JSA
The first article of series examining the tension between the ease of doing business and the necessity for regulation, looks at the hurdles to setting up enterprises in India and attracting foreign investment.
The article was authored by Vivek K Chandy (Joint Managing Partner) & Raj Ramachandran (Partner), published in IBLJ.
Click here to read the full article.
Watch the latest edition of JSA Live, where our Principal Associate, Anindita Basu, discusses the mandatory requirement for private companies to issue securities exclusively in dematerialized form. The objective of this amendment is to ensure transparency, efficiency, and to mitigate the risks of fraud, loss, and theft. It streamlines the share issuance process. Anindita also delves into the compliance requirements associated with this initiative.
Transcript
Earlier, in September, 2018, the Ministry of Corporate Affairs (MCA) notified the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018. As per the amended norms, a new rule 9A was added to the existing rules, requiring every unlisted public company to issue securities only in dematerialised form and facilitate the dematerialisation of all its existing securities in accordance with the provisions of the Depositories Act, 1996 and the regulations thereunder.
Following up on this, MCA announced the PAS amendment on 27th October, 2023 impacting all companies, majorly the private companies by way of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (“PAS Amendment Rules”).
The PAS Amendment Rules encompass two major amendments: (i) with respect to the bearer share warrants under the erstwhile Companies Act, 1956, and (ii) mandatory dematerialisation for all private companies excluding small companies, which will briefly discuss In this session.
New Rule 9B has been inserted by way of the PAS Amendment Rules. It requires mandatory dematerialisation of securities issued by private companies. requiring all private companies other than small companies and govt co.s, to dematerialise their shares before October 1, 2024.
This amendment will ensure better transparency, efficiency, and mitigate fraud, risk of loss and theft. Streamlines the share issuance process.
Accordingly, twin obligations are placed on company & holder of shares. Under the amendment, every private company, which is not a small company, must within a period of 18 months of closure of such financial year: (a) issue the securities only in dematerialised form; and (b) facilitate dematerialisation of all its securities. Companies looking to fundraise / raise capital to note that before making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer, they must ensure that, (c) entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised.
Additionally, any security-holder who intends to transfer or subscribe to any securities of the private company, by the way of private placement, bonus or rights issue, need to ensure that all the securities are held in dematerialised form before such transfer or subscription.
Apart from this, compliances applicable to an unlisted public company pertaining to holding shares in demat form are also applicable to private companies. These include –
(a) Applications with depository for dematerialisation of all existing securities and securing ISIN for each type of security;
(b) Informing the existing security holders about the facility of dematerialisation;
(c) Complies with all applicable regulations with respect to dematerialisation;
To ensure such compliance, ROC now requires filing of return in form PAS-6 with ROC on a half yearly basis within 60 days from conclusion of such half of the financial year, with respect to reconciliation of the share capital of the company; Bring to the notice of the depositories, any difference in issued capital by the company and the capital held in dematerialised form;
Grievances of any security holders are now to be filed with IEPF Authority, which is entitled to initiate any action against a depository or depository participant or RTA or STA, as may be required, after prior consultation with SEBI.
Penalty: There are no specific penal provisions for non-compliance of these provisions and therefore, general penal provisions under section 450 of the Act should apply. Per Section 450, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of a continuing contravention, a further penalty of one thousand rupees for each day after the first during which the contravention continues, capped to two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.
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Recently, the Hon’ble High Court of Delhi (“Delhi HC ”), in Splendor Landbase Ltd. vs. Aparna Ashram Society & Anr.[1], disposed of a batch of petitions under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), where the arbitration agreement, or the instrument/agreement containing the arbitration agreement, was unstamped or inadequately stamped.
The Delhi HC outlined the procedure and modalities that can be followed while dealing with petitions under Section 11 of the Arbitration Act, where appointment of an arbitrator was sought, involving unstamped or insufficiently stamped arbitration agreement(s). The Delhi HC, while doing so, considered the observations made by the Hon’ble Supreme Court of India (“Supreme Court”) in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd[2] (“N.N. Global”). For a detailed analysis, please refer to the JSA Prism of May 6, 2023.
Issues
The Delhi HC framed and answered the following 4 (four) issues:
Findings and Analysis
While answering Issue No.1, the Delhi HC observed that while entertaining a petition under Section 11 of the Arbitration Act, the function being performed by the court is akin to receiving evidence. Accordingly, it was held that whether the agreement/instrument is duly stamped or not, has to be examined in the backdrop of Section 17 of the Stamp Act, which contemplates that all instruments chargeable with duty and executed by a person in India, will be stamped before or at the time of execution. The Delhi HC observed that this task of examining and impounding any instrument can be delegated to an officer appointed by the court in terms of proviso (b) to Section 33(2) of the Stamp Act.
After reproducing the observations made by the Delhi HC in N.N. Global and reading the same in conjunction with the scheme of the Arbitration Act and Stamp Act, the Delhi HC held that it would be incumbent for a petitioner who files a petition under Section 11 of the Arbitration Act on the basis of an unstamped/insufficiently stamped agreement to file the original instrument as executed.
However, the requirement of filing the original of the concerned agreement/instrument can be obviated when the instrument/agreement is duly stamped and a statement to that effect has been specifically made in the petition under Section 11 of the Arbitration Act.
As per N.N. Global, if a certified copy of an agreement is filed along with a petition under Section 11 of the Arbitration Act, the party filing it must necessarily declare the stamp duty which has been paid in respect of the original instrument.
When, at any stage, the issue as to the sufficiency of stamping arises, it would be open for the court to require the concerned party (in possession of the original agreement) to file the same.
While dealing with Issue No.2, the Delhi HC held that after impounding the unstamped instrument/agreement, as mandated under Section 33 of the Stamp Act, it would be open for the court to either:
OR
The Delhi HC recommended following the latter procedure in cases where the quantum of stamp duty payable was not in dispute. In such cases, Section 40 of the Stamp Act would not apply. After payment of stamp duty (along with penalty), such amount will be sent to the concerned Collector of Stamps, along with an authenticated copy of such duly endorsed instrument and a certificate in writing stating the amount of duty levied in respect thereof.
The Delhi HC observed that following the abovementioned procedure would effectuate the mandate under Section 11(13) of the Arbitration Act and ensure that the disposal of petitions under Section 11 of the Arbitration Act is not inordinately delayed on account of the adjudicatory exercise to be carried out by the Collector of Stamps.
The Delhi HC further observed that, as per the Supreme Court’s decision in Black Pearl Hotels Pvt. Ltd. v. Planet M. Retail Ltd.[3], while taking recourse to Section 35 of the Stamp Act, the following duties can be delegated to its office or the registrar of the court in exercise of the powers conferred under Chapter-II of the Delhi High Court (Original Side) Rules, 2018:
Answering Issue No.3, the Delhi HC held that it would be appropriate for a court to issue time bound directions to the concerned Collector of Stamps, to ensure that the statutory mandate under Section 11(13) of the Arbitration Act is not defeated. In arriving at this conclusion, the Delhi HC took note of its earlier decision in Uno Minda Ltd. v. Revenue Department[4] (“Uno Minda”), wherein 30 (thirty) days were granted to the Collector of Stamps to adjudicate the stamp duty payable and communicate it to the parties therein. The Delhi HC in Uno Minda observed that a maximum of 3 (three) months’ time can be granted to the Collector of Stamps to determine the stamp duty payable in cases where the matter involved any complex/extraordinary circumstances. The Delhi HC also took note of its inherent powers as conferred on it under Rule 16 of Chapter I of the Delhi High Court (Original Side) Rules, 2018 to come to this conclusion.
While answering Issue No.4, the Delhi HC relied on the Supreme Court’s judgment in New Central Jute Mills Co. Ltd. v. State of West Bengal[5]. In that judgment, the Supreme Court held that the instrument must first be stamped in accordance with the law of the state where it has been executed, since the liability of an instrument to stamp duty arises on execution. It held that in cases where the stamping rate on the instrument is higher in a state where the document is sought to be enforced (“second state”), the instrument would be required to be stamped only with the excess amount and in accordance with the law and the rules in force in such second state.
Conclusion
The judgment offers a much-needed roadmap for navigating the legal procedures involved in cases where parties seek to rely on an unstamped or insufficiently stamped arbitration agreement in a petition under Section 11 of the Arbitration Act.
Recently, issues pertaining to stamp duty have acted as impediments in appointment of arbitrators, leading to inordinate delays in the initiation of the arbitration proceedings. Parties often opt for arbitration to avoid the delays usually faced in conventional litigation, and such issues can defeat this very purpose. By outlining a clear procedure for courts to follow in these instances, the judgment is likely to fulfil 2 (two) crucial objectives. First, it advances the overarching goal of the Arbitration Act by promoting a more efficient arbitration process. Second, it aligns with the parties’ original intention in choosing arbitration as a dispute resolution mechanism, thus facilitating a more seamless path to resolution.
This Prism has been prepared by:
|
Ananya Kumar |
Nikhil Ratti Kapoor |
Kartikey Gupta |
For more details, please contact [email protected]
[1] Arb. P. 366/2021 decided on 22 August 2023
[2] (2023) 7 SCC 1
[3] (2017) 4 SCC 498
[4] 2023 SCC OnLine Del 3598
[5] AIR 1963 SC 1307
This is a compilation of all Corporate Brief – publications, deals, events, articles, prisms and newsletters circulated in the month of August 2023 by JSA.
To read further details, click here or refer to the below document.
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This is a compilation of all Corporate Brief – publications, deals, events, articles, prisms and newsletters circulated in the month of July 2023 by JSA.
To read further details, click here or refer to the below document.
For more details, please contact [email protected]
*In case the document is not visible on the device you are using, please click the link above.
The Department for Promotion of Industry and Internal Trade (“DPIIT”) has, in supersession of Press Note No. 5 (2014 series) (“2014 Press Note”), notified the Press Note No.1 (2023 Series) dated July 21, 2023 (“2023 Press Note“). The 2023 Press Note updates the validity period and other guidelines for granting industrial licenses under the Industries (Development and Regulation) Act, 1951 (“IDR Act“).
The validity period of new/ existing industrial licenses is extended from 3 (three) years to 15 (fifteen) years for all licenses granted under the IDR Act. The said extension aligns with the validity of the licenses issued for defence items which were initially revised to 15 (fifteen) years and extendable to 18 (eighteen) years as per Press Note No. 10 (2015 Series) in view of the long gestation period under defence contracts). An extension of 3 (three) years may be granted on top of the 15 (fifteen) years as per the guidelines provided in the 2023 Press Note.
The guidelines for extending the validity of existing industrial licenses have also been revised as follows-
The above guidelines are applicable for extension of validity of industrial license in cases where the existing license holder has not commenced production within 15 (fifteen) years of issue of the license.
The 2023 Press Note is in line the Government’s stance to make it easier for businesses to obtain and extend industrial licenses which marks a positive step in boosting and bringing in more investments into the country and has been put in place to lighten industrialists’ compliance burden, creating a more advantageous, supportive and conducive business environment.
This Prism has been prepared by:
Sidharrth Shankar |
Sourav Nath |
Dhananjay Khurana |
Please click here to download the Prism as PDF.
This newsletter captures the key regulatory developments in the insurance sector between April 2023 – June 2023.
New Information and Cyber Security Guidelines
The Insurance Regulatory and Development Authority of India (“IRDAI”) released the IRDAI Information and Cyber Security Guidelines, 2023[1] (the “Cyber Security Guidelines”) to bolster the defence and related governance mechanisms within the insurance industry, equipping it to effectively deal with the emerging cyber threats. The Cyber Security Guidelines are applicable to all insurers including foreign reinsurance branches and insurance intermediaries covering brokers, corporate agents, web aggregators, third party administrators, insurance marketing firms (“IMFs”), insurance repositories, insurance self-network platforms, corporate surveyors, motor insurance service provider (“MISPs”), common service centres, and the Insurance Information Bureau of India (“Regulated Entities”). In terms of the Cyber Security Guidelines, the Regulated Entities are required to, inter alia, (a) create an organization structure for governance, implementation, and monitoring of information security, (b) ensure that employees, contractors, and third parties follow the guidelines for the acceptable use of all the information assets, (c) manage risks and implement controls to prevent financial loss, loss of customer confidence and/ or loss of operating licenses, and (d) have adequate security domain policies in place to give effect to the guidelines. The Regulated Entities that have already completed their security audit for the financial year (“FY”) 2022-23 can ensure compliance with the Cyber Security Guidelines from the next fiscal year.
Per the Cyber Security Guidelines, the Regulated Entities are required to mandatorily report cyber incidents to Cert-In within 6 (six) hours of noticing or being brought to notice about such incidents with a copy to the IRDAI and other concerned regulators/ authorities. IRDAI has further directed[2] that the notification to IRDAI be made in the prescribed format within 24 (twenty-four) hours of the aforesaid intimation.
Master Circular on Registration of Indian Insurance Company, 2023[3]
In accordance with the provisions of the IRDAI (Registration of Indian Insurance Companies) Regulations, 2022 “Registration Regulations”), the IRDAI has issued the Registration of Indian Insurance Company, 2023 (“Master Circular”) to specify the various forms as referred to in the Registration Regulations and provide clarifications on various provisions of the Registration Regulations. Further, the Master Circular has repealed the following circulars/ guidelines:
The Master Circular is effective for a period of 3 (three) years from April 24, 2023, unless reviewed and/ or extended earlier.
Reduction in solvency requirement applicable for surety insurance bonds
The IRDAI Circular on ‘Modification of Surety Insurance Guidelines’[4] read with the IRDAI Press Note on ‘Measures towards developing Surety Insurance Bonds market’[5], has modified the solvency requirement applicable for surety insurance bonds from the control level of 1.875 (one point eight seven five) times to 1.5 (one point five) times. Further, the prevailing 30% exposure limit applicable on each contract underwritten by an insurer, has been done away with. These revisions aim to expand the surety insurance market by increasing availability of such products and allowing more insurers to meet the rising demand across sectors, particularly increasing liquidity of contractors and providing strong boost especially to the infrastructure sector.
Development of insurance products in line with the laws on surrogacy and assisted reproductive technology[6]
IRDAI has directed insurers to comply with the provisions of and develop and make available health and life insurance coverage products for surrogate mothers and oocyte donor in compliance with the provisions of the Surrogacy (Regulation) Act, 2021, the Assisted Reproductive Technology (Regulation) Act 2021 and the rules made thereunder.
Discontinuation of facility of re-payment of loan taken against an insurance policy through a credit card[7]
All the life insurance companies have been instructed to stop accepting credit cards as a mode of re-payment of loans granted against insurance policies. This decision impacts policyholders who typically use credit cards to repay loans taken against their insurance policies.
Repealing of redundant circulars, guidelines, and clarifications[8]
To reduce complexity in compliance requirements and streamline the regulatory framework, the IRDAI has repealed 70 (seventy) circulars/ guidelines/ clarifications pertaining to brokers, agency distribution, surveyors, IMFs, web aggregators and MISPs, including, inter alia, the following:
Monitoring of investments in Alternative Investment Fund (“AIF”)[9]
While insurers are permitted to invest in Category I and Category II AlFs as a part of ‘other investments’, in order to closely monitor the exposure of insurers to AIFs, IRDAI has prescribed the following additional requirements:
Guidelines on remuneration of directors and key managerial persons (“KMPs”) of insurers[10]
The IRDAI has issued the below mentioned guidelines to ensure: (a) effective governance of compensation, (b) alignment of remuneration with prudent risk taking, (c) effective supervisory oversight and stakeholder engagement, and (d) safety of interest of the policyholders and other stakeholders.
Insurance Regulatory and Development Authority of India (Remuneration of Non-Executive Directors of Insurers) Guidelines, 2023
These guidelines are applicable for remuneration payable to non-executive directors of private sector insurers from FY 2023-24. The insurers are required to complete the process of framing/ reviewing the remuneration policy based on these guidelines within 3 (three) months of the issuance of the guidelines. Some of the key provisions are as follows:
Insurance Regulatory and Development Authority of India (Remuneration of Key Managerial Persons of Insurers) Guidelines, 2023
These guidelines are applicable for remuneration payable to KMPs of private sector insurers from FY 2023-24. The insurers are required to complete the process of framing/ reviewing the remuneration policy based on these guidelines within 3 (three) months of the issuance of the guidelines. Some of the key provisions are as follows:
The above guidelines do not apply to foreign reinsurance branches operating in India and replace and supersede: (i) the Insurance Regulatory and Development Authority of India (Remuneration of Non-Executive Directors of Private Sector Insurers) Guidelines, 2016, and (ii) the Insurance Regulatory and Development Authority of India (Remuneration of Chief Executive Officer/ Whole-time Director/ Managing Director of Insurers) Guidelines, 2016.
Regulations pertaining to International Financial Service Centre Insurance Offices (“IIOs”)
The International Financial Services Centres Authority (“IFSCA”) has issued the below mentioned regulations in relation to the operations of IIOs.
International Financial Services Centres Authority (Re-insurance) Regulations, 2023 (“Re-insurance Regulations”)[11]
The Re-insurance Regulations provide the framework for oversight and control of inward and outward arrangement of re-insurance business by IIOs. Some of the key provisions of the Re-insurance Regulations are as follows:
Reporting requirements for life, general, health and re-insurance business
With the objective to specify capital and solvency requirements for IIOs which are undertaking life, general, health or re-insurance business (as applicable), the IFSCA has released the following regulations:
The above regulations, inter alia, require IIOs to submit: (i) statements of admissible assets, amount of liabilities and solvency margin in the prescribed forms; and (ii) the annual actuarial report, and the valuation of assets and liabilities along with the computation of solvency margin, to the IFSCA.
Regulatory Framework applicable to insurance business carried out by IIOs and IIOs[14]
The International Financial Services Centres Authority (Management Control, Administrative Control and Market Conduct of insurance business) Regulations, 2023 (“Business Regulations”) provide a regulatory framework related to management and administrative controls, policyholders’ interest protection, sharing of data, fair advertisements, and market conduct of insurance business carried out by IIOs or International Insurance Intermediary Offices (“IIIOs’). Under the Business Regulations, IIOs are required to endeavour to prevent any entity from exercising direct or indirect control over it, through acquisition of significant ownership or interest, through portfolio transfers, leading to change in the shareholding pattern. The Business Regulations impose certain requirements on an IIO in case there is any proposed change in the shareholding or management control. An IIO is also required to take prior approval from the IFSCA in case of a merger, amalgamation, or transfer involving the IIO, and adhere to certain prescribed requirements. IIOs are also required to formulate policies for:
IIOs and IIIOs are also required to provide for a policy for protection of interest of the policyholders.
[1] IRDAI Notification, bearing reference no. IRDAI/GA&HR/GDL/MISC/ 88/04/2023, dated April 24, 2023. The Cyber Security Guidelines supersede IRDAI Circulars on this subject dated April 7, 2017, December 29, 2020, September 2, 2022 and October 11, 2022.
[2] IRDAI Circular, bearing reference no. IRDAI/GA&HR/CIR/MISC/128/06/2023, dated June 13, 2023.
[3] IRDAI Circular, bearing reference no. IRDAI/F&I/CIR/RIC/90/4/2023, dated April 24, 2023.
[4] IRDAI Circular, bearing reference no. IRDAI/NL/CIR/SIC/104/5/2023, dated May 15, 2023.
[5] IRDAI Press Note dated May 16, 2023.
[6] IRDAI Circular, bearing reference no. IRDAI/HLT/CIR/PR0/01/05/2023, dated May 10, 2023 read with IRDAI Circular, bearing reference no. IRDAI/LIFE/CIR/PRO/138/6/2023, dated June 26, 2023.
[7] IRDAI Circular, bearing reference no. IRDAI/LIFE/CIR/MISC/99/5/2023 dated May 4, 2023.
[8] IRDAI Circular, bearing reference no. IRDAI/INT/CIR/MISC/129/6/2023, dated June 14, 2023.
[9] IRDAI Circular, bearing reference no. IRDAI/F&I/CIR/INV/139/06/2023, dated June 28, 2023.
[10] IRDAI Circular, bearing reference no. IRDAI/F&A/GDL/MISC/141/6/2023, dated June 30, 2023.
[11] IFSCA Notification, bearing reference no. IFSCA/2022-23/GN/REG036, dated April 11, 2023.
[12] IFSCA Notification, bearing reference no. IFSCA/2022-23/GN/REG038, dated April 19, 2023.
[13] IFSCA Notification, bearing reference no. IFSCA/2022-23/GN/REG039, dated April 19, 2023.
[14] IFSCA Notification, bearing reference no. IFSCA/2022-23/GN/REG035, dated April 26, 2023.
This Newsletter has been prepared by:
|
Nandini Seth |
Ronak Ajmera |
Rupaly Middha |
For more details, please contact [email protected]
This is a compilation of all corporate publications, deals, events, articles, prisms and newsletters circulated in the month of June 2023 by JSA.
To read further details, click here or refer to the below document.
For more details, please contact [email protected]
*In case the document is not visible on the device you are using, please click the link above.
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