Why Ministry of Corporate Affairs should introduce Easy Exit Scheme?

All of you in corporate practice would have noticed Easy Exit Scheme, 2011 introduced by the Ministry of Corporate Affairs to pave way for weeding out defunct companies. Previously when this scheme was introduced, several companies had exited. Similarly now defunct companies could become active to apply for an exit. One of the benefits of this scheme is that the applicant comapnies do not need to update all accounts and returns and  other documents which such companies might have omitted to file. As such it is quite possible that several squared up transactions do not get reported and several contraventions might not get detected at all. For instance if in Year 1 there is a loan transaction carried out in perfect violation of Section 295 of the Companies Act, 1956 and in Year 2 the same has been squared by an entry and in Year 3 [let us say 2011] they file a Statement of Account and get an honourable exit (officially), it is nothing 'closing eyes where they are supposed to open'. In this era of scams, should MCA be introducing schemes such as EES 2011 without proper safeguards? Would it not be prudent for professional certifications as regards 'no violation' in the past three years at least? If complaints are not there, could that indicate 'all is well"? Are we not having enough experience of shareholders filing complaints under Section 235 / 273 / 397/ 398 and other provisions even after 8 to 10 years upon coming to know of issues? Can there be an exit otherwise than through a proper winding up in the case of companies with assets and liabilities? How is the EES, 2011 valid when it allows companies with assets and liabities to exit? What is the validity of the indemnity of one or two directors? Will there be any verification of their means and credibility so as to say that their indemnity would stand the test at the relevant time? Are we not hearing many a stories of closure of companies floated by Kings through such schemes which could have been 'pass through' for various transactions? It is time we wake up and make the administration shake up!    

corporatelawmadesimple: benefits of compounding of offences under the Comp...

corporatelawmadesimple: benefits of compounding of offences under the Comp...: "A prosecution of the offence would not be launched in a Criminal Court by filing a criminal complaint whereby the hassles of appearing befor..."

benefits of compounding of offences under the Companies Act

A prosecution of the offence would not be launched in a Criminal Court by filing a criminal complaint whereby the hassles of appearing before a criminal court would not arise. If a prosecution had already been launched, the compounding of offence puts an end to such prosecution.


The compounding fee payable in consideration of the appropriate authority allowing the application for compounding is not same as a fine levied by a criminal court. A fine will be levied as the or part of the punishment for the offence committed preceded by the court convicting the accused of the offence.

However it protects public interest by ensuring that prior to compounding, the default is remedied by compliance of the applicable provision; by curbing compounding of repeat offences and above all by making it a discretionary power. If a case involves serious offences investigated by CBI or Serious Corporate Frauds, the compounding authority may refuse to allow applications for compounding offences arising from seemingly technical defaults!

corporatelawmadesimple: Private Placement of Securities to 50 or more pers...

corporatelawmadesimple: Private Placement of Securities to 50 or more pers...: "In the year 2000, Section 67 of the Companies Act, 1956 [the Act] was amended to introduce a proviso prohibiting a company from issuing shar..."

Private Placement of Securities to 50 or more persons amounts to a Public Issue

In the year 2000, Section 67 of the Companies Act, 1956 [the Act] was amended to introduce a proviso prohibiting a company from issuing shares to 50 [Fifty] or more persons otherwise than through a public issue. A public issue of shares is a cumbersome and costly process with enormous disclosure requirements. It is not possible to proceed with an issue of shares to public unless Securities and Exchange Board of India [SEBI], which is the capital market regulator, clears the offer document. The aforesaid amendment was not made as clearly as we have mentioned in the opening sentence.


As you may be aware, lawmakers in India have always had the sadistic pleasure of saying something indirectly testing even the ability of persons with professional qualifications such as company secretaries and lawyers.

Prior to the above amendment, promoters of companies have issued shares to thousands and thousands of persons to raise equity capital. Such share issues were popularly known as private placement of shares and many such companies have vanished soon after the issue of shares. When this law was introduced, private placement of shares to people stopped for a while. However companies resorted to issuing shares to 50 [Fifty] or more people in tranches ensuring that each time the issue is made only to less than 50 [Fifty] persons.

Recently in a leading case, SEBI had issued an order against one such issue of shares by private placement. The aggrieved company termed the order of SEBI as “imprudent and inappropriate”. SEBI vide its order dated 24th November, 2010 held that the issue of Optionally Fully Convertible Debentures (OFCDs) by certain companies to persons who are allegedly friends, relatives, associates, employees and other individuals who are associated / affiliated or connected in any manner with those companies. SEBI held that an issue of securities to 50 [Fifty] or more persons is a ‘Public Issue” and consequently the issue ought to have been made after complying with the relevant provisions of the Act, the SEBI (ICDR) Regulations, 2009 and other Regulations.

corporatelawmadesimple: Grounds of Refusal against Registration of Tradema...

corporatelawmadesimple: Grounds of Refusal against Registration of Tradema...: "The Trademarks Act, 1999 (the Act) is the law in India containing absolute and relative grounds for refusal of registration of a trademark. ..."

Ensure that Arbitration Agreement applies to all necessary parties

If a party to a claim before an arbitral tribunal is a necessary party without whose presence no effective adjudication is possible and against whom there may a claim or any other relief sought, it is essential that such a party is a party to the arbitration agreement. Arbitration is a creation of the contractual arrangement between parties to the agreement. If there is a dispute in relation to certain parties of which one or more are not at all parties to the arbitration agreement, the best course of action is a civil suit only. It would be futile to waste time in initiating any arbitration claim. If the non-party, at the time of request for arbitration and at the time of establishement of arbitral tribunal does not object, one may argue that he has consented to be a party to the arbitration agreement. Conversely it is incumbent upon every non-party to object to his being arrayed as a party in any arbitration proceedings. Even at the stage of Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside an award, a non-party could render the entire arbitration process unenforceable against him. Arbitration process involves convenience but cost. Therefore before initiating any proceedings, aggrieved persons must sit down and settle not only the nature of dispute and required relief but also the question whether the arbitration will work in respect of all those against whom an order or relief is proposed to be sought. On the other hand, if all necessary parties are parties to arbitration agreement, if a party fails invokes arbitration in relation to a dispute covered by arbitraiton agreement, Section 5 and Section 8 of the ACA will require any judicial authority to direct the parties to the suit or other legal proceeding to have their disputes resolved through arbitration, upon application by any party. Arbitration revolves around the agreement under which it gets initiated; between the parties to the agreement; and further that it is restricted to the subject matter covered by the arbitration agreement. Thus (1) arbitration cannot bind a non-party and (2) arbitral tribunal cannot travel beyond the scope of the agreement.      

ABATEMENT OF PROCEEDINGS UNDER SICA LEAVES STAKEHOLDERS IN A STATE OF QUANDARY

When secured creditors take any action under Section 13(4) of the SARFAESI Act in relation to enforce their security interest in a sick industrial company as defined under the Sick Industrial Companies [Special Provisions] Act, 1985 [SICA], the proceedings before the Board for Industrial and Financial Reconstruction [BIFR] abates by operation of law. The law does not envisage a formal posting before BIFR in order to declare that the proceedings pending adjudication by BIFR have been abated. Therefore the moment such an action takes place, the proceedings before BIFR abates. Abatement terminates proceedings without any bearing on the merits. BIFR by itself or AAIFR in an appeal cannot revive a reference that has got abated in pursuance of law. Abatement takes place instantaneously. It opens the floodgates for any person to initiate any legal proceeding which may be in the nature of a distress or winding up. The irony is that while secured creditors will have the last laugh, and if the company is not in winding up [as it would not be, being a sick industrial company], all other stakeholders will be in a fluid situation. This could enable the promoters to tie up or team up with secured creditors or even otherwise, and alienate the other valuable assets or rights and ditch the unsecured creditors / sundry creditors! In such a case legal system will only be a silent spectator. Even in respect of non-sick industrial company, if the company is not in winding up, if the secured assets of the company sold in auction due to an action under Section 13(4) of SARFAESI Act, such a situation would prevail. The only remedy in such a case would be to initiate any action for the winding up of the company and see if proceedings are necessary to be taken out under various sections dealing with fraudulent preference or misfeasance or other offences including falsification of books of account. Thus legal system leaves stakeholders in a limbo. The proviso under sub-section (9) of Section 13 of SARFAESI Act stating that in the case of a company in liquidation Section 529A would apply does not offer much assistance because that would also assist only if the company is in winding up. Therefore there is a good case for amending SICA and also SARFAESI Act to remedy this mischief!    

parties to private agreement could agree restrictive covenants relating to transfer of shares

The division Bench of the Bombay High Court holds that in a private agreement parties may agree to certain covenants restricting their right to transfer shares held by them in a public company and such restrictions are not hit by Section 111A of the Companies Act, 1956. Section 111A states that shares of public company are freely transferable.The division bench of the HC held in its decision dated 01/09/2010 that the expression "freely transferable" in Section 111A does not mean that the shareholder cannot enter into consensual arrangement/agreement with the third party (proposed transferee) in relation to his specific shares. The division bench delared that they do not accept the view taken by the single judge in the Western Maharashtra Development Corpn V Bajaj Auto Case dated 15/02/2010! 

delay does not get you interim relief

If an urgent relief is required to be obtained from a court of law by way of an interim relief you must go to the court as immediately as possible from the time you came to know about an event or happening or anything that is apprehended that is likely to put you in a situation where if such event takes place or continues you will suffer an irreparable loss. Ordinarily from the date of knowledge, a period of 7 days may not be considered as a delay that would defeat the immediate purpose. For instance, if a director of a company receives a notice which contains a proposal for his removal, he must seek protection by acting swiftly! If he takes a lot of time moves the court at the elventh hour, it would be fatal. Court granting interim portection would see the conduct of the applicant; the lawgic is if he is really aggrieved, he would run to the court for relief! Better act fast!! 

removal of directors - not an easy job

To remove a person holding the position of a director in private or public limited company is not an easy job. Even a shareholder holding one share will be able to move a resolution in any general meeting; and the Board of Directors will be obliged to complying with all statutory requirements relating thereto. However it is difficult to gather necessary votes for ensuring success of the proposal. Further the Company Law Board may grant an injunction if the removal of director would amount to oppression. Even if proposing shareholder has fair chances of success, it may be difficult if facts and circumstances are such. 

What would be construed to be contrary to mandatory provisions of Company Law?

A Clause in the Articles of Association of a public company allows even proxies to speak at general meetings.

Is this clause invalid because Section 176 of the Companies Act, 1956 provides that the proxies are not allowed to speak at the meeting?

Section 170 states that notwithstanding anything to the contrary contained in the Articles of Association of a company, the provisions of Sections 171 to 186, shall apply to a public company.

If a clause in the Articles of Association of a public company allows proxies to speak, should that particular clause be construed to be contrary to Section 176 and as such ‘invalid’ due to Section 170 of the Act?

Takeover Code and Offer under Public Announcement

Recently I was talking to a man of fifty years, a post graduate in commerce, having been working as an officer of a nationalized bank. He showed me what is in fact is an open offer issued by the acquirers of a company in pursuance of the SEBI [Substantial Acquisition of Shares and Takeovers] Regulations. He was telling me that he had received that offer to purchase his 200 shares way back in 2008. He had didn't hear anything thereafter. He did not write to the comapny nor did he make any complaint about non-receipt of notices and reports. He didn't know that the offer was in pursuance of a regulation. Therefore he didn't even appreciate that reguations exist in the interests of unwary investors like him. In this backdrop we find many a such investors who are not even aware of their own rights nor do they understand that there are regulations issued by SEBI for protecting their interests. India, is a country of masses regulated by a few who know it fully well that the regulations are intended for the masses too but masses do not even know such regulators exist not to speak at all about their understanding the existence and purpose of regulations! In India, retail investors are docile even now;  that is the reason why there is a strong need for a vibrant regulatory authority and swift justice delivery system!   

IT IS NOT THE END OF SHARE TRANSFER RESTRICTIONS IN PUBLIC COMPANIES

Smt. Pushpa Katoch Vs. Manu Maharani Hotels Ltd. and Ors. [2006] 131 Comp Cas 42 (Delhi), 121(2005)DLT333, 2005 (83) DRJ 246


The Delhi High Court also held that by virtue of the provisions of Section 111A, the right of a shareholder to transfer his/her shares could not be fettered. Mr. Justice A.K. Sikri held thus:

The CLB further rightly mentioned that as per the provisions of Section 111A of the Act, there could not be any fetters on the right of a shareholder to transfer his/her shares. It may be noted that the Legislature has made different provisions for transfer of shares in case of private limited company and public limited company. Section 111, which deals with "Power to refuse registration and appeal against refusal", relates to the private limited companies. On the other hand, provisions of Section 111A dealing with "Rectification of register on transfer" are attracted in the case of public limited companies. While restrictions can be stipulated in the Articles of Association so far as transfer of shares of a private limited company is concerned, sub¬-section (2) of Section 111A of the Act specifically provides that the shares or debentures and any interest therein of a company shall be freely transferable. Proviso to this sub-section further stipulates that if a company, without sufficient cause, refuses to transfer the shares within two months, the transferee may file an appeal to the Company Law Board and "it shall direct company to register the transfer of shares". Since the respondent No. 1 company is a public limited company, the CLB rightly opined that there could be no fetters on the right of a shareholder to transfer his/her shares. We have already noted that there is no such provision giving pre¬emptory right to other promoters in the Articles of Association. Even if there was such a provision in the Articles of Association, it would have been ultra vires the provisions of the Act, as no company can provide in the Articles of Association any matter which offends the specific provision of an act (see Re. Denver Hotel Co., 1893(1) Chancery Division 495). No doubt, the four sisters promoted the company and their intention was to make the family property as a hotel and run the same. No doubt, in the Board meeting held on 16th March 1994 and the Memorandum of Family Agreement it was recorded that any promoter wanting to sell the shares would first offer the same to other promoters. However, at the same time, while incorporating this company, the promoters decided to have a public company limited by shares rather than a private company. They should have understood the implication and consequences of getting a public company incorporated. If they wanted such an arrangement, as recorded in the minutes of the meeting dated 16th March 1994 and the Memorandum of Family Settlement, they should have been wise enough to incorporate a private company and further to provide such a clause in the Articles of Association. After incorporating a public company, it was too late in the day to think of such an arrangement and recording the same in the Board meeting or the family settlement, which could not have any legal basis.

A Special Leave Petition against the judgment of the Delhi High Court was dismissed by the Supreme Court on 7th April 2006. I am in respectful agreement with the view of the Delhi High Court which reflects the correct position in law.

The above decision of Justice A K Sikri was quoted with approval by the Bombay High Court in Western Maharashtra Development Corpn. Ltd. v Bajaj Auto Limited [2010] 154 Comp Cas 593 (Bom). Setting aside an Arbitral Award, the Bombay High Court held that “the Arbitrator has ignored the express and specific provisions of the Companies Act, 1956; lost sight of the very concept of free transferability of the shares of a Public Limited Company and failed to apply the provisions of Section 9 under which overriding force is given to the Act notwithstanding anything to the contrary contained in the Memorandum, Articles or agreement. In the said case, the Bombay High Court held that the position in law of a Public Company is materially different. By the provisions of the Companies' Act, 1956, restrictions on the transferability of shares which are contemplated by the definition of a "private company" under Section 3(1)(iii) are expressly made impermissible in the case of a public company by the provisions of Section 111A. The High Court held that the submission that Section 111A would not interdict "an agreement between particular shareholders relating to the transfer of specified shares" is cannot be accepted. Elaborating further the Bombay High Court held as follows:

“In essence, the submission of the Respondent is that the provisions of Section 111A should be read as being subject to a contract to the contrary. A restriction to that effect cannot be read into the provision of Section 111A; firstly because, such a restriction is not mentioned in the statutory provision; secondly, the word "transferable" is of the widest import; and thirdly, the context in which the provision has been introduced, is susceptible to the inference that it should be given a wide meaning. Where the language of the statute is plain and unambiguous, neither the consequence nor the conduct of parties would be of relevance.”

Clause 6 of the Companies Bill, 2009 contains provisions relating to articles of association [regulations] of a company. This clause allows incorporating entrenchment rights in the articles of association of any company including a public company. There is no provision similar to Section 111A that states shares of a public company are freely transferable. Therefore if restrictions relating to transfer of shares are incorporated in the Articles of a public company the decision of the Delhi and Bombay High Court in the above cases would get nullified!
 
Investors acquiring stake in public companies have no reason to worry if the bill becomes an enactment at the earliest!

When will section 8 of arbitration and conciliation act 1996 apply

Section 8 of Arbitration and Conciliation Act, 1996 will apply only when -

Parties are substanbtially same; for namesake if some witnesses are added as parties, that does not prevent the Court or Tribunal or judicial forum from directing the parties to arbitration as mandated by Section 8; a party must be shown to be either a necessary party or at the least a proper party.

Subject matter - the core issue in the suit or proceedings before the Court or Tribunal or judicial forum should be the arbitrable dispute as stated by the Applicant who has invoked Section 8.

The relief must be capable of being granted by Arbitratal Tribunal. If it is a special relief vested by law in a particular court or Tribunal or judicial forum, arbitral tribunal cannot exercise jurisdiction over such subject matters.

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add a disincentive to listed companies the shares of which are not traded

July 26, 2010

If not less than 75% of the control is exercised by a single person or group, either directly or indirectly through one or more entities or affiliates, the company will be run almost as a proprietary concern with public shareholders not capable of bargaining anything or stopping anything. Governance would not improve by mere regulatory requirements relating to independent directors! Because without any contravention of regulations, the institution of independent directors could be reduced into a farce. As a result the public shareholders do not really find any utility of their VOTING POWER; more so in the case of illiquid stocks. Therefore if level of capital market activity, track record profits, track of dividend, capital appreciation on the basis of market cap do not show dynamism and such a negative trend continues for not less than 6 months, there must be regulator appointed nominee from a panel who shall be liable to MONITOR the corporate management decisions and actions so as to protect the interests of the public shareholders who are obviously a scattered lot.

SPICE UP; LET THEM WAKE UP!

OFFENCES UNDER FEMA - COMPOUNDING PREVENTS PROSECUTION

Transactions involving foreign exchange [Forex Transactons] are regulated by FEMA. Commonly known Forex Transactions are purchase and sale of shares and other securities in India by foreign nationals, foreign entities and persons who are resident outside India [Non-Residents]. Common mode of making such investments is through setting up of wholly owned subsidiaries or joint ventures in India. Similarly Indian enterprises and entrepreneurs set up their subsidiaries, joint ventures and entities in several other countries. FEMA regulates transactions initiated by non-resident Indians too. Acquisition and Sale of immovable properties in India by Non-Residents and Acquisition and Sale of immovable properties situate abroad by Indian Residents are also regulated under FEMA.




These regulations offer necessary guidance in a relation to a given Forex Transaction. Several compliance requirements arise while carrying out a Forex Transactions. Generally regulations offer some sort of a hurdle in translating the thoughts of an enterprising business man into action. However it is necessary to note that these regulations have been introduced keeping the national interest in mind and accordingly they have to be considered and complied with. Complications do arise while putting through or executing Forex Transactions. As a result contraventions of FEMA and / or the applicable regulations do take place resulting in the commission of prosecutable offences. When such offences occur, Section 15 of FEMA offers a facility to get the offences compounded rather than getting engrossed in avoidable adjudication proceedings and avoidable prosecution measures.



Until recently getting a contravention under FEMA compounded would involve huge costs. Irrespective of whether the contravention had arisen due to any technical or inadvertent reasons, compounding authorities have been levying huge compounding fee. They are guided by the provisions of Section 13 of FEMA which states that a person who contravenes any provision of FEMA or rules and regulations thereunder is liable to a penalty upto thrice the sum involved in such contravention if Adjudicating Authority adjudges the contravention.

Recently RBI introduced a refreshing change to this practice of levying huge costs on for allowing a contravention to be compounded. Vide its Circular A.P. (DIR Series) Circular No. 56 June 28, 2010, RBI brought out new norms to be applied in relation to applications for compounding of contraventions.

What RBI would examine? - The Perspective Approach

When an application is made for compounding of a contravention, the RBI would examine the nature of contravention in the following manner:

a. whether the contravention is technical and/or minor in nature and needs only an administrative cautionary advice;

b. whether the contravention is serious and warrants compounding of the contravention; and

c. whether the contravention, prima facie, involves money-laundering, national and security concerns involving serious infringements of the regulatory framework.

Investigation by Enforcement Directorate

If RBI finds that it is necessary for further investigation, it may recommend the matter to the Directorate of Enforcement (DoE) for further investigation. Such action may be initiated under FEMA, 1999 by the Enforcement Directorate or the Anti Money Laundering Authority instituted under the Prevention of Money Laundering Act, 2002 or to any other agencies, as RBI may deemed fit.

COMPOUND AND REDUCE FINES AND PENALTIES!