Mandatory bond issuance by Large Corporates: FAQs on revised framework
/0 Comments/in Bond Market, Corporate Laws, NCS /by Team CorplawIT Governance: Upgrade needed by April 01, 2024
/0 Comments/in Banks, Financial Services, Information Technology, NBFCs, RBI /by Subhojit ShomeElectoral bonds junked: consequences for donor companies
/0 Comments/in Companies Act 2013, corporate governance, Corporate Laws /by Payal Agarwal– Payal Agarwal, Senior Manager (corplaw@vinodkothari.com)
In a recent Supreme Court ruling in the matter of Association for Democratic Reforms & Anr. v/s Union of India, Electoral Bond Scheme (EBS/ Scheme) was declared as unconstitutional, including certain amendments to section 182 of the Companies Act, 2013 (“CA”), amended vide the Finance Act, 2017 as arbitrary and violative of the Constitution of India (COI).
Naturally, a question arises: What is wrong? Contributions to political parties? No. It is only the opacity of the recipient which has been hit. Hence, if companies have contributed, they couldn’t have kept a shroud of secrecy over the same.
Two, if companies had to disclose, and the amendments on 2017 are now junked, does it mean companies have to go back and disclose? It doesn’t seem so. In fact, the apex court itself has taken care of the actionables and put the burden of disclosure on the Election Commission of India (ECI).
Corporate houses, apparently, the largest contributors to electoral bonds, have expressed concerns on what will be the implications of the ruling on donor companies. Several questions arise – What has been declared unconstitutional and what is still valid? What would be the fate of the political donations already made? What actionables arise on a company having made donations to political parties through electoral bonds or otherwise? In this write-up, the author has attempted to analyze the same in light of the 232-pager ruling.
Section 182 of CA – Pre and Post Finance Act 2017
In order to understand what has been rendered unconstitutional and why, let us analyse the provisions of section 182 of CA as it stood prior to the amendment pursuant to Finance Act 2017 v/s how it stands today.
Particulars | Position prior to Finance Act, 2017 | Position post Finance Act, 2017 | Whether unconstitutional as per SC ruling? |
Limits on political contribution – Proviso to Sec 182(1) | Aggregate value of contribution to political parties cannot exceed 7.5% of 3-years’ average net profits | No maximum limit on political contributions | Yes. The SC concluded removal of limits to be “manifest arbitrariness” for removing a classification without recognising the harms thereof. |
Disclosure in financial statements – Section 182(3) | Contributor company to disclose names of each parties against the total amount contributed to such parties | Only total amount contributed to be disclosed, without disclosing names | Yes. The SC concluded this to be an “essential” information for effective exercise of voting, and hence, non-disclosure as an infringement to the right of information of voter under Article 19(1)(a) of COI |
Mode of contribution – Section 182(3A) | New insertion pursuant to Finance Act | Political contributions to be made only through banking channels (account paying cheque/ bank draft/ ECS) and through instruments issued under a scheme for political contributions (electoral bonds) | No impact. However, the Electoral Bond Scheme has been declared to be unconstitutional. |
Consequences for donor companies
The SC ruling does not declare “political donations” per se as unconstitutional or invalid, what is rendered violative of constitutional rights is the Electoral Bond Scheme and the amendments to section 182 of CA vide Finance Act, 2017 permitting unlimited and anonymous contributions to political parties.
The legal implications of declaring a statute unconstitutional has been discussed in various rulings in the past, such as, re Behram Khurshid Pesikaka v. State of Bombay, and others. These say the consequences are dealt with by the court only. In the present matter of Electoral Bond Scheme, the SC has directed SBI and the Election Commission of India to disclose the details of contributions received through electoral bonds, and refund the non-encashed amounts to the donor.
In essence it does not seem apt that any burden will be cast upon companies for going by a law which was valid till it was scrapped. Hence, no adverse implications should follow for the donor companies. However, for the sake of its corporate duty, a company which has contributed in the past may now do a disclosure in the forthcoming annual report. Thus, The omission of disclosure of particulars of political donations made along with names of the parties, between FY 2017-18 to FY 2022-23, may be made good by companies in the financial statement for the FY 2023-24 giving details of contribution made along with names of the political parties for each of the previous financial years, along with the current FY 23-24.
Principle of “manifest arbitrariness”
Having reference to various rulings and judicial precedents, the SC has summarized that the doctrine of “manifest arbitrariness” can be imposed to strike down a provision. Such a proposition can be applied where:
- the legislature fails to make a classification by recognizing the degrees of harm, and
- the purpose is not in consonance with constitutional values.
In the context of permitting unlimited contribution to political parties, on the grounds of removing classification between donations by “individuals” v/s “companies”, or between “loss making companies” and “profit making companies”, the degree of potential harm has been ignored. Section 182 was enacted to curb corruption in electoral financing, however, the amendment allowed companies, incorporated for a specific purpose as per their MoA, to contribute unlimited amounts to political parties without any accountability and scrutiny. This may also facilitate incorporation of “shell companies” solely for the purpose of making such political contributions and permit undue influence of companies in the electoral process, thus violating the principle of free and fair elections and political equality.
The hon’ble SC has ruled the deletion of maximum limit as “violative” of COI and “manifestly arbitrary” for not recognising the degrees of harm in removing the classification between –
- Political donations by “companies” and “individuals” where the ability to influence electoral process is much higher with the former, since “Contributions made by individuals have a degree of support or affiliation to a political association. However, contributions made by companies are purely business transactions, made with the intent of securing benefits in return.”
- “Profit-making” and “loss-making companies” for the purposes of political contributions, since “it is more plausible that loss-making companies will contribute to political parties with a quid pro quo and not for the purpose of income tax benefits.”
The present SC ruling quashes the anonymous political donations and the amendments in CA permitting unlimited corporate donations to political parties. Political donations are not unconstitutional, however a company, making such donations, shall ensure the same does not result into emptying the resources of the company while also ensuring transparency in disclosure of such political donations in its financial statements for the right of information of the concerned shareholders as well as larger stakeholder and voter base.
Tech-driven compliance monitoring and validation of internal models
/0 Comments/in Financial Services, Information Technology, NBFCs /by Anita Baid– Anita Baid, finserv@vinodkothari.com
Streamlining internal compliance monitoring function
The recent RBI directive on streamlining the internal compliance monitoring function by leveraging technology has raised concerns regarding actionable on the part of regulated entities covered thereunder. The notification on Streamlining of Internal Compliance monitoring function – leveraging use of technology dated January 31, 2024 is based on RBI’s review of of the prevailing system in place for internal monitoring of compliance with regulatory instructions and the extent of usage of technological solutions to support this function.
Read more →The big buzz on small business payment delays
/0 Comments/in Corporate Laws /by mahakagarwalMahak Agarwal | corplaw@vinodkothari.com
The Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) has been around for close to 2 decades now, providing for penal interest for delayed payments to MSMEs; yet, it is only of late that there has been buzz around this. Why?
This attributes to clause (h) of Section 43B of the Income Tax Act, 1961 (IT Act, 1961), inserted by the Finance Act, 2023, effective FY 23-24. That is to say, its impact will be faced for outstanding payments as on 31st March, 2024. Now, with the year end fast approaching, there’s a sense of confusion amongst taxpayers who buy goods or services from MSMEs.
Read more →Finance Ministry to modernize the Indian Stamp Act
/0 Comments/in Corporate Laws, Taxation /by executiveArchana Kejriwal | corplaw@vinodkothari.com
The Ministry of Finance, Government of India, through its Department of Revenue, has issued a draft Indian Stamp Bill, 2023[1] on 17th January, 2024 inviting public comments and suggestions within 30 days, with an intent to align it with the modern stamp duty regime. Once enacted, the Bill seeks to replace the Indian Stamp Act, 1899[2].
The Indian Stamp Act, 1899 is a fiscal legislation enacted for the purpose of generating revenue to the Government. Being enacted during the British era, the Act has undergone several amendments from time to time, however, most of the provisions still stand redundant, for instance, proviso under section 8(2) of the Act provides for the treatment of stamp duty on bonds, debentures or other securities issued by the local authority prior to 26th March, 1897, the Act at several places uses denomination of money in ‘anna’ which has no role in the present. Such transitional provisions hold no stand anymore, thus may be removed. Therefore, it has been proposed to modernise the legislation to enable it to deal with the present realities and objectives.
In this article, we have made an attempt to analyse the changes proposed.
Read more →AIFs ail SEBI: Cannot be used for regulatory breach
/0 Comments/in Corporate Laws, SEBI /by Vinod KothariVinod Kothari | corplaw@vinodkothari.com
The alternative investment management industry in India works in the form alternative investment funds (AIFs), a SEBI-regulated vehicle. Most of the PE, VC funds, and hedge funds in India work in this mode.
AIFs have recently been at the receiving end of regulatory flak. RBI had expressed concerns on use of AIFs by regulated lenders for evergreening, and prohibited regulated entities from making any investment in such AIFs as have investments in their borrowers.
Now, SEBI, vide a Consultation Paper dated 19th January heaped a bunch of similar concerns, and required AIFs to affirm that the AIF or investments therein are not being used for regulatory breaches. These concerns, SEBI says, are a result of an ongoing thematic check on the AIF industry, and SEBI says it has already detected at least 40 cases, involving AUM over Rs 30000 crores, where the structure was used to create dents in existing financial regulations.
Based on Data relating to activities of Alternative Investment Funds (AIFs)
The AIF industry has demonstrated steady growth in recent years. As of September 2023, the assets under management (AUM) of AIFs have surged to 3.88 lakh crores, a substantial increase from the 13,000 crores recorded in September 2015. [See Graph above].
Read more →Sustainability linked derivatives: An instrument with a potential
/0 Comments/in Capital Markets, Financial Services, Sustainability, Sustainability /by Vinod Kothari– Vinod Kothari, vinod@vinodkothari.com
Sustainability-linked loans and bonds have been surging globally. While there has been a dip in the recent periods (Q3 and Q4 of 2023) owing to tightening of regulatory conditions, the global volumes of sustainability-linked loans stood at around $ 400 billion[1].
However, there is another instrument – a derivative, which also has a linkage with sustainability targets, and that is making a global buzz. ISDA, having named this Sustainability Linked Derivatives or SLDs, is creating proper documentation basis to take this market forward. As of now, the market for SLDs is neither large nor highly standardised, but as credit defaults rose from nowhere and from a purely OTC product into being in the very thick of the global financial crisis, SLDs also merit close attention.
What is an SLD?
Think of usual derivatives in financial business – it will be an interest rate swap, or cross currency swap/FX forward. An SLD adds a sustainability-linked overlay on a typical IRS or FX hedge transaction.
For instance, assume Borrower X has taken a floating rate loan of $ 100 million, say at SOFR + 100 bps. X now hedges interest rate risk by entering into an IRS with Bank A, whereby Bank swaps this for a fixed rate of 4.5%.
Here, if we add an SLD overlay, Bank A will agree to provide a discount of, say 5 bps if X is able to meet certain specified sustainability KPIs. On the contrary, if X fails to meet the KPIs, then X pays a penalty of equal or a different amount. Depending on the agreement, the discount or penalty, or bonus/malus, may either be exchanged between the counterparties or by spent by either counterparty by way of a donation for a sustainability cause.
Read more →LEAP to listing: India permits direct listing of shares overseas through IFSC
/0 Comments/in Corporate Laws, FEMA, IFSC, MCA /by Team CorplawMCA & MOF notify rules for the same
– Vinita Nair & Prapti Kanakia | corplaw@vinodkothari.com
Indian companies were permitted to raise funds from overseas either pursuant to issue of depository receipts listed overseas or having the non-residents subscribe to issuances made in India or by way of borrowing overseas. As an initiative to provide an avenue to access global capital markets, GoI had announced the decision to ease raising of foreign funds in order to boost foreign investment inflows, unlock growth opportunities and offer flexibility to Indian companies to raise funds. Consequently, an enabling provision for direct listing of prescribed class of securities on permitted stock exchanges in permissible foreign jurisdictions was inserted vide Companies (Amendment) Act, 2020 in Section 23 of Companies Act, 2013 (‘CA, 2013’), that deals with permissible modes of issue of securities, vide notification dated September 28, 2020 and made effective from October 30, 2023. Thereafter, the Ministry of Corporate Affairs (‘MCA’) notified Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (‘LEAP Rules’) effective from January 24, 2024. As listing of shares abroad will result in raising funds from persons resident outside India, Ministry of Finance (‘MoF’) notified FEMA (Non-Debt Instruments) Amendment Rules, 2024 amending FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’) with effect from January 24, 2024. SEBI is also expected to roll out the operational guidelines for listed companies to list their equity shares on permitted stock exchanges.[1]
Additionally, FAQs on direct listing scheme (FAQs) have also been rolled out on January 24, 2024. Further, two of the key recommendations of the working group report on Direct Listing of Listed Indian Companies on IFSC Exchanges submitted in December 2023 was to notify the rules under Section 23 (3) and (4) of CA, 2013 and notify necessary amendments in NDI Rules to permit cross-jurisdiction issuance and trading of equity shares of Indian companies on IFSC exchanges.
Presently, both the LEAP Rules as well as NDI Rules have notified International Financial Services Centre in India (‘Gift City’) as the permissible jurisdiction and India International Exchange and NSE International Exchange as the permissible stock exchange. International Financial Services Centres Authority (‘IFSCA’) had issued the IFSCA (Issuance and Listing of Securities) Regulations, 2021 effective July 19, 2021 (‘IFSC Regulations’) however, in the absence of enabling provision under CA, 2013 and NDI Rules, Indian companies were unable to undertake listing of securities abroad.
In this article we provide an overview of the regulatory regime and deal with the procedural aspect.
Read more →