INTRODUCTION

 

This newsletter covers key updates about the developments in corporate and labour law during the month of August 2019. In relation to corporate law, we have covered key regulatory developments including (a) circular issued by Ministry of Corporate Affairs (MCA) clarifying ‘appointed date’ of mergers and acquisition; (b) notifications issued by MCA amending the provisions related to differential voting rights under the Companies Act, 2013 (Companies Act); (c) the provisions relating to debenture redemption reserve; (d) the time period within which start-ups can issue employee stock option; and (e) key features of the regulatory sandbox framework issued by Reserve Bank of India (RBI). 

 

In relation to labour law we have covered (a) the key provisions of the Code on Wages, 2019; and (b) a Delhi High Court judgment stating that probationer is not a workman under the Industrial Dispute Act, 1947 and the termination does not amount to retrenchment.

Please see below the summary of the abovementioned regulatory developments.

 

CORPORATE LAW

‘Appointed date’ is crucial for arriving at values appearing in books of accounts for the purpose of transfer to transferee company for transfer of assets / business and also for arriving at the value of the shares for transferor and transferee companies i.e. exchange ratio in a scheme of amalgamation/arrangement.

 

Recently, there was some uncertainty observed from the behaviour of National Company Law Tribunal (NCLT) and Regional Directors where they were taking a rigid view that ‘appointed date’ must be a specific calendar date and rejected the concept of ‘appointed date’ linked with scheme becoming effective upon satisfaction of certain agreed conditions in scheme and receipt of requisite approvals including NCLT approval. In fact, Mumbai NCLT stirred a hornet’s nest by interpreting that ‘appointed date’ should be the valuation date i.e. date when the merger consideration is determined.

 

In this context, the clarification from MCA vide its circular dated 21 August 2019 is a welcome step in unpacking and resolving these ambiguities pertaining to ‘appointed date’.

 

Clarifications issued are as follows:

 

i. Parties to the merger/amalgamation may choose an ‘appointed date’ specific to a calendar date or tied to occurrence or fulfilment of any condition or event as agreed between the parties upon which the scheme shall become effective.

 

ii. The ‘appointed date’ under the scheme shall be deemed to be ‘acquisition date’ for the purpose of Ind AS 103 (Business Combination).  

 

iii. The ‘appointed date’, if it is a specific calendar date, may precede the date of filing of scheme with NCLT. However, justification is required to be given in the case where the ‘appointed date’ is significantly ante-dated.

 

iv. Where the ‘appointed date’ is an event-based date and it is subsequent to the date of filing of scheme with the NCLT, then Registrar is required to be intimated of the same within 30 days of such scheme coming into force.

MCA has amended the provisions relating to issue of shares with differential voting rights provisions under the Companies Act with the objective of enabling promoters of Indian companies to retain control of their companies in their pursuit for growth and creation of long-term value for shareholders, even as they raise equity capital from global investors.

 

The key change to the Companies (Share Capital & Debentures) Rules, 2014 brings in an enhancement in the previously existing cap of 26% of the total post issue paid up equity share capital to a revised cap of 74% of total voting power in respect of shares with differential voting rights of a company. 

 

Another key change brought about is the removal of the earlier requirement of distributable profits for 3 years for a company to be eligible to issue shares with differential voting rights. This would encourage more companies to issue shares with differential voting rights. 

 

MCA has amended the provisions relating to the conditions for creating DRR under the Companies Act. The requirement of creation of DRR of 25% of the value of outstanding debentures has been removed in respect of listed companies, non-banking financial companies registered with the RBI and housing finance companies registered with National Housing Banks for both public issue and private placement.

 

For unlisted companies, the adequacy of DRR has been reduced from 25% to 10% of the value of the outstanding debentures.

 

The time period within which employee stock options can be issued by start-ups recognized by the Department for Promotion of Industry & Internal Trade to promoters or directors holding more than 10% of equity shares, has been enhanced from 5 years to 10 years from the date of their incorporation.

Regulatory Sandbox allows the regulator, the innovators, the financial service providers (as potential deployers of the technology) and the customers (as final users) to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks. At the end of it, all the market participants can get clarity on the viability of the product/service/technology and accordingly modify it, if required. The main objective of Regulatory Sandbox is to foster responsible innovation in financial services, promote efficiency and bring benefit to consumer. 

 

In line with the above, RBI on 13 August 2019 released the ‘Enabling Framework for Regulatory Sandbox’ (Framework). The Regulatory Sandbox is a live, testing environment where new products, processes, services and business models can be deployed on a limited set of eligible customers for a specified time period with certain relaxations in the extant RBI regulations and guidelines.

 

Some of the key benefits of the Regulatory Sandbox are:

 

i. Customer feedback on the performance of the product/service given by the entity;

 

ii. The solutions given by entity can lead to deeper financial inclusion; and

 

iii. The dependency of the regulator on industry/stakeholder consultation reduces.

 

The key aspects of the Framework are discussed below:

 

Target Applicants

 

The target applicants for the Regulatory Sandbox are FinTech companies including start-ups, banks, financial institution and any other company partnering with or providing support to financial services businesses.

 

Key Features of the Regulatory Sandbox

 

i. List of product/services/technology

 

The Regulatory Sandbox will be based on thematic groups focussing on financial inclusions, payments and lending, digital Know Your Customer (KYC) etc. RBI has provided an indicative list of innovative products/services/technology which can be considered for testing under the Regulatory Sandbox. Innovative products/services include retail payments, marketplace lending, smart contracts etc., and innovative technology include data analytics, applications under block chain technologies etc. 

 

ii. Fit and Proper criteria

 

All the applicants are required to satisfy the following conditions:

 

(a)    Eligible entity- company incorporated and registered in India, a bank licensed to operate in India and financial institutions constituted under a statute in India.

 

(b)    Minimum net worth of INR 25 lakh as per its latest audited balance sheet.

 

(c)    The promoter(s)/director(s) of the entity should be fit and proper as per the criteria prescribed in the Framework and will be required to give a declaration and undertaking to that effect in the prescribed form.  

 

(d)    Satisfactory conduct of the bank accounts and credit history of the promoter(s)/director(s)/entity.

 

(e)    The products/services are technologically ready for deployment in the broader market & ensure compliance with the existing regulations/laws on consumer data protection and privacy.

 

(f)     Adequate safeguards built in its IT systems for protection against unauthorized access, alteration, destruction, disclosure or dissemination of records and data.

 

iii. Relaxations for applicant 

 

RBI may relax, if required, certain regulatory requirements for applicant for the duration of the Regulatory Sandbox on case-to-case basis. For example, relaxation may be given qua liquidity requirements, management experience etc. However, the Framework expressly provides for mandatory compliance to requirements such as customer privacy and data protection, secure storage of and access to payment data of stakeholders, security of transaction KYC/anti-money laundering/combating of financing of terrorism requirements and statutory restrictions.

 

iv. Exclusions

 

Entities offering financial service which is similar to those that are already being offered in India may not be suitable for the Regulatory Sandbox unless the applicants can show that either a different technology is being gainfully applied or the same technology is being applied in a more efficient and effective manner.

 

The Framework provides for an indicative negative list of products/services/technology which may not be accepted for testing such as credit registry, credit information, crypto currency, any product/services banned by the regulator/government of India etc.

 

v. Extending or Exiting the Regulatory Sandbox

 

The sandbox entity will be required to exit the Regulatory Sandbox at the end of the sandbox period and any regulatory relaxation provided will also expire. In case the sandbox entity wants an extension of the sandbox period it will be required to apply along with valid reasons, one month before the expiration thereof.

 

vi. Consumer Protection

 

The entities are required to notify its test customers about the potential risks and obtain their explicit consent in this regard. Further, the sandbox entity will be required to ensure that any existing obligations of the customers of the financial service under the experimentation are fulfilled or addressed before exiting or discontinuing the Regulatory Sandbox.

 

The sandbox entity will be required to take indemnity insurance of an adequate amount and period to safeguard the interest of its customers. The policy cover will start with the start of the testing stage and end three months after exit of the sandbox entity from the Regulatory Sandbox.

 

Process and Stages

 

The sandbox process will be overseen by the Fintech Unit (FTU) under overall guidance of the inter Departmental Group of RBI with participation of domain experts.

 

i.  Preliminary screening

 

FTU will receive the applications and shortlist applicants and this process may last for 4 weeks.

 

ii.  Test design

 

The test design will be finalised by FTU through an iterative engagement with the applicants and identify outcome metrics for evaluating evidence of benefits and risks. This process may last for 4 weeks.

 

iii.  Application Assessment

 

FTU will vest the test design and propose regulatory modifications, if any, and this process may last for 3 weeks.

 

iv.  Testing

 

FTU will generate empirical evidence to assess the tests by close monitoring and this process may last for 12 weeks.

 

v.  Evaluation

 

The final outcome of the testing of products/services/technology under the Regulatory Sandbox will be confirmed by the RBI. The outcome reports on the test will assessed by FTU and on basis of which FTU will decide whether the product/service is acceptable under the Regulatory Sandbox.

 

Statutory and Legal Issues

 

The RBI will provide the sandbox entity with certain relaxations where necessary for the duration of the Regulatory Sandbox. However, RBI will bear no liability arising from the sandbox process and the applicant will bear the liability arising from the experiment.

 

LABOUR LAW

 

The Indian Parliament has passed the Code on Wages 2019 (Wage Code) on 8 August 2019 which consolidates Indian central and state level employment legislations on payment of wages and bonus. The Wage Code has brought about much needed uniformity to India’s employment laws relating to payment of wages and bonus. Specifically, the Wage Code has consolidated the multiple legislations under the following main central legislations:

 

(i) The Payment of Wages Act, 1936 (Payment of Wages Act): This legislation prescribed payment of wages to employees who were earning less than INR 24,000 per month. 

 

(ii)    The Minimum Wages Act, 1948 (Minimum Wages Act): This legislation prescribed payment of minimum rates of wages to employees who were employed in sectors listed under the schedule to the Minimum Wages Act.

 

(iii)   The Payment of Bonus Act, 1965 (Bonus Act): This legislation mandated payment of minimum statutory specified bonus to employees working in factories and establishments whose salary or wage was less than INR 21,000 per month.

 

(iv) The Equal Remuneration Act, 1976 (Equal Remuneration Act): This legislation prescribed equal pay for equal work and prevented discrimination based on sex.

It is important to note that the Wage Code is not in effect as of date. Until the provisions of the Wage Code is notified, the abovementioned legislations continue to be in force.

 

We have discussed the key provisions of the Wage Code below:

 

1. Wage coverage to employees in all sectors:

 

The Payment of Wages Act is applicable to employees whose salary or wage is less than INR 24,000 per month. The Wage Code is applicable to all the employees irrespective of the wage or salary they are earning.  

 

The Minimum Wages Act is applicable to only employees who are employed with sectors specified in the schedule to the Payment of Wages Act. The Wage Code extends to all the employees irrespective of whether they are working in the organised or unorganised sectors.

 

2. Introduction of a minimum floor wage:

 

Under Minimum Wage Act, the appropriate government, State Government or Central Government, as applicable, had the power to determine the quantum of minimum wage. Therefore, there was no pan India base prescribing for minimum wage.

 

The Wage Code provides that the Central Government shall determine and fix the floor wage by taking into consideration minimum living standard of a worker and geographical area. Based on the floor wage, the Central or State government shall fix the minimum rate of wages which shall not be less than the floor wage. Further, if the minimum rate of wages fixed by the Central or State government is more than the floor wage, then the Central or State government cannot reduce the minimum rate of wages.

 

States having minimum wage more than floor wage are required to pay minimum wage not less than the floor wage fixed by the Central Government.

 

3. Prohibition on Gender Discrimination: 

 

The Wage Code prohibits gender-based discrimination between employees in recruitment and renumeration for the same work or work of similar nature. It is pertinent to note that contrary to the Equal Remuneration Act, the Wage Code prohibit gender-based discrimination allowing a third category of gender i.e. transgender to also be protected from discrimination in matters relating to employments. Further, prohibition on discrimination in matters relating to employment is in line with the Equal Remuneration Act.

 

4. Payment mode for wages:

 

The Wage Code provides that the wages shall be paid in cash, cheque, by crediting to the bank account or by the electronic mode. However, specific industry or establishment may be directed by the Central or State government through a notification that the wages shall be paid only by cheque or by crediting the wages in the bank account. Under the Wage Code, wages will be paid daily, weekly, fortnightly and monthly basis. Under the Payment of Wages Act, wages are payable before the expiry of tenth day after the last day of the wage period in respect of which the wages are payable.

 

Payment of wages through banking channels is in line India’s policy towards a cashless economy and regulation over cash payment.

 

5. Payment of Overtime: 

 

The number of hours of work that constitute a normal working day may be fixed by the Central or State government. Employees working in excess of the number of hours constituting a normal working day shall be entitled for the overtime rate which shall not be less than twice the normal rate of wages.

 

Under Minimum Wages Act, the overtime rate is fixed by the concerned Central or State government whereas under the Wage Code such overtime rate has been fixed at twice the normal rate of wages.  

 

6. Payment of Bonus:

 

The provisions for payment of bonus under the Wage Code are similar to the Bonus Act in terms of minimum and maximum bonus. The threshold of salary or wage per month below which an employee will be eligible for bonus will be notified by the appropriate Government. Currently, the threshold under the Bonus Act is INR 21,000 per month.

 

The definition of salary or wage under the Bonus Act and Wage Code excludes certain specific payments such as travel allowance, contribution to pension, gratuity, retrenchment compensation etc. The Wage Code additionally provides that if the amount of these exclusions exceeds 1.5% or such other percentage notified by the Central Government then the amount which exceeds the abovementioned percentage will be deemed to be a part of salary or wage. The amount of these exclusions for the purposes of calculating the salary or wage was not capped under the Bonus Act. Further, under the Wage Code, if an employee is provided any remuneration in kind in lieu of wages then the value of such remuneration which exceeds 15% of the total wages will also be included for calculation of wage. These new provisions will ensure that employers are restricted from making deductions from wages and reducing the wage amount on which bonus is payable to employees.     

 

In addition, under the Wage Code, the bonus has to be paid only through banking channels. 

 

7. Advisory Board:

 

The Minimum Wages Act and Equal Renumeration Act provides for constitution of advisory board. However, no such provision is present in the Bonus Act and Payment of Wages.

 

The Wage Code provides for constitution of Central and State level advisory board by the Central and State government respectively. The advisory board is required to advice Central government on fixing and revising minimum wages, providing increasing employment opportunities for women etc. The advisory board will consist of representative of employers, representative of employees and independent persons (not exceeding one-third of the total members of the board).

 

8. Inspector/Facilitator: 

 

The Payment of Wages Act, Minimum Wages Act, Bonus Act and Equal Renumeration Act provides for appointment of inspectors to carry out inquiry relating to contravention of provisions under such laws. Same function of the inspector has been retained under the Wage Code.

 

However, under the Wage Code, the inspector/facilitator has been entrusted with additional function of advising the employers and workers with respect to compliance of provision of the Wage Code.

 

9. Limitation:

 

Under the Payment of wages Act, Bonus Act, Minimum Wages Act and Equal renumeration Act the limitation period for filing claims varied from 6 months to 2 years. Under the Wage Code, the limitation period for filing the claims has been increased to 3 years.

 

10. Penalties:

 

The penalty for non-compliances under the Wage Code is as provided below: 

 

(i) The penalty applicable on an employer for paying less than the bonus prescribed under Wage Code is fine of up to INR 50,000. The penalty for repeat offence within five years of first offence is imprisonment which may extend to three months and/or fine of up to INR 100,000.  

 

(ii) The penalty applicable on an employer for non-compliance of other provisions of the Wage Coded is fine of up to INR 20,000. The penalty for repeat offence within five years of first offence is imprisonment which may extend to one month and/or fine of up to INR 40,000.

 

(iii) The penalty applicable on an employer for non-maintenance or improper maintenance of records in the establishment is fine of up to INR 10,000.

 

Matter: M/S Deccan Charters Private Limited vs. Sarita Tiwari

 

Order Date: 27 August 2019 

 

Summary:  

 

Services of the Sarita Tiwari was terminated on the ground of non-satisfactory performance and misbehaviour with a senior employee of Deccan Charters Private Limited during the probation period. Same was challenged by Sarita Tiwari in the Labour Court wherein the Labour Court awarded reinstatement with full back wages.

Appeal was preferred in the Delhi High Court wherein Sarita Tiwari contented that she is a workman under the Industrial Dispute Act, 1947 and termination of service will tantamount to retrenchment.  However, the Delhi High Court by relying on the judgment in the case of Mahinder Singh vs. Indian Airlines Ltd. held that a probationer was not a workman under the Industrial Disputes Act, 1947. Further, termination of service of a probationer does not amount to retrenchment.

Delhi High Court also placed the reliance on the case of M. Venugopal vs. Divisional Manager wherein the Supreme Court held that termination of service before expiry of period of probation does not constitute to retrenchment.