A year ago, while ushering in 2008, there were strong signals that suggested challenging times were in the offing for the corporate sector. The global financial markets were reeling from the effects of the sub-prime crisis, and pundits had predicted the effect would be devastating. Those predictions, alas, turned out to be true – only the severity of the crisis was far greater than imagined at first.
As far as Wall Street is concerned, we saw the stand-alone investment banking industry being wiped out – with leading investments banks being converted into commercial banks, some being merged with larger entities and one entity (Lehman Brothers) being doomed into bankruptcy. The more fortunate companies in the manufacturing and services sectors managed to squeeze out some form of lifeline or the other from the Government – the insurance giant, AIG, and a couple of auto companies are illustrations of this outcome. The effects of the crisis were not confined to the US. It affected companies in the UK and Europe and even resulted in the collapse of the Icelandic economy. The problems were compounded by shenanigans in the financial sector – the noted ones occurred, coincidentally, in the beginning and the end of the year – the Societe Generale derivatives trading fraud in January and the Bernard Madoff scandal in December.
Although the Asian economies initially appeared immune from the crisis, they eventually became engulfed in it. Most stock indices across Asia have taken a beating, including the BSE and NSE in India. The overwhelming effects of the crisis have also percolated to the real sector in large economies such as a China and India that export goods and services to the developed nations. The available evidence leaves very little reason for proponents of the decoupling theory to rejoice. As a final blow, the terror attacks in Mumbai have adversely affected investor sentiment, and it will take some time and significant positive measures from the Government to reverse this trend.
As far as Indian corporate law and governance is concerned, there is a mixed bag. The year 2008 has witnessed significant legislative efforts to reform Indian partnership law and company law. The Limited Liability Partnership Bill has already been passed by both houses of Parliament, while the Companies Bill is currently pending consideration. These laws have the potential to significantly alter the framework of business entities in India. The Competition Commission too has issued detailed proposals for merger regulation.
On the securities regulation front, two developments are worthy of mention. First, the change of guard that occurred in SEBI this year – with Mr. C.B. Bhave taking over the helm of affairs - has brought about structural and functional changes within its organisation. SEBI’s recent efforts to infuse transparency in its operations are a path-breaking move and deserve to be emulated by other governmental authorities. Second, SEBI has adopted several measures throughout the year to prop up the sagging markets (both primary and secondary). On the primary markets front, share offering processes were streamlined – the ASBA process (applications supported by blocked account) was introduced for public offerings, the timeline for rights offering was reduced and the minimum pricing norms for qualified institutional placements (QIPs) was relaxed. On the secondary markets front, SEBI enhanced creeping acquisition limits for promoters to enable them increase their stakes in companies during depressed market conditions. In a volte face, SEBI also reversed its earlier decision on participatory notes (P-notes) by removing all restrictions on issuance of P-Notes by foreign institutional investors. It is not entirely clear if these measures have been met with success yet; they appear to be knee-jerk reactions and piecemeal in approach.
SEBI also undertook measures to strengthen the corporate governance regime in clause 49 of the listing agreement. The definition of “independent directors” was made more stringent. However, the experience with enforcement of corporate governance norms calls for pessimism. SEBI let several public sector undertakings off the hook from implementing the minimum independent director rule. The year draws to a close with the lingering aftertaste of the Satyam Computers episode that leaves one quipping about the efficacy of India’s corporate governance norms and culture.
The foreign investment regime has witnessed a few changes this year. The Government introduced Foreign Currency Convertible Bonds as a new form of investment. Further, in order to boost foreign flow of capital into India, two key changes were made: ADRs/GDRs now enjoy more flexible minimum pricing norms, and ECBs are subject to less onerous conditions in most sectors. These relaxations have not had any significant impact on investment flows yet: some may argue they are too little, too late.
Apart from the legislature and the executive, the judiciary too has been somewhat active during the year on corporate and commercial matters. The Bombay High Court’s decision in the Vodafone tax case is bound to have great implications on M&A activity in the country. Courts across the breadth of the country were busy trying cases involving banks and their clients that entered into currency derivative transactions – some clarity in the position has begun to emerge lately. Finally, both SEBI and SAT have ruled on several matters surrounding securities regulations, such as insider trading, takeover regulations and public offerings.
Overall, 2008 has been an eventful year on the corporate and financial standpoint. But, the several lows the year witnessed only leave cause for optimism in the future as we enter 2009.
On a final note, this season also marks the first anniversary of this Blog. Its first post appeared on December 26, 2007. I would like to take this opportunity to thank all the contributors for their excellent posts on various areas of corporate and business laws and for fostering healthy debate and discussion on Indian corporate legal issues in a manner widely disseminated and easily available to the interested reader. Last, but not the least, I would like to thank our readers for their wonderful support on an ongoing basis and for their comments and feedback.
Wishing all of you a New Year filled with success, happiness and prosperity.