Monday, October 31, 2016

Attempt at Easing Out the NPA Crisis: An Analysis of the RBI’s Reform Efforts

[The following post is contributed by Neelasha Nemani, who is a 5th year student at National Law University Odisha (NLUO), Cuttack.]

The “bad loan crisis” that has gripped India’s large banking sector didn’t just happen overnight. This problem has long since been the elephant in the room; in other words, it has been the most obvious impending risk that neither the legislature nor the regulator seemed to have acknowledged until it got much worse. This post seeks to delineate the efforts of the Reserve Bank of India (“RBI”) in easing out the current crisis, with particular focus on an analysis of its Strategic Debt Restructuring Scheme, 2015 (“SDR”) and the Sustainable Structuring of Stressed Assets Scheme, 2016 (“S4A”).

The SDR Scheme

In 2014, the RBI introduced the Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum and Corrective Action Plan, 2014 in which a change of management in the stressed borrower company could be envisaged as a restructuring plan to assist lenders in their attempt to recover bad loans. In line with these guidelines, the RBI on June 8, 2015, introduced the SDR Scheme according to which a consortium of lenders, also known as Joint Lenders’ Forum (“JLF”), converts a part of its stressed loan in the ailing borrower company into equity, with the consortium owning at least 51% stake in the company.[1]

This scheme essentially seeks to give banks the opportunity to take over the management of the ailing company and turn it around to make it a viable project within 18 months, after which it would sell its stake to a new promoter. Banks, through this form of restructuring, seek to realize their stressed assets, since the asset can be re-categorized as a Standard Asset[2] once its stake in the company has been sold. The scheme also provides for a regulatory relaxation to the banks during this 18-month period wherein:

1.         The bank is not required to observe the requisite provisioning norms[3] to support the asset undergoing reconstruction, thereby retaining existing cash flows.

2.         The bank is permitted to charge the interest earned from the reconstruction on accrual basis[4] and will not have to wait until it is actually realized.

However, while theoretically speaking this scheme may have been envisaged as a solution to the growing problem of Non-Performing Assets (“NPAs”), it also comes with its own set of problems as far as its practical implementation is concerned:

1.         The 18-month window given to the banks is too short a period within which the bank could be expected to efficiently run the business and manage its restructuring as well as find a new buyer. The banks’ tasks include valuing the company, converting part of its debt into equity, preparing a restructuring plan for an overhaul, etc. Simultaneously, they also have to work on identifying a new promoter who itself, for the purpose of acquisition, will have to conduct its own due diligence of the company, conduct valuation, complete the requisite formalities in respect of the acquisition, etc. For all of this to be completed successfully within 18 months seems quite unrealistic.

The downside of this scheme is that if the lenders are unsuccessful in selling their stake and exiting the company within 18 months, the regulatory relaxations discussed above cease to exist and the banks will be required to comply with the provisioning requirements for the total outstanding debt with retrospective effect, from the date of the first restructuring, in one quarter. Needless to say, the SDR route is not advisable if the banks are not certain of being able to sell their stake within the said 18-month period. Further, the scheme does not provide for a partial sale either. Hence, trying to find a buyer for a majority stake in an ailing company, especially within such a short period, is very difficult. The scheme also requires that the promoter should be unrelated to the original promoter or promoter group of the company, thereby adding to the complexity.

As a response to this criticism, the RBI has recently amended the requirements, providing that the banks will no longer have to sell their entire 51% stake in order to upgrade the status of the concerned asset to a Standard Asset, and will only have to sell 26% of their stake to a new promoter.

2.         Due to their lack of expertise, banks find it extremely difficult to engage in the management of companies. Therefore, it has been seen in most cases that they continue with the existing management of the borrower company and only exercise external supervisory control over the affairs of the company, making it less attractive for a new promoter.

3.         Upon acquiring the controlling stake of 51% in a listed company, the new promoter will be required to make an open offer of 25%. If the open offer is fully subscribed to, the buyer will be the effective holder of 76% stake in the company, triggering the delisting of the company due to SEBI’s minimum public float requirements. In such a situation, no new promoter would be encouraged to purchase the 51% stake in the company owing to the fact that delisting would impact the promoter’s liquidity. While banks have been given the exemption of having to delist the company, new promoters have not been provided this comfort.

Statistics reveal that out of the total 21 cases of SDR that were invoked, only two were successfully closed in the last 14 months since the inception of this Scheme. Due to the above problems, it has been pointed out that this scheme only causes an ever-greening of NPAs by delaying their re-categorization into NPAs by a few years and will not actually solve the issue at hand.

The S4A Scheme:

In order to further strengthen the lenders’ ability to deal with bad loans, the RBI had, on June 28, 2016, introduced the S4A scheme alongside the SDR scheme. According to these guidelines, banks can bifurcate the debt of the borrower into two portions – the sustainable portion which would be based on the debt servicing capability of the borrower company (classified as a Standard Asset), and the unsustainable portion which would be linked to equity or quasi equity instruments. An Overseeing Committee would be set up by the Banks’ Association, in consultation with the RBI which will review the process and act as an advisory body.

The positive aspects of S4A over the SDR are several, some of which are:

1.         Banks do not have to find a new promoter to buy their stake in the stressed company and the existing promoters are allowed to continue. This acts as an incentive to the promoters to turn the company around and consequently the banks can benefit out of such equity valuation.

2.         Banks are permitted to hold optionally convertible debentures instead of equity shares in the company, which is always more preferable.

3.         The entire debt portion does not have to be converted into equity, as under the SDR scheme. Since only the unsustainable portion of the debt is required to be converted into equity, some bankers are of the opinion that operations will be able to be managed more smoothly and there would be a more realistic chance at recovery of the loan.

However, here are some glaring problems with this scheme that may question its viability:

1.         The S4A does not allow banks to offer any moratorium on debt repayment and also does not allow amendments to the repayment schedule or even a reduction of interest rate.

2.         Unlike under the SDR, there is no relaxation to banks in respect of the provisioning requirement. Therefore, banks will be required to maintain a minimum 20% provision of the total loan amount outstanding or 40% of the unsustainable portion of the debt at the time of initiation of the scheme. The banks will also have to provide for 100% of the expected losses on the unsustainable portion over the period of four quarters, over and above the 20%-40% requirement.[5]

3.         Only projects that have started commercial production can take advantage of this scheme.[6] Therefore, infrastructure projects that may have been stalled due to delay in regulatory approval cannot be invoked under this scheme.

4.         The presumption that conversion of debt into equity is the cure for all ills has not proven to be true in a lot of cases. Equity is a perennial liability and is a costlier mode of finance compared to debt capital which at least has tax benefits. If a project does not seem to be sustainable, this route is not a viable option.

5.         Under the existing framework of the scheme, only the existing cash flows at the current level can be used to determine the debt servicing capability of the company. This mandate received much flak from bankers across the country because they identified that a good number of companies were not operating at their optimal level currently and were therefore unable to make the cut for initiating this scheme.

While the S4A may have theoretically addressed the fallacies that were present in the SDR scheme, the viability of this scheme nonetheless seems questionable to bankers.

- Neelasha Nemani






[1] Sanjay Israni and Rajashree Ravi, India: Strategic Debt Restructuring, Mondaq, October 25, 2016, available at http://www.mondaq.com/india/x/426592/Financial+Restructuring/Strategic+Debt+Restructuring.

[2] Explanation: A ‘Standard Asset’ is an asset which is not a Non Performing Asset as defined under section 2(o) of the SARFAESI Act, 2002.

[3] The ‘Provisioning Norms’ referred to here have been detailed in the RBI Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances, 2013.

[4] Interest from a Non Performing Asset is required to be recorded on receipt basis as opposed to interest from a Standard Asset which is recorded on accrual basis. For details, refer to the above Provisioning Norms.

[5] RBI, Notification on Scheme for Sustainable Structuring of Stressed Assets (Guidelines), June 13, 2016.

[6] Id., at para 4.

Thursday, October 27, 2016

The Tata Sons Imbroglio: Whither Corporate Governance?

Much ink has already been spilt over the last three days following the revelation that the chairman of the Tata Sons board, Mr. Cyrus Mistry, has been “replaced”, and that Mr. Ratan Tata has returned to helm the affairs as interim chairman for a period of four months until a successor can be found. This has not only sent the sprawling corporate group into crisis mode, but it has led to considerable speculation on whether a high-stakes corporate litigation is likely to ensue.

Broad Nature of Company Law Issues

From a technical perspective, the legal issues surrounding Mr. Mistry’s replacement may not be all too complicated. First, Tata Sons Limited is an unlisted company, and hence governed by the provisions of the Companies Act, 2013. It is not subject to the slew of corporate governance norms and securities regulation dispensed and implemented by the Securities and Exchange Board of India (SEBI). Tata Sons is a closely held company with about 65% of the shares held by two Tata Trusts controlled by Mr. Ratan Tata, with about 18.5% being held by the Shaporji Pallonji Mistry group, to which Mr. Mistry belongs.

Second, the Tata Sons’ board has only replaced Mr. Mistry as the “chairman”, while he continues to be a non-executive director of the company. Although the Companies Act envisages roles and functions for a chairperson of a company, it does not stipulate the precise mechanism for appointment and removal of such a chairperson. That is indeed left to each company to frame in its articles of association. Hence, the likely bone of contention has veered towards whether the board of Tata Sons complied with its articles of association while replacing Mr. Mistry as its chairman. Based on news reports (here and here), it appears that following Mr. Mistry’s assumption of chairmanship, the articles of association of Tata Sons were amended to restrict the powers of the chairman and to enhance the oversight and control exercised by the Tata Trusts. In that sense, the board (including the directors nominated by Tata Trusts) may very well have possessed the appropriate powers to replace Mr. Mistry as the chairman.

This being the case, it is as yet unclear whether the dispute will end up in litigation. In a letter issued by Mr. Mistry to the board of Tata Sons, he has alleged that the directors have failed to “discharge the fiduciary duty owed to stakeholders of Tata Sons and of the group companies”. While available in theory, any action surrounding breach of directors’ duties through a shareholder derivative action ought to be brought in a civil court, and may not only be difficult to establish, but may be inefficient given the costs and time involved in successfully bringing such an action. A more appropriate action in such a case would be one for oppression and mismanagement under section 241 of the Companies Act, 2013. Any shareholder holding 10% of the shares of a company (in this case the Shaporji Pallonji Mistry group satisfies the requirement) can bring an action before the National Company Law Tribunal (NCLT) on the ground that the affairs of the company are being conducted in a manner “prejudicial or oppressive” to a shareholder, or that a material change has taken place in the management or control of a company, which is likely to cause prejudice to shareholders. The NCLT possesses wide-ranging powers to pass various kinds of orders in an action involving oppression and mismanagement. Even here, the bar to bring an oppression action is quite high, and ultimately it will boil down to the specific facts and circumstances whether such an action can be successfully availed of.

These and other issues will certainly be the subject matter of debate in the legal circles in the days to come.

Impact on Corporate Governance

My larger focus in this post is on the impact this episode has on corporate governance in Indian companies generally. It would be too simplistic to treat the Tata Sons boardroom crisis as one involving an unlisted company that is bereft of public shareholders. Tata Sons is the promoter (or controlling shareholder) of several listed companies within its fold, and which in the aggregate represent about 7.5% of the market capitalization on BSE. In such a scenario, the corporate governance issues surrounding Tata Sons is no longer a matter within the house, but one that involves the interests of minority shareholders and other stakeholders of all listed companies within the Tata stable. In that sense, the conduct of affairs on the Tata Sons board has a considerable impact on the governance of all of those listed companies.

Taking this into consideration, the sequence of events that transpired over the last few days leaves much to be desired. Even if the board of Tata Sons did legally possess the right to replace the chairman, the manner in which that was accomplished does not comport with basic principles of corporate governance. For instance, press reports indicate that sufficient advance notice may not have been given to Mr. Mistry and that the item regarding his replacement was included in the agenda as part of “other items”, thereby springing a surprise on him (although reports suggest that he was informed by one of the directors the day before the meeting). While this may be legal due to the nature of Tata Sons as an unlisted company, the impact of Mr. Mistry’s exit has been felt across all the listed companies in the group, which have witnessed declines in the market value of their shares.

Key Lessons

What lessons from this episode may be relevant for the broader corporate governance framework in India? At the outset, this continues to raise significant issues for promoter-driven companies. Matters that affect promoters, including disputes among groups of promoters, will directly impact the listed companies and their minority shareholders and other stakeholders. Hence, the governance framework is important not only at the listed company-level, but also at the promoter-level. It is paradoxical that despite the establishment of a detailed governance framework (albeit through the articles of association) in Tata Sons, such a negative outcome was unavoidable.

Second, one cannot escape from the fact that in promoter-driven companies, there could be multiple centres of power. For instance, promoters themselves may have a governance framework (as Tata Sons did), and decisions taken through such a framework would have implications for all listed companies under it. However, there is a perceptible governance gap here. Decisions taken by promoters (being either individuals or unlisted companies) are not subject to the same level of transparency and governance norms as listed companies are. For instance, even though Tata Sons had a professional board with immensely competent individuals, the balance of power stipulated in the articles of association swayed heavily in favour of the Tata Trusts, thereby arguably impinging upon the exercise of powers of the board as a whole, and the chairman in particular. Hence, decision-making at the promoter level was not accompanied by any accountability to stakeholders of listed companies, although they are considerably impacted by such decisions. Moreover, in the Tata Sons episode, there was no advance warning to the markets about the impending precipitous action that was taken by the board on 24 October 2016. What began as a terse announcement of the chairman’s replacement then led to speculation regarding the reasons behind such action. The lack of any legal requirements on the part of Tata Sons to provide advance notice or sufficient details following the action may have led to this situation.

Third, the absence of disclosure and transparency requirements pertaining to the promoter (being an unlisted company) has left the shareholders of the listed companies in the lurch and kept them guessing about the reasons for the chairman’s replacement. This has led to a lot of speculation both among investors and commentators. Added to this are the allegations now made by Mr. Mistry in his letter to the Tata Sons board, which is now available in the public domain.

Fourth, and more importantly, what is the role of the boards of various listed companies within the group? At one level, the board’s attention may not be called for as the various events have occurred at the promoter level. The listed company boards have neither considered nor taken any decision. But, that would be too simplistic and na├»ve an approach. Given that the recent string of events have a direct impact on the shareholders and stakeholders of these listed companies, the boards must state their position and clarify the issues and assuage the concerns of investors. An additional complication is that Mr. Mistry continues to be the chairman and non-executive director of various listed companies within the Tata Group. Will this affect the functioning of the boards of the Tata Group when there is a battle for control and management of the promoter company? These are important questions that the boards will have to consider and answer. To that extent, the move by the stock exchanges in writing to the Tata Group companies to explain and clarify the events and their impact on each company is a welcome one.

The Way Forward


In all probability, the issues surrounding Tata Sons will be resolved one way or another, and the companies within the Tata Group will move on with their businesses. But, the lessons learned so far (there may be much more after a deeper analysis) cannot be ignored. From a governance perspective, this calls for a more focused approach towards promoter-driven companies, especially those run by business families. In such cases, governance oversight must extend beyond listed companies and into the domain of promoters. Issues affecting promoters cannot be isolated from their impact on listed companies. Hence, this raises a question whether some types of governance norms must be imposed on promoters themselves, in addition to the listed companies. Even if there is no need for a slew of corporate governance norms extending their reach towards promoters, decision-making by promoters ought to be made more transparent. More importantly, listed companies and their boards must be in a state of preparedness to deal with issues that occur at the promoter level, whether it be succession or any other disputes. 

Monday, October 24, 2016

Liberalization of RBI’s Policies

The Reserve Bank of India (RBI) last week issued a series of circulars liberalizing and streamlining its policies on various types of equity investments as well as on external commercial borrowings (ECBs). The key pronouncements are highlighted below:

1.         Foreign Investment in “Other Financial Services”

In the case of non-banking finance companies (NBFCs), foreign investment is allowed up to 100% under the automatic route in case of 18 activities that are listed in the schedule to the relevant RBI regulations. Under Circular No. 8 issued on October 20, 2016, the RBI has extended this treatment (i.e. 100% foreign investment under the automatic route) to “other financial services”, which includes activities that are regulated by any financial sector regulator such as the RBI, the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority (IRDA), and the like. This is subject to appropriate conditionalities as may be imposed by the relevant regulator. However, if the activity is either not regulated or its regulatory status is unclear, then the foreign investment will be allowed only under the Government approval route.

2.         Investment by a Foreign Venture Capital Investor (FVCI)

FVCIs are now permitted to make investments in certain sectors without requiring any approval from the RBI. In case of unlisted companies, FVCIs can make investments in equity, equity-linked instruments or debt instruments in specific sectors, which include biotechnology, IT, nanotechnology, etc. as listed in RBI’s Circular No. 7 issued on October 20, 2016. However, an FVCI can invest into a “startup” irrespective of the sector in which such startup is engaged. A “startup” is defined as a private limited company, registered partnership firm or a limited liability partnership (LLP) which is not older than five years, and with an annual turnover not exceeding INR 25 crores in any preceding financial year, and is working in areas driven by technology or intellectual property as specified.

3.         Review of Sectoral Caps

Pursuant to various changes announced by the Government of India to conditions specific to various sectors, the RBI by way of Circular No. 6 dated October 20, 2016 announced a process of simplification for foreign direct investment (FDI). Among the key changes are: imposition of a composite sectoral cap encompassing all types of foreign investment, prescriptions on total foreign portfolio investment, specifications regarding ownership and control of entities by Indian citizens, foreign investment in LLPs, stipulations regarding foreign investment by swap of shares, and so on.

4.         Extension and Conversion of ECBs

Under the ECB guidelines, designated AD Category-1 banks are allowed to approve requests from borrowers for changes in repayment schedules on certain conditions, so long as these are made during the tenure of the ECB (i.e. prior to maturity). However, under Circular No. 10 dated October 20, 2016, the RBI has allowed designated AD Category-1 banks to approve the extension of matured but unpaid ECBs, subject to certain conditions. The approval also extends to allowing conversion of “matured-but-unpaid” ECBs into equity. This will provide greater flexibility to the borrowers and lenders to structure appropriate arrangements in case of failure of repayment upon maturity of the ECB.

All of the above measures are intended to increase the availability of fundraising opportunities for Indian companies from various types of foreign investors as well as lenders.


Friday, October 21, 2016

Withdrawal of Open Offer: A Debate Rekindled?

[The following post is contributed by Saumya Bhargava & Prateek Suri, who are Associates at AZB & Partners, New Delhi. Views expressed are personal.]

[In an earlier post dated August 5, 2016, we had discussed an order relating to the open offer of Jyoti Limited in the context of circumstances under which an open offer is allowed to be withdrawn in India]

Public announcement of an open offer often leads to a frenzy in the securities market. Stock prices are likely to surge and investors are seen closing strategic transactions. However, not all open offers end up being successful. In the last three years, India Inc. has witnessed the failure of some open offers and attempts at withdrawal of some others. Instances of the latter have led to unique consequences as the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“2011 Regulations”) provide for very limited circumstances under which an open offer may be withdrawn. The rule is that open offers are sacrosanct except in exceptional circumstances, like death of an acquirer or refusal of statutory approvals, which are situations specifically carved out in the 2011 Regulations.[1] This is because such withdrawals have an adverse impact on the market and on the interest of investors. The securities market regulator, Securities and Exchange Board of India (“SEBI”), with its twin objectives of protection of interests of investors and promotion of growth of the securities market, has residual discretionary power under the 2011 Regulations to decide which cases merit withdrawal.

The Supreme Court of India and the Securities Appellate Tribunal (“SAT”) have consistently taken the view that the exercise of such discretionary power is restricted to cases similar to the specific exceptions in the 2011 Regulations and the 1997 Regulations (like the ones enumerated above) which fall under the ambit of “impossibility”. SEBI has followed such interpretation in its order issued on August 1, 2016 in the case of Jyoti Limited. Such an interpretation may have harsh ramifications on the atmosphere for mergers and acquisitions in India. The interpretation forces acquirers to bear risks attached with an open offer despite occurrence of circumstances beyond its control, for example, discovery of fraud after the public announcement, which appears to have transpired in the case of Nirma Industries Limited (in 2013), where the Supreme Court did not permit withdrawal. Such an interpretation also effectively leaves acquirers stranded, when the objectives of proposed takeover offer become futile, owing again to reasons outside the control of the acquirer, like delay caused by SEBI in granting approval required for the open offer to succeed. This has especially proved true in cases of voluntary offers. In this context, this post discusses the legal position adopted by the Supreme Court in its interpretation of sub-regulation 27(1)(d) of the 1997 Regulations (and its parallel, being sub-regulation 23(1)(d) of the 2011 Regulations), which deal with SEBI’s discretionary power to approve withdrawals of open offers.

In the matter of Jyoti Limited, SEBI has squarely applied the Supreme Court’s interpretation expressed in the case of Nirma Industries Limited (in 2013) and Akshya Infrastructure Limited (in 2014) (which relates to the 1997 Regulations) to the matter of Jyoti Limited (which relates to the 2011 Regulations). The fundamental question is whether situations where circumstances beyond the control of the acquirer render the offer meaningless can be considered by SEBI under the umbrella of “such circumstances which in the opinion of SEBI merit withdrawal”? For instance, in the case of Pramod Jain decided by SAT (in 2014), SEBI had delayed the approval of the draft letter of offer by two years. During such period, not only did the health of the company decline significantly (which could have been possibly revived by a timely takeover as pointed in the minority opinion of SAT), but the promoters of the target company also squandered its valuable assets and siphoned funds. Another example is the case of Nirma Industries Limited where, after the public announcement for takeover was made by the acquirer, a brazen fraud was discovered by a special investigative audit, which arguably could not have otherwise been discovered by the acquirer. In both these situations the objectives of the acquirer(s) behind making the offers were rendered meaningless, leading to a virtual defeat of the proposed offer.

However, the Supreme Court (Nirma Industries Limited and Akshya Infrastructure Limited), the SAT (Pramod Jain) and now SEBI (Jyoti Limited) refused withdrawal of the respective open offers. They reasoned that such situations would not be covered by the sub-regulation because of a statutory rule of interpretation, ejusdem generis, which essentially means that when a general word/phrase follows a list of specific words/phrases, the general word/phrase would be interpreted to include only items of the same class as those listed before it, unless there is an indication of a different legislative intent. If there is such an indication, the principle is not applicable. The Supreme Court, in Nirma Industries Limited, observed that the first two sub-regulations of the 1997 Regulations form a common genus of impossibility: i.e. (i) the statutory approval(s) required have been refused and (ii) the sole acquirer, being a natural person, has died. The Supreme Court therefore reasoned that the principle of esjudem generis applies and consequently the expression in the sub-regulation was construed to be restricted only to situations that make it impossible for the acquirer to fulfill the public offer.

The Supreme Court may have failed to take note of the possibility of a different legislative intent behind Regulation 27. The Regulation 27 (as part of the 1997 Regulations) was amended in 2002 pursuant to a recommendation to delete a sub-regulation 27(1)(a) (that permitted withdrawal of an open offer consequent upon a competitive bid) by the Bhagwati Committee to ensure effective protection of interest of the shareholders. It is well settled that, before applying the principle of ejusdem generis, the whole text must be taken into consideration to scrutinize any possibility of a different legislative intent. If one considers Regulation 27 as it originally existed prior to the amendment, it would be clear that a common genus of impossibility did not exist in the sub-regulation. This is because the deleted sub-regulation does not qualify the criteria of “impossibility” so as to indicate existence of a common genus of impossibility in the regulation. Therefore, the application of the principle of ejusdem generis to this sub-regulation dealing with SEBI’s residuary power (to approve withdrawal of open offer) seems to be misguided. Such interpretation adopted by the Supreme Court also contradicts another well settled rule of statutory interpretation which states that, where two interpretations are possible, that interpretation ought to be taken which would not render any provision of a statute otiose. In conclusion, such a restricted interpretation through the application of ejusdem generis renders the sub-regulation granting power to SEBI effectively meaningless.

As a result of the restriction imposed on SEBI’s power to grant approval for withdrawal of open offers, acquirers are forced to assume full risks related to open offers and delays caused by SEBI or fraud by promoters of the target company are not recognized as valid grounds for withdrawal of open offers. Even if a fraud is discovered by way of a special investigative audit after public announcement of an open offer, a request for withdrawal may be rejected on the pretext of improper due diligence by the acquirer. The current position of law continues to cause prejudice to the business interests of the acquirers/ investors, whose interest is also required to be taken care of by SEBI.

Frivolous withdrawal of open offer can lead to severe consequences for investors and the securities market. However, a balance must be achieved such that SEBI is able to consider situations where, due to change in circumstances beyond the control of the acquirer, the open offers may be permitted to be withdrawn to protect the interests of the acquirer. Therefore, from a commercial perspective, it makes sense to not restrict the exercise of discretion by SEBI. SEBI must freely form its opinion about the merits of every case, which is a power that is also granted to SEBI for exempting open offers in a takeover. In conclusion, it can only be hoped that the Supreme Court reconsiders the issue afresh and the roadblocks for India Inc. relating to ease of business are effectively eliminated.

- Saumya Bhargava & Prateek Suri






[1] Withdrawal of offers was previously governed under Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“1997 Regulations”) as well.

Wednesday, October 19, 2016

Companies Mediation and Conciliation Rules: An Update

[The following post is contributed by Bhushan Shah and Neha Lakshman from Mansukhlal Hiralal & Company. The views expressed are personal]

Section 442 of the Companies Act, 2013 ('Act') empowers the Central Government to constitute a panel of experts to mediate and settle disputes pending before the National Company Law Tribunal (‘NCLT’), National Company Law Appellate Tribunal (‘NCLAT’) or the  Central Government (each a 'Tribunal'). The Ministry of Corporate Affairs ('MCA') through a notification issued in September enacted the Companies (Mediation and Conciliation) Rules, 2016 ('Rules') which prescribe the procedural aspects of mediation and conciliation in respect of the aforesaid matters.

In this post, we summarise some of  the important provisions under the Rules as follows:

- Constitution of Panel of Mediators or Conciliators: The Regional Director is empowered to constitute a panel of persons to act as mediators / conciliators, from persons who are:

(a) former judges of the Supreme Court, High Court, District Court;

(b) former member or registrar of a tribunal constituted at the national level under any law for the time being in force;

(c) former members of the Indian Corporate Law Service or Indian Legal Service with fifteen years experience;

(d) those who are qualified legal practitioners for not less than ten years;

(e) those who have been professionals for at least fifteen years of continuous practice as Chartered Accountants or Cost Accountants or a Company Secretaries;

(f) former Members or Presidents of any State Consumer Forum, or

(g) experts in mediation or conciliation who have successfully undergone training in mediation or conciliation.

- Procedure for mediation and conciliation: The parties are free to appoint a sole mediator or conciliator of their choice. If, however, the parties are unable to arrive at a mutual decision, the forum in which their litigation is pending may direct each party to appoint a mediator / conciliator of its choice or appoint a person from the panel of experts to act as the mediator/conciliator. The NCLT may also suo moto refer a dispute, pending before it to mediation / conciliation if it deems fit.

- Duty of mediator/conciliator to disclose certain facts: It shall be the duty of a mediator or conciliator to disclose to the NCLT/ Central Government, as the case may be, any circumstances that may give rise to a reasonable doubt as to independence or impartiality in carrying out functions.

- Mediator and Conciliator not bound by the provisions of the Indian Evidence Act and CPC: The mediator or conciliator shall not be bound by the Indian Evidence Act, 1872 or the Code of Civil Procedure, 1908 while disposing the matter, but shall be guided by the principles of fairness and natural justice, having regard to the rights and obligations of the parties, usages of trade, if any, and the circumstances of the dispute.

- Role of the mediator/conciliator: The mediator/conciliator shall facilitate a settlement between the parties and attempt to arrive at a mutual consensus. However, the mediator/conciliator shall not and cannot impose any settlement nor give any assurance that the mediation or conciliation shall result in a settlement and the mediator or conciliator shall not impose any decision on the parties.

- Time limit for mediation or conciliation: The process for any mediation or conciliation shall be completed within a period of three months from the date of appointment of expert or experts from the Panel. However, in any mediation in relation to a proceeding before the NCLT, it may on the application of mediator or conciliator or any of the party to the proceedings, extend the period for mediation or conciliation by such period not exceeding three months. If a party fails to attend a session or a meeting fixed by the mediator or conciliator deliberately or wilfully for two consecutive times, the mediation or conciliation shall be deemed to have failed and mediator or conciliator shall report the matter to the Tribunal, as the case may be.

- Communication between mediator or conciliator and the Tribunal: In order to preserve the confidence of parties in the Tribunal, and the neutrality of the mediator or conciliator, there shall be no communication between the mediator and the Tribunal, in the subject matter. However, if any communication between the mediator or conciliator and the Tribunal is necessary, it shall be in writing and copies of the same shall be given to the parties or their authorised representatives. Further communication between the mediator and the aforesaid authorities can only be limited to the topic stated in the rules.

- Expenses of the mediation/conciliation: At the time of referring the matter to the mediation or conciliation, the Tribunal shall fix the fee of the mediator or conciliator and, as far as possible, a consolidated sum may be fixed rather than for each session or meeting. The expenses of the mediation or conciliation shall be borne equally by the various contesting parties, unless otherwise directed.

- Bar on initiation of judicial or arbitral proceedings during pendency of mediation/conciliation: The parties shall not initiate, during the mediation or conciliation, any arbitral or judicial proceedings with respect to the same matter, except that a party may initiate arbitral or judicial proceedings where, in its opinion, such proceedings are necessary for protecting its rights.

- Matters which shall not be referred to for mediation/ conciliation: The following matters shall not be referred to mediation or conciliation:

(a) the matters relating to proceedings in respect of inspection or investigation, matters which relate to defaults or offences for which applications for compounding have been made by one or more parties;

(b) cases involving serious and specific allegations of fraud, fabrication of documents forgery, impersonation, coercion etc;

(c) cases involving prosecution for criminal and non-compoundable offences;

(d) cases which involve public interest or interest of numerous persons who are not parties before the Tribunal.

Comment: The notification of these rules and establishment of the panel of mediators and conciliators is a necessary step, which shall hopefully translate into an increase in the use of mediation and conciliation for commercial disputes and reduce the burden on the NCLT.

- Bhushan Shah and Neha Lakshman