Saturday, February 25, 2017

Abolition of the Foreign Investment Promotion Board

The economic liberalization that began in India in 1991 brought with it a substantial increase in foreign direct investment (FDI) since then. Those involved in, or following, these developments, since the 1990s will remember the rather significant role played by the Foreign Investment Promotion Board (FIPB) in approving FDI into the country. Foreign investors (or their Indian partners or investee companies) had to prepare detailed applications setting out reasons for why their proposal for foreign investment had to be permitted. The FIPB, comprised of members from various ministries, would (sometimes minutely) scrutinize the details of each proposal and convey its approval or rejection, as the case may be. Often no reasons would be forthcoming to support its decision. Lacking any specific statutory source for its authority, its location was shifted between various ministries before finally being housed in the Ministry of Finance since 2003.

Over the years, however, considerable changes in the FDI policy reshaped the role and prominence of the FIPB. For instance, more sectors were moved from the “approval route” to the “automatic route” in that FDI could be brought into the relevant industries without prior approval of the FIPB. Moreover, the FIPB itself began redefining the manner in which it performed its role. For instance, there was a gradual enhancement in the level of transparency in its decision-making process. The substance of its decisions was notified publicly and the relevant bureaucracy even began to respond to queries from anxious FDI participants and their advisors on an online chat forum, before the application process itself was transitioned into an online system. Compared to its initial years, one witnessed a more transparent process being introduced in the operations of the FIPB, although the scope of its involvement in FDI was dwindling over time due to more sectors being brought under the automatic route.

It is in this context that the Finance Minister’s statement during the budget delivered earlier this month becomes important. In his speech, he noted:

96.    Our Government has already undertaken substantive reforms in FDI policy in the last two years. More than 90% of the total FDI inflows are now through the automatic route. The Foreign Investment Promotion Board (FIPB) has successfully implemented e-filing and online processing of FDI applications. We have now reached a stage where FIPB can be phased out. We have therefore decided to abolish the FIPB in 2017-18. A roadmap for the same will be announced in the next few months. In the meantime, further liberalisation of FDI policy is under consideration and necessary announcements will be made in due course.

This has effectively sounded the death knell for an institution that performed a key role for FDI in India over the last quarter of a century. It is recognition of the fact that the FIPB has outlived its utility, and that it is time for some radical change to the way the country approaches FDI. This move has generally been welcomed, and rightly so. The decisions of the FIPB tended to be based on subjective criteria that led to considerable uncertainty to investors as well as to Indian companies that are recipients of FDI. Unimpeded discretion to this body obviously gave rise to rent-seeking behaviour that is difficult to bring under check. The Finance Minister’s proposal would largely address these concerns.

At the same time, it is premature to come to any definitive conclusion regarding the merits of the proposal. What is crucial is yet unknown. And that relates to how the FIPB will be phased out and, more importantly, whether any other mechanism would effectively replace it. Some are euphoric in that they consider the Finance Minister’s statement to mean an effective abolition of any system that requires prior governmental approval for FDI. But, it would be prudent to exercise some caution, as there is certainly a likelihood that some system of checks and balances would continue to operate in respect of FDI in the country. It is possible that in case of sectors that are still within the approval route, the sectoral regulators will begin exercise oversight over FDI issues. This may amount to decentralization of sorts, although it might confer greater power to individual ministries. As this analysis suggests, FIPB did perform the role of being a single window clearance mechanism for FDI, and the transition to sectoral regulatory system may only exacerbate the uncertainties and inefficiencies. Others have argued that it might be an opportune moment to consider abolishing the approval route altogether. While this may introduce greater transparency and certainty, this result is unlikely given the need for regulatory oversight in FDI in at least a handful of nationally sensitive sectors.[1] In the end, it seems necessary to await further details regarding what, if at all, would replace the FIPB.

[1] After all, even some of the more developed markets do provide for protective mechanisms in sensitive sectors. See, e.g. the Committee on Foreign Investment in the United States and the Foreign Investment Review Board (Australia).

Friday, February 24, 2017

Supreme Court Reinforces Sanctity of a Takeover Offer

In what circumstances can a takeover offer, once made, be withdrawn? This issue has occupied the attention of the Supreme Court in two previous cases, Nirma Industries v. Securities and Exchange Board of India and Securities and Exchange Board of India v. Akshya Infrastructure Pvt. Ltd. In these cases, the Supreme Court took a strict view and held that the acquirers were not permitted to withdraw their offers (see discussion here and here respectively). Thereafter, in Pramod Jain v. Securities and Exchange Board of India, the Securities Appellate Tribunal (SAT) was constrained by the Supreme Court rulings and refused to permit a withdrawal of an offer even where there was a two-year delay in obtaining SEBI’s approval of the offer and in the meantime the target’s promoters were alleged to have encumbered the most valuable asset of the company and to have siphoned company funds (see discussion here).

It recently came to my attention that the SAT’s decision in Pramod Jain had been appealed to the Supreme Court, which issued its verdict last November. Unsurprisingly, the Supreme Court followed the same line of reasoning in treating takeover offers as sacrosanct and did not permit the acquirer to withdraw the offer, thereby confirming the ruling of SAT, and the earlier ruling of the Securities and Exchange Board of India (SEBI). Legal counsel for the acquirers (who the were appellants before the Supreme Court) sought to distinguish Nirma Industries and Akshya Infrastructure, primarily on two grounds. First, there were significant delays at SEBI’s end (of nearly two years) that made the offer economically unviable. The delays were as a result of several complaints filed before SEBI against both the acquirer as well as the target. Second, given that the acquirer had made a hostile offer for the target, the target’s management had indulged in defensive tactics (such as by siphoning the assets of the company). However, the Supreme Court did not accept the reasoning provided by the acquirer.

The Court found it appropriate to adhere to its decision and reasoning in the earlier two cases. Although it agreed with the SAT’s finding that there was undue delay on the part of SEBI in dealing with the offer, this by itself was not sufficient to merit a withdrawal of the offer by the acquirer. Circumstances relating to the offer have been specifically provided in the SEBI Takeover Regulations (in this case the earlier version of 1997 applied), and the present case did not fall within any of them. Moreover, the Supreme Court also observed that the consequence of any wrongful conduct on the part of the target or its management is not an automatic withdrawal of the offer, and that appropriate remedies are available to the acquirer to pursue as an aggrieved party.

Disputes relating to takeover regulations have on occasion found their way to the Supreme Court, which has played the role of interpreting ambiguities in the regulations. As regards withdrawal, regulation 27 of the SEBI Takeover Regulations of 1997 has been the subject matter of three different decisions of the Supreme Court, as discussed herein. All have been unanimous in circumscribing the ability of the acquirer to withdraw the offer, thereby reinforcing the sanctity of takeover offers. Given such a strict approach adopted by the Supreme Court, it is incumbent upon SEBI to deal with and dispose of issues pertaining to takeover offers in a timely manner.

Tuesday, February 21, 2017

SEBI accuses statutory auditors for fraud, etc.

SEBI has passed an interim order against various persons which also doubles up as a show cause notice (“SCN”) on the erstwhile statutory auditors (“the Auditors”) of a listed company. The Auditors are asked to show cause why directions should not be issued to debar them from issuing certificates under several specified securities laws.

While directions have been issued against the concerned listed company (Arvind Remedies Limited or “Arvind”) and its Director/Promoter, the focus here is on the action initiated against the Auditors.

Several alleged irregularities were found in the accounts of Arvind. Sales, profits and assets were said to have been heavily overstated and bogus/double accounts maintained. Huge write off in assets were made which has invited suspicion by SEBI. The Managing Director was said to have been paid commission on the basis of such alleged bogus sales. The price of the shares of Arvind fell substantially. The Auditors resigned and a new firm of auditors was appointed. Action has been initiated by SEBI against the previous/erstwhile auditors who audited the accounts of Arvind during the period under investigation.

SEBI has alleged that the Auditors were “…negligent in certifying accounts of ARL and failed to maintain professional standards in Audit...(and)..therefore, enabled ARL and its Director to perpetrate manipulation/fraud on genuine investors in the securities market.”. SEBI has alleged violation by the Auditors of multiple provisions of the SEBI Act and the SEBI PFUTP Regulations. These provisions relate to serious acts such as fraud, deceit, use of manipulative/deceptive device, etc.

SEBI has asked the Auditors to show cause why they should not be banned from issuing certificates under various Securities Laws (SEBI Act and Rules/Regulations issued thereunder, under provisions of Companies Act, 2013 administered by SEBI, etc.).

A question had arisen in the past whether SEBI had any power to take action against auditors and whether this was the exclusive prerogative of the Institute of Chartered Accountants of India. The Bombay High Court had held (in Price Waterhouse & Co. vs. SEBI (2010) 103 SCL 96), that “ cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, the SEBI has absolutely no power to take any remedial or preventive measures in such a case.”.

Earlier too (on which I had posted here), SEBI had debarred an auditor of a listed company from issuing certificates under various specified Securities Laws. There, SEBI had made a specific finding that the auditor “had fraudulently certified the Annual Report, which it did not believe to be true and had fraudulently caused the Annual Reports of the relevant period to be published with untrue information” (emphasis mine).

The SCN/Order, however, is unclear in parts. On one hand, it alleges that the Auditors have made serious violations of fraud, etc. On other hand, the Order says that the Auditors were “…negligent in certifying accounts of ARL and failed to maintain professional standards in Audit..”. It will be interesting to see how such negligence or failure to maintain professional standards can be held to be fraud, deceit, etc.

In any case, if it can be held that auditors have violated these provisions relating to fraud, manipulation, etc., then apart from ban from issuing certificates, other powers SEBI has of levying penalty, prosecution, etc. could also be invoked.

Needless to add, action by SEBI does not rule out action by the Institute of Chartered Accountants of India and also action under the Companies Act, 2013.

The M&A Environment in Brazil - A Guide for Indian Acquirers

My learned colleague Rodrigo and I have written an article on the M&A environment in Brazil (from an Indian buyer’s perspective). It is available at and I have also excerpted it below.


Brazil is the world’s fifth largest country and with an estimated population of 200 million, it is also the world’s fifth most populous country after China, India, USA and Indonesia. Brazil is a member of BRICS[1], an association of five major emerging national economies. Generally speaking, Brazil was a relatively closed economy in the 1970s and 1980s. However, similar to India, liberalization took place in the 1990s, resulting in the lifting of trade barriers and protective practices and the local manufacturers are now more competitive internationally.

Brazil has rich biodiversity and abundant agricultural, mineral and energy potential as well as broad industrial base and infrastructure and a diversified economy. The country has showcased enormous internal growth potential in last few years and dynamic business conditions. With abundance of semi-skilled and unskilled labor, Brazil is a commodity powerhouse. Recent years have seen a devaluation in the local currency i.e. Brazilian Real[2] leading to an attractive exchange rate for offshore acquirers. As a result, Brazil has been able to attract significant foreign investments and has emerged as one of the favourite destinations for global investors.

There has been a trend recently of Indian entities aggressively acquiring foreign companies or entering into mergers with them, so as to establish their presence in global markets. The transactions have been entered into by Indian entities either to expand their research and development, or to access intellectual property relating to their business or gain entry into lucrative as well as well-established markets around the globe. Indian investors have noticed the economic growth and potential in Brazil, and have made significant investments in Brazil. According to the Indian embassy in Brazil, Indian companies have made investments of around $5 billion i.e INR 32,762 crore, in Brazil.

Recent Indian investments in the Brazilian pharmaceuticals market with Cipla acquiring Duomed Produtos Farmaceuticos Ltd and Lupin Ltd acquiring Medquímica Indústria Farmacêutica S.A, is indicative of the recognition by Indian investors of the lucrative markets in Brazil.

Even IT companies like TCS, Wipro, and Infosys, automobile companies like Mahindra & Mahindra and infrastructure companies like L&T have followed the trend and invested in Brazil. The oil and gas sector in the country has seen investments by Indian companies, like Videocon Industries Ltd, which already owns stake in 10 exploration blocks in Brazil and proposes to further invest $2.5 billion over three years.

Legal Environment

The basic laws which govern any merger and acquisition transaction in Brazil are:
·        Brazilian Corporations Law (Law 6,404/76);
·        CVM Regulations;
·        Antitrust Law (12,529/2011)

Regulatory bodies

The bodies regulating the various aspects of the mergers and acquisition are as follows:
·        Banco Central do Brasil (“BCB”): BCB is the central bank and regulates the monetary policy, exchange controls, registration and control of foreign capital, profit remittances and banks and financial institutions.
·        Comissão de Valores Mobiliário (“CVM”): CVM is the securities and exchange commission of Brazil and regulates the securities market and listed companies.
·        Conselho Administrativo de Defesa Econômica (“CADE”): CADE is the anti-trust commission regulating and monitoring any unfair business practices and anti-competitive practices.
·        Instituto Nacional da Propriedade Industrial (“INPI”): INPI is Brazil’s institute of industrial property regulating patent and trade mark registrations and technological development.
·        Others: Depending on the business purpose of the company, other agencies may be involved. Examples are the National Agency of Petroleum (“ANP”) for oil and gas companies, Sanitary Authorities(“ANVISA”) for pharmaceutical companies, among others.

Investment Vehicles

Popular forms of vehicles which are involved in carrying out mergers and acquisitions in Brazil, include the following:
·        Sociedades limitadas (e. Limited liability companies): These entities are basically private limited companies issuing quotas and comprise of quota holders. The advantage of this is having flexibility especially in relation to formalities. They are regulated by the Civil Code and articles of association.
·        Companhias fechadas (e. Closely-held corporations): These entities are basically public limited companies and issue shares and comprise of shareholders. They are required to have a developed corporate governance structure in place. They are regulated by Federal Law 6.404/76 (Corporations Law) and their bye-laws (estatutos).
·        Fundo de Investimento em Participações: This is a close-ended private investment fund consisting of certain qualified quota holders, which is managed by an administrator. They are regulated by the CVM.

Methods of mergers and acquisition

A few notable ways of entering into an acquisition transaction in Brazil are:
·        Private Negotiations: The acquiring party can enter into negotiations with the controlling shareholders and execute a shareholders agreement. This is the most efficient method in light of the fact that most of the companies in Brazil have a concentrated ownership. It needs to be noted that the minority shareholders have been provided a tag-along right as per law, as the acquirer of the controlling voting rights is obliged to make an offer for the non-controlling voting rights at a price of at least 80% of the price paid for the controlling voting shares.
·        Acquisition through the stock market: This method is effective in case the ownership of a company is dispersed. The same can be combined with private negotiations involving owners of the dispersed shares. Any such acquisition could trigger the requirement of an open offer as well.
·        Hostile acquisition: There is no distinction as per the laws of Brazil between a voluntary acquisition and a hostile acquisition, and considering that majority of the companies in Brazil have a concentrated ownership, the probability of the occurrence of a hostile acquisitions is rare.
·        Mergers: Mergers in Brazil can be classified into three types of transactions. First, is fusão, which is a merger of two or more companies to form a new company. Second is cisão, which is a spin-off of an existing company. Third is incorporação, which involves one or more companies merging into another. The most common type of merger transaction in Brazil are incorporação and cisão, while fusão is used less in the context of Brazil as it is considered troublesome. Cisãois usually used for the purpose of segregating the assets and liabilities of a company which are to be sold from the rest.

Tax Perspectives

Even though the tax regime in Brazil is complicated, there is flexibility provided which can be utilized by foreign companies through efficient tax planning. Acquisition of a company in Brazil does not entitle the company to utilize tax benefits such as tax credits and net operating losses carry-forward, however the same can be utilized through a merger with a company in Brazil.
From a tax perspective, share purchase is more beneficial than an asset sale, as a share purchase provides benefits like claim of amortization of goodwill generated on the share acquisition of the Brazilian company as a deductible expense in respect of the Brazilian corporate income taxes and social contribution on net profits. Additionally, through a share purchase, the indirect taxes applicable on sale of assets can also be avoided. Brazil also does not have a regime for indirect transfer of ownership of a company, which can also be utilized by foreign investors.
Brazil has also executed double taxation avoidance agreements with various countries, including India. The benefits under the double taxation avoidance agreement is therefore available to Indian companies which seek to establish themselves and operate in Brazil.


Foreign Investment: Under the foreign investment regime in place in Brazil, foreign ownership or control in certain sectors, e.g. media and broadcasting, mail and telegraph services, aviation companies etc., is prohibited. Additionally, certain other sectors have restrictions with regard to foreign investment, e.g. utility providers, insurance, similar public transportation, railroad, securities companies, fund managers and gambling.
Transfer of technology: The regulations relating to transfer of technology require that the technology transfer agreements, including transfers of patents and trademarks, must be approved and registered with INPI. In addition to the approval by INPI, any remittances for such transfers require BCB’s prior approval. Creation of such a multi-fold approval system increases the complexity of any inbound merger and acquisition transactions.
Foreign Managing Director: The management of both Limitadas and Corporations, may be undertaken by a foreign individual as long as he is resident in Brazil and has obtained a permanent visa and work permit. According to Brazilian laws, in order to obtain a permanent visa for the foreign managing director, the shareholders must prove to the Brazilian authorities that either (a) an investment of at least 600,000 Brazilian Reals was made per foreign managing director that will be assigned in Brazil; or (b) an investment of at least 150,000 Brazilian Reals was being made per managing director to be assigned in Brazil, together with the presentation of a business plan and the undertaking of a commitment with the authorities of hiring at least 10 local employees within 2 years following the arrival of the expatriate.
Foreign Employees: When hiring foreign employees, the company must follow all the legal formalities to obtain proper visa and also to obtain an authorization to hire foreign employees from the Ministry of Labour, Ministry of Justice, Federal Police and the Federal Revenue’s Office. Accordingly, foreign employees must obtain a temporary work visa. The term of validity of this visa may vary according to the relationship of the employee with the Brazilian company. Brazilian law states that at least two thirds of the workforce of the companies registered in the country must be composed of Brazilian citizens, and two thirds of the payroll must go to Brazilians.

Issues and Challenges

Complex laws and regulations: The multiple regulators and the complex procedures prescribed under various regulations applicable to merger and acquisition transactions, act as an impediment in both the entry of new foreign investors wishing to acquire and the existing entities as well.
Environment: The environment protection laws makes the owner of real estate property liable for any contamination which occurs, even though the actual contamination may have been done by some other party or the previous owner.
Anti-trust: The requirement of approval of CADE in case of certain specified mergers and acquisition transactions, creates yet another issue for such transactions as the same are time consuming. The approval of the CADE required for proceeding with such transactions can take up to 330 days and can cause a major hold up in deals.
New anti-corruption law: Brazil introduced a new Anti-corruption Act (Law 12,846/13) on January 29 2014, which provides stringent civil and administrative liability for corporate entities involved in corruption or bribery. The new law also creates a liability for the directors, managers, officers, administrators or employees of a company which have been involved in such an act.
Tax related issues: The Imposto Sobre Operações Relativas à Circulação de Mercadorias e Serviços de Transporte Interestadual de Intermunicipal e de Comunicações (“ICMS”), which is Brazilian value-added tax on sales and services and Imposto sobre Produtos Industrializados (“IPI”), which is the Brazilan tax on Industrialized Products, are the most commonly applied taxes in Brazil. Transactions in some sectors have significant ICMS and IPI, which can be burdensome for foreign investors. Additionally, Brazil has a transfer pricing policy in place, which applies to import and export of services and goods in relation to related parties who are not residents of Brazil and keeps a check on the transactions between such parties.
Language: The official language of Brazil is Portuguese, which creates issues for a foreign company planning to invest in the country. The legal documents and contracts are required to be in Portuguese, in order to remain valid and in order to be enforced in the court of law in Brazil. The law in Brazil mandates that certain documents like charter documents, minutes of meetings and real estate related agreements have to be only in Portuguese. In addition, although documents like shareholders’ agreements, voting agreements and escrow agreements can be in some other language, in case of a conflict in interpretation of the document in the two languages, the Portuguese version of the document will prevail.
Judicial System: The Brazilian judicial system is presently ill-equipped to deal with the issues relating to complex commercial transactions such as mergers and acquisitions. Additionally, the same is both time consuming and expensive, making it unviable to approach the courts for resolutions of any issues.
Diligence Specific Issues: Other than the above, certain diligence specific issues emerge in Brazilian acquisitions. Some of these are briefly set out below:
·        Poor quality of information
·        Lack of internal controls
·        Non-compliance
·        Labor and employment issues
·        Inter-company and related party transactions
·        Lack of visibility and absence of written contracts
·        High cost of capital (working capital finance, under-investment)
·        Cultural issues (for example, in relation to anti-bribery, anti-corruption regulations)
·        Sellers are often poorly advised

In Conclusion

Therefore, the key to successful entry in Brazil through acquisition is careful target selection and disciplined due diligence, amongst others. Specifically since many of the above issues also arise in the Indian context, Indian acquirers are well placed to deal with these issues constructively.

Additionally, identification of networked lawyers/ advisors who can work together and advise Indian and Brazilian entities in relation to potential cross-border deals is critical. For example, the authors’ law firms have a close working relationship and assist on India-Brazil corridor deals.

Disclaimer: The contents of this article are for informational purposes only and not for the purpose of providing legal advice. Views expressed are personal.

About the authors
Satyajit Gupta is leading the Corporate/ M&A team at Advaita Legal. Satyajit has completed his B.A., LL.B. from National Law School of India University, Bangalore. He is dual-qualified to practice laws of India and England. Satyajit is the Committee Liaison Officer of the International Bar Association Asia Pacific Forum and a Vice-Chair of the Asia Pacific Committee of the American Bar Association.  

Rodrigo Ferraz de Camargo is the partner responsible for the corporate department at FCAM. Mr. Camargo has a B.A. (L.L.B.) in Law from Pontifícia Universidade Católica PUC-SP, an L.L.M. in Corporate Law from PUC-SP, and an L.L.M. in Bank Law from IBMEC – SP. He has work experience in Mergers and Acquisitions (M&A), succession planning, corporate law, bank law, capital market, civil law, and competition law.

[1]  The term “BRIC” was coined in 2001 by then-chairman of Goldman Sachs Asset Management, Jim O’Neill, in his publication Building Better Global Economic BRICs. The foreign ministers of the initial four BRIC states (Brazil, Russia, India, and China) met in New York City in September 2006 at the margins of the General Debate of the UN General Assembly, beginning a series of high-level meetings. The first full-scale diplomatic meeting was held in Yekaterinburg, Russia, on 16 June 2009.
[2]   1 Brazilian Real = INR 18.37