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Corporate and Commercial Matters
Certain important and recent enactments, legal developments and case laws in this area are set out below.
In-principle approval required for registration of Companies or Limited Liability Partnerships to carry on the profession of Chartered Accountant, Cost Accountant, Architect, Company Secretary etc.
At the time of incorporation of Companies or LLP, where one of the objects is to carry on the business of banking, insurance or to practice the profession of Chartered Accountancy, Cost Accountancy & Company Secretaries, Architecture then the concerned Registrar of Companies ("ROC") or Limited Liability Partnerships ("LLP") shall incorporate the same only on production of in-principle approval / No- Objection Certificate ("NOC") from the concerned regulator/professional Institutes.
Name Availability Guidelines, 2011
Ministry of Corporate Affairs ("MCA") has put some restrictions regarding availability of name by system online, without backend process by the ROC. Till date, in the Straight Through Processing ("STP") mode wherein the forms were certified by practicing professionals, ROC has witnessed some cases wherein names were approved online through the STP mode but such names should not otherwise be made available for registration. In view of the same MCA has re-examined and decided as under:-
1. The facility of name approval through STP mode though has continued to be available; however an additional system check has been inserted in the procedure of name approval. In other words, names mentioned in the Form 1A passing through STP mode, will be checked by the system for ascertaining the similarity with any registered trademarks or if any two words of such name matches exactly with the name of any other company name then such Form 1A will be transferred to processing in non-STP mode;
2. Such Form 1A approved after system check and not falling under non-STP Mode thereafter will not be available for filing of incorporation documents (Form 1, 18 & 32) up to:-
a) 1900 hrs (7.00 PM) of the same day, if the name through STP mode is approved by the system upto 1100 hrs (11.00 AM) on any working day;
b) 1900 hrs (7.00 PM) of the any next working day if the name is approved after 1100 hrs (11.00 AM) on any working day or on holiday/ non-working day;
3. It also provides that the name approval application in case of single word (other than words private limited/ limited) shall not be processed in STP mode.
Filing of Cost Audit Report and Compliance Report in XBRL format/mode
The MCA has mandated cost auditors and companies, which are liable to file Cost Audit Reports (Form-I) and Compliance Reports (Form-A), to file these reports in XBRL format for the year 2011-12 onward (including overdue reports relating to previous years). The said reports are required to be filed with the GOI after June 30,2012. The relevant taxonomy together with Form-I and Form-A in XBRL format is likely to be notified by the MCA.
Guidelines for declaring a financial institution as Public Financial Institution under Section 4A of the Companies Act, 1956
MCA has revisited the guidelines for declaring a Financial Institution as Public Financial Institution under Section 4A of the Companies Act, 1956 ("CA"). MCA had already defined the criteria vide General Circular No. 34/2011 dated June 2, 2011 and in the said respect, the circular issued on May 21, 2012 has inserted two more conditions which shall be satisfied by a financial institution while applying to be declared as ‘Public Financial Institution' to the Ministry. Therefore, a financial institution to be declared as Public Financial Institution shall fulfil the following criteria:
a. A company or corporation should be established under a special Act or the CA being the Central Act;
b. Main business of the company should be industrial/infrastructure financing;
c. The company must be in existence for at least 3 years and its financial statements should show that its income from industrial/infrastructural financing activities exceeds 50% of its total income;
d. The net worth of the company should be minimum of INR 10 billion;
e. Company is registered as a Infrastructure Finance Company ("IFC") with RBI or as a Housing Finance Company ("HFC") with National Housing Bank ("NHB");
f. The NOC from RBI/NHB, in the case of IFC/HFC, with regard to supervisory concerns, if any, must be obtained and enclosed with the application;
g. Such IFCs/HFCs, after being declared as PFIs are required to disclose in their audited financial statements that they are complying with the direction and conditions laid down by MCA.
It is to be noted that conditions (6) and (7) are the two new conditions which have been inserted in the already defined criteria.
Further in case of Central Public Sector Undertakings, no restriction shall apply with respect to condition prescribed in (3) and (4) mentioned above.
Investor Education and Protection Fund (Uploading of Information Regarding Unpaid and Unclaimed Amounts Lying With Companies) Rules, 2012
MCA has notified Investor Education and Protection Fund (Uploading of Information Regarding Unpaid and Unclaimed Amounts Lying With Companies) Rules, 2012 which have come into effect from May 20, 2012.
The said rules prescribes the following requirements:
1. Every company (including Non-banking Financial Companies and residuary non banking companies) shall furnish information/statement on unpaid and unclaimed amounts of dividend on its own website and through e-Form 5 INV to MCA or such other website as may be specified by GOI, comprising information on particulars as follows:
a) The names and last known address of the person entitled to receive the sum;
b) The nature of the amount;
c) The amount to which each person entitled;
d) The due date for transfer into the IEPF; and
e) Such other information as considered relevant for the purpose;
2. The company has to identify such unpaid and unclaimed dividend as per Section 205C the CA;
3. Such a statement has to be filed within 90 days from the holding of annual geneal meeting or the date on which it should have been held according to Section 166 the CA;
4. The statement shall be filed every year till the completion of seven years;
5. E-Form 5 INV shall be duly verified and certified by the statutory auditors of the company or a Chartered Accountant or a Company Secretary or a Cost Accountant practicing in India;
6. In case a company fails to furnish and upload information or furnishes and uploads false information, then the company and every officer in default shall be liable and accordingly provisions of Section 629A of the CA will be applicable;
7. All the companies are required to comply with the above requirement for the financial year ended March 31, 2011 also and the due date of filing/uploading such information for the said financial year is July 31, 2012.
ENVIRONMENT & CLIMATE CHANGE
Guidelines for High Rise Buildings
The Ministry of Environment and Forest ("Environment Ministry") have stipulated following guidelines regarding building of different heights whenever building projects are appraised by Expert Appraisal Committee:
a. For buildings more than 15 meter (m) height- All necessary fire fighting equipment shall be in place before the occupancy of the building;
b. Minimum width of the road:
|
S. No. |
Height of Building |
Width of Road |
|
|
Minimum |
Desirable |
||
|
1 |
Between 15m - 30m |
15m |
18m |
|
2 |
Between 30m - 45m |
18m |
24m |
|
3 |
Between 45m - 60m |
24m |
30m |
|
4 |
Above 60m |
30m |
45m |
c. Location of fire station:
|
S. No. |
Height of Building |
Width of Road |
|
|
Minimum |
Desirable |
||
|
1 |
Between 30m - 45m |
Within 10 Km |
Within 05 Km |
|
2 |
Between 45m - 60m |
Within 05 Km |
Within 02 Km |
|
3 |
Above 60m |
Within 02 Km |
Within 10 minute driving distance |
d. Regular and periodic mock-up drills shall be undertaken by the fire department at least once in a year;
e. No objection from fire department shall be obtained at two stages i.e. (a) before the construction of the building and (b) before the occupancy of the building;
f. No objection certificate from national/ state disaster management authority, as applicable, shall also be required;
g. Applicable guidelines of fire department, national/ state disaster management authority, shall be strictly followed by the developer and occupiers/ cooperative societies;
h. The state level environment impact assessment authorities may decide to have the more stringent provisions than above guidelines for projects under their jurisdictions.
National Manufacturing Policy - Measure for Implementation
The Environment Ministry has taken following decision in furtherance of the National Manufacturing Policy issued by GoI, to expedite the prior environmental clearance for National Investment and Manufacturing Zones ("NIMZ") units required under EIA Notification, 2006:
a. The cases pertaining to units under NIMZ will be considered by granting them the highest inter-se priority;
b. The individual units within the NIMZ would be exempted from public hearings once a public hearing has been conducted for the entire NIMZ, provided these NIMZs are notified as industrial estates by the concerned State Government.
Clarification on Calculation of Built Up Area
Environment Ministry has issued clarification regarding the calculation of built up area as follows:
a. The built up area covers the ‘built up or covered area on all floors put together and including basement and other service areas which are proposed in the building/construction project';
b. Area which is not covered or any area which is open to sky/ cut out/ duct should not be counted in calculations of built up area;
c. Atrium; open portion of building which is not covered at intermediate floor levels but covered at top level like shopping malls or hotels can be taken into account for calculation of the built up area but it should not be calculated for each floor.
Consideration of Projects of Thermal Power, Steel Sector etc. For Environmental Clearance
The Environment Ministry has clarified that in the projects relating to thermal power, steel sector and other projects which are largely dependent on coal as raw material, it is essential to provide the quality of coal alongwith the firm coal linkages. The coal quality parameters shall include (i) calorific value; (ii) sulphur content; and (iii) ash content and such other parameters as may be prescribed. It would also be mandatory to specify the location of mine.
The Environment Ministry has further clarified that in the eventuality of change in coal parameters based on which Environment Impact Assessment was prepared, it would be necessary that the project is referred back to Environment Ministry to revisit the environment clearance granted earlier so as to assess the adequacy of the conditions already stipulated and to incorporate any additional condition as may be required.
The Environment Ministry also clarified that the case for environment clearance for thermal projects would be processed based on the status furnished by the project proponent in line with parallel processing being adopted for granting environmental clearance of projects where forestry clearance is also required. However, environment clearance would be issued only after stage-I forestry clearance for linked mine has been issued.
Prior Environment Clearance for Mining of Minor Minerals of Area Less Than 5 Hectare
Implementing the order of Supreme Court in Deepak Kumar v. State of Haryana & Ors., the Environment Ministry has decided that all mining projects of minor minerals including renewal of lease, irrespective of size o lease, would require prior environment clearance. Mining projects of area upto 50 hectare including projects of minor mineral with area less than 5 hectare would be treated as category ‘B' projects as defined in the EIA Notification, 2006.
Institutionalising Corporate Environmental Responsibility
The Environment Ministry, in association with ASSOCHEM, CII, FICCI and FIMI has prepared a draft report outlining the element of Corporate Environment Policy for protection of the environment and has invited comments on the same. The said report is available on the website of Environment Ministry.
COMPETITION LAW
Combination Amendment Regulations
The Competition Commission of India ("CCI") has notified the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combination) Amendment Regulations, 2012 ("Combination Amendment Regulations") with a view of simplifying the process of making filings with the CCI and to keep merger regulations at pace with the needs of the market. The Combination Amendment Regulations came into effect on February 23, 2012. The Combination Amendment Regulations amend the merger control regulations notified by the CCI on June 1, 2011 ("Combination Regulations"). The amendments made are as follows:
A. Direct/ indirect acquisition of non-controlling stake - Increase in threshold limit from 15% to 25%
Threshold limit for exemption from the Combination Regulations in respect of direct/indirect acquisition of non-controlling stake has been increased from 14.99 to 24.99%, to align with the shareholding limit provided in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 for mandatory public offers in listed companies.
Accordingly, the CCI approval requirement under Combination Regulations would now be triggered for stake acquisition of 25.
B. Buyback of shares and amendment to rights issue provisions
The Combination Regulations exempted acquisition of shares or voting rights pursuant to corporate actions (ie bonus, consolidation/ stock split) and subscription to rights issue (to the extent of entitled proportion of shareholder), not leading to acquisition of control. Combination Amendment Regulations have now included buyback of shares, where there is no acquisition of control, within the ambit of this exemption. Exemption provisions for rights issue have been amended by Combination Amendment Regulations to remove the restriction on subscription to the extent of entitled proportion. Accordingly, subscription to a rights issue would be possible beyond the shareholder's entitled proportion, and exemption from prior CCI approval would continue to be available so long as there is no acquisition of control.
C. Intra-group reorganizations (mergers/ demergers)
While the Combination Regulations provide an express exemption for intra-group acquisitions, mergers were not covered within this exemption, and prior CCI approval was required even for intra-group mergers, which can be said to be harmless transactions from a competition law standpoint. CCI, in its recent order, regarding merger of Wyoming Mauritius with Tata Chemicals, had clarified that mergers would fall outside the purview of "intra-group acquisition exemption" and would require prior approval.
As a first step, following intra-group mergers/ demergers have been exempted under the Combination Amendment Regulations:
a) Holding company and direct/ indirect wholly-owned subsidiary of the group
b) Subsidiaries wholly owned by same group
PHARMACEUTICAL
Prohibition of the Registration of Names of Chemical Elements or International Non-proprietary Names
In the exercise of powers granted to the Controller General of Patents, Designs and Trademarks ("Controller General") under the Trade Marks Act, 1999 ("TM Act"), the Controller General has published a list of International Non-Proprietary Names ("INN") and has stated that the same cannot be registered as trademark under the TM Act.
In India, registration of INNs and words which are deceptively similar to INNs are prohibited under Section 13 (b) of the TM Act. Any registration of trademark to this effect shall be considered wrong and may be cancelled or varied for rectification by the Registrar of Trade Marks.
Section 13 under the TM Act has been in effect since 2003, however, a list of INNs has been issued recently. Considering that INNs are used in relation to pharmaceutical substances, recognizing a list of INNs assumed relevance so that same/ similar trademarks cannot be applied for, creating confusion as to the identity of the product. It is with this objective that the Controller General has issued a list of 8151 names as INNs. With a list of INNs being notified by the Controller General, any names which are identical or deceptively similar to those on the INN list will not be registered as a pharmaceutical trademark.
Drugs and Cosmetics (2nd Amendment) Rules, 2012
The Ministry of Health and Family Welfare has, vide notification dated March 22, 2011, released draft rules to amend the Drugs and Cosmetics Rules, 1945 ("DCR").
Rule 161 of DCR prescribes labelling, packing and limit of alcohol in Ayurvedic (including Siddha) or Unani Drugs ("ASU Drugs"). The draft rules propose to display the official and botanical names for herbal ingredients along-with the quantity and form of ingredients on the labels of containers or packages containing ASU Drugs.
The draft rules further propose to enlarge the scope of Rule 161 of DCR by including patent or proprietary ASU Drugs within its ambit.
Case Laws
Corporate Laws
Dmitry Rosnin v. Registrar of Companies
The petitioners were residents of Moscow, Russia and were desirous of incorporating a private limited company in the state of Goa with its registered office at Arpora, North Goa, India.
For that purpose, on July 2010, they were allotted Director Identification Number ("DIN") by MCA. Thereafter, the petitioners applied for online incorporation of the company and submitted the required e-forms with the ROC (respondent). They complied with all the requirements of an applicants seeking incorporation of a company, which were required to be fulfilled. However, the process of incorporation and registration of their private company was delayed by the respondent on the ground that they had not made certain compliances and particularly that the foreign subscribers had not stated their local address.
The petitioners filed instant writ of mandamus or any other appropriate writ or direction in the nature of mandamus with the Bombay HC to direct the respondent to register a company without insistence on the petitioner to providing a local address.
On the same, the Bombay HC asked certain queries from the respondent:
- Whether the foreign subscribers and shareholders can become directors and that a private limited company with foreigners can be registered and incorporated in India or not, and the answer from the respondent was in the affirmative.
- Justify the insistence of furnishing the local address, and in answer, the respondent placed reliance on regulation 17 of the Companies Regulation, 1956. However, on perusal of that regulation, the Bombay HC found nothing is therein, which requires the petitioners to furnish their local address.
Thus, on the basis of the above, the respondent was unable to point out anything from the applicable rule which requires the petitioners to give their local address. Therefore, the petitioners succeeded. Further, the Bombay HC directed the respondent to register and incorporate the private limited company.
Surat Goods Transport Service v. Golkonda Engg. Enterprises Ltd.
The petitioner was doing the business of transportation of goods of the customers as per the orders placed by them from time to time and respondent was doing the business of manufacture and sale of steel, strips, and cables etc.
The respondent engaged the petitioner in transportation of its material/goods from one place to another. During the course of business transactions, the respondent became due in a sum towards freight charges to the petitioner. Since the amount due was not paid in spite of repeated requests, the petitioner got issued a legal notice to the respondent as required under sections 433(e) and 434(l) (a) of CA demanding an amount together with interest and filed a petition to the Andhra Pradesh HC to sought an order of winding up against the respondent.
In the counter the respondent stated that, the petitioner failed to deliver certain goods to the consignee; that the petitioner with held the material for want of payment of certain amounts alleged to have been due and payable.
On the said petition, the Andhra Pradesh HC held that the section 433 of the CA, it follows that:
(l) there must be a debt; and
(2) the company must be unable to pay the same.
SC in catena of decisions has held that an order under section 433 (e) of the CA is discretionary. There must be a debt due and the company must be unable to pay the same. A debt under this section must be a determined or a definite sum of money payable immediately or at a future date and that inability being referred to in the expression 'unable to pay its debts' in section 433 of the CA should be taken in the commercial sense and that the machinery for winding up will not be allowed to utilize merely as a means for realization of debts due from the company.
For invoking the relevant provisions, i.e., section 433(e) read with section 434(1) (a) of the CA in relation to winding up of a company on the ground of its inability to pay its debt, what is necessary is that despite service of notice by the creditor, the company which indebted in a sum exceeding one lakh rupees then due, failed and/or neglected to pay the same within three weeks thereafter or to secure or compound for it to the reasonable satisfaction of the creditor. Failure of the company to pay the agreed interest or the statutory interest would come within the purview of the word 'debt'. Further, section 433(e) of the CA does not state that the debt must be precisely a definite sum. It is not a requirement of law that the entire debt must be definite and certain.
Further, it was held that in cross-examination, the petitioner stated that the consignment which is required to be delivered to consignee met with a fire accident in transit. However, it is nowhere stated in the petition that the consignment is involved in fire accident while on transit. And, when once the goods are entrusted to the petitioner for transportation, he is bound to take reasonable care till delivery is effected to the consignee.
On the other hand, according to the respondent, the worth of consignment entrusted to the petitioner for being delivered to consignee is INR 0.6 Million. There is a serious dispute as to whether the consignment entrusted to the petitioner is involved in the fire accident while on transit or not.
In the given facts and circumstances, the it was held that, the defence raised by the respondent is a substantial one and not moonshine and invocation of winding up proceedings, in the given facts and circumstances, is misconceived. Accordingly, the company petition was dismissed
M/s Magnolia Flat Owners Association & Ors. vs M/s. DLF Universal Limited & Ors.
In a case similar to the Belaire Owners Association vs. DLF Limited and Ors. wherein the CCI has slapped a INR 6.30 billion fine on DLF for abuse of its dominant position in the market, DLF has been pulled up again by the CCI in a case involving another housing complex, Magnolia.
DLF announced the launch of a group housing complex, known as ‘Magnolia' consisting of 19 multi-storyed residential buildings to be constructed in DLF City Phase V, Gurgaon, Haryana. In accordance with the initial plans/advertisements, each of the 19 multi-storyed buildings would consist of only 17 to be constructed within a period of 36 months. However, in place of 17 floors, DLF unilaterally got a plan sanctioned by the Department of Town and Country Planning for increasing the number of floors in each of the buildings to between 22 and 26 floors and has till date not handed over possession of the flats to the informant.
Consequently, on grounds of the construction being delayed and change in building plan originally envisaged, a complaint was filed by the informant against DLF under section 19(1)(a) of the Competition Act, 2002 ("Competition Act").
The informant alleged that DLF, by abusing its dominant position has imposed arbitrary, unfair and unreasonable conditions on the Informant.
CCI held that DLF had indeed abused its dominant position and observed the following unfair and unreasonable practices adopted by DLF:
a. Unilateral changes in the agreement and supersession of terms by DLF without any right to the allottees;
b. DLF's right to change the layout plan without consent of allottees;
c. Absolute discretion of DLF to change inter se areas for different uses like residential, commercial etc. without informing the allottees;
d. Allottees have no exit option except when DLF fails to deliver possession within agreed time, but even in that event buyer gets his money refunded without interest only after sale of said apartment by DLF to someone else;
e. DLF's exit clause gives them full discretion, including abandoning the project, without any penalty;
f. DLF has sole authority to make additions / alterations in the buildings, with all the benefits flowing to DLF, with the allottees having no say in this regard;
g. Arbitrary forfeiture of amounts paid by the Allottees in many situations;
h. Accepting money and starting construction without the relevant sanctions being in place. Further, a clause in the agreement protected DLF from any liability, or from returning the allotment/instalment money if approval/sanction was not granted;
i. Including an unfair arbitration clause in the apartment buyers agreement that stated that any dispute would be decided by a sole arbitrator appointed by DLF and his/her decision would be final.
In Re: Suo-Motu Case against LPG Cylinder Manufacturers
In a suo- moto action initiated by the CCI against 48 LPG cylinder manufacturers, it imposed a penalty amounting collectively to approx INR 1.65 billion on them for forming a cartel and submitting identical or near bids to Indian Oil Company Limited in tender invitation by it in respect of procurement of 10.5 million 14.2kg LPG cylinders.
On investigation into and analysis of the bidding pattern of various parties for bids submitted in 25 states, the Director General ("DG") of the CCI found that among all the bids submitted in each state the parties have in all but one state quoted identical or near identical rates. It was further found that some of these companies were under the same management, but even companies not under the same management whose offices were located far off from each other in different parts of the state had identical or near identical bids.
As per the DG, factors like market conditions, small number of companies, little or no entry, industry association, repetitive bidding and little or no technological change, facilitating and aiding collusion were also present in the case. The DG further found that the companies were using an association by the name of Indian LPG cylinder manufacturers association to share possible rates.
The CCI found that "the collusive conduct of the LPG Cylinder Manufacturers fall in the pernicious category of offences which have been condemned by anti-trust authorities all over the world." The CCI found the companies guilty of colluding/cartelization under Section 3(3) of the Competition Act in equal measure and no mitigating circumstances were available to them.
UTV Software Communications Limited, Mumbai vs Motion Pictures Association, Delhi
In the instant case, CCI upheld the claim of UTV Software Communications Private Limited ("UTV") that the Motion Pictures Association, Delhi, ("MPA") has abused its dominant position by imposing unreasonable conditions that limit production, supply, distribution and exhibition of films in the areas of its operation, that is Delhi, Uttar Pradesh and Uttarakhand ("Territory") The CCI has also passed a 'cease and desist' order asking MPA to dispense with rules which are anti-competitive.
MPA is a non-profit association registered under Section 25 of CAto promote and assist the business of production, distribution and exhibition of films that its members are involved in and also to provide a common forum for its members to meet and address their problems. UTV provided information to the CCI pursuant to section 19(1) of the Competition Act of the anti-competitive practices being adopted by the MPA. Section 19(1) empowers the CCI to take cognizance of anti-competitive practices either suo moto, that is, of its own accord or on receipt of information by any person. Pursuant to information received from UTV under section 19(1) of the Competition Act, CCI was of the opinion that prima facie the MPA was indulging in anti-competitive practices and thus pursuant to the powers entrusted to it under Section 26 of the Competition Act, ordered the DG'to investigate the matter. The findings of the DG were as follows:
a. Most of the producers, distributors and exhibitors in the Territory were members of the MPA and the members of the MPA were not allowed to deal with those who were not members of the MPA, or those who were suspended by the MPA for violation of its regulations/rules. Dealing by a member with a non-member could lead to suspension or expulsion from membership of the MPA;
b. Due to the above stated facts, it becomes essential for a distributor to take membership of the MPA to carry on business in the Territory smoothly. It was almost impossible to survive in the film distribution business without being a member of the MPA;
c. The MPA has framed various rules for registration and distribution of films. Any member film producer or distributor carrying out business in the Territory has to get his film registered with the MPA;
d. Members of the MPA were forced to sign a producer distributor certificate and an acquiring form for the purpose of registration of films. The aforesaid certificates and forms contained unreasonable conditions such as hold back periods for exploitation of satellite, tv, radio and related rights. Members also have to agree to transfer all commercial and non-commercial rights of the film including copyrights, commercial video rights etc. to the MPA. Contracts entered into between producers and distributors were superseded by MPA rules;
e. The MPA adopts practice of fining members for non-registration of a film or for violation of other rules and regulations;
The CCI observed that the rules of the MPA restricting their members not to deal with non-members, making the registration of each film compulsory, restrictions regarding unfair holdback periods and rules regarding penalizing members who do not follow the dictates of the association are anti-competitive in nature and violative of Section 3(3)(b) of the Competition Act. Section 3(3)(b) of the Competition Act provides that any agreement entered into by associations that limits or controls the production, supply, markets, technical development, investment or provision of services shall be presumed to have an appreciable adverse affect on competition.
In its decision, the CCI stated that "the rules of the association are anti-competitive and are against the spirit of free competition in the market."
Authors: Sunil Seth (sunil.seth@sethdua.com) and Atul Dua (atul.dua@sethdua.com) are senior partners with Seth Dua & Associates, Solicitors & Advocates, India.