A sigh of relief for the HVDLEs, not shy from compliance

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Extension of “comply or explain” period in respect of corporate governance norms

– Nitu Poddar | corplaw@vinodkothari.com

SEBI in its board meeting dated March 29, 2023 decided to extend the timeline for “comply or explain” period for the High Value Debt Listed Entity (HVDLE) for compliance of corporate governance norms (i.e. regulation 16 to 27 of LODR Regulations) till March 31, 2024. A HVDLE is a company having listed debt and an outstanding value of such listed debt of Rupees 500 crore and above. It is to be noted that the HVDLEs were given a timeline of two financial years[1] (FY 21-22 and 22-23) to comply with the corporate governance norms or explain the reason for non-compliance in the quarterly corporate governance report to be filed with the stock exchange(s). Given this extension of mandatory compliance of the said norms – can the HVDLEs just sit back and relax till March 31, 2024? No, they will still have to endeavor to comply. Any short compliance requires reporting to the exchanges on a quarterly basis.

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Bond market needs a friend, not parent

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Policies seem to be working at cross-purposes

Vinita Nair, Senior Partner | corplaw@vinodkothari.com

The need to promote bond markets is almost cliched, and does not require elaboration. However, when one observes the regulatory and fiscal developments concerning bond markets in recent times, one wonders whether there is a clear and unified sense of direction. The role of policymaker may be supporting, reformative, protective, promotional, etc. Sometimes, protective regulation may also be intended to play a promotional role – for example, if investors’ interest is better protected, it may promote investor confidence and hence, appetite. However, it is hard to see a clear theme in the spate of changes concerning bond markets in the recent past.

Fiscal measures:

As regards fiscal measures, there are several changes in the Budget 2023 that may be directly or indirectly affecting the bond markets. The Budget saw market-linked debentures[1], a bit controversial development, as a case of fiscal arbitrage, and killed the same, resulting in the death of the instrument. The exemption from  withholding tax exemption in case of listed bonds was taken away – which will be difficult to understand as the theoretical justification for withholding tax is the possibility of tax leakage in case of destination-based tax. The case for the leakage is difficult to make, as listed bonds are issued in demat format, and hence, all transactions take place through regular banking channels. If the intent of policymakers was to promote retail investment in bonds, this is certainly antithetical to that objective.

Another fiscal change, which may have a long-term negative impact, is the denial of long-term capital gain treatment to investment in debt mutual funds[2]. Debt mutual funds were also responsible for the demand-side of corporate bonds. Mutual fund’s share in the outstanding corporate bonds as at the end of FY 2022 stood at 15.85%[3]

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Entering in FY 23-24: Regulatory review of corporate law developments

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– Payal Agarwal, Deputy Manager (payal@vinodkothari.com)

As the new financial year 23-24 commences, we look back at where we stand at the end of FY 22-23, in terms of the regulatory developments. While there has been no substantial traffic in terms of regulatory developments to the Companies Act, the migration of various forms in MCA’s V3 portal proved to be (and still continues to be so in some cases) a turmoil, with a standstill in the fundraising process, and other practical difficulties, even resulting in levy of additional fines. 

There has been significant traction on the part of SEBI too. While Structured Digital Database (SDD) remained the buzzword for the listed entities with the stock exchanges requiring them to submit quarterly compliance certificates, the stress for proper controls on insider trading remained the focal point. Having stiffed the nerves of the Compliance Officers in the listed entities through the quarterly compliance certificates, the same has been finally absorbed in the annual secretarial compliance reports under the Listing Regulations.

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SEBI amends its comprehensive PIT FAQs: Explains contra trade restrictions

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Aisha Begum Ansari & Sanya Agarwal | corplaw@vinodkothari.com

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SEBI approves a basket of amendments – BM dated 29th March, 2023

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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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The triumphs and tribulations of being a promoter in listed entities

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– Team Corplaw | corplaw@vinodkothari.com

Introduction

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.

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Private sector banks to continuously monitor major shareholders

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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.

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Growing relevance of Audit Committee and IDs

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For boosting corporate governance framework

– Pammy Jaiswal, Partner | pammy@vinodkothari.com

Background

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

Crowdfunding platforms – risks and concerns in the Indian context

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Timothy Lopes, Manager

finserv@vinodkothari.com

Introduction

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.

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Holding of promoter shares through investment companies: Dividend restrictions clog upstreaming and create tax inefficiency

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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.

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