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Primacy of fair market value assessments in intragroup share transfers

Introduction In the recent case of Bray Controls South East Asia Pte Ltd v. Commissioner of Income (International Taxation), W.P.(C) 17911/2024, the Delhi High Court (the “HC”) examined an intragroup transfer of shares and highlighted the importance of a legally compliant valuation report in determining tax liability in India. The petitioner, Bray Controls South East Asia Pte Ltd (“Bray Sing”), a company incorporated in Singapore and a tax resident there, proposed to purchase the shares of an Indian company, Bray Controls India Private Limited (“Bray Ind”), from another affiliated group entity, Bray International Incorporated (“BII”), a tax resident of the United States.  To facilitate this transfer, Bray Sing applied for a nil withholding tax certificate under Section 195(2) of the Income Tax Act, 1961 (the “IT Act”), contending that the transaction would not result in any capital gains taxable in India. Background The Assessing Officer (“AO”) rejected the request for a nil withholding tax certificate and directed that tax be withheld at 10% of the total consideration.  In doing so, despite Bray Sing clarifying that no benefits under the India-Singapore tax treaty were being sought, the AO proceeded on the assumption that Bray Sing might claim such benefits. Aggrieved by the AO’s order, Bray Sing invoked Section 264 of the IT Act and filed a petition seeking a revision of the AO’s order.  In this petition, the Commissioner of Income Tax (“CIT”) concurred with the AO’s conclusion but on different grounds.  The CIT noted that Bray Sing had not furnished a valuation report of the fair market value (“FMV”) of the shares of Bray Ind at the time of their original acquisition by BII.  However, in response to the notice under Section 264 of the IT Act, Bray Sing had submitted the latest valuation report on record dated December 12, 2022, reflecting the FMV as INR50.25 (Indian Rupees Fifty and Twenty‑Five Paise) per share.  This conflicted with the agreed transaction price of INR100 (Indian Rupees Hundred) per share, thereby creating ambiguity regarding the genuineness of the proposed sale price. The CIT further observed that that as the shares were unlisted and Bray Sing had not furnished historical financials or valuation data, the capital gains tax liability was not accurately ascertainable.  As a result, the CIT concluded that the tax should be withheld at 10% of the transaction value. The HC ruling The HC ruled that the historical cost of acquisition of shares of Bray Ind by BII was not relevant to determine whether the current transfer would trigger capital gains tax. The HC clarified that the focus should have specifically been on: the sale consideration now agreed upon for the proposed transfer to Bray Sing; whether the sale consideration matched the FMV of the shares computed in accordance with Rule 11UA of the Income Tax Rules, 1962 (the “IT Rules”), on a proximate date; and the historical cost at which the shares were acquired by BII. For context, as per Rule 11UA(1)(c)(b) of the IT Rules, the FMV of unquoted equity shares on the valuation date is determined through the net value asset value or book value method.  This approach relies on the book value of a company’s underlying assets and liabilities as reflected in its audited financials, rather than speculative projections of future income. In the present case, both the AO and the CIT, failed to apply this statutory framework for valuation.  Instead, the AO and the CIT focussed on the valuation in respect of the price paid by BII at the time of its acquisition of Bray Ind’s shares, although that transaction: (i) was not under scrutiny in the current assessment year; and (ii) was not relevant to determine whether the proposed transfer of shares from BII to Bray Sing would give rise to capital gains. For the purposes of Bray Sing’s application for a nil withholding tax certificate, the authorities were required to confine their examination to the contemporaneous transaction and take into account the agreed transfer price, the fair market value of the shares under Rule 11UA of the IT Rules, and the original cost of acquisition of BII. Therefore, the HC set aside the impugned order and remanded the matter to the CIT for fresh consideration. Our comments Multinational groups often undertake internal restructuring exercises to achieve operational efficiencies, align business structures, or meet regulatory requirements.  In relation to transactions involving Indian subsidiaries, it becomes imperative to follow Rule 11UA of the IT Rules and base the transaction value on a chartered accountant’s formal valuation report.  It is clear from this case that Indian tax authorities can seek data or valuations that may not be relevant to the transaction at hand, which can delay simple transactions and expose parties to the risk of interim tax withholding.  In addition, this has the effect of increasing compliance costs and can also affect cash flow.  Following the letter of the law is, therefore, critical. By: Majmudar & Partners, International Lawyers, India
21 August 2025
Commercial, Corporate & M&A.

INDIA – RECENT SECURITIES LAW DEVELOPMENTS

Dematerialization of physical securities of shareholders before filing the DRHP The Securities and Exchange Board of India (the “SEBI”) has, recently, approved amendments to the SEBI (Issue Capital and Disclosure Requirements) Regulations, 2018 (the “ICDR Regulations”), and has mandated that selling shareholders, key managerial personnel, senior management, directors, qualified institutional buyers (“QIBs”), employees, shareholders with special rights and all entities regulated by financial sector regulators, should dematerialize their shares before filing the Draft Red Herring Prospectus (“DRHP”).  This move is expected to, inter alia, facilitate faster share transfers, eliminate the loss of and damage to physical securities, enhance transparency, and reduce fraud and forgery. Prior to the proposed amendment, only promoters were required to hold their shares in dematerialized form before filing a DRHP. Relaxation of public issue and promoter-related norms to ease reverse flipping and founder ESOP continuity As part of its ongoing efforts to promote the ease of doing business, the SEBI has approved key amendments to the ICDR Regulations and the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, aimed at easing restrictions on public issues, especially in cases involving reverse flipping and founder equity incentives: Firstly, the SEBI has exempted from the requirement of holding for one (1) year equity shares to be sold in an offer for sale (“OFS”) those equity shares arising out of the conversion of fully paid-up compulsorily convertible securities (“CCS”) received under an approved scheme.  This will allow investors holding CCS to convert their CCS before an OFS and participate in it. This move will aid CCS holders in companies that undergo a reverse flip to be based in India just before listing. Secondly, the SEBI has added more entities into the definition of “relevant persons” for the purposes of minimum promoter contribution. “Relevant persons” such as alternative investment funds (“AIF”), foreign venture capital investors, scheduled commercial banks, insurance companies registered with the Insurance Regulatory and Development Authority of India, public financial institutions and non-promoter shareholders forming part of the promoter group, any non-individual public shareholder holding at least 5% of the post-issue capital, or any entity (individual or non-individual) forming part of promoter group other than the promoter(s) will now be permitted to contribute equity shares arising from conversions of fully paid-up CCS towards the minimum promoter contribution.  Under the existing framework, only promoters of a company could contribute equity shares arising from conversion of fully paid-up CCS to fulfil the minimum promoter contribution.  This amendment now aligns the treatment of promoters and significant non-promoter contributors for minimum promoter contribution compliance. Thirdly, in a significant relaxation, the SEBI has addressed the hardship faced by founders classified as promoters who were required to liquidate employee stock ownership plans or other share-based benefits held at the time of DRHP filing.  Going forward, founders who have been granted such benefits at least one (1) year prior to filing the DRHP may continue to hold and/ or exercise these benefits even after being classified as promoters and the company becoming a listed entity. Angel fund framework revamped to align with accredited investor norms and enhance fundraising flexibility The SEBI has approved a revised regulatory framework for angel funds under the SEBI (Alternative Investment Funds) Regulations, 2012 (the “AIF Regulations”).  While retaining angel funds within the AIF regime, the SEBI has introduced key changes to eligibility norms, investment thresholds, and compliance requirements. The key regulatory changes include: Accredited investor requirement Going forward, angel investors will now be required to be accredited investors to be able to invest in angel funds. Inclusion of angel investors as qualified institutional buyers for angel funds The SEBI has approved an amendment to the ICDR Regulations to allow angel investors to be treated as QIBs for the limited purpose of investing in angel funds, thereby expanding the potential investor base for angel funds, while remaining compliant with the Companies Act, 2013.  Section 42(2) of the Companies Act, 2013 excludes QIBs from the limit of two hundred (200) persons in respect of offers to subscribe to securities by way of private placement.  Earlier, the limit on the number of investors (including angel funds) to two hundred (200) adversely impacted capital inflows into start-ups.  Now that angel funds have been categorized as QIBs, they will be outside the two hundred (200) investor limit prescribed under company law. Operational reforms for angel funds The SEBI has also approved the following operational reforms for angel funds: Relaxed investment thresholds: The floor and cap for investment in an investee company have been revised from INR2,500,000 (Indian Rupees Two Million Five Hundred Thousand) to INR100,000,000 (Indian Rupees One Hundred Million) to a higher range of INR1,000,000 (Indian Rupees One Million) to INR250,000,000 (Indian Rupees Two Hundred and Fifty Million). Removal of concentration limits: The previous restriction limiting investment in a single company to 25% of the angel fund's total investment has been removed. Wider investor participation: Angel funds can now accept contributions from more than two hundred (200) accredited investors in a single investment, easing scale limitations. Follow-on investments permitted: Angel funds can make additional investments in companies that have outgrown start-up classification. Co-investment schemes under AIF structure for Category I & II AIFs now permitted The SEBI has approved an amendment to the AIF Regulations allowing Category I and Category II AIFs to offer co-investment schemes (“CIV Schemes”) within the AIF regulatory framework to facilitate AIFs and investors to co-invest and support capital formation in unlisted companies through AIFs. Under the new framework, a co-investment scheme refers to a scheme of a Category I or II AIF that facilitates co-investment by accredited investors of a particular AIF scheme into unlisted securities of an investee company in which the AIF scheme is already invested.  For example, if an AIF scheme invests INR1,000,000,000 (Indian Rupees One Billion) into a company, and the total funding requirement is INR3,000,000,000 (Indian Rupees Three Billion), accredited investors of the AIF scheme may be offered the opportunity to co-invest the balance INR2,000,000,000 (Indian Rupees Two Billion) through a CIV Scheme in addition to their investment through the AIF. Currently, such co-investments are made through co-investment portfolio managers under the SEBI (Portfolio Managers) Regulations, 2020, which poses operational challenges, such as dual registration requirements for fund managers (as AIF and portfolio manager), and complexity for unlisted companies dealing with numerous shareholders.  The new AIF-based route seeks to address these issues by enabling co-investment directly through the AIF vehicle. A separate CIV Scheme will be required for each co-investment opportunity, ensuring clear segregation and governance, and certain regulatory relaxations applicable to other AIF schemes will apply to CIV Schemes. Extension of the liquidation period for VCFs migrated to the AIF regime By its circular dated June 6, 2025, the SEBI has extended the liquidation period for venture capital funds (“VCFs”) migrating to the AIF framework by one (1) year, i.e., from July 19, 2025 to July 19, 2026.  This extension, granted after consultations with industry stakeholders, gives VCFs more time to wind down legacy structures and align with the AIF framework.  However, the deadline for eligible VCFs to apply for migration continues to be July 19, 2025. In 1996, the SEBI notified the SEBI (Venture Capital Funds) Regulations 1996 (the “VCF Regulations”) to encourage investment and funding in early-stage companies in India.  However, with the introduction of the AIF Regulations, the VCF Regulations were repealed.  Despite the repeal, existing VCFs were permitted to continue under the VCF regime, subject to certain conditions.  The AIF Regulations also offered such VCFs an option to re-register and operate under the AIF regime. To facilitate this transition, the SEBI notified certain amendments to the AIF Regulations in 2024, providing a structured mechanism for VCFs to migrate to the AIF regime, and allowing VCFs migrating to the AIF regime who had at least one (1) scheme that had not been wound up post expiry of its liquidation period under Regulation 24(2) of the VCF Regulations, additional time to liquidate until July 19, 2025. While the window for liquidation has been extended, the SEBI has clarified that all other provisions of its August 19, 2024 circular remain in force, and no relaxation has been granted with respect to the eligibility conditions or application timelines for migration into the AIF framework.
14 July 2025
Restructuring and insolvency

Supreme Court directs status quo to be maintained in the liquidation of Bhushan Power and Steel Ltd.

Introduction In Kalyani Transco v. M/s Bhushan Power and Steel Ltd. (2025 INSC 621), the Supreme Court (the “SC”) set aside the approved resolution plan (the “Resolution Plan”) and directed liquidation of Bhushan Power and Steel Ltd. (“BPSL”) negating the judgments of the National Company Law Tribunal (the “NCLT”) and the National Company Appellate Law Tribunal (the “NCLAT”) which had approved the Resolution Plan.  This caused a huge uproar in the financial world, and on an application filed by JSW Steel Ltd. (“JSW”), the SC has, by its order dated May 26, 2025, directed that status quo be maintained in respect of the liquidation proceedings of BPSL.  For now, the order of liquidation passed in the foregoing case stands stayed and no steps towards liquidation are to be undertaken. Background This case deals with the corporate insolvency resolution process (the “CIRP”) of BPSL, one of the dirty dozen non-performing asset accounts identified by the Reserve Bank of India for immediate resolution under the Insolvency and Bankruptcy Code, 2016 (the “IBC”).  For context, the CIRP was initiated by Punjab National Bank, with claims more than INR470,000,000,000 (Indian Rupees Four Hundred and Seventy Billion) admitted for the financial creditors and over INR 6,000,000,000 (Indian Rupees Six Billion) for the operational creditors. Several resolution applicants such as JSW, Tata Steel and Liberty House participated in the CIRP process, and JSW emerged with the highest score in the committee of creditors’ (the “COC”) evaluation.  Following this, in February 2019, the resolution professional (the “RP”) moved an application for approval of the Resolution Plan before the NCLT.  Meanwhile, the Central Bureau of Investigation initiated criminal proceedings against BPSL and its directors, basis which the Enforcement Directorate (the “ED”) registered a case against BPSL for offences under the Prevention of Money Laundering Act, 2002 (the “PMLA”). The NCLT, by an order dated September 5, 2019 (the “NCLT Order”), approved the Resolution Plan, subject to compliance with certain conditions, namely, the requirement to: (i) adhere to Section 30(2) of the IBC; (ii) treat pending criminal proceedings against erstwhile directors as not affecting the implementation of the Resolution Plan; and (iii) distribute profits earned during the CIRP in accordance with the Essar Steel judgment.  Despite the approval of the Resolution Plan, the ED provisionally attached BPSL’s assets under the PMLA in October 2019.  JSW and the COC challenged the attachment before the NCLAT and the SC, respectively, and obtained interim protection against the attachment. Thereafter, the NCLT Order was challenged in appeal before the NCLAT.  Additionally, after the ED’s attachment order was pronounced but while the foregoing appeal was pending, Section 32A of the IBC, which provides immunity to the corporate debtor from liability for offences committed prior to the commencement of the CIRP, was inserted into the IBC with effect from December 28, 2019. In the appeal, the NCLAT, by an order dated February 17, 2020 (the “NCLAT Order”), upheld the NCLT Order in large part but modified some conditions, including the condition related to the effect of criminal proceedings on the CIRP.  The NCLAT Order also provided that, keeping in mind Section 32A of the IBC, the ED and other investigating agencies cannot attach the assets of BPSL, as the Resolution Plan had already been approved.  Thereafter, the NCLAT Order was challenged before the SC.  While proceedings were pending before the SC, the Resolution Plan was implemented by JSW by making payment to the financial creditors in 2021 and to the operational creditors in 2022. Key contentions Appellants’ contentions: The appellants, which included the operational creditors, ex-promoters of BPSL, and the State of Odisha, argued that the CIRP was violative of the provisions of the IBC, as it involved: (i) a failure to adhere to the strict timeline of completing the CIRP within two hundred and seventy (270) days under Section 12 of the IBC; (ii) improper verification of the eligibility of the resolution applicants under Section 29A of the IBC; and (iii) non-compliance of the requirement to pay the operational creditors in priority over the financial creditors as mandated by Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the “2016 Regulations”). Further, the appellants also argued that JSW, in collusion with the COC, had enriched itself at the expense of the other creditors by delaying implementation of the Resolution Plan.  The COC failed to exercise its commercial wisdom, took contradictory stances and did not act in the interest of all stakeholders.  It was also argued that the NCLAT exceeded its jurisdiction by reviewing the ED’s decision under the PMLA, which is outside the scope of the IBC. Respondents’ contentions: The respondents, which included JSW and the COC, argued that the Resolution Plan had been implemented, and payments had been made to the financial and operational creditors.  The delays were due to legal uncertainties, such as the attachment of BPSL’s assets.  Further, they argued that the COC’s commercial decisions, including extensions granted to implement the Resolution Plan, were necessary for the successful resolution of BPSL.  It was also asserted that the implementation of the Resolution Plan was not prejudicial to any stakeholder, and the Resolution Plan was ultimately in the best interest of all parties. The ruling The SC, by its judgment dated May 2, 2025, set aside the NCLT Order and the NCLAT Order and rejected the Resolution Plan as being non-compliant with the provisions of the IBC.  The SC ordered the NCLT to initiate liquidation proceedings against BPSL under Chapter III of the IBC, emphasizing that the benefit of Section 32A of the IBC cannot be used to justify non-implementation or delayed implementation of a resolution plan.  Further, any payments made by JSW to creditors, during the pendency of the appeals, were directed to be returned, as per the statement made by COC’s counsel, Dr. Abhishek Manu Singhvi. The SC, inter alia, addressed the following points: (i) Non-compliance with timelines: The SC held that the CIRP was not completed within the mandatory period of two hundred and seventy (270) days as required by Section 12 of the IBC, and no valid extension was sought or granted. The application for approval of the Resolution Plan was filed long after the expiry of the statutory period, rendering the process flawed. (ii) Failure of RP: The SC held that the RP failed to discharge key statutory duties, including verifying the eligibility of the resolution applicants under Section 29A of the IBC and ensuring compliance with the requirement to pay operational creditors on a priority basis under Regulation 38 of the 2016 Regulations. (iii) Role of the COC: The SC held that the COC failed in exercising its commercial wisdom and did not take into account the interests of all stakeholders. The COC took contradictory positions and ultimately supported JSW’s delayed implementation without proper justification. (iv) JSW’s actions: The SC found that JSW misused the process of law by: (I) delaying implementation of the Resolution Plan for over two (2) years; (II) making misrepresentations; and (III) unjustly enriching itself by not making upfront payments as was agreed upon in the Resolution Plan. (v) Jurisdictional overreach by the NCLAT: The SC observed that the NCLAT had acted beyond its jurisdiction by reviewing the ED’s order attaching assets under the PMLA, which is a matter outside the scope of the IBC. Our comments  Although the strict interpretation employed in the SC’s decision is a welcome step in terms of upholding the sanctity of the law, the decision may have inadvertently overlooked certain practical and commercial considerations.  One such consideration is that the liquidation of a company as significant as BPSL may have far-reaching negative consequences for employees, suppliers, customers, and the broader economy in general.  Additionally, the possibility that an approved resolution plan can be unwound years later, on account of procedural lapses, may have a chilling effect on participation by stakeholders in the CIRP process.  This decision has created uncertainty among lenders and resolution applicants and has undermined the efficacy and finality of the CIRP process under the IBC.  Considering all of this, the SC has issued an order of status quo pending the filing of a review petition by JSW.  Let’s hope that the SC takes a hard relook at its earlier order to better serve the ends of justice.
30 May 2025
Tax

The Clean Slate Doctrine and the tax quandary

Background The Clean Slate Doctrine is a key legal principle embedded in the Insolvency and Bankruptcy Code, 2016 (“IBC”), which plays a pivotal role in the corporate insolvency process in India. The doctrine suggests that once a company successfully undergoes the insolvency resolution process and is taken over by a new buyer, the new owner should not be held accountable for any of the company’s pre-existing debts, penalties, or liabilities. This principle is designed to give the company a fresh start, essentially, a “clean slate” free from the baggage of its prior financial troubles. The Clean Slate Doctrine has been upheld in several landmark rulings by India's Supreme Court, reaffirming its crucial role in the IBC framework. In the Essar Steel India case, India’s Supreme Court (“SC”) emphasized that one of the primary objectives of the IBC is to streamline insolvency procedures in India and bring all claims under a unified system. The SC ruled that once a resolution plan is approved by the National Company Law Tribunal (“NCLT”), any and all previous liabilities, including debts and penalties, are extinguished. This means no party can initiate or continue any legal proceedings related to a claim that is not included in the approved resolution plan. In the Edelweiss Asset Reconstruction case, the SC held that government dues, such as taxes and duties, are extinguished if they are not part of the resolution plan. In the Surya Exim case, the Gujarat High Court, following the SC rulings, held that any tax demands issued after the NCLT’s approval of a resolution plan should be cancelled, reinforcing the idea that claims not included in the approved plan are no longer valid. Despite these judicial rulings, recent developments have raised concerns about the continued enforcement of the Clean Slate Doctrine. Reports suggest that Indian tax authorities, including the Goods and Services Tax (“GST”) authorities, have issued notices to companies like Tata Steel and B&B Global Enterprises, both of which successfully underwent the IBC resolution process, demanding payment of pre-resolution GST dues on outstanding tax assessments. The chief argument of the tax authorities is that statutory dues, such as taxes, are sovereign in nature and are not subject to the same treatment as other liabilities in the IBC resolution process. Unless these dues are explicitly waived, they argue, tax claims survive the insolvency resolution, as they cannot be overridden by the provisions of the IBC. Our comments Section 31 of the IBC clearly provides that once a resolution plan is approved by the NCLT, it is binding on all stakeholders including the corporate debtor, its creditors, employees, and even the tax authorities. If the tax authorities fail to file their claims during the insolvency proceedings, they should not be allowed to assert such claims afterwards. This is especially true in cases where the authorities do not actively participate in the resolution process or miss the filing deadlines, only to return with notices post-approval. Such actions are legally unjustifiable and procedurally flawed. The IBC framework is built on judicial discipline, with High Court and Supreme Court precedents setting the tone for lower authorities to follow. Allowing tax authorities to act in contradiction to these rulings erodes this discipline. By going after companies post-resolution, the Indian tax and GST authorities are not only contravening Supreme Court rulings, but they are also undermining the entire IBC framework, creating confusion, and adding to the legal and financial uncertainty that plagues businesses in the country. The primary objective of the IBC is to facilitate the revival of distressed companies, and the Clean Slate Doctrine is crucial to this objective. If businesses that go through the IBC resolution process are burdened with past financial and legal liabilities, particularly tax claims that are initiated after the resolution, then the very purpose of the insolvency framework is undermined. Potential investors, wary of inheriting unresolved liabilities, will be hesitant to participate in the IBC process, stymying the revival of distressed companies. It is imperative that there is clearer administrative discipline within tax departments and greater coordination between insolvency professionals and tax officers. What is needed urgently is a directive from the Central Board of Direct Taxes, Ministry of Finance, refraining Indian tax officers from making tax or GST demands on companies that have undergone an IBC resolution process. Authors: Ravi S. Raghavan, Partner, Tax and Private Client Group, Majmudar & Partners, India
16 May 2025
Foreign investment and Corporate/M&A

India’s DPIIT Clarifies on Issue of Bonus Shares in Prohibited Sectors

Introduction As per Para 1 of Annexure 3 of India’s consolidated foreign direct investment policy, Indian companies are allowed to freely issue rights/ bonus shares to their existing non-resident shareholders, subject to adherence of sectoral caps and compliance of applicable laws like the Companies Act, 2013. By Press Note 2 of 2025 (the “Press Note”), India’s Department for Promotion of Industry and Internal Trade has clarified that, under Para 1 of Annexure 3 of the policy, an Indian company may issue bonus shares in compliance with applicable law to pre-existing non-resident shareholders in sectors where foreign direct investment (“FDI”) is currently prohibited, subject to the condition that the shareholding percentage of the pre-existing non-resident shareholders does not change due to the bonus shares issuance. Analysis To give some context, currently, FDI in India is allowed in most sectors through the automatic route (no approval required from the government) and through the approval route (approval required from the government) in some sectors, such as defence and insurance. However, FDI is not allowed in certain prohibited sectors, such as: (i) lottery business; (ii) gambling and betting; (iii) chit funds; (iv) Nidhi company; (v) trading in transferable development rights; (vi) real estate business or construction of farmhouses, excluding, inter alia, the development of townships and construction of residential/ commercial premises, roads or bridges; and (vii) manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. FDI is also prohibited in sectors that are not open to private sector investment, such as atomic energy and railway operations. The FDI policy has evolved over the decades following India’s independence from British rule in 1947. Although many foreign investors exited their India businesses as the FDI policy in some sectors got restrictive, foreign ownership continued in some companies. As per press reports, an Indian cigarette manufacturer, Godfrey Phillips India Ltd., sought a clarification from the DPIIT on whether it could issue bonus shares to its original non-resident shareholder, Philip Morris, because FDI in the cigarette manufacturing sector was now prohibited. It appears that the DPIIT assessed and acceded to this request, and the Press Note was a culmination thereof. As a result of the Press Note, Indian companies engaged in any of foregoing prohibited sectors will be eligible to issue bonus shares to their existing non-resident shareholders. However, such an issuance should not result in additional foreign investment coming into the company and the foreign shareholding percentage should remain the same. The Press Note will be effective from the date of issue of the applicable Foreign Exchange Management Act, 1999 notification, which is awaited. In our view, the Press Note is a welcome clarification and will eliminate the ambiguity surrounding the issuance of bonus shares to pre-existing investors in restricted sectors. Authors: Akil Hirani and Sanchita Makhija, Majmudar & Partners, India
16 May 2025
Corporate and M&A

MCA PROPOSES EXPANSION OF THE FAST TRACK MERGER FRAMEWORK

The Ministry of Corporate Affairs (the “MCA”) has recently issued a public notice inviting comments on the draft Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2025 (the “Draft Amendment Rules”). The Draft Amendment Rules aim to widen the scope of fast-track mergers under Section 233 of the Companies Act, 2013 (the “CA Act”) to increase corporate restructuring efficiency. This move follows the announcement made in the Union Budget 2025–26 to simplify and expand the process of fast-track mergers to more classes of companies. Background Largely from a tax perspective, mergers are a common tool for corporate restructuring; however, the National Company Law Tribunal (the “NCLT”) often takes 9 (nine) to 12 (twelve) months or even longer to approve merger schemes. In order to expedite the process, the fast-track merger route is available under Section 233 of the CA Act. Section 233 of the CA Act currently allows fast-track mergers between (i) small companies; (ii) a holding company and its wholly owned subsidiary; (iii) start-up companies; and (iv) a start-up company and a small company. The Draft Amendment Rules propose to extend eligibility for availing the fast-track merger route to additional classes of companies. These include: (i) mergers between two (2) or more unlisted companies (excluding Section 8 companies) with borrowings from banks, financial institutions or any other body corporate below INR500,000,000 (Indian Rupees Five Hundred Million), and there being no defaults in repayment of such borrowings, along with an auditor’s certificate confirming that the foregoing conditions have been met; and (ii) mergers between a holding company (listed or unlisted) and one (1) or more of its unlisted subsidiaries, even if not wholly owned. Presently, in the Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 (the “Merger Rules”), mergers of only wholly owned subsidiaries with their holding company are permitted under the fast-track merger route. It is now proposed in the Draft Amendment Rules that an unlisted subsidiary even if not a wholly owned subsidiary may also be allowed to merge with its holding company under the fast-track merger route; (iii) mergers between one (1) or more subsidiaries of a holding company with one (1) or more other subsidiary of the same holding company, where the transferor company or companies are unlisted; and (iv) mergers between foreign holding companies with and into their Indian wholly owned subsidiaries as per Rule 25A(5) of the Merger Rules. Issues with the Draft Amendment Rules The intent behind the fast-track merger route is speedy approval of mergers by doing away with the requirement of NCLT approval. However, Section 233 of the CA Act prescribes high thresholds of securing approval, i.e., from at least nine-tenths in value of creditors and shareholders holding at least 90% of the total number of shares. Obtaining approvals in companies with diverse shareholders or multiple creditors can be cumbersome and time-consuming. Also, the Central Government has the power to refer a scheme of merger to the NCLT if it is of the opinion that the scheme of merger is not in public interest or in the interest of creditors. Given that the term “public interest” is open to wide interpretation in the absence of any criteria in the CA Act or the Merger Rules, this can delay approvals of schemes of mergers, thereby defeating the intent of a fast-track merger. Separately, the MCA has missed the opportunity to facilitate mergers under the fast-track route of not-for-profit companies by excluding them from the expanded scope. Our comments Despite these shortcomings, the Draft Amendment Rules are a step in the right direction. The MCA has responded to the industry demands for greater flexibility and efficiency in mergers and amalgamations by making an effort to address the long-standing challenges associated with the NCLT merger route. The inclusion of more classes of companies to be eligible for fast-track mergers will improve corporate restructuring. The fast-track route is beneficial especially for mergers among intra-group entities, which is often low risk, without having the need to go through the lengthy and cumbersome NCLT approval route. Another positive inclusion is enabling foreign companies to merge with their wholly owned Indian subsidiaries through the fast-track route which paves way for timely global restructurings. As highlighted in our earlier discussion on fast-track mergers, the MCA has prescribed definite timelines within which the steps required for fast-track mergers can be completed to avoid undue delays. Schemes of mergers filed through the fast-track route should be approved in a timely manner without unnecessary delays or discretion to facilitate the ease of doing business in India. Authors: Rukshad Davar and Tanisha Agrawal, Majmudar & Partners, India
16 May 2025

The Proposed Structure of India’s New Income-tax Bill, 2025

Background In July 2024, India’s Finance Minister announced that a comprehensive review of the existing Income-tax Act, 1961 (the “IT Act”) would be undertaken with the intent to make the tax law simple and to minimize tax controversy.  The Finance Minister introduced the Income-tax Bill, 2025 (the “Tax Bill”) in Parliament on February 12, 2025.  Once enacted, the Tax Bill will become effective from April 1, 2026 and replace the IT Act that has been in place for over sixty (60) years. A Parliamentary Select Committee (the “Committee”) will be formed to deliberate on the Tax Bill, and the Committee will be required to submit its report on the first day of the next parliamentary session (i.e., July 2025).  The Indian government will consider the Committee’s report to revise the Tax Bill, which will then proceed to Parliament for approval in both houses, followed by the President’s assent to become law. Overall structure of the Tax Bill   We have summarised below some of the key features of the Tax Bill. A. Chapters and sections: The Tax Bill preserves the familiar chapter structure, heads of income, substantive provisions, and the assessment and appeal procedures. The Finance Act for each year will continue to set the tax rates for that particular year.  However, the number of sections in the Tax Bill has been reduced from 8191 to 536, and the number of chapters have been reduced from 47 to 23. Lengthy sentences in certain sections and subsections of the IT Act have been broken down into clauses in the Tax Bill to improve readability. However, there are instances where the Tax Bill continues to refer to provisions from the IT Act, such as the definitions of “income” and “infrastructure facility.”  Additionally, there are various cross-references to different schedules and tables within the Tax Bill, which may be a bit cumbersome to follow. The concept of an “assessment year” has been done away with, and the term “previous year” is now being referred to as the “tax year.” In the IT Act, the term “notwithstanding,” which was used in many provisions to override other tax provisions, has been replaced with the term “irrespective.”  Further, the term “in accordance with” have been replaced with “as per,” and “as may be prescribed” has been replaced with “prescribed.” In addition to the general definitions that apply to the entire Tax Bill, specific definitions for particular chapters or sub-chapters have been provided at the end of those chapters or sub-chapters. The language of certain definitions in the Tax Bill, including those for "business connection" and “associated enterprises,” will require careful evaluation. Explanations and provisos to sections and sub-sections have been converted into sub-sections. Various sections from the IT Act have been represented in tabular form.  This includes provisions for: (i) calculating salary income and deductions; (ii) the dates when specified businesses can commence their operations for claiming deductions for capital expenses; (iii) tax deductions at source for various payments, (iv) determining the cost of acquisition of a capital asset in specific situations; and (v) the presumptive tax regime. B. Obsolete sections: Various outdated sections have been removed, such as those related to investment allowances on new plant and machinery, fringe benefits tax, dividend distribution tax, pre-emptive purchase of immovable property by the Indian government, etc. C. Tax Deduction at Source: Presently, as per the IT Act, there are various provisions relating to tax deduction at source (“TDS”) wherein different rates and thresholds have been provided depending on the nature of payment or status of payees. The Tax Bill proposes to comprehensively overhaul the structure by consolidating them into a single section (except for TDS on salary) wherein all TDS provisions are categorized into three broad heads as follows: (i) TDS on payments to residents; (ii) TDS on payments to non-residents; and (iii) TDS on payments to any person (residents, non-residents or both).  For each category, TDS provisions have been consolidated into a single table for ease of identification of the applicable rates, thresholds, payees, and the nature of payments on which TDS will get attracted. D. Tax in special cases: Certain chapters relating to the determination of tax in special cases, minimum alternate tax, and tax on shipping companies, have been combined into one chapter. E. Exempt incomes: Certain provisions relating to tax exempt incomes, including the existing Section 10 of the IT Act, have been moved into six (6) different schedules. F. Tax rates, computation of Income: The tax rates, computation of business profits, the capital gains tax regime, and the taxation of mergers and acquisitions are largely aligned with current provisions of the IT Act. G. Amendments proposed by the Finance Bill, 2025: Most of the amendments proposed by the Finance Bill, 2025, have been incorporated into the Tax Bill, with a few exceptions. One notable exception is the proposed extension of the sunset date for tax neutral relocation of offshore or original funds to resultant funds in the IFSC, which has not been included and remains set at March 31, 2025. H. New tax rules to be specified: Many provisions in the Tax Bill will require specific rules to be prescribed, which are likely to be released separately. I. Transfer pricing: Except for a few clarificatory modifications to the language, the transfer pricing framework remains the same. No changes have been proposed in the timelines, compliances, procedural aspects, and penalty provisions.  The Finance Minister, in her Budget speech, had stated that the safe harbour rules will be expanded to reduce litigation and enhance certainty.  However, no amendments have been made to the safe harbour provisions in the Tax Bill. Our comments The Tax Bill broadly aligns with the existing provisions of the IT Act.  The FAQs released along with the Tax Bill are welcome and provide much-needed clarity and simplify the tax provisions.  The consolidation of definitions, elimination of redundant provisions, and extensive use of tables and formulae enhance the tax law’s readability and understanding.  A detailed comparative analysis of the provisions proposed in the Tax Bill may reveal certain interpretative issues, which will have to be addressed in the future.  It will be interesting to see how notifications or circulars that were issued under the IT Act, as well as decisions rendered by various courts, will apply to provisions in the Tax Bill that are worded in an identical or similar fashion. Authors: Ravi S. Raghavan, Partner, Tax and Private Client Group, Majmudar & Partners, India 
28 February 2025
Tax

Income arising from crypto sales prior to April 1, 2022 to be taxed as capital gains and not as income from other sources

Background An individual salaried taxpayer (the “Individual”) purchased bitcoins during the financial year 2015-16 and sold them in the financial year 2020-21. In the tax return, the Individual claimed that the bitcoins sold qualified as a capital asset under Section 2(14) of the IT Act; and, therefore, gains arising from the sale of bitcoins must be regarded as long-term capital gains as the Individual had held the bitcoins for more than thirty-six (36) months.  Additionally, the Individual claimed long-term capital gains tax exemption under Section 54F of the IT Act as the capital gains were used to purchase a residential property.  The Indian tax authorities rejected the Individual’s claim and held that bitcoins did not qualify as a capital asset under Section 2(14) of the IT Act and, therefore, the gains must be taxed as income from other sources.  This also led to rejection of the Individual’s claim for tax exemption under Section 54F of the IT Act. The Individual lost his appeal before the Commissioner of Income-tax (Appeals) and, subsequently, preferred an appeal before the Income Tax Appellate Tribunal, Jodhpur (the “Jodhpur Tribunal”). Legal position Under the provisions of the Income-tax Act, 1961 (the “IT Act”) in the case of individual taxpayers, “long-term capital gains” on sale of property (which is a capital asset) that has been acquired before July 23, 2024 and held for more than thirty-six (36) months is taxed at the rate of 20% (excluding surcharge and cess) whereas any “income from other sources” is taxed at the rate of 30% (excluding surcharge and cess).  A tax exemption is available to an individual taxpayer if the long-term capital gains is utilized to purchase a residential property.  Moreover, in computing the long-term capital gains tax, the IT Act also allows indexation benefits to determine the cost of acquisition of the property.  Such beneficial tax provisions are not available to an individual taxpayer if tax has to be calculated on “income from other sources.”  Thus, the characterization of income is crucial in determining the final tax liability. The Jodhpur Tribunal’s ruling The Jodhpur Tribunal noted that the term “capital asset” as defined under Section 2(14) of the IT Act means “property of any kind held by an assessee, whether or not connected with his business or profession.”  The Jodhpur Tribunal delved into Explanation 1 to Section 2(14) of the IT Act, which clarifies that the term “property” includes and shall be deemed to have always included any right in or in relation to an Indian company, including the right of management or control or any other right whatsoever.  Moreover, the Jodhpur Tribunal highlighted that the term “transfer” under Section 2(47) of the IT Act in relation to a capital asset includes the sale, exchange, relinquishment or extinguishment of any right therein.  On this basis, the Jodhpur Tribunal concluded that the Indian tax authorities were not correct in asserting that one should actually own something as property for it to qualify as a capital asset.  Even if a person has a right or claim in a property, it should be considered a capital asset under Section 2(14) of the IT Act. The Jodhpur Tribunal further noted that Section 2(47A) of the IT Act pertaining to “Virtual Digital Assets” (“VDA”) (which include underlying assets such as bitcoins) was only inserted in 2022.  Although from 2022 onwards, VDAs were taxed at a higher rate, they, nevertheless, continued to retain the character of capital assets by default and were to be considered as “property of any kind.”  Moreover, as the relevant amendment to the IT Act on the taxation of VDAs was prospective in nature, the lower rate of tax on capital gains would apply to the Individual’s sale of bitcoins prior to 2022. The Jodhpur Tribunal also discussed the point on dual interpretation of a statutory provision, i.e., whether bitcoin was a capital asset or not.  Relying on the Supreme Court’s decisions in the Vegetable Products and the Safari Retreats tax cases, the Jodhpur Tribunal concluded that when two (2) views or interpretations are possible, the view that is more favourable to the taxpayer must be considered. Based on all the foregoing, the Jodhpur Tribunal held that all rights are property, and therefore, the right of the taxpayer in the bitcoin is a capital asset (albeit a virtual one), which results in capital gains and is not chargeable under the head income from other sources. Our comments This is one of the first rulings in India where a tax tribunal has held that bitcoin or cryptocurrency, being a virtual asset, is a capital asset, because of which gains on the sale thereof are to be classified as capital gains and not as income from other sources.  This decision negates the position taken by the Indian tax authorities that when you buy a bitcoin you own nothing, except your right to sell your share therein to another willing buyer.  The Jodhpur Tribunal has clarified that the amendments pertaining to the taxability of VDAs introduced by the Finance Act, 2022, are prospective in nature and cannot be made applicable to prior years.  Please refer to our previous update here on Indian tax implications in cryptocurrency transactions post April 1, 2022. More likely than not the Indian tax authorities will appeal the Jodhpur Tribunal’s decision to the Rajasthan High Court; however, considering the well-drafted and reasoned thirty-one (31)-page order passed by the Jodhpur Tribunal, it remains to be seen what the outcome will be. As we see it, the cryptocurrency industry in India is still in a nascent stage with skewed knowledge available regarding its working, which complicates its classification and, therefore, its categorization under India’s taxation system.  The tax rate of 30% (irrespective of the income bracket of the taxpayer), non-availability of any deductions (other than the cost of acquisition), non-availability of set-off of losses, and the requirement to withhold tax, all seem to be aimed to discourage investments in VDAs. Author: Ravi S. Raghavan, Partner, Tax and Private Client Group, Majmudar & Partners, India 
17 February 2025

CROSS BORDER M&A 2025

PRIOR YEARS – A QUICK PREVIEW 2023 was a year of significant global challenges, including interest rate hikes and ongoing geopolitical conflicts.  While 2024 began with optimism for economic growth and increased deal activity, persistent geopolitical tensions kept uncertainties high.  Global M&A experienced a modest upward trend in 2024 with a 9.8% increase in deal volume compared to 2023. India displayed resilience in 2024, achieving a GDP growth rate of 8.2%.  Cross-border M&A deals surged by 66% in the first nine (9) months of 2024, with IT, manufacturing and banking sectors leading the inbound M&A activity.  IPOs witnessed a surge which enabled exits for private equity investors. India’s 2024 growth story was a mix of positive developments and persistent challenges.  Key drivers included the re-election of the government, the “Make in India” initiative, boost in the production-linked incentives, growing technical capabilities, a skilled large workforce and increased domestic consumption.  Challenges remained as the rupee depreciated against the US dollar, inflation proved stubborn, markets remained volatile and global economic uncertainties persisted throughout 2024. TARIFFS – A REAL CONCERN Come 2025, Donald Trump’s widespread statements to impose tariffs on BRICS nations, including India, as part of the “America First” economic agenda, have raised uncertainties in global trade.  If this proposal were to materialize, Indian companies will face pressure on their exports or will need to establish manufacturing facilities in the US to avoid steep tariffs, if their key market is the US.  Presently, it seems that the services sector is insulated from tariffs, and as a result, outsourcing activity will continue to see growth and inbound investments. While it is almost certain that outsourcing of manufacturing activities into India for servicing the US market can face a downward trend, US investors are likely to continue to invest in India to augment their manufacturing activities to service other global markets, excluding the US, given India’s technical capabilities, cost competitive advantage, and skilled large workforce. CAN INDIA CONTINUE TO SHINE To remain one of the preferred inbound M&A destinations, India needs to attract foreign investors not only from the US but from other countries as well by speeding up and continuing policy reforms.  A promising reform is the upcoming labour law overhaul, which will consolidate various labour legislations into four (4) codes, and is anticipated to be unveiled in the Union Budget 2025.  The government is also expected to continue its focus on skill development.  The government’s move to ease FDI inflows in space, e-commerce, pharma, and defence sectors, with presently nearly 90% of the sectors being under the automatic route is commendable.  The government needs to ease regulations in permitting investments from land border countries in non-sensitive sectors, and to ease import duties. There is significant uncertainty how Trump’s trade policies will be implemented across businesses and countries which is likely to delay cross- border investments.  In our view, the first six months of 2025 will be more of a wait and watch mode as US trade policies unfold and investors reset expectations.  The remaining part of 2025 will likely provide clarity on US trade policies and how cross-border M&A will shape up for a few quarters thereafter.  Stay tuned.
07 February 2025

INDIA’S NEW INSURANCE REGIME CAN CHANGE THE GAME

Background India’s insurance industry is on the brink of transformative changes with the anticipated introduction of the Insurance Amendment Bill (the “Bill”) during the winter session of Parliament. This landmark reform builds on past efforts, primarily, the Insurance (Amendment) Act, 2021, under which foreign direct investment (“FDI”) in Indian insurance companies was increased from 49% to 74%.  Under the Bill, the government is likely to have no FDI cap in the insurance sector and permit foreign investors to own up to 100% in Indian insurance companies.  In addition, the government is considering the issuance of composite licenses, thereby permitting an insurance company to offer all types of insurance under one license and entity. Effect of raising the FDI limit to 100% Despite the current limit of 74%, many foreign players continue to hold stakes below 74%, with control in the hands of their Indian joint venture partners.  In fact, some foreign insurers have or are considering exiting India due to regulatory restrictions on control of joint venture companies.  It is felt that the removal of the FDI cap altogether will attract new entrants and address the sector’s need for greater capital to fuel growth. Composite licenses Currently, life insurance companies are barred from offering health or general insurance products, and vice versa.  A composite license will allow insurers to consolidate their operations and reduce compliance burdens and costs.  This proposed reform will align with best practices in mature insurance markets like the UK and Singapore, and will enable the creation of bundled products, such as policies combining life and health insurance. For Indian insurers this will offer an opportunity to diversify their portfolios and remain competitive in a dynamic market.  Foreign insurers will also benefit by being able to simplify their different joint ventures and consolidating operations. In addition to the foregoing, the Bill also introduces several forward-looking reforms: Broader financial distribution: Insurers will be able to distribute other financial products like mutual funds, loans, and credit cards, creating new revenue streams and offering integrated solutions. Reduced capital requirements: The Bill may lower entry barriers by reducing the initial capital requirements for insurers (currently at INR100 crore (US$11.8 million approx.)) and reinsurers (INR200 crore (US$23.6 million approx.)). By tailoring minimum capital requirements to a company’s size and operations, the Bill seeks to lower entry barriers for smaller, niche players, thereby encouraging innovation. Captive insurance licenses: Large businesses may be permitted to set up captive insurance entities to manage their own risks, giving them greater control over risk management. Dynamic investment regulations: The Insurance Regulatory and Development Authority of India will have more flexibility in revising investment norms in line with market needs, potentially improving returns for policyholders. Agents free to sell from multiple companies: The Bill is likely to permit individual insurance agents to sell policies of multiple companies, eliminating the existing restriction that limits them to one life and one general insurer. Our comments These reforms reflect the government’s intent to modernize India’s insurance sector and make it more dynamic, competitive, and consumer friendly.  By opening the doors to 100% FDI and addressing structural limitations, the Bill has the potential to align India’s insurance industry with global standards, while fostering innovation and growth.   This can also attract more global players, especially if they can exercise greater control. The Bill once implemented will enhance insurance penetration in India.  For consumers, this will mean better insurance products, competitive pricing, and improved service delivery. All in all, the Bill promises long-term benefits for all stakeholders. Author: : Akil Hirani
04 December 2024

HOW EASILY ARE MAC CLAUSES IN INDIAN M&A CONTRACTS ENFORCEABLE?

Background Material Adverse Effect (“MAE”) or Material Adverse Change (“MAC”) clauses are often used in mergers and acquisition (“M&A”) agreements.MAC clauses are a double-edged sword.  On the one hand, they protect an acquirer from adverse or unfavourable events or changes to the target company which may negatively affect the business prior to closing.  However, on the other hand, a MAC clause can be detrimental if the acquirer tries to frustrate the M&A agreement alleging that the circumstances under which the transaction was agreed have materially changed. Legal position The doctrine of impossibility and frustration has been covered in Section 56 of the Indian Contract Act, 1872 (the “ICA”).  Under this doctrine, a contract to do an act which, after the contract is made, becomes impossible, or becomes unlawful, by reason of some event which the promisor cannot prevent, then the contract becomes void when the act becomes impossible or unlawful.  Where one person has promised to do something which he knows, or, with reasonable diligence, might have known, and which the promisee does not know, to be impossible or unlawful, the promisor must compensate the promisee for any loss which such promisee sustains through the non-performance of the promise.  This doctrine requires that MAC clauses meet an exceptionally high standard to justify frustration of a contract. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, as amended from time-to-time (the “Takeover Regulations”), also permit the withdrawal of an open offer in certain circumstances.  In interpreting the Takeover Regulations, once again, Indian courts have set stringent standards to determine whether an event is a MAE. In Satyabrata Ghose v. Mugneeram Bangur & Co. & Anr. (AIR (41) 1954 SC 44), the Supreme Court (the “SC”) observed that a contract can be frustrated on the ground of subsequent impossibility, if an unexpected event or change of circumstances which is beyond the control of the contracting parties alters the foundation of the agreement.  The SC stated that the word “impossible” used in Section 56 of the ICA must not be interpreted in its literal sense.  Rather, it must be construed as referring to a situation where the contract’s performance becomes impractical as regards the object and purpose of what the parties had intended.  Similarly, the Madras High Court, in R. Narayanan v. Government of Tamil Nadu (W.P.(MD)No.19596 of 2020), ruled that a contract gets frustrated when a contractual obligation becomes impossible to perform because of a radical change in circumstances without either party’s fault. In Energy Watchdog & Ors. v. Central Electricity Regulatory Commission & Ors. (AIR 2017 SC (SUPP) 43), the SC observed that the performance of a contract is not discharged merely because it has become onerous for a party due to unforeseen events.  Rather, it is imperative to prove that the performance of the contract has become objectively impossible and not just onerous or financially detrimental. As regards public M&A transactions regulated by the Securities and Exchange Board of India (the “SEBI”), in Nirma Industries Ltd. v. SEBI ((2013) 8 SCC 20), the SC addressed the issue of withdrawal of an open offer.  In this case, Nirma, the acquirer, discovered that the target company had engaged in financial misrepresentation and fraud, which is why it withdrew the open offer.  While interpreting Regulation 27 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, (the “Erstwhile Takeover Regulations”), the SC ruled that withdrawal from an open offer could be permitted only under conditions of impossibility of performance, thereby aligning the interpretation of the Erstwhile Takeover Regulations with the doctrine of frustration under Section 56 of the ICA.  Despite Nirma’s arguments that financial misrepresentation and fraud constituted a material adverse change to the transaction, the SC held that withdrawal was only justified in cases of impossibility of performance. This standard was followed by the courts in subsequent decisions.  As for example, in SEBI v. Akshya Infrastructure Pvt. Ltd. (2014 (11) SCC 112), the SC held that an unjustifiable delay by SEBI in approving a takeover offer leading to the open offer becoming unfavourable for the acquirer was insufficient to invoke frustration.  The SC stated that economic difficulty does not come under the impossibility threshold because market fluctuations or financial strain have not been recognized as grounds for frustration of a contract.  Similarly, in Pramod Jain & Ors. v. SEBI (AIR 2016 SC (SUPP) 184), the SC held that a delay of two (2) years by SEBI in approving an open offer did not justify withdrawal of the offer, although the target company’s financial health had deteriorated during those two (2) years.  The SC upheld the general principle that once a public offer was made, it cannot be withdrawn unless it satisfies the circumstances specified in Regulation 27 of the Erstwhile Takeover Regulations. In the case of Jyoti Private Limited (WTM/SR/CFD/39/08/2016), the acquirer wanted to withdraw its offer under Regulation 23(c) of the Takeover Regulations as no change in control and management of the target company was feasible due to a pending BIFR proceeding.  Although Regulation 23(c) of the Takeover Regulations allows withdrawal of an open offer if any condition mentioned in the acquisition agreement is not met for reasons outside the control of the acquirer, the SEBI narrowly interpreted Regulation 23(c) and denied withdrawal of the open offer citing that the conditions did not render the performance of the open offer as impossible to continue.  This indicates that the doctrine of impossibility remains central to judicial pronouncements even though, in theory, the Takeover Regulations have expanded the concept of withdrawal rights. Likewise, in Gujarat Urja Vikas Nigam Ltd. v. Solar Semiconductor Power Company (India) Pvt. Ltd. (2017 (16) SCC 498), the SC dealt with changes in government policy affecting tariffs and held that policy changes affecting profitability did not frustrate a contract unless explicitly drafted in the agreement.  This decision emphasized the importance of precise drafting of MAC clauses to account for potential regulatory changes, particularly in sectors vulnerable to governmental shifts​. In another significant ruling, in the case of Coastal Andhra Power Ltd. v. Andhra Pradesh Central Power Distribution Co. Ltd. (AIR 2019 (NOC 350) 120), the SC addressed the issue of whether increased costs due to regulatory changes could frustrate a Power Purchase Agreement.  The SC concluded that the increased financial burden, although substantial, did not constitute impossibility, unless the change fundamentally disrupted the contract’s core obligations.  Again, economic unviability alone was held not to be sufficient to invoke an MAC clause​. The reluctance of Indian courts to broaden the scope of what constitutes frustration of contract was further demonstrated in the case of Halliburton Offshore Services Inc. v. Vedanta Ltd. & Anr. (O.M.P. (I) (COMM) & I.A. 3697/2020).  Here, the Delhi High Court examined the impact of the COVID-19 pandemic on contractual obligations and held that although the pandemic was unforeseen, it was still not sufficient a ground to frustrate the contract on the basis of difficulty or financial distress. Our comments Indian courts have limited the practical utility of MAC clauses for acquirers seeking protection from adverse changes or events by setting a high threshold for frustration – legal or natural impossibility.  While Indian courts have followed a strict approach in interpreting MAC clauses to preserve the sanctity of contracts and to avoid frustration of contracts due to mere inconvenience, the burden of proving impossibility remains high, making it costly and challenging for parties, even if a MAC clause is tailor-made.  This high standard is in conflict with the true purpose of a MAC clause. Building on our discussion of MAC clauses, it is imperative to draft MAC clauses with due care and precision in M&A transactions and avoid boilerplate MAC clauses.  In light of the narrow approach taken by Indian courts, acquirers must carefully list all events that can be treated as MAE, who can invoke them, and any exclusions.  Any ambiguity in a MAC clause may further weaken its enforceability. As an aside, although not specifically tested by the courts, an approach that may be considered by parties is to provide a monetary threshold in the contract which if exceeded would permit the acquirer to pull out and not close the deal.  As for example, any event arising in the target company or in relation to the target company’s business which reduces its net worth by 1%.  This type of an eventuality may be more defendable from an acquirer’s standpoint, as there is a good chance of it being construed like a necessary condition to close the deal and may take it out of the purview of the restrictive interpretations relating to MAC clauses. Author: Rukshad Davar
26 November 2024
Press Releases

M&A AND PE IMPACT DUE TO THE CHANGES TO INDIA’S COMPETITION LAW REGIME

The Competition (Amendment) Act, 2023 (the “2023 Amendment”) was introduced on April 11, 2023, to amend the Competition Act, 2002 (the “Act”) and, inter alia, establish a new threshold for assessing transactions, known as the Deal Value Threshold (the “DV Threshold”).  On September 10, 2024 (the “Effective Date”), India’s Ministry of Corporate Affairs (the “MCA”) and the Competition Commission of India (the “CCI”) gave effect to the DV Threshold, which is particularly relevant for transactions in the digital markets, and notified the following: (i) the CCI (Combinations) Regulations, 2024 (the “Combination Regulations”); (ii) the Competition (Minimum Value of Assets or Turnover) Rules, 2024 (the “De Minimis Threshold Rules”); (iii) the Competition (Criteria of Combination) Rules, 2024 (the “Green Channel Rules”); (iv) the Competition (Criteria for Exemption of Combinations) Rules, 2024 (the “Exemption Rules”); and (v) an FAQ on the Combination Regulations.  In addition, certain provisions of the 2023 Amendment were notified, and the CCI issued a general statement on the Combination Regulations giving clarifications and addressing feedback received during the review process. This update highlights the key changes introduced by the CCI and their impact on transactions. Key changes Transactions involving acquisitions of control, shares, voting rights, or assets of a target entity, mergers or amalgamations (a “Transaction”) have to be assessed under the Act as potential “combinations.”  Once classified as such, the parties to the Transaction are required to issue a notification to the CCI (the “Notification Requirement”) for its clearance against any potential appreciable adverse effect on competition.  In this context, several significant changes have been introduced. (i) DV Threshold: Before the Effective Date, Transactions were assessed as “combinations” and triggered the Notification Requirement if they exceeded the assets and turnover thresholds stipulated under the Act. In assessing this, the assets and turnover of the entities involved in the Transaction, such as the acquirer, the target, the group of the target after acquisition, and the entity remaining after merger (as applicable), were considered.  However, the Notification Requirement did not apply if the target was subject to the de minimis exemption (as discussed below), which is commonly referred to as the “small target exemption.” Now, an additional DV Threshold has been introduced.  After the Effective Date, if the value of the Transaction itself exceeds INR 20 billion (~US$240 million) and the target entity, or the entity involved in the merger or amalgamation, has “substantial business operations in India” (the “SBO Threshold”), it will be considered a combination and must be notified to the CCI.  Further, the De Minimis Threshold Rules do not apply to Transactions that breach the DV Threshold.  Therefore, Transactions which were previously exempt because they did not breach the assets and turnover thresholds, or met the small target exemption, will now be subject to the Notification Requirement if the size of the Transaction exceeds INR 20 billion (~US$240 million) and they have “substantial business operations in India.”  This change is particularly relevant to companies operating in the digital and technology sectors, where companies often have minimal assets but significant data and market power. The manner in which to compute and assess the value of the Transaction and the SBO Threshold is set out below: (a) Value of Transaction The “value” of a transaction includes every valuable consideration, whether direct or indirect, immediate, or deferred, in cash or otherwise.  This includes consideration: (A) agreed separately for covenants, undertakings, obligations, or restrictions imposed on seller or others. In this regard, the CCI has clarified that if no separate consideration has been ascribed to the non-compete covenants, or if such consideration is already included in the overall consideration, nothing further needs to be added to the value of Transaction; (B) for all inter-connected steps and transactions; (C) payable within two (2) years from the effective date for arrangements related to or incidental to the Transaction, such as technology assistance, licensing of intellectual property, usage rights for products, service or facility, supply agreements, or branding rights; (D) for call options and shares to be acquired through exercise of such options. In this regard, the CCI has clarified that where the option exercise price is pre-determined, such price will be considered.  However, if the exercise price is contingent, then a best estimate will be considered; and (E) payable, as per best estimates, contingent on future outcomes specified in the Transaction documents. In this regard, the best estimate will be the estimate of the board of directors (the “Board”) or the approving authority of the person obligated to file the notice.  However, if the best estimate has not been recorded by them, then the “maximum payable amount” will be treated as the best estimate.  The manner in which to compute this maximum payable amount has not been specified in the Combination Regulations.  That said, it appears that in case a Transaction contemplates contingent payments or adjustments to purchase price based on future performance, the Board and the approving authority must now make a reasonable best estimate at the time of entering the Transaction considering all reasonable predictions of future outcomes.  However, if such a “best estimate” has not been recorded by the foregoing parties, then the law will likely consider the largest possible payment under the most favourable future outcomes. Further, in the calculation of the “value”: (I) future payments cannot be discounted at the present value; (II) the value should include consideration for any acquisition by a party or its group entity in the target within two (2) years prior to the relevant date (i.e., the date on which the Board accords its approval to the proposal of merger or amalgamation, or the date of execution of agreement or such other document for acquisition, the “Relevant Date”); (III) Transaction costs, such as legal, investment banking, or regulatory fees, are to be excluded; and (IV) in case of Transactions where the true and complete value is not recorded in the Transaction documents, the value will be as considered by the Board or any approving authority of the person obligated to file the notice, and if the value cannot be reasonably determined by the Board or the approving authority, the value may be considered as exceeding the DV Threshold.  Therefore, the new rules prescribe that if the deal value is uncertain or cannot be precisely determined, the parties should assume that the DV Threshold will be breached and file a notice with the CCI. (b) SBO Threshold For a digital services provider, the SBO Threshold will be met if: (A) 10% or more of its global business or end users are located in India; (B) its gross merchandise value (“GMV”) for the period of twelve (12) months before the Relevant Date in India is 10% or more of its global GMV; or (C) its turnover during the preceding financial year in India is 10% or more of its global turnover derived from all products and services.  Further, the proportion of business users or end users is to be computed on the basis of the average number of such users for a period of twelve (12) months preceding the Relevant Date.  These changes will bring global technology transactions to the CCI’s scrutiny if any of the foregoing SBO Thresholds are met. For a non-digital entity, the SBO Threshold will be met if: (I) its GMV value for the period of twelve (12) months before the Relevant Date in India is 10% or more of its global GMV and more than INR 5 billion (~US$59,700,000); or (II) its turnover during the preceding financial year in India is 10% or more of its global turnover derived from all products and services and more than INR 5 billion (~US$59,700,000).  The additional threshold of INR 5 billion for non-digital entities will ensure that only entities with significant operations in India become subject to the DV Threshold. The CCI has also imposed a gun-jumping penalty of up to 1% of the deal value of the Transaction or up to 1% of the total assets or turnover, whichever is higher.  Therefore, if parties to the Transaction proceed to consummate an otherwise notifiable Transaction without obtaining the CCI’s prior approval, they can be subjected to the foregoing penalties. (c) Transition Provisions The Notification Requirement will apply to a Transaction that comes into effect, wholly or partly, on or after the Effective Date.  Accordingly, the Notification Requirement will not apply to Transactions that have been consummated prior to the Effective Date.  However, Transactions that have been signed (i.e., agreements or other documents executed prior to the Effective Date) but not consummated on the Effective Date, will have to immediately be reassessed for the Notification Requirement and must adhere to the standstill obligations (i.e., no implementation of the Transaction before receiving the CCI’s approval) to avoid gun-jumping penalties.  Transactions that have been signed and partly consummated as of the Effective Date will have to immediately be reassessed for the Notification Requirement for the pending portions.  That said, actions for partial consummation before the Effective Date will not be penalised for gun-jumping. (ii) Definition of control: In the context of a Transaction involving acquisition of control, the term “control” has been redefined to mean the ability to exercise “material influence,” in any manner whatsoever, over the management, affairs, or strategic commercial decisions (the “Material Influence Threshold”) of the target.  Originally, the definition of “control” was inclusive in its ambit, as well as silent on the standard to be used to assess its existence. The Material Influence Threshold is the lowest level of control, falling below de facto control (when someone holds less than 50% of the voting rights but still controls most of the votes cast at meetings) and de jure control (when someone holds more than 50% of the voting rights).  To establish control, particularly at the Material Influence Threshold, factors such as shareholding, statutory or contractual rights (e.g., veto or consultation rights), and participation in management are key.  Other indicators include the status and expertise of the person or entity, Board representation, and structural or financial arrangements. Control can also take forms like negative control (blocking special resolutions) or operational control (through commercial agreements).  Control is classified as negative, positive, sole, or joint, with varying degrees recognized in competition law.  While the CCI had already, in its prior rulings, begun to adopt the Material Influence Threshold, the formal insertion in the Act should make the combinations regime and the Notification Requirement more predictable for investors and entities.  Nevertheless, a further clarification may be necessary on what will qualify as “material influence,” and courts may have to step in.  Perhaps, the CCI should have identified a set of rights that will not constitute material influence. (iii) Exempted combinations: To sum up the position, after the notified changes, a Transaction triggers the Notification Requirement, if it breaches the asset, turnover, or DV Thresholds.  However, if the Transaction gets covered by the small target exemption under De minimis Threshold Rules, then the Notification Requirement does not apply, except if the DV Thresholds are breached.   Notwithstanding the foregoing, if a Transaction gets covered under the Exemption Rules, then the Notification Requirement does not apply. (a) De minimis Threshold Rules The 2023 Amendment expressly references the De minimis Threshold Rules in the Act, and these rules are aligned with the March 7, 2024 notification of the MCA (which exempted transactions where the target had assets below INR 4.5 billion (~US$ 53,700,000) or turnover below INR 12.5 billion (~US$ 149,000,000) in India).  This will ensure greater stability for parties relying on an exemption. (b)Exemption Rules The Exemption Rules replace Schedule I of the erstwhile CCI (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011.  As per the Exemption Rules, the following Transactions, inter alia, are exempt: (A) Acquisitions in the ordinary course of business by underwriters, stockbrokers, and mutual funds (subject to specified thresholds), and those of stock-in-trade, raw materials, trade receivables, or other similar current assets that do not constitute business. As the availability of this exemption has been narrowed, minority investors will not be able to avail of this exemption. (B) Investment acquisitions if the acquirer does not, after the acquisition, hold (directly or indirectly) more than 25% of the shares or voting rights of the target entity (as a special resolution under the (Indian) Companies Act, 2013, requires a 75% majority and a shareholder with more than 25% voting rights will be able to veto such a resolution), or gain control of the target entity. Investment acquisitions mean acquisitions where the acquirer does not gain by virtue of the acquisition Board representation either as a director or observer or access to commercially sensitive information (“CSI”) (not yet defined), in any enterprise.  However, there should not exist horizontal, vertical, or complementary relations between the acquirer (including its group entities and affiliates) and the target (including its downstream group entities and affiliates), and if there is such an overlap, then the exemption will apply only if the acquisition does not result in the acquirer holding 10% or more shares or voting rights post-acquisition. In relation to the definition of “control,” it has been clarified that when a private equity investor invests as a minority shareholder, the CCI may not regard such an investment as a purely passive one if the minority shareholder gets Board representation or information rights.  The CCI may view these rights as conferring control, whether intended or not.  Moreover, even if there is no change of control, such investments will also not be subject to any exemptions and may, therefore, trigger the Notification Requirements, which can increase costs and lengthen timelines.  The CCI’s intention is clear, i.e., it seeks to prevent the sharing of CSI inter se between funds and their investee companies. (C) Incremental acquisitions where the acquirer or its group entities do not hold more than 25% of the shares or voting rights prior to or after the acquisition. However, the acquisition should not result in the acquisition of control, and after the acquisition, the acquirer or group entities should not, for the first time, gain Board representation or access to CSI.  Further, in case of horizontal, vertical, or complimentary overlaps, the incremental shareholding or voting rights acquired by a single acquisition or a series of smaller inter-connected acquisitions should not exceed 5%, and such acquisition should not result in the shareholding or voting rights of the acquirer or group entities increasing from less than 10% to 10% or more. (D) In a scenario where there is no change of control, the following are exempted: (I) additional acquisitions where the acquirer or group entities hold more than 25% (prior to acquisition) but less than 50% (prior or after acquisition) of the shares or voting rights; (II) additional acquisitions where the acquirer or group entities hold more than 50% of the shares or voting rights; (III) acquisitions through bonus issues, stock splits, buyback of shares, etc.; and (IV) intra-group asset acquisitions, mergers and amalgamations. (E) Demerger and issuance of shares by the resulting company in consideration of the demerger, either to the demerged company or to the shareholders of the demerged company. The exemption simplifies the process for companies seeking to demerge a division or unit into a separate entity with either direct or mirrored shareholding in the resulting company because reorganizations, typically, do not raise any anti-competitive concerns. (iv) Definition of “affiliate”: The definition of “affiliate” has been revised to mean entities: (a) holding 10% or more of the shareholding or voting rights; (b) having the right or ability to access CSI; or (c) having the right or ability to have a representation on the Board either as a director or an observer. Earlier, the CSI criterion was not there.  The revised definition is relevant to both the Green Channel Rules and the Exemption Rules. In order to avail of the benefit of the Green Channel Rules, parties along with their group entities and affiliates must not produce or provide similar, identical, or substitutable products or services.  Additionally, they must not be involved in activities that are at different stages or levels of production or that are complementary to each other.  If these criteria are not satisfied, the combination will not receive deemed approval under the Green Channel Rules.  For instance, if Company A is acquiring Company B, the overlaps assessment will need to evaluate the relationship between Company A (including its ultimate controlling person, group entities, and affiliates such as a minority investor with access to CSI) and Company B (including its downstream group entities and affiliates).  The revised definition means that the overlaps assessment must now cover a wider range of entities, potentially including those without direct influence over the involved parties.  The broader scope will ensure a more thorough evaluation of potential overlaps but will also increase the due diligence burden on entities. If the CCI finds that the combination does not fulfil the criteria, or the information or declarations provided are materially incorrect or incomplete, the automatic approval shall be void ab initio, and the CCI may then issue any orders it considers fit.  However, no such orders will be issued without first providing the parties involved an opportunity to be heard.  Moreover, the CCI will not initiate any inquiry more than one (1) year after the combination has taken effect.  Additionally, the acquirer or other parties to the combination may submit a further notice in Form I within thirty (30) days of the CCI's order to avoid penalties. (v) Miscellaneous: The previous rule allowed two hundred and ten (210) days for a combination to take effect after notifying the CCI.  This has now been shortened to one hundred and fifty (150) days or until the CCI issues an order of approval, whichever happens first.  Further, the CCI must now give a prima facie opinion on a combination within thirty (30) calendar days, which was earlier thirty (30) working days.  If no opinion is issued within this timeframe, the combination will be deemed to be automatically approved.  Furthermore, the filing fees for Form I (short form notification) and Form II (a more detailed form) have been increased.  Form I fees have risen from INR 2 million to INR 3 million (~US$ 35,800), and Form II fees have gone up from INR 6.5 million to INR 9 million (~US$ 107,400). Conclusion Although many of the changes introduced by the MCA and the CCI are welcome, in our view, certain amendments such as the expanded definition of control, the introduction of the DV Threshold, and the restrictions in the Exemption Rules, are likely to increase the costs and lengthen the timelines for investors, as it will be necessary to undertake a detailed analysis of both, quantitative and qualitative factors.  Going forward, PE investors must carefully negotiate agreements and ensure that the rights sought by them do not unintentionally act as a trigger of the Act and the Combination Regulations. Authors: Rukshad Davar and Bhavya Solanki
28 October 2024

The Indian Landscape of Insider Trading Understanding Regulations, Managing Risks, and Upholding Ethical Governance for Board Members

Insider trading refers to the practice of trading a company’s securities based on Unpublished Price Sensitive Information (“UPSI”), which is not available in the public domain. UPSI encompasses any information that, when made public, can significantly influence the prices of securities. To determine whether information is UPSI two key criteria are checked: (i) whether the information is generally not accessible to the public; and (ii) whether its publication can affect stock prices. Important legal provisions The erstwhile Companies Act, 1956, did not address insider trading. However, after the Securities and Exchange Board of India (the “SEBI”) was formed in 1988, the regulation of insider trading became a focused endeavour. Section 12-A of the SEBI Act, 1992 (the “Act”), granted the SEBI the authority to regulate insider trading practices and to issue regulations accordingly. The SEBI introduced the SEBI (Prohibition of Insider Trading) Regulations 2015, (the “Regulations”), which have been amended over time. An “Insider” is defined as anyone who is a Connected Person or has access to UPSI. A “Connected Person” includes relatives such as spouse, siblings and lineal descendants, partners or employees in a Connected Person’s partnership, body corporates under the Connected Person’s influence, and members of a Hindu Undivided Family. Individuals like accountants, lawyers, advisors, auditors, and others who might not be directly employed by the company but have a role that reasonably gives them access to UPSI through professional, fiduciary, or contractual relationships are also included. As per Regulation 2(e) of the Regulations, the term “generally available information” refers to information that is accessible to the public without bias and excludes unverified reports in the media. This provision clarifies as to what qualifies as UPSI and what does not, ensuring that only truly sensitive information falls under the insider trading regulations. Implications for board members For board members, the implications of the Regulations are profound. Directors are considered insiders under the Regulations because they are, by virtue of their positions, privy to sensitive information that can influence market behaviour. The SEBI is continuously monitoring price movements of traded shares and the trades being effected, which means that directors are at a higher risk of being scrutinized for insider trading violations. Therefore, directors must exercise extreme caution in all their dealings, both within and outside the boardroom. The consequences of violating insider trading regulations are severe, both legally and reputationally. Under Section 15G of the Act, penalties for insider trading can range from INR 1 million (~US$ 12,000) to INR 250 million (~US$ 300,000) or three times the profits gained, whichever is higher. Beyond financial penalties, those found guilty may face imprisonment and disqualification from future directorships, severely damaging their careers. The reputational harm extends to the company as well, as it erodes trust of shareholders, investors, and the public, which can lead to significant long-term financial consequences. In PVP Ventures v. Securities & Exchange Board of India, the SATM imposed a penalty of INR300 million (~US$360,000) on PVP Global Ventures and its promoter for insider trading. The promoter was found to have traded shares of PVP Ventures while possessing UPSI related to negative financial results, and he failed to make the necessary disclosures. It is not enough for board members to avoid trading on UPSI themselves. They must also ensure that they are not inadvertently sharing price sensitive information with others who might use it improperly. The inclusive nature of Regulation 2(1)(d)(ii) means that even conversations with family members, friends, or professional advisors can potentially lead to insider trading violations if UPSI is disclosed and forms the basis of trades effected by “connected persons.” Do’s and Don’ts: Avoiding communication pitfalls To mitigate the risk of insider trading, board members must be vigilant about communications that may inadvertently disclose UPSI. Insiders are strictly prohibited from sharing or providing access to UPSI unless it is for legitimate purposes, performance of duties, or legal obligations. This restriction extends to all communications related to a company or its securities, whether listed or proposed to be listed. As such, board members must ensure that any sharing of UPSI occurs solely in the ordinary course of business and with partners, collaborators, or advisors who need the information to fulfill their roles and must maintain strict confidentiality. Moreover, when transactions require the dissemination of UPSI, such information must be made generally available at least two trading days before the transaction. In addition, boards must put in place strict confidentiality agreements and maintain a structured digital database that records the nature of UPSI shared, the identities of those involved, and timestamps for audit purposes. This database must be preserved for at least eight (8) years to ensure compliance in case of investigations. Do’s and Don’ts: Establishing clear policies and procedures Board members must ensure that their organisations have clear and comprehensive policies regarding the handling of UPSI. This includes implementing and regularly updating a code of conduct. These policies and the code of conduct must outline strict protocols for information sharing and specify the steps that must be taken to protect UPSI. Board members must also enforce mandatory training for all employees and connected persons, ensuring that each individual is aware of their obligations under the Regulations. By promoting a culture of compliance and vigilance, board members can significantly reduce the risk of insider trading incidents within their organisations. Do’s and Don’ts: Avoiding conflicts of interest Board members must be cautious about potential conflicts of interest that may arise from their dual roles as corporate leaders and individual investors. They must avoid participating in any trading activities that could be perceived as a form of benefit from their access to UPSI. Additionally, members must ensure that their personal financial interests do not interfere with their fiduciary duties to the company. Establishing personal trading plans that comply with the Regulations and receiving prior approval from the compliance department of the company before executing trades are prudent steps to prevent conflicts. Do’s and Don’ts: Monitoring and reporting suspicious activities Board members have a critical responsibility to monitor trading activities within the organisation and report any suspicious behaviour that can indicate insider trading. Regular audits and reviews of trading patterns, especially among those with access to UPSI, are essential to detect potential violations early. Boards must also establish a robust whistleblower policy that encourages employees and connected persons to report any concerns related to insider trading without fear of retaliation. Immediate action should be taken to investigate and address any potential breaches of the Regulations. Actively monitoring and enforcement of compliance by board members can uphold the company's ethical standards and avoid the severe consequences of insider trading violations. M&A guidelines for the board During a merger or acquisition (“M&A”) transaction, one of the significant challenges is managing the communication of UPSI to a potential buyer without violating insider trading regulations. Regulation 3(3) allows the sharing of UPSI during due diligence for M&A transactions, provided it is for legitimate purposes and serves the best interests of the company. However, this exception can create complications, particularly in determining whether the disclosure of information is necessary and how it might impact other stakeholders. Additionally, Regulation 3(5) requires companies to document the board’s opinion that sharing UPSI is in the best interests of the company, yet the regulation does not clearly define the criteria for forming such an opinion, adding another layer of complexity. To mitigate the risks of insider trading during M&A transactions, board members must strictly adhere to Regulation 3. Firstly, directors and officers should be promptly informed of potential trading restrictions early in the M&A process. This ensures compliance with the prohibition on trading on UPSI. Board members must also evaluate whether the transaction is material under Regulation 2(1)(c). If deemed material, it is essential to impose trading blackouts for insiders to prevent any misuse of non-public information. In line with Regulation 3(2A), board members should establish strict procedures to limit access to UPSI during the M&A process. Knowledge of the transaction should be confined to a core group, directors, and advisors to maintain control over sensitive information and minimize the risk of inadvertent insider trading violations. These steps are critical to ensuring regulatory compliance and upholding the integrity of the transaction. Silent period In accordance with best practices and to uphold the principles of fair trading, it is essential for the board to enforce a silent period before the release of a company’s financial results. Although the Regulations do not explicitly mention of a “silent period,” Regulation 4 underscores the prohibition of trading on UPSI around the time of release of a company’s financial results. To align with these principles, companies, typically, implement a silent period of 15 to 30 days prior to the announcement of financial results, during which directors, officers and other insiders are restricted from trading the company’s securities. The silent period serves to prevent any misuse of confidential financial information that can unfairly benefit insiders before the information becomes publicly available. By restricting trading during this critical period, the board minimizes the risk of insider trading and maintains investor confidence by ensuring that all market participants have equal access to the financial data once disclosed. Adherence to trading plans Under Regulation 5(2)(v), trading plans for insiders must now specify the value or number of securities and the nature of the trade. Clear price limits have been set, with buy trades capped at 20% above and sell trades at 20% below the previous day’s closing price. Further, the Regulations now allow for the splitting of large insider trades over a specified period, which serves to reduce market disruption and prevents sudden price swings, and the waiting period for insiders to trade has now been shortened from 6 months to 120 days. Conclusion The role of directors in preventing insider trading cannot be overstated. Given their access to sensitive UPSI, directors are uniquely positioned to uphold a company’s reputation and the integrity of the market. The stringent regulations prescribed by SEBI, particularly the comprehensive scope of who qualifies as an insider and the severe penalties under Section 15G of the Act, emphasize the critical need for vigilance. Board members must prioritize strict adherence to the regulations, implement robust internal policies, and remain proactive in monitoring compliance within their organisations. This includes preventing any personal conflicts of interest and ensuring that all employees and connected persons are fully compliant with and aware of the regulatory requirements. Further, in an ever evolving regulatory landscape, with amendments being introduced regularly to close loopholes and enhance transparency, board members need to stay informed and responsive to changes. Ignorance or complacency is not a defense, as the consequences of insider trading violations are severe and can have long-lasting impacts on an individual’s career and an organisation’s reputation. A commitment to ethical governance is essential for maintaining the trust of shareholders, investors, and the broader public. Author: Mr. Akil Hirani
28 October 2024
Press Releases

The Indian Landscape of Insider Trading

Insider trading refers to the practice of trading a company’s securities based on Unpublished Price Sensitive Information (“UPSI”), which is not available in the public domain. UPSI encompasses any information that, when made public, can significantly influence the prices of securities. To determine whether information is UPSI two key criteria are checked: (i) whether the information is generally not accessible to the public; and (ii) whether its publication can affect stock prices.   Important legal provisions The erstwhile Companies Act, 1956, did not address insider trading. However, after the Securities and Exchange Board of India (the “SEBI”) was formed in 1988, the regulation of insider trading became a focused endeavour. Section 12-A of the SEBI Act, 1992 (the “Act”), granted the SEBI the authority to regulate insider trading practices and to issue regulations accordingly. The SEBI introduced the SEBI (Prohibition of Insider Trading) Regulations 2015, (the “Regulations”), which have been amended over time. An “Insider” is defined as anyone who is a Connected Person or has access to UPSI. A “Connected Person” includes relatives such as spouse, siblings and lineal descendants, partners or employees in a Connected Person’s partnership, body corporates under the Connected Person’s influence, and members of a Hindu Undivided Family. Individuals like accountants, lawyers, advisors, auditors, and others who might not be directly employed by the company but have a role that reasonably gives them access to UPSI through professional, fiduciary, or contractual relationships are also included. As per Regulation 2(e) of the Regulations, the term “generally available information” refers to information that is accessible to the public without bias and excludes unverified reports in the media. This provision clarifies as to what qualifies as UPSI and what does not, ensuring that only truly sensitive information falls under the insider trading regulations.   Implications for board members For board members, the implications of the Regulations are profound. Directors are considered insiders under the Regulations because they are, by virtue of their positions, privy to sensitive information that can influence market behaviour. The SEBI is continuously monitoring price movements of traded shares and the trades being effected, which means that directors are at a higher risk of being scrutinized for insider trading violations. Therefore, directors must exercise extreme caution in all their dealings, both within and outside the boardroom. The consequences of violating insider trading regulations are severe, both legally and reputationally. Under Section 15G of the Act, penalties for insider trading can range from INR 1 million (~US$ 12,000) to INR 250 million (~US$ 300,000) or three times the profits gained, whichever is higher. Beyond financial penalties, those found guilty may face imprisonment and disqualification from future directorships, severely damaging their careers. The reputational harm extends to the company as well, as it erodes trust of shareholders, investors, and the public, which can lead to significant long-term financial consequences. In PVP Ventures v. Securities & Exchange Board of India, the SATM imposed a penalty of INR300 million (~US$360,000) on PVP Global Ventures and its promoter for insider trading. The promoter was found to have traded shares of PVP Ventures while possessing UPSI related to negative financial results, and he failed to make the necessary disclosures. It is not enough for board members to avoid trading on UPSI themselves. They must also ensure that they are not inadvertently sharing price sensitive information with others who might use it improperly. The inclusive nature of Regulation 2(1)(d)(ii) means that even conversations with family members, friends, or professional advisors can potentially lead to insider trading violations if UPSI is disclosed and forms the basis of trades effected by “connected persons.”   Do’s and Don’ts: Avoiding communication pitfalls To mitigate the risk of insider trading, board members must be vigilant about communications that may inadvertently disclose UPSI. Insiders are strictly prohibited from sharing or providing access to UPSI unless it is for legitimate purposes, performance of duties, or legal obligations. This restriction extends to all communications related to a company or its securities, whether listed or proposed to be listed. As such, board members must ensure that any sharing of UPSI occurs solely in the ordinary course of business and with partners, collaborators, or advisors who need the information to fulfill their roles and must maintain strict confidentiality. Moreover, when transactions require the dissemination of UPSI, such information must be made generally available at least two trading days before the transaction. In addition, boards must put in place strict confidentiality agreements and maintain a structured digital database that records the nature of UPSI shared, the identities of those involved, and timestamps for audit purposes. This database must be preserved for at least eight (8) years to ensure compliance in case of investigations.   Do’s and Don’ts: Establishing clear policies and procedures Board members must ensure that their organisations have clear and comprehensive policies regarding the handling of UPSI. This includes implementing and regularly updating a code of conduct. These policies and the code of conduct must outline strict protocols for information sharing and specify the steps that must be taken to protect UPSI. Board members must also enforce mandatory training for all employees and connected persons, ensuring that each individual is aware of their obligations under the Regulations. By promoting a culture of compliance and vigilance, board members can significantly reduce the risk of insider trading incidents within their organisations.   Do’s and Don’ts: Avoiding conflicts of interest Board members must be cautious about potential conflicts of interest that may arise from their dual roles as corporate leaders and individual investors. They must avoid participating in any trading activities that could be perceived as a form of benefit from their access to UPSI. Additionally, members must ensure that their personal financial interests do not interfere with their fiduciary duties to the company. Establishing personal trading plans that comply with the Regulations and receiving prior approval from the compliance department of the company before executing trades are prudent steps to prevent conflicts.   Do’s and Don’ts: Monitoring and reporting suspicious activities Board members have a critical responsibility to monitor trading activities within the organisation and report any suspicious behaviour that can indicate insider trading. Regular audits and reviews of trading patterns, especially among those with access to UPSI, are essential to detect potential violations early. Boards must also establish a robust whistleblower policy that encourages employees and connected persons to report any concerns related to insider trading without fear of retaliation. Immediate action should be taken to investigate and address any potential breaches of the Regulations. Actively monitoring and enforcement of compliance by board members can uphold the company's ethical standards and avoid the severe consequences of insider trading violations.   M&A guidelines for the board During a merger or acquisition (“M&A”) transaction, one of the significant challenges is managing the communication of UPSI to a potential buyer without violating insider trading regulations. Regulation 3(3) allows the sharing of UPSI during due diligence for M&A transactions, provided it is for legitimate purposes and serves the best interests of the company. However, this exception can create complications, particularly in determining whether the disclosure of information is necessary and how it might impact other stakeholders. Additionally, Regulation 3(5) requires companies to document the board’s opinion that sharing UPSI is in the best interests of the company, yet the regulation does not clearly define the criteria for forming such an opinion, adding another layer of complexity. To mitigate the risks of insider trading during M&A transactions, board members must strictly adhere to Regulation 3. Firstly, directors and officers should be promptly informed of potential trading restrictions early in the M&A process. This ensures compliance with the prohibition on trading on UPSI. Board members must also evaluate whether the transaction is material under Regulation 2(1)(c). If deemed material, it is essential to impose trading blackouts for insiders to prevent any misuse of non-public information. In line with Regulation 3(2A), board members should establish strict procedures to limit access to UPSI during the M&A process. Knowledge of the transaction should be confined to a core group, directors, and advisors to maintain control over sensitive information and minimize the risk of inadvertent insider trading violations. These steps are critical to ensuring regulatory compliance and upholding the integrity of the transaction.   Silent period In accordance with best practices and to uphold the principles of fair trading, it is essential for the board to enforce a silent period before the release of a company’s financial results. Although the Regulations do not explicitly mention of a “silent period,” Regulation 4 underscores the prohibition of trading on UPSI around the time of release of a company’s financial results. To align with these principles, companies, typically, implement a silent period of 15 to 30 days prior to the announcement of financial results, during which directors, officers and other insiders are restricted from trading the company’s securities. The silent period serves to prevent any misuse of confidential financial information that can unfairly benefit insiders before the information becomes publicly available. By restricting trading during this critical period, the board minimizes the risk of insider trading and maintains investor confidence by ensuring that all market participants have equal access to the financial data once disclosed.   Adherence to trading plans Under Regulation 5(2)(v), trading plans for insiders must now specify the value or number of securities and the nature of the trade. Clear price limits have been set, with buy trades capped at 20% above and sell trades at 20% below the previous day’s closing price. Further, the Regulations now allow for the splitting of large insider trades over a specified period, which serves to reduce market disruption and prevents sudden price swings, and the waiting period for insiders to trade has now been shortened from 6 months to 120 days.   Conclusion The role of directors in preventing insider trading cannot be overstated. Given their access to sensitive UPSI, directors are uniquely positioned to uphold a company’s reputation and the integrity of the market. The stringent regulations prescribed by SEBI, particularly the comprehensive scope of who qualifies as an insider and the severe penalties under Section 15G of the Act, emphasize the critical need for vigilance. Board members must prioritize strict adherence to the regulations, implement robust internal policies, and remain proactive in monitoring compliance within their organisations. This includes preventing any personal conflicts of interest and ensuring that all employees and connected persons are fully compliant with and aware of the regulatory requirements. Further, in an ever evolving regulatory landscape, with amendments being introduced regularly to close loopholes and enhance transparency, board members need to stay informed and responsive to changes. Ignorance or complacency is not a defense, as the consequences of insider trading violations are severe and can have long-lasting impacts on an individual’s career and an organisation’s reputation. A commitment to ethical governance is essential for maintaining the trust of shareholders, investors, and the broader public. *Mr. Akil Hirani is the Managing Partner and Head of Transactions at Majmudar & Partners, an international law firm based in India. With extensive expertise in corporate law, cross-border transactions, and regulatory matters, he is widely recognized for his work in guiding multinational companies through complex legal landscapes. His practice encompasses mergers and acquisitions, joint ventures, and corporate restructuring and more.   Quote: Ignorance or complacency is not a defense, as the consequences of insider trading violations are severe and can have long-lasting impacts on the organisation’s reputation.  
17 October 2024

M&A AND PE IMPACT DUE TO THE CHANGES TO INDIA’S COMPETITION LAW REGIME

The Competition (Amendment) Act, 2023 (the “2023 Amendment”) was introduced on April 11, 2023, to amend the Competition Act, 2002 (the “Act”) and, inter alia, establish a new threshold for assessing transactions, known as the Deal Value Threshold (the “DV Threshold”).  On September 10, 2024 (the “Effective Date”), India’s Ministry of Corporate Affairs (the “MCA”) and the Competition Commission of India (the “CCI”) gave effect to the DV Threshold, which is particularly relevant for transactions in the digital markets, and notified the following: (i) the CCI (Combinations) Regulations, 2024 (the “Combination Regulations”); (ii) the Competition (Minimum Value of Assets or Turnover) Rules, 2024 (the “De Minimis Threshold Rules”); (iii) the Competition (Criteria of Combination) Rules, 2024 (the “Green Channel Rules”); (iv) the Competition (Criteria for Exemption of Combinations) Rules, 2024 (the “Exemption Rules”); and (v) an FAQ on the Combination Regulations.  In addition, certain provisions of the 2023 Amendment were notified, and the CCI issued a general statement on the Combination Regulations giving clarifications and addressing feedback received during the review process. This update highlights the key changes introduced by the CCI and their impact on transactions. Key changes Transactions involving acquisitions of control, shares, voting rights, or assets of a target entity, mergers or amalgamations (a “Transaction”) have to be assessed under the Act as potential “combinations.”  Once classified as such, the parties to the Transaction are required to issue a notification to the CCI (the “Notification Requirement”) for its clearance against any potential appreciable adverse effect on competition.  In this context, several significant changes have been introduced. (i) DV Threshold: Before the Effective Date, Transactions were assessed as “combinations” and triggered the Notification Requirement if they exceeded the assets and turnover thresholds stipulated under the Act. In assessing this, the assets and turnover of the entities involved in the Transaction, such as the acquirer, the target, the group of the target after acquisition, and the entity remaining after merger (as applicable), were considered.  However, the Notification Requirement did not apply if the target was subject to the de minimis exemption (as discussed below), which is commonly referred to as the “small target exemption.” Now, an additional DV Threshold has been introduced.  After the Effective Date, if the value of the Transaction itself exceeds INR 20 billion (~US$240 million) and the target entity, or the entity involved in the merger or amalgamation, has “substantial business operations in India” (the “SBO Threshold”), it will be considered a combination and must be notified to the CCI.  Further, the De Minimis Threshold Rules do not apply to Transactions that breach the DV Threshold.  Therefore, Transactions which were previously exempt because they did not breach the assets and turnover thresholds, or met the small target exemption, will now be subject to the Notification Requirement if the size of the Transaction exceeds INR 20 billion (~US$240 million) and they have “substantial business operations in India.”  This change is particularly relevant to companies operating in the digital and technology sectors, where companies often have minimal assets but significant data and market power. The manner in which to compute and assess the value of the Transaction and the SBO Threshold is set out below: (a) Value of Transaction The “value” of a transaction includes every valuable consideration, whether direct or indirect, immediate, or deferred, in cash or otherwise.  This includes consideration: agreed separately for covenants, undertakings, obligations, or restrictions imposed on seller or others. In this regard, the CCI has clarified that if no separate consideration has been ascribed to the non-compete covenants, or if such consideration is already included in the overall consideration, nothing further needs to be added to the value of Transaction; for all inter-connected steps and transactions; payable within two (2) years from the effective date for arrangements related to or incidental to the Transaction, such as technology assistance, licensing of intellectual property, usage rights for products, service or facility, supply agreements, or branding rights; for call options and shares to be acquired through exercise of such options. In this regard, the CCI has clarified that where the option exercise price is pre-determined, such price will be considered.  However, if the exercise price is contingent, then a best estimate will be considered; and payable, as per best estimates, contingent on future outcomes specified in the Transaction documents. In this regard, the best estimate will be the estimate of the board of directors (the “Board”) or the approving authority of the person obligated to file the notice.  However, if the best estimate has not been recorded by them, then the “maximum payable amount” will be treated as the best estimate.  The manner in which to compute this maximum payable amount has not been specified in the Combination Regulations.  That said, it appears that in case a Transaction contemplates contingent payments or adjustments to purchase price based on future performance, the Board and the approving authority must now make a reasonable best estimate at the time of entering the Transaction considering all reasonable predictions of future outcomes.  However, if such a “best estimate” has not been recorded by the foregoing parties, then the law will likely consider the largest possible payment under the most favourable future outcomes. Further, in the calculation of the “value”: (I) future payments cannot be discounted at the present value; (II) the value should include consideration for any acquisition by a party or its group entity in the target within two (2) years prior to the relevant date (i.e., the date on which the Board accords its approval to the proposal of merger or amalgamation, or the date of execution of agreement or such other document for acquisition, the “Relevant Date”); (III) Transaction costs, such as legal, investment banking, or regulatory fees, are to be excluded; and (IV) in case of Transactions where the true and complete value is not recorded in the Transaction documents, the value will be as considered by the Board or any approving authority of the person obligated to file the notice, and if the value cannot be reasonably determined by the Board or the approving authority, the value may be considered as exceeding the DV Threshold.  Therefore, the new rules prescribe that if the deal value is uncertain or cannot be precisely determined, the parties should assume that the DV Threshold will be breached and file a notice with the CCI. (b) SBO Threshold For a digital services provider, the SBO Threshold will be met if: (A) 10% or more of its global business or end users are located in India; (B) its gross merchandise value (“GMV”) for the period of twelve (12) months before the Relevant Date in India is 10% or more of its global GMV; or (C) its turnover during the preceding financial year in India is 10% or more of its global turnover derived from all products and services.  Further, the proportion of business users or end users is to be computed on the basis of the average number of such users for a period of twelve (12) months preceding the Relevant Date.  These changes will bring global technology transactions to the CCI’s scrutiny if any of the foregoing SBO Thresholds are met. For a non-digital entity, the SBO Threshold will be met if: (I) its GMV value for the period of twelve (12) months before the Relevant Date in India is 10% or more of its global GMV and more than INR 5 billion (~US$59,700,000); or (II) its turnover during the preceding financial year in India is 10% or more of its global turnover derived from all products and services and more than INR 5 billion (~US$59,700,000).  The additional threshold of INR 5 billion for non-digital entities will ensure that only entities with significant operations in India become subject to the DV Threshold. The CCI has also imposed a gun-jumping penalty of up to 1% of the deal value of the Transaction or up to 1% of the total assets or turnover, whichever is higher.  Therefore, if parties to the Transaction proceed to consummate an otherwise notifiable Transaction without obtaining the CCI’s prior approval, they can be subjected to the foregoing penalties. (c) Transition Provisions The Notification Requirement will apply to a Transaction that comes into effect, wholly or partly, on or after the Effective Date.  Accordingly, the Notification Requirement will not apply to Transactions that have been consummated prior to the Effective Date.  However, Transactions that have been signed (i.e., agreements or other documents executed prior to the Effective Date) but not consummated on the Effective Date, will have to immediately be reassessed for the Notification Requirement and must adhere to the standstill obligations (i.e., no implementation of the Transaction before receiving the CCI’s approval) to avoid gun-jumping penalties.  Transactions that have been signed and partly consummated as of the Effective Date will have to immediately be reassessed for the Notification Requirement for the pending portions.  That said, actions for partial consummation before the Effective Date will not be penalised for gun-jumping. (ii) Definition of control: In the context of a Transaction involving acquisition of control, the term “control” has been redefined to mean the ability to exercise “material influence,” in any manner whatsoever, over the management, affairs, or strategic commercial decisions (the “Material Influence Threshold”) of the target.  Originally, the definition of “control” was inclusive in its ambit, as well as silent on the standard to be used to assess its existence. The Material Influence Threshold is the lowest level of control, falling below de facto control (when someone holds less than 50% of the voting rights but still controls most of the votes cast at meetings) and de jure control (when someone holds more than 50% of the voting rights).  To establish control, particularly at the Material Influence Threshold, factors such as shareholding, statutory or contractual rights (e.g., veto or consultation rights), and participation in management are key.  Other indicators include the status and expertise of the person or entity, Board representation, and structural or financial arrangements. Control can also take forms like negative control (blocking special resolutions) or operational control (through commercial agreements).  Control is classified as negative, positive, sole, or joint, with varying degrees recognized in competition law.  While the CCI had already, in its prior rulings, begun to adopt the Material Influence Threshold, the formal insertion in the Act should make the combinations regime and the Notification Requirement more predictable for investors and entities.  Nevertheless, a further clarification may be necessary on what will qualify as “material influence,” and courts may have to step in.  Perhaps, the CCI should have identified a set of rights that will not constitute material influence. (iii) Exempted combinations: To sum up the position, after the notified changes, a Transaction triggers the Notification Requirement, if it breaches the asset, turnover, or DV Thresholds.  However, if the Transaction gets covered by the small target exemption under De minimis Threshold Rules, then the Notification Requirement does not apply, except if the DV Thresholds are breached.   Notwithstanding the foregoing, if a Transaction gets covered under the Exemption Rules, then the Notification Requirement does not apply. (a) De minimis Threshold Rules The 2023 Amendment expressly references the De minimis Threshold Rules in the Act, and these rules are aligned with the March 7, 2024 notification of the MCA (which exempted transactions where the target had assets below INR 4.5 billion (~US$ 53,700,000) or turnover below INR 12.5 billion (~US$ 149,000,000) in India).  This will ensure greater stability for parties relying on an exemption. (b) Exemption Rules The Exemption Rules replace Schedule I of the erstwhile CCI (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011.  As per the Exemption Rules, the following Transactions, inter alia, are exempt: Acquisitions in the ordinary course of business by underwriters, stockbrokers, and mutual funds (subject to specified thresholds), and those of stock-in-trade, raw materials, trade receivables, or other similar current assets that do not constitute business. As the availability of this exemption has been narrowed, minority investors will not be able to avail of this exemption. Investment acquisitions if the acquirer does not, after the acquisition, hold (directly or indirectly) more than 25% of the shares or voting rights of the target entity (as a special resolution under the (Indian) Companies Act, 2013, requires a 75% majority and a shareholder with more than 25% voting rights will be able to veto such a resolution), or gain control of the target entity. Investment acquisitions mean acquisitions where the acquirer does not gain by virtue of the acquisition Board representation either as a director or observer or access to commercially sensitive information (“CSI”) (not yet defined), in any enterprise.  However, there should not exist horizontal, vertical, or complementary relations between the acquirer (including its group entities and affiliates) and the target (including its downstream group entities and affiliates), and if there is such an overlap, then the exemption will apply only if the acquisition does not result in the acquirer holding 10% or more shares or voting rights post-acquisition. In relation to the definition of “control,” it has been clarified that when a private equity investor invests as a minority shareholder, the CCI may not regard such an investment as a purely passive one if the minority shareholder gets Board representation or information rights.  The CCI may view these rights as conferring control, whether intended or not.  Moreover, even if there is no change of control, such investments will also not be subject to any exemptions and may, therefore, trigger the Notification Requirements, which can increase costs and lengthen timelines.  The CCI’s intention is clear, i.e., it seeks to prevent the sharing of CSI inter se between funds and their investee companies. Incremental acquisitions where the acquirer or its group entities do not hold more than 25% of the shares or voting rights prior to or after the acquisition. However, the acquisition should not result in the acquisition of control, and after the acquisition, the acquirer or group entities should not, for the first time, gain Board representation or access to CSI.  Further, in case of horizontal, vertical, or complimentary overlaps, the incremental shareholding or voting rights acquired by a single acquisition or a series of smaller inter-connected acquisitions should not exceed 5%, and such acquisition should not result in the shareholding or voting rights of the acquirer or group entities increasing from less than 10% to 10% or more. In a scenario where there is no change of control, the following are exempted: (I) additional acquisitions where the acquirer or group entities hold more than 25% (prior to acquisition) but less than 50% (prior or after acquisition) of the shares or voting rights; (II) additional acquisitions where the acquirer or group entities hold more than 50% of the shares or voting rights; (III) acquisitions through bonus issues, stock splits, buyback of shares, etc.; and (IV) intra-group asset acquisitions, mergers and amalgamations. Demerger and issuance of shares by the resulting company in consideration of the demerger, either to the demerged company or to the shareholders of the demerged company. The exemption simplifies the process for companies seeking to demerge a division or unit into a separate entity with either direct or mirrored shareholding in the resulting company because reorganizations, typically, do not raise any anti-competitive concerns. (iv) Definition of “affiliate”: The definition of “affiliate” has been revised to mean entities: (a) holding 10% or more of the shareholding or voting rights; (b) having the right or ability to access CSI; or (c) having the right or ability to have a representation on the Board either as a director or an observer. Earlier, the CSI criterion was not there.  The revised definition is relevant to both the Green Channel Rules and the Exemption Rules. In order to avail of the benefit of the Green Channel Rules, parties along with their group entities and affiliates must not produce or provide similar, identical, or substitutable products or services.  Additionally, they must not be involved in activities that are at different stages or levels of production or that are complementary to each other.  If these criteria are not satisfied, the combination will not receive deemed approval under the Green Channel Rules.  For instance, if Company A is acquiring Company B, the overlaps assessment will need to evaluate the relationship between Company A (including its ultimate controlling person, group entities, and affiliates such as a minority investor with access to CSI) and Company B (including its downstream group entities and affiliates).  The revised definition means that the overlaps assessment must now cover a wider range of entities, potentially including those without direct influence over the involved parties.  The broader scope will ensure a more thorough evaluation of potential overlaps but will also increase the due diligence burden on entities. If the CCI finds that the combination does not fulfil the criteria, or the information or declarations provided are materially incorrect or incomplete, the automatic approval shall be void ab initio, and the CCI may then issue any orders it considers fit.  However, no such orders will be issued without first providing the parties involved an opportunity to be heard.  Moreover, the CCI will not initiate any inquiry more than one (1) year after the combination has taken effect.  Additionally, the acquirer or other parties to the combination may submit a further notice in Form I within thirty (30) days of the CCI's order to avoid penalties. (v) Miscellaneous: The previous rule allowed two hundred and ten (210) days for a combination to take effect after notifying the CCI.  This has now been shortened to one hundred and fifty (150) days or until the CCI issues an order of approval, whichever happens first.  Further, the CCI must now give a prima facie opinion on a combination within thirty (30) calendar days, which was earlier thirty (30) working days.  If no opinion is issued within this timeframe, the combination will be deemed to be automatically approved.  Furthermore, the filing fees for Form I (short form notification) and Form II (a more detailed form) have been increased.  Form I fees have risen from INR 2 million to INR 3 million (~US$ 35,800), and Form II fees have gone up from INR 6.5 million to INR 9 million (~US$ 107,400).   Conclusion Although many of the changes introduced by the MCA and the CCI are welcome, in our view, certain amendments such as the expanded definition of control, the introduction of the DV Threshold, and the restrictions in the Exemption Rules, are likely to increase the costs and lengthen the timelines for investors, as it will be necessary to undertake a detailed analysis of both, quantitative and qualitative factors.  Going forward, PE investors must carefully negotiate agreements and ensure that the rights sought by them do not unintentionally act as a trigger of the Act and the Combination Regulations.   By: Rukshad Davar and Bhavya Solanki, Majmudar & Partners, India  
17 October 2024

CROSS-BORDER SHARE SWAPS MADE EASIER THROUGH AMENDMENTS TO INDIA’S FOREIGN EXCHANGE REGULATIONS

The Indian government has recently notified the Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024 (the “Amendment Rules”) to amend the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the “NDI Rules”).  This update delves into some important changes on share swaps and clarifications introduced by the Amendment Rules. Key changes (i) Equity swaps by way of transfers: Rule 9A has been newly introduced in the NDI Rules to regulate equity swaps in the context of a transfer of shares.  Under this Rule, the transfer of equity instruments of an Indian company between a resident and a non-resident (“NR”) may occur via a swap of either, equity instruments of an Indian company, or equity capital of a foreign company.  Both types of swaps are subject to compliance with the rules and regulations prescribed by the Central Government and the Reserve Bank of India (the “RBI”) (“Appliable Law”).  In simple terms, the NDI Rules now permit the following transfers:  A resident holding equity instruments in an Indian company can transfer such instruments to an NR in exchange for equity instruments held by the NR in another Indian company; An NR holding equity instruments in an Indian company can transfer such instruments to a resident in exchange for equity instruments held by the resident in another Indian company; A resident holding equity instruments in an Indian company can transfer such instruments to an NR in exchange for the equity capital held by the NR in a foreign company, subject to compliance with Applicable Law; and An NR holding equity instruments in an Indian company can transfer such instruments to a resident in exchange for the equity capital held by the resident in a foreign company, subject to compliance with Applicable Law. (ii) Equity swaps for primary issuance of shares: The Amendment Rules have also introduced changes to Paragraph (1)(d) of Schedule I to the NDI Rules, which deals with issuance of equity instruments by an Indian company. Previously, Indian companies were permitted to issue equity instruments to an NR in exchange for equity instruments held by the NR in another Indian company.  The Amendment Rules have introduced a new clause that explicitly permits Indian companies to issue new equity instruments to an NR in exchange for equity capital held by the NR in a foreign company, subject to compliance with the OI Rules.  This change will facilitate cross-border share swaps for Indian companies and may result in more businesses opting for reverse flipping and simpler share-swap based structures for mergers, acquisitions, and restructuring across borders, subject to compliance with Applicable Law, including tax law. (iii) Definition of “control”: Rule 23 of the NDI Rules govern downstream (or indirect) foreign investments in India (“DI”) made by foreign investors through entities “owned” or “controlled” by those foreign investors (“FOCCs”). Previously, the NDI Rules defined “control” under Explanation (d) to Rule 23(7) as: (a) for companies, the right to appoint a majority of the directors or to control the management or policy decisions, including by virtue of shareholding, management rights, shareholders’ agreements, or voting agreements; and (b) for limited liability partnerships (“LLP”), the right to appoint a majority of the designated partners, where those designated partners, with specific exclusion to others, held control over all the policies of the LLP.   The Amendment Rules have now removed the foregoing definition and have added a new definition under Rule 2 of the NDI Rules.  Pursuant to this change, “control” for companies is now defined to have the meaning assigned to it in the Companies Act, 2013 (the “Companies Act”), while the definition of “control” for LLPs remains the same as before.  Additionally, the explanation on the definition of “control” under Schedule II(1)(a)(ii) of the NDI Rules, which applied to Foreign Portfolio Investors (“FPI”), has been removed.  Under the Companies Act, the definition of “control” is largely similar to the erstwhile definition in the NDI Rules but also expressly states that control can be exercised, directly or indirectly, by a person or persons acting individually or in concert.  Given the foregoing, in our view, the change has been introduced to harmonize the definition of “control” across various laws in India and is largely clarificatory in nature. (iv) DI by FOCCs owned by Overseas Citizens of India (“OCIs”): The Amendment Rules state that any DI made by an Indian entity (including a company, trust or partnership firm) owned and controlled by Overseas Citizens of India (“OCIs”) on a non-repatriation basis under Schedule IV of the NDI Rules will not be considered as indirect foreign investment. Pursuant to the change, the treatment of investments made by OCIs on a non-repatriation basis has been expressly clarified to be at par with the treatment of investments made by non-resident Indians (“NRIs”) on a similar basis.  The provision on treatment of investments by NRIs on a non-repatriation had been introduced in India’s foreign exchange regulations by way of Press Note 1 of March 2021.  The NDI Rules, under Schedule IV(A)(1)(a) read with Schedule IV(A)(1)(b) already stated that an NRI or an OCI, including a company, trust, partnership firm incorporated outside India and owned and controlled by NRIs or OCIs, may make specified investments on a non-repatriation basis, and these investments will be deemed to be domestic investments at par with the investments made by Indian residents.  Given this, in our view, the changes are clarificatory in nature. (v) Definition of “startup company”: The Amendment Rules have updated the definition of “startup company” to align with the latest notification on India’s Startup Action plan issued by the Department for Promotion of Industry and Internal Trade on February 19, 2019 (S.R. 127(E)).  The changes are intended to harmonize the definition of startup companies under Indian laws. (vi) Transfers: Rule 9 of the NDI Rules regulates the transfer of equity instruments of Indian companies by or to NRs. Previously, Proviso (i) of Rule 9(1) required prior government approval for transfers between two (2) NRs if the Indian company was engaged in a sector requiring such government approval.  The Amendment Rules replace the foregoing clause with a broader requirement of obtaining prior government approval for transfers in all cases where government approval is required.  This change clarifies that all necessary approvals under law, whether sector-specific or sector agnostic (for instance, acquisitions under Press Note 3 of 2020, which require government approval when the transferee is in a country sharding land border with India or has a beneficial owner who is situated in or is a citizen of such country), or from other regulators, will be required for transfers between two (2) NRs. (vii) FPI: In Schedule I of the NDI Rules, Paragraph 3(a) outlines the foreign investment entry routes into India, namely the automatic route, the government route, and the FPI route. Previously, under the FPI Route, aggregate FPI of up to either: (a) 49% of the Indian company’s fully diluted paid-up capital; or (b) the sectoral or statutory cap, whichever was lower, did not require government approval or compliance with sectoral conditions; provided, that, the FPI did not result in transfer of ownership and control of the Indian company from resident Indian citizens to NRs. The Amendment Rules omit the 49% threshold and now permit FPI up to the sectoral or statutory cap under the automatic route.  However, the Amendment Rules continue to specify an approval requirement if the acquisition by the FPI results in a transfer of ownership and/or control of the Indian company from a resident to an NR.  While the removal of the 49% threshold is welcome, the extent of the impact of this change is currently unclear as any transfer of ownership of the Indian company will continue to require government approval. (viii) White Label ATM: The Amendment Rules now incorporate White Label ATM (“WLA”) operations in the NDI Rules to align them with Paragraph 5.2.25 (White Label ATM Operations) of the Consolidated Foreign Direct Investment Policy (effective from October 15, 2020). Now, the NDI Rules also reflect that 100% FDI is permitted in WLA operations through the automatic route, subject to attendant conditions. Authors: Rukshad Davar, Rahul Datta and Bhavya Solanki, Majmudar & Partners, India    
26 September 2024

CROSS-BORDER SHARE SWAPS MADE EASIER THROUGH AMENDMENTS TO INDIA’S FOREIGN EXCHANGE REGULATIONS

The Indian government has recently notified the Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024 (the “Amendment Rules”) to amend the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the “NDI Rules”). This update delves into some important changes on share swaps and clarifications introduced by the Amendment Rules. Key changes (i) Equity swaps by way of transfers: Rule 9A has been newly introduced in the NDI Rules to regulate equity swaps in the context of a transfer of shares.  Under this Rule, the transfer of equity instruments of an Indian company between a resident and a non-resident (“NR”) may occur via a swap of either, equity instruments of an Indian company, or equity capital of a foreign company.  Both types of swaps are subject to compliance with the rules and regulations prescribed by the Central Government and the Reserve Bank of India (the “RBI”) (“Appliable Law”).  In simple terms, the NDI Rules now permit the following transfers: A resident holding equity instruments in an Indian company can transfer such instruments to an NR in exchange for equity instruments held by the NR in another Indian company; An NR holding equity instruments in an Indian company can transfer such instruments to a resident in exchange for equity instruments held by the resident in another Indian company; A resident holding equity instruments in an Indian company can transfer such instruments to an NR in exchange for the equity capital held by the NR in a foreign company, subject to compliance with Applicable Law; and An NR holding equity instruments in an Indian company can transfer such instruments to a resident in exchange for the equity capital held by the resident in a foreign company, subject to compliance with Applicable Law. (ii) Equity swaps for primary issuance of shares: The Amendment Rules have also introduced changes to Paragraph (1)(d) of Schedule I to the NDI Rules, which deals with issuance of equity instruments by an Indian company. Previously, Indian companies were permitted to issue equity instruments to an NR in exchange for equity instruments held by the NR in another Indian company.  The Amendment Rules have introduced a new clause that explicitly permits Indian companies to issue new equity instruments to an NR in exchange for equity capital held by the NR in a foreign company, subject to compliance with the OI Rules.  This change will facilitate cross-border share swaps for Indian companies and may result in more businesses opting for reverse flipping and simpler share-swap based structures for mergers, acquisitions, and restructuring across borders, subject to compliance with Applicable Law, including tax law. (iii) Definition of “control”: Rule 23 of the NDI Rules govern downstream (or indirect) foreign investments in India (“DI”) made by foreign investors through entities “owned” or “controlled” by those foreign investors (“FOCCs”). Previously, the NDI Rules defined “control” under Explanation (d) to Rule 23(7) as: (a) for companies, the right to appoint a majority of the directors or to control the management or policy decisions, including by virtue of shareholding, management rights, shareholders’ agreements, or voting agreements; and (b) for limited liability partnerships (“LLP”), the right to appoint a majority of the designated partners, where those designated partners, with specific exclusion to others, held control over all the policies of the LLP. The Amendment Rules have now removed the foregoing definition and have added a new definition under Rule 2 of the NDI Rules.  Pursuant to this change, “control” for companies is now defined to have the meaning assigned to it in the Companies Act, 2013 (the “Companies Act”), while the definition of “control�� for LLPs remains the same as before.  Additionally, the explanation on the definition of “control” under Schedule II(1)(a)(ii) of the NDI Rules, which applied to Foreign Portfolio Investors (“FPI”), has been removed.  Under the Companies Act, the definition of “control” is largely similar to the erstwhile definition in the NDI Rules but also expressly states that control can be exercised, directly or indirectly, by a person or persons acting individually or in concert.  Given the foregoing, in our view, the change has been introduced to harmonize the definition of “control” across various laws in India and is largely clarificatory in nature. (iv) DI by FOCCs owned by Overseas Citizens of India (“OCIs”): The Amendment Rules state that any DI made by an Indian entity (including a company, trust or partnership firm) owned and controlled by Overseas Citizens of India (“OCIs”) on a non-repatriation basis under Schedule IV of the NDI Rules will not be considered as indirect foreign investment. Pursuant to the change, the treatment of investments made by OCIs on a non-repatriation basis has been expressly clarified to be at par with the treatment of investments made by non-resident Indians (“NRIs”) on a similar basis.  The provision on treatment of investments by NRIs on a non-repatriation had been introduced in India’s foreign exchange regulations by way of Press Note 1 of March 2021.  The NDI Rules, under Schedule IV(A)(1)(a) read with Schedule IV(A)(1)(b) already stated that an NRI or an OCI, including a company, trust, partnership firm incorporated outside India and owned and controlled by NRIs or OCIs, may make specified investments on a non-repatriation basis, and these investments will be deemed to be domestic investments at par with the investments made by Indian residents.  Given this, in our view, the changes are clarificatory in nature. (v) Definition of “startup company”: The Amendment Rules have updated the definition of “startup company” to align with the latest notification on India’s Startup Action plan issued by the Department for Promotion of Industry and Internal Trade on February 19, 2019 (S.R. 127(E)).  The changes are intended to harmonize the definition of startup companies under Indian laws. (vi) Transfers: Rule 9 of the NDI Rules regulates the transfer of equity instruments of Indian companies by or to NRs. Previously, Proviso (i) of Rule 9(1) required prior government approval for transfers between two (2) NRs if the Indian company was engaged in a sector requiring such government approval.  The Amendment Rules replace the foregoing clause with a broader requirement of obtaining prior government approval for transfers in all cases where government approval is required.  This change clarifies that all necessary approvals under law, whether sector-specific or sector agnostic (for instance, acquisitions under Press Note 3 of 2020, which require government approval when the transferee is in a country sharding land border with India or has a beneficial owner who is situated in or is a citizen of such country), or from other regulators, will be required for transfers between two (2) NRs. (vii) FPI: In Schedule I of the NDI Rules, Paragraph 3(a) outlines the foreign investment entry routes into India, namely the automatic route, the government route, and the FPI route. Previously, under the FPI Route, aggregate FPI of up to either: (a) 49% of the Indian company��s fully diluted paid-up capital; or (b) the sectoral or statutory cap, whichever was lower, did not require government approval or compliance with sectoral conditions; provided, that, the FPI did not result in transfer of ownership and control of the Indian company from resident Indian citizens to NRs. The Amendment Rules omit the 49% threshold and now permit FPI up to the sectoral or statutory cap under the automatic route.  However, the Amendment Rules continue to specify an approval requirement if the acquisition by the FPI results in a transfer of ownership and/or control of the Indian company from a resident to an NR.  While the removal of the 49% threshold is welcome, the extent of the impact of this change is currently unclear as any transfer of ownership of the Indian company will continue to require government approval. (viii) White Label ATM: The Amendment Rules now incorporate White Label ATM (“WLA”) operations in the NDI Rules to align them with Paragraph 5.2.25 (White Label ATM Operations) of the Consolidated Foreign Direct Investment Policy (effective from October 15, 2020). Now, the NDI Rules also reflect that 100% FDI is permitted in WLA operations through the automatic route, subject to attendant conditions. Authors: Rukshad Davar, Rahul Datta and Bhavya Solanki, Majmudar & Partners, India
12 September 2024
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