Monday, April 29, 2013

One Person Company – a still-born, half-baked concept?

The Companies Bill 2012 proposes a new concept of One-person Company (OPC). The obvious objective is to overcome the hurdle of needing a second person to form a company, despite the saying that “two’s company”. This brief post is to highlight its nature, some issues and also questioning the real benefit of an OPC.

OPC, as the term implies, is a company with one and only one shareholder. The need to have two directors also is avoided and only one director is needed. However, unlike a shareholder, the number of directors can be more than one. And the single shareholder need not be the director or any of the directors. A succeeding shareholder will have to be named in case of death of the initial shareholder.

Thus, it is expected to help an individual incorporate himself/herself. The need to find a second shareholder/director for a proprietary business in corporate form is avoided.

Succession/transfer of a business in corporate form is clearly easier than if it owned in a sole proprietary form. And one can delink different businesses in separate OPCs since there is no limit on how many OPCs one single individual can form.

The OPC will have to add the tag One-person Company under its name.

Some other procedural concessions in terms of meetings, etc. are given for obvious reason that there cannot be a “meeting” of a single shareholder/director.

However, beyond a few procedural concessions, and avoidance of the need of second shareholder/director, it is not clear what substantial benefits are available. The relatively long/complicated procedure for formation, maintenance and dissolution of a Company remain without any major relief. The requirement of finding a second shareholder/director is generally not found cumbersome in India where a friend, relative or staff member can easily act as such.

Further, except a few minor procedural concessions, the provisions of accounts, audit, etc. would also apply to an OPC.

Certain businesses like that of finance may face problems if sought to be carried in a Company form. Thus, an individual engaged in business of lending or investments may need prior registration from the Reserve Bank of India, minimum net owned funds of Rs. 2 crores, etc.

Conversion of existing proprietary businesses can create complexities of tax. There is an existing provision in the Income-tax Act, 1961 (section 47(xiv)) which should help in availing relief from capital gains, even if originally it was not framed with an OPC in mind. However, other tax issues may remain. The concern of deemed dividends under Section 2(22)(e), the question of allowability of remuneration to proprietor, etc. are some other challenges an OPC may face. The other challenge will be of stamp duty on transfer of the business to the OPC.

Strangely, it is not clear how an OPC may go to the next logical step of becoming a non-OPC when it wants to introduce more shareholders. Ideally, a simple amendment of its memorandum and articles should have sufficed. However, there are no specific provisions enabling this. The question therefore is whether an OPC is doomed to remain a one shareholder company during its existence?

Conversion from a non-OPC to an OPC has also not been provided for. Thus, an existing private limited company may not be able to convert itself into an OPC.

OPCs should have been useful particularly in case of wholly owned subsidiaries of companies where the parent company would be the sole shareholder. However, there is a requirement that makes one wonder whether a company can be the sole shareholder. The definition of OPC does talk of a “person” being a shareholder. However, it is required that a succeeding shareholder be named in case of death of the initial shareholder. The concept of death is generally understood in sense of natural persons and not companies. Thus, unless one takes a view that this requirement is not a mandatory one or stretch it to include dissolution of a company, the concept of OPC may not be available for forming a WOS.

All in all, it seems that despite the initial enthusiasm that this concept received, it seems that in practice, this by itself is not likely to encourage sole proprietors to convert into a company in large numbers. 

Supreme Court on “Market Abuse”

In a judgment delivered last Friday, the Supreme Court came down heavily on “market abuse” not just on the case at hand but more generally on the practice to the extent prevalent in India.

The case, N. Narayanan v. Adjudicating Officer, SEBI, arose in the form of an appeal from the Securities Appellate Tribunal (SAT) in relation to the appellant who was the whole time director of Pyramid Saimara Theatre Limited (PSTL). The SAT had confirmed an order of the Securities and Exchange Board of India (SEBI) restraining the appellant from dealing in securities for a period of 2 years and also an order of the adjudicating officer of SEBI imposing a monetary penalty of Rs. 50 lacs  on the appellant. These orders were in connection with the violation of section 12A of the SEBI Act as well as relevant provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003. It was found that the financial results of the company as disclosed to the stock exchanges were inflated and that they did not represent the true and fair state of affairs of the company. This maintained the stock price of the company high and enabled certain shareholders to raise financing by pledging of shares.

In an unequivocal decision, the Supreme Court upheld the orders of  SEBI and the adjudicating officer and found the appellant guilty of violating the SEBI Act as well as the 2003 Regulations. The court found the existence of the required facts that support the holding that the appellant was guilty of violating the requisite provisions of the law.

While the judgment does not appear to lay down any new principles of law, it does place tremendous emphasis on the importance of efficient capital markets that require a strict disclosure regime. The judgment also seems to lament about the current state of affairs regarding regulation of the capital markets through a proper disclosure regime.

Three points emerging from the Supreme Court’s decision are noteworthy:

1.  The first is the need for efficient capital markets with a strict disclosure regime. The court noted that where shares of a company are quoted on the stock exchange, it is crucial to have proper disclosure of information for accurate pricing of the companies securities and for the efficient operation of the capital markets. It also noted the prevalence of market abuse in India:

10. … “market abuse” has now become a common practice in the India’ security market and, if not properly curbed, the same would result in defeating the very object and purpose of SEBI Act which is intended to protect the interests of investors in securities and to promote the development of securities market. …

This must also be read with the information requirements under the Companies Act, wherein the books of accounts of the company must be maintained so as to provide a true and fair view of the state of affairs of the company and also to explain significant transactions. This is also consistent with the corporate governance requirements under the listing agreement.

2. Given the court’s view of the prevalence of market abuse in India, it has called for strict measures to be applied and for more stringent enforcement by the regulator. The court’s “word of caution” or one might say a stern warning can be witnessed in the court’s own words:

43. SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading etc. or else they will be failing in their duty to promote orderly and healthy growth of the Securities market. Economic offence, people of this country should know, is a serious crime which, if not properly dealt with, as it should be, will affect not only country’s economic growth, but also slow the inflow of foreign investment by genuine investors and also casts a slur on India’s securities market. Message should go that our country will not tolerate “market abuse” and that we are governed by the “Rule of Law”. Fraud, deceit, artificiality, SEBI should ensure, have no place in the securities market of this country and ‘market security’ is our motto. People with power and money and in management of the companies, unfortunately often command more respect in our society than the subscribers and investors in their companies. Companies are thriving with investors’ contributions but they are a divided lot. SEBI has, therefore, a duty to protect investors, individual and collective, against opportunistic behavior of Directors and Insiders of the listed companies so as to safeguard market’s integrity.

3. The court has re-emphasised the principles applicable towards directors’ liability.  In this particular case, the appellant raised an argument that although he was a whole-time director of the company, he was only in charge of the human resources department, and was therefore not responsible for the other affairs of the company, including financial matters which were under the overall control of the managing director. The Supreme Court rejected this argument outright. All directors carry the responsibility to ensure that the books of accounts of the company represent a true and fair view of the financial state of the company. That responsibility cannot be passed on either to other directors or even to the auditors of the company. The level of onus laid down by the Supreme Court is as follows:

33. … a Director may be shown to be placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of business of the company even though no specific act of dishonesty is provide against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially.

34. The facts in this case clearly reveal that the Directors of the company in question had failed in their duty to exercise due care and diligence and allowed the company to fabricate the figures and making false disclosures. Facts indicate that they have overlooked the numerous red flags in the revenues, profits, receivables, deposits etc. which should not have escaped the attention of a prudent person.

This clearly suggests that directors cannot simply turn a blind eye to the goings on in the company. That apart, the directors appear to have a positive obligation to seek further information and raise further questions once a red flag becomes visible. While this high burden seems to be applicable to an executive director, as was the case on the present facts, it is unlikely that a non-executive director’s burden would be substantially lower than this especially in the presence of a red flag situation. Of course, the present case must be read in the context of executive directors only, but it certainly suggests the attitude of the courts towards duties and liabilities of directors of public listed company.

In all, while the Supreme Court’s decision is based on the facts and circumstances of the specific case and does not lay down any new principle of law, there is overwhelming evidence of the intention of the court to stringently apply securities laws such that the efficiency of the capital markets be maintained. While the Supreme Court does send a message to SEBI, a lot would depend not only on the availability of resources to enable the regulator to carry on a more enhanced role, but it would also depend on the robustness of various laws, particularly the procedural laws, that would equip it to carry on its mandate in an effective manner. One example of this is the high burden of proof that SEBI is expected to discharge in insider trading cases, which it has only been partially successful in discharging on average.    

Mandatory imprisonment under Companies Bill 2012

The Companies Bill 2012 has an innocuously titled chapter titled “Miscellaneous” which provides stringent and perhaps unprecedented punishment.

The Chapter provides for imprisonment and fine for several types of situations. A minimum imprisonment (six months/three years) is also provided.

Clause 447, for example, says that any person found guilty of fraud shall be punishable with imprisonment of at least six months but which may extend to 10 years and fine. The fine shall be at least the amount involved but may extend to 3 times such amount. If the fraud involves the public interest, the minimum imprisonment would be 3 years.

The term fraud is widely and inclusively defined. It has to be in relation to a company/body corporate, public or private, listed or unlisted. There should be an intent to deceive, to gain undue advantage from or to injure the interests of specified persons. There are no requirements of minimum amount, materiality, etc. for such act/omission, etc. to be treated as fraud. The affected person may be the Company, the shareholders, the creditors or any other person. The fraud may be committed by any person. The person need not have gained any amount and the affected person need not have lost any amount.

There are other provisions in the Bill that refer to this clause and deem certain actions to be “fraud” punishable under clause 447. For example, furnishing of false information or suppression of material information in documents filed with the Registrar in relation to registration of a Company amounts to fraud and punishable under clause 447. So is the making certain untrue/misleading information in any prospectus.

Clause 448 refers to intentional making of materially false statement or omitting material facts. These may be in documents such as report, certificate, financial statement, prospectus, or other document required by or for the purposes of the Act or rules. These too will be punishable as fraud under Clause 447.

Clause 449 states that intentional giving of false evidence while being examined on oath or in a solemn affirmation attracts minimum imprisonment of 3 years and which may extend to 7 years.

In view of specific provisions in clause 441, the offences listed above are not compoundable.

While frauds, misstatements, etc. have been of serious concern recently, one wonders whether such stringent, minimum and mandatory punishment for such a broad group of cases is justified and whether it has been adequately debated. 

Saturday, April 27, 2013

The Scope of the Jurisdiction to Grant Relief against a Penalty Clause

In Andrews v Australia and New Zealand Banking Group, the High Court of Australia has considered an important question of contract law: is the jurisdiction to grant relief against a penalty clause confined to a sanction triggered by an event that can be characterised as a breach of contract, or does it extend to a sanction triggered by other events? The Supreme Court of India had occasion to consider exactly this question about two years in BSNL v Reliance, but unfortunately did not do so. We have commented on that decision here.

Simplifying the facts for the purposes of analysis, customers of the ANZ Banking Group [“ANZ”] challenged certain payments that they were required to make for banking services. This fell into, mainly, three classes: a late payment fee [“Late Payment Fee”], payable if a customer is late in making a scheduled payment; “honour” fees payable by a customer who overdraws his account and interest on these fees [“Honour Fee”]. At first instance, Gordon J. found that the Late Payment Fee was payable as a consequence of breach of contract by the customer (in not making the scheduled payment), but that the Honour Fee was not. The question was whether this meant that no relief could be granted against the payment of the Honour Fee. In English law, this was traditionally the position, established by the speeches delivered in the House of Lords in Export Credits Guarantee Department v Universal Oil Products [1983] 1 WLR 399. The result was that a sanction triggered by an event that was not a breach of contract did not attract the penalty rules.

The High Court of Australia rejected that analysis in an instructive judgment, of which the following is a brief summary. The word “condition”, like “rescission”, has a variety of meanings in contract law. One meaning, of course, is an important or fundamental term of a contract the breach of which entitles the other party to withhold further performance and terminate the contract. Used in this sense, condition is contrasted with warranties and innominate terms. But the word “condition” is not used in this sense in the cases in which the penalty rules were established.  In those cases, there was typically a bond, which would be forfeited on the happening or non-happening of a certain event. That event was called a “condition”. It could be a promise by the other party (in which event the bond would be forfeited on breach) but it could also be an event that was not a promise by the other party. In Campbell v French, Lord Kenyon gave this example: a bond to be forfeited if the “Pope of Rome visits London tomorrow” is perfectly good, since the event is, although unlikely, not impossible. The example demonstrates that “condition”, in this sense, did not mean “promise” and that relief granted against forfeiture, naturally, could not have been confined to a breach of promise. As the High Court points out, equity granted relief provided the non-performance of the condition secured by the bond could be compensated by an award of money. If the bond secured a money condition, the court of equity intervened by ordering the defendant to pay the principal amount, interest and costs; if it secured a non-money condition, the court of equity would direct an issue of quantum damnificatus to assess the loss. In neither case was there any basis for the suggestion that equity would intervene if the bond secured a promise but would not intervene if it secured something else. The High Court points out that the emergence of assumpsit did not introduce the breach limitation, because the relief granted by the common law courts in this action mirrored the relief granted by the courts of equity but did not substitute it. In other words, the equitable relief retained its identity; the common law courts simply gave relief too.

One question that arises from the judgment of the High Court of Australia is this: if the penalty rules are not limited to a breach of contract, when do they not apply? The High Court gives a tentative answer to this, by pointing out that it would be necessary to examine whether the Honour Fee was payable as a security for the performance of an obligation or as the price of “further accommodation” by the ANZ Group. Professor Peel points out in a case note in the Law Quarterly Review ((2013) 129 LQR 152) that this distinction “seems simply to move some of the problems associated with the breach limitation to a different place”.

The Indian law on this point remains unresolved. In BSNL v Reliance, Mr Gopal Subramanium argued that clause 6.4.6 was a payment triggered by an event other than breach and that the penalty rules did not, therefore, apply. As we have discussed in our post, the Supreme Court did not decide this point. Section 74 opens with the words “when a contract is broken”, suggesting that it does not apply to an event other than breach. However, as the authors of the 2nd edition of Pollock and Mulla point out at page 328, section 74 does not exhaust the equitable jurisdiction of the court to relieve against penalty clauses. That jurisdiction was exercised with respect to some stipulations before section 74 was amended in 1899, and nothing in the amendment suggests that it was taken away. The question, therefore, remains open and one hopes the Supreme Court will answer it when the opportunity next arises.

Thursday, April 25, 2013

Good faith in Contract Law

It is widely assumed that English contract law does not recognise a general duty of good faith. Instead, the law has preferred an incremental, piecemeal approach of solving particular problems as and when they arise; rather than a general overriding notion of ‘good faith’. For instance, Bingham LJ said in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433, “In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognizes and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as 'playing fair', 'coming clean' or 'putting one's cards face upwards on the table.' It is in essence a principle of fair open dealing… English law has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness.

Examples of these piecemeal solutions are not too hard to find. In White & Carter v. McGregors [1962] AC 413, the House of Lords affirmed that it was open for a contracting party to refuse to accept a repudiatory breach and (if possible to do so without the cooperation of the other contracting party) continue with the contract, and bring an action for the agreed price after the time for performance. Lord Reid however held that there was no notion known to English law which compelled a contracting party to act reasonably while making a choice between accepting or refusing a repudiation. Leaving the door slightly open, however, Lord Reid held “"it might be said that, if a party has no interest to insist on a particular remedy, he ought not to be allowed to insist on it…” This door was pushed further open in a couple of cases (The Puerto Buitrago [1976] 1 Lloyds Rep 250; The Alaskan Trader [1984] 1 All ER 129) but more recently, the position has been summarized in The Aquafaith [2012] 2 Lloyd's Rep 61: “The arbitrator was wrong to regard the comments of Kerr J (and all the subsequent references in the authorities to the need for an extreme case of unreasonableness on the part of the owners to bring in the exception) as a "gloss" on Lord Reid's dictum in White & Carter and to treat Lloyd J's dictum as entitling him to focus on "no legitimate interest", without reference to the degree of unreasonableness. When Lord Reid's speech is read in its entirety, it is clear that the innocent party's right to elect is not trammeled by the need to act reasonably. It requires something beyond that before the courts will interfere and prevent the innocent party insisting on performance of the contract. The effect of the authorities is that an innocent party will have no legitimate interest in maintaining the contract if damages are an adequate remedy and his insistence on maintaining the contract can be described as 'wholly unreasonable', 'extremely unreasonable' or, perhaps, in my words, 'perverse'.”

Another example can be found in the line of cases exemplified in Socimer International Bank v. Standard Bank London [2008] EWCA Civ 116 – where the question is whether a party which contractually enjoys certain discretion must exercise that discretion reasonably. Socimer, and subsequent cases, note that it need not exercise the discretion reasonably: however, the exercise of discretion must not be so unreasonable as to be arbitrary. The threshold is thus rationality (somewhat analogous to the Wednesbury standard which is so familiar to public lawyers). The Court will intervene when the party has taken a perverse view. 

This structure of piece-meal solutions may well change if the approach recently adopted by Leggatt J. in Yam Seng PTE v. International Trade Corporation, [2013] EWHC 111 (QB) gains currency. Leggatt J. drew on several established lines of authority on the various ways in which absolute discretions of contracting parties are read down (including the Socimer line, referred to above). These lines indicated to the Judge that the traditional view – that English law looks at good faith with antipathy – is misplaced. The learned Judge then chose to imply a term into the contract between the parties: the term was implied in fact (and not in law: thus, the term was based on the presumed intent of the parties), but the reasoning behind the implication of the term has great significance. The learned judge started from the proposition in Attorney General of Belize v. Belize Telecom [2009] 1 WLR 1988 that implication is part of the broader process of construction of the contract as a whole. He next considered the tests for interpreting a contract: one of which is that the contract must be interpreted as a whole in light of the ‘factual matrix’: Investors Compensation Scheme [1998] 1 WLR 896. Leggatt J. then held – and this proposition appears to me to require further consideration – that this factual matrix includes “shared values” of the parties. One of these shared values was (and, indeed, it will be hard to think of a case where counsel would have instructions to argue to the contrary) was ‘honesty’. If one accepts that Belize laid down a broader test for implication than was traditionally understood, and if one accepts that 'shared values' are part of the background of fact in which a contract must be interpreted, this reasoning may well follow. Both those assumptions are debatable.

Leggatt J. however also indicated that the same result would follow even on the traditional tests of implication. He held that implication of a good faith duty is necessary for the business efficacy of most contracts, and is a term which both parties would have immediately accepted without thinking. This is problematic: while both parties may testily suppress an officious bystander asking “will you act in good faith?” with an “Oh! Of course!", it is unclear if they would do so if the officious bystander elaborated on what he meant by good faith. Was it a duty to not make false statements? Was it a duty to bring all relevant information to the light of the other party? Was it a duty to not give evasive answers if asked by the other party about one aspect? I am not sure whether all contracting parties would immediately agree with these types of obligations. In Socimer, for instance, while Rix LJ does speak of implication on the basis of ‘good faith’, he does point to the narrow content of the duty he has implied: he is careful to draw a distinction between reasonableness in an objective sense, and rationality. The English law of contract has worked fairly well – indeed, is perhaps the law most favoured by businessmen – for centuries without an overarching notion of good faith: what particular business efficacy was lacking is unclear. Ultimately, the concerns over certainty would persist, with no obvious benefit which is not found in the already established lines of authority. The implication of the notion of a duty of good faith on the presumed intention of parties would perhaps allow a back-door entry to the Court imposing its standards of conduct on parties under the guise of presumed intention. For a term to be properly implied, it is not enough to show that there was a presumed intention as to goods faith: what must be shown is a presumed intention as to the content of that good faith norm. One could well argue, therefore, that the judge ought not to have aggregated the several lines of authority to draw a general principle based on implication. Instead, it was best to leave the several lines of authority to chart their own courses.

Leggatt J. also was of the view, “In so far as English law may be less willing than some other legal systems to interpret the duty of good faith as requiring openness of the kind described by Bingham LJ in the Interfoto case as "playing fair'" "coming clean" or "putting one's cards face upwards on the table", this should be seen as a difference of opinion, which may reflect different cultural norms, about what constitutes good faith and fair dealing in some contractual contexts rather than a refusal to recognise that good faith and fair dealing are required.” This, it is respectfully suggested, only highlights the problems with implying a free-standing duty of good faith: it will be impossible to determine what the standards of good faith which were presumably intended by the parties are, and is a license for uncertainty. On the facts, the necessary term to be implied – the duty to not acquiesce in undercutting of prices by other distributors, on the facts in Yam Seng – could perhaps (though this is by no means certain: the point seems arguable both ways) have been implied without having to resort to ‘good faith’. Further, one could also argue that adequate remedies were available under the Misrepresentation Act, 1967 on the facts of the case. It is not clear what the notion of good faith added.

One area of where an idea of ‘good faith’ may be useful, according to the learned Judge, is the law governing long-term contractual relations. “While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer term relationship between the parties which they make a substantial commitment.” While this point has force, it is only an argument to suggest that certain contracts must have certain specific duties implied: it is not an argument for why ‘good faith’ must be implied. In other words, one wonders whether there is any advantage from shifting the question from “should there be a duty of good faith?” to “what is good faith?” Ultimately, it is respectfully (and very tentatively, at this stage) suggested that there is no need for a general implication of a duty of good faith being incorporated into commercial contracts under English law.

Tuesday, April 23, 2013

GNLU Centre for Corporate and Competition Law (GCCCL): First International Conference

[The following announcement is posted on behalf of the GNLU Centre for Corporate and Competition Law]

The GNLU Centre for Corporate and Competition Law (GCCCL) announces the first International Conference on, ‘Modern Corporate Laws: Understanding the Dynamism- Within and Beyond the Legal Boundaries’, on 5th and 6th of October, 2013.

With the rising competition in the corporate world, the increasing numbers of shareholders, the emerging financial market, the modern corporate world is subject to multifarious issues and concerns. There are endless questions to the issues and challenges to modern corporate laws without any answers. With the aim to grapple with the multifarious concerns and realities for a reform in the corporate governance, emerging dimension of corporate social responsibility, protection of securities market and the challenges to corporate restructuring, the two-day conference is to explore possibilities of convergence and appreciation of divergence, and at times conflicting perceptions and views on the proposed themes.


Following are the themes for the Call for Papers:

1. Corporate Governance- Competing Models and Possibility of Convergence

2. Development of Securities Market: Improving Accessibility, Spreading Prosperity & Inspiring Confidence

3. Corporate Restructuring : Driving factor for Corporate Growth- Revisiting in borders and beyond


- Submission of Abstracts                                 :  5th July, 2013
- Declaration of selection of abstracts             :  10th July, 2013
- Submission of full papers                               : 10th September, 2013
- Registration closes                                         : 25th September, 2013


Entries should have a cover page containing the following:

- Full name & Designation
- Institution/Organization/University & Professional/Educational details; and Email address & telephone number.

Entries should be submitted in .doc format with the following specifications:

- Font Type : Garamond
- Spacing : 1.5 inch spacing
- Font Size:  Title16 points , Sub-title:14 points and Text:12 points.
- Citation Method: Chicago Manual of Style (15th Edition).
- Word Limit: 3000

For the details of the Conference, plse. check the event website,

Important Instructions

- Kindly make sure that the soft copy of abstract is sent to

- Full papers to be sent both in hard and soft copies, soft copy to be sent via mail on and the hard copy to be sent at the address given bellow.

- Filled up registration form and Demand Draft (DD) to be sent at the bellow mentioned address.

GNLU Centre for Corporate & Competition Law
Gujarat National Law University
Attalika Avenue, Knowledge Corridor,
Koba, Gandhinagar – 382007, Gujarat (INDIA)

For any further queries, kindly mail us on 

Thursday, April 18, 2013

SEBI Order in the Art Fund Case

Earlier this week, SEBI passed an order against Osian’s-Connoisseurs of Art Private Limited holding that the Osian Art Fund falls within the purview of the SEBI Act and the SEBI (Collective Investment Scheme) Regulations, 1999 (the CIS Regulations). Since the art fund had raised investments without registering with SEBI, it was ordered to wind up its scheme and refund monies collected by it and also prohibited from accessing the capital markets.

The Osian Art Fund was set up as a private trust with a trustee, and managed by an investment management company. It had raised monies from investors whose monies were pooled to acquire and manage art works (that were the underlying assets). A few years ago, SEBI began investigation into the affairs of the art fund and specifically on whether it violates the SEBI Act and the CIS Regulations. Osian made several submissions and arguments, including on the interpretation of the law on the issue, following which SEBI passed its order.

SEBI was required to rule on 4 specific issues, which are dealt with separately. First, although the definition of a collective investment scheme in section 11AA(2) of the SEBI Act refers to a scheme or arrangement offered by any “company”, it cannot be read to mean that only funds set up as companies fall within the purview of the legal regime. On the other hand, the substantive provisions in section 12(1B) of the SEBI Act and Reg. 3 of the CIS Regulations provide that no “person” shall carry out a collective investment scheme without registration with SEBI. Adopting this approach, only a company structure can be used to set up a collect investment scheme, and that no other type of structure (including trust) is a permissible one.

Second, although the CIS Regulations were promulgated in the late 1990s following the Dave Committee Report to deal with fraudulent schemes involving plantation/agro companies, they are not limited to that asset class. SEBI found that the Act and the CIS Regulations apply to any asset class. What is important is the nature of the scheme and not the asset class.

Third, while SEBI seemed to accept the legal interpretation that the Act and the CIS Regulations apply only to a “public” offering of securities by a collective investment scheme, on the facts of the Osian case it was found that the units of the art fund were marketed extensively. Relying upon the forceful precedent of the Supreme Court in the Sahara case, SEBI found that the Osian fund was available to more than 50 offerees (the limit stipulated for a public offering in section 67(3) of the Companies Act, 1956). The fact that only sophisticated investors could subscribe to units which had a minimum subscription amount and minimum investment lots would not detract from the fact that this is a public offering.

Finally, SEBI found that the units of the art fund were “securities” as that expression carries a wide connotation under the SEBI Act and the Securities Contracts (Regulation) Act, 1956.

Overall, SEBI order is convincing on all counts, and is supported by principles of interpretation and jurisprudence with reference to securities regulation. The interpretation indicates the fairly wide scope of the CIS Regulations, which serves as a caution to entities that are establishing collective investment schemes (especially those that wish to stay outside the purview of registration with SEBI) and also a source of some comfort to the investors in such schemes.

Wednesday, April 17, 2013

Amendments to the Combination Regulations

[The following post is contributed by Karan S. Chandhiok, who is the Managing Associate of the Competition Law Team at Luthra & Luthra Law Offices. Karan graduated from Amity Law School followed by a BCL at Oxford. He currently serves as a Member Executive of the Competition Law Bar Association.

These views are personal.

Karan may be contacted at or]

The Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (the Combination Regulations) came into effect from 1 June 2011. These represent the substance of the merger control regime in India. in order to address some of the reservations that were expressed by the industry and antitrust practitioners alike, the Competition Commission of India (the CCI) introduced a list of exempted transactions, which according to the CCI would “ordinarily not cause an appreciable adverse effect on competition”. These transactions are listed at Schedule I to the Combination Regulations.

Laudably, the CCI has continued its efforts of consulting with stakeholders and has already amended this list twice in the past 15 months to bring it closer to practical realities. The first set of amendments wase introduced in February 2012 (the 2012 Amendments) and can be accessed here. 

The latest amendments to the Combination Regulations came into force on 4 April 2013 and the further reduce the regulatory burden of seeking the prior approval of the CCI. These amendments are summarised below:

Creeping Acquisitions

The 2012 Amendments aligned the Combination Regulations with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Code) increasing the limit of exempted shareholding from 15% to 25% so long as such shareholding was acquired as an investment or in the ordinary course of business and did not result in a change of control of the target enterprise.  The new category 1A brings the Combination Regulations and the Takeover Code further closer to each other by exempting creeping acquisitions. The new Category 1A now exempts transactions where the acquirer:

- already holds 25% or more but less than 50% of the shares or voting rights in the target enterprise; and

- acquires not more than 5% of the target enterprise in one financial year on a gross basis,

provided that, such acquisition does not lead to the acquisition of sole or joint control.

The CCI has not provided any guidance on the meaning of ‘gross acquisition’, but the Takeover Code states that in the determination of “gross acquisition” any intermittent fall in shareholding or voting rights whether owing to disposal of shares held or dilution of voting rights on account of any fresh issues of shares, shall be disregarded.

The definition of ‘control’ still remains somewhat of an elusive concept. In the SPE/Grandway/Atlas combination (C-2012/06/63), the CCI has offered some guidance on this concept:

Joint control over an enterprise implies control over the strategic commercial operations of the enterprise by two or more persons. In such a case, each of the persons in joint control would have the right to veto/block the strategic commercial decision(s) of the enterprise which could result in a dead lock situation…

Intra-group mergers and amalgamations

The requirement of seeking approval for transactions that are essentially internal restructurings has been debated by stakeholders and practitioners in various forums in India and abroad. The 2012 Amendments provided a limited relief to such transactions by exempting mergers and amalgamations involving enterprises that were wholly owned within the same group.

The new Category 9 broadens the scope of this exemption. Under the new Category 9, exemption is available for mergers or amalgamations involving enterprises, where:

·         one enterprise holds more than 50% of the shares or voting rights of the other enterprise; or

·         enterprise(s) within the same group hold more than 50% of the shares or voting rights of each enterprise,

provided that, such transactions do not lead to the transfer of joint to sole control.

This exemption is certainly a welcome step. However, it glosses over the fact that family owned companies are often held through various intermediate companies that represent the shareholding of each promoter; and collectively, these intermediate holding companies form part of the ‘promoter group’. The Competition Act, 2002 (the Act) does not recognise the concept of ‘persons acting in concert’ as under the Takeover Code. Under the Act, a single individual is an ‘enterprise’. Therefore, a restructuring amongst the promoter group companies will still require the approval of the CCI as these entities (despite forming part of the same ‘promoter group’) would not be held within the same ‘group’, as defined under the Act.      

Note that the original Category 9 exempting the acquisition of ‘current assets’ has now been moved and included in category (5) along with stock-in-trade, raw materials, stores and spares, trade receivables and other similar current assets in the ordinary course of business.

Clarifications on intra-group acquisitions

The Combination Regulations exempted acquisitions of control, shares, voting rights or assets within the same group. It is now clarified that this exemption will not be available where the target enterprise is jointly controlled by enterprises not falling within the same group.

It is hoped that in the next set of amendments, the CCI relooks at the obligation to file a notice with the CCI within the statutory period of 30 days (see section 6(2) of the Act). In a jurisdiction such as India, where a transaction cannot be consummated till it receives the prior approval of the CCI, a time limit for the filing offers limited value.  One hopes that the CCI would take a lenient view where parties have not closed a transaction, but have made a belated notice to the CCI for operational reasons or otherwise.

© Karan S. Chandhiok