SEBI REFORMS | NEW INSIDER TRADING REGULATIONS

Securities and Exchange Board of India (``SEBI``) last week approved SEBI (Prohibition of Insider Trading) Regulations, 2014 (``New Regulations``). This update will briefly examine the revisions proposed by SEBI in its New Regulations.

Background: SEBI constituted a committee under the chairmanship of Justice N K Sodhi (``Committee``) to strength the regulatory framework in dealing with the insider trading regulations in India. The Committee in December 2013 submitted a comprehensive report and recommend a new set of insider trading regulations. SEBI last week in its board meeting broadly approved the recommendation of the Committee and substituted old regulations with New Regulations. While the text of the New Regulations is still to be published and notified, following are the key changes approved by the SEBI Board.

Key Changes in the New Regulations

• Definition of Insider: The definition of `Insider` has been widened to include person connected on the basis of being in any a) contractual; b) fiduciary or c) employment relationship that allows such a person to access unpublished price sensitive information (UPSI). Further, Insider will also include a person who is in possession or has access to UPSI

• Immediate Relatives: Immediate relatives will be presumed to be connected persons, with a provision of right to challenge this presumption. SEBI in past has faced several difficulties in showing evidence for passing of UPSI to an immediate relative. With this proposed amendment, the burden of proof will now shift on the immediate relative to prove that he or she did not hold UPSI before trading the securities.

• UPSI Strengthened: UPSI under the old regulations was been defined as information not generally available and which may impact the price. The New Regulations strengthens the definition of UPSI by providing a test to identify price sensitive information, aligning it with listing agreement and providing platform of disclosure. Earlier, the definition of price sensitive information had reference to company only; now it has reference to both a company and securities. Further, generally available information means information that is accessible to the public on a non-discriminatory platform which would ordinarily be stock exchange platform.

• Legitimate Business Transaction:: Aligning insider trading norms with international practices and facilitate legitimate business transaction, SEBI now intends to permit access of UPSI though due-diligence with appropriate safe guards. This provision will make it easier for private equity and strategic investors for accessing UPSI during their due diligence. However to maintain the information cemetery, UPSI must be disclosed at least 2 days before the trading.

• Management holding UPSI: Insiders who are liable to possess UPSI all round the year i.e. CEO, CFO and senior management of the company, would now have the option to formulate pre-scheduled trading plans. Trading plans would, however, will be required to be disclosed on the stock exchanges and have to be strictly adhered to.

• Ease of Compliance Burden: Repeated disclosures have been removed so as to ease compliance burden and to align with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (``Takeover Code``). Disclosure of any change of 2% for persons holding more than 5% shares or voting rights has been removed as they are prescribed under Takeover Code.

MHCO COMMENT

Broadly, the changes proposed by SEBI are significant. It primarily endeavours to provide a good legal system and broadening the definition of insider to curtailing any person from wrong trading in securities who has advantage of having asymmetrical access to unpublished information. However, we will have wait for wordings of the New Regulations for its true interpretation. 

(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.)

GOVERNMENT RELAXES FDI NORMS FOR CONSTRUCTION DEVELOPMENT SECTOR | BOOST TO AFFORDABLE HOUSING

The Union Cabinet chaired by Prime Minister of India on 29 October 2014 consented to amend the Foreign Direct Investment (FDI) policy in construction sector i.e. Townships, Housing, Built-up infrastructure.

The key amendments are as follows:

• Minimum area to be developed: (a) The minimum built up area has been reduced from 50,000 square meters to 20,000 square meters for construction development projects (b) The term ``service housing plot`` has been replaced by ``service plots`` allowing companies to have commercial plots. Further the minimum built up area for plot has been reduced from 10 hector to nil;

• Minimum capitalization: The minimum capital requirement (which is to be brought within 6 months of the commencement of the project) has been reduced from USD 10 million to USD 5 million for a wholly owned subsidiary;

• Exit: Investors can now exit the project immediately after the completion of the project or after 3 years from the date of final investment subject to the development of trunk infrastructure;

• Transfer: Transfer from one non resident investor to another non resident before completion of the project has been permitted subject to the Foreign Investment Promotion Board approval;

• Affordable housing: The cabinet has proposed [is this proposed or has been approved] that any project which has a 30% allocation of total project cost for low-cost affordable housing would be exempted from compliance of the conditions pertaining to minimum capitalisation and minimum developed area norms;

• Completed Projects: For completed projects, 100% FDI under the automatic route is allowed for operation and management of townships, malls/shopping complexes and business centres;

• Investor Responsibility Eased: (a) Responsibility of Investor for obtaining all regulatory permission by the investor has been dropped; (b) The condition regarding development of 50% of project within 5 years from the date of commencement and making it the responsibility of the investor has now also been waived.

The aforesaid amendments will come into effect upon the Department of Industrial Policy & Promotion issues a press note notifying the changes.

MHCO COMMENT

The relaxations in the conditions for foreign investment in real estate and construction sector are a great boost to the foreign investors to invest in residential and commercial projects. Real estate developers see the most incentive in reduction in area and capital requirements, as they will provide the much needed liquidity in the sector. Most importantly, these are the major steps for fulfilment of the Cabinet`s dream of creating smart cities across the country at affordable pricing.

(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.)

SECTION 138 CASES FOR DISHONOUR OF CHEQUES | SUPREME COURT CLARIFIES ON THE JURISDICTION

A three judge bench of the Hon`ble Supreme Court of India (Supreme Court) in its very recent judgment (Dashrath Case) has now held that all the criminal matters relating to dishonour of cheques under Section 138 of the Negotiable Instrument Act, 1881 (Act) would only be entertained by the court which has the territorial jurisdiction on the location of the drawee bank or in simple words where the cheque was dishonoured. This judgement will have far reaching consequences for all the pending criminal matters and the new matters filed under Section 138 of the Act. This update endeavours to analyse the consequences of the Dashrath Case.

• Earlier Position in relation to an Offence under Section 138

A division bench of Supreme Court in the Bhaskaran Case had held that the offence under Section 138 of the Act is based on the completion of the `chain of command` as explained below:

• Drawing of the Cheque and presentation to the bank;

• Return of the cheque unpaid by the bank where it was dishonoured;

• Issue of a notice in writing is given to the drawee and demanding the unpaid payment;

• Inability to pay of the drawee to pay within a 15 (fifteen) day period of the receipt of notice;

This, all together would amount to offence of `dishonour of cheque` under Section 138 of the Act. In other words the court would have the jurisdiction to entertain the offence at any place where one of the following causes of action took place.

• New Position in relation to an Offence under Section 138

• The three judge bench of the Supreme Court in Dashrath Case has overruled the division bench judgment in Bhaskaran Case holding that any one of the above acts could not decide the Court that shall have jurisdiction and as especially the place where the issue was noticed by the drawer could not decide the Court that shall have jurisdiction. The reason for the same given by the Supreme Court is that the earlier position increases the hassles of the drawer for no reason;

• With regard to commission of an offence under Section 138 of the Act, the Supreme Court has held that when dealing with criminal offences the Code of Criminal Procedure (CrPC) and the Indian Penal Code, 1860 should be followed. The CrPC clearly states that the offence should be tried where it occurred. Therefore, in Section 138 cases, the jurisdiction of the court to try the offence should be based on where the cheque was dishonoured and not where the notice was issued as it would not be the location of the offence;

• Supreme Court further has provided the following approach should be followed for pending Section 138 Cases:

* All the cases which have reached a crucial stage of recording of evidence should be continued to be entertained under the said courts where they are being entertained at present;

* All other cases, including wherein the accused has not been served properly, the complaint will now be returned. The complainant will be allowed to file a new complaint within 30 days of return in the court having territorial jurisdiction of the drawee bank and the same will be deemed to be filed within limitation period.

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.comfor any assistance.

CORPORATE SOCIAL RESPONSIBILITY | COMPANIES ACT 2013

India`s new Companies Act 2013 (Companies Act) has introduced several new provisions which change the face of Indian corporate business. One of such new provisions is Corporate Social Responsibility (CSR). The concept of CSR rests on the ideology of give and take. Companies take resources in the form of raw materials, human resources etc from the society. By performing the task of CSR activities, the companies are giving something back to the society.

Ministry of Corporate Affairs has recently notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April 2014.

Applicability: Section 135 of the Companies Act provides the threshold limit for applicability of the CSR to a Company i.e. (a) net worth of the company to be Rs 500 crore or more; (b) turnover of the company to be Rs 1000 crore or more; (c) net profit of the company to be Rs 5 crore or more. Further as per the CSR Rules, the provisions of CSR are not only applicable to Indian companies, but also applicable to branch and project offices of a foreign company in India. 

CSR Committee and Policy: Every qualifying company requires spending of at least 2% of its average net profit for the immediately preceding 3 financial years on CSR activities. Further, the qualifying company will be required to constitute a committee (CSR Committee) of the Board of Directors (Board) consisting of 3 or more directors. The CSR Committee shall formulate and recommend to the Board, a policy which shall indicate the activities to be undertaken (CSR Policy); recommend the amount of expenditure to be incurred on the activities referred and monitor the CSR Policy of the company. The Board shall take into account the recommendations made by the CSR Committee and approve the CSR Policy of the company. 

Definition of the term CSR: The term CSR has been defined under the CSR Rules which includes but is not limited to:  

• Projects or programs relating to activities specified in the Schedule; or 
• Projects or programs relating to activities undertaken by the Board in pursuance of recommendations of the CSR Committee as per the declared CSR policy subject to the condition that such policy covers subjects enumerated in the Schedule;

This definition of CSR assumes significance as it allows companies to engage in projects or programs relating to activities enlisted under the Schedule. Flexibility is also permitted to the companies by allowing them to choose their preferred CSR engagements that are in conformity with the CSR policy. 

Activities under CSR: The activities that can be done by the company to achieve its CSR obligations include eradicating extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, combating human immunodeficiency virus, acquired, immune deficiency syndrome, malaria and other diseases, ensuring environmental sustainability, employment enhancing vocational skills, social business projects, 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 and such other matters as may be prescribed. 

 

Local Area: Under the Companies Act, preference should be given to local areas and the areas where the company operates. Company may also choose to associate with 2 or more companies for fulfilling the CSR activities provided that they are able to report individually. The CSR Committee shall also prepare the CSR Policy in which it includes the projects and programmes which is to be undertaken, prepare a list of projects and programmes which a company plans to undertake during the implementation year and also focus on integrating business models with social and environmental priorities and process in order to create share value.

 

The company can also make the annual report of CSR activities in which they mention the average net profit for the 3 financial years and also prescribed CSR expenditure but if the company is unable to spend the minimum required expenditure the company has to give the reasons in the Board Report for non compliance so that there are no penal provisions are attracted by it.  

 

MHCO COMMENT 

 

The introduction of CSR provision in the Companies Act is a welcome step and all companies which satisfy the CSR criteria will have to undertake CSR activities under the new CSR regime during current financial year. This step will boost much required social projects with some professional management of the private sector.

 

(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.)