A CENTRE OF RISK MANAGEMENT AND DERIVATIVES INITATIVE

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Making you commercially aware

National Law University, Jodhpur August, 2014

This newsletter seeks to highlight and provide an overview of contemporary issues pertaining to

business and commercial laws to widen our understanding of business laws which presently is

limited to an academic understanding. From the next edition onward the date of release would be

cited like “Volume: Summer 2014, Issue: Month”

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TOP STORIES

1. The question of CCI’s jurisdiction to “modify” apartment buyers agreements - A

Review of COMPAT’s DLF order. - Aakanksha Kumar………………………………………..3

2. Analyzing SEBI’s order in the Satyam Case. - Ayushi Mishra………………………………..9

3. The dilemma of exempting provisions to private companies under the 2013 Act – to

exempt or not to exempt? - Apurva Joshi & Abhijay Negi……………………………………..11

4. Section 108 of Companies Act, 2013: A Pro-shareholder Democracy Provision? -

Shivesh Aggarwal & Dhruva Sareen ……………………………………………………………….15

5. RBI’s efforts to revive the creaking infrastructure space - Divpriya Chawla…………….20

6. An Iron fist for Corporate Social Responsibility- Suprita Suresh…………………………...23

7. Reflections on Insider Trading regulations in India and their inadequacies- Srinivas

Raman…………………………………………………………………………………………………...26

8. E-commerce marketplaces: Making a case for FDI compliance in E-retail- Sagnik

Das……………………………………………………………………………...……………29

ACKNOWLEDGMENTS

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THE QUESTION OF CCI’S JURISDICTION TO “MODIFY” APARTMENT BUYERS

AGREEMENTS - A REVIEW OF COMPAT’S DLF ORDER

- Aakanksha Kumar

In a heavy setback to the real estate giant, DLF Ltd., the Competition Appellate Tribunal

[‘COMPAT’], on May 19, 20141 upheld the 2011 order of the Competition Commission of India

[‘CCI’]2 holding the company guilty of abusing its dominant market position with regard to a

residential society in Gurgaon. In August 2011, the CCI had, pursuant to the information filed by

the Belaire Owner’s Association, found that DLF had misused its position of power in dictating

the terms of the Apartment Buyers Agreement [‘ABA’] and imposed unilateral and one-sided

clauses. The CCI pronounced DLF guilty for grossly abusing its dominant position by having

imposed unfair conditions in the sale of flats/apartments to home buyers/consumers. It further

imposed a penalty of INR 6,300 million (USD 140 million), at the rate of 7% of the average

turnover of DLF for the last three financial years and issued a 'cease and desist' order against

DLF from imposing such unfair conditions in its agreements with buyers for residential buildings

to be constructed in Gurgaon.

The CCI had also asked DLF to appropriately modify unfair conditions imposed on its buyers,

within 3 months of the date of receipt of the order. This was followed by DLF's appeal to

COMPAT, which however, asked CCI in March 2012 to pass another order “specifying the

extent and manner in which terms and conditions of the ABA needed to be modified”.3

Consequently, CCI passed a supplementary order on January 3, 2013 to modify the buyer

agreement DLF's Belaire project at Gurgaon. In two separate supplementary orders announced

thereafter on January 10, 2013, the CCI said the modifications suggested for the Belaire project

buyers agreement would be applicable for DLF's Park Place4 and Magnolia projects5 as well, that

were subjects of ongoing cases.

1COMPAT Order in Appeal Nos. 20 of 2011, 22 of 2011, 23 of 2011, 12 of 2012, 19 of 2012, 20 of 2012, 8 of 2013,

9 of 2013, 11 of 2013 and 29 of 2013 on May 19, 2014. 2 CCI Order in Case No. 19 of 2010 on August 12, 2011. 3 M/s. DLF Limited v Competition Commission of India & Ors, COMPAT Order in Appeal No. 20 /2011 with I.A.

Nos. 14, 18, 19 & 21 of 2012 on March 29, 2012. 4 CCI Supplementary Order in Case No.s 18, 24, 30, 31, 32, 33, 34 and 35 of 2010 on January 10, 2013. 5 CCI Supplementary Order in Case No. 67 of 2010 on January 10, 2013

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It is interesting to note that DLF’s continued argument, that the CCI is not the appropriate forum

for hearing the matter, tethered majorly on two submissions – that of the non - retrospectivity of

the law, and the other of CCI’s lack of jurisdiction over competition issues in the real estate

sector, especially with respect to modification of ABAs. The COMPAT in its May19, 2014

Order, found that the CCI, in pursuance of its powers under S.27 of the Competition Act, 2002,

can only modify those -

“agreements which are in contravention of section 3... The CCI under section 27(a) of the Act

can direct the total discontinuance of the agreements and also injunct the party concerned not to

re-enter such agreement…In addition, it can then direct that the agreements would stand

modified and that would be under section 27(d) of the Act. Insofar as the action in

contravention of section 4 of the Act is concerned, the CCI can direct the concerned guilty

party to discontinue its abuse of dominant position. In addition to this, the CCI would have

power under section 27(b) of the Act to impose penalty.”6

It is further interesting to note that the aforementioned order was passed by a bench of the

COMPAT, which comprised of the very same two members that gave the March 2012 order for

suggesting modifications. Shri Vinod Dhall, very succinctly observed that the COMPAT’s

aforesaid finding is “perplexing given that COMPAT had itself remitted the matter in March

2012 to CCI, and instructed it to specify the extent and manner in which the terms of the

impugned agreement should be modified. Thus, apparently, in March 2012, COMPAT held the

view that the latter had the power to direct modification to an agreement in an AOD case. When

and why this view changed has not been explained by COMPAT; therefore, an air of uncertainty

hangs over this issue of law.”7

This finding creates a further cause of concern over the interpretation of S.27 powers of the CCI,

when placed in the larger context of competition regulation and abuse of dominance in the real

estate sector. In the aftermath of order imposing penalty on DLF, and the subsequent

modification order, the CCI saw a huge influx of complaints from aggrieved resident

associations against apartment developers and real estate companies, citing instances of delayed

6 Supra note 1 at ¶ 74 7Vinod Dhall, “Shackling Competition” The Financial Express (June 5, 2014)

<http://www.financialexpress.com/news/column-shackling-competition/1257318>

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delivery and biased buyer-builder agreements.8 However, even though such companies might

have been indulging in similar exploitative tactics, the CCI dismissed most of these cases

because such companies, unlike DLF, did not enjoy a position of dominance in the relevant real

estate market. Though the CCI is right in its interpretation in so far as that for any and all

injustice done by the builder to the consumer, the remedy does not lie within India’s competition

laws, however, while the apartment buyers of dominant real estate developers like DLF are

provided an effective avenue to address their concerns, apartment buyers of smaller builders,

although subject to similar exploitative terms, are left to suffer. Their only recourse is before

India’s consumer law forums, which are hardly as efficacious in delivering justice.9 Further, after

the COMPAT order, seeking a modification of ABAs post a S.4 violation finding, seems a

longshot, given the fetters now introduced on CCI’s powers under S.27. A plain reading of the

text of S.27 leads one to understand that the CCI does have the power to “pass such other order

or issue such directions as it may deem fit.”10 If the COMPAT order is literally interpreted, there

is no forum which may be approached by aggrieved apartment buyers and owners, to seek

amendments to oppressive and exploitative clauses in existing ABAs. And this is merely because

the agreements in question were/ have been entered into prior to the coming into force of the Act,

i.e. prior to May 20, 2009. On the other hand, a too literal interpretation could also lead one to

conclude that any exploitative clauses in agreements entered into AFTER the coming into force

of the Act, by dominant players, may be modified by the CCI if a S.4 violation is found. Was this

the intention of the legislators when drafting S.27? While humbly respecting the findings of the

COMPAT order, it does seem odd, to impute the meaning to S.27 powers, that while a S.3

violation finding can lead to CCI modifying the agreement, even if the same is prior to May 20,

2009, a S.4 violation act must be only AFTER May 20, 200911 for the CCI to have the power to

modify.12 So, in effect the finding means that if there is an agreement for cartel; that can be

amended. But if there is a dominant position and that dominance is exercised pursuant to an

agreement, the CCI can’t amend the agreement but can penalize for abuse of dominance. This I

8 Dilasha Seth, “Competition commission flooded with complaints against realtors” Business Standard (March 25,

2012) <http://www.business-standard.com/article/companies/competition-commission-flooded-with-complaints-

against-realtors-112032500040_1.html> 9Dhanendra Kumar & Avirup Bose, “CCI’s realty test” The Financial Express (June 7, 2014)

<http://www.financialexpress.com/story-print/1257955> 10Competition Act, 2002, S.27(g) 11 Supra note 1 at ¶ 74 12 Dhall, Supra note 7

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believe is against the letter and spirit of the Competition Act as a whole, and the residual powers

available with the CCI under S.27(g).13 This argument was made by the counsels for the buyers,

but was rejected by the COMPAT, citing an unexplained version of the lex specialis rule.14

Pursuant to the legislative framework of the Competition Act, the duty of the Commission is to

“prevent practices having adverse effect on competition, promote and sustain competition,

protect the interests of consumers and ensure freedom of trade carried on by other participants,

in markets in India.”15 This mandate is extraordinarily wide and does in a way seem to overlap

with the jurisdiction of sector-specific regulators. However, there is no real estate regulator in

place in India today. The draft bill – the Real Estate (Regulation and Development) Bill, 2013

was introduced in the Rajya Sabha by the then Minister of Housing and Urban Poverty

Alleviation on August 14, 2013. The Standing Committee on Urban Development submitted its

report on February 13, 2014. The Bill regulates transactions between buyers and promoters of

residential real estate projects. It establishes state level regulatory authorities called Real Estate

Regulatory Authorities (RERAs), in light of the fact that even though the Parliament’s

jurisdiction to make laws related to real estate as “land” is in the State List of the Constitution,

the primary aim of this Bill is to regulate contracts and transfer of property, both of which are in

the Concurrent List.16 Clause 29 of the Bill provides for the functions of the state level RERAs

for promotion of real estate sector. It empowers the Authority to make recommendations to the

appropriate Government or the competent authority in order to facilitate the growth and

promotion of a healthy, transparent, efficient and competitive real estate sector. Clause 33 on

Powers of the Authority further reads thus – “… (3) Where an issue is raised relating to

agreement, action, omission, practice or procedure that—

(a) has an appreciable prevention, restriction or distortion of competition in connection with the

development of a real estate project; or

13See also Nisha Uberoi’s opinion on the ruling at – “COMPAT Holds DLF Guilty; Dilutes CCI’s Powers!” The

Firm, CNBC TV18 (May 30, 2014) < http://thefirm.moneycontrol.com/story_page.php?autono=1096181> 14 Supra note 1 at ¶ 74 “We do not think that for modification of the agreements, as has been ordered by the CCI,

this clause can be made available. It is an established canon of interpretation that where there is a specific

provision available then a general provision can be taken recourse to. [sic] For this reason also we hold that the

direction about the modification was not possible in the peculiar facts of this case” 15Competition Act 2002, S.18 16Joyita Ghose, “Legislative Brief - The Real Estate (Regulation and Development) Bill, 2013” PRS Legislative

Research (June 10, 2014)

<http://www.prsindia.org/administrator/uploads/media/Real%20Estate/Real%20Estate%20-

%20Legislative%20Brief.pdf>

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(b) has effect of market power of monopoly situation being abused for affecting interest of

allottees adversely,

then the Authority, may, suo motu, make reference in respect of such issue to the Competition

Commission of India.”

This particular provision of the Bill is in consonance with the concurrency and cooperation

between the CCI and the sectoral regulators, as envisaged with the Competition Act, 2002 itself.

Apart from the S.18 wordings explaining the objective of the CCI, provisions in Ss. 21 and 21 A

provide for an exchange of information and reference from and by the CCI and other sectoral

authorities. Through the Competition Amendment Act, 2007, attempts were made to ensure that

the Competition Act, 2002, resolves turf wars with sector regulators. The original law permitted

reference to CCI by another regulator only when any party requested for it. Now, the regulator

can refer suo motu as well. The amendments also inserted the requirement of recording reasons

for disagreeing with CCI.17

Under Ss. 21 and 21A of the Act, both CCI and the sector regulators may 18cooperate when it

comes to dealing with issues that appear to have an impact on the jurisdiction of the other. If a

sector regulator is handling a case and it turns out that there is a possibility of the decision to be

taken infringing the Competition Act, the sector regulator may refer the matter to CCI for its

opinion. CCI is obliged to give its opinion within sixty days. In a similar fashion, if CCI is

investigating a case and it is pointed out that there is a possibility of the decision being contrary

to the provision of the law entrusted to a sector regulator, then CCI may make a reference to the

sector regulator, asking for its opinion and input into the matter. However, opinions from both

the sector regulator and CCI will not be binding. 19

Further, S. 60 provides that the Act shall have overriding effect, notwithstanding anything

inconsistent therewith contained in any other law for the time being in force; and S. 62 provides

17 Competition Act , 2002 s 21(2) – “ (2)On receipt of a reference under sub-section (1), the Commission shall give

its opinion, within sixty days of receipt of such reference, to such statutory authority which shall consider the

opinion of the Commission and thereafter, give its findings recording reasons therefor on the issues referred to in

the said opinion” 18‘Draft National Competition Policy 2011’, (Ministry of Corporate Affairs) 18-21

<http://www.mca.gov.in/Ministry/pdf/Draft_National_Competition_Policy.pdf> accessed 9 May 2014 - The

Committee on National Competition Policy and allied matters has recommended that the words in Section 21 of the

Competition Act, 2002: ‘may’ be substituted by ‘shall’, thus making it mandatory. However, the proposed

amendments to the Act are yet to be adopted.; See generally CUTS - ICRIER ‘Competition and Regulatory

Overlaps: The Case of India’ (CUTS, IICA Country Paper- India) <http://www.cuts-

ccier.org/IICA/pdf/Country_Paper_India.pdf> 19 CUTS, IICA Country Paper- India Supra note 18 at 8

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that the provisions of the Competition Act shall be in addition to, and not in derogation of, the

provisions of any other law for the time being in force. Combined reading of the sections gives

an impression that CCI has the primary jurisdiction to try cases on competition related matters.20

The Bill provides for recourses available on failure to grant possession by the residential real

estate project promoter and imposes a penalty in the form liability to “return the amount received

by him in respect of that apartment, plot, building, as the case may be, with interest at such rate

as may be prescribed in this behalf including compensation”21 However, nowhere in the Bill do

the RERAs have the power to modify the terms of an “agreement for sale” if the buyers are

aggrieved by oppressive or unilateral terms. The only contingency envisaged is a unilateral or

exploitative cancellation of the entire agreement for sale.22 Therefore, even if the RERAs so

come into existence in the future without any modifications in the law as it presently stands, the

jurisdiction to modify remains with the CCI. And the same stems from S.27(g), which as Ms.

Nisha Uberoi (Partner, AMSS, Mumbai) describes, is a “catch all”23

This article has previously been published as a livelaw blog post. Link to the same is:

http://www.livelaw.in/question-ccis-jurisdiction-modify-apartment-buyers-agreements-review-

compats-dlf-order/

20Ishita Gupta, ‘Interface between Competition & Sector Regulators : Resolution of The Clash of Regulators’,

(Competition Commission of India, Internship Project Report) 19

<http://cci.gov.in/images/media/ResearchReports/Interface%20between%20CCI%20and%20Sector%20Regulators.

pdf.> 21 The Real Estate (Regulation And Development) Bill, 2013, Clause. 16 22 The Real Estate (Regulation And Development) Bill, 2013, Clause 11(5) 23 Supra note 13.

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ANALYZING SEBI’s ORDER IN SATYAM CASE

- Ayushi Mishra

On 15th July 2014, the Securities and Exchange Board of India (SEBI) passed an order in the

Corporate scam of Satyam Computers after five years of the matter first coming into limelight.

The founder of Saytam Computers B. Ramalingam Raju and four other former executives

namely the former Managing Director, Chief financial Ofiicer, Vice President Finance and Head

Internal Audit to pay Rs. 1849.93 crores because of the unlawful gains made through the sale of

shares. The former executives are required to pay a simple interest at 12% on the sum since

2009, within 4 days of the order. With that the total amount comes somewhere to be Rs. 2,958.29

crores. Raju and the other four executives are also barred from accessing the global markets for

14 years to protect the interest of the investors and integrity of securities market.

“...the fraudulent acts and omissions of the noticees in a co-ordinated manner have shattered the

confidence of millions of genuine and unsuspecting investors in securities of Satyam Computer

and caused serious prejudice to integrity of the securities market,”- SEBI’s 65 page order

Background of the matter

Ramalingam Raju the founding Chairman of Satyam was arrested after he had admitted in 2009

that his Company had amplified its earning and assests for years. SEBI issued a showcause

notices to all five executives in the order between March 2009 and April 2009. Thereafter,

supplementary notices were sent. He fudged accounts resulting in artificial cash and bank

balances going up. Also there were over-stated debtor’s position being showed in the balance

sheets. According to the SEBI’s order there were 7,600 invoices being faked and also continuous

increase in terms of balance deposits presented in the books as against actual balances reported

by banks over 2001-2008. Merely taking into account the fictitious invoices Satyam’s revenues

were over-stated to the extent of Rs. 4,782.75 crores over a period of 5-6 years. The five

aforementioned former executives were found guilty of engaging in Insider trading and

following unfair and fraudulent trade practices to make illegitimate and illegal gains from

Company’s shares. They were categorically found in violation of SEBI (Prohibition of fraudulent

and unfair trade practices relating to securities Markets), 2003 and SEBI (prohibition of Insider

Trading) Regulations, 1992. Also they were found guilty of falsifying financial accounts to

mislead investors and shareholders. Reportedly Ramalinga Raju made gains to the tune of Rs.

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543.93 crores through a sale of shares and Rs. 1,258.88 crores via pledging of shares. Srinivas

made unlawful gains of Rs. 29.5 crores, Ramakrishna of Rs. 11.5 crores and Prabhakaran Gupta

of Rs. 5.12 crores through sale of shares.

Shortcomings with the order

Considering that the order came five years after the matter coming to light, the order is

infructuous for many reasons. Firstly, the order coming after 5 years does very little to

compensate the investors or deter the errant parties. This is precisely because there are no assets

remaining with the parties to meaningfully execute the order and because the legitimate money

of the alleged perpetrators is already attached by other probe agencies. Also besides the SEBI’s

order, the order of the Special Court in Hyderabad is still pending though the arguments in the

SBI case have been completed. Secondly, the order also highlights the inadequacy of Indian legal

system to deal with corporate frauds of such a magnitude and stature. This is precisely due to the

time taken in passing of the Order where a swift order would have sent a clearer message to the

investors regarding the intention of the regulators. Delay due to non- cooperation of the parties

and SEBI’s concern for providing natural justice ended up providing leverage to the parties in

terms of time. Thirdly, the order is not effective since the same is not penal in nature and

therefore, the deterrent effect of the same goes down. Also it’s a setback for the affected parties

who initiated a class action with an aim to compensate the victims. A corporate fraud of such a

mammoth magnitude should be treated like a criminal case, more so because of the thousands

who lost their jobs and millions who invested. Nevertheless, a criminal action is still to see the

light of the day.

Looking at the future

Nevertheless, SEBI’s order is in the right direction and will act as a deterrent for those who think

they can escape the clutches of SEBI. But more said that done it is imperative to inquire and get

to know what is really in store for such similar episodes in future waiting in wings to enacted

anytime in future. This being especially the concern due to the time taken in passing the order in

one of India’ biggest financial misappropriation scam despite the fact where cases like Enron

were investigated much quickly. Also the Satyam case can make us question the ability of such

frauds to be caught in red blood than being brought in light due to the confessions of the

financial fudging perpetrators themselves.

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THE DILEMMA OF EXEMPTING PROVISIONS TO PRIVATE COMPANIES UNDER

THE 2013 ACT – TO EXEMPT OR NOT TO EXEMPT?

- Apurva Joshi & Abhijay Negi

The Companies Act, 2013 had put the previously nested-by-exemptions, private companies,

under the inconvenient burden of several new compliances to be adhered to. After nagging

demands of India Inc., the Ministry of Corporate Affairs on June 24, 2014 invited public

comments on a draft notification which aimed at changing the scenario and shifting towards a

pro-private approach. On July 14, 2014, a final draft notification was placed in the parliament,

which now is awaiting approval of the two Houses. There seems to be a dilemma in the minds of

the legislature framers whether to curtail the exemptions given to the private companies under

the 1956 scheme or to let the companies continue with them. This article has traced a few

important exemptions regarding which there have been rounds of serious deliberations in the

corporate world.

Compliance woes

Under the new Act, by virtue of section 117 (3) read with section 179 (3), various items of board

resolutions were required to be filed. The draft notification aims at reducing the compliance

burden of the private companies. However, in an attempt to ease out the burden has proposed full

exemption to private companies from sec. 117 (3)(g), as a result of which private companies will

not be required to file MGT-14 pursuant to board meetings thus restoring the 1956 regime as

regards the compliances.

Related Party Transactions

Private companies are the ones which enter into transactions on the basis of inter-personal

relationships. By virtue of not being public they cannot be expected to deal with parties at arms’

length manner at all times. Thus, the compliance of ‘related party transactions’ has brought in

with it practical problems.

Originally, section 188 of the Act had proposed strangling compliances for the private companies

as well as regards the related party transaction, which the notification inviting comments had

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sought to cure. The Act provided for the directors of a private company to refrain from

participating in a board meeting where a matter in which they are interested is to be discussed24,

which runs against the very spirit of private companies, which actually do not have any

independent directors, interest of ‘any director’ comes into picture, making the compliances even

stricter. However, the final notification has restored the restrictions on related party transactions

in case of private companies, with the following conditions:

(a) A resolution has to be approved by a vote of the minority only, excluding the ‘related party’

when related parties are indulged. Relaxation with respect to this aspect has been provided to

private companies, which means that in a private company, even the interested director may

vote.

(b) Holding-subsidiary relationships and investor-associate relationships have been excluded

from related party relationships25. However, most transactions by or between private companies

will still come under the ambit of sec. 188 since most of these transactions are covered by the

“common director” or “common shareholder” clause still in the definition and not by holding-

subsidiary or investor-associate relationships.

Therefore, the implication is that if a transaction falls under the ambit of section 188, it will

require board and general meeting approval, if the company size/transaction size thresholds are

crossed. The advantage owing to the notification is that in such a general meeting, even related

parties may vote and thus, obtaining required majority would not be an unattainable task though

the added compliance may still prove to be an irritant.

However, one of the most cumbersome - by all directors about their shareholdings, and every

time there is a change therein – still remains intact26 despite the other major relief provided by

the final draft notification.

Kind of share capital and voting rights

The draft notification inviting public comments provided for non-application of the

aforementioned provision for companies where memorandum or articles of association of a

company, so provide. However, the present draft notification proposes non-application of the

24 Section 184(2), Companies Act, 2013. 25 Section 2(76), Companies Act, 2013. 2626 Section 184(1),Companies Act, 2013.

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provisions i.e. restoring the 1956 situation by non-application in entirety. This is being seen as a

welcome relief, especially by the new start-ups which can opt for the risk minimizing differential

rights.

Loans by private companies

Under the Companies Act, there was no restriction on lending by private companies as a private

company is essentially a conglomeration of private capital from various sources and there seems

to be not valid reason as to why lending should be regulated, when the directors have interest in

other entities. Additionally, what is especially questionable is the regulation in lending to own

entities by the private companies.

The amendment proposed to Section 185 in the draft notification proposes that a private

company, similar to a public company, will be prohibited from advancing any loans to directors

or any other company in which the director is interested, unless the lending company satisfies the

following three conditions, namely, (a) there is no body corporate shareholder in the lending

company; (b) the lending company’s aggregate borrowings from other bodies corporate or banks

or financial institutions is limited to whichever is minimum, either (i) twice the net worth of

company; or (ii) Rs 50 crores and (c) there is no pending default in repayment of borrowings by

the lending company.

Deposits from members

Shareholders’ loans in case of private companies were exempted from the purview of deposit

restrictions under the Companies Act 1956. However, the Deposit Rules under the new Act took

away the exemption purportedly as a result of various kinds of scams which have taken place in

the recent past. The proposed exemption to private companies for accepting loans/deposits from

their shareholders, up to 100% of net worth, has been given adopted by the final notification,

subject to a filing compliance, non-adherence to which may lead to penal consequences.

Limit on company audits

Under the 1956 scheme, there was no limit on the number of companies an auditor could audit.

However, the new legislation restricted the auditing confirms by mandating the private

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companies to not appoint a person as an auditor if he is already an auditor for 20 other

companies.27

In the original draft of the notification, private companies were completely excluded from the

limit. Now, the limit of 20 on company audits will now exclude all small companies, and private

companies having a paid up share capital of less than Rs 100 crores. The limit now exists only

with respect to public companies.

This is being seen as a big relief to auditing firms as well as private companies.

Conclusion

Though a strong argument against provision of exemptions to the private companies is the need

for strengthening the feeblest limb of corporate governance, certainly, similar standards of

compliances and adherence to corporate governance principles cannot be expected from private

companies. The Ministry of Corporate Affairs reportedly received close to a thousand

applications and the outcome in form of the final draft notification seems a promising and

welcome departure from strict compliance schemes, especially in view of the private companies.

27 Section 141, Companies Act, 2013.

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SECTION 108 OF COMPANIES ACT, 2013: A PRO-SHAREHOLDER DEMOCRACY

PROVISION?

- Shivesh Aggarwal & Dhruva Sareen

It is well-known that a shareholder is considered to be an indispensable element of a company.

That being said, a ‘shareholder’ means the shareholder registered in the books of the company.28

When investing in a company, a shareholder is entitled to certain rights, including the right to

attend and participate in shareholders' meetings. These shareholders' meetings are not just

formalities; rather they provide a platform for shareholders to query the manner in which the

company is managed.29 Shareholder participation is a key component of a successful annual

meeting of shareholders.30 However, due to physical inconvenience, only a mere fraction of the

total investors are able to cast votes in the company meetings leading to an undemocratic polling

in important company matters. The new legislation governing company law has tried to tackle

this problem effectively by introducing a provision mandating electronic voting in companies;

which is being seen as a seamless move towards democratic polling.

The Indian Companies Act, 2013 (“2013 Act”) has marked a paradigm shift refurbishing the

corporate governance norms that both domestic companies and overseas investors abide by. The

2013 Act is to set the tone for a more modern legislation which would enable growth and greater

regulation of the corporate sector in India,31 recognizing the electronic mode for notices and

28 Commissioner of Income Tax, Bombay City II v. Shakuntala, AIR 1966 SC 719; Rameshwari Lal Sanwarmal v.

CIT, AIR 1980 SC 372: (1980) 2 SCC 371. 29 Naresh Thacker & Rhia Marshall Banerjee, Can postal ballots and electronic voting replace shareholder

meetings?, LEXOLOGY, http://www.lexology.com/library/detail.aspx?g=d0626acc-21e1-4730-b691-b7a613b496f9. 30 Noam Noked, Online shareholder Participation in Annual Meetings, THE HARVARD LAW SCHOOL FORUM ON

CORPORATE GOVERNANCE AND FINANCIAL REGULATION, http://blogs.law.harvard.edu/corpgov/2012/07/19/online-

shareholder-participation-in-annual-meetings/. 31 Companies Act, 2013: Fresh thinking for a new start, DELOITTE, http://www.deloitte.com/assets/Dcom-

India/Local%20Assets/Documents/Thoughtware/Tax_thoughtpapers_Dec_19/Deloitte_Companies%20Act,%20201

3.pdf; See Legitimate concerns of the industry should be given due consideration to refine the Act & foster a sound

and enabling business regulatory environment, BUSINESS STANDARD,

http://www.business-standard.com/article/news-cm/legitimate-concerns-of-the-industry-should-be-given-due-

consideration-to-refine-the-act-foster-a-sound-and-enabling-business-regulatory-environment-

114062500301_1.html.

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voting32, which is in line with the MCA’s efforts to give cognizance to use of electronic media as

evident from a number of green initiatives’ introduced in the recent past.33 This has made India

one of the fore-runners in the field of digitalizing ballots in commercial law prioritizing the

networking of globally located investors.

Few years ago, a “Passing of Resolution by Postal Ballot” had been introduced34 since the

inconvenience of the shareholders to be physically present during voting was foreseen. But apart

from the aforementioned move, one of the more prolific endeavors has been to digitalize the

exercise of right to vote by the shareholders35 with the object of ensuring wider shareholders

participation in the decision making process of companies.36 Hence in 2012, SEBI had made it

mandatory for top 500 entities listed at BSE and NSE, chosen on the basis of their market

capitalization, to provide e -voting facility to its shareholders.37

Through this facility, customers having de-mat accounts could access the brokerages' websites

and vote on the company resolutions. To define electronic voting (e-voting), it is a term

encircling several different types of voting, implementing both electronic means of casting a vote

and electronic means of counting vote.38 Through e-voting, the rigidity of a postal ballot39 or any

method entailing physical presence is smoothened, and the expensive process of proxy

solicitation is jettisoned.40 Therefore, Section 108 of the Companies Act, 201341 read with Rule

20 of Companies (Management and Administration) Rules, 2014 now requires all listed

companies and companies with 1000 or more shareholders to provide e-voting42 in addition to

32 K.R. Srivats, Mandatory e-voting: Listed companies feel the heat of regulatory overlap, BUSINESS LINE,

http://www.thehindubusinessline.com/companies/mandatory-evoting-listed-companies-feel-the-heat-of-regulatory-

overlap/article6126762.ece. 33 See Companies Act, 2013: Key highlights and analysis, PWC

https://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-analysis.pdf. 34 See § 192A, Companies Act, 1956; See also The Companies (Passing of the Resolution by Postal Ballot) Rules,

2001. 35 See § 108, Companies Act, 2013 r/w R. 20, Companies (Management and Administration) Rules, 2014. 36 General Circular No. 20/2014, MINISTRY OF CORPORATE AFFAIRS,

http://www.mca.gov.in/Ministry/pdf/General_Circular_20_2014.pdf; See also E-voting will democratise

shareholder participation, BUSINESS STANDARD, http://www.business-standard.com/article/pf/e-voting-will-

democratise-shareholder-participation-114070600722_1.html. 37 SEBI vide Circular No. CIR/CFD/DIL/6/2012 dated 13th July, 2012 38 E-voting, NSDL, https://www.evoting.nsdl.com/. 39 Postal ballot” is defined to mean “voting by post or through any electronic mode.” See § 2(65), Companies Act,

2013. 40 See JOHN R. HEWITT & JAMES B. CARLSON, SECURITIES PRACTICE AND ELECTRONIC TECHNOLOGY 3-12 (2014). 41 § 108 of Companies Act, 2013 reads, “The Central Government may prescribe the class or classes of companies

and manner in which a member may exercise his right to vote by the electronic means.” 42 See Rule 26, Companies (Management and Administration) Rules, 2014.

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providing the procedure for e-voting implementation.43 For unlisted public companies, the

applicability depends on the number of shareholders. For companies having less than 1000

shareholders, e-voting facility is not required to be mandatorily provided both in case of postal

ballot as well as for General Meetings.44

Countries like France have found this mechanism to be of great help45 but countries like the

United States have ambivalent views on the matter46, propounding the convenience but its lack

of trajectory towards greater cost benefit. China47, on the other hand, advocates electronic voting

for listed companies, reflecting it in the Chinese Code and the Provisions on strengthening the

Rights and Interests of Public Shareholders. New Zealand48, Australia49, Turkey50 and the United

Kingdom are also recent entrants in the field of the said implementation.

In the present technological diaspora, a company has a new-found opportunity to take advantage

of emerging social trends by reaching the proximity of the shareholder and not expect the

contrary, in order to inculcate a cult and ethical investor group. This may lead to embellished

retail participation in addition to cost benefit51 and environmental conservation. This would give

a more flexible deadline to the voting cycle and simultaneous voting sessions for different multi-

equity share companies while leading to a quicker declaration of results52 due to the reduction in

administrative paperwork and the abrasion of the need of verification of signatures in a said

company. For the companies, e-voting would create an incidental benefit of providing an

auditable trail of how voting rights are exercised, which may be particularly valuable to

43 See Rule 20, Companies (Management and Administration) Rules, 2014.; See also

http://www.ril.com/downloads/pdf/scrutinizer_report_evoting_poll.pdf. 44 S. Dhanapal, E-voting under Companies Act, 2013,

https://docs.google.com/file/d/0B_ik38gcTNpRb19LSEtfRklJc1k/edit. 45 Art. L. 225-107, Code de commerce; See SABRINA BRUNO & EUGENIO RUGGIERO, PUBLIC COMPANIES AND THE

ROLE OF SHAREHOLDERS: NATIONAL MODELS TOWARDS GLOBAL INTEGRATION 111 (2011). 46 See JESSE A. FINKELSTEIN, R. FRANKLIN BALOTTI & GREGORY P. WILLIAMS, MEETINGS OF STOCKHOLDERS 4-109

(1995). 47 BO GONG, UNDERSTANDING INSTITUTIONAL SHAREHOLDER ACTIVISM: A COMPARATIVE STUDY OF THE UK AND

CHINA 193 (2013). 48 Laura Littlewood, Virtual shareholders' meetings, electronic voting and paperless communications: are you

ready?, BELL GULLY, http://www.bellgully.co.nz/resources/resource.03331.asp. 49 A critical analysis of E-voting facility under companies Act 2013 V/s 35B of Listing Agreement, HPACS:

CORPORATE & LEGAL, http://www.hpacs.com/news_events_details.aspx?event=150. 50 Mary Ellen Power, Turkey leading charge in electronic voting in shareholder meetings, E-SIGNLIVE,

http://www.silanis.com/blog/business-solutions/turkey-leading-charge-in-electronic-voting-in-shareholder-

meetings/. 51 Vinod Kothari, E-voting becomes mandatory for all listed companies, MONEYLIFE,

http://www.moneylife.in/article/e-voting-becomes-mandatory-for-all-listed-companies/26983.html. 52 See CS P. Surya Prakash & Younus, E-voting in pursuit of better corporate governance, R&A ASSOCIATES,

http://rna-cs.com/e-voting-in-pursuit-of-better-corporate-governance.

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institutional shareholders.53 Investors will see it as a welcome change with the increment in

transparency in the internal management decisions for the same.

However, with AGMs due very soon, there is mushrooming apprehension regarding the

applicability and implementation of the e-voting mechanism. Corporations considering

employing these procedures are weighing the benefits against the potentially adverse

consequences of shareholder hostility.54 The lapse or failure to deliver the vote in time for voting

to the scrutinizer may lead to loss of vote.55 In the e-voting process, role of scrutinizer will go

under paradigm shift as there will be no physical collecting and counting of ballot papers,

verification of signatures and rejection of invalid votes, if any.56 Since voting through e-means

would be on the basis of proportion of share in the paid-up capital or 'one-share one-vote', the

Chairperson of the meeting shall regulate the meeting accordingly.57 This has put into

consonance additional regulatory norms that would need to be established before the complete

enshrinement of the said voting mechanism. Another apprehension is that sensitive information

regarding a shareholder’s account could fall in the wrong hands. Not merely that, most of the

shareholders will have to be made familiar with its functioning for them to grasp the mechanism

properly.58 E-voting would also require greater regulation and coordination between the

Registrar and the Share transfer agents regarding the shareholders’ data, lest it would lead to

non-access of the said mechanism to vote.

Despite all the merits that the mechanism expounds, a growing fear has culminated its smooth

operation. The Bombay high court recently has raised concerns about the e-voting provisions of

the new Companies Act 2013 in a significant ruling that could force the government and the

capital market regulator to rethink the provision.59 The question is whether the 2013 Act, read

with various circulars and notifications, has the effect of altogether eliminating the need for an

53 Elizabeth Boros, Virtual Shareholder Meetings,

http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1112&context=dltr. 54 See Daniel Adam Birnhak, Online Shareholder Meetings: Corporate Law Anomalies or the Future of

Governance?, 29 RUTGERS COMPUTER & TECH. L.J. 423, 445-46 (2003). 55 Supra note 11. 56 Singh & Associates, e-Voting A New Mandate For Listed Companies, MONDAQ,

http://www.mondaq.com/india/x/208666/Shareholders/eVoting+A+New+Mandate+For+Listed+Companies. 57 General Circular No. 20/2014, supra note 20. 58 Id. 59 Khushboo Narayan & Ashish Rukhaiyar, Bombay HC raises concerns over e-voting provisions, LIVEMINT & THE

WALL STREET JOURNAL,

http://www.livemint.com/Politics/vaEVpPKsejPkH27JZY84zH/Bombay-HC-raises-concerns-over-evoting-

provisions.html.

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actual meeting being convened. Some companies are interpreting the provision for e-voting60 as

a way to do away with shareholder meetings, including annual general meetings (AGMs), except

those explicitly required by law.61 If companies don’t hold shareholder meetings and rely only on

votes by postal ballot, which includes voting electronically, it will “erode” the shareholders’

right to take an informed decision.62 The electronic voting may lead to the eradication of the

physical electoral process in toto, thereby dispensing of the elaborate opinions and insights into

the company’s managerial functions.

Apart from whatever mentioned above, it can be asserted that where postal ballot or electronic

voting have not been provided, the attendance of members of shareholders and members

attending is very low, therefore in principle, the apparent legislative intent in providing for postal

ballots and electronic voting is not only unexceptionable but entirely salutary. 63 However, what

corporate governance demands is not the tyranny of a finger pressing a button but the

government of the tongue.64

Thus, it is concluded that there needs to be an intertwined existence of both the electronic voting

and a physical electoral process. This would lead to the conveyance of ideas and visionary

acumen of the shareholders of a said company, which would lead to the discernment of more

sagacious ideas to be instilled in the company’s organic existence.

60 Godrej Industries Limited, CSD/256/2014 (Bombay High Court) (8 May 2014), available at:

http://bombayhighcourt.nic.in/generatenewauth.php?auth=cGF0aD0uL2RhdGEvanVkZ2VtZW50cy8yMDE0LyZm

bmFtZT1PU0NTRDQ0NzE0LnBkZiZzbWZsYWc9Tg==. 61 Supra note 32. 62 Supra note 33. 63 Id. 64 Id.

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RBI’S EFFORTS TO REVIVE THE CREAKING INFRASTRUCTURE SPACE

- Divpriya Chawla

India’s infrastructure sector having battled decades of dysfunction continues to suffer from the

endemic and affect the country’s economic future as it struggles to recover from a slowdown.

According to the World Bank, the growth rate slipped from 10.5 percent in 2010 to 4.8 percent in

2013 owing to years of underinvestment in infrastructure which have left the country with poorly

operational transit systems and power grids. With rapid urbanization straining the country’s

erratic water and electricity networks and burgeoning trade pressurising India’s inefficient ports,

the slowing economy has been further endangered.

Based on the projections of the Mid-Term Appraisal of the Eleventh Five Year Plan, in order to

attain a 9 percent real GDP growth rate, infrastructure investment on an average should be

almost 10 percent of GDP during the Twelfth Plan. This translates into Rs. 41 Lakh Crores in

2006-07 prices (real terms), as estimated by the Planning Commission. Upon converting this

investment requirement into nominal terms (based on expected inflation of 5%), the requisite

investment comes to an equivalent of Rs. 65 lakh Crores in current prices. Deductions from

various projected sources leave a funding gap to the tune of Rs. 14 Lakh Crores. The task of

raising finance for infrastructure projects is therefore especially daunting. Post 2000s, debt

financing for infrastructure projects has been on the rise since the budgetary allocations and the

internal resources of the enterprises engaged in infrastructure proved to be inadequate. The

corporate bond market has, therefore, been in a nascent stage and the pressure is on the banking

system to provide funds to the infrastructure sector.

Partial Credit Enhancement of Corporate Bonds

The Central Bank with a motive to strengthen the expanding bond market in India recently

proposed allowing banks to provide partial credit enhancement to the debt instrument by

releasing a draft circular on 20 May 2014. The same had already been recommended by the

Working Sub-Group on Infrastructure in its report Infrastructure Funding Requirements and its

Sources over the Implementation Period of the Twelfth Five Year Plan (2012 – 2017). The move

is modelled on the Project 2020 Initiative of the European Commission and the European

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Investment Bank, which is going through its pilot phase. The Project is designed to offer peace

of mind to institutional investors.

The RBI in its release said it has decided to allow the banks to provide partial credit

enhancements to bonds issued for funding infrastructure projects with a view to encourage

corporates to avail of bond financing. A bond, as generally understood is a debt obligation,

whereby investors who buy corporate bonds lend money to the company issuing the bond and in

return, the company is under a legal obligation to pay a stipulated interest and, in most cases, to

return the principal when the bond matures. Credit ratings are forward-looking opinions about

credit risk and are relied upon by investors in making their investment decisions. Credit ratings

of an agency express the agency’s judgment about the issuer’s ability and willingness to honour

its financial obligations in full and on time.

In the case of corporate infrastructure bonds, banks are not in a position to fund their credit needs

as they are exposed to liquidity risk due to asset-liability mismatch in infrastructure financing.

This happens as infrastructure projects have long gestation periods, ranging from twenty five to

thirty years, while most of the bank’s funds are primarily raised by way of fixed deposits which

have a gestation period of 120 months or ten years. This leaves insurance and provident, pension

funds whose liabilities are long term as better suited means to finance infrastructure projects. The

regulatory requirement for these funds necessitate that the money be invested in bonds of high or

relatively high credit rating and the focus of these institutional investors continues to be

principally on project bonds with “A” credit rating. However, infrastructure bonds do not get

such high ratings by the credit rating agencies owing to inherent risks in the initial stages of

project implementation and subsequent failures on a large scale which leads to the piling up of

non-performing assets.

With this move, the Central Bank aims to enhance the credit rating of such bonds by reassuring

the buyer that the borrower will honour the obligation. The mechanism of improving the credit

rating of such bonds is to separate the debt of the project company into senior and subordinate

tranches. The credit enhancement provided by banks will be able to provide such bonds with

partial credit enhancement in the form of a subordinated instrument – either a loan or contingent

facility – to support senior project bonds issued by the Companies, and thereby improve their

credit rating. The partial credit enhancement provided by the banks shall be limited to the extent

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of improving the credit rating of the bonds by a maximum of two notches or 20 percent of the

entire bond issue, whichever is low.

Exemption from Regulatory Norms

More recently, the Central Bank by its order dated 15 July 2014 allowed banks to float

infrastructure bonds up to seven years, provided they extend home loans for affordable housing.

The long term bonds would be exempted from the mandatory regulatory norms such as the Cash

Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) if the money raised is used for

funding infrastructure projects. The order aims to mitigate the Asset-Liability management

problems and problems arising due to the log gestation periods of such projects.

Conclusion

The steps under taken by the Central Bank show its inclination to build up the dwindling

infrastructure sector and act upon the maiden Budget of the Narendra Modi Government. The

steps seek to address the concerns of the infra space as well as the entire banking system which

has come under heavy stress in the wake of economic slowdown. The methodology adopted by

the Central Bank may be seen as a blessed move for the infrastructure sector which currently

faces cost and time constraints in light of the present economic scenario.

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AN IRON FIST FOR CORPORATE SOCIAL RESPONSIBILITY?

-Supritha Suresh

Corporate Social Responsibility (herein and after referred to as “CSR”), which has so long been

a voluntary contribution on part of a corporate entity has now been a part of the legal aegis,

thanks to the philanthropically notified § 135 of the Companies Act, 2013 (herein and after

referred to as “the Act”). This ‘disclose-or-explain’ regimen that has been brought about by the

Act ensures that the activities undertaken thereunder are disclosed along with the financial

statements of the Company in its general meeting65. While on one hand, § 135 read with

Schedule VII of the Act, provides for robust change in the commercial outlook of companies, the

Companies (Corporate Social Responsibility Policy) Rules, 2014 as effective from April 1, 2014

provides a comprehensive code with respect to various technicalities that might come into

question.

APPLICABILITY: In India, the concept of CSR as governed under § 135 of the Act, which

received the assent of the President of India on August 29, 2013 is applicable to companies with

an annual turnover of 1,000 crore INR and more, or a net worth of 500 crore INR and more, or a

net profit of five crore INR and more.

CSR COMMITTEE: These Companies as governed under § 135 are required to constitute a

‘Corporate Social Responsibility Committee’ consisting of three or more directors, out of which

at least one director is to be an independent director. This Committee is responsible for

formulating and recommending to the Board a policy which indicates the activities66 undertaken

by the Company, the amount of expenditure incurred on facilitating such activity and further

65 See §134(3)(o) 66 An indicative list of activities is provided as under Schedule VII of the Companies Act, 2013. These enumerated

are: eradicating extreme hunger and poverty; promotion of education; promoting gender equality and empowering

women; reducing child mortality and improving maternal health; combating human immunodeficiency virus,

acquired immune deficiency syndrome, malaria and other diseases; ensuring environment sustainability;

employment enhancing vocational skills; social business projects; contribution to the Prime Minister’s National

Relief Fund or any fund set up by the Central Government or the State Governments for socio-economic

development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward

classes, minorities and women; and such matters as may be prescribed.

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monitor the CSR policies of the Company67. The Committee is further to institute a transparent

monitoring mechanism for the same68.

The Rules69 have further clarified that in cases of an unlisted public company or a private

company covered under § 135(1) which is not required to appoint an independent director

pursuant to § 149(4) of the Act, shall have its CSR Committee without such director.

A private company having only two directors on its Board shall constitute its CSR Committee

with two such directors, and moreover with respect to a foreign company covered under these

rules, the CSR Committee shall comprise of at least two persons of which one person shall be as

specified under clause (d) of sub-Section(1) of § 380 of the Act and another person shall be

nominated by the foreign company.

IMPLEMENTATION OF THE RECOMMENDATIONS OF THE CSR COMMITTEE: The onus of

implementing the Committee’s recommendations is put on the Board of the Company. The

Board after taking into account the recommendations is to approve the policy so put forward and

further disclose the same in the Company’s website. Along with approval, the Board is also to

ensure that the activities so included in the policy are ‘undertaken by the Company’70. In meeting

the financial requirement, the Board is to spend at least two percent of the average net profits

made by the company during the three immediately preceeding financial years.

‘Net profits’, while under § 135 refers to § 198, the Rules provide further clarity with respect to

the same as exclusive of the profits arising from overseas branches of the company (regardless of

whether the same is operated as a separate company or otherwise), and in cases of foreign

companies covered under these rules to mean net profits as under § 381(1)(a) read with § 198 of

the Act71.

The company can implement its CSR activities through the following methods:

i. Directly on its own, as far as these activities are excluded from its normal course of

business.

ii. Through its own non-profit foundation set-up so as to facilitate this initiative.

67 See §135(2) 68 See Rule 5(2) 69 See Rule 5(1) 70 §135(4)(b) 71 See Proviso to Rule 3(1)

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iii. Through independently registered non-profit organizations that have a record of at

least three years in undertaking similar such related activities72.

iv. Collaborating or pooling their resources with other companies73.

WHAT CONSTITUTES CSR: While the range of activities as prescribed in Schedule VII are quite

wide, it is impossible that the company is to give preference to the areas in its locality (around

which it operates) for spending the amount earmarked for CSR activities74.

Only CSR activities undertaken in India will be taken into consideration75.

Activities meant exclusively for employees and their families will not qualify as CSR76.

Contribution directly or indirectly to any political party under § 182 of the Act is outside

the purview of ‘CSR’77.

A format for the board report on CSR has been provided which includes amongst others,

activity-wise, reasons for spending under 2% of the average net profits of the previous three

years and a responsibility statement that the CSR policy, implementation and monitoring process

is in compliance with the CSR objectives, in letter and in spirit. This has to be signed by either

the CEO, or the MD or a director of the company. The only space left in the legal framework is

with respect to surplus arising out of CSR activities, which while is not to be included in the

business profit of the Company78, neither the Act nor the Rules specify what is to be done with

this amount and whether the same is liable to tax deductions.

72 Rule 2(i) 73 Rule 4(3) 74 See Proviso to §135 75 Rule 4(4) 76 Rule 4(5) 77 Rule 4(7) 78 Rule 6(2)

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REFLECTIONS ON INSIDER TRADING REGULATIONS IN INDIA AND THEIR

INADEQUACIES

- Srinivas Raman

Insider trading essentially refers to trading done on the financial market by individuals or

companies who have access to, and use unpublished price sensitive information which has not

been disclosed to the public. Such confidential information is of a nature that knowledge of it

would significantly affect the share prices. This type of activity leads to inequality in the market

as the majority of the investors do not have inside information about the companies. This in turn

leads to potential investors losing confidence in the share market and ultimately has an adverse

effect on the market as it fails to achieve its objectives. The Securities and Exchange Board of

India (SEBI), being the national stock market regulatory authority has deemed insider trading as

a criminal activity; however, violations of the SEBI insider trading prohibition regulations are

rampant in the business world and instances of insider trading seldom get reported and are rarely

convicted due to the multitude of problems with respect to the law in force, the implementation

measures and the procedural delays. While other countries such as the United States of America

have taken several proactive measures to curb the hazards associated with insider trading, it

would not be unfair to observe that India has adopted a rather lackadaisical approach to

regulating this white collar crime.

SEBI and Insider Trading

To begin with, the Securities and Exchange Board of India Prohibition of Insider Trading

Regulation, 1992 (hereinafter referred to as the Act)79 has been crippled by several shortcomings

since its inception, the need to amend these deficiencies has been recognized only in the recent

past. One of the main shortcomings of the Act was with regard to the terms used to define insider

trading. Ambiguity was prevalent in the definitions of several key terms and some critical

elements were not included within the purview of the definitions thereby reducing the scope of

application. It was in this backdrop that SEBI appointed a committee under the chairmanship of

Justice Sodhi to review the 1992 policy and amend it. After this much needed amendment, many

79 SECURITIES AND EXCHANGE BOARD OF INDIA PROHIBITION OF INSIDER TRADING

REGULATIONS, 1992

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of the loopholes pertaining to insider trading practices have been plugged though it remains to be

seen whether the new law can withstand the test of manipulations over the next few decades.

Another major limitation of the Act is that despite the rigorous amendments to the original draft,

the law still lacks commensurate implementation measures. Indeed SEBI has been criticized as

being a “toothless lion” as far as insider trading prevention laws in India are concerned.80 The

main reason why insider trading is rampant in India is due lack of technical knowhow to harness

the most effective investigative methods. While detecting insider trading cases and gathering

enough evidence is an arduous task in any country, in India it seems almost impossible since the

regulators simply do not have adequate tools.81 A miniscule number of insider trading cases are

reported in India and most of them end up in acquittals due to lack of evidence. Even in the

minute number of cases leading to convictions, the penalties imposed are too low and do not act

as a deterrent to future crimes.

Though the Justice Sodhi committee can be credited for the provision which allows SEBI access

to email and other short text messages on mobile phones under certain circumstances, it has still

not enacted any provision which allows wiretapping. Wiretapping refers to interception of

private telephonic conversations between persons. It is important to note that some of the largest

insider trading cases such as the Rajat Gupta case could be cracked only because of wiretapping

of conversations. It has been observed that in most cases, there is lack of direct evidence and

only indirect or circumstantial evidence is produced before the court due to insufficient evidence

gathering methods, and this is the prime reason for the large number of acquittals in consonance

with the well-established principle ei incumbit probatio qui dicit, non qui negat. In India,

wiretapping of conversations is considered an invasion of privacy and is not allowed to be

conducted by SEBI. The only exceptions to this rule is in case of situations falling within the

ambit of ‘threat to national security’ or in cases of money laundering. Wiretapping is not

generally allowed in most countries, but in countries like the USA there are some provisions

depending on the case where wiretapping for the purposes of detecting insider trading activities

is permitted. In India, however no such provision exists.

80 http://www.business-standard.com/article/markets/regulator-seeks-more-teeth-to-curb-insider-trading-offences-

112062200061_1.html (Last visited on 5/08/2014) 81 http://blogs.wsj.com/indiarealtime/2014/04/21/why-is-it-tough-to-catch-insider-trading-in-india/ (Last visited on

5/08/2014)

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One of the positive aspects about the Act post the 2002 amendment is that is stresses the need for

good corporate governance such as prophylactic measures or self- regulation by the companies

themselves so as to ensure that no price sensitive information is misused by any of its directors,

employees, etc. It encourages a Chinese wall situation where the unpublished price sensitive

information of various departments of a single company are kept isolated within that particular

department, leading to a more secure trading environment.

Apples and Oranges?

European Union states, Australia, and the United States have always been ahead in the game as

far as insider trading detection and convictions are concerned; following aggressive and state of

the art investigative procedures in white collar crimes. They have made their laws as iron clad as

possible and it is time India followed suit.

Interestingly in BRICS states that are comparable to India, white collar crimes are as rampant

and under-investigated. This leads to an interesting observation in segue – is there a direct

correlation between development and the ability to prosecute white collar crimes? Are we

comparing apples with oranges when we look Westwards for comparative perspectives on

tolerance for such crimes? In states like Brazil and other South American states whose rapid

development and exponential growth can be compared to our own, insider trading appears to

escape the cudgels of the law. Perhaps the larger question should be whether insider trading in

the developing “global south” is a sign of a maturing market economy or a worm in the

development apple.

In conclusion, while the Act has been subject to many amendments over more than two decades,

it still suffers from a few lacunae that need to be filled. Implementation and enforcement need

strict attention; more severe penalties should be prescribed and enforced. SEBI should be given

wider powers to investigate and utilize more effective and efficient investigative tools. Also the

liability of one who receives unpublished price sensitive information has not been dealt with as

adequately as the liability of the one who delivers such information. This obscurity needs to be

cleared up in order to affix liability on those who actually benefit from insider trading and not

just on those who aid and abet them.

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E-COMMERCE MARKETPLACES: MAKING A CASE FOR FDI COMPLIANCE IN E-

RETAIL

- Sagnik Das

INTRODUCTION

In common parlance, e-commerce refers to the buying or trading in goods or services over the

internet. It enables a firm or individual to conduct business over an electronic network or the

internet. E-commerce can operate in either of four ways; it could be business to business

(hereinafter “B2B”), business to consumer (hereinafter “B2C”), consumer to business or

consumer to consumer. E-commerce is one of the most promising business sectors in India

presently, as the modern Indian consumer slowly but surely starts placing trust on online retail

shopping. However, these e-commerce ventures require a continuous and substantial flow of

funds in order for the businesses to keep thriving. Such large scale funding cannot usually be

provided by Indian Venture Capitalist Funds, that do not have huge capital to invest, or do not

want to assume substantial risk by placing their money on upcoming e-commerce ventures in

India. Thus, the majority of funding for start-ups and maintenance of e-commerce ventures in

India comes from foreign private equity or venture capitalists firms which are willing to assume

the risk of investing in such e-commerce retail companies. The perfect case in point is Flipkart.

Recently, Flipkart received a massive round of foreign funding and aims to become a $100

billion company in five years.82 With that being the case, the question that logically arises is

regarding the legality of foreign direct investment in such e-commerce companies in India under

the FDI Policy.

In India, under the Consolidated FDI Policy,83 foreign direct investment in the e-commerce

sector is permitted upto 100% via the automatic route and therefore, without the requirement of

government approval.84 However, it comes with the caveat that such companies in e-commerce

that receive foreign direct investment must only be engaged in B2B e-commerce and not in retail

trading (that is, B2C e-commerce). Thus, FDI in B2C e-commerce companies is prohibited. This

82 Flipkart gets record funding, aims to become $100 Billion Firm, NDTV PROFIT, Jul. 30, 2014. 83 Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Consolidated FDI Policy

(Effective from April 17, 2014), D/o IPP F. No. 5(1)/2014-FC.I, available at

http://dipp.nic.in/English/Policies/FDI_Circular_2014.pdf. [hereinafter “Consolidated FDI Policy”] 84 Sl. No. 6.2.16.1, Consolidated FDI Policy.

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is further buttressed when the FDI Circular makes it clear that retail trading by means of e-

commerce is prohibited for companies with FDI, both in single-brand85 as well as multi-brand

retail.86 On the other hand, FDI upto 100% via the automatic route is permitted in wholesale

trading, which includes B2B e-commerce.87 Recently in fact, the newly elected Central

Government has also deferred the consideration of allowing FDI in the e-commerce sector till a

later point of time.88

THE TWO MODELS OF E-COMMERCE BUSINESS VENTURES

There are primarily two models by which e-commerce business ventures can operate; the

inventory-based model and the marketplace model. In this model, the same entity owns the

goods, services and the medium on which they are sold. In the “inventory-based” model

therefore, the business ventures are directly engaged in B2C e-commerce. On the other hand, the

“marketplace” model provides a platform for business transactions between buyers and sellers to

take place and in return for the services provided, the venture providing the platform for the sale,

earns commission from the sellers of goods/services. In this model, ownership of the inventory

lies with the enterprises that advertise their products of the platform (the website) and they are

the ultimate sellers.

COMPLIANCE WITH FDI NORMS: THE VALIDITY OF WEBSITES THAT OPERATE

MARKETPLACES

In India, FDI is clearly prohibited through the inventory-based model, as it directly engages in

B2C e-commerce or retail trading. However, the situation is different for the marketplace model.

In the marketplace, the company operating the platform or the website is not directly engaged in

retail. It merely provides a platform on which any seller can list its items for sale. Therefore,

there is no restriction on FDI coming into these companies which operate such websites based on

the marketplace model. In fact, this conclusion is fortified by a recent discussion paper on e-

commerce, released by the Department of Industrial Policy and Promotion.89 At paragraph 6.4 of

this discussion paper, it is clearly stated that FDI in the marketplace model is already present in

85 Sl. No. 6.2.16.3, 2(f), Consolidated FDI Policy. 86 Sl. No. 6.2.16.4, 1(ix), Consolidated FDI Policy. 87 Sl. No. 6.2.16.1.1, Consolidated FDI Policy. 88 FDI in e-commerce not to be allowed for now, THE HINDU BUSINESS LINE, Jun. 29, 2014. 89 Discussion Paper on E-commerce in India, Department of Industrial Policy and Promotion, Ministry of

Commerce and Industry, available at

http://dipp.nic.in/English/Discuss_paper/Discussion_paper_ecommerce_07012014.pdf.

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India and the paper focuses on suggestions as to whether FDI should be permitted in the

inventory-based model of e-commerce as well. Thus, the discussion paper makes clear that the

restriction on FDI in e-commerce applies only to B2C e-commerce and not to companies which

receive FDI but operate websites which work on the marketplace model.

This reflects the trend among Indian companies engaged in e-commerce to shift from the

inventory-based model to operating marketplaces, so that they are able to receive 100% FDI.90

Some examples of such companies which have switched to the marketplace model include

Snapdeal, Flipkart and Rediff.91 This trend is best reflected by the case of Flipkart. Initially, it

tried to route in FDI in e-commerce by using the dual company structure, creating a back-end

B2B commerce entity, which could receive 100% FDI, and a front-end B2C entity, which would

operate the website. The FDI was routed from the back-end company to the front-end one.

However, the Enforcement Directorate (ED) took exception to such a model and initiated

investigations against Flipkart for possible FDI violations.92 As a result of this, Flipkart recently

switched over to the marketplace model,93 in order to continue receiving FDI.

Thus, websites operating marketplaces are allowed to receive FDI, under the current FDI norms.

In fact, this is how foreign companies such as Amazon have also entered the Indian e-commerce

market. For now it seems, with the question on allowing FDI in e-commerce retail being shelved

by the BJP Government that the safest way such websites can continue to receive substantial

foreign investment, is by operating the marketplace model, rather than have an inventory of their

own.

90 Online retailers shed inventory in favour of marketplace model, THE ECONOMIC TIMES, Oct. 9, 2013. 91 Id. 92 ED starts FDI probe against Flipkart, BUSINESS STANDARD, Dec. 12, 2012. 93 Flipkart changes business model, launches Flipkart marketplace, BUSINESS STANDARD, Apr. 6, 2013.

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ACKNOWLEDGMENTS

Contributors

Aakanksha Kumar

Abhijay Negi

Shivesh Aggarwal

Dhruva Sareen

Srinivas Raman

Sagnik Das

Executive Director

Dr. Rituparna Das

Managerial Board

Convenors

Vinayak Panikkar Vineet Bhansali

Managerial Secretaries

Arundhati Venkataraman Supritha Suresh

Members

Apurva Joshi Abhinav Kumar Praneeta Vasan

Divpriya Chawla Suryaneel Das Anina D'Cunha

Editorial Board

Editors in Chief

Divya Mehra Alimpan Banerjee

Executive Editors

Siddharth Mishra Yashita Sharma Preethika Gidia

Associate Editors

Soumya Bhargava Harvi Shah HBK Teja

Ayushi Mishra Garima Tyagi Shouri Bhat

Alumni Advisors

Rathin Somnath Sanchit Agarwal

The copyright in all the articles published in the ‘CRMD Business Times’ vest completely with

its authors. The Centre of Risk Management and Derivatives takes no responsibility for the

views expressed by the authors in this newsletter.