ESG BRSR core, Quantitative thresholds for material events, Dematerialisation of Bonus shares, Backstop fund for mutual funds, Valuation rules for AIFs
– Mahak Agarwal, Sanya Agrawal & Vanshika Khandelwal | corplaw@vinodkotahri.com
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– Team Corplaw | corplaw@vinodkothari.com
The classic rule of Solomon, that the shareholders are different and the company that they promote is different, and that the liabilities of the company cannot be passed over to the shareholders, seems to be getting constantly indented, particularly as courts and regulators realize that companies are inanimate; it is the controlling heads who actually run companies. Therefore, if there is a vice in the schematics of a company, it must rope in the promoters too. Securities regulator, and our own SEBI too, has been fastening several obligations of listed entities on the promoters, including the recent ‘Consultation paper on strengthening corporate governance at listed entities by empowering shareholders’ proposal to block the personal shareholdings of the promoters for continued lapses by the listed entity.
There are several other implications of being a promoter or promoter group entity, transactions by such entities with the listed entity are mandatorily treated as related party transactions, public disclosures on sale of shares. There are several sections of the Companies Act, 2013 (“Act”) as well, which impose liabilities, including criminal liabilities, on promoters. Some of these provisions are section 7 (imposing criminal liability for incorporation related offenses), of the Act, if it is found that the company has been incorporated by furnishing any false information or representation or by suppression of any material information, the promoters would be held liable for action under section 447. Further, section 34 elaborates that if any statement in the prospectus is untrue or misleading, the promoter will be held criminally liable under Section 447. On the same lines, section 35 (imposing civil liability for public issue related mis-statements), section 42 (imposing penalty for contravening the provisions w.r.t private placement including default in filing of return of allotment), section 102 (imposing penalty for non-disclosure / wrongful disclosure in the explanatory statement), 284 (liability with respect to non-cooperation with liquidator) to list a few.
This article focuses on who is a promoter/promoter group entity (PGE), what are the implications of being either, how does one get out of the classification, having been into either, both in case of listed and unlisted companies.
Read more →RBI Directions, 2023 require banks to have a mechanism to detect violation w.r.t. RBI prior approval and ‘fit and proper’ status
– Vinita Nair, Senior Partner | corplaw@vinodkothari.com
Given their systemic significance, ensuring that ownership of banks neither gets concentrated, nor falls into wrong hands, has always been important. Therefore, acquisition of shares or voting rights (‘S/VR’) is strictly regulated by Section 12B of Banking Regulation Act, 1949 (‘BR Act’), supplemented by RBI Directions issued from time to time. In the case of public sector banks, there is a ceiling of 10% of the total voting rights for shareholders other than the Central Government.
Section 12B of BR Act prescribes the requirement of prior approval of RBI in case of a person intending to become a “major shareholder”, that is, a holder with 5% of the S/VR in a banking company. The requirement is applicable where a person acquires or agrees to acquire S/VR, which could be (a) either directly or indirectly, and (b) whether alone, or by acting in concert with any other person. Hence, there is a need to do both horizontal aggregation [that is, relatives[1] and persons acting in concert (PAC)[2]], as well as vertical aggregation (that is, indirect acquisition through controlled entities or “associated enterprises[3]”.
This article discusses the possible pain points likely to be faced by the banks, other requirements under the new regime and actionable arising therefrom.
Read more →For boosting corporate governance framework
– Pammy Jaiswal, Partner | pammy@vinodkothari.com
In the era where the regulators are constantly bringing amendments to secure the stake and protect the interest of shareholders (including the stakeholders), it becomes imperative to understand the role, function and relevance of one such board committee being the ‘Audit Committee’ (hereinafter referred to as the ‘AC’) which has been given the responsibility to oversee and monitor several crucial matters after the board of directors. These functions are in the nature to ensure transparency and accountability (pillars of corporate governance) to a large extent. It has been seen in several cases in the past that lapses on the part of this committee often leads to major scams and corporate scandals.
In this paper, the author has tried to explain the idea and intent of the law makers behind introducing the concept of the AC, its expected role and function in ensuring and boosting corporate governance given the terms of reference suggested under applicable laws in India with a brief global comparison.
The entire Paper as was published by SSRN can be read here
– Abhirup Ghosh | abhirup@vinodkothari.com
Additional Tier 1 bonds which are known by many names – AT1 bonds or Contingently Convertible Bonds (CoCo Bonds) or Perpetual Bonds, are capital structure instruments. Every liability instrument in corporate finance is essentially a capital structure instrument, that is, it is somewhere in the order of priority for its loss absorbency feature, but some of the instruments are high in the order of priorities, and therefore, their placing in the capital structure is commonly not a matter of concern. However, AT1 bonds are placed just after common equity, and therefore, if equity has suffered a meltdown, AT1 bonds will be next to be hit.
This article examines the life and death of AT1 bonds.
Read more →Timothy Lopes, Manager
Crowdfunding as a concept has been in the limelight for quite some time now. Globally there are several crowdfunding platforms that exist. These crowdfunding platforms essentially allow almost anybody to raise funds for any cause, ideas or business ventures. Interestingly, the first online crowdfunding platform was launched back in 2001[1].
However, with the advent of online crowdfunding platforms also comes the inherent risks associated with it. Through this article, the author aims to highlight the inherent risks associated with crowdfunding along with the legal permissibility and restraints in India.
Read more →
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Vinod Kothari & Payal Agarwal | corplaw@vinodkothari.com
Most of the promoter holdings in India, in companies large and small, are funneled through group investment companies. These companies, often with a complicated network of cross holdings, were created historically with multiple motives. While shadier motives such as re-routing of black money belong to some decades old practice, there have been multiple other reasons – from lowering of capital gains on holdings by not offering the market value of the listed operating entity, to camouflaging beneficial holdings or defying the definition of “promoter group”, etc etc. In many cases, the division of family holdings among sons or brothers is also done by dedicating an investment company to each such participant. In short, there have existed multiple reasons for networked holdings though layers of investment companies, with natural persons or groups of natural persons (HUFs, family trusts, etc) sitting somewhere at the end of the spectrum.
Over time, these practices have become increasingly unviable, and tough. For example, the possibility of avoiding capital gains tax by disregarding the value of listed stocks at operating company level and transferring the holding entity, which is obviously unlisted, was struck at by the introduction of Rule 11UA of the Income tax Act which requires an “adjusted NAV” computation w.e.f. 1st April, 2017 that takes into consideration the fair value of the investments too. The possibility of garbing the identity of natural persons was further challenged by the introduction of sec. 90 of the Companies Act read with the Significant Beneficial Owners Rules with effect from February, 2019, mandating the disclosure of indirect holdings of significant beneficial owners. Cross-holdings may still avoid classification as a “promoter group” entity, but over a period of time, the sheer burden of compliance by itself outweighs the benefits.
Read more →No grandfathering for MLDs, prospectively, tax benefit for debt mutual funds goes away
-Vinod Kothari and Aanchal Kaur Nagpal
As expected, the Finance Bill, 2023 was passed on March 24, 2023 by Lok Sabha within minutes. With a huge amount of changes including several newly inserted provisions, the so-called amendments were actually a Bill in itself, minus any “notes on clauses” or “memorandum of delegated legislation”, and given the amending document that refers to page numbers and line numbers of the Bill, it is a hard to read document, more so to realise the long term impact it has for the capital markets.
For capital markets, the amended Bill confirms that there will be no grandfathering for market-linked debentures (MLDs), as it specifically provides for a grandfathering only for debt mutual funds. Thus, the future of an approximately Rs. 20 lakh crore non-equity-oriented mutual funds in the country[1], going forward, will be questionable.
Read more →-Vinod Kothari and Timothy Lopes
It all started after Silicon Valley Bank (‘SVB’) announced its Q1’23 Mid quarter update[1], revealing that it intended to raise about USD 2.25 billion of capital owing to the fact that it had sold its USD 21 billion ‘Available for Sale’ (‘AFS’) securities portfolio, which consisted of US treasuries and Mortgage Backed Securities (‘MBS’) and suffered a USD 1.8 billion loss.
This caused a run on its deposits that triggered the quick collapse of SVB just two days after this announcement, which is being called the ‘largest bank failure since the global financial crisis’[2]. On March 10, 2023, the SVB Financial Group announced[3] that its wholly owned subsidiary SVB was closed by the California Department of Financial Protection and Innovation and placed under Federal Deposit Insurance Corporation (‘FDIC’) receivership.
Part of the blame is being placed on the investment decisions made by SVB in long term MBS. The Financial Times[4] talks about how crazy it was that SVB did not hedge its Held-to-Maturity (‘HTM’) portfolio which comprised of very long term agency MBS maturing in 10 years or more.
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