SEBI issues clarification on clubbing of investment limits of Foreign Portfolio Investors:The Securitites Exchange Board of India ('SEBI") has issued Circular NO. SEBI/HO/IMD/FPIC/CIR/P/2018/ 150 dated December 13, 2018 ("Circular") providing clarification on clubbing of investment limits of Foreign Portfolio Investors ("FPI"). By this Circular, SEBI has partially amended two of its previous circulars, that i, circular no. CIR/IMD/FPIC/CIR/P/2018/64 dated April 10, 2018 on Know Your Client ("KYC") requirements for FPIs and circular no. SEBI/IMD/FPIC/IR/P/2018/66 also dated April 10, 2018 providing clarification on clubbing of investment limits of foreign government/foreign government related entities.

In the Circular, SEBI has clarified that the beneficial ownership criteria in Prevention of Money-laundering (Maintenance of Records) Rules, 2005 ("PMI-A Rules") should be made applicable for the purpose of KYC only and not for clubbing of investments of FPls. The Circular provides that clubbing of investment limits for FPls will be on the basis of common ownership of more than 50% or based on common control. Exceptions to this are provided for FPls which are appropriately regulated public retail funds, etc. "Control" is defined to include the right to appoint majority of the 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 shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

The Circular also provides that in cases where two or more FPls including foreign Governments/ their related entities are having direct or indirect common ownership of more than 50% or control all such FPls will be treated as forming part of an investor group and the investment limits of all such entities shall be clubbed at the investment limit as applicable to a single foreign portfolio investor. Investment by foreign Government agencies will also be clubbed with the investment by the foreign Government/ its related entities for the purpose of calculation of 10% limit for FPI investments in a single company, if they form part of an investor group. 

Prior to this Circular, the beneficial ownership criteria under the PMI-A Rules was applicable to clubbing of investment limits of FPls. This beneficial ownership criteria under the PMI-A Rules is a more stringent than the criteria in the Circular as it establishes a materiality threshold for identification of beneficial owners (which is 25% in case of companies). Further, the PMI-A Rules also require analysis of how the beneficial owner exercises control. This 25% threshold under the PMI-A Rules has now been changed to common ownership of more than 50% or based on common control for clubbing of investments of FPIS.

Disclosure of significant beneficial ownership in the shareholding pattern of listed entities: The Securities and Exchange Board of India ("SEBI") in its Circular No. SEBU HO/ CFD/CMDI/ CIR/ P/ 2018/ 0000000149 dated December 07, 2018 ("Circular") has provided that in the interest of transparency to the investors in the securities market, all listed entities are required to disclose details pertaining to significant beneficial owners in a prescribed format.

This is in furtherance to Section 89 and 90 of the Companies Act, 2013 ("Act") and the recently notified Companies (Significant Beneficial Owners) Rules, 2018 ("Rules"). As per the Act and the Rules, companies, partnerships, trusts etc. are required to disclose details of members who are classified as "significant beneficial owners".

For companies, "significant beneficial owner" is an individual or natural person, acting alone or together or through one or more persons including trust or person resident outside India, whose name is not entered in the register of members as the holder of such shares and the individual is holding ultimate beneficial interest of not less than 10% in share capital of a company or who exercises significant influence or control in the company through other means.

Details of such significant beneficial owners are required to be provided in the format provided by SEBI in its earlier circular dated November 30, 2015.

Though this is a step towards ensuring better corporate governance, it is pertinent to note that Circular will become applicable from March 31 2019, which is when the first reporting is required to be undertaken. This may put additional compliance burden on listed entities. Further, as the Rules themselves have been recently enacted, there are certain provisions which are unclear in application, which may be of concern to the listed entities.

Insolvency Professionals to act as Interim Resolution Professionals, and Liquidators (Recommendation) (Second) Guidelines, 2018: On November 30, 2018, the Insolvency and Bankruptcy Board of India ("IBBI") replaced the Insolvency Professionals to act as Interim Resolution Professionals and Liquidators (Recommendation) Guidelines, 2018 with the amended Insolvency Professionals to act as Interim Resolution Professionals and Liquidators (Recommendation) (Second) Guidelines, 2018 ("Guidelines").

Under the Insolvency and Bankruptcy Code 2016 ("IBC"), in certain circumstances, the IBBI plays an important role in recommending an insolvency professional ("IP") who may act as an interim resolution professional ("IRP") and/or liquidator in the corporate insolvency resolution process ("CRP"). This is provided under Section 16 of the IBC. Similarly, recommendation of the IBBI is required under Section 34 of the IBC where, for example, the resolution professional is required to be replaced.

When such a reference or direction is received under Section 16 or 34 of IBC for recommending/ proposing the name of an IP, the IBBI has no information about the volume, nature and complexity of the CRP or liquidation process and the resources available at disposal of an IP. Further, it takes time for a reference or a direction from the National Company Law Tribunal ("NCLT") (under Section 16 or 34) to reach the IBBI. The process of appointment of an IRP or liquidator may entail 2-3 weeks, which could be saved if the NCI-T has a ready panel of IPS recommended by the IBBI which it can use to pick up any name from the panel while issuing an order under CIRP for appointment of IP.

With this aim, the Guidelines prescribe establishment of a common panel of IPS for appointment as IRPs or liquidators and this will be shared with the NCI-T. The panel will have NCI-T bench wise list of IPs, which can be picked by the NCI-T while issuing an order. The Guidelines also provide for an eligibility criteria basis which an IP can become part of the panel. IBBI will invite expression of interest from IPS to act as IRPs or liquidators, and this will be done NCI-T bench wise. The eligible IPS will be included in the panel in order of the volume of their ongoing processes/cases/insolvency resolutions they have in hand (this will be assessed on a scoring methodology provided for in the Guidelines). The Guidelines also provide that despite having a panel, NCI-T may still require IBBI to recommend an IP from outside the panel and in such cases, IBBI will accordingly recommend an IP.

Fund raising by issuance of debt securities by Large Entities: With a view to operationalising the Union Budget announcement for 2018-19, which, amongst other, stated that "Securities and Exchange Board of India ("SEB/") will also consider mandating, beginning with large entities, to meet about one-fourth of their financing needs from the debt market', SEBI has issued Circular no. SEBU HO/ DDHS/ CIR/ P/ 2018/ 144 dated November 26, 2018 ("Circular") whereby it provides detailed guidelines for operationalising the above budget announcement. This Circular is a step towards SEBl's and central government's attempts to strengthen the Indian bond market.

For listed entities following April-March as their financial year, the framework provided in the Circular will come into effect from April 01, 2019 and for the entities which follow calendar year as their financial year, the framework will become applicable from January 01 2020. The framework will be applicable for all listed entities (except for scheduled commercial banks), which as on last day of the financial year (i.e. March 31 or December 31):

  1. have their specified securities or debt securities or non-convertible redeemable preference share, listed on a recognised stock exchange(s) in terms of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015; and
  2. have an outstanding long term borrowing of Rs 100 crores or above, where outstanding long-term borrowings shall mean any outstanding borrowing with original maturity of more than 1 year and shall exclude external commercial borrowings and intercorporate borrowings between a parent and subsidiary(ies); and
  3. have a credit rating of "AA and above", where credit rating shall be of the unsupported bank borrowing or plain vanilla bonds of an entity.

If this criteria (points (i) — (iii) above) are fulfilled, the listed entity will be considered as a "Large Corporate" ("LC") and such LC will have to raise not less than 25% of its incremental borrowings, during the financial year (subsequent to the financial year in which it is identified as a LC), by way of issuance of debt securities. The expression "incremental borrowings" is defined to mean any borrowing done during a particular financial year, of original maturity of more than 1 year, irrespective of whether such borrowing is for refinancing/repayment of existing debt or otherwise and shall exclude external commercial borrowings and inter-corporate borrowings between a parent and subsidiary(ies).

In case of there is a shortfall in the requisite mandatory incremental borrowing, the Circular provides for a monetary penalty/fine of 0.2% of the shortfall in the borrowed amount to be levied and paid to the stock exchange(s). The Circular also provides reporting requirements for such LC, along with sample illustrations as to how the framework will be applicable to such LCS.

Ratio Decidendi

Before giving instructions to Director General to carry out investigation in any matter, the Competition Commission of India is not required to seek assistance from experts of eminence or the affected parties themselves An appeal was made in the High Court of Delhi against the order of the Single Judge dismissing the writ petition filed by the Abbott Healthcare Private Limited ("Appellant") against the Competition Commission of India ("CC'"). The challenge in the writ petition was against the order of the CCI wherein the CCI had passed an order under Section 26(1) of the Competition Act, 2002 ("Act") directing the Director General ("DG") to cause an investigation into a matter and submit an investigation report within 60 days from the receipt of the said order.

The matter related to a letter received by CCI from the National Pharmaceutical Pricing Authority, Department of Pharmaceuticals ("NPPA") requesting CCI to analyse alleged anticompetitive agreement between four leading pharmaceutical companies. The allegation was that they were controlling the prices of oral diabetes drugs containing the Active Pharmaceutical Ingredient (API) Vildagliptin. The CCI also received an anonymous e-mail purportedly sent by one of the employees of the Appellant, which indicted that there was an understanding to maintain the price of drugs across the country.

The Appellant contended that (i) the CCI was required to take an informed view regarding both the veracity of the e-mail as well as also the data provided by NPPA so as to form a prima facie opinion; (ii) without considering the Appellant's contentions, the CCI could not have formed a prima facie view, which it was required to form in terms of Section 26 of the Act, and also in light of the fact that the CCI is conferred with powers of a Civil Court under the Code of Civil Procedure which includes summoning and enforcing the attendance of any person; and (iii) Regulation 17 (2) of the Competition Commission of India (General) Regulations, 2009 in terms of which the CCI is empowered to invite the information provider and such other person as is necessary for a preliminary conference. In substance, the Appellant contended that it was incumbent upon the CCI to exercise such powers and form a prima facie view after conducting due enquiry. Rejecting the contentions of the Appellant, the Court upheld the order of the Single Judge and placed reliance on the case of Competition Commission of India v. Steel Authority of India Ltd. and Anr., (2010) 10 SCC 744. The Court held that:

  1. Upon receiving information from any person or on its own knowledge, the CCI is expected to satisfy itself and express its opinion that a prima facie case exists and then pass a direction to the DG to cause an investigation into the matter in terms of Section 26(1 );
  2. The direction under Section 26(1) to the DG may be passed with or without seeking assistance from any other quarters including experts of eminence or the affected parties themselves;
  3. The aggrieved/affected parties cannot claim a right to notice or hearing at such stage;
  4. Issuance of direction by CCI under Section 26(1) of the Act is a direction simplicitor to cause an investigation and is administrative in nature to one of its own wings departmentally. It does not effectively determine any right or obligation of the parties to the case. Such direction is akin to departmental proceedings and does not entail civil consequences for any person;
  5. The CCI is not expected to give notice to the parties or to hear them at length. It is of a very preliminary nature; and
  6. It is only after consideration of the report of the DG and passing of an order in terms of Section 26(2) of the Act that the aggrieved/ affected parties gain a specific right of notice and hearing.

[Abbott Healthcare Private Limited v. Competition Commission of India - LPA.658/2018, CM No.49071-49075/2018]

News Nuggets

Arbitration Rajasthan High Court clarifies on arbitrator's defacto inability to perform

The Rajasthan High Court has held that in the case events during proceedings before the arbitrator lead to a doubt in the party's mind regarding prejudice against it and qua impartial conduct, the situation would fall within defacto inability of the arbitrator to perform his functions as pre Section 14 of the Arbitration Act. Court in Doshion (P) Ltd v. Hindustan Zinc Ltd noted that proceedings before arbitrator had continued under shadow of conflict regarding fees payable, and that such unpleasant situation is to be avoided in the best interest of the parties and the arbitrator.

Insolvency proceedings can be initiated against 'corporate guarantor' 

The NCI-AT has held that without initiating Corporate Insolvency Resolution Process (CIRP) against the principal borrower, financial creditor can initiate CIRP against the Corporate Guarantors. It noted that as per IBC Section counter-indemnity obligation in respect of a guarantee comes within the meaning of a 'financial debt'. The Tribunal in Vishnu Kumar Agarwal v. Piramal Enterprises also held that two applications under Section 7 cannot be admitted simultaneously, against two corporate guarantors, for the same set of claim and default, unless the corporate debtors are joint venture company.

Illegality of deed leading to default not to be challenged under code

Assignment of a loan to another company by creditor cannot be challenged in petition under Section 7 of the IBC and that too by a party who had the knowledge of the Assignment Deed. The Corporate debtor had challenged the admission of application by NCI-T by stating that there was illegal assignment of a loan since the account was not NPA at that time. NCI-AT in Lalan Kumar Singh v. Phoenix Arc dismissed the appeal to stop the insolvency proceedings observing that corporate debtor was previously aware of assignment therefore it cannot raise the allegations of any mala fide.

Arbitration — 5th Schedule restricts only present employees for arbitrator

The Supreme Court has held that the 5 th Schedule to the Arbitration Act governing appointment of arbitrator restricts only present employees, and that a person who was an employee 10 years ago cannot be restricted on apprehensions of bias unless proven. Court in Govt. of Haryana v. G.F. Toll Road Pvt. Ltd. rejected the allegations over appointment of ex-employee by the State of Haryana and terminated the three-member arbitral tribunal appointed by ICA. The Apex Court ruled that the proceedings be continued with the mutually agreed sole arbitrator.

Competition - Director can be proceeded against on violation of Sections 3 & 4

The Delhi High Court has held that officers or directors of a company can be proceeded against for violation of Sections 3 and 4 of the Competition Act, dismissing the plea that directors are punishable only where CCI order is not obeyed. It stated that it would be an anathema if officers/directors could not be punished. Court in Mahyco Monsanto Biotech v. CC/ refused to refer the case to the Larger Bench and upheld the interpretation that Section 48 can be invoked against individual officers or directors to investigate their role and conduct of offences under Sections 3 and 4 and punishable by order under Section 27.