Wednesday, April 27, 2016

Due Diligence in Corporate Transactions and Insider Trading Laws

In corporate transactions involving shares of listed companies, the ability to conduct a detailed due diligence is constrained by laws that regulate insider trading. In a paper titled “Due Diligence in Share Acquisitions: Navigating the Insider Trading Regime”, I seek to examine this issue in detail. The abstract of the paper is as follows:

The goal of this paper is to unpack the underlying friction between the need to facilitate due diligence in share acquisition transactions that could place inside information in the acquirer’s hands, and at the same time to ensure that such information is not misused by the acquirer to the detriment of the other shareholders, a matter that insider trading regime regards as sacrosanct. In analysing and seeking to resolve this tension, this paper draws upon examples from three jurisdictions, namely the United Kingdom (UK), Singapore and India. The core argument of this paper is that from a theoretical perspective the due diligence objective of acquirers can be reconciled with the goals of the insider trading regime in order to preserve the interests of the target shareholder as long as certain restrictions are placed on the conduct of the acquirer.

A more general background note on insider trading regulation in India is available here, as part of the NSE CECG Quarterly Briefing series.

SEBI’s Inconsistent Orders on Similar Securities Law Violations

[The following guest post is contributed by Supreme Waskar, who is a corporate lawyer]

By way of its order dated April 20, 2016 in the matter of M/s. Krishna Enterprises & M/s. Rajesh Services Centre (“Appellants”), the Securities Appellate Tribunal (SAT) observed that the Securities and Exchange Board of India (SEBI) is inconsistent in levying penalties for similar violations.

The Appellants were held guilty of aiding and abetting Edserv Softsystems Ltd. in siphoning off its IPO proceeds, whereby under section 15HA of the SEBI Act, 1992, the adjudicating officer (AO) imposed penalty on each of the Appellants of Rs.10 lakhs for violating section 12A(b)&(c) of the SEBI Act and Rs.10 lakhs for violating Regulation 3(c)&(d) of the SEBI (Prevention of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”).

The AO found that the violation of section 12A(b)&(c) of the SEBI Act and violation of regulation 3(c)&(d) of PFUTP Regulations are two independent violations and accordingly imposed penalty under Section 15HA for two violations separately whereas in the case of  Kejas Parmar vs. SEBI (2014),[1] the AO had held that where there is violation under section 12A(b)&(c) and also violation under regulation 3(c)&(d) of PFUTP Regulations, then both the provisions have to be read together and in such a case common penalty ought to be imposed under Section 15HA of SEBI Act.

Accordingly, SAT has remanded the matters to the file of AO for fresh decision on merits and in accordance with law. The orders passed by the AOs promote the development of the securities market and are in the interests of the securities market. If the orders passed by the AO are not in public interest, then under Section 15I (3) of the SEBI Act, SEBI is empowered to review the orders passed by the AO. Passing conflicting orders does not promote the development of the securities market and would not be in the interests of the securities market.

- Supreme Waskar

[1] (Appeal No.188 of 2014)

Monday, April 25, 2016

Taxing E-Commerce through State entry tax laws - a short-term revenue maximisation strategy

[The following is an article published in Business Standard today on the recent trend of taxing E-Commerce through entry tax – authored by Sudipta Bhattacharjee, Principal - Tax Controversy Management, Advaita Legal (views are personal). The final concluding paragraph was not part of the published article, and has been added for the sake of completeness.]

Taxing E-Commerce through State entry tax laws - a short-term revenue maximisation strategy

Growth and potential of e-commerce in India have been extensively commented upon, and unfortunately, this has led to state governments yearning for a share of this pie.

The initial forays of state governments to tax e-commerce through the VAT route met with stern opposition in Karnataka and judicial censure from the High Court in Kerala. In the last year or so, state governments seem to have changed strategy and decided to extract their pound of flesh from e-commerce by making a variety of hasty amendments to their entry tax legislations (and in the process, often leaving the said amendments vulnerable to challenge on various legal/constitutional grounds).

To illustrate:

> West Bengal mandated courier/logistics companies making such deliveries in the state to register themselves and generate waybills through an official portal only after making a mandatory pre-deposit of entry tax, even though the entry tax legislation there was stayed earlier by the Calcutta high court. This coercive practice was recently stayed by the high court.

> Bihar amended its legislation to make all goods couriered in the state liable to entry tax at the hands of e-commerce logistics/courier companies. Assam also amended its entry tax legislation empowering the commissioner to issue notification prescribing a procedure for collection of entry tax on entry of goods made through online purchase/e-commerce and also for collection of entry tax from a person other than an importer but on behalf of the importer. The constitutional validity of these amendments in Bihar and Assam is vulnerable to challenge. In fact, the amendments in Bihar have already been challenged and the matter is listed for final hearing before the Patna HC on May 4.

> Uttarakhand, similarly, amended the Uttarakhand entry tax legislation to prescribe a 'simple procedure' for collection of entry tax on entry of goods made through online purchases and issued a notification thereunder. The notification mandated a 10 per cent entry tax. However, the amended section in the entry tax legislation neither has clarity as to the 'taxable person' nor does the notification issued thereunder prescribe a procedure as mandated by the amended section in the entry tax legislation. Recently, the Uttarakhand High Court granted an interim stay against entry tax on goods purchased through e-commerce based, inter alia, on foregoing grounds and will hear this matter again the near future. Despite sub judice status, the Uttarakhand government has further amended the entry tax legislation (with effect from March 31, 2016) probably to deal with the arguments raised before the high court in the aforementioned litigation.

> Himachal Pradesh has also made amendments to its entry tax legislation similar to that of Uttarakhand and is likely to be exposed to similar legal/constitutional challenges.

> Gujarat has not only amended the definition of 'importer' ('taxable person' under entry tax) to include e-commerce players, but has gone a step further to mandate that e-commerce players qualifying as 'importer' shall "collect the (entry) tax from the person for whom such facilitation has taken place".

> Rajasthan, Odisha and Mizoram have also joined this bandwagon.

Given that the very constitutional validity of levying entry tax by state governments is under examination by the larger bench of the Supreme Court, this approach by the states appears to be driven solely by short-term revenue maximisation devoid of any long-term tax policy consideration; especially, given the avowed consensus of most state governments towards introduction of the Goods and Services Tax (GST) by 2017, which will subsume entry tax.

Thus, e-commerce companies will incur huge expenditures to tweak their IT systems/logistics to deal with entry tax in various states (with some states casting responsibility to pay entry tax on ultimate buyer and some on e-commerce courier/logistics companies) and then again re-customise to deal with the GST in 2017.

Also, fastening entry tax liabilities upon the marketplace players will push 'marketplace' players to assume responsibilities that probably transcend the limited role envisaged for such players in the recent Press Note 3 of 2016.

Last but not the least, there is no reasonable basis to treat sales through the mode of online/mobile platform in a different manner than sales through traditional modes. Such an arbitrary distinction in fact stifles E-Commerce and curtails consumers’ choices. Given the strong legal/Constitutional and policy arguments against such disruptive taxation, State Governments ought to refrain from attempts to fasten E-Commerce marketplace players (who are nothing but service providers) with VAT and/or entry tax liability.

Thursday, April 21, 2016

Pothier’s Mailbox: Misunderstanding the Moment of Contract Formation under the Contract Act

(The following guest post is contributed by Shivprasad Swaminathan, who is Associate Professor at the Jindal Global Law School)

The argument
The law on the moment of contract formation applied by the courts in India and endorsed by the scholarly literature rests on a mistaken understanding of s. 4 of the Indian Contract Act, 1872. Courts and scholars in India have treated the postal acceptance rule—that the contract is concluded at the moment of posting—and the revocation rule—that an acceptance can be revoked at any time before it comes to the knowledge of the offeror—as analytically distinct. This post argues that they are not, and that the revocation rule presupposes that the contract is not concluded until the time the acceptance comes to the knowledge of the offeror. The point of the phraseology s.4, it will be argued, was to put it out of the power of the offeror to revoke his offer once the acceptance has been dispatched; and not to conclude the agreement at the moment of dispatch. Two Scottish cases which jostled with the doctrinal implications of Robert Pothier’s will theory—which formed the basis for the English locus classicus on the postal rule, Adams v Lindsell (1818)—and deliberately deviated from the English law, provided the blue-print for s. 4, namely, Dunmore v Alexander (1830) and Dunlop v Higgins (1848), will be invoked to lend theoretical and historical support to the argument.

Pothier and the English Law
The law on acceptance in England has orbited around the early nineteenth century decision, Adams v Lindsell [(1818) 1 B & Ald 681] which established the so-called dispatch rule of acceptance: the dispatch of an acceptance completes contract formation. A fortiori, revocation of the acceptance by a more expeditious means than the one carrying the acceptance was not an option. In English law, the rule has not been extended to instantaneous modes of communication, and has been contained to communications by post alone as a result of which the dispatch rule is now synonymous with the “postal rule”. The rule in Adams v Lindsell, Brian Simpson suggests, was inspired by Robert Joseph Pothier’s Traite des Obligations (A.W.B.  Simpson, ‘Innovation in Nineteenth Century Contract Law’ (1975) 91 LQR 247, 261). On Pothier’s ‘will theory’ all that was required was a concurrence of wills—if a subjective meeting of wills there was, it hardly mattered whether or not there was a communication thereof. Adams v Lindsell confirmed that “what mattered in contract formation was not communication, but a subjective meeting of the minds.” (M. Lobban, ‘Formation of Contracts, Offer and Acceptance’ in W. Cornish et al eds. Oxford History of Laws of England XII 336).

Acceptance under the Indian Contract Act
Pollock and Mulla note that the effect of s. 4 was not any different from the English law on the subject, except on the point of revocation—that the acceptor may revoke the acceptance by a faster means of communication since the acceptance is complete as against him only when the acceptance comes to the knowledge of the offeror. (Pollock and Mulla 2nd ed. 1909, 33). On this point, they note, the Act follows the Scottish decision of Dunmore v Alexander (1830) rather than the English law.

The courts in India proceeded on the understanding that the law on acceptance in India is broadly the same as the English law. This has meant their reading s. 4 as having incorporated the dispatch rule: that the acceptance is complete when it is put in the course of transmission. The place of posting has been held to be the place of completion of contract. (See Kamisetti Subbiah v Katha Venkataswamy (1903) 27 ILR Mad 355). This rule has also been extended to the case of telegraph (Baroda Oil Cakes v Purshottam (1954) 57 ILR Bom 1137).  When the question of instantaneous communication came up, which it did  in 1966, which is to say, only after Entores v Miles Far East Trading Corporation [[1955] EWCA Civ 3] had been decided, the Supreme Court of India yet again followed the cue of the English law. In Bhagwandas Goverdhandas Kedia v Girdharilal Parshottamdas AIR 1966 SC 543] the Supreme Court by a 2:1 majority held that s. 4 incorporated the postal rule which did not apply to instantaneous communications. The majority (Shah and Wanchoo JJ) confirmed that in the case of postal acceptance, the contract is concluded when it is posted by the acceptor, and that in cases of instantaneous communication, the contract is only concluded when the acceptance comes to the knowledge of the offeror. Hidayatullah J, in his dissenting opinion argued that there was nothing in s.4 to restrict its applicability to postal cases alone and that it was capacious enough to apply to all forms of communication including instantaneous ones. Interestingly, however, the fulcrum of agreement in the majority and dissenting opinions was the assumption that s. 4 provided that a contract is concluded when posted.

The Scots Cases and the their Contrast with English law
For Pothier, it will be recollected, as long as there was a subjective acceptance, it sufficed, and there was no need for communication. This view was also adopted by John Bell, a greatly influential nineteenth century authority on Scottish contract law (See H. MacQueen, ‘Its in the Post!’ in F. McCarthy et al eds. Essays in Conveyancing and Property Law). Two mid- nineteenth century Scots cases defied Pothier, Bell and the postal rule in Adams v Lindsell. They were Dunmore v Alexander and Dunlop v Higgins. And an appreciation of the theoretical assumptions underlying them is indispensable for understanding what s.4 of the Indian Contract Act had purported to accomplish. Pollock and Mulla correctly identified that it was Dunmore that seemed to have provided the doctrinal inspiration for s.4, but failed to draw out the implications that arose from that case.

The facts that gave rise to the dispute in Dunmore v Alexander were these. Betty Alexander was in the employment of Lady Agnew. She wrote to Countess of Dunmore offering Betty’s services. Countess of Dunmore accepted the offer by post and later sent another letter revoking the acceptance. Although Lady Agnew received the acceptance before the revocation, she forwarded the two to Betty at the same time. Betty sued for breach of a completed contract. On first appeal, Lord Newton in the Outer House held that the contract was not concluded at the moment the first letter was transmitted and that the second letter countermanded the acceptance before the conclusion of the contract.  Lord Newton held that “each party may resile so long as the offer or acceptance has not been communicated to the other party”. On second appeal, a majority of the Inner House upheld the decision. As Hector MacQueen points out:

What might have been thought to be taking place in Scotland as a result of Dunmore v Alexander was a move towards a requirement of communication between parties before statements of obligatory content could even begin to be considered binding or legally effective. (Hector MacQueen, Its in the Post!)
The next important decision, Dunlop v Higgins did not purport to shake the authority of Dunmore, at least not until the matter reached the House of Lords on appeal. A firm in Glasgow offered to sell iron to a merchant in Liverpool by letter, expecting an acceptance in due course. The buyer accepted by post on the same day, which should have, in the normal course, reached Glasgow on the next day. It, however, reached a day late due to frost. The seller instantly replied refusing to sell because the acceptance had not been received in due course. The seller sued for breach of contract. The court of Inner Session did use Adams v Lindsell, but did not find in it the proposition that posting completed the court. Instead, the court found in it the proposition that posting the acceptance merely barred the possibility of the offeror withdrawing the offer” (MacQueen, op cit). Lord Fullerton’s judgment is very instructive and retraces—and extends—the lines drawn by Dunmore.

I find it necessary to make a distinction...between the binding effect of the acceptance when put into the post as barring the offeror from founding on the implication that it was declined, and the absolute completion of the contract. I think the posting of the acceptance by the pursuers had most certainly the first effect…But I am by no means prepared to go farther, and to say, that in the larger question of the actual completion of the contract, the mere fact of the putting of the letter of acceptance into the post-office has the same effect as if it had not only been put into the post-office, but had actually been delivered to the other party.
As Gerhard Lubbe argues, Lord Fullerton was unwilling to accept the proposition of Adams v Lindsell that ‘the expedition of the acceptance actually completed the contract’ (‘Formation of Contract’ in Kenneth Reid and Reinhard Zimmermann (eds.) A History of Private Law in Scotland Vol II (OUP 2000) 35). On his view, there, ‘was no question of a completed agreement where one party was wholly ignorant of the acceptance.’(Lubbe ibid) As to the effect of posting, his decision left no scope for doubt that posting the acceptance merely barred the possibility of the offeror withdrawing the offer.’ (Lube ibid). On appeal, the House of Lords upheld the court of Inner Session’s decision, but read Adams v Lindsell as standing for the proposition that posting constituted acceptance, before going on to apply it in the case on hand. The Lord Chancellor held that the law in England is the same as that of Scotland and relied on John Bell’s commentaries to confirm that view.

Analytical Connection between formation and revocation
The Dunmore and Dunlop cases which provide the blue print for s.4 proceed on the basis that there is an analytical connection between the moment of formation of the agreement and revocation. Revocation is possible before the acceptance comes to the knowledge of the offeror because the agreement is not complete. If revocation of acceptance is not possible in English law that is because the formation of the agreement is complete at the moment of posting. If one accepts that agreement is complete at the moment of posting, the “revocation” permitted by s.4 would have to be implausibly re-characterized as complete contracted being “avoided” by the acceptor. This implausible view was in fact taken by the Madras High Court in Kamisetti Subbiah v Venkataswamy (1903) 27 ILR Mad 355,359. This view rests on an antinomy because s.4 speaks of an acceptance being revoked, not of a contract being voidable at the option of one of the parties. The only merit of this otherwise problematic decision is that it draws out completely the logical implications of taking s.4 as incorporating the dispatch rule of Adams v Lindsell. And that, when done, provides a reductio ad absurdum of sorts, against the argument that s.4 incorporates the postal rule.

The only proper reading of s.4 is that acceptance is complete only when it comes to the knowledge of the acceptor. The point of making acceptance complete as against the offeror is not to bind him in the agreement, but rather to put it out of his power to withdraw the offer. Therefore, contra the majority and dissenting opinions in Bhagwandas, on the terms of s.4, an acceptance is always concluded only when it comes to the knowledge of the offeror—and this obviates the need of a special rule for instantaneous communication.

A rule that has been around for over two centuries comes to have an aura of non-contingency or logical necessity around it. But, if the postal rule ever had that aura, it has long since dissipated. The most persuasive justification for the postal rule is that concluding the contract at the moment of posting the acceptance, puts it out of the power of the offeror to revoke his offer. (McKendrick, Contract Law: Texts, Cases and Materials 111). But if this is the best justification, as McKendrick argues, the putative rule it supports is that of the sort found in Dunmore v Alexander, namely, that the postage of letter bars the offeror from revoking the offer. The Dunmore rule is now followed by Vienna Convention for the International Sale of Goods, Unidroit Principles of International Commercial Contract and Principles of European Contract law. 

Tuesday, April 19, 2016

A Move Towards “Pool in India”; However, Room for More Reforms Exists!

[The following post is contributed by Yashesh Ashar, who is a tax and regulatory consultant. Views expressed are personal.]

The Finance Bill, 2016 has given in to the much sought-after demand of the domestic private equity (PE) industry by amending the provisions relating to the tax withholding obligations for the category I and category II alternative investment funds (‘AIFs’) registered with the Securities and Exchange Board of India (‘SEBI’) under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’).

Under the extant provisions, with effect from June 1, 2015, an AIF is required to withhold tax at source at the rate of 10% on payment (or credit) of income to its investors (whether resident in India or non-resident in India). The tax deducted at source is available as credit in the hands of the investors.

This requirement is mainly onerous vis-à-vis investors as it prescribes withholding of taxes on all incomes, including those that are either exempt in their hands viz. dividend income or long term capital gains on listed securities (in case of resident as well as non-resident investors) as well as those that are not liable to withholding requirements viz. capital gains income (in case of resident investors). As regards non-resident investors, this condition also requires tax withholding against capital gains income exempt under the relevant Double Taxation Avoidance Agreement (‘Tax Treaty’) and would require non-resident investors to claim refund of the tax withheld from the tax authorities, which would entail additional lead time, cash-flow issues for the investors and consequently, impact their return on investments in the AIF.

The Finance Bill, 2016 proposes to amend the above provisions by prescribing that the AIF will be required to deducted tax on income – (i) at the rate of 10%, in case of payment to resident investors; and (2) at the rates in force, in case of payment to non-resident investors. This amendment will allow the AIFs to consider the concessional provisions under the relevant Tax Treaty while making payments of capital gains income to the non-resident investors.

Historically, a substantial majority of the capital raised from foreign investors for PE investments in India by India-based fund-managers / by Indian investment professionals have been raised in fund vehicles domiciled in overseas jurisdictions (predominantly in Mauritius) due to various tax and regulatory reasons.

A move toward the “Pool in India” initiative got impetus with, first, the AIF Regulations weeding out the asset-side restrictions under the erstwhile SEBI (Venture Capital Funds) Regulations, 2012; second, with the legislation providing a “partial pass-through status” to the AIFs under the Finance Act, 2015; and third, by permitting foreign investments in AIFs under automatic route and clarifying the regulations relating to downstream investments by AIFs having foreign investments under the foreign direct investment (‘FDI’) policy of the Government of India.

The new provisions relating to withholding on capital gains income of non-resident investors bring a much needed parity in taxation between the investors investing in funds domiciled overseas (say, Mauritius, Singapore) and foreign investors directly investing in an AIF, thereby providing a choice (and possibly a nudge) to foreign investors to consider direct investments in AIFs in India. To the extent the new provisions are favorably worded, they provide a major encouragement to pooling of funds in India.

However, as the title of this post suggests, the amendments are not wholesome and much more could be done to facilitate and encourage pooling in India:

1.         Pass-through for losses:  As mentioned above, as the tax provisions stand today, the AIFs are provided only a partial pass-through status. To be precise, the losses suffered by AIFs are not allowed to be passed on to the investors. Thus, it would not be possible for the AIFs to pass on the losses incurred to the investors. In order to provide a complete pass-through for foreign investors, the AIFs should be allowed to pass on the losses as well to the investors.

2.         Requirement of obtaining permanent account number (‘PAN)’: As per the provisions of the Income Tax Act, any person making any investment in India or earning any source of income in India is required to obtain a PAN from Indian tax authorities. Further, the provisions of the Act also provide for a higher withholding at 20% on payment of income to non-residents who do not have a PAN. This has proved as a deterrent for non-resident investors from jurisdictions having favorable Tax Treaty from making direct investments into India. The Finance Bill, 2016, proposes to modify these provisions to provide exemption from higher withholding tax subject to certain conditions as notified. Exempting non-resident investors investing in AIFs from jurisdictions with favorable Tax Treaties with India, subject to relevant KYC and certificate from chartered accountants on taxability, would provide a much-needed relaxation to non-residents desirous of investing directly into AIFs.

3.         Incentives for fund managers: In order to provide a further impetus to the “pooling in India”, the taxation regime in India should be at par with their overseas counterparts (particularly, Singapore) even with regard to incentives for the fund managers. For example, the fund managers in Singapore enjoy concessional tax rates on management fees as well as remission from goods and services taxes. Such concessions in India may go a long way in reimporting the fund management activities exported out of India to other countries.

4.         Simplification of the alternative investment fund’s regime: Most of the international securities market regulators have followed the approach of regulating the fund manager (viz. USA, Singapore, European Union). However, SEBI seems to have adopted a dual approach by registering and regulating the AIF as well as regulating the conduct of the fund manager to the AIF. This approach also entails an additional process and time in launching a new AIF. Accordingly, SEBI should consider streamlining the AIF Regulations in the lines of internationally acceptable practice. This recommendation has also been made by the Alternative Investment Policy Advisory Committee (‘AIPAC’) formed by SEBI under the chairmanship of Mr. N Murthy.

5.         Pooling for portfolio investors: Though the foreign portfolio investors are allowed to make investment in Category III AIFs (‘Cat III AIFs’), the Act does not provide pass-through status to them. This has impaired the expected development of the domestic hedge fund industry post the introduction of the Cat III AIFs under the AIF regime. This has mainly been due to the fundamental principle of the trust taxation regime (as most of the AIFs are set-up as trust), which does not provide pass-through for business activities.

However, considering the recent circular of the Central Board of Direct Taxes (‘CBDT’) dated February 29, 2016 stating that income arising from transfer of listed shares and securities which are held for more than 12 months should be treated as capital gains, if desired by the taxpayer. Based on this, those Cat III AIFs which are proposing to make investments in only listed shares and securities (excluding derivatives) should be allowed pass-through status in the lines of AIFs. Needless to say that this should be subject to reasonable obligations on the fund managers to ensure that the individual as well as aggregate investments limits as prescribed by SEBI for FPIs.

The above reforms may also make popular the vastly recognized ‘unified structure’ – wherein the overseas pooling vehicle would just act as a feeder to the AIF - for private equity investments into India, which was either to not so popular given the tax and regulatory issues. This may obviate the need for India based private equity firms from relocating and incurring huge costs on relocating and maintaining offices, employees, infrastructure for carrying out fund management activities in overseas jurisdictions.

Apart from that, the relaxation of the withholding provisions may make many India based private equity firms reconsidering their strategy in favour of ‘unified structure’.

A favorable environment for pooling funds in India could help accelerate the growth of the overall fund industry as well as other ancillary industries such as fund administration, custodial services, and trustee ship services thereby, creating additional employment opportunities in the financial services sector. This may also help in stalling the export of India’s talent pool in fund management space to other countries. A reduction in uncertainty in tax and regulatory regime would also promote investor confidence in directly investing in India as well as improve India’s competitive edge in housing funds and funds management industry.

Overall, the pooling of funds in India would have a positive effect on the Indian economy from a long-term perspective.

- Yashesh Ashar

Sunday, April 17, 2016

Gender Diversity and Government Companies

It has been more than a year since a provision in the Companies Act, 2013 came into effect that requires all listed companies to have at least one woman director. As we had previously discussed, companies scrambled to comply with the requirement as of April 1, 2015, the effective date. However, a recent news report in the Business Standard indicates that 57 companies listed on the NSE are yet to comply with this requirement. More importantly, at least a third of the violators are public sector companies (PSCs). This represents yet another instance whereby, instead of taking the lead in ensuring compliance with enhanced corporate governance norms, PSCs have been in breach.

Such a situation is not new. A similar one arose a few years ago when several PSCs failed to comply with the requirement of appointing a minimum number of independent directors, and SEBI initiated action against them (discussed here and here). However, those actions had to be dropped because the PSCs argued that despite their repeated efforts, the appointments of independent directors could not be implemented due to the lack of approval from the President of India for such appointments (as required under the articles of association of such companies). PSCs are staring at a similar bottleneck even regarding the appointment of women directors.

This does not at all bode well for corporate governance in India if even the letter of the law cannot be complied with, and where the perpetrators of non-compliance are government-owned companies. As I had observed elsewhere in connection with the earlier episode involving the appointment of independent directors:

This episode may likely have deleterious consequences on corporate governance reforms in India. Compliance or otherwise of corporate governance norms by government companies has an important signaling effect. Strict adherence to these norms by government companies may persuade others to follow as well. But, when government companies violate the norms with impunity, it is bound to trigger negative consequences in the market-place thereby making implementation of corporate governance norms a more arduous task. …

That sentiment would hold good even for the present episode involving women directors. Despite giant strides having been taken in strengthening substantive corporate governance norms in India, much less progress is made with compliance and enforcement.