This article is an extract from GTDT Practice Guides: India M&A. Click here for the full guide.

Part 1 – Dispute resolution and M&A Introduction

Because of the covid-19 pandemic, the initial period of 2020 witnessed a slowdown in economic activity and, consequently, in M&A transactions. This was especially the case in the wake of lockdown restrictions, with corporates adapting to new ideas of normalcy. However, M&A activity recovered, albeit slowly, in the latter half of 2020,2 with certain kinds of transactions and some specific sectors gaining prominence, demonstrating the resilience of India Inc.

In 2020, India witnessed an increase in M&A activity in sectors including technology, telecommunications, pharmaceuticals and healthcare, banking, retail, energy and infrastructure. Several high-profile M&A transactions took place in the Indian technology sector in the past year, with various substantial deals by Jio (including Facebook’s acquisition of a stake in Reliance Jio for US$5.7 billion and Google’s investment in Jio for US$4.5 billion). India also saw a historic rise in renewable energy M&A transactions.3 In keeping with this trend, Adani Green Energy Ltd has agreed to buy SB Energy Holdings Ltd in a deal for US$625 million.4

Growth, driven by macroeconomic factors and the ever-growing demand for energy resources to sustain it, has led to a great deal of focus on renewable energy (which accounts for 24.8 per cent of installed capacity) and efforts to channel foreign investment into the energy sector. These, in turn, provide ripe opportunities for M&A activity in the sector.

While at a high level there are positive drivers, the complex regulatory environment of India does entail some challenges, particularly to foreign investors, and consequently identification of some of those issues is critical to managing the risk of litigation or disputes that may arise.

M&A disputes typically involve issues relating to failure to disclose all relevant information on account of fraud or misrepresentation, breaches of representations and warranties, shareholder disputes, valuation, price adjustments, etc. While in principle disputes can arise both before and after closing a deal, typically M&A disputes in India fall in the latter category. The various issues that arise in the context of M&A in India are, typically, sector-agnostic. However, some peculiarities do exist specific to some sectors, for instance, in the energy sector there may be specific challenges given the highly regulated nature of the sector and the heavy presence of state entities in the supply chain.

Modes of acquisition

As in many other jurisdictions, acquisitions may be carried out through various modes, which ultimately have a significant bearing on the mode of dispute resolution in relation to such acquisitions. The typical modes of acquisition include:

  • acquisition of shares of a listed or unlisted company;
  • acquisition of a business;
  • acquisition of assets; and
  • merger and scheme of amalgamation.

M&A activity pursued under the schemes of arrangement provisions of the Companies Act 2013 may in certain circumstances require disputes to be necessarily referred to Indian courts, as certain disputes have been held to be incapable of reference to arbitration.

Statutory framework

The statutory framework governing M&A is quite broad and it is not feasible to set out an exhaustive list. However, the key relevant legislation, especially concerning disputes related to M&A transactions, is as follows:

  • Companies Act 2013 (CA 2013);
  • SEBI (Substantial Acquisition of Shares and Takeover) Regulations 2011 (Takeover Regulations);
  • Income Tax Act 1961;
  • Foreign Exchange Management Act 1999 (FEMA) and rules and regulations thereunder; and
  • Competition Act 2002.

In the case of acquisition of stressed assets, the Insolvency and Bankruptcy Code 2016 comes into play. Further, depending upon the specific sector involved, additional statutes, rules and regulations would be applicable to particular M&A transactions.

The term ‘merger’, while not defined under CA 2013, is also referred to as 'amalgamation' given that merger transactions involve an amalgamation of companies. The National Company Law Tribunal (NCLT) is the tribunal vested with the authority to approve such schemes. When an application is made to the NCLT for approving such a scheme, the NCLT may order a meeting of the creditors or shareholders of the company, as the case may be. At this meeting, if a majority of persons representing three-quarters in value of the creditors or shareholders (as the case may be) agree to such a scheme, and it is sanctioned by way of an order passed by the NCLT, such scheme shall be binding on all the creditors and shareholders of the company, as applicable.

As per section 234 of CA 2013, the provisions under Chapter XV apply mutatis mutandis to M&A transactions involving a foreign company. The preconditions for such acquisitions, inter alia, include that the foreign company must be from a jurisdiction notified by the central government and that prior approval of the Reserve Bank of India (RBI) must be procured.

Disputes in M&A

M&A disputes are broadly contractual in nature, such as breach of warranties, post-deal price adjustments, shareholders’ rights, breach of confidentiality and exclusivity, etc. which are typically resolvable by arbitration or a civil suit. However, there are some disputes that are not purely contractual in nature and that usually involve rights in rem, which have been determined by courts to be inarbitrable and are necessarily required to be litigated. Further, there are some disputes that may arise entirely relating to regulatory issues, such as under the applicable securities laws, competition regulations, tax laws, etc, that will require acquirers to engage in litigation in Indian courts.

Contractual disputes

Contractual issues that are to be decided inter se between the acquirer and the target are generally preferred to be settled by arbitration. The terms set out in the contract largely determine the kind of disputes that may arise. A recent example of a post-transaction M&A dispute is the ongoing court proceedings before the High Court of Delhi5 and the Supreme Court of India6 involving the US e-commerce giant Amazon Future Retail Limited (FRL) and Reliance Retail Limited, which follows an emergency arbitration that was invoked by Amazon in the Singapore International Arbitration Centre (SIAC) in August 2020 on the grounds that the transaction entered into between FRL and Reliance Retail Limited violates the provisions of the SHA entered into between Amazon, Future Coupons Private Limited (FCPL) and three other promoters of the Future Group in August 2019. The SHA provided for a call option that would enable Amazon to exercise the option of acquiring all or a part of FRL’s shares after a period of three to 10 years. Further, Amazon also contended that the transaction between FRL and Reliance Retail Limited violated a non-compete clause in the SHA that explicitly named a few entities that the Future Group was restricted from transacting with, one of which was Reliance Retail Limited. The SIAC passed an emergency arbitration order (EA order) in favour of Amazon, directing FRL, FCPL and the three other promoters of the Future Group to temporarily refrain from proceeding with the transaction with Reliance Retail Limited. FRL has filed a suit before the Delhi High Court so as to prevent Amazon from interfering with the transaction with Reliance Retail Limited, claiming that the EA order was not binding on FRL.

Concealment of material information and misrepresentation

In 2008 Daiichi Sankyo, a Japanese entity, acquired a majority stake in an Indian company, Ranbaxy Laboratories Ltd. After the completion of the acquisition, a dispute arose out of the share purchase and share subscription agreement wherein the acquirer claimed that the sellers made false representations and fraudulently induced the transaction by concealing the genesis, nature and severity of pending investigations by the US Food and Drug Administration and Department of Justice against Ranbaxy. The matter was referred to a Singapore-seated arbitration under the ICC Arbitration Rules with an award passed in favour of Daiichi Sankyo. The arbitral tribunal had concluded that even though Daiichi Sankyo exercised majority control of the board of Ranbaxy, owing to the compartmentalised nature of information and communications within Ranbaxy Laboratories Ltd made available to it, the fraud and misrepresentation could not have been discovered at an earlier time even on reasonable diligence. Daiichi Sankyo was subsequently successful in securing enforcement of the award by the Delhi High Court, wherein the court held that it 'is not for this court to dwell deep into these aspects while considering objections under section 48 of the Arbitration Act'.7

Contractual provisions and statutory violations – Securities and FEMA Regulations

There have been issues with put or call options that are commonly found in M&A share purchase agreements that have since been clarified by the Securities and Exchange Board of India (SEBI) to be valid and enforceable.8 However, there were some doubts as to the validity of such a provision entered into prior to 2013 (which are also not covered by SEBI’s clarification as it was only prospective) given the prohibitions against contracts in derivatives not traded on the stock exchanges and earlier circulars by SEBI.

In 2007 Edelweiss Financial Services Limited entered into a share purchase agreement with Percept Finserve Private Limited for purchase of certain shares of Percept Limited, which inter alia provided that upon breach of certain conditions by Percept, the acquirer would have the option to resell the shares back to the seller at such price as would give the acquirer an internal rate of return of 10 per cent. Non-adherence to the terms led to the same being referred to arbitration where ultimately the arbitrator held the put options to be illegal, as such options constituted forward contracts, which were prohibited. This award was subject to set-aside proceedings under section 34 of the Arbitration and Conciliation Act 1996 (ACA), where the Bombay High Court set aside the arbitral award on the ground of 'patent illegality', as it found that there was no general prohibition of such options contracts even prior to 2013 and such contracts are valid and enforceable.9 More recently, in Banyan Tree Growth Capital LLC v Axiom Cordages Ltd & Ors,10 in relation to the enforcement of a Singapore-seated foreign award rendered by a tribunal constituted under SIAC Rules, the Bombay High Court dismissed the respondent’s challenge made on the ground that the put options deed entered into by the parties to a shareholders' agreement (SHA) was illegal and violative of Indian public policy. The court upheld the validity of the put option deed entered into in 2008 by the petitioner, who was a foreign private equity investor, with the promoters of Axiom Cordages Ltd under the Indian securities regulations. It upheld the validity on the basis, inter alia, that the Securities Contract Regulation Act 1956 intended to prohibit speculative transactions, and put options of the kind found in an SHA providing an investor an exit opportunity did not amount to such a speculative trade. The court further held that the SEBI notification dated 3 October 2013 reflected 'a complete statutory recognition in regard to shareholders' contracts for purchase or sale of securities, containing a put option and permitting an exercise of option under such agreement' and that it was also applicable to agreements entered into prior to the issuance of the notification. The NTT Docomo Inc v Tata Sons Ltd decision11 by the Delhi High Court in relation to enforcement of an award by the London Court of International Arbitration is another instance where put options were not considered to be violative of the FEMA Regulations and thus did not attract any ground for non-enforcement under section 48 of the ACA.

In Vijay Karia,12 the Supreme Court considered an award that was made in a dispute arising out of an SHA involving promoters of an Indian company and an Italian corporate buyer. The final award directed the Indian promoters to sell shares held by them at a discounted rate to the Italian corporate buyer. The appellant sought to resist enforcement of the award on the basis that it violated Rule 21 of the Foreign Exchange Management (Non-debt Instrument) Rules 2019. However, the court noted that there is no provision in FEMA that automatically voids transactions that are in violation of its provisions. The court observed that the scheme of the legislation allows for permission for such transfer of shares to be sought from the regulatory authority (ie, RBI) ex post facto and therefore held that a rectifiable breach under FEMA cannot be considered a violation of the fundamental policy of Indian law that would render the award unenforceable (while noting that the RBI may exercise its regulatory authority and insist that the shares be sold at market value).

This decision of the Supreme Court is consistent with the judgment of the Delhi High Court in Cruz City 1 Mauritius Holdings v Unitech Ltd,13 which held that an arbitral award that required the honouring of a clause mandating guaranteed returns, even if found violative of FEMA regulations, does not amount to a violation of public policy to justify its non-enforcement.

Foreign seat of arbitration

The recent case of PASL Wind Solutions Private Limited v GE Power Conversion India Private Limited14 arose out of a contract for the supply of converters between two companies incorporated under Indian law. The question before the Supreme Court was whether two companies incorporated in India can choose a forum for arbitration outside India. The Supreme Court dismissed the appeal and held that companies incorporated in India or parties at dispute can choose to arbitrate outside India. It was observed that 'nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when both parties happen to be Indian nationals'.

Bank guarantees

The unconditional bank guarantee is considered to be among the most secure forms of protection against various risks in M&A transactions. However, there are occasions where there may arise differences over interpretation of contractual clauses, which can muddy the waters on such provisions. However in the context of bank guarantees, the courts will rarely interfere in their invocation and there are only a few circumstances where a grantor of a bank guarantee can prevent the beneficiary from obtaining payment, such as where it is shown that the invocation is vitiated by egregious fraud or there exist 'special equities' such that invocation of the bank guarantee would result in irretrievable injury to the guarantor.15

Material adverse event clauses

Material adverse event or material adverse change (MAC) clauses are commonly found in contracts to withdraw from contractual obligations, prior to closing of the transaction, under some specified material change to circumstances. For a MAC clause to have effect, it has to be in relation to specified aspects that are provided for within the terms of the agreement and the change ought to be a material one compared with the situation at the time of signing the acquisition agreement. The burden of proof as to material change is upon the one who invokes such a provision to be excused from performance. In the Indian context, the courts have seldom had the chance to interpret and lay down the ambit of 'material adverse change' and define its triggers. Further, the scope of an MAC clause is to be determined on a case-by-case basis, depending upon the manner in which material adverse change has been defined in a specific contract, and the carve-outs with respect to such a definition (for instance, changes to market or financial conditions). Therefore, so far, courts have placed reliance upon the provisions of the Contract Act 1872 in this regard. The Supreme Court’s position in the context of the Takeover Regulations is that only in instances of impossibility might non-performance of an obligation be permitted and would consequently have to meet the high threshold under section 56 of the Indian Contract Act 1872, which relates to the doctrine of frustration.16

Shareholder disputes – contractual versus oppression and mismanagement claims

In the context of M&A, it is common to find SHAs, joint venture agreements, share purchase agreements, non-disclosure agreements or even articles of association of companies to contain arbitration clauses, wherein the parties agree to refer contractual disputes to arbitration. However, not all shareholder disputes, whether in the context of M&A or otherwise, are arbitrable per se. As a matter of Indian law, generally rights in rem are inarbitrable and therefore civil suits and arbitrations are permissible only where it is with respect to rights inter se the parties (ie, rights in personam). Based on the principle noted above, the Supreme Court has identified certain classes of disputes to be prima facie non-arbitrable, namely:

  • criminal offences;
  • matrimonial disputes;
  • insolvency and winding-up petitions;
  • guardianship matters;
  • testamentary matters;
  • intellectual property rights;17 and
  • the court has also observed that disputes that are subject to the exclusive jurisdiction of specially constituted statutory tribunals18 may also not be arbitrable under Indian law.19

The Supreme Court has also recently laid out a fourfold test to determine arbitrability of a matter, namely, a dispute is not arbitrable when:

  • the matter relates to actions in rem;
  • the cause of action and subject matter of the dispute affect third-party rights;
  • the cause of action and subject matter of the dispute relate to inalienable sovereign and public interest functions of the state; and
  • the subject matter of the dispute is not arbitrable under a particular statute.20

In respect of shareholder disputes where there is some overlap of issues between contractual claims and claims of oppression and mismanagement under CA 2013, the issue of arbitrability is less than clear, with contradictory judgments in Indian courts.

In Siddharth Gupta & Ors v Getit Infoservices & Ors,21 a dispute arose out of an SHA entered into by the existing shareholders of Getit Infoservices Private Limited with an investor that contained an arbitration clause providing for disputes to be referred to arbitration administered by SIAC, with its seat in Singapore. The investor acquired a shareholding of 50.1 per cent in the respondent company in accordance with the SHA, which was subsequently increased to 76 per cent. Some of the existing shareholders alleged that the investor’s increased shareholding was at a substantial discount to the true value of the shares and filed a petition alleging oppression and mismanagement against the respondent company and the investor before the Company Law Board (CLB), and further contended that the dispute could not be referred to arbitration since the reliefs for oppression and mismanagement could only be granted (by a court) under the Companies Act 1956.

The CLB held that the reliefs sought fell squarely within the scope of the arbitration clause of the SHA and that the allegations in any event were merely of contractual violations and thus allowed the arbitration to proceed. The CLB observed that the petition for oppression and mismanagement under sections 397 and 398 (397/398 petition) appeared to be a 'dressed-up' one and that 'when a party seeks reference to arbitration, obligation is cast upon the court to see whether any prima facie case made under sections 397/398, if not, then it shall forthwith refer the same to arbitration'. The CLB held that violation of articles of association or provisions of law would not amount to oppression unless such conduct is laced with malfeasance or malice.

On the other hand, in Malhotra v Malhotra,22 the Bombay High Court placed emphasis on the nature of reliefs that might be granted in a derivative action for oppression and mismanagement. The thrust of the decision is that arbitral tribunals are not empowered to exercise the broad powers available to a statutory tribunal in an action for oppression and mismanagement such as the ability to appoint an administrator, an observer, or a special committee to oversee the affairs of a company, etc and that 'no arbitration agreement can vest an arbitral tribunal with the powers to grant the kind of reliefs against oppression and mismanagement' like that of a statutory tribunal, and where claims may relate to non-contractual actions that result in the oppression of minority shareholders or mismanagement of the affairs of the company the same is not capable of being referred to arbitration.

However, the court also observed that dressed-up petitions that are filed in the guise of oppression and mismanagement claims in order to oust a valid arbitration agreement, where found to be vexatious, oppressive and mala fide, reference of the dispute to arbitration may be possible. The decision is also founded on the principle that there is no provision in a self-contained code that is the ACA for the splitting-up of cause of action based on the reliefs sought.23

Oppression and mismanagement

Apart from the purely contractual disputes, shareholder disputes may also arise owing to litigious action by minority shareholders of a target company. Such disputes are governed by the provisions of CA 2013 and are subject to the original jurisdiction of the NCLT and the appellate jurisdiction of the National Company Law Appellate Tribunal (NCLAT).

The shareholder of a company who is denoted as a member under CA 2013 may apply to the NCLT under section 241 CA 2013, seeking an order under section 242 subject to the criteria stipulated in section 244. In the case of shareholders, not less than 100 members or 10 per cent of the total number of members, whichever is less, or members holding at least 10 per cent of issued share capital may initiate such claims and the NCLT is further empowered to waive these minimum requirements. Although the provisions dealing with oppression and mismanagement are dealt with under Chapter XVI, titled ‘Prevention of Oppression and Mismanagement’, the statute does not define either term and thus judicial precedent is the guide as to what constitutes oppression and mismanagement.

The Supreme Court has observed that oppression can occur when the affairs of the company are carried on without probity and fair dealing towards minority shareholders24 or where it is shown that minority shareholders have been prejudiced in the exercise of their legal and proprietary rights as shareholders, although it has been clarified that the legality of a particular action by the management of the company has no bearing on whether the affairs of the company have been conducted in a manner oppressive to its members.25

A claim of mismanagement is brought where the minority shareholders wish to challenge a change in management of the company, composition of the board of directors, or the shareholding pattern of the company. It has been held that directors of a company have a fiduciary duty towards the shareholders of the company (ie, they must act on behalf of the company with the utmost care, skill and due diligence) and that directors owe a primary duty to shareholders to make full and honest disclosure on all important matters. More specifically, the Supreme Court has held applied the doctrine of 'proper purpose', whereby directors owe it to shareholders to only issue shares for a proper purpose.26

Most commonly, claims for oppression and mismanagement are brought where shareholders allege exclusion from management,27 dilution of shareholding,28 or unauthorised actions by the board of directors.29 In determining whether there exist just and equitable grounds for ordering the winding-up of a company, Indian courts generally follow the principles laid down by those in the United Kingdom.30 Generally, oppressive conduct is limited to that which is outside the scope of the constitutional documents of a company; however, there may be situations where there are understandings that are not expressly part of the constitutional documents that have been breached.31

Recently, in Tata Consultancy Services Ltd v Cyrus Investment Pvt Ltd,32 pertaining to the removal of Mr Cyrus Pallonji Mistry as the executive chairman of Tata Sons Ltd, certain entities of the Tata Group made allegations, inter alia, with respect to oppression and mismanagement under sections 241 and 242, read with 244 of CA 2013.

The Supreme Court upheld the decision of the NCLT, and while setting aside the order of the NCLAT, dismissed the charges for oppression and mismanagement, observing that the validity of and justification for the removal of a person can 'never be the primary focus of a tribunal under section 242 unless the same is in furtherance of a conduct oppressive or prejudicial to some of the members'. Further, the post of executive chairman is not statutorily recognised or regulated, like the post of a director. The Supreme Court further held that there were no just and equitable grounds that justified winding up the company.

Issues of control

The Takeover Regulations regulate the acquisition of shares, control and voting rights in listed companies. Under the Takeover Regulations, in respect of acquisition of listed companies, a mandatory open offer is triggered in the following scenarios:

  • where an acquirer’s shares or voting rights in a target company entitle the acquirer to exercise 25 per cent or more of voting rights in the target company;
  • where an acquirer holds shares or voting rights entitling it to exercise 25 per cent or more of the voting rights of the target company (but less than the maximum permissible non-public shareholding), the acquisition of additional shares or voting rights entitling it to exercise more than 5 per cent of the voting rights in a financial year; and
  • where an acquirer exercises control, direct or indirect, over the target.

With regard to the last criterion, the Takeover Regulations define control in a broad way that reads as follows:

'Control' includes the right to appoint majority of directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Given the wide and inclusive definition of the word control, the jurisprudence on what amounts to control has been somewhat subjective. In Subhkam Ventures v SEBI, the Securities Appellate Tribunal (SAT) on a perusal of the various agreements and provisions arrived at a conclusion that the rights (right to appoint a director on the board, right to be present to constitute quorum, affirmative voting rights, etc) did not amount to control. The SAT distinguished between rights that were meant to protect the interest of an investor (by reference to the contractual provision titled 'Protected Provisions') from rights that provided for day-to-day operational control.33 However, because of an out-of-court settlement by the parties, an appeal filed by SEBI at the Supreme Court was dismissed and the Supreme Court recorded that the order passed by SAT 'will not be treated as a precedent'.

Thus there are only decisions of SEBI as guidance, which tend to deal with the issue on a case by case basis. While in the Jet–Ethihad case,34 SEBI concluded the covenants do not amount to control, in the NDTV case35 SEBI observed inter alia that the subsistence of the agreement even beyond the loan repayment for the exercise of a call option indicates that the said transaction amounts to control. Acquisitions carried on-market thus risk having certain contractual rights including the exercise of options being classified as de facto control, which ultimately may trigger open-offer obligations. The Takeover Regulations do provide for some exemptions from the open-offer requirement, with acquisitions by scheme of arrangement being among them.36

Taxing troubles

In the context of cross-border acquisitions, there are few provisions under the Income Tax Act 1961 that may lead to disputes between the parties. The following provisions can in particular have an impact on acquisitions:

  • as per section 195, a resident payer (buyer) has an obligation to withhold taxes applicable to a transaction with a non-resident payee (seller);
  • according to section 163, a resident buyer may be treated as an agent of a non-resident seller and accordingly be assessed for liability to pay tax;
  • acquisition of assets from a seller who is subject to pending tax proceedings or demand can be held to be void; and
  • transfer pricing issues relating to transactions carried out by related parties of a company prior to acquisition.

In the recent past there have been several instances where tax liabilities have emerged out of past transactions of a company that has since either merged or been acquired, thus leading to post-deal disputes. At the same time, insurers are reluctant to provide tax-liability coverage in the cross-border context owing to the prevalence of such cases.37 Further there are limits imposed by the RBI regarding deferment of any part of consideration in relation to a holdback for any contingent liabilities or indemnification (currently 25 per cent of consideration value may be set aside for a maximum period of 18 months under the FEMA Regulations).38 Thus the likelihood of disputes relating to indemnity of tax risks in the context of cross-border acquisitions is significant even in cases where there are clearly worded indemnity provisions in underlying agreements.

Part 2 – Criminalisation of civil disputes Introduction

With the advent of liberalisation, India has seen an unprecedented growth in its industrial, financial and other commercial sectors. There has been a rapid increase in the influx of foreign investment and the business ecosystem of India has undergone a revolutionary change. Consequently, there have been changes in the legal framework to ensure regulatory compliance and to protect the public at large from corporate wrongdoing.

Various statutes prescribe criminal liability for non-compliance of provisions contained in such legislation. The intent of such penal provisions is to not only make corporations accountable for their actions but also to deter them from conducting business in an unscrupulous and improper manner.

Over the years, these criminal sanctions have, however, been manipulated and utilised as a tool to intimidate the other party and also to file frivolous and malicious proceedings. More often than not, criminal complaints are also filed in matters of pure commercial civil disputes with a view to either avoid a civil liability, delay legitimate proceedings or to get the other party to the negotiating table. Furthermore, in the wake of a number of widely publicised financial frauds, regulatory defaults that could earlier be addressed through penalties have now been made punishable with a fine, imprisonment or both, by over-zealous regulatory authorities. Furthermore, frequent delays in disposal of cases do not help matters. These issues no doubt pose a concern in the conduct of business, particularly for those abroad looking to invest in India.

Having said that, with the government’s initiative of ‘Ease of Doing Business’ in India, the need to decriminalise technical defaults and make them compoundable through levy of penalties only has led to the 2019 amendments to CA 2013. Certain offences, such as the issuance of shares at a discount, failure to file annual returns, etc, have been recategorised as civil defaults. Moreover, the power to adjudicate such offences has been moved from the NCLT to central government.

Evolution of corporate criminal liability in India

In this background, it is important to understand the evolution of corporate criminal liability in India. This concept, derived from section 11 read with section 2, Indian Penal Code 1860 (IPC), explains that every person including any company or association, whether incorporated or not, shall be liable to punishment. This principle has also been adopted in CA 2013 as well as the Income Tax Act 1961. The Supreme Court, in the case of Assistant Commissioner, Assessment-II, Bangalore and Ors v Velliappa Textiles Ltd and Ors,39 held that a company cannot be prosecuted for offences requiring imposition of mandatory term of imprisonment coupled with a fine. In a subsequent decision, in Standard Chartered Bank and Ors v Directorate of Enforcement and Ors,40 the Apex Court overruled the above proposition of law. The court observing the definition of the word 'people' in section 11, IPC and section 3(42), General Clauses Act 1897 held that the term includes any company or association of body of person and hence, in cases of offences that mandate both imprisonment and fine, the companies shall be penalised with a fine.

Furthermore, in Iridium India Telecom Ltd v Motorola Incorporated Co,41 the Apex Court held that:

a corporation is virtually in the same position as any individual and may be convicted of common law as well as statutory offences including those requiring mens rea. The criminal liability of corporation would arise when an offence is committed in relation to the business of the corporation by a person or body of persons in control of its affairs. In such circumstances, it would be necessary to ascertain that the degree and control of the person or body of persons is so tense that a corporation may be said to think and act through the person or the body of persons.

Hence the requirements to impose criminal liability in relation to a corporation would encompass the following:

  • the alleged illegal act should be done within the scope of employment;
  • it should cause or accrue a benefit to the company either directly or indirectly; and
  • mens rea behind the alleged illegal act. Mens rea is attributed to corporations on the principle of alter ego of the company.

The issue of criminal liability in the case of companies remains controversial and challenging in nature. In its 47th report, the Law Commission of India provided a number of recommendations for the effective resolution of the dispute on the criminal liability of companies in socio-economic crimes.

Criminal liability under the Companies Act 2013

In relation to offences under CA 2013, as stated above, through the 2019 amendments to the Act, various provisions that imposed imprisonment as well as a fine have now been restricted to the payment of penalties. Several offences have been recategorised as civil defaults with the aim to ensure compliance as well as to prevent repetition by imposition of stricter penalties. While many provisions have been decriminalised, the amendment to section 135 introduces imprisonment for three years of an officer in default of the corporate social responsibility directives prescribed under the Act as well as the amendments. This amendment was, however, not notified by the central government.

The Company Law Committee set up on 18 November 2019 has made recommendations to the government on further recategorisation of several more criminal compoundable offences to civil wrongs carrying civil liabilities, to facilitate and promote ease of doing business as well as to declog the special courts and the NCLT. While fraudulent activities committed by a company are serious allegations that continue to require criminal sanction, procedural, technical and instances of non-compliance such as defaults related to corporate governance norms, etc, have been considered as offences that can be dealt by the civil judicial mechanism. There is, therefore, no change in the treatment of non-compoundable offences. Clearly, a distinction is sought to be made between offences that are mere civil defaults and those that show a premeditated intent to defraud and deceive stakeholders. Such classification eliminates fear of prosecution particularly among investors and provides a boost of encouragement to invest in Indian businesses.

Pursuant to the above-mentioned recommendations, the Companies (Amendment) Act 2020 received the President’s assent on 28 September 2020. The 2020 Amendment Act removes penalties for certain offences and reduces them for one-person companies and small companies. The penalties are prescribed not only upon the corporation but also every officer in default of the requisite compliance. Further, the 2019 Amendment to section 135 has been further amended to remove the imposition of imprisonment and by replacing it with a stipulated penalty on the officer in default of CSR directives as prescribed. The amendment sections were notified on 22 January 2021.42

While these reforms are welcome and the need of the hour, it is equally true that criminal complaints are resorted to by parties in matters of a civil nature. Such complaints are filed not only against the corporation but also all the directors, including foreign investor nominees, with a view to pressurise and procure a settlement of the (civil) disputes that may have arisen between the parties or in some cases plainly with a view to harass the other party.

Judicial approach

Indian courts have condemned such abuse of the process of law. Although the quashing of criminal proceedings depends on the circumstances of each case, the Indian courts have laid down principles for quashing a First Information Report (FIR) and resultant criminal proceedings when the underlying issues are of a civil nature. In Alpic Finance Ltd v P Sadasiva & Anr, 43 the Supreme Court set out the principles under which a criminal complaint may be quashed:

  • Where the allegations made in the complaint or the statements of the witnesses recorded in support of the same taken at their face value make out absolutely no case against the accused or the complaint does not disclose the essential ingredients of an offence which is alleged against the accused;
  • where the allegations made in the complaint are patently absurd and inherently improbable so that no prudent person can ever reach a conclusion that there is sufficient ground for proceeding against the accused;
  • where the discretion exercised by the Magistrate in issuing process is capricious and arbitrary having been based either on no evidence or on materials which are wholly irrelevant or inadmissible; and
  • where the complaint suffers from fundamental legal defects, such as, want of sanction, or absence of complaint by legally competent authority and the like.

In a landmark judgment, in State of Haryana v Bhajan Lal,44 the Supreme Court has laid down circumstances under which courts can quash an FIR to prevent abuse of the process of any court or otherwise to secure the ends of justice. The court illustrated the following circumstances:

  • Where the allegations made in the FIR or the complaint, even if they are taken at their face value and accepted in their entirety, do not prima facie constitute any offence or make out a case against the accused.
  • Where the allegations in the FIR and other materials, if any, accompanying the FIR do not disclose a cognisable offence, justifying an investigation by police officers under Section 156(1) of the Code except under an order of a Magistrate within the purview of Section 155(2) of the Code.
  • Where the uncontroverted allegations made in the FIR or complaint and the evidence collected in support of the same do not disclose the commission of any offence and make out a case against the accused.
  • Where the allegations in the FIR do not constitute a cognisable offence but constitute only a non-cognisable offence, no investigation is permitted by a police officer without an order of a Magistrate as contemplated under Section 155(2) of the Code.
  • Where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no prudent person can ever reach a just conclusion that there is sufficient ground for proceeding against the accused.
  • Where there is an express legal bar engrafted in any of the provisions of the Code or the Act concerned (under which a criminal proceeding is instituted) to the institution and continuance of the proceedings and/or where there is a specific provision in the Code or Act concerned, providing efficacious redress for the grievance of the aggrieved party.
  • Where a criminal proceeding is manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge.

Further, in Lalita Kumari v Govt of UP,45 the Supreme Court laid down the scope of preliminary inquiry required while filing an FIR. If the offence does not seem to be cognisable, the police must undertake a preliminary inquiry before filing the FIR. The court also provided an illustrative list of circumstances where such a preliminary inquiry must be conducted. These include cases of matrimonial disputes or family offences, commercial offences, medical negligence cases, corruption cases, cases where there is abnormal delay or laches in initiating criminal prosecution, etc.

Conversely, in Sau Kamal Shivaji Pokarnekar v The State of Maharashtra,46 it was held that criminal complaints cannot be quashed merely because the allegations made therein appear to be of a civil nature. A criminal complaint or an FIR also cannot be quashed merely on the ground that a civil suit is pending and that a mere allegation of mala fide intention against the informant is of no consequence that could be the basis for quashing the proceedings.47 In State of Kerala and Ors v OC Kuttan and Ors48 it was expounded that the power of quashing a criminal complaint should be exercised only in the rarest of cases.

In a recent judgment in Govind Prasad Kejriwal v State of Bihar and Other,49 the Supreme Court held that while conducting an inquiry before issuing notice to the accused, a magistrate is required to consider:

  • whether a prima facie case has been made out; and/or
  • whether the criminal proceedings initiated are an abuse of process of law or the court; and/or
  • whether the dispute is purely of a civil nature; and/or
  • whether the civil dispute is tried to be given the colour of criminal dispute.

Thus, where a civil dispute takes on a criminal manifestation, in order to recover dues, out of vengeance to harass or impede a settlement by threatening to pursue criminal charges, such criminal suit, FIRs or proceedings are likely to be quashed by the court as vexatious in nature.50 Cases where a party has a mala fide intention for filing the criminal complaint, in a dispute of purely civil nature, shall be considered as an abuse of process.51 However, where the dispute contained a genuine criminal ingredient and the allegations made by a party in their criminal complaint had sufficient ingredients in proving the allegation, the same would not be quashed. In such circumstances, the courts will quash the complaint only in the rarest of cases.

Apart from CA 2013, criminal sanctions find place in various other business laws. An easier solution to curb the abuse of process as well as to promote investor confidence appears to be removal of such sanctions from relevant business and economic statutes. To this end, the Confederation of Indian Industry (CII) has presented 12 alternative ways for decriminalisation of business and economic legislation to the Indian Prime Minister and Finance Minister. In its report, the CII has recognised 37 Acts, ranging from the Partnership Act 1932, Securities and Exchange Board of India Act 1992, the Securities Contracts (Regulation) Act 1956 to the Insolvency and Bankruptcy Code 2016, and has recommended that offences in these statutes that are of a technical nature or do not affect public interest prejudicially should be decriminalised.52

The points envisioned by CII that can be actioned to replace the current criminal provisions are as follows:

  • provide for many summons cases concerning relatively minor offences to be compoundable;
  • revisit or prescribe limitation periods for assuming jurisdiction;
  • introduce a transparent mechanism for no-guilt admission and settlement of technical offences with penalties and not prosecution;
  • introduce a dispute settlement mechanism – deferred prosecution agreements (with exceptions);
  • introduce one-time settlement schemes;
  • consider making summons cases compoundable by expanding the scope of section 320 of the Criminal Procedure Code 1973;
  • award costs where courts have observed that there is frivolous litigation or dilatory tactics;
  • fill vacancies expeditiously to ensure that benches act at full strength;
  • create a process for without-admission-of-guilt settlement of tax and economic offences (with exceptions) to reduce the backlog of future matters and remove some pending matters;
  • increase the role of technology in courts with e-filings and the like; and
  • introduce plea bargaining and settlement mechanisms.

The objective of such decriminalisation is to avoid civil cases being treated as criminal in nature and to alleviate the fear of prosecution among entrepreneurs, foreign investors and independent directors, which it is hoped will lead to economic growth and prosperity.

Conclusion

While robust criminal jurisprudence in the context of corporates is a necessity to maintain balance and enforce compliance, the legislature is also tasked with ensuring that the statutes are not draconian. Considering the corporate world has emerged to be a global network of economics and diversity, it is significant to ensure that domestic corporate law and its corresponding criminal liabilities are pragmatic and distinguishable from civil remedies. Being tough on crime requires making intelligent distinctions between conduct that truly threatens the public and conduct that is better handled by fines or civil law.53 The responsibility for making this distinction and promulgating suitable laws lies with the legislature, and the implementation of such laws on the parties and their advisers.