Friday, June 25, 2010
The Court held that Section 10(b) of the U.S. Securities Exchange Act of 1934 “does not provide a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges”. Following this, the Court held that if Section 10(b) is not extra-territorial, then the concomitant anti-fraud provision in Rule 10b-5 would also not be extra-territorial. Hence, the focus is “not on the place where the deception originated but on purchases and sales of securities in the United States”.
As far as Indian companies are concerned, it circumscribes the situations in which Indian listed companies may be sued in the U.S. for securities laws violations. However, it does not affect Indian companies who have ADRs listed on the U.S. stock exchanges, as they continue to be subject to U.S. securities laws and to actions by ADR holders who have acquired them on U.S. stock exchange. To that extent, the decision does not have any impact on the lawsuits relating to Satyam that are pending before the U.S. courts.
Enron/Skilling Case: In another decision rendered yesterday in Skilling v. United States, the U.S. Supreme Court decided against Jeff Skilling (the former CEO on Enron) on his objection to the venue of trial in Houston on grounds of pretrial publicity, but ruled in his favour on the argument that he did not violate a statute on “theft of honest services”, which it interpreted narrowly to mainly include bribery and kickback schemes. The court found that the “Government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but the Government never alleged that he solicited or accepted side payments from a third party in exchange for making these representations.”
Thursday, June 24, 2010
Pertinently, he notes that while the “limited liability corporation is an invention of man” and a “device created to attract capital”, we also have “institutions and laws whereby corporations can internalise and privatise profits while costs of damages to communities and the environment are externalised and socialised”.
When a citizen does wrong, you know whose ass to kick. When a corporation causes harm, who exactly should take the rap? Moreover, unlike a person, as Nace points out, a corporation can do the Houdini — disappear and reappear in another body with a new name — and avoid being punished. Such are the questions that President Obama and the American people, and also the Indian government and Indian people, are grappling with.This is similar to the difficulties judges earlier encountered in finding corporations guilty of crime. The statement by Edwin Thurlow, 1st Baron Thurlow (1731-1806) comes to mind: “Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?”
To a large extent, this only carries historical value because the ability of companies to be punished for crime has developed over the years, and has been recognised in India even for offences involving mandatory imprisonment and fine. Supreme Court’s decision in Standard Chartered Bank v. Directorate of Enforcement is noteworthy on this count.
Returning to Arun Maira’s observations, here are some further excerpts:
Mankind has developed many powerful ‘dual use’ technologies that can do great good but, in the wrong hands, can do great harm too. … The large, limited liability corporation is also a powerful ‘dual use’ concept invented by man. …
Business needs freedom to take risks, innovate and increase wealth. Governments must protect their citizens and promote the common cause. Therefore, even as governments promote business, they must also regulate it. Business leaders resent regulation. They would rather be trusted to regulate their own behaviour. They must always remember that corporations are given a licence to operate by society, and that society can curb or even withdraw that license. …
Self regulation requires a conscience. Corporations are the engines of capitalism. Wherein lies the conscience of the corporation — an inanimate, legal construct devised by man? That is the question at the heart of corporate governance. Does it lie in the board, which society should trust to ensure that the corporation causes no harm? If so, is the board equipped with the moral precepts, intellectual ideas and norms of conduct that will enable it to discharge its responsibility to society? The responsibility of the chairman of the board is to ensure that the board is so equipped. A capable board with a conscience can ensure that the corporation’s executive management is well equipped to act responsibly too.
Tuesday, June 22, 2010
Monday, June 21, 2010
Friday, June 18, 2010
(The following post comes to us from Rohan Bagai, who has previously contributed posts on this Blog here and here)The International Chamber of Commerce (ICC) Court of Arbitration Secretary General, Mr. Jason Fry and Ms. Francesca Mazza, Counsel and Secretary to the ICC Commission on Arbitration are set to impart their knowledge and share their experience in a one-hour, interactive webinar (web-based seminar) on June 23, 2010 at 4 pm (GMT+2), which focuses on revision of the ICC Rules of Arbitration (the “Rules”).
In October 2008, a ‘Task Force on Revision of the ICC Rules of Arbitration’ (the “Task Force”) was constituted in order to ensure that the Rules continue to meet the needs of their users, reflecting best practice in the field of international arbitration.
As members of the Drafting Sub-Committee of the Task Force and the Court Secretariat, Mr. Fry and Ms. Mazza will explain the reasons for starting the Rules revision process, its procedure and the current status, and give examples of the changes being presently debated.
The webinar guarantees a live and interactive learning experience for all participants, which would include practicing lawyers, corporate counsels, arbitrators or any other professionals in the field of dispute resolution, who will be able to ask questions and get answers in real time.
- Rohan Bagai
Thursday, June 17, 2010
It is generally accepted that a defendant in an action for damages cannot exercise the right of “set-off” on the basis of a mere “claim”, which has not crystallised. For example, while the law permits a defendant to set off debts owed to him by the plaintiff against a successful claim in court, he cannot normally resist the plaintiff’s case on the basis that litigation is pending in other courts, resulting potentially in a decree worth more than the sum due to the plaintiff. The rationale for this rule is that a plaintiff who has successfully pursued an action against a defendant cannot have his claim frustrated on the mere possibility of a decree against him in the future.
There are, however, exceptions to this rule, and the right of “retention” is perhaps the most well-known exception. There is terminological confusion over exactly what the term “retention” means, and it has been used to denote two allied but very different legal concepts. Recently, the United Kingdom Supreme Court considered this issue elaborately, in Inveresk plc v. Tullis Russell,  UKSC 19. Although the issue arose as a part of Scots law, Lord Collins observed that English law is no different.
Inveresk had agreed to sell certain intellectual property to Tullis, and the commercial arrangement between the parties was captured in two contracts, which, as Lord Hope notes in his judgment, is common in these transactions. Under the first contract, Tullis agreed to pay an initial sum of £5 million, and subsequently “Additional Consideration”, depending on the volume of sales in a defined time period. Under the second contract, Inveresk agreed to continue manufacture, sale for the same period, and ensure that the value of the assets did not diminish in the course of completing the formalities of transfer. Subsequently, disputes arose between the parties as to the sum of Additional Consideration payable by Tullis, and Inveresk brought an action to recover approximately £900,000. Tullis, meanwhile, brought an action against Inveresk alleging a breach of the second contract, since Inveresk had allegedly not dealt with customers in accordance with the terms of the contract, resulting in a drop in the value of the assets Tullis was to buy. This claim was for about £5 million – substantially greater than the sum Inveresk claimed.
The matter was heard by the Supreme Court on two narrow points, of which one turned on the language of the particular contract. The second point, however, was Tullis’ plea that should Inveresk succeed in its claim of £900,000, it was entitled to “retain” that sum pending resolution of its claim for £5 million against Inveresk. This, naturally, is contrary to the general rule of law that a mere uncrystallised claim cannot be the subject of a set-off, and the Court therefore had occasion to consider the scope of the exception to this general rule, and the circumstances in which it becomes applicable.
Lord Rodger’s judgment is particularly significant. He begins by noting that the term “retention” is “most unhelpfully” applied to two different legal doctrines. The first is the well-accepted principle that a party is not required to perform his obligations under a contract unless the other party does so as well. For example, a tenant can lawfully withhold rent if he alleges that he has not received possession, as can a buyer who claims that he has received “materially defective goods”. At times, this right is also known as “retention”, and is normally allowed when a party is able to establish that the two obligations in question are “counterparts” of each other.
What is more controversial is the claim that a party is entitled to withhold or “retain” the debt, regardless of the performance of the other party of the contractual obligations giving rise to the debt, on the ground that other claims are pending against that party, and that it is therefore “just and equitable” to “postpone” or “retain” this debt. The concept is clear from the following words of Lord Rodger, extracted from paragraphs 57 and 77 of his judgment:
Firstly, a defender has a right to withhold or “retain” payment of, say, the price of goods which he says are materially defective, until the pursuer proves that he has supplied goods which are conform to the contract. But the term “retention” is also applied to the (different) situation where a defender admits that, say, the price of goods is due. In that situation he cannot have any right to withhold payment of the price. But he can submit to the court that he should not be obliged to pay the price until some unliquidated claim which he has against the pursuer (here, a claim for damages) is resolved. In effect, the defender asks the court to allow him to “retain” the price meantime so that, if his claim for damages succeeds, he can offset the liquid damages against the liquid price.
It is important to carefully distinguish between the two types of retention that Lord Rodger refers to above. Lord Rodger traced the “second” right of retention (of illiquid claims) to the Compensation Act, 1592 and cases on the scope of that statute and allied rights. As is obvious, retention, in the proper sense of the term, is not a right as much as it is a remedy in equity, to be granted by a court at its discretion. Lord Rodger was able to demonstrate, therefore, from the authorities on the subject, that a court has the power to allow a defendant to retain a “debt” pending resolution of a claim “arising out of wholly different circumstances”.
Two points are noteworthy. First, Lord Rodger was careful to note that this power of the court to allow the equitable remedy is an “exception” to the general rule that the law will not permit a defendant to postpone the payment of a liquid debt against him in order to have the opportunity to crystallize his own illiquid claim against the plaintiff and then set it off against the plaintiff’s claim. The general rule remains, and courts may resort to the exception only when, for some reason, that would be the just and equitable way to proceed in the particular circumstances”. Secondly, while there is naturally no exhaustive answer to what those particular circumstances are, the fact that the two claims arise out of the same contract or transaction is “a relevant factor”. Another possible factor is the relationship between the magnitude of the claims – if the defendant seeks to retain a debt against a substantially larger claim, he has a better prospect of succeeding.
This issue has never arisen directly in India. Two Supreme Court decisions on the possibility of setting off a mere “claim” – Union of India v. Raman Foundry, AIR 1974 SC 1265, overruled in Kamaluddin Ansari v. Union of India, AIR 1984 SC 29 – turned on a specific clause in a contract. It will be interesting to observe whether Indian courts follow the UK approach, for retention, although sparingly granted, is a powerful remedy for a defendant.Further analysis of this judgment is available on Legal Developments.
Wednesday, June 16, 2010
Monday, June 14, 2010
The Law-In-Perspective Blog uses the analogy of Ponzi schemes to explain a March 2010 circular of SEBI that prohibits mutual funds from using the unit premium reserve to pay dividends. If one would prefer to avoid the negative connotation associated with a Ponzi scheme, the post also looks at another parallel, being the restrictions under the Companies Act, 1956 on return of premium on shares of a company through payment of dividend.
2. Indianizing Corporate Governance
In a Business Standard column, Pratip Kar calls for the localization of corporate governance norms. He argues:
The conceptual underpinnings of corporate governance, in their present form, are rooted in the western culture and thought or in the western “dharma” (in the wider sense of the word); and in the rational jurisprudence of the Roman law and the western law. Hence they lend themselves to an easy adaptation by the English-speaking peoples. They are a product of European liberalism. They have evolved through the debates on the beneficiaries of a governance process between the Magna Carta and the American War of Independence. Board activism and empowerment, at the heart of which is the demand to strengthen the board, also have their origins in the English-speaking countries such as Australia, Canada, the United Kingdom and the United States. However, those countries whose economic and political traditions, and institutions and ownership structures, are different from the English-speaking countries, find these concepts distant as well as foreign; or in a sense “not invented here”; and not easy to accept.This is a path on which some of us on this Blog have tread in examining corporate governance in India. A more general analysis on transplant of corporate governance norms in India is available here, while a specific analysis on independent directors is available here.
In India, the way corporate governance came to be formally adopted by firms especially after 2000 reflects the natural dominance of the contemporary western culture and thought over Indian perceptions and readings. It has not often been realised that the principles of corporate governance have always been an integral part of Indian culture and society. This has its advantages as well as weaknesses.
Advantages arise from the fact that in an era of globalisation, when the Indian economy is seeking to integrate itself with the global economy, and when there is a concerted move towards harmonisation of global regulatory standards and accounting principles, it is only pragmatic that the corporate governance architecture should be built on globally-recognisable design, and the standards scripted in globally-understood alphabets. For this reason, long before the two words became a business reality in India, the principles of corporate governance came to be easily adopted by those companies and people behind them, who had by education or by business came in closer touch with the western world.
The weakness is that, unless the founding principles of business are rooted in the dharma and culture of a country, their easy and wider acceptability and adaptability become elusive, if not difficult. It is important for us to find our own idiom for true governance, one that is rooted in the Indian ethos, but speaks the global language.
3. A Holding Company for PSEs
A Financial Express column proposes the idea of setting up a holding company for public sector enterprises (PSEs) in India. While this idea is worth exploring further, its results will be effective only if the holding company itself is immune from the several issues such as excessive governmental interference currently plaguing PSEs.
The holding company model is not without other examples. China has gone down the path of consolidating the holdings of its state owned enterprises under the State-owned Assets Supervision and Administration Commission (or SASAC) and it would be useful to draw from results of the Chinese experience as well.
Friday, June 11, 2010
The replacement of the state taxes by the Value Added Tax in 2005 marked a significant step forward in the reform of domestic trade taxes in
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Tuesday, June 8, 2010
In relation to NRIs and FIIs the new pricing norms stipulated under the May Circular are in conflict with already existing exchange control rules which allow NRIs and FIIs to trade on the stock exchange without adhering to any special pricing norms.
The May Circular amends the pricing guidelines stipulated under A.P. (DIR Series) Circular No. 16 dated October 4, 2004 (the “October Circular”). The May Circular includes NRIs and FIIs in the list of eligible non-resident transferees while prior to this, NRIs and FIIs were not eligible as transferees under the October Circular. However, as per paragraph 4 of the May Circular, it only amends paragraphs 2.2 and 2.3 of the Annex to the October Circular (dealing with pricing) and all other instructions of the October Circular remain unchanged.
Paragraph 2.1 of the October Circular (which has not been amended by the May Circular) states that the pricing guidelines stipulated therein are applicable to transfers from residents to non-residents or vice versa, by way of sale under “private arrangement”. The crucial term is “private arrangement” which according to common understanding is a transaction where the buyer and seller know each other’s identities. Such a transaction may also occur on the stock exchange e.g. a block deal.
The exchange control rules which allow NRIs and FIIs to sell on the stock exchange without any price restriction are those stipulated under Schedule 3 and Schedule 2 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (“FEMA 20”) respectively, i.e. the portfolio investment route. In such transactions, the buyer and seller do not know the identity of each other and the sale and purchase occurs on the normal segment of the stock exchange. Therefore, there does not appear to be any conflict as argued by Mr. Sundaresan.
The only effect of the May Circular is that transfer by a resident to an NRI or an FII under Regulation 10A (b) of FEMA 20 can take place under the automatic route if the pricing guidelines are adhered to. Under the October Circular, NRIs and FIIs were not eligible transferees and thus, transfer by a resident to NRIs or FIIs by way of private arrangement would have required approval under Regulation 10A (b) of FEMA 20.
One of the consequences of applying the SEBI guidelines applicable in case of preferential allotment to transfer of shares of listed companies from residents to non-residents or vice versa would be that in case of companies whose equity shares have been listed for less than six months, the parties could potentially violate the foreign exchange law by either receiving less than the floor price or paying more than the ceiling price.
It seems that the reference in this argument is to Regulation 76(3) of the Securities Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”) which requires recomputation of issue price of shares allotted on preferential basis in similar circumstances and payment of differential by the allottee to the issuer company.
However, such a consequence does not flow from the text of the May Circular. The May Circular does not incorporate all the provisions of Regulation 76 by reference. It only adopts the SEBI pricing formula as a standard for determining the sale price while taking the relevant date to be the date of purchase or sale of shares. Mr. Sundaresan’s view appears to be a remote possibility as the text of the May Circular does not warrant the conclusion that the specific principle of recomputation specified in Regulation 76(3) was intended to be adopted in the May Circular.
SEBI has not envisaged a preferential allotment being made within two weeks of listing of a company. Thus, the price formula would not work in such cases and as a consequence of this no cross-border transfer of such shares may legitimately take place during such period.
Chapter VII of the ICDR Regulations (which deals with preferential allotment) does not prohibit a preferential allotment within two weeks of listing of a company. Assuming that the period of listing of the company is less than two weeks from the relevant date, Regulation 76(2) provides that where equity shares have been listed for a period less than six months as on the relevant date, then the floor price for allotment has to be higher of the following:
(a) price at which equity shares were issued by the issuer in its initial public offer or value per shares arrived in a scheme of arrangement pursuant to which shares were listed, as the case may be, or
(b) average of weekly high and low of the closing prices of the related equity shares quoted on the recognised stock exchange during the period the shares have been listed preceding the relevant date.
There is no provision in the ICDR Regulations which prohibits a preferential allotment being made within two weeks of listing of a company and appropriate pricing formula has been prescribed.
Monday, June 7, 2010
Towards that end, the Code Committee of the Takeover Panel has issued a Consultation Paper to review certain aspects of the regulation of takeover bids. The paper includes a detailed discussion of matters such as acceptance condition thresholds, the “disenfranchisement” of shares acquired during an offer period, disclosure of securities holdings, matters relating to advice on takeover offers, inducement fees, and similar matters. While the discussion in the paper may not directly resonate with many of the developments on the takeover front in India, it nevertheless provides conceptual clarity on a number of issues, although it does not attempt to provide any solutions. Overall, it is an interesting read.
Friday, June 4, 2010
- Rohan Bagai