REIT REGIME IN INDIA

1. INTRODUCTION
   
   The draft SEBI (Real Estate Investment Trusts) Regulations, 2013 (“REIT Regulations”) is yet another attempt of Securities Exchange Board of India (“SEBI”) to bring about the Real Estate Investment Trusts (“REIT”) regime in India. SEBI, in 2007, released the first draft of the REIT Regulations. Thereafter in 2008, SEBI introduced REITS via a new investment vehicle Real Estate Mutual Funds (“REMFs”) under the SEBI (Mutual Fund) Regulations, 1996 which did not see much success due to various tax and other issues. This update is our endeavor to provide you with our analyses of the key provisions of the REIT Regulations and challenges in implementation thereof.


2. NEED
   
   Indian real estate market has seen a rapid growth and has the potential of growing much further. To this end, REIT will help the real estate industry by providing an exit to the sponsor which will provide them liquidity and the ability to invest in other projects and on the other hand the investors will get an avenue where they can earn regularly by investing in ‘complete’ properties which are less riskier than the ‘under construction’ properties.


3. BROAD FRAMEWORK
   
   
   • Sponsor(s) to set up trust under the provisions of Indian Trust Act, 1882 and appoint trustee. Trustee shall enter into investment management agreement with the manager on behalf of the trust. Manager to appoint principal valuer, any other valuers, auditor, registrar and transfer agent, merchant banker, custodian and any other intermediary/ service provider required.
   • Trust to apply for registration with SEBI as REIT as per the procedure laid down under REIT Regulations. Manager to identify and recommend investment opportunities for investment by REIT. After due diligence by the Trustee, the REIT, either directly or through a Special Purpose Vehicle, to invest in the real estate assets which shall be held by the Trustee in the name of REIT for the benefit of unit holders. However, sponsor to hold 25% or more of the total units of the REIT prior to initial offer.
   • After registration of REIT and full valuation of REIT assets by principal valuer, if REIT holds RE assets of the value of more than INR 10 billion, 25% or more of the units of the RE assets maybe offered to public via initial offer as per the procedure laid down under REIT Regulations.
   • Units of REITS to be listed within 15 days of closure of the initial offer. Once the units are listed and full valuation of all REIT assets has been done by the principal valuer, follow on offers can be made to the public.
   • Sponsor to maintain 25% stake in REIT assets for 3 years from the date of listing of the units.
   • Declaration of dividends as per the offer document/ follow-on offer document by the manger.
   • Manager to distribute not less than 90% of the net distributable income after tax of the REIT to the unit holders as dividends.


4. PARTIES TO THE REIT STRUCTURE
   
   The REIT Regulations prescribe the eligibility criterion, the roles and responsibilities and tenure of the each of the parties involved in the REIT structure. REIT structure has the following parties:
   
   

   

   
   
   • Sponsor(s): Net worth on consolidated basis to be INR 200 million and industry experience of 5 years on individual basis. They can exit REIT after 3 years from listing of the units by selling their stake (which has to be 15% at all times) to re-designated sponsors after obtaining approval from the unit holders.
   • Trustee: Has to be registered with SEBI under SEBI (Debenture Trustee) Regulations, 1993. Should not be an associate of the sponsor/ manager/ principal valuer. 50% or more of its directors to be independent and not related parties to REIT.
   • Manager: Net worth to be INR 50 million or more. Further, the manager and 2 or more key personnel in its Investment Committee to have 5 or more year experience in fund management/ advisory services/ property management in real estate industry or in development of real estate . More than half of the members of the Investment Committee to be independent. Manager may be removed with the approval of the unit holders.
   • Principal Valuer: Principal valuer should have 5 or more years of experience in valuation of real estate. Should not be an associate of sponsor/ manager/ trustee. Principal valuer may be removed with the approval of the unit holders. Must be changed in every 2 years.
   • Re-designated sponsor: Sponser(s) will arrange for them after obtaining the approval of the unit holders. Same requirements as sponsor.


5. RESTRICTIONS
   
   
   • Investment can only be in securities and real estate in India.
   • Investment cannot be vacant or agricultural land or mortgages other than mortgage backed with security.
   • 90% of the value of REIT assets to be invested in completed and rent generating properties. Completed properties are properties which have received occupancy certificates and rent generating properties are properties of which 75% or more area has been rented/ leased out.
   • Only 10% of the value of REIT assets to be invested in developmental properties, listed or unlisted debt of companies, mortgage backed securities, government securities etc.
   • Investment in developmental properties by REITs has to be locked in for 3 years after completion and should be leased out.
   • 75% or more gains made by REITs excluding the gains made by disposal of properties shall be from rental, leasing and letting real estate assets.
   • Investors to subscribe to a minimum of 2 units in REIT. Each unit of REIT to be of INR 0.1 million.
   • Unit holders can only sell their units on the stock exchange.


6. VALUATIONS, DISCLOSURES, AUDIT AND DELISTING
   
   
   • The manager to ensure that Net Asset Value of REIT is calculated once in every 6 months by principal valuer and declared to the stock exchange.
   • The principal valuer to conduct full valuation of REIT once in a year including physical inspection.
   • REITs have to make several disclosures under the REIT Regulations. The trustee to oversee that the manager ensures that the disclosures/ reporting to the unit holders, SEBI, trustees and recognized stock exchanges are adequate, timely and in accordance with the REIT Regulations.
   • The manager to ensure that the audit of accounts of REIT by auditor is done at least twice in a year and the report is submitted to the exchanges within 45 days of end of such half year.
   • Delisting of the REIT units to take place in the events of following: Minimum public float falls below the prescribed 25%; or Number of unit holders fall below 20 (excluding related parties); or SEBI or stock exchange require delisting for (a) violation of the listing agreement or (b) in the interest of unit holders; or Sponsor/ manager request delisting with the approval of requisite unit holders; or Unit holders apply for delisting.


7. CONCERNS
   
   REIT Regulations while drafted carefully raise concerns on tax, stamp duty, distribution of income, foreign praticpation etc. We have discussed a few significant issues below:
   • Tax issues: If a Sponsor transfers the real estate asset to Trust (on behalf of REITs), it will attract capital gains under the Indian Income Tax Act, 1961 (“Income Tax Act”). Please note that the Sponsor will not be able to transfer the property at a nominal value as the ready reckoner value will be the sale price. We recommend that capital gains on such transfer should be waived as it not actual transfer but transfer from one promoter entity to another.
   • Stamp Duty: Transfer of real estate from the Sponsor to the Trust (on behalf of REITs) will attract stamp duty for conveyance. In most of the urban cities, conveyance would attract a stamp duty of 5% of market value or actual value of the sale. This will substantially increase the cost and may make REIT unattractive for the real estate companies. We recommend some concession on the stamp duty should be granted to promote REIT.
   • Distribution of Income: The framework requires distribution of dividend as per offer document. If REIT holds shares of SPV, any distribution of profits will be subject to a corporate tax of 30% on SPV and dividend distribution tax of 15%. We recommend that such SPV under the REITs should be exempted from corporate tax, dividend distribution tax and Minimum Alternate Tax and should be given pass through status similar to venture capital funds provided Section 10(23FB) if the Income Tax Act providing single level of tax in the hands of the unit holders.
   • Title of Property: REIT Regulations require the Trustee to ensure that the real estate asset has a proper legal and marketable title and all material contracts entered into by REIT are binding and enforceable. We believe that most of the immovable properties in India have some minor issues with respect to verify the title and hence the title should restrict to marketability of real estate. Further, such liability should be of the Sponsor who will transfer the property to REITs and not that of the Trustees.
   • Limited Liability Partnership (“LLP”): After 2008, LLP has been the flavour for developers to hold the real estate asset. We recommend that definition of SPV and body corporate in the REIT Regulation should include LLP thereby enabling Sponsors more flexibility in their investments.
   • Foreign Investment: REIT Regulations permit foreign investors to invest in REITs subject to exchange control regulations. Reserve Bank of India will be required to liberalise current regulations to specifically allow REIT investments by non-residents as direct investment is presently restricted in real estate business subject to conditions and investment in Trust requires approval of Foreign Investment Promotion Board.
   • Units of REITs to qualify as security: Units of REITs should be defined as ‘security’ under Securities Control Regulation Act, 1956 , as these need to be compulsorily listed under the REIT Regulations.

MHCO COMMENTS

If majority concerns raised by the industry are addressed by SEBI, REIT could evolve as a preferred mode of investment for the investors. Further, it will provide liquidity and transparency to the much required real estate sector. With the recent trend of Indian companies to list their real estate in Singapore exchange, REITs will boost the Indian real estate market.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)

HIGHLIGHTS | COMPANIES ACT 2013

1. BACKGROUND AND INTRODUCTION
   1. After a run of around 56 years, the (Indian) Companies Act, 1956 (1956 Act) is now in the process of being substituted by a new law.
   2. The new Companies Bill 2012 (Bill) was approved by the Lok Sabha (the lower house of India) on 18 December 2012 and by the Rajya Sabha (the upper house of India) on 9 August 2013. The Bill received presidential assent on 29 August 2013 to become law i.e. (Indian) Companies Act, 2013 (2013 Act). Recently, the Ministry of Corporate Affairs (MCA) has notified a list of provisions (around 98 Sections) of the 2013 Act that came into force with effect from 12 September 2013.
   3. 2013 Act has 470 Sections and 7 Schedules as against 658 Section and 15 Schedules in 1956 Act. 2013 Act seems to be logically rearranged unlike 1956 Act wherein the provision were scattered all across the statute. However, substantial part of 2013 Act is governed via company rules (Rules) which are in process of being drafted and notified in due course.
   4. This update is our endeavor to provide you with our analyses of the key highlights of 2013 Act. We hope it is helpful to you for understanding the significant changes and potential implications of 2013 Act.


2. KEY HIGHLIGHTS
   1. NEW CONCEPTS AND DEFINITIONS
      2013 Act has introduced several new concepts and definitions. Few of them which we believe to be the most crucial are analyzed below:
      • Companies
        1. One Person Company: 2013 Act now allows one person to form a company vis-à-vis the earlier position where a minimum of two persons were required to form a company (private). This new concept will be beneficial as entrepreneurs will be able to singly set up a corporate entity, restrict the liability of business and reduce compliances. Further, it will now be easier for foreign companies to set up wholly owned private subsidiaries in India, as it will not require divesting any part of stake in such subsidiaries to its group or subsidiary companies unlike under the 1956 Act wherein such divestment was required to meet the minimum two person rule to set up a company. [Section 2(62) and Section 3(1) (c)]
        2. Small Company: 2013 Act introduces this new concept of a small company, which means a company other than a public company having paid up share capital not exceeding INR 50,00,000 (or such higher amount as may be prescribed which shall not be more than INR 5,00,00,000) or turnover of which as per its last profit and loss account does not exceed INR 2,00,00,000 (or such higher amount as may be prescribed which shall not be more than INR 20,00,00,000). However, this section of small company will not be applicable to (a) holding or subsidiary company; (b) company registered under Section 8 of 2013 Act (i.e. companies form with the charitable object); or (c) company or a body corporate formed under the special act. [Section 2(85)]
        3. Dormant Company: 2013 Act now allows a company to be formed and classified as a dormant company for holding assets or intellectual property subject to the company not having any significant accounting transaction. Further, an inactive company can also make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company. [Section 455]
        4. Associate Company: 2013 Act now defines the much controversial Associate Company to mean a company which has ‘Significant Influence’ over the other company and which is not a subsidiary company but includes a joint venture company. Further it has been explained that ‘Significant Influence’ shall mean control of at least having 20% of total share capital or control of the business decision under an agreement. [Section 2(6)]
        5. Private Company: 2013 Act has now increased the total limit of number of members / shareholders in private company from 50 to 200. [Section 2(68)(ii)]
        6. Investments Companies: 2013 Act provides that any company (unless otherwise prescribed) shall not make investment through more than two layers of investment companies. However, this section has not been made applicable to a company acquiring any other company incorporated outside India, if such other company has investment subsidiaries beyond two layers as per the laws of such country. This Section may considerably restrict the flexibility of Indian companies in structuring their transactions. [Section 186]
      • Object Clause: 1956 Act required the object clause (which is stated in the memorandum of association of a company) to be classified into (a) main object; (b) objects incidental or ancillary to the attainment of the main objects; and (c) other objects of the company. The reason for having such classification in the object clause was to restrict the company from commencing any other business unless it complies with certain requirements. However, this requirement of such classification has been done away with by the 2013 Act, i.e. all objects will now be the main objects of the company. [Section 4(1)]
      • Key Managerial Personal (KMP): KMP is commonly used in investment agreements and now finds a place in the 2013 Act. KMP includes (a) Managing Director (MD) or Chief Executive Officers (CEO); (b) Whole time director; (c) Chief Financial Officer (CFO); (d) Company Secretary (CS) and; (e) such other officer as may be prescribed. 2013 Act requires certain companies to appoint KMPs which will be notified in the Rules. [Section 2(51)]
      • Promoter: The term Promoter was not defined in the 1956 Act. However it was extensively used through company law. 2013 Act now specifically defines Promoter, which includes (a) a person who has been named as such in the prospectus or is identified as such in the annual return; or (b) who has control over the affairs of the company (other than in a professional capacity), as a shareholder or a director or otherwise; or (c) in accordance with whose advice or directions the Board is accustomed to act. [Section 2(69)]
      • Class Action Suits: 2013 Act introduces the western concept of class action suits which allows requisite number of members, depositors or any class of them file a suit against the company, its directors, auditors and/or other experts or consultants or advisors, if they believe that affairs of the company are conducted in a manner prejudice to the company or its members or depositors. [Section 245]
      • Buy back of Securities: 2013 Act provides that no buy back will be done by a company within one year from date of closure of previous buy back. Based on this provision, each company will now require having a cooling off period of one year between the two buy backs. Further, if a company has defaulted in repayment of its loans, deposits or interests payable then the company shall compulsorily have to wait for a period of three years after repayment of all such outstanding amount and rectifying such breach. [Section 68]
   2. MANAGEMENT AND ADMINISTRATION
      2013 Act provides detailed role of the management by incorporating sections enunciating powers, duties and responsibilities of board of directors, KMP, etc. Following are some of the important changes in the 2013 Act vis-à-vis 1956 Act:
      1. Directors
         • Maximum Number of Directors: The maximum number of directors for a public company has been increased from 12 to 15. In case the company desires to further increase the board size, it may do so by passing a special resolution. The requirement of taking permission of the Central Government as provided in 1956 Act is done away with in 2013 Act. [Section 149(1)]
         • Number of Directorships: A person cannot be a director (including alternate director) in more than 20 companies out of which he or she cannot be a director of more than 10 public companies. 2013 Act now restricts over all directorship of any individual as compared to 1956 Act which allowed 15 directorships of any person in a public company and any number of directorships in a private company. [Section 165]
         • Resident Director: At least one director of the company is required to fulfill the residency test i.e. stay for not less than 182 days in India in the previous calendar year. [Section 149(3)]
         • Woman Director: Certain class of the companies (which will be notified in the Rules) must have at least one woman director on the board. [Section 149(1)]
         • Small Shareholder Director: A listed company may have one director elected by small shareholders. Small shareholder means a shareholder holding shares of nominal value of not more than INR 20,000 or such other sum as may be prescribed.
         • Independent Directors: To align the company law with Clause 49 of Equity Listing Agreement (Clause 49), 2013 Act has introduced the concept of Independent Directors. In this respect, few of our general observations are as follows:
           • The term independent director has been defined with certain prescribed qualification and disqualification. [Section 149(6)]
           • Every listed company is required to have at-least one-third of the total number of directors as independent directors. Independent directors shall be entitled to sitting fees, commission from the profit and reimbursement of expenses. However, they will not be entitled to stock options. [Section 149(9)]
           • The appointment of the independent director shall be approved by the members in a general meeting and they will not be required to retire by rotation. [Section 149(13)]
           • An independent director can hold the office for consecutive two terms of five years each following which there should be three years break before he or she is reappointed as an independent director. [Section 149(11)]
           • Nominee director shall not be considered as an independent director. [Section 149(6)]
           • While the intention of 2013 Act is to align itself with Clause 49, there are few aspects which are different. All listed companies will now have to comply with Clause 49 and 2013 Act which will make the compliance process more cumbersome.
           • Independent director shall only be liable for such act of omission, commission by a company which had occurred with his or her knowledge, attributable through Board processes, and with his/ her consent or connivance or where he or she had not acted diligently. [Section 149(12)]
         • Duties of the Director: 2013 Act attempts to codify the duties of directors, including but not limited to the following, they are required to (a) act in good faith and in the best interest of the company; (b) not to have direct or indirect conflict of interest with the interest of the company; and (c) exercise duties with diligence and reasonable care and declares that it would be punishable offence to commit a breach of those duties. The liability of the director in default for contravention, for which no specific penalty is prescribed, has been increased from INR 50,000 to INR 500,000. [Section 166)]
      2. Board Meetings:
         • The first board meeting is required to be held within 30 days of incorporation of a company and a minimum of four meetings are required to be held every year in such a manner that there are not more than 120 days between two meetings. [Section 173 (1)]
         • A notice of minimum seven days is required to be given for convening a board meeting. The company can hold board meetings at a shorter notice to transact urgent business subject an independent director, if any shall be present in the meeting. In case of absence of independent directors from such a meeting, the decisions taken at such a meeting shall be circulated to all the directors and shall be final only upon the ratification thereof by at least one independent director, if any. [Section 173 (3)]
         • The board meeting can be attended by the directors through video conferencing or other audio-visual modes, and such presence will be counted as quorum for the meeting, subject to the condition that they can be recorded and stored. [Section 173 (2)]
      3. Committees: Besides the Audit Committee, the 2013 Act requires listed and such other class of companies as may be prescribed to form Nomination and Remuneration Committee, Corporate Social Responsibility Committee and Stakeholders Relationship Committee. [Section 178]
   3. CORPORATE SOCIAL RESPONSIBILITY (CSR):
      The Ministry of Corporate Affair had introduced CSR Voluntary Guidelines in 2009. These guidelines are now part of the 2013 Act and mandates following companies with the CSR activities:

      • Every company having net worth of INR 500,00,00,000 or more, or turnover of INR 1000,00,00,000 or more or a net profit of INR 5,00,00,000 or more during any financial year shall constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
      • CSR Committee shall formulate the policy for activities specified in Schedule VII of the 2013 Act which broadly includes (a) eradicating extreme hunger and poverty; (b) promotion of education; (c) promoting gender equality and empowering women; (d) reducing child mortality and improving maternal health; (e) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; (e) ensuring environmental sustainability; (f) employment enhancing vocational skills; (g) social business projects; (g) contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; (h) such other matters as may be prescribed.
      • 2013 Act mandates companies to spent atleast two percent of the average net-profits of immediately preceding three years on CSR activities, and if not spent, an explanation with the reasons thereof shall be required to be given in the Director’s Report. [Section 135]
   4. SHAREHOLDERS MEETING
      • Notice: A notice of clear 21 days is required to be given to each shareholder. 2013 Act now permits notice to be sent through electronic mode and should also be given to all the directors.
      • Quorum: 2013 Act has revised the quorum requirement for a general meeting of public company. The new requirements are broadly linked to the total number of shareholders of the particular company. Quorum for the meeting will be as follows:
        • Public Company
          • Five members personally present shall be the quorum for the meeting, if the total number of members does not exceed 1000;
          • 15 members personally present shall be the quorum for the meeting, if the total number of members are up to 5000; and
          • 30 members personally present shall be the quorum for the meeting, if the total number of members exceeds 5000. [Section 103]
        • Private Company: Two members personally present shall form the quorum for the meeting.
      • Electronic Voting: Central Government shall prescribe class or classes of companies and the manner in which members may exercise his / her rights to vote by electronic means. [Section 108]
      • Demand for Poll: A member having not less than 1/10th of the total voting power or holding shares of an aggregate of not less than INR 500,000 can demand poll. Further, 2013 Act removes the distinction between the private or public company in terms of eligibility of members for making demand for poll. [Section 109]
      • Postal Ballot: Unlike 1956 Act wherein postal ballot was only applicable to listed companies, it appears that 2013 Act has extended postal ballot requirement to all the companies which includes pubic unlisted and private companies as well. Central Government has yet to provide what specific items would require members’ resolutions passed through postal ballot. [Section 110]
   5. MERGERS AND AMALGAMATION
      2013 Act introduces some new provisions with regard to mergers and acquisitions, apart from incorporating changes to the existing provisions in the 1956 Act. The objective of bringing these changes is to simplify the procedures involved and ensure higher standards of accountability. Some of the key new provisions in this respect are:

      • Holding and subsidiary: A fast track procedure has been introduced for merger and amalgamation of holding company and its fully owned subsidiary. An approval of the court is not required as long as the Registrar of Companies (ROC) and official liquidator have no objection and the Central Government has granted its consent. [Section 233]
      • Cross Border Mergers: 1956 Act did not permit Indian companies to merge with foreign companies. 2013 Act now allows Indian companies to merge with foreign companies subject to an approval of the Reserve Bank of India and foreign company being incorporated in the jurisdiction notified by Central Government. [Section 234]
      • Listed to Unlisted: In the event of an arrangement between a listed transferor company and an unlisted transferee company, 2013 Act now permits for the (subject to consent of the tribunal) unlisted company to stay unlisted until it becomes listed. Further, if the shareholders of the transferor company decide to exit, the exit price cannot be less than the price as provided under Securities Exchange Board of India Regulations.
      • Squeeze out of minority shareholding: 2013 Act now allows 90% majority shareholders of a company to squeeze out the minority shareholders at a price determined on the bases of value determined by the registered valuer. [Section 236]
   6. AUDIT AND AUDITORS
      With the background of Satyam corporate scandal in India, 2013 Act extensively enhances accountability of the auditors. The key changes in this respect are as follows:
      • Appointment of Auditors: Auditors will now be appointed for a term of five years. However, their term will be ratified at each annual general meeting. [Section 139(1)]
      • Mandatory Rotation: Auditors for listed companies (and other class(es) of companies as may be prescribed) are now required to mandatorily rotate their auditors – every five years in case of the appointment of an individual as auditor and every 10 years in case of appointment of an audit firm with a uniform cooling off period of five years in both cases. Further, firms with common partners in the outgoing audit firm will also be ineligible for appointment as auditor during the cooling off period. [Section 139(3)]
      • Non Audit Service: Any services to be rendered by an auditor of a company should be approved by the Audit Committee or the board of the company. Additionally, the auditor is restricted directly or indirectly from providing certain specific services, which include a) accounting and book keeping services; b) internal audit; c) design and implementation of any financial information system; d) actuarial services; e) investment advisory services; f) investment banking services; g) rendering of outsourced financial services; h) management services, and any other services which may be prescribed. [Section 144].
      • Secretarial Audit: 2013 Act provides for a mandatory requirement to have secretarial audit which is required to form a part of the director’s report for all listed companies and other classes of companies that may be prescribed. [Section 204]
   7. FINANCIAL STATEMENT AND DIVIDEND
      • Financial Year: Under the 1956 Act, companies were permitted to decide their own financial year. 2013 Act has taken away this liberty and requires all the companies to have a financial year ending as on the 31st of March. If any company desires to follow a different financial year because the holding company or subsidiary company requires following of different financial year for consolidation of its accounts, it will have to make an application to Tribunal. Tribunal, if satisfied, shall grant such an exemption. [Section 2(41)]
      • Consolidated Statement: 2013 Act requires consolidation of certain financial statements of any company having subsidiary, associate or joint venture company to prepare and present in addition to stand alone financial statements.
      • Dividend: Unlike the 1956 Act, the 2013 Act does not require certain percentage of profit to be transferred to the reserves before declaring the dividend. Further, a company which has incurred any loss during the current financial year upto to the end of the quarter immediately preceding the date of declaration of interim dividend, shall not be required to declared such interim dividend at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. [Section 123]
   8. REGULATORS
      • National Company Law Tribunal (NCLT or Tribunal): 2013 Act provides for constitution of Tribunal and Appellate Tribunal with the objective of facilitating expeditious disposal of proceedings. All the matters, issues and disputes falling within the ambit of 2013 Act will now be referred to NCLT. Appeal would lie before the Appellate Tribunal and thereafter can be challenged before the Supreme Court. High Courts will now have no jurisdiction in matters related to company law. [Section 407 to 434]
      • National Financial Reporting Authority (NFRA): 2013 Act also provides for constitution of NFRA which will substitute the National Advisory Committee on Accounting and Auditing Standards. NFRA will supervise and regulate the activities of auditors and companies and see that they are in compliance with accounting and auditing standards. [Section 132]
      • Serious Fraud Investigation Office (SFIO): SFIO is an expert body established by Central Government in 2003 as a special organization to examine serious cases of fraud and scams received from MCA. The body was formed to carry out investigations under the provisions of the 1956 Act and was formed in light of the rise in white collar crimes and stock market scams. 2013 Act now itself incorporates within its folds the mandate for setting up an investigative body and recognizes the already existing SFIO as the investigative body. [Section 211]
   9. REVIVAL AND REHABILITATION OF SICK COMPANY
      • The existing provisions for revival and rehabilitation of sick companies have been substantially altered. 2013 Act now permits ‘any’ company and not just an ‘industrial’ company to be declared as sick company and avail benefits of this scheme.
      • The determination of whether a company is a sick company or not has moved from the concept of ‘erosion of net worth’ to ‘inability to pay debt’. If a company fails to repay its debt within 30 days from receipt of a demand from the secured creditor representing 50% or more in value of the outstanding debt of the company, the company would be considered as a sick company.
      • A secured creditor whose debt has not been repaid can apply to the Tribunal for declaration of the company to be sick. If the said company is unable to provide a scheme to the Tribunal for its revival, an interim administrator may be appointed by the Tribunal to take over the management of the sick company. The Tribunal may consider various options for the revival of the sick company including its acquisition by a solvent company, restructuring of its assets, etc. If the Tribunal is satisfied that revival is not possible, it will pass an order for winding up of the company. [Chapter XIX]
   10. WINDING-UP
       • 1956 Act provided three modes of winding-up of a company i.e. (a) Compulsory Winding-Up ordered by the court; (b) Voluntary Winding-Up by members; and (c) Winding-Up under supervision of the court. 2013 Act now prescribes only two modes i.e. a) Winding-Up by the Tribunal and b) Voluntary Winding-Up. Further, 2013 Act does not acknowledge the distinction between member voluntary winding up and creditor voluntary winding up vis-à-vis the position in the 1956 Act.
       • 2013 Act adds following new grounds for winding-up of a company by NCLT:
         • If the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality;
         • If order has been made by NCTL under Chapter XIX (Revival and Rehabilitation of Sick Companies);
         • If on an application made by the ROC or any other person authorised by the Central Government by notification under 2013 Act and NCLT is of the opinion that the affairs of a company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
         • If the company has made a default in filing with the ROC its financial statements or annual returns for immediately preceding five consecutive financial years; or
         • If NCLT is of the opinion that it is just and equitable that the company should be wound up. [Section 270 to 365]


3. OUR OBSERVATIONS
   We believe the changes in the 2013 Act have far reaching implications and are all set to considerably change the manner in which the companies operate in India. The most important challenge it poses is transition of the companies to comply with the provisions of 2013 Act from the accustomed 1956 Act. One can only hope the government provides appropriate mechanism for such transition and 2013 Act is able to bring better corporate governance among the corporates which will act as stimulant for growth of the Indian economy.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)

SEBI | RULES FOR ANGEL INVESTORS

Securities Exchange Board of India (SEBI) very recently notified amendments (Amendment(s)) to the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) to give effect to budget for FY 2013-14 on the angel investor pool. By way of the Amendment, a new sub-category has been created under Category I – Alternative Investment Funds (“AIF(s)”) called “Angel Funds” by inserting a separate Chapter III-A in the AIF Regulations. The key changes through the Amendments are as follows:

1. Registration of Angel Funds: Angel Funds can register in accordance with Chapter II of the AIF Regulations. Further, the already registered AIFs may apply for conversion of its category into an Angel Funds.
2. Raising funds: Angel Funds have been permitted to raise funds only from angel investors through private placement by issue of information memorandum or placement memorandum.
3. Conditions for investments on Angel Funds: Angel Funds have been permitted to make investments only in start-ups / early stage companies and are therefore permitted to invest only in venture capital undertakings which:
   • are not more than 3 (three) years old;
   • have a turnover not exceeding INR 250,000,000 (Indian Rupees Two hundred fifty million);
   • are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of INR 3,000,000,000 (Indian Rupees Three billion); and
   • have no family connection with the investors proposing to invest in the investee company.
4. Conditions imposed on Angel Investors: Certain conditions have been imposed on angel investors such as:
• Individual angel investors are required to have early stage investment experience or experience as a serial entrepreneur or be a senior management professional with 10 years experience AND to have net tangible assets of atleast of INR 20,000,000 (Indian Rupees Twenty million); and
• Corporate angel investors shall be required to have INR 100,000,000 (Indian Rupees One hundred million) net worth or be a registered AIF under AIF Regulations / Venture Capital Fund registered under the SEBI (Venture Capital Funds) Regulations, 1996.
5. Minimum Corpus of Angel Funds: Angel Funds shall have a corpus of at least INR 100,000,000 (Indian Rupees One hundred million) (as against INR 200,000,000 (Indian Rupees Two hundred million)) for other AIFs.
6. Minimum and maximum investment by an angel fund in an investee company: Investment in an investee company by an angel fund shall be not less than INR 50,000,000 (Indian Rupees Fifty million) and more than INR 500,000,000 (Indian Rupees Five hundred million) and shall be required to be held for a period of at least 3 (three) years.
7. Launching of Schemes: An Angel Fund may launch schemes by filing the scheme memorandum at least 10 (ten) working days prior to launch of the scheme with SEBI in accordance with the rules laid down by SEBI in this regard.
8. Lock-in: Investment by an Angel Fund in the venture capital undertaking shall be locked-in for a period of 3 (three) years.
9. Maximum investment by an angel fund in one venture capital undertaking: Angel funds shall invest a maximum of 25% (twenty five) of the total investments under all its schemes in one venture capital undertaking.
10. Continuing interest of member/ sponsor: The manager or sponsor shall have a continuing interest in the angel fund of not less than 2.5% (two and half percent) of the corpus or INR 5,000,000 (Indian Rupees Five million) whichever is lesser, and such interest shall not be through the waiver of management fees.
11. Social Venture Funds: A minimum amount of INR 2,500,000 (Indian Rupees Two million and five hundred thousand) can be collected as grants by Social Venture Funds. However, no profits or gains shall accrue to the provider of such grants.
12. Prohibition on listing: Units of angel funds shall not be listed on any recognised stock exchange.

MHCO COMMENT

The move by SEBI to recognise Angel Funds as a separate class of funds is a positive move. The key reasons for this believe are as follows:

• Tax benefit: By recognising angel funds as a Category I AIF, it appears that the benefit of the 'pass - through' available only to Category I AIFs pursuant to AIF Regulations and the Finance Act, 2013 shall also extend to angel funds.
• Sharp assessment of risk appetite of angel investors: The criterion for being an angel investor seems to have been introduced after a sharp assessment of making sure that angel investors understand the nature of their investment and have the requisite capacity to handle the outcome of such investments.
• Ensuring that angel funds invest in start ups: Restrictions on investment avenues for angel funds seem to be reflective of plan for ensuring that angel funds invest only in start ups.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)

ENFORCEABILITY OF OPTIONS

1. MEANING
   1. A call option (“Call Option”) grants a right to the option holder to buy shares, debentures or other securities (“Securities”) held by the Call Option provider to the option holder on the occurrence of certain events and on the basis of agreed pricing formula. The option provider has a binding obligation to sell his Securities to the option holder when the option holder exercises the Call Option.
   2. A put option (“Put Option”) grants an exit to the option holders which require the other party, namely the option provider, to the Securities held by the option holder on the occurrence of certain events and on the basis of pre-agreed pricing formula. In other words, the option provider has binding obligation to buy the Securities to the option holder when the option holder exercises the Put Option.
   3. Right of first offer (“ROFO”) is a negotiated contractual right of a shareholder whereby the selling shareholder has an obligation to first offer the Securities to the non-selling shareholder before offering to a third party. If the non-selling shareholder is not interested in purchasing the Securities or cannot reach an agreement with the selling share shareholder, than the selling shareholder may sell the Securities to a third party for a price higher than what was offered by the non-selling shareholder.
   4. Right of first refusal (“ROFR”) is a negotiated contractual right of a shareholder whereby the non-selling shareholder has a pre-emptive option to purchase the Securities of a company at a price at which a third party intends to buy the Securities of a selling shareholder. This means that the selling shareholder is required to go to a third party first and get the valuation at which the third party is willing to buy the Securities of the company and share it with the non-selling shareholder.
   5. Put Options, Call Options, ROFO and ROFR (collectively referred as “Options”) are generally incorporated in the shareholders agreement between the Investor, Promoter and the Company. This note is intended to analyses the enforceability of such Options.


2. LEGAL CHALLENGES
   1. Section 111-A of the Companies Act, 1956
      1. Options have time and again been viewed by the courts as a right contrary to the principle of ‘free transferability’ of shares of a public limited company laid down in Section 111-A of the Companies Act, 1956 (“Companies Act”). As Section 111-A of the Companies Act is not applicable to private companies; the concept is challenged vis-à-vis section 111-A of the Companies Act only in case of listed and unlisted public companies.
      2. The original text of Section 111-A of Companies Act and the principle of ‘free transferability’ was imported in the Companies Act in September 1995 from Section 22-A of Securities Contract Regulation Act, 1956 (“SCRA”)which now stands deleted. It is also important to note that the said Section 111-A was inserted in the Companies Act by the Depositories Act, 1996 which primarily regulates depositories in Securities held in dematerialised form and matters incidental thereto.
      3. Therefore, one could argue that enactment of Section 111-A was not to emphasise on free transferability of shares of public limited companies but to provide an impetus to transfer shares in dematerialised form and a mechanism to check misuse of power by board of directors of the company.
   2. Incorporation of Option clauses in articles of association of a company
      1. While the debate on the Options in terms of 111-A of the Companies Act does not arise with respect to private companies, the inclusion of Options clause in the articles of association (“Articles”) of a company is a hotly debated topic both in cases of both, private and public companies.
      2. When shareholders agree to an Option in a shareholders agreement and do not incorporate it in the Articles of the company, the controversy arises as to whether the clause is enforceable against the Company in the absence of its incorporation in the Articles.
   3. SCRA
      1. SCRA does not expressly deal with the Options. However, Section 18 read with other relevant Sections/ notifications under SCRA provide that no person is permitted to enter into any contract for sale or purchase of securities other than a spot delivery contract or contract for cash or hand delivery or special delivery or contract in derivatives as is permissible under SCRA or the Securities and Exchange Board of India Act, 1992, and the rules and regulations made under such Acts and rules, regulations and bye-laws of a recognised stock exchange[1]. In view of the above, all dealings in Securities other than on a spot delivery basis unless settled through stock exchanges are illegal.
      2. Options are incorporated in a typical venture funding or private equity transaction, wherein a contingent contract which may result in a contract for sale or purchase of securities can only be exercised on the happening of a contingency and not merely upon the grant of such Option.
      3. Upon exercise of such Options, contract is normally performed immediately, on a spot delivery basis where the consideration for the securities is paid simultaneously upon the transfer of such securities.
      4. As SCRA does not expressly make any provisions for Options one has to refer to judicial precedents for interpreting SCRA provisions vis a vis Options. The same has been discussed below in the MCX Case (defined below).


3. JUDICIAL PRECEDENTS
   1. The Supreme Court in 1992 in its decision in V B Rangaraj v V B Gopalakrishnan[2] (“Rangaraj Case”)held that a restriction on the transfer of shares contrary to the Articles of a private company was not binding on the private company or its shareholders.
   2. The Gujarat High Court in 1998 in its decision in Mafatlal Industries Limited v Gujarat Gas[3] relying on the Supreme Court’s decision in the Rangaraj Case, did not enforce the pre-emptive rights of the shareholders of a public company as the same were not incorporated Articles of the public company.
   3. The Supreme Court in 2003 in its decision in M S Madhusoodhanan v Kerala Kaumudi Private Limited[4] (“Madhusoodhanan Case”) not disagreeing with the decision in Rangaraj Case distinguished itself from the facts in Rangaraj Case on the ground that there was a clear distinction between allotment of new shares by a company and transfer of shares between shareholders.
      1. Firstly, in Rangaraj Case, the company was to issue shares, in Madhusoodhanan Case, as the agreement was inter-se shareholders, the role of the company was only to recognize the transferee as a new shareholder. It was therefore held that in Rangaraj Case, it was essential for the company to be part of an agreement to allot shares, however the same was not required in Madhusoodhanan Case.
      2. Secondly, in Rangaraj Case, the restriction was on the right of all the shareholders, present and future, however in Madhusoodhanan Case, the agreement was merely between particular shareholders, which imposed a restriction on the transferability of their shares. It was therefore held that in such a case a restriction in relation to identified members on identified shares of a private company did not amount to restriction of transferability of shares per se.
   4. The Delhi High Court in 2005 in its decision in Pushpa Katoch v. Manu Maharani Hotels Limited[5] (“Pushpa Katoch Case”) held that as per the provisions of Section 111A of the Companies Act, there could not be any fetters on the right of a shareholder to transfer his/her shares in a public company and observed that a right of pre-emption, even if found in the Articles of the Company, would be ultra vires the provisions of the Companies Act.
   5. The Single Bench of the Bombay High Court in 2010 in Western Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd[6] (“Bajaj Auto Case”), in relying on the decision of the Delhi High Court in Pushpa Katoch Case held that pre-emptive rights over shares in a public company even if incorporated in the Articles of the company is a fetter on the transferability of such shares and therefore patently illegal. This judgment does not deal with a situation wherein the agreement is only between the shareholders inter se.
   6. The division bench of the Bombay High Court in September 2010 in Messrs Holdings Limited v. Shyam Madanmohan Ruia[7] (“Messrs Holdings Case”), upheld the validity of such pre-emptive rights and opined that such rights do not violate the provisions of Section 111-A of the Companies Act.
      1. One of the key observations in this case was that a shareholder has freedom to transfer his shares on terms defined by him, subject to compliance with existing laws and that such arrangements do not restrict free transferability of shares. It was also held by the Court that pre-emptive rights arise out of a private contract between shareholders with a third party and these need not be embodied in the Articles of the company since the company is not a party to such arrangements.
      2. The division bench also referred to the exemption notification dated 27 June 1961 (“1961 Notification”) issued under Section 28 of the SCRA by the Central Government exempting contracts for preemption or similar rights contained in the Promotion or Collaboration Agreements or any Articles of limited company on the ground that such contracts were in the interest of trade and commerce or the economic development of the country. The Division Bench further held that because of 1961 Notification it cannot be presumed that legislature while enacting Section 111-A impliedly intended to make the agreements illegal or invalid.
   7. The division bench of the Bombay High Court has very recently in MCX Stock Exchange Limited V Securities & Exchange Board of India & Ors[8] (“MCX Case”) brought some clarity with regards to enforcement of Options in securities of a public unlisted company. The division bench differentiated between forward contracts (i.e. firm contract to buy back of shares or sell) and Options and observed the following:
      1. An Option to purchase or repurchase and a forward contract simpliciter lies in the fact that the Options are by its nature dependent on the discretion of the person who is granted the option whereas the forward contract is a reciprocal arrangement imposing obligations and benefits on the promissor and the promisee.
      2. The performance of an Option cannot be compelled by the person who has granted the Option. Contrariwise in the case of a forward contract, performance can be elicited at the behest of either of the parties. In the case of an Option, a concluded contract for purchase or repurchase arises only if the Option is exercised and upon the exercise of the Option.
      3. Under the notification that has been issued under the SCRA, a contract for the sale or purchase of securities has to be a spot delivery contract or a contract for cash or hand delivery or special delivery. In this case, the contract for sale or purchase of the securities would fructify only upon the exercise of the option in future. If the option were not to be exercised by them, no contract for sale or purchase of securities would come into existence. Moreover, if the option were to be exercised, there is nothing to indicate that the performance of the contract would be by anything other than by a spot delivery, cash or special delivery.
   In arriving to the above decision, the division bench relied on an earlier decision of the Bombay High Court in Jethalal Thakkar v Kapur[9]. Even though there was a subsequent decision of the single judge to the contrary in Niskalp Investments and Trading Company Limited v Hinduja TMT Limited[10] (“Nishkalp Case”), that seem to have not been considered. Further, Supreme Court has set aside the said order against SEBI as SEBI had agreed to amend the Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchange) 2006. However, Apex Court has nowhere stated that MCX Case will not be treated as a precedent.


4. Our Observation
   1. Given the contradiction on the issue and commenting on the overall picture it is fair to conclude that Indian courts have generally not complete clarity due to multiplicity of contradictory judgment of different High Courts.
   2. Courts have either refused to recognise clauses in shareholders agreements or, even when consistent with company legislation, enforced such clauses only if they have been incorporated in the Articles of the Company. Unless the Options are not endorsed by the Supreme Court, the extensiveness of the same cannot be taken for granted. So the take away from the analysis is:
      1. Incorporation of Option clauses in Articles of a company and entering into inter se agreements with the commercials for Options:
         • While, the Division Bench in Messers Holdings Case has specifically stated that such consensual agreements between particular shareholders relating to their shares can be enforced like any other agreements and it is not required for such arrangements to be embodied in the Articles of a company, it is questionable as to whether the principles enumerated in Rangaraj Case, namely for a company to be bound by a restriction on transfer of shares the same would have to form part of the Articles of the company, have been negated by the decision of Messers Holdings Case.
         • It may be noted that the principles laid down by the Supreme Court in Rangaraj Case were further analysed by the Supreme Court in Madhusoodhan Case which concluded that the judgment arrived at by the Supreme Court in Rangaraj Case was on account of the restriction being a blanket restriction on all the shareholders present and future and could not be imported to a private agreement between particular shareholders.
         • Messers Holdings Case has agreed with the interpretation of Supreme Court in Madhusoodhan Case and in the spirit of free transferability has extended this concept to private arrangements between shareholders in a public company. However, if certain provisions are required to enforced against a company, the rationale relied on Messers Holdings Case for not incorporating such transfer restrictions in the Articles of the company or making the company a party to such arrangements, may not necessarily hold well. Consequently, in our view the rationale behind Rangaraj Case may come into play which means that principles laid down in Rangaraj still hold good.
         • The Bombay High Court in 2011 in its decision of Jer Rutton Kevasmanek and Another v. Gharda Chemicals Limited[11] (“Jer Rutton”) has said that if the Options clause is incorporated only in the Articles and no separate agreement has been entered into recording the commercials on Options, Section 9 of the Companies Act will come into play and the Options clause in the Articles will be unenforceable as such clauses in cases of public companies are contrary to Section 111 A of the Companies Act.
         • Accordingly, we recommend that such clauses should be incorporated in the Articles of both private and public companies alongwith their inclusion in shareholders agreements.
      2. Enforceability of Options vis-à-vis the concept of free transferability of shares of a public company enshrined under Section 111A of the Companies Act and SCRA:
         • The decision in Madhusoodhan Case is an authority on the proposition that consensual agreements between particular shareholders relating to their specific shares do not impose restriction on the transferability of shares. Further, such consensual agreements between particular shareholders relating to their shares can be enforced like any other agreements.
         • Though Messer Holdings Case recognises the rights inter se among shareholders in case of restrictions on transfer of shares by providing a more liberal interpretation it is a High Court judgement. Therefore, for blanket transferability restrictions on all shareholders, the law still is still unclear.
         • Further, MCX Case recognises enforceability of the Options under SCRA. However, Supreme Court has set aside the order against SEBI. Nonetheless, we believe the Bombay High Court judgment has precedent value.
         • Unless, Messers Holding Case is endorsed by the Supreme Court or the new Companies Bill 2013 comes into force, this issue remains contentious. Until further development, parties can draw comfort from the ruling of the Bombay High Court in the MCX Case and enter into Option agreements.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)

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[1] SEBI Notification No. G.S.R. 219(E) Dated 2 March, 2000 under Section 16(1) of the SCRA
[2] (1992) 1 SCC 160
[3] 1999 97 CompCas 301 Guj
[4] (2004) 9 SCC 204
[5] 2006 (131) CompCas 42 Del
[6](2010) 154 Comp Cas 593 (Bom)
[7] 2010(5) BomCR589
[8] 2010(5)BomCR59
[9] AIR 1956 Bom 74
[10] (2008) 143 Comp. Cas. 204 (Bom)
[11] 2011(113)BomLR2487

SEBI NOTIFIES THE REGULATIONS ON NON-CONVERTIBLE REDEEMABLE PREFERENCE SHARES

Securities and Exchange Board of India (“SEBI”) on 12 June 2013 notified SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (“Regulations”) and bestowed the much needed clarity on the issuance and listing of the non-convertible redeemable preference shares (“NCRPS”). While before notification of these Regulations, SEBI (Issue and Listing of Debt Securities) Regulations, 2008[1] and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009[2] (“Pre-existing Regulations”) were in place to deal with issuance and listing of certain securities, the Pre-existing Regulations did not cover the issuance and listing of NCRPS. Notification of the Regulations therefore bridges this gap. Given that in the last 3 (three) years, more than INR 250,000,000,000 (Indian Rupees Two hundred and fifty billion) has been raised through preference share issuance by 295 companies and that in 2011-12 alone, 147 issuers have tapped this market to raise INR 100,000,000,000 (Indian Rupees One hundred billion)[3], the notification of these Regulations is a very welcome step primarily because they offer (a) an additional opportunity to companies to raise funds by providing for listing of NCRPS and; (b) transparency in the process for issuance of NCRPS, giving the investors an opportunity to make an informed investment. The Regulations are applicable to public issue of NCRPS, listing of NCRPS issued through public issue or on a private placement basis and issue of perpetual non-cumulative preference shares and perpetual debt instrument issued by banks on private placement basis. The key features of the Regulations are as follows:

1. Lays down the procedure, conditions and compliances for issue of NCRPS in a public issue;
2. Makes the listing of NCRPS desired to be offered in a public issue mandatory and sets out the conditions for such listing;
3. Makes the listing of NCRPS issued on private placement basis optional and sets out conditions for such listing;
4. Lays down the conditions for continuous listing and trading of NCRPS;
5. Lays down the conditions for issuance of perpetual non-cumulative preference shares and perpetual debt instrument issued by banks on private placement basis; and
6. Lists down the powers of SEBI with regard to all of the above.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)

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[1] Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 are applicable to issuance and listing of debt securities. Debt securities mean non-convertible debt securities which create or acknowledge indebtedness, and include debenture, bonds and such other securities of a body corporate or any statutory body constituted by virtue of a legislation, whether constituting a charge on the assets of the body corporate or not.
[2] Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 are applicable to issuance and listing of equity shares and convertible securities.
[3]http://articles.economictimes.indiatimes.com/2013-03-07/news/37531845_1_preference-shares-equity-savings-offer document

REAL ESTATE BILL – 2013

Press Information Bureau (“PIB”) has recently made a press release[1] (“Press Release”) stating that the Union Cabinet has approved the Real Estate (Regulations and Development) Bill, 2013 (“Bill”). A copy of the Bill is still not available for the public review. However, the Press Release summarizes the object, benefits and advantage of the bill.

1. Key objects of the Bill are:
   1. To provide uniform regulatory environment;
   2. Protect consumer interest;
   3. Speedy adjudication of disputes; and
   4. Orderly growth of the real estate sector.
2. Salient features of the Bill are:
   1. Applicability: The Bill is applicable to the only to residential area. It seems that commercial premises will not be covered under this Bill.
   2. Regulatory Authority: Each state government to establish regulatory authority (“Authority”) with specified functions and powers to monitor real estate transactions. The function of the Authority is to act as a nodal agency to co-ordinate efforts regarding development of the real estate sector in each of the state.
   3. Project Registration: Promoter has to compulsorily register his project with the Authority. Further, Promoter shall disclose all details about the project (name, type, plans, partnership companies, names of persons involved with constructions, area for sale based on standardized market). Authority will grant registration to Promoter if it is satisfied that promoter has complied with all the formalities. The Bill also provides punitive provisions including canceling the registration of the Project in case the the Promoter contravenes the
   4. Agent Registration: All the real estate agents (“Broker”) are also required to be registered with the Authority to sell immoveable property. Further, the Broker will not facilitate the sale of any immovable property which is not registered with the Authority.
   5. Compulsory Deposits: Promoters will be required to deposit 70 (seventy) percent or such amount as notified by the appropriate state government, realized from the allottees from time to time with the scheduled banks. This amount shall not be used by the Promoter other than cost related to the allottees Project.
   6. Dispute Settlement Mechanism: The Authority will establish fast track dispute resolution mechanism for settlement of the disputes between the Promoter and the Allottee.
   7. Real Estate Appellant Tribunal: Appropriate government to establish Real Estate Appellate Tribunal to hear appeal against the order of Regulatory Authority.
   8. Central Advisory Council: The Council will be set up to advice the central government on implementation on the Real Estate (Regulations and Development) Act, 2013.
   9. Comments: We believe the Bill is introduced to bring evenness and consistency in the reality sector to promote orderly growth in the industry. If the bill if passed by the parliament, it will bring transparency and give tool to the end customer to take action against the Promoters in the event of the Promoters default and reshape the fairness in the reality system.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)

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[1] PIB Press Release ID: 96440 dated 5 June 2013