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2011 legal opinion: The year of I am Anna and corporate law reforms

JSA partner Lalit Kumar glances back through 2011, the year that was dominated by the Anna Hazare campaign, via his lens of the most important reforms and changes in corporate laws.

The year 2011 will be left behind as the year which saw - India on the top of the cricketing world after 28 years (though the star batman’s willow and fans still impatiently wait for the hundredth hundred), end of Left’s more than three decades of rule in West Bengal, Tihar being abode to many who were mostly seen in corridors of power, RBI relentlessly taming inflation and combating rupee fall, faltering growth of Indian economy, plummeting M & A activities, extremely tight money and capital markets, a humble man from Bihar winning a deserving highest amount that Big B could offer on KBC and many more such things.

Out of all, the year would be remembered as the year when a solitary man displayed enough strength to bring the government to knees and who was joined by selfless countrymen shouting and writing wherever they could – ‘I am Anna’. Year 2011 can rightly be said as the year of ‘I am Anna’. The year of ‘I am Anna’ was action-packed on many accounts and following this trend, the corporate laws were no exception.

This year the new company law was finally tabled in the winter session of the Parliament although now there is news that it has been referred back to Standing Committee for further scrutiny. Similar fate was met by the bold decision of the government to allow FDI in multi-brand retail. This initiative suffered a major setback when the government had to bow to the demands of some of its allies and opposition to suspend its decision. Finance minister was heard saying that it is not a roll back but only a suspension till consensus from all stakeholders is obtained. Nobody knows when that will happen. While the year didn’t see much of these major changes but still it witnessed a lot that happened.

Beginning of January, the RBI issued directions which created a new class of non-banking financial companies called the ‘core investment companies’ primarily invented to govern companies which mostly make investments in group companies. February gave much relief to unlisted companies which are not subsidiaries of listed companies from seeking government approval for paying their managerial personnel in cases when companies have no profits or inadequate profits.

March brought cheer and joy particularly to the private equity investors when the government rolled back its earlier stand and clarified that conversion formula (instead of upfront conversion price) can be specified for convertible instruments. In addition to this roll back, there was another of this kind which happened much later in October when the government decided to withdraw the contentious clause in the FDI policy which treated instruments possessing any kind of options as external borrowings instead of foreign investment.

The much known Press Note 1 of 2005 has been deleted. It required a foreign investor / collaborator to get prior government’s nod (after getting no-objection from the Indian partner) where the foreign investor wants to form another alliance with some other Indian partner in the ‘same’ field of activity.

Another welcome change is the simplification of the policy relating to down-stream investment (i.e. further investment made by an already FDI funded Indian company).

A Bombay High Court judgment has held that shareholders in a public limited company can now contractually agree on restricting their freedom to transfer shares. Fortunately, a similar provision has been inserted in Companies Bill, 2011. However, the Companies Bill, 2011 provides a contrary provision to another judgment of the Bombay High Court which says that a private company which is a subsidiary of a public company cannot retain the basic characteristics of a private company.

Escrow accounts can be easily opened now where the consideration to be paid and the securities to be exchanged can be parked till the acquisition transaction is finally closed. Pledge of Indian company’s shares held by a non-resident has been made much easier with no nod from RBI required now. Transfer of shares between non-resident and resident not adhering to RBI’s pricing guidelines but complying with SEBI’s pricing regulations do not need a go-ahead from RBI on account of the fact that it meets the guidelines of another regulator.

After much delay, FDI in limited liability partnerships is a reality now though it requires government approval and has to meet other stringent conditions. Shareholders and board members can now easily participate and vote through electronic meetings.

The M & A activities of listed companies will experience change with the new takeover law in place. The new law has increased the initial trigger threshold from 15 per cent to 25 per cent giving more space for acquisition without triggering the open offer. The minimum open offer size stands increased from 20 per cent to 26 per cent.

Finally, the year saw the notification of the merger control regulations effective June 1, 2011 requiring mandatory notification to the Competition Commission of India which exceed a certain prescribed limits based on assets or turnover.

Inspite of all of the above, it is disheartening that the year is closing without seeing the end result for which ‘I am Anna’ was shouted or written everywhere. I hope 2012 achieves what 2011 couldn’t.

Lalit Kumar is a partner at J Sagar Associates (JSA). The views expressed above are personal.
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