Bimonthly Legal Tablet : Volume 1 Issue 1
Bimonthly Legal Tablet
Volume 1, Issue 1, November 1, 2011
|Law & Policy|
Law & Policy
The Consolidated FDI Policy (Effective from October 01, 2011)
The Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India (‘DIPP’) has issued a ‘Consolidated FDI Policy’ (‘FDI Policy’) vide Circular No. 2 of 2011 dated September 30, 2011, which came into effect on and from October 01, 2011. The FDI Policy subsumes and supersedes all Press Notes, Press Releases, Clarifications and Circulars issued by DIPP, which were in force as on September 30, 2011.
1. Types of instruments which can be issued by Indian companies
• Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible
debentures and fully, compulsorily and mandatorily convertible preference shares subject to
pricing guidelines/valuation norms prescribed under FEMA Regulations.
• Pursuant to deletion of Paragraph 126.96.36.199 of the FDI Policy, equity shares, fully, compulsorily
and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible
preference shares, having built-in options, may be issued/ transferred to non-residents.
2. Import of capital goods/machinery/equipment (including second-hand machinery) and pre-operative/pre-incorporation expenses (including payments of rent etc.)
• Any import of capital goods/machinery etc., made by a resident
in India, has to be in accordance with the Export/Import Policy and applications for conversion of import payables for capital
goods into FDI have to be made within 180 days from the date
of shipment of goods.
• Payments to be made by foreign investor for pre-operative/pre-
incorporation expenses can now be made directly to the company or through the bank account opened by the foreign investor, as provided under FEMA Regulations.
• AD Category-I banks have been given general permission to
open Escrow account and Special account of non-resident corporate for open offers/exit offers and delisting of shares.
• AD Category-I banks have also been permitted to open and maintain, without prior approval of RBI, non-interest bearing Escrow accounts in Indian Rupees in India on behalf of residents
and/or non-residents, towards payment of share purchase
consideration and/or provide Escrow facilities for keeping
securities to facilitate FDI transactions, subject to terms and
conditions specified by RBI.
4. Pledging of Shares
• Promoter of an Indian company (borrowing company), which
has raised ECB, may pledge the shares of the borrowing company or that of its associate resident companies, for the purpose of securing ECB raised by the borrowing company,
provided a no-objection for the same is obtained from an authorized dealer.
5. FDI in Limited Liability Partnerships
• FDI in LLPs is allowed subject to certain prescribed conditions.
6. Inclusion of ‘Apiculture’ in ‘Agriculture & Animal Husbandry’
• 100% FDI under automatic route allowed in Floriculture,
Horticulture, Apiculture and Cultivation of Vegetables and
Mushrooms under controlled conditions.
7. Additional condition introduced for ‘Single Brand Product Trading’
• The FDI Policy requires the foreign investor to be the owner of
8. Clarification regarding Financial Services
• Foreign investment in other financial services, other than those
specified in the FDI Policy, would require prior approval of the
9. Increase of foreign investment in Terrestrial Broadcasting/FM Radio
from 20% to 26%
• The FDI Policy has enhanced the limit to 26% under approval route.
10. Foreign investment in Construction-Development Sector
• Exemption from several conditions has been granted for
construction development activities in education sector and old
11. Inclusion of ‘Basic and Applied R&D on Bio-Technology, Pharmaceutical
Sciences/Life Sciences’ as an ‘Industrial Activity’
• Definition of ‘Industrial Activity’ has been expanded to include
the ‘basic and applied R&D on bio-technology, pharmaceutical
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
Vide Notification dated September 23, 2011, Securities Exchange Board of
India (SEBI) has notified the much awaited New Takeover Regulations namely
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
(hereinafter referred to as “SEBI (SAST) Regulations, 2011”) which will replace the existing Takeover (SAST) Regulations, 1997. The new Regulations shall come into force on the 30th day from the date of their publication in the Official Gazette i.e. w.e.f. October 22, 2011, any acquisition or sale of shares of Listed Company shall be governed by provisions of SEBI (SAST) Regulations, 2011.
1. Definition of “Control” modified:
• New definition of Control has been introduced as under: “Control” includes 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 their shareholding or management rights or shareholders agreements or voting agreements or in any other manner: Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely
by virtue of holding such position.
2. New Definitions Introduced
• “Enterprise Value” means the value calculated as market capitalization of a company plus debt, minority interest and preferred shares, minus total cash and cash equivalents.
• “Volume weighted average market price” means the product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares traded on the stock exchange.
• “Volume weighted average price” means the product of the number of equity shares bought and price of each such equity share divided by the total number of equity shares bought.
• “Weighted average number of total shares” means the numbe of shares at the beginning of a period, adjusted for shares cancelled, bought back or issued during the aforesaid period, multiplied by a time-weighing factor.
3. Increase in Initial Threshold Limit from 15% to 25%.
• The Initial Threshold limit provided for Open Offer obligations is increased from 15% to 25% of the voting rights of the Target
4. Creeping Acquisition Limit raised from 15%-55% to 25%-75%:
• A single and clear creeping acquisition bracket. This will be available to all persons holding 25% or more but up to 75% i.e. maximum permissible non-public holding shall be eligible for creeping acquisition of 5% each financial year.
5. Open Offer Trigger Point based on Individual Holding:
• Individual Acquirer Shareholding shall also be considered for determining the Open Offer Trigger Points apart from
consolidated promoter shareholding.
6. Change in Control
• Irrespective of acquisition or holding of shares or voting rights in a target company, no acquirer shall acquire, directly or indirectly, control over such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with the SEBI (SAST) Regulations, 2011.
7. Detailed provisions relating to Indirect Acquisition:
• The SEBI (SAST) Regulations, 2011 prescribes detailed provisions relating to Indirect Acquisitions of shares or control.
8. Detailed provisions for Voluntary Open Offer
• The concept of voluntary open offer has been separately dealt in
the SEBI (SAST) Regulations, 2011.
• In case of voluntary open offer, the offer size may be of 10% or
more of the voting rights at the will of the Acquirer.
9. No Exemption in case of acquisition from other competing acquirer
10. Increase in Offer Size from 20% to 26%.
• The Offer Size is increased upto 26%.
11. Frequently Traded Shares
• For determining the frequency of trading in shares, the trading
turnover during the 12 months preceding the month in which the
Public Announcement is made will be considered. Further, the
volume of trading for frequently traded company increase from
5% to 10% to have a more realistic picture.
12. New Provisions in case of increase in shareholding beyond the maximum
permissible non-public shareholding due to Open Offer
• Obligation on the acquirer to bring down the non-public
shareholding to the level specified and within the time permitted
under Securities Contract (Regulation) Rules, 1957;
• Ineligibility to make a voluntary delisting offer under SEBI
(Delisting of Equity Shares) Regulations, 2009, unless a period of
twelve months has elapsed from the date of the completion of
the offer period.
13. Abolition of Non-compete fees.
• Any amount paid to the Promoters/Sellers whether as consideration, non-compete fee or control premium or otherwise, shall be added in Offer Price and hence public shareholders shall be given offer at the highest of such prices.
14. Provisions relating to Exemption from Open Offer has been modified
15. Revision in SEBI fees to be given while submitting the draft letter of offer
16. Recommendation on the Open Offer by the Board of Target Company
• A recommendation on the offer by the Board of Target Company
has been made mandatory and such recommendations shall be
published at least two working days before the commencement
of the tendering period in the same newspapers where the public
announcement of the open offer was published, and
simultaneously, a copy of the same shall be sent to SEBI, Stock
Exchange and Manager to the Offer.
17. New Formats Introduced for PA, LOO, and Disclosures, Exemptions,
Recommendation on the Open Offer by the Board of Directors and so on.
Simultaneously with the amendment in SEBI (SAST) Regulations, 2011,the format of disclosure of shareholding as provided under Clause 35 of the Listing Agreement in respect of following has been replaced:
• Statement showing holding of securities (including shares, warrants, convertible securities) of persons belonging to the category “Promoter and Promoter Group”;
• Statement showing holding of securities (including shares, warrants, convertible securities) of persons belonging to the category “Public” and holding more than 1% of the total number of shares;
• Statement showing holding of securities (including shares, warrants, convertible securities) of persons (together with PAC) belonging to the category “Public” and holding more than 5% of the total number of
shares of the company.
The Draft Lokpal Bill
The draft Lokpal Bill proposes to establish a central government anti- corruption institution, i.e., ‘Lokpal’, supported by Lokayukta at the state level. Lokpal is intended to be completely independent of the government and is supposed to be free from ministerial influence in its investigations. Members are to be appointed by judges, Indian Administrative Service officers with a clean record, private citizens and constitutional authorities through a transparent and participatory process.
The National Manufacturing Policy
The first National Manufacturing Policy aims at bringing about a quantitative and qualitative change with the following six objectives:
1. Increase manufacturing sector growth to 12-14% over the medium term
to make it the engine of growth for the economy. The 2 to 4% of
differential over the medium term growth rate of the overall economy
will enable manufacturing to contribute at least 25% of the National GDP
2. Increase the rate of job creation in manufacturing to create 100 million
additional jobs by 2022.
3. Creation of appropriate skill sets among the rural migrant and urban poor
to make growth inclusive.
4. Increase domestic value addition and technological ‘depth’ in
5. Enhance global competitiveness of Indian manufacturing through
appropriate policy support.
6. Ensure sustainability of growth, particularly with regard to the
environment including energy efficiency, optimal utilization of natural
resources and restoration of damaged/degraded eco-systems.
Some of the salient features of the first National manufacturing Policy are as
• Liberalization in labour and environment regulations.
• Single window clearance for all issues related to industrial units. Setting up of national investment and manufacturing zones.
• Special purpose vehicle created to develop infrastructure on public-
• Incentivisation of green technology.
• Financial and tax incentives to small and medium enterprises.
The Companies Bill, 2011
The Cabinet on October 25, 2011 has deferred a decision on the Bill
following objections by the finance and law ministries. It is learnt the
objections were related to the newly introduced provisions regarding the
corporate social responsibility norms. The jurisdictional issues with regard to the role of Securities and Exchanges Board, the Central Board of Direct Taxes and certain statutory provisions under the proposed Bill were also contentious matters.
Yograj Infrastructure Limited v. Ssang Yong Engineering and Construction Company Limited, JT 2011 (10) SC 588
The Supreme Court held that in cases where the parties specifically agree that the law governing an arbitration would be a law other than the proper law of the agreement, then in that case, it is not open to the parties to contend that the proper law of the agreement would be applicable to the arbitration proceedings as well.
M/s Delhi International Airport Private Limited v. Union of India, JT 2011 (10) SC 649
‘Term contracts’ need to be viewed in the context of the judicial thought process with respect to ‘contract labour’. The following pronouncement is useful for the purpose.
The Supreme Court held that Delhi International Airport Private Limited (DIAL) is a contractor of Airport Authority of India (AAI) as it meets the definition of a Contractor under Contract Labour (Regulation and Abolition) Act, 1970. It has further held that the notification dated July 26, 2004 issued by the central government under Section 10 of Contract Labour (Regulation and Abolition) Act, 1970 was equally binding on DIAL and DIAL must abolish all contract labour as per the terms of the notification. The said notification prohibits employment of contract labour of trolley retrievals in the establishment of the Airport Authority of India.
Suraj Lamp and Industries (P) Ltd. thru. DIR v. State of Haryana and Anr., Special Leave Petition (C) No. 13917 of 2009, decided on 11.10.2011
The Supreme Court reiterated the legal position that immovable property can be legally and lawfully transferred/conveyed only by a registered deed of conveyance. Transactions of the nature of ‘GPA sales’ or ‘SA/GPA/WILL
transfers’ do not convey title and do not amount to transfer, nor can they be recognized or valid mode of transfer of immoveable property. The courts will not treat such transactions as completed or concluded transfers or as conveyances as they neither convey title nor create any interest in an immovable property. They cannot be recognized as deeds of title, except to
the limited extent of Section 53A of the Transfer of Property Act.
Aica Kogyo Company Limited (AICA Japan), and Asia Laminates India Private Limited (AICA India), CCI Order dated September 30, 2011
Competition Commission of India – Order dated September 30, 2011
A notice was filed by Aica Kogyo Company Limited (AICA Japan), and Asia
Laminates India Private Limited (AICA India) under Sub. Section (2) of
Section 6 of the Competition Act , 2002 on September 7, 2011 to the
Competition Commission of India (CCI) relating to a proposed combination by which AICA Japan proposes to acquire, through its wholly owned subsidiary, AICA India, the Laminates Division (sunmica Division) of the Bombay Burmah Trading Corporation Limited (BBTCL).
The CCI held that given the presence of a large number of players with fragmented market shares in the surfacing/ decorative laminates business in India the proposed combination is not likely to have an appreciable adverse affect on competition in India.
Analysis of the Competition Act, 2002 v. the Petroleum and Natural Gas Regulatory Board Act, 2006
The Competition Commission of India is a special national level expert body created under the Competition Act, 2002 to monitor and regulate competition across all markets in India and protect the interest of consumers in India. The Competition Commission has been provided with a legal framework to determine competition issues. In this regard, it has been vested with powers to undertake inquiries, summon and enforce the attendance of any person and examine him under oath, require the discovery and production of documents, receive evidence on affidavit, issue commissions for the examination of witnesses or documents, requisition any public record or document , call upon
such experts from the field of economics, commerce, accountancy,
international trade or from any other discipline as it deems necessary to assist the Commission in the conduct of any enquiry by it, direct any person, issue
interim order, issue final order, impose penalty and has the power to regulate its own procedure.
There are various laws that have been enacted to regulate specific sectors and which have provided for the creation of sector specific regulatory bodies. The Petroleum and Natural Gas Regulatory Board Act 2006 has created the Petroleum and Natural Gas Regulatory Board to regulate the refining processing, storage, transportation, distribution, marketing and sale of
petroleum, petroleum products and natural gas. It has also been established to protect the interests of the consumers and entities engaged in specified activities relating to petroleum, petroleum products and natural gas. The Board has to also ensure uninterrupted and adequate supply of petroleum,
petroleum products and natural gas in all parts of the country and to promote competitive markets.
There are certain provisions of the Petroleum and Natural Gas Regulatory Board Act, 2006 that can potentially overlap with the functions of the Competition Commission. These provisions though provide for protecting interest of consumers through fair trade and competition do not however have any detailed legal framework to determine whether there has been
violation of the competition principles. The extensive legal framework for determining the competition issues is provided for under the Competition Act.
Further, the policies of the Petroleum Regulatory Board seek to identify a problem in the beginning and create an administrative machinery to address behavioral issues before the problem arises whereas the competition policy addresses the problem afterwards in the backdrop of the market conditions.
The competition legislation grants private right of action along with provision of damages. This ensures a qualitatively higher standard of consumer welfare which is unavailable under the legislative framework of the Petroleum Regulatory Board. In fact the right of private action is unclear under the various provisions of the PNGRB Act 2006. Unlike the Competition Act 2002,
it does not define a person. There is also an absence of any guidance under the enactment to construe ‘person’. Further, there is no possibility of recovery of any damages for anti-competitive conduct under the PNGRB Act.
In view of the observations highlighted above, it is clear that the Competition Commission of India is the main statutory authority regulating and evaluating competition issues in all markets in India and ensuring that no practice develops that has an adverse effect on competition in all sectors . The Petroleum And Natural Gas Regulatory Board in relation to competition issues should be allowed to refer matters to the Competition Commission of
Business News for September and October, 2011
September 06, 2011- Cabinet clears Land Acquisition Bill. It may be passed in the winter session.
September 07, 2011- The Nuclear Safety Regulatory Authority Bill 2011 will establish a legal framework to regulate nuclear and radiation safety and establish an authority to carry out the task. The proposed regulator introduced in the Lok Sabha will replace the Atomic Energy Regulatory Board.
September 10, 2011- Government would like to introduce the Companies Bill 2011 in the winter session of Parliament. September 13, 2011- 1. Foreign Institutional Investors will now be able to invest up to 5 billion dollars in infrastructure bonds having residual maturity of one year at the time of purchase and initial maturity of five years or more. The lock in period has been reduced to one year.
2. Environment Minister releases environmental clearance norms for projects requiring forest land.
September 14, 2011- 1. It is not for judiciary to repeal or amend the law on capital punishment says Supreme Court.
2. The Delhi High Court stayed order of Controller of Certifying Authorities directing Yahoo India to pay 11 lakhs as penalty for its failure to provide information about some persons including their e-mail I.Ds. The Bench directed Yahoo India to furnish the requisite information within a week. Yahoo contended that CCA is not authorized to impose fine or penalty. Matter listed for further hearing on November 08, 2011.
3. IRDA issues final guidelines, mediclaim portability starts in October.
4. A special voluntary disclosure scheme for bringing back black money stashed in tax havens abroad may be in the offing. CBDT is recommending to the Government.
September 15, 2011- 1. Supreme Court directs Delhi International Airport
Limited to abolish its contract labour system.
2. UPA government is drafting a law that will give people the right to be
compensated if they have not received services on time. Government Officials will have to mandatorily address citizens’ complaints within a specified time limit according to provisions in the Right to Service Delivery and Grievance Redressal Bill.
September 21, 2011- 1. Draft on new SEZ rules soon; relook at land ceiling norms.
2. Supreme Court: Union Cabinet can decide on Majithia wageboard award pending case.
3. The Supreme Court has criticized Telecom regulator TRAI’S report assessing zero loss in 2G spectrum allocation.
4. The Central Bank has directed Banks to implement improved fraud risk management practices by September 30, 2012.
5. TDSAT sets aside DOT demand on Idea for not rolling out services on time.
September 24, 2011- 1. Supreme Court split on black money recall directive. 2. U.S Internet rules that tackle the controversial issue of balancing consumer and content provider interests against those who sell access to the web will take effect from November 20, 2011.
September 27, 2011- Securities and Exchange Board of India proposes self regulatory body for investment advisors.
September 28, 2011- 1. Investment Bankers will not have it easy as SEBI plans to tighten IPO rules.
2. Insurance Regulatory and Development Authority may allow insurers to invest in derivatives and commodity fixtures in gold and silver.
September 30, 2011- Cabinet approves new Mining Bill for sharing profits, royalties with local communities.
October 1, 2011- 1. Mining Bill cleared; Companies to share profits with locals. 2. The government amended the foreign direct investment rules keeping all instruments with in-built options such as right to sell back shares out of FDI ambit. The new policy issued by the Department of Industrial Policy and Promotion (DIPP) imposes an additional condition on FDI in single brand retail saying that the investor must own the brand. The policy says that only equilty shares, fully ,compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares with no built in options of any type would qualify as eligible instruments for FDI.
October 5, 2011- SEBI amends clauses on equity listing, DR, SME listing. RBI has unveiled a new instrument infrastructure debt fund to channel money into infrastructure financing. October 6, 2011- 1. PAN must for payment of premium above Rs. 50,000/- in cash says insurance regulator IRDA.
2. SEBI makes it mandatory for companies to disclose promoters’ shares.
October 8, 2011- The government will allow companies to use their own accounting terms in the new reporting format from the next fiscal year accommodating an industry request that the new rule be relaxed t make data comparison easy for shareholders.
October 9, 2011- Reserve Bank of India relaxed some foreign exchange facilities recently for NRI’s and persons of Indian Origin. RBI has further liberalized foreign exchange facilities for individuals under FEMA.
October 10, 2011-1. The Competition Appellate Tribunal registered an
appeal filed by DLF against Rs. 630 crore fine imposed by CCI on the reality major for abuse of dominant market position.
2. Communications Minister Kapil Sibal will unveil the Draft National
Telecom Policy 2011 today containing new rules for the sector. The revised rules will replace the existing framework that has been in place since 1999. It aims to make the country’s telecommunication sector more transparent, relax merger and acquisition norms to encourage consolidation and also give more teeth to sector on regulator TRAI. As per the draft New Telecom Policy,
telecom users will be able to avail free roaming and keep their phone
numbers even if they switch service providers anywhere in the country.
Indian telecom manufacturers are set to get incentives under the New
Telecom Policy. The government will announce the final policy in December this year.
October 11, 2011- 1. A high level inter-ministerial group chaired by the P.M. has decided to continue with 100% foreign direct investment regime in the pharmaceuticals sector. But takeover of Indian drug companies by foreign companies will face stringent scrutiny by the country’s competition authority to ensure that they do not facilitate collusion and predatory pricing.
2. The Companies Bill, 2009 as per Law Minister Salman Khurshid, would be hopefully passed in winter session of parliament. The new Companies bill promises greater shareholder democracy and stricter corporate governance
norms. For the first time the Bill has introduced ideas like mandatory corporate social responsibility, class action suits and a fixed term for independent directors. It also proposes to tighten the laws for raising money from the public. The Bill also seeks to prohibit any insider trading by Companies Directors or key managerial personnel by treating such activities as a criminal
October 12, 2011- 1. Government is seriously considering raising the bar on foreign direct investment cap in single brand retail from 51%.
2. The word “tweet” is to become a registered trademark of the micro-blogging website twitter.
October 14, 2011- 1. Cabinet has approved introduction of Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Bill, 2011 in the winter session of the Parliament. This would allow the banks to recover their dues and deal with their non-performing loans effectively without compromising borrowers rights.
2. Cable Networks will need to switch to digital set-top boxes beginning March, 2012. The Cable TV Networks (Regulation) Act will be amended through an ordinance.
October 15, 2011- Supreme Court suggests fine in cheque bouncing cases.
October 16, 2011- Supreme Court while deciding an appeal filed by the State
against Nazrl Islam has held that a person facing criminal cases cannot be considered for appointment in government service unless acquitted of the charges.
October 20, 2011- 1. The National Housing Bank which is the housing finance regulator has banned the levy of pre-payment penalty.
2. The reserve Bank today said that Indians who have non-resident accounts in
the country can now hold them in any currency which is fully convertible.
October 25, 2011- Consumers are set to earn more on their savings accounts with the RBI de-regulating interest rates. Government clears the National Manufacturing Policy which seeks to set up mega industrial zones and create 100 million jobs by 2022.
Bills to be cleared in the Winter Session
• Land Acquisition Bill
• The Nuclear Safety Regulatory Authority Bill, 2011
• The Companies Bill, 2011 .The Companies Bill, 2009 as per Law Minister
Salman Khurshid would hopefully be passed in winter session of parliament.
• IRDA issues final guidelines, mediclaim portability starts in October 3.
• UPA government is drafting a law that will entitle people the right to be
compensated if they have not received services on time. Government
Officials will have to mandatorily address citizens’ complaints within a
specified time limit according to provisions in the Right to Service Delivery
and Grievance Redressal Bill.
• Cabinet approves new Mining Bill for sharing profits, royalties with local communities. Kapil Sibal unveils the Draft National Telecom Policy, 2011 containing new rules for the sector. The government will announce the final policy in December this year. Cabinet has approved introduction of Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Bill, 2011 in the winter session of the Parliament.
Union Cabinet approves the first National Manufacturing Policy on October 25, 2011
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