Thursday, October 8, 2015

International Criminal Court Moot: India National Rounds 2016

[The following announcement is posted on behalf of the Moot Court Committee, National Law University Delhi]

National Law University Delhi (NLU Delhi) has been officially selected by ICC Hague and Leiden University for organizing the 2016 India Qualifying National Rounds of the International Criminal Court Moot Court Competition. The National Rounds are tentatively scheduled to take place in early March next year. The Competition is a realistic simulation of proceedings at the International Criminal Court. The moot addresses fundamental issues of substantive and procedural international criminal law.

The registrations for the international rounds are open till 22 October, and more details can be accessed here: The National Rounds organizers would subsequently devise a separate registration procedure after teams have registered for the International Rounds.

NLU Delhi is extremely glad to partner with the Organizing Committee of the ICC Moot Court Competition and the Grotius Centre for International Legal Studies at Leiden University to organize the National Rounds. The ICC Moot encourages students to study the working of the International Criminal Court, which becomes extremely pertinent in the current global context.

We look forward to welcoming you in New Delhi next year for the National Rounds, and we hope you keep India’s flag flying at Den Haag.

The rules for the International Rounds can be accessed at Please contact us at for any queries or clarifications.

Friday, October 2, 2015

The Differential Dividend Story

[The following guest post is contributed by Siddharth Raja, Founding Partner of Samvad Partners. Views are personal.]

A previous post on this Blog raises some interesting questions – although this author believes that analysis is both incomplete and, indeed, not purely academic. While the above blog post only addressed one aspect of the issue, the larger question is this: whether a dividend can be paid only to some shareholders and not to all; and, what role does a contractual provision enabling a “waiver” play in relation to the issue of a differential dividend? This post seeks to analyse these matters.

Financial investors rely heavily on “liquidation preference” clauses.  Such clauses constitute a contractual measure to order the priority upon which a portfolio company is expected to distribute moneys to its shareholders different from a typical proportionate distribution – upon the occurrence of a “liquidity” or distribution event that has resulted in the company in question receiving cash proceeds, typically, as a result of profits it has made upon a sale of its assets (or, some such valuable rights).  Within such a construct, the investors place themselves – contractually – ahead (or, in most cases, first) in the order of priority in respect of any such distribution from the company. This enables them the right to receive before any others, especially the equity shareholders, the proceeds of any distribution of moneys that the company might make. 

One of the methods companies utilize to effect such a distribution is the dividend route.  However, the initial legal presumption inherent in dividend distribution is that members of the same class of shares are entitled to proportionately equal dividends, i.e., on a pari passu basis amongst themselves (in the absence of an agreement to the contrary amongst, and binding upon, the members of that class).  It is for this reason – priority in distribution – amongst others, that investors in India choose to hold preference shares as opposed to equity shares. 

In other words, the holder of a preference share is able to both contractually, as well as legally, avail himself of a superior and enforceable right to receive, ahead of any payment to any other class of shareholders, moneys a company may resolve to distribute.  The characterization of such a right as one of a preference share and its holder, in contrast to that of an ordinary equity share leaves no room for doubt or different analysis.

The issue, however, becomes more acute within the same class of preference shareholders – that we will examine from the following paragraph onwards and which forms the crux of this post. 

Obviously, if there are several classes of preference shares themselves, then it is conceivable that one class of preference shares may have superior rights to another class of preference shares. That way of ordering does not militate against the principle of equality of shareholders holding the same type or class of shares. In fact, as noted in a leading commentary, where shares are expressly divided into separate classes (thereby necessarily contradicting the presumed equality between shares), it is a question of construction in each case as to what the rights of each such class are.[1]

Viewed thus, while analyzing the various legally available avenues open to a company to distribute returns to its preference shareholders, two issues arise for consideration, depending on which method is adopted:


1. Can the terms of issue (or a company’s articles of association) prescribe that, within the same class of preference shares, one preference shareholder (or a separate group therein of such preference shareholders) will have a differential right of dividend, such that it, in effect, gets a higher liquidation or distribution preference?


2. Can a preference shareholder(s) waive – and, in some cases, waive permanently – its right to a preferential dividend in favour of a particular preference shareholder who is to get a higher liquidation or distribution preference, again of a member within the same class.    

These are not purely academic issues. In the case of a company which has raised several rounds of financial investment (ecommerce or marketplace companies are good examples), it is not uncommon to ask: can one investor give (by waiving his dividend rights) the benefit of a differential treatment to another investor who is contractually to secure a higher “liquidation preference”?   And whether this avenue of distributing returns to just an institutional investor holding preference shares is legally tenable as against other shareholders, including equity shareholders? 

I will deal with the first issue.  Prima facie all shares rank equally, unless the terms of its issue (or the company’s charter documents stipulating the rights of each share class) provides for a priority of one or some shares over others in the same class.  Section 106 of the Companies Act, 1956,[2] enables a minimum 3/4ths majority of the holders of a particular class of shares (which majority can also be obtained via a special resolution passed at a class holders meeting) to consent to a variation in “the rights attached to the shares of [such] class”, provided the terms of issue does not prohibit such a variation; or the company’s memorandum or articles of association has an express provision enabling such variation – the yet-to-be-notified Section 48 of the Companies Act, 2013 is in pari materia with this provision. 

Although the law typically encounters differential rights between different classes of shares as a matter of a class right (i.e., one class’s rights are superior than another class, say, for instance, as regards return of capital), it is not uncommon to find and, indeed, nothing which legally prevents – I argue – such differential rights even within the same class, but as between different holders of such shares as a matter of a shareholder’s right qua the particular shares of that class they hold. 

Implicit in Section 106 is the right of a class of shares, through a prescribed majority, to provide for variations in the share rights of its class, which must mean, therefore, that some such shareholders could have a superior right (say, a further preferential right to dividend), while other ‘non-entitled’ shareholders do not possess such rights – since the variation contemplated is as regards the rights attached to a class of shares, such variation could conceivably be more favourable to one or a group of shareholders therein and not to the other shareholders of the same class, if the requisite consent in accordance with law has been obtained. This position is underscored by the fact that the consent mechanism in Section 106 of the 1956 Companies Act (and, by extension, Section 48 of the 2013 Companies Act) is specifically predicated on what is provided for as regards differential rights, in the terms of issue of such shares or in the charter documents.  In other words, such terms of issue or the charter documents could, at the very first instance, validly provide for a differential rights basis even between or amongst the holders of the same class of shares – and, hence, a subsequent variation to the same or different effect is also permissible.  To the extent a shareholders’ agreement exists among and binding upon the members of that class, the differential rights ought best to be then incorporated into the terms of issue, or in the charter documents, so as to keep expressly in line with these statutory provisions relating to variation of class or shareholder rights.  In effect, I am arguing that a variation of a class right extends even to a variation in a shareholder’s right within that class. That would seem obvious under Section 106, but stating it in these terms, also recapitulative.

The yet-to-be-notified Section 48 of the 2013 Companies Act, in fact, goes one step further – the proviso to sub-section (1) stipulates that if the variation by one class of shareholders of their rights affects the rights of any other class of shareholders, a similar consent must be obtained from such other class – meaning thereby, within the same class, differential rights as between shareholders are contemplated in the mechanism under the statute, if that provision is adhered to either in its original terms or in its charter, or via a modification in line with the proper and stipulated majorities.  Any transferee of such ‘entitled’ shareholders’ shares will succeed to such rights on the principle of assignment of a contractually agreed to provision that is also in compliance with the ‘variation’ principle in Sections 106 / 48, as the case may be.

The second issue on ‘waiver’ raises questions that do not fit well with the above analysis. It is one thing to mention ‘waiver’ effectively as a right of a person (namely, the shareholder concerned), and then proceed to discuss how that is to be legislated in various documents and analyze its consequences vis-à-vis the company concerned along with the company’s rights – that is what the blog post above-mentioned does.  But, that begs the question of a dividend right (or a crystallized entitlement once declared) being a share or a class right, especially in the context of the nature of the underlying share, whether equity or preference.  In the latter case, dividend is one of the distinguishing characteristics of the type or class of share itself.  If so, it would sit better – I argue – with the analysis of the issues under # 1 above of a share or class right, that the differential basis in the treatment of the receipt of the dividend as envisaged through such a ‘waiver’ of any dividend entitlement, be actually captured through the terms of issue itself or in the charter documents, or through a variation in due form and proper majority according to the law specifically so providing for such variations.

Undoubtedly, any such ‘waiver’ contractually agreed to ought to be binding as a matter of mutual agreement; and, so, if the effect of receiving a differential dividend is still achieved whether through the ‘variation’ or original terms route under # 1 above, or through the ‘waiver’ mechanism, the legal consequence is the same as to its intended effect.  So, the issue is moot and are we not splitting hairs? 

Except that the concept of ‘dividend’ itself under Indian law seems to militate against using the ‘waiver’ route.  The point is driven home if we were to consider this question: what happens if between interim and final dividend (where the holder has waived its dividend rights), the share is transferred and the shareholder who waived its right to a dividend is not the same shareholder now holding the share which carries with it an inherent right to dividend once declared?  Only if the transferee has accepted the transfer of shares subject to the ‘waiver’ of dividend, will such ‘waiver’ bind him – else not, on the basis of dividend being a share right; a position underscored in Section 123 of the 2013 Companies Act (Section 205 in the 1956 Companies Act) as it relates to the declaration and payment of dividends.  In other words, in order to have the ‘waiver’ operate subsequently especially so as to confer a differential right in favour of one holder or some holders, as against others, it would be prudent to incorporate such a differential basis into the terms of issuance or charter document itself via a variation’ properly done, rather than rely on a ‘waiver’ that may conceivably not bind all subsequent holders since a waiver is a shareholder right or benefit and not a share or class right. 

The question is however moot whether a skillfully drafted ‘waiver’ binding a subsequent transferee can be displaced by such a subsequent holder on the basis he did not take the share subject to a right which he knew not, or ought not to be fixed with the knowledge of – or if the ‘waiver’ is intended to operate only as a one-off. 

I would only end by saying that if certainty in the law is the safest house for the corporate lawyer as regards the rights and benefits of his client, then a differential dividend is best incorporated in the terms of issue or the charter document itself, rather than through the use of ‘waivers’.

- Siddharth Raja

[1] Paul L. Davies, et al, Gower and Davies’ Principles of Modern Company Law, 8th Edn., London: Sweet & Maxwell, 2008, pg. 823.
[2] This provision of the 1956 Companies Act is still in force as the corresponding provision, Section 48 of the Companies Act, 2013, is yet to be notified as the National Company Law Tribunal is yet to be established.

Thursday, October 1, 2015

RBI Introduces Rupee-Denominated Bonds Regime

[The following guest post is contributed by Vinod Kothari of Vinod Kothari & Co.]

Continuing with some other recent moves to liberalise the options of raising debt from external sector, the Reserve Bank of India (“RBI”) on 29 September, 2015 announced new guidelines (the “Guidelines”) for issuance of rupee-denominated bonds (“RDBs”) overseas.

The Guidelines are much more liberalised compared to the draft version issued earlier this year.  The earlier version had end-use restrictions pertaining to external commercial borrowings (“ECBs”). The final version has replaced the end-use restrictions with a narrow negative list, thereby enabling companies to issue RDBs virtually for any purpose, including for working capital.

Also, as compared to the proposed framework for ECBs released some days earlier, the maturity of the RDBs under the Guidelines is only 5 years.

This author is of the view that the RDB option will be used by Indian companies extensively, and will be put to several imaginative uses, the full picture of which will emerge only over a period of time. We take below a quick look at some of the significant features of the RDB framework.

Several options for companies

Indian companies may issue bonds to overseas investors with absolutely no restrictions if the investors register in India as foreign portfolio investors (“FPIs”) and invest domestically in listed bonds. There is a concessional rate of withholding tax for this purpose.[1] These bonds are bonds issued in India – hence, there are no restrictions on the end-use. Leaving aside some exceptions, these bonds have to be listed bonds, in order to make them eligible for subscription by FPIs.

The RDBs, on the other hand, are subscribed to by overseas investors directly. The end-use restrictions, discussed below, are minimal. There is no need for any registration as an investor in India. Withholding taxes will be applicable based on the domicile of the country from where the money comes, and the treaty that India has with that country.

Indian companies also have the option of issuing foreign currency convertible bonds (“FCCBs”). FCCBs are hybrid instruments as they carry an equity conversion option. In addition, they are subject to ECB restrictions too.

RDBs are rupee-denominated, and are issued to overseas investors. They may be secured or unsecured, or listed or unlisted, rated or unrated. Hence, this seems to provide to Indian companies are a very different option as compared to the existing options.

Who can issue?

The Guidelines leave it completely open for any Indian company to issue RDBs. This includes non-banking finance companies (“NBFCs”), housing finance companies, or other Indian companies. Therefore, NBFCs, which have hitherto been denied access to ECBs may also make use of RDBs.

The facility is otherwise open only to companies –therefore, real estate investment trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”) which are organised as trusts, would not have otherwise been eligible to issue RDBs. However, the Guidelines explicitly allow REITs and InvITs to make use of RDB facility for raising leverage.

Can special purpose vehicles issue the bonds? Prima facie, we see no restraint on the issuance of the bonds by SPVs as well.

The ECB option is typically not allowed to entities in the services sector, other than some specified services. Will the RDB option be available to service sector entities?  To this, the answer seems clearly, yes, as the RBI has not stated that only entities currently entitled to raise ECBs will be eligible to issue the RDBs. Note that the original wording of the draft guidelines was: “Indian corporates eligible to raise ECB are permitted to issue Rupee linked bonds overseas. The corporates which, at present, are permitted to access ECB under the approval route will require prior permission of the Reserve Bank to issue such bonds and those coming under the automatic route can do so without prior permission of the Reserve Bank.”. In the final Guidelines, this has been replaced by the following: “Any corporate or body corporate is eligible to issue Rupee denominated bonds overseas.” Therefore, it is clear that there is no restraint on who may issue RDBs.

End-use restrictions

One of the biggest drawbacks in the draft Guidelines was that it was proposing to put end-use restrictions.[2] In the final Guidelines, there is only a minimal negative list. The negative list consists of the following:

- Real estate activities other than for development of integrated township / affordable housing projects: Note that the expression “real estate business” is defined in RBI master circulars and it means buying, selling or dealing in real estate.

- Investing in capital market and using the proceeds for equity investment domestically: That is to say, the borrowings cannot be used for making domestic downstream investments. There must not be a direct nexus between raising of the RDBs and investment in equities by the issuer entity. The restriction cannot be taken to mean that the issuer must not be holding any equity investments at all. Can the issuer be an NBFC? We see no problem in that. In case of investment companies, including core investment companies, the RDB option does not seem permissible, but for asset finance companies, loan companies (see below as well), etc., there does not seem to be any bar.

- Activities prohibited as per the foreign direct investment (“FDI”) guidelines: Prohibited activities as per FDI include real estate business, tobacco, or other strategic activities. Note that NBFC activity is not a prohibited activity – it only has minimum capitalisation requirements.

- On-lending to other entities for any of the above objectives: Once again, the bar is not for on-lending per se, but for on-lending for one of the restricted activities above. That is to say, it is not that a loan company or asset finance companies cannot make use of the RDB option – if the borrower is not engaged in one of the activities listed in the negative list.

- Purchase of land.

Maturity and cost

The Guidelines require a minimum of 5 years’ maturity. Note that generally, in ECB guidelines, the requirement is of “average maturity”. The RBI seems to have gone by the presumption that RDBs will have a bullet maturity – hence, the guidelines do not mention average maturity. However, if the bonds are not bullet bonds, that is, they are amortising bonds, it may be logical to read the maturity requirement as referring to average maturity rather than total maturity.

There is no cost restriction at all – the guidelines simply say that the cost should be commensurate with cost of domestic borrowing. As domestic borrowing cost will admittedly be different for different entities, it seems that there will no control exercised by the RBI on how much coupon the issuer seeks to pay on the RDBs.

The investors in the RDBs may or may not hedge their rupee risk. Therefore, the spreads on the bonds will include a (a) credit risk premium; and (b) a currency risk premium. Since at least the first risk is entity specific, and the second risk is a function of what view someone takes on the potential movements in exchange rate, issuers will be free to determine the spreads with the investors.


In our view, the RDB option ushers a complete new era for debt-raising by Indian companies, and will integrate financial markets in India further with the rest of the world. We can certainly envisage several innovative applications of the RDB option by companies going forward.

- Vinod Kothari

[1] Sec 194LD provides a concessional rate for payments up to 1 July 2017.
[2] The was one of the key points discussed in the Bond Market Summit organised earlier this year: see Panelists in the Summit strongly recommended that end-use restrictions should be removed. Representatives of RBI were also there in the Summit.

Sunday, September 27, 2015

RBI Circular on Payment Gateways

[The following guest post is contributed by Jitendra Soni, who is an associate at AZB & Partners in Noida. Views are personal]

The Reserve Bank of India ("RBI") has recently issued a fresh circular in an attempt to facilitate cross-border e-commerce transactions, which can be accessed here (“Circular”). Prior to this Circular, the authorized banks were permitted to offer the facility to repatriate only export related remittances by entering into standing arrangements with Online Payment Gateway Service Providers (“OPGSPs”) in respect of such export of goods and services. This Circular takes a step ahead by permitting the authorized banks to offer a similar facility for imports transactions. Some of the key guidelines as laid down in this Circular are highlighted below for ease of reference:


AD Category-I banks should report the details of each of their arrangements with OPGSPs, as and when entered into, to the RBI and should take all steps as laid down in the Circular for operationalizing such arrangement, namely, carrying out due diligence of the OPGSPs, maintenance of separate export and import collection accounts in India for each OPGSP, etc.

Foreign entities which are desirous of operating as OPGSP are required to open a liaison office in India with the prior approval of the RBI. The Circular also prescribe the duties of such OPGSPs for operationalizing such arrangement, namely, ensuring compliance with Information Technology Act, 2000 and all other laws in India, placing mechanism for resolution of disputes and redressal of complaints, etc.

Indian entities functioning as intermediaries for electronic payment transactions, which are desirous of undertaking cross border transactions, are required to maintain separate accounts for domestic and cross border transactions.

Import Transactions

Only the import of goods and software (as permitted under the prevalent Foreign Trade Policy) whose value does not exceed USD 2,000 are eligible to avail this facility.

Immediately upon receipt of funds from the importer and in no event, later than two (2) days from the date of credit to the collection account, the sale / import proceeds in the import collection account is required to be remitted to the respective overseas exporter’s bank account.

The permitted debits and credits in and from the OPGSP import collection account are as follows:
Permitted Debits
Permitted Credits
Collection from Indian importers for online purchases from overseas exporters electronically (through credit/debit card, etc.)
Payment to overseas exporters in permitted foreign currency.
Charge back from the overseas exporters
Payment to Indian importers for returns and refunds.

Payment of commission at rates/frequencies as defined under the contract to the current account of OPSGP.

Bank charges
Export Transactions

The framework governing the export payment transactions remains largely as was prescribed in the earlier circulars issued by the RBI, namely, Circular No. 109 dated June 11, 2013 (accessible here) and Circular No. 17 dated November 16, 2010 (accessible here).

Only the exports of goods and services (as permitted under the prevalent Foreign Trade Policy) whose value does not exceed USD 10,000 are eligible to avail this facility.

The permitted debits and credits from the OPGSP export collection account are as follows:
Permitted Debits
Permitted Credits
Payment to respective Indian exporters’ accounts.
Repatriation from the NOSTRO collection account, electronically.
Payment of commission at rates/frequencies as defined under the contract to the current account of OPSGP.

Charge back to the overseas importer where the Indian exporter has failed to discharge his obligations under the sale contract.

Implications of this Circular

One of the concerns which remained unaddressed prior to this Circular was that companies operating in the ecommerce space were not specifically permitted by the RBI to remit sales proceeds directly to the bank account of the overseas merchant for import of goods made by such merchants. This Circular perhaps marks a way forward in rationalizing the regulatory framework pertaining to processing and remittance of import related payments to the overseas merchants.

On a practical note and going forward, in the context of advising online marketplaces in India, which have overseas merchants listed on their websites, this Circular will form the basis of advice that such marketplaces can appoint OPGSPs to facilitate the import related payment to the overseas bank account of such merchants. 

- Jitendra Soni

Saturday, September 26, 2015

SEBI Denied Locus Over Scheme of Arrangement

It is a well-known fact that schemes of arrangement are a popular method to implement mergers and corporate restructuring transactions in India. While they involves an elaborate and cumbersome procedure and the oversight of the court, parties enjoy tremendous flexibility in structuring their transactions. More importantly, such a scheme is binding on the dissenting minority. When this involves listed companies, it is obvious that the Securities and Exchange Board of India (SEBI) as well as the stock exchanges would take on an important role in determining the outcome of the scheme, and particularly in ensuring that shareholder interest is not adversely affected. However, the role of SEBI and the stock exchanges in such schemes has been tenuous. Courts have kept them away from the purview of schemes of arrangement that are essentially driven through the courts under the Companies Act. While SEBI has sought to encroach upon the scheme territory through amendments to the listing agreement introduced in 2003 and through two circulars issued in 2013, the position remains unclear. Its attempt to establish jurisdiction over a scheme of arrangement more recently resulted in a lack of success before the Bombay High Court this month.

Before dealing with the recent ruling, a discussion of the previous position would be in order. The question of SEBI’s jurisdiction over a scheme of arrangement came up for the first time in Securities and Exchange Board of India v. Sterlite Industries Ltd., (MANU/MH/0339/2002). When SEBI appealed against a scheme of arrangement and reduction of capital, a division bench of the Bombay High Court refused to recognise any power of SEBI in representing itself before the court (a power that it sought to undertake with a view to safeguarding the interest of the investors).

Deprived of any role in such schemes, SEBI followed a somewhat unusual method to exert itself by imposing a role for the stock exchanges in a scheme. It amended the listing agreement in May 2003, by which companies have been required to file any scheme of arrangement with the stock exchanges at least one month before filing it with any court or tribunal for approval.[1] This is to ensure that stock exchanges have the opportunity to examine whether the scheme violates any provisions of the securities laws or stock exchange requirements. This power has indeed been exercised by the stock exchanges. For example, in Re Elpro International Ltd. ([2009] 149 Comp. Cas. 646), although the Bombay Stock Exchange (BSE) did not approve a scheme of reduction of capital when the parties filed with it, the Bombay High Court sanctioned the scheme but with liberty to the stock exchanges to pursue their rights under the listing agreement. Given BSE’s refusal to approve the scheme, the company decided not to pursue the arrangement. In that sense, the amendment to the listing agreement giving power to the stock exchanges has had an indirect deterrent effect.

A decade after the introduction of clause 24(f) to the listing agreement, SEBI issued two circulars (here and here) in 2013 not only strengthening the powers of the stock exchanges in evaluating schemes of arrangement, but also in giving SEBI itself the opportunity to review schemes. The downside of these additional powers (and that of clause 24(f) of the listing agreement is that they only enable SEBI and the stock exchanges to provide comments on the scheme. If they decide not to approve the scheme, the consequences thereof are unclear. If, for instance, a company decides to proceed nevertheless and seek the approval of the court, at most SEBI and the stock exchanges may make their representations before the court. They appear to have no veto powers over the scheme.

It is in this regulatory backdrop that the Bombay High Court in Securities and Exchange Board of India v. Ikisan Limited was required to consider SEBI’s locus in seeking a review of a scheme of arrangement that was already sanctioned by the court. This judgment by Justice S.J. Kathawalla issued on September 23, 2015 in Company Application No. 124 of 2013 in Company Scheme Petition No. 234 of 2011 is also accessible through the Bombay High Court website ( .


The litigation relates to two related schemes of arrangement filed by a group of companies. The first scheme, implemented in 2010, involved an amalgamation of one company into another. The second, implemented in 2011, and involving the previously amalgamated company and other companies related to a complex restructuring. The details of the schemes are not only somewhat complicated, but they are unnecessary for the present discussion.

The record indicated that when the second scheme was pending before the Bombay High Court, SEBI received a complaint from a shareholder regarding some deficiencies in the nature of the scheme. SEBI forwarded the complaint to BSE, but no action was taken. It is also the case that the BSE did not raise any objections when the scheme was filed with it pursuant to clause 24(f) of the listing agreement. In the meanwhile, the Bombay High Court provided its sanction to the scheme, which was duly implemented. It was only subsequently that SEBI approached the Bombay High Court for a review of the scheme on account of various deficiencies, and on the ground that the scheme therefore did not comply with the relevant legal requirements for sanction. Although the judgment of the court refers to the various details of the scheme, this post is limited to the discussion pertaining to SEBI locus standi in seeking a review of a scheme under sections 391 to 394 of the Companies Act, 1956.

For the major part, the Bombay High Court relied on its previous division bench judgment in Sterlite Industries (discussed above). As decided in that case, SEBI did not have the locus standi to challenge a scheme under the Companies Act. Although the Sterlite Industries decision went on appeal to the Supreme Court, it refused to interfere in the matter and left the substantive issues open. Accordingly, in this case the court found no reason to doubt the binding nature of Sterlite Industries. Although SEBI sought to exercise its wide scope of powers that were recognised by the Supreme Court in Sahara India Real Estate Corporation Ltd. v. SEBI ((2013) 1 SCC 1), it was not found to have overruled the decision in Sterlite Industries.

The court also found that there was substantial delay in SEBI’s action in bringing the application for review. Although the scheme was sanctioned in 2011 and further complaints from shareholders followed soon thereafter, SEBI acted only in 2013. In any event, given the grave nature of the allegations brought by SEBI, the court decided to delve into the merits of the case. But, here too, the court did not find reason to overturn its earlier order sanctioning the scheme. Hence, SEBI’s application was dismissed.


This effort represents another instance in SEBI’s continued efforts to seek meaningful intervention in schemes of arrangement, but without success. It continues to bear the adverse consequences of the ruling in Sterlite Industries. Unless a different outcome ensues from the Supreme Court, significant change is unlikely. The unintended consequences of this approach is that it provides parties with the option of embarking upon a scheme of arrangement in order to sidestep SEBI’s oversight, potentially leading to a regulatory arbitrage. As I have previously mentioned, schemes of arrangement do provide sufficient flexibilities to parties to undertake various types of restructuring transactions that may not necessarily be in the interests of the minority shareholders. This may deprive such shareholders of regulatory supervision.

At the same time, it is not all gloom and doom for the regulator and the minority shareholders. The present case arose in 2011, i.e. prior to SEBI’s issuance of circulars in 2013 granting it (and the stock exchanges) greater oversight over schemes of arrangements. Cases subsequent to the issue of the circulars would be subject to a more stringent regime, although this remains untested.

More importantly, this case as well as Sterlite Industries hinge on the timing of SEBI’s intervention. In both those cases, SEBI stirred into action after the court had already sanctioned the scheme. It either exercised the powers of appeal or review. Conversely, if SEBI had approached the court during the hearing stage (and prior to the sanction of the scheme), the outcome may have been different. It may not be possible in such a situation for the court to refuse to hear SEBI’s objections to the scheme.

Going forward, the situation is clearer. Under the Companies Act, 2013, the notice of the scheme is required to be sent by the company to various authorities, including SEBI (section 230(5)), who are entitled to make representations before the court. Hence, SEBI’s right of audience before the court is explicit. Of course, this provision is yet to come into force, due to which SEBI will be compelled to navigate through the current system in the near future. The bottom-line from SEBI’s perspective appears to be: raise objections to the scheme before the court sanctions it, or never.

[1] Listing Agreement, clause 24(f).