SEBI eliminates one-to-one analyst meets from the purview of LODR

-Recommendations of sub-group dropped under the LODR Amendment

By CS Aisha Begum Ansari, Assistant Manager, Vinod Kothari & Company

corplaw@vinodkothari.com

Background

Information symmetry is extremely important in a listed company since it helps in effective price discovery and builds the faith of the investors.  Analyst and investor meets are one of the many ways used by the companies to disseminate information. The companies usually conduct analyst or investor meets after the disclosure of financial results to answer the questions relating to financial performance, future prospects, etc. based on generally available information without disclosing any unpublished price sensitive information (‘UPSI’). Such meets generally include conference calls or meeting with group of investors or group of analysts as per the prefixed schedule. Further, the same also includes one-to-one meet or calls with investors or analysts, which may either be prefixed or in the nature of walk-in.

While, SEBI mandates provisions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) and SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) to curb as well as regulate such leak of UPSI; one of the recent changes under the Listing Regulations vide SEBI Listing Regulations (Second Amendment) Regulations, 2021[1] (‘LODR Amendment’) issued on 7th May, 2021 seems to have completely excluded one-to-one meet from the regulatory ambit prescribing disclosure requirements.

This article discusses the regulatory requirement in relation to investor meet, phases of amendment, present requirement and international practice.

Compliance requirements under SEBI Regulations

Erstwhile Listing Agreement

Clause 49 of the Listing Agreement[2] which specified the reporting requirements, obligated the companies to disclose on its website or intimate the stock exchange the presentations made by it to the analysts. Also, the companies were required to disclose in its Report on Corporate Governance, presentations made to institutional investors or the analysts as a means of communication to shareholders.

 Listing Regulations (prior to amendment)

The Listing Regulations mandated listed entities to disclose the schedule of analyst or investor meets and presentations to such analysts or investors –

  1. On the website of the listed entity [Regulation 46(2)(o) of Listing Regulations]
  2. On the website of the stock exchange where its securities are listed (Clause 15 of Para A, Part A of Schedule III of Listing Regulations).
  3. Means of communication in the form of presentations made to institutional investors or analyst in the annual corporate governance report. (Para C(8)(e) of Schedule V to Listing Regulations).

Erstwhile PIT Regulations (1992)

The 1992 regulations prescribed elaborate requirement in relation to analyst meets. Listed companies were required to follow the following guidelines while dealing with analysts and institutional investors:—

  • Only Public information to be provided – Listed companies were required to provide only public information to the analyst/research persons/large investors like institutions. Alternatively, the information given to the analyst were required to be simultaneously made public at the earliest.
  • Recording of discussion – In order to avoid misquoting or misrepresentation, it was suggested that at least two company representative to be present at meetings with analysts, brokers or institutional investors and discussion should preferably be recorded.
  • Handling of unanticipated questions – A listed company were required to be careful when dealing with analysts’ questions that raise issues outside the intended scope of discussion. It was suggested that unanticipated questions could be taken on notice and a considered response could be given later. If the answer included price sensitive information, a public announcement was required to be made before responding.
  • Simultaneous release of Information – When a company organized meetings with analysts, the company was required to make a press release or post relevant information on its website after every such meet. The company could also consider live webcasting of analyst meets.

PIT Regulations

PIT Regulations, presently, mandate listed entities to develop best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made. Further, the listed entity needs to ensure that information shared with analysts and research personnel is not UPSI.

Discussion in working group/ committee reports

Report submitted by the Committee on Corporate Governance[3]

The Committee was of the view that the disclosure of schedules of analyst/ institutional investor meetings does not serve any practical purpose, and there have been instances of its misuse. Hence, the Committee recommended that the disclosure of schedules of analyst/institutional investor meetings may not be required. However, the information to be shared at such meetings has to be strictly in compliance with the SEBI PIT Regulations.

Report on disclosures pertaining to analyst/ investors meets[4]

The issue of information asymmetry between various classes of investors arising out of limited disclosures in respect of analyst meets/ institutional investors meet/ conference calls was discussed by Primary Markets Advisory Committee (PMAC) in the meeting in July, 2020. SEBI, based on the recommendation of PMAC, had formed sub-group which issued the ‘Report on disclosures pertaining to analyst meets, investor meets and conference calls’ (‘Report’) on November 20, 2020.

The Committee deliberated on best practice followed by listed entities in India, regulatory regime in developed countries and acknowledged the fact that existing regulations are not followed in letter and spirit by majority of listed companies thereby causing information asymmetry.

The Report explicitly distinguished between group analysts or investors meet and one-to-one in terms of the regulatory compliance. The Report recommended disclosure of transcripts and recordings of proceedings of group investors meet on the website of the company and to the stock exchange within a prescribed time frame whereas for one-to-one meetings, it recommended disclosing the number of such meetings in the quarterly compliance report on corporate governance along with a confirmation that no UPSI was shared with them.

The committee provided the rationale that the fundamental reason for analysts to seek meetings with the listed entity was to check their hypothesis that they have developed, based on controls and processes that have been built to comply with the public disclosures and complying with regulations relating to handling of private information and that premature public disclosure of these questions may lead to a regime of ‘’mandatory dissemination of proprietary information’’.

It is also important to note that the sub-group in its Report discussed that the content of the discussions for one-to-one meets, should not be intimated to the stock exchange due to following demerits:

  • Invasion of privacy of the institutional investors;
  • Allow third parties not a part of the meet to take speculative positions for trading decisions; and
  • Lead to overload of information to retain investors

Based on the sub-group’s discussion, the following recommendations were made:

  • Provide number of one-to-one meet as part of corporate governance report on a quarterly basis while submitting to the stock exchange;
  • The same needs to carry an affirmation that no UPSI was shared by any official of the company in such meetings; and
  • Company to maintain a record of all one-to-one meetings covering the name/names of the investor who were met, the name of the fund that he/ she represents, name of the brokerage firm which fixed the meeting (if any), the location, date and time of the meeting and a reference to the presentation made and preserve the same for a period of at least eight years.

Discussion in SEBI Board meeting of March 25, 2021[5]

The agenda provides details of recommendation made in relation to group analyst meet, however, does not provide any rationale/ discussion with respect to one-to-one meeting or reason for excluding the requirement from Listing Regulations altogether.

Anomaly in the LODR Amendment

Regulation 46(2)(o) and Clause 15(a) of Para A, Part A of Schedule III of Listing Regulations defines the term ‘meet’ as ‘group meetings or group conference calls’ for the purpose of disclosure of schedule of analyst/ investor meet and presentations made by the company to them.

Further, regulation 46(2)(oa) and Clause 15(b) of Para A, Part A of Schedule III provides for manner of disclosure of audio/ video recordings and transcripts of post earning calls or quarterly calls on the website of the company and to the stock exchange respectively.  The said sub-clause has no reference of the term ‘meet’. The said provisions are reproduced below:

Regulation 46(2)(oa):

“(oa) Audio or video recordings and transcripts of post earnings/quarterly calls, by whatever name called, conducted physically or through digital means, simultaneously with submission to the recognized stock exchange(s), in the following manner:

  • the presentation and the audio/video recordings shall be promptly made available on the website and in any case, before the next trading day or within twenty-four hours from the conclusion of such calls, whichever is earlier;
  • the transcripts of such calls shall be made available on the website within five working days of the conclusion of such calls:

Provided that—

  1. The information under sub-clause (i) shall be hosted on the website of the listed entity for a minimum period of five years and thereafter as per the archival policy of the listed entity, as disclosed on its website.
  2. The information under sub-clause (ii) shall be hosted on the website of the listed entity and preserved in accordance with clause (a) of regulation 9.

The requirement for disclosure(s) of audio/video recordings and transcript shall be voluntary with effect from April 01, 2021 and mandatory with effect from April 01, 2022.”

Clause 15(b) of Para A, Part A of Schedule III

“(b) Audio or video recordings and transcripts of post earnings/quarterly calls, by whatever name called, conducted physically or through digital means, simultaneously with submission to the recognized stock exchange(s), in the following manner:

  • the presentation and the audio/video recordings shall be promptly made available on the website and in any case, before the next trading day or within twenty-four hours from the conclusion of such calls, whichever is earlier;
  • the transcripts of such calls shall be made available on the website within five working days of the conclusion of such calls:

The requirement for disclosure(s) of audio/video recordings and transcript shall be voluntary with effect from April 01, 2021 and mandatory with effect from April 01, 2022.”

Since, the term ‘meet’ is not mentioned in the above provisions, it leads to an interpretation that in case of post earning calls or quarterly calls, irrespective of the fact whether such meeting is with the group of investors or one-to-one meeting, audio/ video recordings and transcripts will be required to be submitted to the stock exchange.

Regulatory regime in other countries

1. United States of America

Regulation Fair Disclosure[6] (referred as ‘Regulation FD’) prohibits companies from selectively disclosing material non-public information (referred as ‘MNPI’) to analysts, institutional investors, and others without concurrently making widespread public disclosure.

Response to question 101.11 of the FAQs on Regulation FD[7] allows directors of the company to speak privately with a shareholder or group of shareholders by implementing policies and procedures to help avoid insider trading. Also, where a shareholder expressly agrees, through confidentiality agreement, to maintain confidentiality of MNPI, a private communication between the director and a shareholder does not violate Regulation FD norms.

2. Canada

Part V of the National Policy on Disclosure Standards[8] provides guidelines with respect to private briefings with analysts/ institutional investors. The Policy does not prohibit one-to-one discussions with analysts but identifies that the potential of selective disclosure of material non-public information is fraught with difficulties. It emphasizes on timely public disclosure of material information and entering into confidentiality agreements with the analysts.

3. United Kingdom

Market Abuse Regulation (“MAR”)[9] prevents selective disclosure of MNPI. MAR requires that the companies must not disclose MNPI selectively at the investor meetings.  If they do, an immediate announcement would be required but it would still be a breach of the regulations.

4. Singapore

Rule 703(4) of the Singapore Exchange Listing Rules[10] requires the issuer to observe the Corporate Disclosure Policy as provided under Appendix 7.1. of Rule[11]. Para 23 under PART VIII of the Policy recommends the issuer to observe an “open door” policy in dealing with analysts, journalists, stockholders and others.

Issuer is required to abstain from disseminating material information which has not been disclosed to the public before. However, if such material information is inadvertently disclosed at meetings with analysts or others, it must be publicly disseminated as promptly as possible by the means described in Part VIII.

Conclusion

One-to-one meets carry a significant amount of risk with it for being a source / device for leak of UPSI especially where the same are not explicitly regulated.   The intent behind recording and disclosing the same is to safeguard the company officials from any potential charge of breach of PIT Regulations. One will have to wait and watch if the relaxation results in any adverse implications.   Further, SEBI will have to clarify on the ambiguity relating to disclosure requirements of one-to-one analysts meet w.e.f. post earning calls or quarterly calls if the intent is to restrict only to ‘meet’ as defined in the respective clauses.

[1] https://egazette.nic.in/WriteReadData/2021/226859.pdf

[2]https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/1293168356651.pdf#page=7&zoom=page-width,-16,792

[3] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/oct-2017/1509102194616.pdf#page=1&zoom=page-width,638,870

[4] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/nov-2020/1605853267317.pdf#page=1&zoom=page-width,-16,792

[5] https://www.sebi.gov.in/sebi_data/meetingfiles/apr-2021/1619067296590_1.pdf

[6] https://www.sec.gov/rules/final/33-7881.htm

[7] https://www.sec.gov/divisions/corpfin/guidance/regfd-interp.htm

[8] https://www.osc.ca/sites/default/files/pdfs/irps/pol_20020712_51-201.pdf

[9] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0596&from=EN

[10] http://rulebook.sgx.com/rulebook/703-0

[11] http://rulebook.sgx.com/rulebook/appendix-71-corporate-disclosure-policy

 

Our article titled SEBI proposes enhanced disclosures for meetings with analyst, investors, etc. can be accessed through following link:

 

 

 

SEBI notifies substantial amendments in Listing Regulations

Proposals approved in SEBI BM of March, 2021 made effective

Payal Agarwal | Executive  ( corplaw@vinodkothari.com )                                                                                                      May 07, 2021

Introduction

SEBI, the capital market regulator of India, vide a gazette notification dated 06th May, 2021 notified Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2021 [“the Amendment Regulations”] that were approved in SEBI’s Board Meeting held on March 25, 2021. Most of the amendments were already rolled out earlier as consultation papers in 2020. The amendments become effective from May 06, 2021.

This article discusses the major amendments carried out and the likely impact and actionable for the listed entities.

Brief of the amendments are as follows –

A gist of all the amendments under the Amendment Regulations have been captured in a snippet.

1.     Applicability of the Listing Regulations

In terms of Regulation 3 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2013 (‘Listing Regulations’) the provisions of Listing Regulations are applicable to entities that list the designated securities on the stock exchange.

The Amendment Regulations clarify that the applicability of certain provisions of Listing Regulations based on market capitalisation will continue to apply even where the entities fall below the prescribed threshold.

While the market capitalisation may be derived for any day, the recognised stock exchanges viz. BSE Limited and National Stock Exchange of India Limited releases a list of listed entities based on market capitalisation periodically. However, the provisions under Listing Regulations become applicable based on market capitalisation as at the end of the immediate previous financial year.

The present amendment on the continuation of applicability of provisions even after the listed entity ceasing to be among the top 500, 1000, 2000 listed entities, as the case may be, seems inappropriate. The applicability of these provisions were originally introduced in view of the size of the listed entities that held major market cap. Indefinite applicability of the said provisions despite fall in the market capitalisation of the listed entity is more of a compliance burden. The provision should be amended by SEBI in line with the timeframe provided under Reg. 15 i.e. where a listed entity does not fall under the list of top 100, 500, 1000, 2000 for three consecutive financial years, the compliance requirement should cease to apply.

Therefore, a conjoint reading of both the provisions should be allowed to take a liberal interpretation in respect of the newly-inserted Regulation 3(2) as well, thereby relaxation of compliance requirements on completion of a look-back period of 3 consecutive financial years.

2.     Risk Management Committee

Regulation 21 of Listing Regulations requires the listed entities to constitute a Risk Management Committee (RMC).  A comparative study of the erstwhile and the amended provisions w.r.t RMC is given below –

Topic Erstwhile provisions Amended provisions
Applicability of RMC ·       On top 500 listed entities (Based on market capitalisation) ·       On top 1000 listed entities based on market capitalisation
Composition ·       Members of Board of Directors

·       Senior executives of listed entity

·       2/3rds IDs in case of SR Equity Shares

·       Minimum 3 members

·       Majority being members of board of directors

·       Atleast 1 Independent Director (ID)

·       2/3rds IDs in case of SR Equity Shares

Minimum no. of meetings One Two
Quorum Not specified ·    2 or 1/3rds of total members of RMC, whichever is higher

·       Including atleast 1 member of Board

Maximum gap between two meetings Not specified Not more than 180 days gap between two consecutive meetings
Roles and responsibilities The board of directors were to define the role and responsibility and delegate monitoring and reviewing of the risk management plan and such other functions, including cyber security. As provided under Part D of Schedule II, that inter alia  includes:

·       Formulating of risk management policy;

·       Oversee implementation of the same;

·       Monitor and evaluate risks basis appropriate methodology, processes and systems.

·       Appointment, removal and terms of remuneration of CRO.

Power to seek Information No such power. The same was only available with Audit Committee under Reg. 18 (2) (c). RMC has powers to seek information from any employee, obtain outside legal or other professional advice and secure attendance of outsiders with relevant expertise, if it considers necessary.

The roles and responsibilities of the RMC has now been specified in the Regulations itself, which were once left at the discretion of Board. The formulation of Risk Management Policy has also been delegated to the RMC, with particular contents of the policy being specified under the Schedule.

An important role of the RMC, among others, include review of the appointment, removal and terms of remuneration of Chief Risk Officer (CRO). The appointment of CRO is not a mandatory requirement under Listing Regulations. CRO is required to be appointed for all banking companies, and non-banking financial companies (NBFCs) having asset size of Rs. 50 billions or more, being registered as an Investment and Credit company, Infrastructure Finance Companies, Micro Finance Institutions, Factors, or Infrastructure Debt Funds. Further, the Insurance Regulatory and Development Authority of India (IRDAI) Corporate Governance Guidelines requires the insurance companies to appoint CRO.

The role of RMC further provides for co-ordination with other committees where the roles  overlap. It is seen that the risk management function is also laid upon the Audit Committee. Therefore, the roles of both the committees might be overlapping. In view of the same, some companies choose to constitute one joint committee combining the roles of both Audit Committee and RMC.  From the provisions providing for co-ordination of activities, it may also be taken as a clear indication that the committees cannot be merged into one, but co-ordinate where the activities require so.

Actionables –
  • Changes in the constitution of RMC / Constitution of RMC in case of first-time applicability;
  • Modification of the Risk Management Policy as per the Amendment Regulations;
  • Amending the existing charter of the Committee to align with the amendments.

While the Amendment Regulations are effective immediately, the changes cannot take place overnight. Therefore, it is advisable that the listed entities shall take the matter of constitution/ re-constitution of RMC in the ensuing Board Meeting.  The modification of Risk Management Policy will be then taken up by the RMC and can be done within a reasonable period of time.

What should be this period? A probable answer to this should lie in the proviso to clause (a) of Reg. 15 that permits a timeline of six months from the applicability to comply with corporate governance requirements as stipulated under regulations 17 to 27, clauses (b) to (i) and (t) of sub-regulation (2) of regulation 46 and para C, D and E of Schedule V. However, that is applicable only in case of companies covered in Reg. 15 (2) (a). Therefore, the time available is till June 30, 2021 as thereafter, the companies will be required to confirm on RMC composition in the quarterly filings done under Reg. 27.

3.     Overriding powers of LODR Regulations

Earlier, proviso to Regulation 15(2)(b) provided a clear stipulation of overriding effect of specific statute in case of conflicting provisions. The Amendment Regulations provides for deletion of the said proviso effective from September 1, 2021. No rationale seems to have been provided in the agenda[1] put up before SEBI at the board meeting for this major amendment.

Regulators viz. RBI, IRDA, PFRDA at times have specific corporate governance related compliances that are stricter and at times conflicting with the requirements of Listing Regulations. For eg. With respect to composition of Audit Committee for a public sector bank, RBI Circular of September, 1995 provides for following composition in case of public sector banks: (a) Executive Director of the Bank (Wholetime director in case of SBI) (b) two official directors (i.e. nominees of Government and RBI) and (c) Two non-official, non-executive directors (at least one of them should be a Chartered Accountant). Directors from staff will not be included in ACB. This is certainly conflicting with the composition provided in Reg. 18 of Listing Regulations.

Subsequent to September 1, 2021 these entities will be regarded as non-compliant of the provisions of Listing Regulations and may be subject to penalty in terms of SEBI Circular dated January, 2020.

4.     Reclassification of promoters into public – related exemptions and procedural changes

Regulation 31A of the LODR Regulations specifies the conditions and approvals post which the promoters can be re-classified into public shareholders. SEBI had proposed changes to the same in a consultation paper dated 23rd November, 2020. The consultation paper was critically analysed in our article. Amendments have been made on similar lines in Regulation 31A.

5.     Alignment with the provisions of the Companies Act, 2013

Certain amendments have been made to remove the gap between the provisions of LODR Regulations, with that of the Companies Act, 2013 as given below –

  • Separate meeting of independent directors – The requirement of conducting a separate meeting of the independent directors without the presence of any other member of the Board of the company is required under both the Companies Act, 2013 as well as the LODR Regulations. However, whereas the Companies Act requires one meeting in a financial year, the LODR Regulations required one meeting in a year (calendar year). Therefore, the same has been substituted with a “financial year” so as to align the requirements of both the governing laws.
  • Display of Annual Return on website – Section 92 read with allied rules requires the companies, having a website, to display its Annual Return on the website. New clause has been inserted under Regulation 46 of LODR Regulations that requires placing the Annual Return on the website of the company.
  • Changes in requirements pertaining to placing of financial statements on website – The audited financial statements of each of the subsidiaries was required to be  placed on the website prior to the Amendment Regulations. New provisos has been inserted under the same so as to avoid preparation of separate financial statements of the subsidiary company, where the requirements under the Companies Act, 2013 are met if the consolidated financial statements are placed instead of separate ones.

6.     Mandatory website disclosures

Regulation 46 of the LODR Regulations provides the mandatory contents to be placed on the website of a listed entity. Most of the disclosures were already existing under respective regulations viz. Reg 30, 43A etc. However, the same has been consolidated under regulation 46. This will now enable stock exchanges to levy penalty in terms of SEBI circular dated 22nd January, 2020.

7.     Analyst meet

The listed entity is required to disclose the schedule of analyst or institutional investor meet and the presentations made to them on its website under regulation 46 and on the website of the stock exchange under Schedule III. The Amendment Regulations have explained the term ‘meet’ to mean the group meetings and calls, whether digitally or by physical means. The Amendment Regulations will require the listed entity to upload the audio/ video recordings and the transcripts within the prescribed timeframe. The same is in line with SEBI’s Report on disclosures pertaining to analyst meets, investor meets and conference calls. However, the amendment does not cover disclosure of one-to-one investor/ analyst meet conducted with select investors recommended in the said Report.

8.     Consolidation of various SEBI circulars

Certain circulars of SEBI lay down various requirements to be complied with in relation to the LODR Regulations. The Amendment Regulations have consolidated the requirements under the principal LODR Regulations.

  • Requirement of Secretarial Compliance Report – While the requirement of Annual Secretarial Compliance report were applicable on the listed entities and its material subsidiaries since a few years back, the same has now been specifically provided under newly inserted sub-regulation (2) of Regulation 24A. Earlier, the practice came pursuant to a SEBI circular.
  • Timeline for report of monitoring agency regarding deviation in use of proceeds – Pursuant to the requirements of Regulation 32 of the LODR Regulations, the monitoring agency is required to give a report on the utilisation of proceeds of issue on a quarterly basis. While timelines were not specified in the LODR Regulations, the report was required to be given within 45 days from the end of the quarter. This timeline was pursuant to the SEBI circular dated 24th December, 2019 . Now, with the Amendment regulations, the same is specified under regulation 32(6) of the LODR Regulations.
  • Requirement of Business responsibility and sustainability report (BRSR)- SEBI had proposed a new format to replace the existing Business Responsibility Report. The proposal was finalised and the BRSR format has been made mandatorily applicable from FY 2022-23 onwards, vide SEBI circular dated April, 2021 . The same has also been consolidated under Regulation 34 of the LODR Regulations. A detailed discussion on BRSR is covered in our article.

Conclusion

The Amendment Regulations are very crucial and significant in nature. While on one hand, certain provisions are aligned with the Companies Act, 2013, whereas on the other hand, overriding powers have been given to LODR Regulations which will require the listed entities formed under special statute to comply with the LODR Regulations in entirety. Uniformity in timelines and relaxation in certain disclosure requirements will encourage ease of doing business, and the coverage of certain provisions extended to listed entities based on market capitalisation will have a remarkable impact on the corporate governance of listed entities.

 

 

 

 

 

 

[1] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/meetingfiles/apr-2021/1619067328922_1.pdf#page=18&zoom=page-width,-17,763

Second Wave of COVID-19 Triggers Relaxations 2.0

corplaw@vinodkothari.com

In order to ensure that companies remain compliant during ongoing relapse of COVID-19 pandemic, several temporary measures have been introduced by the Capital Markets Regulator w.r.t compliance under LODR regulations.

The measures announced will support companies and other industrial bodies to function and meet the timelines in the period of lockdown.

The list of all the relevant circulars in this regard, recapitulating the requirement of law, original timelines and the relaxations granted by the SEBI are summarized below:

Sr.

No.

Regulation /Circular Particulars Requirement/Frequency of filing Original Due Date Extended Date

Entities with its specified securities listed[1]

1 24A Annual Secretarial Compliance Report Sixty  days  from end of the financial yea May 30, 2021 June 30, 2021
2 33(3) Financial Results 45 days from the end of the quarter for quarterly results May 15, 2021 June 30, 2021
60 days from the end of Financial Year for Annual Financial Results May 30, 2021
3 32 read with circular dated December 24, 2019 Statement of Deviation or variations in use of funds 45 days from the end of the quarter for quarterly results May 15, 2021 June 30, 2021
60 days from the end of Financial Year for Annual Financial Results May 30, 2021

Entities with either of their NCDs/NCRPs/PDI listed[2]

4 52(1) &(2) Submission of Financial Results For half yearly results: 45 days from the end of the half year May 15, 2021 June 30, 2021
For Annual Results: 60 days from the end of Financial Year May 30, 2021
5 52(7) read with circular dated January 17, 2020 Statement of deviation or variations in use of funds (along with financial results) For half yearly results: 45 days from the end of the half year May 15, 2021 June 30, 2021
For Annual Results: 60 days from the end of Financial Year May 30, 2021

Entitles with listed municipal bonds

6 SEBI circular dated November 13, 2019[3] Annual Audited Financial Results 60 days from end of the financial year May 30, 2021 June 30, 2021

Entities with listed commercial paper

7 SEBI Circular dated October 22,  2019[4] Submission of financial results 45 days from end of the half year May 15, 2021 June 30, 2021
60 days from end of the financial year May 30, 2021

 

 

[1] https://www.sebi.gov.in/legal/circulars/apr-2021/relaxation-from-compliance-with-certain-provisions-of-the-sebi-listing-obligations-disclosure-requirements-regulations-2015-due-to-the-covid-19-pandemic_50000.html

[2] https://www.sebi.gov.in/legal/circulars/apr-2021/relaxation-from-compliance-with-certain-provisions-of-the-sebi-listing-obligations-disclosure-requirements-regulations-2015-other-applicable-circulars-due-to-the-covid-19-pandemic_50001.html

[3] https://www.sebi.gov.in/legal/circulars/nov-2019/continuous-disclosures-and-compliances-by-listed-entities-under-sebi-issue-and-listing-of-municipal-debt-securities-regulations-2015_44942.html

[4] https://www.sebi.gov.in/legal/circulars/oct-2019/framework-for-listing-of-commercial-paper_44715.html

 

Prepack for MSMEs – A Vaccine that doesn’t Work?

– Megha Mittal

(resolution@vinodkothari.com)

The Insolvency and Bankruptcy (Amendment) Ordinance, 2021 (‘Ordinance’)[1] was promulgated on 5th April, 2021 to bring into force the prepackaged insolvency resolution framework for Micro, Small, Medium Enterprises (MSMEs). While the Ordinance put forth the structure of the prepack regime, a great deal was dependent upon the relevant rules and regulations. On 9th April, 2021, the Insolvency and Bankruptcy (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (“Regulations”)[2] as well as the Insolvency and Bankruptcy (Pre-Packaged Insolvency Resolution Process) Rules, 2021 (“Rules”)[3] have been notified with immediate effect.

As one delves into the whole scheme of things, including the complicated provisions of the Ordinance and the even complication regulations, one gets to feel that the prepack framework will act only as a consolation for the MSMEs – while efforts aimed to increase the efficacy of insolvency resolution, the proposed Framework seems to do a little towards this end. In the author’s humble opinion, key elements of prepacks – cost and time efficiency and a Debtor-in-Possession approach, have been diluted amidst the micromanaged Rules and Regulations. In this article, we discuss how[4].

Read more

Whether expense towards Corporate Environment Responsibility (CER) be eligible as CSR spending?

Nitu Poddar, Senior Associate (corplaw@vinodkothari.com)

Introduction

Since the amendment in the CSR provisions on 22.01.2021, even the existing eight year old provision has gained substantial attention and deliberation by the stakeholders. This article is to discuss yet another topic on CSR which is “whether amount spend towards Corporate Environment Responsibility (CER[1]) stipulated as specific condition under Environment Clearance by the Ministry of Environment, Forest and Climate Change (MoEFCC) can be included as a CSR project?” In other words, whether CER obligations can be merged with CSR obligations or are these two mutually exclusive.

What is CER?

Industrial sectors (specified in the Environment Impact Assessment (EIA) Notification 2006 dated September 14, 2006[2]) which have direct environmental footprint are required to take prior Environment Clearance (EC) from the MoEFCC before setting up any new project / expansion / modernisation of an existing project / change in the product-mix.  While granting such EC, the Ministry puts certain conditions (requirements) on the applicant (referred as Project Proponent (PP) in two categories – specific conditions and general conditions – implementation of which, if unsatisfactory, the EC may be revoked. One of such specific condition imposed by the MoEFCC while granting EC is that the applicant should undertake CER / ESC which is to be based on the local needs and should be restricted to the affected areas around the proposed project.

As per Office Memorandum[3] (OM) No. F. No. 22-65 / 2017-IA.III of MoEFFC dated May 01, 2018,

Some of the activities which can be carried out in CER, are infrastructure creation for drinking water supply, sanitisation, health, education, skill development, roads, cross drains, electrification including solar power, solid waste management facilities, scientific support and awareness to local farmers to increase yield of crop and fodder, rain water harvesting, soil moisture conservation works, avenue plantation, plantation in community areas, etc.

Unlike CSR, CER is based on project cost and not profits made by the proposed project.  The obligation of CER is within the range of 2.5% – 5% of the project cost.

Why CER?

The MoEFCC, in its Office Memorandum (OM) No.J-11013/25/2014-IA.I dated August 11, 2014, discussed that since the CSR obligation is based on profits, there might be cases where the proposed project is yet to make profit. In such case, since the project will have already created impact on the society and environment, it is required to commit towards the same, irrespective of profits, through CER commitment. Further, as per the 2018 OM, all the activities proposed under CER is also required to be monitored and reported bi-annually and also posted on the website of the company.

Anomaly created by different OMs and correspondences of MoEFCC

Considering that the activities undertaken pursuant to CER are akin to the one of the activities prescribed under schedule VII of the Companies Act, 2013 – specifically “ensuring environmental sustainability” among others, it is intuitive to say that expenditure towards CER should be includes as compliance of CSR commitment.

However, on perusal of several OMs and summary record of meeting of the Expert Appraisal Committee (EAC), formed under MoEFFC, one may have to re-think on the above ratio. The relevant extracts of the OMs and summary record are reproduced below for perusal:

  1. [4]2014 OM:
  1. ….In case these activities (or some of these activities) are proposed to be covered by the project proponent under CSR activities, the project proponent should commit providing for the same. In either case, the position regarding the agreed activities, their funding mechanism and the phasing should be clearly reflected in the EC letter.

Author’s Comment: This indicates that overlap might be acceptable provided the commitment is clear from the beginning.

  1. [5]Summary record of 2nd meeting of EAC – 2015 –

The Member Secretary has informed the Committee that presently the Expert Appraisal Committee has been insisting for earmarking either 2.5% of the total cost of the project or 5% of the total cost of the project towards Enterprises Social Commitment / Corporate Social Responsibility, depending upon the size of the project. In this context, copy of Office Memorandum No. J-11013/25/2014-IA.I dated 11.08.2014 issued by the Ministry regarding guidelines on Environment Sustainability and CSR related issue was circulated. Deliberating on the issue, the Committee was of the view that the name of ‘Enterprises Social Commitment’ or ‘Corporate Social Responsibility’ in respect of environment clearance should be in the first place considered for replacement by the name ‘Environmental Conservation Support Activities’.

Author’s Comment: From this discussion, it seems that the terms ESC / now CER and CSR have been used interchangeably and therefore CER and CSR commitment can overlap.

However, in the same paragraph, the decision taken by the EAC has been recorded as follows:

The Committee unanimously agreed for uniform earmarking 2.5% of the capital cost of the project towards Environmental Conservation Support Activities, in addition to the committee’s  [this seems to be a typo error- should be “company”] commitment under the Companies Act.

Author’s Comment: This indicates that CER and CSR are two independent commitments and responsibility of the company and both have to be individually followed and fulfilled.

In one of the scrutiny and deliberation as discussed in the summary records, in the matter of Expansion of Cement Plant, Clinker (1.8 MTPA to 2.6 MTPA) at Village Rauri, Tehsil Arki, District Solan, Himachal Pradesh by M/s Ambuja Cement Ltd. [F. No. J-11011/986/2008-IA-II (I)], one the specific condition was as follows:

  1. At least 5 % of the total cost of the project shall be earmarked towards the Enterprise Social Commitment based on Public Hearing Issues and item-wise details along with time bound action plan shall be prepared and submitted to the Ministry’s Regional Office at Dehradun. Implementation of such program shall be ensured accordingly in a time bound manner.

The project proponent mentioned that they have already spent an amount of 3.01%, 4.06% and 2.57% of the net profit after tax (PAT) towards CSR activities in the year 2012, 2013 and 2014 respectively in compliance of the Companies Act 2013. It has been requested to consider the proposal to waive-off the Specific Condition No. XV, as mentioned above.

The Committee noted that the expenditure of 5% of the total cost of the project towards ESC was prescribed for a period of 5 years. Based on the discussions, held the Committee decided that instead of waiving off the specific condition, it is recommended to extend the implementation period of 5 years for implementing ESC activities to a period of 10 years, which the proponent had also agreed to.

Author’s Comment: This again seems to indicate that MoEFCC is not inclined to mix the CER commitment with the CSR commitment.

  1. [6]Summary record of 2nd meeting of EAC – 2016 –

In all the ECs being granted, as a part of specific condition, the CER commitment has been recorded as below:

At least 2.5% of the total cost of the project shall be earmarked towards the Enterprise Social Commitment based on Public Hearing issues, locals need and item-wise details along with time bound action plan shall be prepared and submitted to the Ministry’s Regional Office. Implementation of such program shall be ensured by constituting a Committee comprising of the proponent, representatives of village Panchayat and District Administration. Action taken report in this regard shall be submitted to the Ministry’s Regional Office.

In addition to the above provision of ESC, the proponent shall prepare a detailed CSR Plan for the next 5 years including annual physical and financial targets for the existing-cum-expansion project, which includes village-wise, sector-wise (Health, Education, Sanitation, Skill Development and infrastructure etc) activities in consultation with the local communities and administration. The CSR Plan will include the amount of 2% retain annual profits as provided for in Clause 135 of the Companies Act, 2013 which provides for 2% of the average net profits of previous 3 years towards CSR activities for life of the project. A separate budget head shall be created and the annual capital and revenue expenditure on various activities of the Plan shall be submitted as part of the Compliance Report to RO. The details of the CSR Plan shall also be uploaded on the company website and shall also be provided in the Annual Report of the company.

Author’s Comment: The view of keeping CER and CSR as two independent commitments seems to being continued.

  1. [7]2018 OM (supersedes 2014 OM) –. Relevant extracts have been reproduced:

(I) The cost of CER is to be in addition to the cost envisaged for the implementation of the EIA/EMP which includes the measures for the pollution control, environmental protection and conservation, R&R, wildlife and forest conservation/protection measures including the NPV and Compensatory Aforestation, required, if any, and any other activities, to be derived as part of the EIA process. 

XXX

(IV) The proposed activities shall be restricted to the affected area around the project.

(VI) The entire activities proposed under the CER shall be treated as project and shall be monitored. The monitoring report shall be submitted to the regional office as a part of half-yearly compliance report, and to the District Collector. It should be posted on the website of the project proponent.

XXX

Author’s Comment: The provision with respect to commitment of any particular CER activity as CSR, as was present in the 2014 OM, has been dropped.

  1. [8]Minutes of 53rd meeting of EAC (Infrastructure-2) held in 2020:

While presenting the parameters of the Project to obtain EC, Tamil Nadu Waste Management Limited, represented as follows:

(xi) The CER fund shall be allocated as per the MoEF&CC office memorandum F.no.22- 65/2017-IA.III dated, 1st May, 2018, which is around Rs. 0.48 Crores which shall be utilized over a period of 3 years. The CSR budget will be allocated as per rules prescribed by the Government of India / Companies Act 2013.

  1. [9]Standard EC Conditions – MoEFCC OM No. F.No. 22- 34/2018-IA.III dated 9th August 2018:

7. Corporate Environment Responsibility

XXX

  1. The company shall have a well laid down environmental policy duly approve by the Board of Directors. The environmental policy should prescribe for standard operating procedures to have proper checks and balances and to bring into focus any infringements/deviation/violation of the environmental / forest /wildlife norms/ conditions. The company shall have defined system of reporting infringements / deviation / violation of the environmental / forest / wildlife norms / conditions and / or shareholders / stake holders. The copy of the board resolution in this regard shall be submitted to the MoEF&CC as a part of six-monthly report.

iii. A separate Environmental Cell both at the project and company head quarter level, with qualified personnel shall be set up under the control of senior Executive, who will directly to the head of the organization.

  1. Action plan for implementing EMP and environmental conditions along with responsibility matrix of the company shall be prepared and shall be duly approved by competent authority. The year wise funds earmarked for environmental protection measures shall be kept in separate account and not to be diverted for any other purpose. Year wise progress of implementation of action plan shall be reported to the Ministry/Regional Office along with the Six Monthly Compliance Report.
  2. Self environmental audit shall be conducted annually. Every three years third party environmental audit shall be carried out.

Author’s Comment: Looking at the elaborative independent requirements / compliance in respect of CER, the view about the intent of the Ministry to keep CER independent of CSR gets stronger

Provisions of Companies Act, 2013

It is also pertinent to note that pursuant to Rule 2(d)(vi) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 ,“activities carried out for fulfilment of any other statutory obligations under any law in force in India” is excluded from the definition of CSR. The idea behind this exclusion seems to be that what a company is obligated to spend as a part of its statutory obligation is anyway a mandatory condition. Such statutory compliance, even if it results into a spending, cannot be regarded as CSR spending. An example may be payment of taxes many of which are dedicated to infrastructure activities. Swachh Bharat Cess is specifically towards cleanliness. However, one cannot take such an expense as a spending towards CSR. Hence, (CSR) responsibility and statutory obligations cannot be inter-mixed.

Difference between CSR and CER

While already discussed above, the difference in CER and CSR is being highlighted:

  1. CSR spending is profit-linked whereas CER spending is project cost-linked. Hence, CER may, at times be applicable even before the company has started making profits.
  2. Another major difference between EC-triggered spending and CSR spending is that there is a wide range of activities which may qualify as CSR. However, the EC forces these activities to be focused and restricted around village/social development in the areas affected by the project only. In that sense, the EC forces the entity to give back to the local area where the company has an environment footprint.

Conclusion

While it would have been rational to include CER under CSR, but this seems to be grey in terms of clarity, both legally and practically. There are two school of thought that is being endorsed – one, that the CER and CSR are two different statutory obligation under two different ministries and therefore should be honoured independently; the other, and more logical argument is that both the commitment are meant to return back to the society and environment on which the company has left its footprint. Accordingly, taking a view that CER and CSR commitments are mutually independent would be putting the company to double compliance for a single objective. Considering that CER is applicable, irrespective of profit, the same should ideally be aligned with CSR plan of the company where section 135 of Companies Act, 2013 is applicable.

While this question may lurk until there is any explicit clarity from either of the ministries, from the bi-annual disclosure on compliance report being submitted by the companies, it seems that India Inc is divided on this matter.

 

[1] CER has also been termed as Enterprise Social Commitment (“ESC”) in several ECs granted to applicants. Later, in the Office Memorandum (OM) No. F. No. 22-65 / 2017-IA. .III of MoEFFC dated May 01, 2018, the terms CER was used.

[2] https://parivesh.nic.in/writereaddata/ENV/EnvironmentalClearance-General/18.pdf

 

[3] http://environmentclearance.nic.in/writereaddata/public_display/circulars/OIEBZXVJ_CER%20OM%2001052018.pdf

 

[4] http://environmentclearance.nic.in/writereaddata/OMs-2004-2021/158_OM_11_08_2014.pdf

 

[5] http://environmentclearance.nic.in/writereaddata/Form-1A/Minutes/0_0_21122122412101Final-MinutesoftheMeeting,2ndEAC,28th30thDecember2015EACmeeting.pdf

 

[6] https://environmentclearance.nic.in/writereaddata/Form-1A/Minutes/23062016PBRL5BUAMinutesofthe7thEAC30thMay-Final.pdf

 

[7] http://environmentclearance.nic.in/writereaddata/public_display/circulars/OIEBZXVJ_CER%20OM%2001052018.pdf

 

[8] http://www.environmentclearance.nic.in/writereaddata/Form-1A/Minutes/01082020DHCMPRSFFinalMinutes53rdEAC(Infra-2).pdf

 

[9] http://environmentclearance.nic.in/View.aspx?rid=30

 

SUPREME COURT RULING IN THE TATA-MISTRY CASE

-A LIMPID VIEW ON MINORITY PROTECTION RIGHTS UNDER INDIAN CORPORATE LAW

Sharon Pinto, Manager, corplaw@vinodkothari.com

Background

The Ruling of the Supreme Court (SC) in this case has shed light on several important aspects related to majority versus the minority rule, oppression and mismanagement, role of Non-Executive Directors (NEDs), scope and powers of the Tribunal in providing relief to any matter under section 242 of the Companies Act, 2013.

This article critically discusses on the various aspects of principles of law emanating from the instant ruling.

Understanding the law relating to oppression and mismanagement under the present statute

Section 241 of the Companies Act, 2013 (‘Act, 2013’/ ‘Act’) provides that any member of a company who complains that:

(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or oppressive to him or any other member or members or to the interests of the company; or

(b) the material change, not being a change brought about by, or in the interests of any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the Tribunal, provided such member has a right to apply under Section 244 of the Act.

Further, the Act under Section 244 specifies not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one tenth of the issued share capital of the company,

may make an application on the aforesaid grounds unless the said requirement is waived by the Tribunal on an application made by the applicant.

The Tribunal is empowered under the provision of Section 242 of the Act to make such order as it deems fit, on receipt of such an application, if it is of the opinion that:

a) the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and

(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up.

Points of law settled the Ruling

a.    Grounds for oppression and mismanagement

By delving into the legislative history of oppression and mismanagement, the SC stated that prejudice to public interest and prejudice to the interests of any member or members were not among the parameters prescribed in the 1913 Act, but under the 1956 Act, prejudice to public interest was included both under the provision relating to oppression and also under the provision relating to mismanagement. Prejudice to the interest of the company was included only in the provision relating to mismanagement. Later, the Act, saw the clubbing of oppression and mismanagement under the same provision and general grounds prescribed are conduct –

  1. prejudicial to any member or members or
  2. prejudicial to public interest or
  3. prejudicial to the interest of the company or
  4. oppressive to any member or members.

The Honorable Court also noted the shift between the conduct of company’s affairs in a prejudicial manner as mentioned above to have been ‘present and continuing’ under the 1913 Act and 1956 Act, whereas, ‘past, present and a continuous’ conduct of affairs of the company can be considered under the present form of statute, although acts of distant past are not to be considered.

As per the provisions stated under the current statute, existence of a dual criteria for invoking oppression and mismanagement is a pre-requisite. Along with the prejudicial conduct of company’s affairs as stated above, the circumstances should be such that they form just and equitable grounds for the winding up of the company, although such winding up may cause unfair prejudice against the members. Thus, the onus of proof for establishing the aforementioned dual criteria rests on the members proposing a case of oppression and mismanagement. If the Tribunal is of the opinion that acts of the company have given rise to such a situation that requires giving such relief as mentioned under section 241 for disposing the matter without winding up of the company.

b.  Scope of powers of the Tribunal

This ruling has shed significant light on the scope of the powers of the Tribunal prescribed under the Act. The Apex Court stated that the rights of the appellate tribunal are curtailed to the matters put forth before the NCLT at the time of the original petition. Therefore, no fresh matters can be decided by the NCLAT as it is not the original court of dispute. Further, NCLT is the final court of fact. Thus, the facts of the case taken up, confirmed or set aside by the NCLT cannot be questioned at the NCLAT, unless the same pertains to the question of law or have been specifically appealed against.

Sub-section (1) of section 242 of the Act states “the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit”. Thus, Section 242 confers the Tribunal with the power to make an order directing several actions. However it has been established under this ruling that such powers of the Tribunal are bound by the reliefs enlisted under the provisions and it may make any supplementary orders which are necessary for putting an end to the matters complained of and giving effect to the order made under the provision. Therefore it is beyond the scope of the Tribunal, under the garb of this provision, to make orders which are specifically barred by law under any other Act in force, for instance reinstatement of a director. It is also established that a contract of personal services cannot be enforced by the Tribunal and at the most it stands as an employment dispute. Further, it is beyond the powers of the Tribunal to set aside an article, unless an amendment of such article has amounted to prejudice or oppressive conduct against the members or the company, as the members of the company enter the company having read and agreed the terms of contract and cannot later question the same.

c.   Removal of director as ground for oppression

Failed business decisions and the removal of a person from directorship cannot be projected as acts oppressive or prejudicial to the interests of the minorities. Even in cases where the Tribunal finds that the removal of a Director was not in accordance with law or was not justified on facts, the Tribunal cannot grant a relief under Section 242 unless the removal was oppressive or prejudicial. Thus it has to be established that such a removal has amounted to oppression and unfair prejudice to the interests of the minority shareholders or the company, irrespective of the legality of the removal.

Further, mere acts of removal of an executive chairperson or a director from the company cannot be considered to trigger the basis for just and equitable grounds for winding up of the company. The SC referred to the case of Hanuman Prasad Bagri & Ors. vs. Bagress Cereals Pvt; (2001) 4 SCC 420. Ltd. The removal of director which has not been made in accordance with law or is not justified by the facts and made with the intent to oppress or prejudice the interests of some members may provide for relief under section 242 of the Act.

The Apex Court further stated that in the given case, since the position of Executive Chairman is not recognized by law, the removal was not required to be executed at a general meeting. While the SC took this view, however, the attention of the SC was not drawn to the fact that whether a person is designated as such or not, on being an executive chairperson, it is a general practice to designate one of the directors as an executive chairperson as per the Articles of the company and therefore, attract compliance under Section 196 and Section 169 of the Act.

d.   Tabled items at the meeting of the board

The law provides for certain items not expressly stated in the agenda, which is circulated prior to the board meeting to be taken up at the meeting itself with the consent of majority of the directors. Citing the judgment in the case of M.I. Builders Pvt. Limited vs. Radhey Shyam Sahu & Others, the stance of the SC remained unclear on whether any important items which necessitate deliberations and consultation of the directors can be tabled at the meeting as per the provision, it is an important question to ponder upon. The requirement of sending an adequate notice with the items to be discussed is an important requirement, so as to enable the directors to consider and plan their schedule as well as action to attend and participate in the meeting. Thus it may be detrimental to the company if an important agenda item is tabled at the meeting with no prior intimation given to the directors.

e.   Scope of a just and equitable cause in the context of a quasi-partnership principles

In order to invoke an order under the provision for oppression and mismanagement there is a necessity of just and equitable grounds amounting to winding up of the company. The SC established by various judgments that such grounds can be said to exist when there is a justifiable lack of confidence in the conduct and management of the company’s affairs. The concept of just and equitable grounds flows from the Law of Partnership and has its roots in probity, good faith and mutual confidence. However for imposing that the organization is in fact in the form of a quasi-partnership, the same has to be properly established in the pleadings. A company however small or domestic cannot per se, be considered a quasi-partnership and shall remain to be a company, the members of which have subscribed to the articles and agreed to conduct business together.

A better understanding of the grounds that would make a just and equitable cause for winding up of the company can be drawn from the case decided by the House of Lords in the matter of  Lau V. Chu, where it was established that a situation of a functional deadlock where the members have lost faith in the ability of the management to conduct affairs of the company, leading to frustration in the shareholders in a manner that the company cannot operate tantamount to such a just and equitable cause, irrespective of whether the structure of the company is that of a quasi-partnership or not. On the other hand, in cases where a breakdown of faith between members is proposed as a ground purporting winding up, without the existence of a management deadlock, it is necessary to establish that there exists a quasi-partnership which is based on mutual faith among the partner as suggested earlier.

f.   Validity of expulsion clause under the Articles

A person who willingly becomes a shareholder and thereby subscribes to the Articles of Association (AoA) and who was a willing and consenting party to the amendments carried out to those Articles, cannot later on challenge those Articles. The same would tantamount to requesting the Court to rewrite a contract to which he became a party with eyes wide open. Since the SC has not held the power of the company to pass a special resolution for enforcing transfer of shares of a member (expulsion clause) under the AoA to be illegal, there should not be any question on considering it to be illegal. It has been established that unless such clause has been inserted as an amendment in a manner prejudicial to the rights of certain members of the company, the same cannot be contested against. It should also be noted that it is beyond the powers of the Tribunal to restrict or set aside any articles of the company.

g.   Affirmative rights of section of investors – does it conflict with the board derogative to manage the company

It was held that, affirmative voting rights for the nominees of institutions which hold majority of shares in companies have always been accepted and recognized globally. Therefore, an article empowering nominated directors with such rights was not ruled out by the court.  This view was based on the fact that if an institution happens to be a shareholder, and a notice of a meeting either of the Board or of the General body is issued, pre-consultation is justified for the institution to have an idea about the stand to be taken by them in the forthcoming meeting. However, the same poses serious questions on the independence of the directors and disposal of independent judgement as is required under the provision of Section 166 of the Act. The view of the court in this matter is such that not all directors are required to be independent, as they may represent the interest of their nominators. Nevertheless, it is to be understood that such nominated directors have dual fiduciary duty towards the institution as well as towards the company and the same has to be balanced. Further in case of a clash between the two, the statute can be interpreted such that the company’s interest shall override the interest of the investor institute as enshrined under the duties of a director.

Our other related write-ups dealing with accustomed to act are as follows:

It is the duty of every director irrespective whether they are appointed as Independent Directors under Section 149 of the Act or as appointees of certain shareholders or institutions as per the provisions of Section 152, to uphold the interest of the company and all the stakeholders at large. The position of nominee directors of the company was established by referring the judgments given in Re: Neath Rugby Limited and Central Bank of Ecuador and others vs. Conticorp SA and others (Bahamas),  However, as discussed before, it cannot be denied that the nominee directors have dual fiduciary duties – one of which is the shareholder which nominated them and the other, is the company on whose Board they are nominated. While balancing the two, they have to ascertain that the interests of the company at large are safe-guarded and thus the company’s interest would triumph over the interest of the nominator institute. The nominee directors are therefore required to ensure both public and private interest while disposing their functions as directors. However, carrying this dual responsibility, they cannot be considered devoid of having an independent opinion as the same would contradict the basic duties of a director irrespective of the manner of appointment of such a director and may result in a detrimental situation for the company.

Conclusion

The ruling has clarified various important questions of law as discussed above, although there exist certain areas not touched upon by the court which would require further interpretation and rulings. While the burden of proof lies on the members claiming a relief under the provisions of the oppression and mismanagement, the Tribunal is required to exercise utmost care as to fulfillment of the requirement as intended behind the provisions. The essence of the provision is the existence of malafide actions of the management and conduct of affairs of the company in an unfair and prejudicial manner, which when evidenced can be sought relief against without winding up the company. Further, directors and management of the company have the primary responsibility of protecting the rights of the company, while balancing between profit and probity and the same cannot be compromised.

Role of Nominee Directors : Balance is the Key

-Megha Mittal & Ajay Kumar

[corplaw@vinodkothari.com]

The idea that directors owe a fiduciary duty towards the company has been deep instilled in the very being of the corporate world – not only in spirit, but also in law. Section 166 of the Companies Act, 2013 (‘Act’) provides that “a director shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.” While section 166 of the Companies Act, 2013 sets out the duties of a director towards the company and its stakeholders in general, one must note that a company also has certain specific set of stakeholders, say lenders, whose interests must also be taken care of – enter “Nominee Directors.”

Nominee directors are usually appointed by financial institutions or investors, generally referred to as nominators, on the board of the borrower company for the purpose of representing and safeguarding their interest thereof. However, regardless of its appointment by a specific stakeholder, a Nominee Director is not relieved of his general duties as a director of the company inter-alia duties under section 166 of the Act. This dual role of a Nominee Director has given way to years of debate with respect to a Nominee Director’s actions affecting the company vis-à-vis its nominator.

While much has been deliberated on this state of pseudo-conflict, the conundrum has now come to rest as the Hon’ble Supreme Court, in its landmark judgement in Tata Consultancy Services Limited v. Cyrus Investments Private Limited & Ors. clarified that while a nominee director is entitled to take care of the interests of the nominator, he is duty bound to act in the best interests of the company and not fetter his discretion.[1]

In this article, we shall throw light on the role and nature of Nominee Directors, and discuss their rights, duties and actions in case of conflict, in light of the Apex Court’s order in Tata Consultancy vs. Cyrus Investments (supra).

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