30 July, 2018
INTRODUCTION
This newsletter covers the updates about the developments in Indian companies, foreign exchange and labour laws during the month of June 2018. In this newsletter we have summarized the key regulatory developments in these areas and certain important judgements of the National Company Law Tribunal and the National Company Law Appellate Tribunal (“NCLAT”) with respect to oppression and mismanagement and High Courts with respect to labour laws. Please see below the summary of the relevant developments, proposals and judgements.
1.BREACH OF RIGHT OF FIRST OFFER UNDER THE ARTICLES OF THE COMPANY AMOUNTS TO OPPRESSION AND MISMANAGEMENT
Pinakin Kharwar vs. Nagina Processors Privet Limited – NCLAT, 28 May 2018
It was mutually decided between the petitioner and the respondent to hold 50% shareholding in each, company A and company B. However, petitioner was given around 33% and 12% shareholding in each company respectively. The petitioner filed two separate petitions against each company. The petitioner also filed an interim application stating that the respondent was liable for acts of oppression and mismanagement as an extraordinary general meeting was called to remove the petitioner from the directorships of the companies without giving due notice to the petitioner and the respondent was in violation of the articles of association (“AoA”) as he had transferred his shares to a third party without offering them to the petitioner first.
The National Company Law Tribunal, Hyderabad bench (“NCLT Hyderabad”) passed the order in favour of the respondents.
The National Company Law Appellate Tribunal (“NCLAT”) overruled the order passed by NCLT Hyderabad and stated that:
- the respondent was liable for a serious act of oppression as he transferred the entire business, and not just the running of the business to a third party without the knowledge of the petitioner;
- the petitioner had not been given notice to attend the extraordinary general meeting even though he was a shareholder; and
- the respondent was in violation of the AoA as the article on restriction on transfer of shares stated that no member could transfer his shares to a third party without offering them first to an existing member.
Respondents were directed to pay INR 1,00,000 each to the petitioner and the matter was sent back to the NCLT.
2.REMOVAL OF DIRECTOR TO GAIN CONTROL OVER THE AFFAIRS OF THE COMPANY AMOUNTS TO OPPRESSION AND MISMANAGEMENT
Deba Kumar Hazarika & Ors. vs. Assam Chemicals & Pharmaceuticals Private Limited-NCLT,8March 2018
When the directors of the company were made aware of the illegal acts of the company from various newspapers, they called for an extraordinary general meeting for the removal of the managing director (“Respondent”). The Respondent obtained an injunction, restraining the companyfrom holdinganyextraordinarygeneralmeeting.Unawareoftheinjunction,the majority shareholders of the company held the extraordinary general meeting and passed a resolution to remove the Respondent as the managing director of the company. Subsequently, another extraordinary general meeting was held and Deba Kumar was appointed as the new managing director of the company however the Respondent continued to be on the board of the company. The Respondent continued to act in a wanton fashion by, inter alia: (a) issuing shares of the company to himself and his associates without taking the consent of all the existing shareholders which was required to be done under the articles of association of the company; (b) removing Deba Kumar from the office of the managing director of the company; and (c) appointing another person in place of Deba Kumar.
The present petition was filed by the petitioner (Deba Kumar) before the Company Law Board, that at a later stage, shifted to the National Company Law Tribunal, Guwahati bench (“NCLT Guwahati”). The NCLT Guwahati on the issue of removal of Respondent from directorship, the NCLT relied on the concept of corporate democracy and went on to state that the majority shareholders had every right to participate in the management of the affairs of thecompany through the board of directors. The majority shareholders who are competent to vote can remove any director, even though such person was appointed as director by the voters whose aggregate shareholding was more than the shareholding of the majority shareholders.
Accordingly, where serious infighting among the directors of a company caused serious prejudice to the company and its stakeholders, the provisions of section 398 of the Companies Act, 1956 (Application to Company Law Board for relief in cases of mismanagement) were attracted.
The petition was allowed by the NCLT with certain conditions.
3.COMMENCEMENT NOTIFICATION FOR CERTAIN SECTIONS OF THE COMPANIES (AMENDMENT) ACT, 2017
On 13 June 2018, the Ministry of Corporate Affairs, issued a commencement notification which has amended certain provisions of the Companies Act 2013. The amended provisions are as follows:
Significant beneficial ownership
Section 90 of the Companies Act, 2013 has now been amended to provide that any person owning individually, or collectively, more than 25% of beneficial interest in shares, or who exercises control over the affairs of the company, shall furnish a declaration with the company stating the nature of his interest and other particulars. The eneficial interest in a share has been defined by the section to include, directly o indirectly, through any contract or arrangement, the right of a person with any other person to:
- exercise any right attached to a share; or
- receive any dividend or distribution with respect to such a share.
It is also mandatory for companies to maintain a register recording the interest of person holding beneficial interest in shares and file this information with the Registrar of Companies.
Further, the company may issue a notice to a person for obtaining information, if the company has reasonable cause to believe that the person:
- is a significant beneficial owner of the company; has knowledge of a significant beneficial owner; or
- has been a significant beneficial owner at any time during the 3 years preceding the date on which the notice was issued.
If such information is not furnished within a period of 30 days from the date of the notice, thecompanymayapplytotheNCLT andthe NCLTmaypassanorderrestrictingthe interest on concerned shares. The aggrieved parties have a right to appeal against such order.
- The section prescribes penalties each for a company and a person, if the provisions of the section are not complied with.
- The penalty prescribed is monetary in nature.
- The penalty prescribed is monetary in nature.
- Investigation of ownership of company.
Consequential changes have been made to section 216 of the Companies Act , 2013 by adding that the Central Government can inspect a company for the purpose of determining true persons who have beneficial interest in the shares of the company.
Return to be filed in case of promoters' stake changes The requirement under section 93 of the Companies Act, 2013 for a listed company to file form MGT-10 with the Registrar of Companies in case of a change in the number of shares held by promoters and top ten shareholders of the company is completely omitted.
Place of keeping and inspection of registers, returns etc. Section 94 of the Companies Act, 2013 is amended to the effect that if now registers maintained by a company are not kept in the registered office of the company and are kept elsewhere, then a special resolution is to be passed at the general meeting of the compan but the requirement of furnishing a copy of the resolution with the Registrar of Companies has been waived off.
I. Annual general meeting Section 96 of the Companies Act, 2013 is amended by adding that an annual general meeting o an unlisted company can be held anywhere in the country if consent of all the members is obtained in advance
The Ministry of Corporate Affairs notified the Companies (Significant Beneficial Owners) Rules, 2018 (“Beneficial Owners Rules”) with respect to sections 89 and 90 of the Companies Act, 2013, which, inter alia deal with the beneficial interest in shares allotted by companies in India.
4. COMPANIES (SIGNIFICANT BENEFICIAL OWNERS) RULES, 2018
The main features of the Beneficial Owners Rules are as follows:
“Significant beneficial owners” have been defined to mean those owners holding the in shares, capital or interest of a company, partnership, or trust as the case maybe.
Global depository receipts, compulsory convertible preference shares or compulsory of the Companies Act, 2013 for an order directing that the shares be subject to the following restrictions:
restriction on transfer of interest attached to the shares in question; suspension on the right to receive dividend in relation to the shares in question; suspension of the voting rights in relation to the shares in question; and restriction on any other rights with the shares in question.
The Beneficial Owners Rules clarify that these shall not be applicable to the holding of shares of companies/body corporates in case of pooled investment vehicles/investment funds such as mutual funds, alternative investment funds, real estate investment trusts and infrastructure investment trusts regulated by the Securities and Exchange Board of India
1. SHRI LAXMAN BALU DEUALKAR VS. KOLHAPUR DISTRICT CENTRAL CO-OP BANK LTD
DEVELOPMENTS IN LABOUR LAWS IN JUNE 2018
1. Shri Laxman Balu Deualkar vs. Kolhapur District Central Co-op Bank Ltd.- Bombay High Court, 14 June 2018
Gratuity can be forfeited on the basis of a domestic inquiry. Conviction by a court of law is not needed to forfeit gratuity The petitioner was the manager of the Kolhapur District Central Co-op Bank Limited (the Bank). The petitioner, on many accounts, fraudulently opened a bogus account and withdrew a total sum of INR 33,000 such account. Show cause notice was issued to the petitioner. Services of the petitioner were therefore terminated. Petitioner filed an application in the Labour Court for payment of gratuity under Payment of Gratuity Act, 1972 (Gratuity Act). Respondent bank issued a second show cause notice to the petitioner for forfeiture of amount of gratuity. The respondent bank had forfeited the gratuity payable to the petitioner under be forfeited if the services of the employee have been terminated for any act which constitutes an offence involving moral turpitude, provided it is committed by the employee in the course
The Bombay High Court:
Relying upon various High Court judgments and rejected the contention of the petitioner that actual conviction needs to take place in order to be able to forfeit gratuity, held that language used in section 4 (6) (b) (ii) of the Gratuity Act does not contemplate actual conviction of the employee
Upheld the order passed by the Supreme Court which stated that benefits are not paid to the employee gratuitously but for her dedication/devotion to her work which should be free of misconduct;
- If termination is justifiable through a domestic inquiry, there is no reason why a further proof in a court would be necessary for forfeiting gratuity; and
- Gratuity was denied to the petitioner under section 4 (6) of the Gratuity Act.
2. EXISTENCE OF AN 'EMPLOYER-EMPLOYEE' RELATIONSHIP IS ESSENTIAL FOR PROTECTION WHEN MATTER IS SUB JUDICE UNDER THE INDUSTRIAL DISPUTES ACT, 1947
IDBI Limited vs. Bhartiya Kamgar Sena- Bombay High Court, 15 June 2018
The Petitioner bank had outsourced cleaning of various offices to contractors who in turn engaged around 270 workers. It is the petitioner's contention that the contractors and workers share an employer-employee relationship. The services of 3 workers were terminated in 2005 and an industrial dispute was raised. In 2017, the respondent workers filed an application demanding status quo to be maintained in terms of their services. The Industrial Tribunal at Mumbai granted this application. Aggrieved, the petitioner bank filed this petition.
Respondent relied on section 33 of Industrial Disputes Act, 1947 (ID Act) and contended that during the pendency of the proceedings, the employer could not alter the conditions of the service. The High Court observed that it must be found that at least prima facie there exists an employer-employee relationship for section 33 of the ID Act to be attracted. The High Court overruled the order of the Industrial Tribunal as without considering whether the workmen could be prima facie considered to be employees of the petitioner bank, the Industrial Tribunal could not have given relief of status quo in respect of their conditions of service. Holding that the impugned order suffered from a jurisdictional error, the High Court held that the same could not be sustained. Accordingly, the petition was allowed, and the impugned order was set aside
3. ALL WOMEN ARE ELIGIBLE FOR MATERNITY BENEFIT LEAVES UNDER THE MATERNITY BENEFIT ACT, 1961, IRRESPECTIVE OF THE NATURE OF THEIR EMPLOYMENT
Rakhi vs. State of Kerala- Kerala High Court, 27 February 2018
Petitioner, who is a program manager in the educational department of Government of Kerala,filed a writ petition against the State of Keralaas maternity leave was granted to the petitioner only for a period of 90 days and not 180 days as required under the Maternity BenefitAct,1961(“MaternityBenefitAct”).The findings of the Kerala High Court wereas follows:
- that the State has a responsibility to see that a restricted meaning is not given to welfare legislations that the right to maternity leave is an essential element of the fundamental right to life as far as a woman is concerned;
- the contention of the respondent which stated that the petitioner was a contract employee and therefore will not be eligible to be governed by the Maternity Benefit Act was rejected. The court held that this contention cannot be allowed as since it would amount to discrimination against women employees only for the reason that they are engaged in projects in contractual capacities;
- e effect that the project on which the petitioner was engaged was only for 1 year and giving a paid maternity leave of 6 months would obliterate the project, was rejected as the service of the petitioner was continuous as her contract was renewed after every 1 year; and the petitioner was granted 26 weeks of paid maternity leave.
1. AMENDMENTS TO FOREIGN EXCHANGE MANAGEMENT (TRANSFER OR ISSUE OF SECURITY BY A PERSON RESIDENT OUTSIDE INDIA) REGULATIONS, 2017
DEVELOPMENTS IN FOREIGN EXCHANGE LAWS IN JUNE 2018
The Reserve Bank of India (“RBI”) vide notification dated 01 June 2018, notified the followingprovisionsoftheForeignExchangeManagement(TransferorIssue of Security by a Person Resident Outside India) Regulations,2017(“TISPROIRegulations"):
- Proviso (ii) to Regulation 10(1) provides that in cases where there is a breach of Foreign Portfolio Investor (“FPI”) limits or sectoral limits, the FPI shall sell such capital instruments to a resident Indian eligible to hold such instruments within the time stipulated by RBI. Breach of such FPI limits or sectoral limits between the time of acquisition and sale, shall not be considered as contravention of provisions of the TISPRO Regulations provided that such sale is within the time as prescribed by the RBI; and
- Proviso (ii) to Regulation 10(2) provides that in cases where there is a breach of non- resident Indian/overseas citizen of India limits or sectoral limits, non-resident Indian/overseas citizen of India shall sell such capital instruments to a resident Indian eligible to hold such instruments within the time stipulated by RBI. Breach of such non- resident Indian/overseas citizen of India limits or sectoral limits between the time of acquisition and sale, shall not be considered as contravention of provisions of the TISPROI Regulations, providedthat suchsaleis within the time asprescribed by the RBI.
The aforementioned provisions have come into force from 02 June 2018.
2. RBI UPDATE ON INVESTMENT TRUST
The RBI on 07 June 2018 has issued a notification which permits the Systemically Important Core Investment Companies (“CIC-NDSI”) to invest in the units of an Infrastructure Investment Trust (“InvIT”). A CIC-NDSI has been defined by the RBI to mean a core investment company having total assets of not less than INR 1 billion either individually or in aggregate along with other CIC-NDSI in a group and which raises or holds public funds.
Regulations.
The notification provides that the CIC-NDSI can hold the units of the InvIT as a sponsor. A sponsor as defined under the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“SEBI Invit Regulations”) is body corporate which sets up (and holds units) in the InvIT.
Further, the notification provides that the holding of the CIC-NDSI in the InvIT cannot exceed the amount of 15% of units for a period of 3 years as prescribed under the SEBI Invit.
3.INVESTMENT BY FOREIGN PORTFOLIO INVESTORS (FPI) IN DEBT – REVIEW
The RBI on 15 June 2018 has vide a circular decided to provide some operational flexibility as well as transition path for FPIs and custodians to adapt to TISPROI Regulations. The following directions have been issued:
Revision of minimum residual maturity requirement
FPIs have been permitted to invest in corporate bonds with minimum residual maturity of above 1 year instead of 3 years earlier, subject to the condition that short- terminvestmentsincorporatebondsbyanFPI shall not exceed 20% ofthetotal investment of that FPI in corporate bonds;
At the end of any day, all investments with residual maturity of up to 1 year will be reckoned for the 20% limit; and
Any short-term investment made on or before 27 Apri l2018 shal lbe exempted from the above mentioned provisions
Single/Group investor-wise limits in corporate bonds FPI investment in corporate bonds shall be subject to the following requirements
The investment shall not exceed 50% of any issue of a corporate bond. In case an FPI, has invested in more than 50% of any single issue, it shall not make further investments in that issue;
No FPI shall have an exposure of more than 20% of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate). In case an FPI exposure, as on 27 April 2018, is in excess of 20% to any corporate (including exposure to entities related to the corporate), it shall not make further investments in that corporate;
New investments (i.e. investments made after 27 April 2018) by FPIs would be exempted from the abovementioned requirement till 31 March 2019. These 'new' investments will, however, have to comply with this requirement thereafter;
TofacilitatenewlyregisteredFPIstobuildupadiversifiedportfolio,FPIsregistering after 27 April 2018 are permitted to comply with the abovementioned requirement by 31 March 2019, or 6 months from the date of registration, whichever is later;
Requirements of single/group investor-wise limits in corporate would not be applicable to investments by multilateral financial institutions and
c. Pipeline investments in corporate bonds FPIs investment transactions in corporate bonds that were under process but had not materialized as on 27 April 2018 (“Pipeline Investments”), shall be exempt from the investment requirements specified above, subject to the custodian of the FPI reasonably satisfying itself that:
d. the major parameters such as price/rate, tenor and amount of the investment have been agreed upon between the FPI and the issuer on or before 27 April 2018;
the actual investment will commence by 31 December 2018; and
ii. the investment is in conformity with the extant regulations governing FPI investments in corporate bonds prior to 27 April 2018.
Custodians may, based on their assessment of adherence to the above conditions, permit, or not permit, as the case may be, the Pipeline Investments by FPIs without reference to the RBI.
Other changes FPI investment in partly paid debt instruments is not allowed.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
al@acuitylaw.co.in
