Corporate Laws

Company Law

The existence of a legal framework is perhaps the most significant aspect of the corporate environment. Not being an exception, the Indian company law, largely based on its English counterpart, streamlines the procedure for regulation of Indian companies & branches of foreign companies operating in India.

Concept & Types

As understood under Companies Act, 1956 a company is an incorporated association registered under the act, having an independent entity distinct from the members constituting it. Companies so incorporated can exist as public or private companies with or without limited liability.

Private company is characterized by restriction on the right to transfer its shares, prohibition on invitation or acceptance of deposits from public, restriction on inviting public to subscribe for its shares or debentures, etc. Devoid of the above restrictions, a company can be designated as a public company. Besides various privileges, exemptions & differences to / between public and private companies, there also exists provisions for conversion of one into the other.

Incorporation

The promoters, deciding the nature of company to be floated, can initiate incorporation of a company, by making application for availability of the name, prepare memorandum & article of association and file it with Registrar of Company (R.O.C.), who after scrutinizing the documents issues the certificate of incorporation.

MoA & AoA

Memorandum of association (MoA) comprises of the fundamental parameters upon which company is enacted which includes clauses of name, registered office, objects, liability & subscription. Similarly, articles of association (AoA) constitute the rules & regulations that govern the management of its internal affairs & conduct of business including provisions relating to share capital of the company, rights of various shareholders, transmission of shares etc. The act also contains provisions & regulates the acceptance of public deposits, which gets initiated through advertisement.

Share Capital

Shares may be defined as indivisible units of fixed amounts into which the capital of the company is divided. Generally, a public company is entitled to issue two kinds of shares-equity & preference. Shares can be issued either by private placement of shares or by inviting the public to subscribe for the shares through a prospectus or by allotting the same to an issue house which offers it for further sale to the public. SEBI has come out with guidelines in relation to issue of shares to the public. In case a company desires to increase its subscribed capital, it has to first offer the share to the existing shareholders .The company can augment its accumulated profits available for paying dividends, by issue of bonus shares. Shares can be freely transferred subject to certain restrictions contained in the act like restrictions on a private company to transfer its shares.

Debentures

Debentures, which are also a source of long term-capital for a company, is a document which acknowledges the debt of the company. They may be non-convertible, partly or fully convertible. The issue of such PCDs & FCDs requires the prior approval of shareholders. SEBI, which regulates the issue of capital by the company, has specified that debentures to be offered to the public have to be secured by mortgage of assets of the issuer company if the redemption takes place on the expiry of 18 months after allotment or afterwards. More importantly a company desirous of raising capital through public issue of securities (debentures, bonds) has to issue a prospectus, which has to be approved by the stock exchange before it is filed with the R.O.C. . SEBI, which regulates the securities market & ensures investor protection, also scrutinizes such documents.

Directors

The act also lays down the provisions relating to composition of the board of directors, who are entrusted with the management & direction of the company to carry out the objectives in MoA. (A prescribed minimum of 2 & 3 in private & public limited company respectively). The AoA of a company describe the powers & duties of the board of directors. Unless specifically required by the AoA the directors need not own any shares. Even a foreign national can be appointed as the director of a company, without seeking any prior approval. The directors, who act in the nature of trustees of the company�s assets, are required by the Act to hold a board meeting at least in every quarter of the year.

Amalgamation & Merger

Used interchangeably, these terms involve the taking over or absorption of the assets, liabilities & business of the transferor company by the transferee company. The formalities are initiated by the formal expression of desire of the transferor company, subject to the sanction by the tribunal, to amalgamate itself with the transferee company, valuation of shares of both the companies & consideration of its exchange followed up by approval of the same by the boards. According to a recent amendment, powers of the high courts have been transferred to nationalcompany law tribunal, to which the petition for amalgamation has to be moved, initially by the transferor company. SEBI has come out with recommendations regarding mandatory disclosures, which have to be made to the shareholders by the listed companies.

Accounts & Audit

The statute makes it a mandatory requirement for the any company to maintain its book of account, which provides a genuine view of the financial maneuvers of the company. It further obligates the company to present its shareholders the company�s financial account statements (along with the auditor�s & director�s report), at every annual general meeting. A member of I.C.A.I. has to be appointed by the company in the nature of an auditor, to audit the company�s account.

Winding Up

It may be defined as the termination of the life of the company, & involves the appointment of a liquidator who supervises property administration through collection of assets, payment of debts & distribution of assets. Winding �up can be compulsory (by the court, on presence of some conditions which make it essential) or voluntary (members & creditors). Petition for compulsory winding up can be made by the company, its creditors, registrar etc.the petition is to presented to the district/high court which is followed by appointment of a liquidator (provisionally) & passing of the order on satisfaction of the court on all counts. From the commencement of the winding up the company shall cease to carry on its business except so far as may be required to secure a beneficial winding up of the company. In the event of winding up, certain payments rank in priority to others, called the preferential payments; and have to accordingly taken up.

SEBI Regulations

The following regulations are available for foreign investment in India

SEBI (Foreign Institutional Investors) Regulations, 1995

provides for registration of foreign institutional investor. It lays down certain investment conditions and restrictions for a foreign institutional investor. It specifies the type of securities in which investment may be made. It lays down the general obligations and responsibilities for a foreign institutional investor whereby it has to provide for the appointment of a domestic custodian, there is a prohibition on giving advise in publicly accessible media, maintenance of proper books of account, appointment of a compliance officer and submission of the required information to the Securities and Exchange Board of India and the Reserve Bank of India. It also provides for procedure for action in case of a default.

SEBI (Foreign Venture Capital Investors) Regulations, 2000

It provides for the following: The following are the eligibility criteria for grant of a certificate of registration as per regulation 4 of SEBI (Foreign Venture Capital Investor) Regulations 2000

• The applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity.

• Whether the applicant has been granted necessary approval by the Reserve Bank of India for making investments in India

• Whether the applicant is an investment company, investment trust, investment partnership, pension fund, mutual fund, endowment fund, university fund, charitable institution or any other entity incorporated outside India; or

• Whether the applicant is an asset management company, investment manager or investment management company or any other investment vehicle incorporated outside India

• Whether the applicant is authorised to invest in venture capital fund or carry on activity as a foreign venture capital investor

• Whether the applicant is regulated by an appropriate foreign regulatory authority or is an income tax payer; or submits a certificate from its banker of its or its promoter�s track record where the applicant is neither a regulated entity nor an income tax payer.

• The applicant has not been refused a certificate by the Board.

• Whether the applicant is a fit and proper person.

EURO ISSUE

Euro issues are to be treated as foreign direct investment.

Indian companies are permitted to raise foreign currency resources through issue of Foreign Currency Convertible Bonds (FCCBs) and/or issue of ordinary equity shares through Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) to foreign investors i.e. institutional investors or individuals (including NRIs) residing abroad. Applications for necessary permission should be made to the Government of India, Ministry of Finance, Department of Economic Affairs, New Delhi. After obtaining the necessary approval from the Government, the Indian company should submit an application to the General Manager, Foreign Investment Division, Exchange Control Department, Reserve Bank of India, Central Office, Mumbai – 400 001 enclosing a copy of the application made to the Government and the in-principle/final approval granted by the Government, for necessary permission for issue/acquisition of shares to/by non-residents, remittance of issue expenses, opening of foreign currency accounts, etc.

It provides for the issue structure of the GDRs.

Banking

FDI is permitted in the banking sector. There is a limit for FDI in the banking sector in India. The important points to be noted here are

The aggregate foreign investment in private banks from all sources (FDI, FII, NRI) cannot exceed 74%.

Resident Indians at all time should hold at least 26% of the paid up capital of the private sector banks.

FDI in the banking sector can be made by individuals also other than foreign banks or foreign banks group. There are guidelines for determining fit and proper person for the purpose of determining foreign investment in the banking sector.

There is a limit on the investment by foreign institutional investors to the limit of 10% with the aggregate limit of 24% which can be raised to 49% with the approval of the Board.

There is a limit of 5% for individual NRI portfolio investment with the aggregate limit for all NRIs restricted to 10% which could be raised to 24%.

FDI and portfolio investment in nationalized banks are subject to overall statutory limits of 20% as provided under Section 3(2D) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

Voting rights are available to the foreign investors by virtue of the legal provision contained in various Indian legislations.

• Private Sector Banks- Section 12(2) of Banking Regulation Act, 1949.

• Nationalized Banks- Section 3(2E) of Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

• State Bank of India- Section 11 of SBI Act, 1955.

• SBI Associates- Section 19(1) and (2) of SBI (Subsidiary Bank) Act, 1959.

Foreign investment by way of transfer of shares of 5% and more of the paid up capital of a private sector banking company, requires prior approval of RBI. Wherever applicable, FDI in banking companies should confirm to provisions regarding shareholding and transfer etc.

Financial Insitutions

• An Indian corporate can raise foreign currency resources abroad by issuing ADR/GDR which makes a provision by foreign institutional investors in India. This is permissible by Regulation 4 of Schedule I of FEMA notification no.20.

• The ADRs/GDRs can be issued to the foreign financial institutions in accordance with the Scheme for Issue of Foreign Currency Convertible Bonds and ordinary shares through Depository Receipt Mechanism Scheme, 1993.

• The foreign financial investor can invest only when the Indian company issuing such shares has an approval from the Ministry of Finance, Government of India. The Indian company should be eligible such ADR/GDR in terms of the relevant scheme in force or notification issued by the Ministry of Finance.

• There should be no end use restrictions on GDR/ADR issue proceeds except for an express ban on investment in real estate and stock markets.

• The Foreign Currency Convertible Bonds (FCCBs) can also be issued to the foreign financial institution which should be in conformity with the external commercial borrowing end use requirements. Apart from this, 25% of the proceeds can be used for corporate restructuring.

• The issue of ADR/GDR to the foreign financial institutional investor should not be invalid as the Indian corporate attracting investment should be eligible to issue shares to persons resident outside India in terms of these Regulations.

• The issue of FCCBs to the foreign financial institution for the purpose of investment should be in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Mechanism) Scheme, 1993.

• Investment by the foreign financial institution should be made upto USD 50 million under the Automatic Route permissible for foreign direct investment.

• From USD 50-100 million the companies have to take RBI approval.

• For USD 100 million and above prior permission of the Department of Economic Affairs is required.

• Investment can be made in the form of investment in preference shares forming part of share capital. Therefore investment can be made by way of receipts as well as shares.

• Duration for conversion of preference shares shall be as per the maximum limit prescribed under the Companies Act, 1956 or what is agreed to between the parties to the shareholders agreement.

Financial Insitutions

Mergers & Acquisition We play a significant role in planning and executing Mergers & Acquisitions, regularly representing both buyers and sellers in Mergers & Acquisitions transactions for Fortune 500 as well as middle market companies. We actively assist our clients in structuring, negotiating, documenting, conducting general legal due diligence, with a special focus of technology rights and other key assets, counseling Board of Directors and other parties for clients such as Fedders, Mentor Graphics, The McGraw Hill Companies Inc. etc.

Representative List of Transactions Broadcom Corporation –Acted as Indian counsel for acqusition of Armedia, Inc. USA and its subsidiary Armedia Labs Private Ltd.

Doughty Hanson & Co. –Carried ut legal due diligence for acqusition of the Indian subsidiary of LM Glasfiber Group, Denmark.

Engineers India Ltd. –Acted as legal counsel for due diligence and valuation services for its proposed acqusition of Bharat Heavy Plates and Vessels Ltd., a Public Sector Undertaking under the administrative control of the Ministry of Heavy Industries & Public Enterprises in consortium with SBI Capital Markets
Ltd. Post acqusition includes legal advice and assistance in execution of all agreements necessary to make EIL a lawful owner of the stake.

Fedders Corporation –Acted as Indian counsel for acquisition of Cooling Appliances Business Division of Voltas Limited

iSoftel, Singapore –Acted as counsel for acqusition of Digital Publishing Solutions and Ameoba Telecom Limited as well as counsel to the acquirer for its funding requirements.

Lason Inc. –Counsel for acqusition of Vetri Software India Pvt. Ltd.

Agency & Franchise

Franchising as a business concept is also rapidly developing in India. At present the concept is present in the hotel, fast food chains both international and domestic/regional brands and various retail outlets & computer education. Therefore, in appropriate cases, it would also be an attractive option for a foreign company to establish business in India through the franchising route. India does not have any franchise specific legislation therefore the relationship and arrangement in a franchise network would be governed by different branches of law for which specific legislations are enacted in India such as

• general law of contract

• intellectual and industrial property law

• monopolies and restrictive trade practices or competition laws,

• taxation,

• labour law,

• legislation regulating foreign exchange and foreign investments and

• consumer protection.

Other legislations may merit consideration depending upon the nature of franchising business and involvement of different parties. Payments under franchise would be subject to the provisions of FEMA, in as much as, remittance of foreign exchange for use and/or purchase of trademark or franchise in India would require prior approval of RBI.