loan which results in a major tax evasion. The tribunal held that it cannot reject the scheme of demerger on these grounds but that the Income Tax Department was at liberty to initiate separate proceedings if they believed that the Reliance Jio was violating any provision of Income Tax Act, 1961.
These were the updates from India’s corporate law for the month of December. We hope you enjoyed them and look forward to reading more!