MAJOR FDI REFORMS| A SNAPSHOT

The Government last week issued a Press Note announcing reforms (Reforms) in 15 major sectors in respect of Foreign Direct Investment (FDI). The objective of the Government is to ease the process of foreign investments in the country and bring substantial foreign investments under the automatic route in order to avoid the delay in FDI investment in India. These Reforms are also another example of the Government’s emphasis on the ease of doing business. The Key Reforms are as follows:

1. Limited Liability Partnership (LLP): FDI in LLP was permitted under the government approval route only in sectors in which: (i) 100% FDI was allowed through the automatic route; and (ii) there are no FDI-linked performance conditions (such as minimum capitalisation norms, etc.). Also, LLPs with FDI were not eligible to make downstream investments.
   
   As per the Reforms, FDI in LLPs is now permitted under the automatic route in sectors in which 100% FDI is allowed under the automatic route and in which there are no FDI linked performance conditions. Further, LLPs with FDI are now permitted to make downstream investments in companies or LLPs engaged in sectors in which 100% FDI is allowed under the automatic route and in which there are no FDI linked performance conditions.
2. Companies owned and controlled by Non Resident Indians (NRIs):NRIs include non-residents who are Indian citizens or are Overseas Citizens of India (OCI) cardholders. Currently, investments made by NRIs on non-repatriation basis are treated at par with domestic investments made by residents. Further, for investments made by NRIs on non-repatriation basis, special dispensation for investment is allowed in construction development (i.e. FDI-linked conditions are not applicable) and civil aviation sector (there are no caps). However, the Government of India realised that larger investments can be attracted not through individuals but largely through corporate entities.
   
   Pursuant to the Reforms, the above-mentioned special dispensation is also extended to companies, trusts and partnership firms, which are incorporated outside India but are owned and controlled by NRIs. Henceforth, such entities owned and controlled by NRIs will be treated at par with NRIs for investment in India.
3. Construction Development Sector: FDI in the construction projects is permitted under the automatic route, subject to fulfilment of certain conditions. The Reforms have liberalised fulfilment of the said conditions, namely: 
   • Conditions of restriction of floor area of 20000 square meters in construction development projects have been removed;
   • Investee company’s obligation to bring in a minimum of USD 5 million within 6 months of commencement of the project has been done away with;
   • For projects under the automatic route, a foreign investor will be permitted to exit and repatriate the foreign investment before the completion of the project, provided that the lock-in requirement of three years is complied with;
   • Transfer of stake from one non-resident to another non-resident on a non-repatriation basis will not be subject to any lock-in period or to any government approval;
   • Exit is permitted at any time if the project or trunk infrastructure is completed before the lock in period;
   • Condition of lock-in period will not apply to Hotels &Tourist Resorts, Hospitals, Special Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs; and
   • 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres.
   Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in-period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period.
4. Single Brand Retail Trading (SBRT): Currently, the FDI Policy on SBRT mandates that: (a) sourcing of 30% of the value of goods purchased should be reckoned from the date of receipt of FDI; (b) products are required to be sold under the same brand internationally and that the foreign investor is required to be the brand owner or have the right to use the brand name under a legally tenable agreement with the brand owner. Also, SBRT by means of e-commerce is not permissible.
   
   As per the Reforms, the 30% sourcing rule would be triggered only after the first store is set up (and not immediately post receipt of foreign investment). For ‘state-of-art’ and ‘cutting-edge technology’, sourcing norms may be relaxed with Government approval. Also, entities with foreign investment in SBRT can sell products with an Indian brand name, and in that case the requirement of using the same brand name internationally and the foreign investor having right to use or own the brand name does not apply. Instead, Indian brands are required to be owned and controlled by resident Indian citizens and/or companies, which are owned and controlled by resident Indian citizens. Further, SBRT can now be undertaken through e-commerce platform.
5. Wholesale and Retail without Government Approval: As per the Reforms, Indian manufacturers with foreign investment would be allowed to sell their products through wholesale and/or retail formats, including through e-commerce platform, without Government approval. However, for this purpose, the manufacturer is required to be the owner of the Indian brand and manufacture at least 70% of its products (in terms of value) in-house, i.e. in India, and source at most 30% from Indian manufacturers. It is pertinent to mention herein that the requirement of sourcing 30% from Indian manufacturers is a new concept introduced by the government.
6. Defence Sector: Currently, foreign investment upto 49% is allowed in the Defence Sector under the Government approval route. Portfolio investment and investment by foreign venture capital investors (FVCIs) is restricted to 24% only. Foreign investment above 49% is also permitted, subject to approval of Cabinet Committee on Security (CCS) on case to case basis, wherever the investment is likely to result in access to modern and ‘state-of-art’ technology in the country.
   
   The Reforms have introduced the following changes:
   • Foreign investment up to 49% will be under automatic route;
   • Portfolio investment and investment by FVCIs will be allowed up to permitted automatic route level of 49%;
   • Proposals for foreign investment in excess of 49% will be considered by Foreign Investment Promotion Board (FIPB);
   • In case of infusion of fresh foreign investment within the permitted automatic route level, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, Government approval will be required.
7. Broadcasting Sector: FDI policy on broadcasting sector has also been amended. New sectoral caps and entry routes are as provided hereinbelow:
   
   

   Activity	Announced cap and route	Existing cap and route
   Teleports(setting up of up-linking HUBs/Teleports);	100% (Up to 49% - Automatic route; Beyond 49% - under Government approval route)	74% (Up to 49% - Automatic route; Beyond 49% and up to 74%- under Government approval route)
   Direct to Home (DTH);
   Cable Networks (Multi System operators (MSOs) operating at National or State or District level and undertaking upgradation of networks towards digitalization and addressability)
   Mobile TV
   Headend-in-the Sky Broadcasting Service(HITS)
   Cable Networks (Other MSOs not undertaking upgradation of networks towards digitalization and addressability and Local Cable Operators (LCOs))
   Terrestrial Broadcasting FM (FM Radio)	49% Government route	26% Government route
   Up-linking of ?News & Current Affairs? TV Channels
   Up-linking of Non-?News & Current Affairs? TV Channels	100% Automatic route	100% Automatic route
   Down-linking of TV Channels

   
   
8. Banking Sector: The Government has decided to introduce full fungibility of foreign investment in the private banking sector. Accordingly, FIIs/FPIs/QFIs can now invest up to sectoral limit of 74% after following the due procedure, provided that there is no change of control and management of the investee company.
9. Enhancing limits for certain sectors: Foreign equity caps of (a) Non-Scheduled Air Transport Service; (b) Ground Handling Services; (c) Satellites- establishment and operation; and (d) Credit Information Companies have now been increased from 74% to 100%. Further, sectors other than Satellites-establishment and operation have been placed under the automatic route.
10. Tea/Coffee/Rubber/Cardamom/Palm Oil & Olive Oil Plantations: 100% FDI to be allowed under automatic route in the said sectors. Currently, FDI is not allowed in either of the above (except tea plantation where FDI is allowed under the approval route).
11. Single entity to carry out both Wholesale and SBRT: As per the current FDI policy, 100% foreign investment is permitted under the automatic route in wholesale cash & carry activities (e.g. Metro Cash and Carry Stores), but a wholesale/cash & carry trader cannot open retail shops to sell to the consumer directly (i.e. only B2B is permitted).
    
    Now, as per the Reforms, it has now been decided that a single entity will be permitted to undertake both the activities of single brand retail trading and wholesale with the condition that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by both the business arms separately.
12. Companies without Operations: Government approval is not required for infusion of foreign investment into an Indian company which does not have any operations and any downstream investments, for undertaking activities which are under automatic route and which have no FDI-linked performance conditions, regardless of the amount or extent of foreign investment.
13. Transfer of Ownership and Control of Indian Companies: Currently, the FDI Policy provides that approval of the Government will be required for establishment and ownership or control of an Indian company in sectors/activities with caps.
    
    However, as per the Reforms, this provision has been amended to provide that approval of the Government will be required if the company concerned is operating in sectors/ activities which are under Government approval route rather than capped sectors. Further, no approval of the Government is required for investment in automatic route sectors by way of swap of shares.
14. Simplification of Conditionalities: It has been announced in the Reforms that certain conditions of FDI policy on Agriculture and Animal Husbandry, and Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities have been simplified. However, the details with respect to these reforms have not been announced yet.
15. Raising the threshold limit: As per the FDI policy, FIPB considers proposals having total foreign equity inflow up to Rs. 3000 crore and proposals above Rs. 3000 crore are placed for consideration of Cabinet Committee on Economic Affairs (CCEA). In order to achieve faster approvals on most of the proposals, it has been decided that the threshold limit for FIPB approval may be increased to Rs.5000 crore.

MHCO COMMENT

Overall, we believe the aforesaid Reforms are a dynamic step to integrate the Indian market with the rest of the world for attracting investments, technology, and enhancing India’s position destination as a destination for foreign investments.

This article was released on 17 November 2015.

AMENDMENT TO INDIAN ARBITRATION ACT

Very recently the president of India has promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2015 (“Ordinance”). The Ordinance seeks to achieve major changes in the (Indian) Arbitration and Conciliation Act 1996 ("Arbitration Act") that may be helpful in conducting the arbitral proceedings more effectively and may also help attract more foreign investment.

The Ordinance makes following key amendments to the Arbitration Act:

• Expeditious Appointment: The arbitrator is to be appointed expeditiously and most preferably within a period of 60 days. The Ordinance further imposes a restriction on the Courts under Section 11 from exercising its powers other than examination of the validity of the arbitration clause alone.

• Relationship: Section 12 imposes an obligation on the arbitrator to make a clear disclosure in writing of any relationship whether past or present or any vested interest thereof. In the event of any established relationship, the person shall not be eligible to be appointed as an arbitrator.

• Time Bound Arbitration: In order to have a time bound arbitration proceeding, the Ordinance provides for a time period of 12 months for passing of the award from the initiation of the proceeding. The period may further be extended by a further period of 6 months only with the consent of the parties. The Ordinance imposes a further restriction on extension of time beyond the period of six months. If at all the parties want further extension they will have to approach the court. If they are able to show sufficient cause the court may extend the period further. While so extending the period, the courts are empowered to reduce the fees of the arbitrator up to 5% for each month of such delay and can also substitute one or all the arbitrators. If the arbitration is not completed within the prescribed time limits the mandate of the arbitrator shall terminate.

• Fast Track Procedure: The Ordinance also provides for a fast track procedure for settlement of the disputes with mutual consent of the parties. Under this method, the parties will choose a sole arbitrator. Further, the parties agree to have the arbitration based on written pleadings, documents and submissions without any oral hearing. Oral hearing shall be held only if the parties make a request to the arbitral tribunal. Under this method, the award has to be made within 6 months from the date of reference.

• Challenges in the name of Public Policy: The Ordinance provides for an amendment in Section 34 of the Act giving a restricted meaning to the use of the term “Public Policy of India”. This is important because the courts had given a very wide interpretation to the term ‘public policy’. Therefore, mostly all awards could be challenged on the ground of ‘violation of public policy’ under Section 34 of the Act. The restriction of the definition will give the courts a limited chance to use this ground to set aside an arbitration award and the same is permitted only in the case wherein the award was passed fraudulently or in contravention of any fundamental policy of Indian Law or which is against the most basic principles of morality or justice.

• Stay of an Award: The Ordinance provides for amendment of Section 36 such that filing of an application for challenge of an award would not automatically stay execution of an award. The award shall be stayed only in the event the court passes an order to such effect.

• Interim Orders: Under Section 9 of the Act, any interim measure for protection pronounced by the Court, the arbitration proceedings must commence within a period of 90 (ninety) days from the court passing the order. It is also provided that no application for any interim measure shall be entertained after the constitution of the arbitral tribunal unless the court is of the opinion that the circumstances may not render the remedy provided under Section 17 is effective. Section 17 also provides that after the arbitral award is passed but before the award is enforced in accordance with Section 36, the party may apply to the arbitral tribunal for the following reasons:

* Appointment of a guardian for minor or person of unsound mind;

* Securing the amount in dispute in the arbitration;

* Measuring protecting goods, or amount of money, or property which is subject matter of the    dispute;

* Interim injunction or appointment of receiver.

• Time and cost effective: In addition to the aforesaid, further amendments have been proposed to be made in Section 2(1)(e),(f)(iii), 7(4)(b), 8(1) and (2), 14(1), 23, 24,25, 28(3), 37, 48, 56 and 57 for making the process of arbitration more time and cost effective.

MHCO COMMENT

The Ordinance has indeed set out very important amendments that were required to overhaul the old school laws that were very biased and time consuming which acted as a deterrent in attracting foreign investment in the country. This positive change in the legal system shall be only a huge relief for litigants subject to the effective implementation of the Ordinance by the Indian courts.

This article was released on 6 November 2015.

(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.)

OFFICE SHARING ARRANGEMENT AMONG FOREIGN OWNED AND CONTROLLED COMPANIES | IS IT A REAL ESTATE TRANSACTION?

Recently, Department of Industrial Policy and Promotion (DIPP), via a Circular clarified that facility sharing arrangements between group companies through leasing/ sub-leasing arrangements shall not be treated as ‘Real Estate Business’ under the Foreign Direct Investment (FDI) Policy for the larger interest of business (subject to two conditions, elaborated below). This update up goes on to enunciate how this clarification will cause more problems than it solves.

FDI Policy: Under the FDI Policy, Indian companies which are recipient of any FDI are prohibited from engaging in `Real Estate Business`. Recently via press note 10 of 2014, DIPP defined the term `Real Estate Business` to mean `dealing in land and immoveable property with a view to earning profit or earning income there from and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.`

Notably, the phrase ‘dealing in land and immoveable property’ includes within its ambit not only buying and selling of, but all transactions in relation to, land and immoveable property. Consequently, the phrase includes any lease or sub-lease entered into in relation to an immoveable property.

In India, it is a common practice for one company in a group to own/ lease office space and own facilities, which are then shared by other group companies. The use of office space by the other group companies is generally not done by leasing/ sub-leasing transaction but rather by entering into facility sharing arrangement. The reason is that leasing and sub-leasing entail creation of interest in the property while the facility sharing arrangement entitles the other group companies to merely use the premises like a license. Transactions of the latter nature address the commercial intent, i.e. one of the group companies bears the cost of the office space while the other group companies also use it. However, the DIPP Circular relates to arrangements of former nature which are not only rare but are also far from commercial reality, therefore the utility value of the DIPP Circular is a question mark.

Further, similar arrangements are also done for sharing servers, cafeteria/ water purifier services, elevators, key managerial officers etc. But as these are movable properties, they are not a subject matter of the DIPP Circular. It is also not clear if such transactions makes the lessor company a ‘service provider’ and therefore makes it liable to pay service tax.

Condition in DIPP Circular: DIPP Circular prescribes two conditions, and if the facility sharing arrangements between group companies through leasing/ sub-leasing arrangements conform with such conditions, they will not be categorised as ‘Real Estate Business’ transactions under the FDI Policy. This means that a FDI recipient Indian company will be permitted to act as a lessor in transactions of such nature. These conditions are the (a) arrangements should be at an arm’s length price calculated as per the Income Tax Act, 1961 (IT Act) and (b) annual lease rent earned by the lessor company should be less than 5% of such lessor company’s total revenue.

On analysing the two conditions closely, it will not be wrong to say that the lose drafting of the DIPP Circular gives rise to a number of problems.

Arm’s length pricing: How should the arm’s length price be calculated? As per the IT Act, arm’s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. Now, if a company permits the use of its office space by its group companies on arm’s length price, the company will have to charge the group companies for such usage and a mere reimbursement will not do. If so, such arrangements shall yield profits for the company. This would mean that office space leasing/ sub-leasing would become a business of the company.

Issues under the company law due to arm’s length pricing: Given that due to the above calculation, the office space leasing/ sub-leasing would become a business of the company, it will have to be inserted as one of the objects of the company in its Memorandum of Association, in spite of the fact that the company in reality has no intention of engaging in any ‘Real Estate Business’. Further, as the group company will be a related party, such an arrangement (not being in the ordinary course of business) will require a board or shareholder’s approval (as the case may be) in terms of section 188 of the Companies Act, 2013.

Limit on the annual rent lease: Furthermore, for a facility sharing arrangement to not qualify as a ‘Real Estate Business’ transaction, the Indian company with FDI will have to ensure that the annual rent earned by it due to the facility sharing arrangements does not exceed 5% of its revenue. (a) Now, in the event the office space of a company is shared by multiple group companies then there is a possibility that the sum total of the rent earned from all such group companies together exceeds 5% of the company’s revenue, to meet the arm’s length pricing condition. (b) Secondly, in multiple cases the office space is owned or leased by a less revenue generating company and therefore it will be difficult for the company to ensure that the annual lease rental earned by it does not exceed a meagre 5% of its revenue. (c) Thirdly, as the revenues of a company fluctuate on yearly basis, the annual rent will have to be determined at the end of the year (so that the lessor company’s revenue figures are frozen) rather than at the beginning of the contractual cycle of the facility sharing arrangement.

Apart from all the above complications, looking objectively at the DIPP Circular, one does not understand its need. Office space sharing arrangements between group companies are not entered into to make profits and therefore cannot be construed as a ‘Real Estate Business’. These transactions are done for commercial ease.

MHCO COMMENTS

DIPP Circular has complicated an uncomplicated situation as it categorises transactions which are not in the nature of `Real Estate Business` as transactions for `Real Estate Business`. The situation has become further obscure by introduction of impractical and conflicting conditions (with no thought given to the consequences of complying with such conditions), to be met to qualify such anyway `Not Real Estate Business` transactions into `Not Real Estate Business` transactions.

(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.)

NET NEUTRALITY

In the last few months, net neutrality has been an intensely contested and debated topic in the field of telecommunications law. Net neutrality is the core principle governing internet. Telecom operators and internet service providers through technology can now control the speed of internet to access few of the websites, contents of internet, etc. Net neutrality essentially means ensuring that the users have equal access to all sites, at the same access speed for each site (independent of telco selection) and at the same data cost for access to each site. It is of utmost importance that this access to internet be neutral so as to ensure access to knowledge at the same rate and also to ensure equal freedom of doing online business.

INTRODUCTION OF AIRTEL ZERO

Airtel Zero plan announced in April 2014, violated the principle of net neutrality and would have split the internet into two a free internet and a paid internet. Such a scheme would allow internet companies to buy data from certain websites and only such sites would be available on a free internet. The result would be that users shall get access to only limited internet sites on the free internet. Further, every time a user of this scheme tried to access a site that was not available as part of the free internet, he/she would be notified that he/she cannot use that site without buying a data pack. It is likely that the consumers would continue using the free internet rather than buy a data pack. Therefore, the launch of the Zero plan led to a public uproar against the Airtel propaganda. By the end of December 2014, Airtel announced that it would not be implementing the scheme and shall await further directions from Telecom Regulatory Authority of India (TRAI).

ROLE OF TRAI

In March 2015, TRAI released a consultation paper on the regulatory framework for Over The Top (OTT) services such as Skype, Whatsapp, Viber, GoogleTalk, etc. The objective of this consultation paper was to analyse the implications of the growth of OTTs and consider whether or not changes were required in the current regulatory framework. This paper was criticised for being lop-sided in the favour of a differential price for the Internet Services Provider and for having contradictory statements. In April 2015, TRAI invited the public to express their opinions on this debate and received over a million emails.

In May 2015, Telecom Minister has said that the Government is in favour of ensuring non-discriminatory access to the Internet for all citizens of the country and would in most likelihood disallow controversial 'Zero Rating' plans floated by companies which do not meet the principles of net neutrality.

A six-member committee was constituted by the Department of Telecom to examine various aspects of net neutrality. This committee recommended that zero-rating plan does not violate net-neutrality and urged the government to adopt the policy of net neutrality, as it is globally defined. It also took the view that since this matter is essentially tariff-related; the final call should to be taken by TRAI, which is the ultimate authority on tariffs for the telecom sector.

ARGUMENTS OF TELECOM OPERATORS

Telecom companies argue that they have spent billions of dollars in setting up infrastructure and building telecom networks. They have been subjected to strict regulatory scrutiny, and yet millions of applications unfairly ride free on their networks. Many of these applications are worth billions of dollars and have millions of subscribers. Applications such as Skype, Viber, WhatsApp, etc compete with the voice and message offerings of the telecom companies, thus reducing their income.

ARGUMENTS OF CONSUMERS

It is worth noting that telecom companies do benefit from the applications that piggy-back on them. Increased usage of applications indicates more data consumption and more inflow of money. The licence to violate net neutrality could have a disastrous impact on justice as telecom companies would be in a position to ensure some sites are served faster than others, as certain companies will receive paid prioritization over others.

It could also become costlier for the users to use certain applications. The user would not experience the rest of the web world outside of the zero-rated sites and many would be denied the knowledge of what their choices on the internet are, violating their right to choose. They would miss out on all the new applications launched globally. Further, it would be harder for small Indian companies to raise the funding to enable them to be featured on this new free internet thus, resulting in only the bigger companies being available to the masses which are more than likely to opt for free internet.

They also contend that this affects the entrepreneurial aspirations of millions by blocking the opportunity that various start-ups such as Google, Facebook and Flipkart had. The internet governs the world of business, communication and entertainment amongst numerous other things. Rejecting net neutrality gives telecom companies the unrestrained power to play the gatekeeper to a valuable resource. It goes without saying that this will unleash price discrimination and monopolistic tendencies in the market.

Naturally, if Airtel is permitted to go ahead with its zero-rated plan, every other telecom operator will follow suit. Telecoms could enter into exclusive deals by which some services are available to only certain telecom networks. Telecom networks do not want to be merely communication pipes that agnostically transfer data. The cost of their ambition will be the loss of the Internets openness.

MHCO COMMENT:

There are presently no laws enforcing net neutrality in India. Although TRAI Guidelines of 2003 for Unified Access Service License promote net neutrality, it does not enforce it. However, the consultation paper released by TRAI in March 2015 after taking into consideration Airtels Zero rating plan is in conflict with its guidelines published in 2003. Internet users await the final decision of TRAI on this crucial matter.

(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.)

Companies (Amendment) Act, 2015

The Companies Act, 2013 (Companies Act) which is still partially to be implemented has been recently amended and notified by the Companies (Amendment) Act, 2015. The amendments are primarily incorporated for ease of doing business, meet the corporate needs and for removal of inadvertent errors. The following are the key changes that have been incorporated in the new Companies Act:

Minimum Paid-Up Capital: The earlier requirement of minimum paid up capital for private companies was Rs 1,00,000/- and for public companies was Rs 5,00,000/-. The amendment has now omitted the requirement of minimum paid up capital for both private and public companies for the ease of doing business.

Common Seal: Section 9 of the Companies Act, required a company to mandatorily have a common seal. The said requirement has been done away with. Further, there are consequential changes incorporated in Section 12(3)(b), Section 22 (2)(a) and Section 46 of the Companies Act with regards to the Common Seal. The amendment now provides that the signature of the officers of the Company shall suffice for legally binding the Company.

Prosecution for Accepting Deposit from Public: A new Section 76A has been inserted which provides for severe punishment including criminal liability against the officer of the Company for violation of provisions of the Companies Act in relation to acceptance of deposits from general public.

Resolution and Agreements: Section 117 of the Companies Act has been amended by inserting a proviso after section 117(3)(g) in order to restrict the inspection or obtaining of copies of board resolutions under Section 399 with the intent to keep certain information confidential.

Declaration of Dividend: Section 123(1) has been amended by inserting the provision whereby a company cannot declare dividend unless the carried over previous losses and depreciation not provided in the previous year(s) are set off against profit of the Company to provide financial stability to the companies.

Reporting of the Fraud: Section 134(3)(ca) and Section 143(12) have been inserted with respect to reporting of the fraud by the board and auditors respectively to increase transparency and also cast a duty on them to report the fraud. Further, an amendment to Section 143(12) now seeks to restrict the auditors obligations and limits it to report only material frauds to the Central Government which will bring great relief to both corporates as well as auditors.

Loans to subsidiary company: Section 185 inter alia prohibits a company (A) from extending loans/ guarantees to another company (B) if the director of A is interested in B. Earlier the Rules and now this amendment clarifies that if B is a wholly owned subsidiary of A then this prohibition is waived. It further waives such a prohibition if A gives guarantee in respect of a loan taken by B from any bank or financial institution, where B is a subsidiary of A.

Related Party Transactions: Section 188 has been amended whereby the approval of shareholders can be by way of an ordinary resolution as compared to previously required special resolution for related party transactions. The amendment further provides that the requirement of passing ordinary resolution shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval. 

Special Bench: Section 419(4) provides that the president shall, for disposal of any matter relating to rehabilitation, restructuring, reviving and winding-up of companies constitute one or more special benches consisting of three or more members, majority necessarily being of judicial members. This section has now been amended and the word "winding-up" now been deleted which means that winding up matters shall be heard by an two member bench instead of a three member bench. Amendment of this provision would help in deciding winding up cases promptly. Further, Section 435(1) and section 436(1)(a) have been amended to reduce the burden on special courts such that special courts shall now try offences which are punishable with imprisonment of two or more years. Simultaneously, an additional provision is inserted in sub clause (1) of section 435 for the purpose of allowing a magistrate to try offences resulting in minor violations of the Companies Act.

MHCO COMMENTS:

This amendments signify that government is continuing to examine the Companies Act, 2013 with the aim to improving and ease of doing business in India. The aforesaid amendments are substantive and welcome.

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 legalupdates@mhcolaw.com for any assistance.

Extension of the fundamental right to freedom of speech and expression to the online world by the Apex Court

The Supreme Court of India in its judgment of Shreya Singhal vs Union of India delivered on 24 March 2015, addressed the issues raised in several writs with respect to the constitutionality of sections 66A, 69A and 79 of the Information Technology Act, 2000 (IT Act). The judgment has brought an end to a plethora of debates and excessive criticism with regards to the IT Act along with the power it confers on the State to curb freedom of speech and expression, a right guaranteed under Article 19(1)(a) of the Constitution of India.

Section 66A of the IT Act made punishable the sending by computer resource or communication device any offensive or menacing information, any information to cause public annoyance, inconvenience and the like.

Section 69A of the IT Act and rules thereunder bestow power to the government to block public access to any information on computer resource in the interest of sovereignty and integrity of India, defence of India, security of the State, friendly relations with foreign States or public order or for preventing incitement to the commission of any cognizable offence relating to aforesaid.

Section 79(3)(b) of the IT Act and the relating intermediary rules make the intermediary liable in case the intermediary fails to remove/ disable access to information, data or communication link residing in or connected to a computer resource controlled by the intermediary upon receiving actual knowledge or upon government notification.

Background:

This verdict has come following atrocious cases of persons being arrested for uploading posts and opinionated comments from their respective accounts on Social Networking sites and for expressing their point of view publicly. In November 2012, two young girls were arrested for allegedly posting content against the Mumbai shut down. Both the girls were charged under Section 66A of the IT Act. A similar incident took place in Uttar Pradesh where a Class XI student was arrested under the same section for allegedly posting defamatory opinion about the political party. The arrest was justified as necessary according to the Circle Officer as according to him it could incite communal tension. There have been similar cases of persons being charged under the sections mentioned in the introductory paragraphs. Following this, a PIL was filed in the Supreme Court in 2012 by a law student contending that Section 66A, Section 69A and Section 79 of the IT Act are unconstitutional being violative of Articles 19(1)(a) and 14 of the Constitution of India, i.e. right to Freedom of Speech and Expression and Right to Equality. This petition was clubbed with nine other petitions and was heard by a division bench of the Apex Court after which this progressive judgment was pronounced.

Judgement:

The Apex Court struck down Section 66A of the IT Act in its entirety as being unconstitutional while upholding the constitutional validity of Section 69A. Further, the Court declared Section 79 as constitutionally valid but subject to being read down with Section 79(3)(B) to mean that content must be taken down under a court order.

Reasoning by the Apex Court:

• Section 66A:
  
  The Supreme Court analysed the provisions of Section 66A of the IT Act in relation to the fundamental right granted under Article 19(1)(a) for freedom of speech and expression under the Constitution. The Apex Court elucidated the three concepts which are essential to comprehend the reach of Article 19(1)(a), i.e. discussion, advocacy and incitement. The Court has held that it is only when discussion or advocacy reaches the level of incitement that the exception to the right laid down under Article 19(1)(a), i.e. Article 19(2) can be triggered allowing state to impose restrictions. It is measuring on this count that the Court has held that section 66A of the Act does not fall within the exception of `reasonable restriction` as laid down under Article 19(2) of the Constitution. For the latter, the Supreme Court analysed each of the elements of Article 19(2) which the Union of India raised in its defence, i.e. public order, decency/ morality, defamation, incitement to an offence and negatived the arguments of Union of India that due to the above elements section 66A falls within the ambit of Article 19(2) of the Constitution.
  
  The Court seemed to have accepted the argument of the Union of India that section 66A is not hit by Article 14 of the Constitution of India, which postulates the fundamental right of right to equality. This is because it recognized an intelligible differentia between speech on the internet and other mediums of communication for which separate offences may be created by the legislation.
  
  The Apex Court held this Section 66A ``affects the freedom of speech and expression of the citizenry of India at large`` as it creates an offence against the Indian citizens who use the internet.


• Section 69A:
  
  The Supreme Court found that this section falls within the elements of `reasonable restrictions` provided as exception to the fundamental right of freedom of speech and expression bestowed on the citizens of India under Article 19(1)(a) of the Constitution. Further it has found that there are several checks and balances built into Section 69A of the Act. Moreover, it has stated that as the reasons for blocking are to be recorded in writing the same are appealable by way of a writ petition. Given the aforesaid reasons, the Apex Court has held that Section 69A as well as the rules thereunder are constitutional.


• Section 79(3)(b) read with intermediary rules:
  
  While upholding the constitutional validity of these sections, the Supreme Court has held that both Section 79(3)(b) and Rule 3(4) of the Intermediary Rules are to be read down to mean that the intermediary must receive a court order / notification from a government agency requiring the intermediary to remove some specific information. The Court has clarified that any such court order or notification must mandatorily fall within the ambit of the restrictions under Article 19(2) of the Constitution.

MHCO COMMENT

The striking down of section 66A is a progressive move as India has experienced the draconian effect of this section in the past. This section was akin to creating a police state in India and sought to create a restriction on the fundamental rights of citizens in an arbitrary fashion. The Court has correctly stated that what may be offensive to one person may not be offensive to another and what may cause inconvenience to somebody may not be inconvenient for someone else.

One of the reasons why the Supreme Court has upheld section 69A of the Act is because the reasons for blocking have to be recorded in writing and therefore can be appealed in the writ. However, on a scrutiny of the section it is nowhere to be found that the reasons for orders should be published or handed over to the owner. Therefore, while this judgment impliedly directs that such order be made available to the owner of the content, the rules thereunder may have to be framed for implementation of the Apex Court`s observation, i.e. which agency can issue such orders, which agency would publish it etc.

The reading down of section 79(3) of the Act may create some trouble as the court has held that it is only upon receipt of a court order that the intermediary will be under an obligation to remove data connected to a computer resource under its control. This therefore means that upon receipt of third party complaints an intermediary will not be obliged to block access to information.

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 legalupdates@mhcolaw.com for any assistance.

INSURANCE BILL PASSED| INCREASE OF FDI

Both the Lok Sabha and the Rajya Sabha have earlier this month on 3 March 2015 passed the Insurance Amendment Bill 2015 (`Insurance Bill`). The Insurance Bill now awaits the presidential assent. Insurance Bill majorly amends the Insurance Act, 1938, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999.

On 26 December 2014 Insurance Laws (Amendment) Ordinance, 2014 (Insurance Ordinance) was effected to bring about these changes to the insurance laws including increase in the foreign direct investment (`FDI`) limits. Upon receipt of the presidential assent the Insurance Bill will replace the Insurance Ordinance. The Insurance Bill is in line with the Budget Speech of 2015 and the Ordinance. It seeks to create an investor friendly environment in country to achieve investment, economic growth and job creation in the insurance sector.

The amendments that are brought about by the Insurance Bill to various insurance legislations are as mentioned herein below:

1. Increase in FDI Limit:
   With the intend to boost insurance sector, the FDI in insurance companies raised from the earlier cap of 26% to 49%. The Foreign Investment upto 26% will fall under automatic route while any further investment upto 49% will attract government route. 49% cap shall include direct, indirect as well as foreign portfolio investment. Further, bifurcation is provided for Foreign Portfolio Investment to include foreign institutional investors, qualified financial investors, foreign portfolio investors and non-resident investors. It is further clarified in the Press Note that the foreign company bringing in capital shall be required to obtain requisite licenses from the Insurance Regulatory Development Authority of India (`IRDA`).
2. Ownership and Control:
   Indian insurance Company has to ensure that the ownership and the control at all times remain in the hands of the resident Indian entities. The definition of ownership and control will be the same as defined under the FDI Policy.
3. Inclusions:
   FDI limits in the insurance sector would be applicable to insurance brokers, third party administrators, surveyors, loss assessors and other insurance intermediaries appointed under applicable IRDA regulations.
   FDI Policy was silent on the applicability of the FDI limits in intermediaries. Certain specific regulations governing the intermediaries other than those specified therein. However, now with the mention of `other insurance intermediaries` this ambiguity has been addressed as it is made clear that FDI limits are applicable to all intermediaries.
4. Banks as Insurance Intermediary:
   A bank functioning as an insurance intermediary has been exempted from applicability of FDI limits. However, this exemption is only available to banks if their revenue from insurance related business is more than 50 % of their total revenues during the financial year. The provisions under paragraphs 6.2.17.2.2(4) (i) (c) & (e) which related to the Banking Private Sector shall be applicable in respect of the bank promoted insurance companies.
5. Industry Councils:
   Life Insurance Council and General Insurance Council are are made self regulating bodies to frame the bye laws for elections, meetings levy and collect fees etc.
6. Powers of IRDA:
   IRDA is entrusted with additional responsibilities of appointing insurance agents to insurers. IRDA is now to regulate their eligibility, qualifications and other aspects. IRDA is now empowered to regulate the key aspects of the operations of insurance companies in areas of solvency, investments, expenses and commissions to formulate regulations for payment of commission and control of management expenses. Authority is given to regulate functions, code of conduct etc of assessors and loss surveyors. The scope of the insurance intermediaries is expanded to include insurance brokers, re insurance brokers, insurance consultants, corporate agents, third party administrators , surveyors, loss assessors and such other entities as may be notified from time to time.
7. Securities Appellate Tribunal:
   The appeals against the decisions of IRDA shall lie with the Securities Appellate Tribunal set up under the SEBI Act, 1992.
8. Penalties:
   The penalties for defaults have been raised to Rs. 25 crores and imprisonment upto 10 years in certain cases. These penalties are levied safeguard the interests of consumers.

MHCO COMMENT

It is interesting to note that as per the IRDA`s annual report of the year ended 2014 - out of 23 private life insurers, more than 20 had foreign investment of above 22% and out of 17 non-life insurers in the private sector, 14 had more than 22% foreign investment. However, the Indian insurance sector has not seen growth for a long duration of time for the paucity of funds. The Insurance Bill is therefore beneficial for the economic growth of the country as it will encourage foreign investments in the insurance sector in India which is the need of the 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 legalupdates@mhcolaw.com for any assistance.

BOMBAY HIGH COURT | NON-SIGNATORIES BOUND BY ARBITRATION AGREEMENT

The Bombay High Court (BHC) in a recent judgment of Rakesh S Kathotia and Anr vs Milton Global Limited and Ors applied the group of companies doctrine upheld by the Apex Court in the Cholro Controls India Private Limited vs Severn Trent Water Purification Inc. & ors. (2013) 1 SCC 641 whereby an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates.

Background:

1. This case was an appeal before the division bench of BHC from an order passed by the single judge of the BHC in arbitration petition (Petition) dismissing the application under Section 9 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). The primarily ground for dismissal of the Petition by the single bench was that there is no `identity` of the parties to the arbitration agreement, as contained in the Joint Venture Agreement dated 14 July 2001 (JVA) and the parties to the application.
   
   
   
2. Under the JVA, Subhkam Group and Vaghani Group jointly constituted Milton Global Limited, a joint venture company (JVC) each holding 49.99% and 50.01% respectively. The management of JVC was vested in a board of directors to be appointed by the Subhkam Group and Vaghani Group. Under the JVA, the Subhkam Group and Vaghani Group were defined as follows respectively:

• The Subhkam Group shall mean Mr Rakesh S Kathotia and such other entities controlled by him or his immediate relatives or his group companies directly or indirectly.

• The Vaghani Group shall mean Milton Plastics Limited Mr Dineshkumar Ishwarlal Vaghani, Mr Kanaiyalal Ishwarlal Vaghani, Mr Chirnajiv Ishwarlal Vaghani, Mr Nilesh Ishwarlal Vaghani and Mr Madhup Bansilal Vaghani and their immediate relatives taken together and such other entities controlled by them or their immediate relatives directly or indirectly.

3. Dispute arose between the parties under the JVA, wherein the Subhkam Group alleged that Vaghani Group set up a competitive company and siphoned the business of JVC to the competitive company. Subhkam Group filed a Section 9 Arbitration Petition before the single bench of the BHC. Single Judge of the BHC dismissed the said Arbitration Petition solely on the ground that there was no identity of the parties to the JVA and parties against whom the interim measured were sought. This order of single bench was challenged before the division bench of the BHC.

DIVISION BENCH ANALYSES

4. BHC in its judgment observed that the parties to the JVA were not merely the named individuals or entitles. After perusal of various clauses of the JVC, BHC came to the conclusion the JVA was executed between `Vaghani Group` and `Subhkam Group` as defined under the JVA.
   


5. BHC further observed that that the terms and phraseology contained in the agreement cannot be ignored rendering it meaningless. A commercial document should be interpreted having regard to words and phraseology therein and no term/phrase should be treated as meaningless, especially if they are consistent with the other parts of the agreement. In case of ambiguity, the `intention` of the parties should be determined and honored to the extent possible.
   


6. BHC in the light of the aforesaid reasons held that the said arbitration petition, could not have been dismissed on the ground that there was `no identity between the parties` to the arbitration agreement and the parties to the arbitration petition. Hence, the non-signatories will be bound by the JVA.
   


7. However, BHC after determining the maintainability of the said arbitration application on identity of the parties, rejected the appeal on the merits of the case.

MHCO COMMENT

The Supreme Court has in the past upheld this theory and has applied it in a number of arbitrations so as to justify a tribunal taking jurisdiction over a party who is not a signatory to the contract containing the arbitration agreement. By following the Supreme Court`s judgement, the BHC has shown that it is open to interpreting an arbitration agreement in a broad manner and is willing to look into the intention of the parties to analyse as to whether non-signatories to the agreement will be bound by the agreement in terms of the words and phraseology of the agreement. This, in our view while this is an interesting judgment parties must be very cautious while drafting their agreements. While this doctrine is being promoted by the courts to further the intentions of the parties there is a high chance of abuse of the doctrine. A draftsman has to be more responsible and use correct and watertight language in agreements. He has to be very cautious with the words in which it couches the party references when casting any duties, obligations or granting rights under an agreement as the courts are showing willingness to look beyond the technicalities. We expect that there will be endeavour to stretch the application of this principle beyond arbitration proceedings, to civil suits and criminal actions.