Thursday, 26 March 2020

Upcoming Mandatory Compliance by Listed Companies towards "Good Corporate Governance"

1.   An Introduction

The Market Regulator, Securities and Exchange Board of India (SEBI) issued amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 vide its circular dated 09th and 10th May 2018 taking into consideration the recommendations issued by Kotak Committee under the chairmanship of Mr. Uday Kotak in the field of Good Corporate Governance. Most of the amendments were effective w.e.f. 1st April, 2019, while other amendments applicable on listed entities w.e.f. 1st April, 2020. This article will acquaint readers about those amendments which are decided to be effective from 01.04.2020.

Explanation for reader: The top 500 and 1000 entities shall be determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

2.   Amendments to be effective from 01st April 2020

  v  Composition of Board

A proviso to Regulation 17 (1)(a) has been inserted which reads as:

Provided that the Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020; “

Commentary: The women director is now proposed to be independent for top 1000 Listed entities. At present, most of the women directors are either from the family of the promoters or the wife/daughter of the directors. Therefore, in order to increase gender diversity on the Board and reduce the biasness to make the board effective.  the SEBI took such initiative.

  v  Minimum no. of directors in listed entities
       New sub-clause to regulation 17(1)(c) as appended below:
“the board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than six directors.”

Commentary: The proposed amendment mandates the minimum no. of directors to be not less than six, which is double the requirement for public companies as prescribed under Companies Act 2013, for the top 2000 listed entities.

 v Separation of role of Non-Executive Chairman and Managing Director/Chief Executive Office (MD/CEO)
       New sub-clause to regulation 17(1B) as appended below:
“(1B). With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall -

(a) be a non-executive director;

(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013”

Commentary: In order to ensure working of the board in best interest of the Company and all stakeholder, the Chairman of 500 listed would required to be a non-executive director and not related to MD or the CEO in light of definition of relative provided under the Companies Act, 2013.

However, the SEBI as on January 10, 2020 vide notification No. SEBI/ LAD-NRO/GN/2020/02. notified Securities and Exchange Board Of India (Listing Obligations And Disclosure Requirements) (Amendment) Regulations, 2020, hence in the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, in regulation 17 (1B), the number “2020” shall be substituted by the number “2022”, which means the amended regulation 17(IB) shall be effective from 01.04.2022. 

v  Quorum of BM

New regulation 17(2A) as appended below:

“(2A) The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019 and of the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director”

Commentary: The proposed regulation requires 1/3rd of the total strength or 3 directors, whichever is higher, including at least one independent director, w.e.f. 01.04.2020 for top 2000 listed entities. As this is more stringent than provisions as specified in Companies Act 2013, which requires the presence of 1/3rd of the total strength or 2 directors, whichever is higher, for a valid meeting , this amendment was inserted  so that strength of board increased would be enhance along with presence of at least one independent director to ensure the working of board in best interest of all stakeholders especially minority shareholders.

  v  Number of directorship
 New regulation 17A as appended below:

“(1) A person shall not be a director in more than eight listed entities with effect from April 1, 2019 and in not more than seven listed entities with effect from April 1, 2020:
Provided that a person shall not serve as an independent director in more than seven listed entities.”

(2) Notwithstanding the   above, any person   who is serving   as a whole time director / managing director in any listed entity shall serve as an independent director in not more than three listed entities”

Commentary: The regulations have been stricter because the Committee believes that multiple directorships beyond a reasonable limit may lead to a director not being able to allocate sufficient time. Hence, w.e.f. 01.04.2020, number of listed entities in which a person can hold directorship is restricted to 8 from 01.04.2019 and to 7 from 01.04.2020. Further, a person who has been appointed as a whole time director or as a managing director in any listed company would not be able to serve as an independent director in more than three listed company.

Views expressed are personal and do not necessarily reflect the views of the Firm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Saturday, 14 December 2019



With a growing online footprint, one is at a higher risk of privacy breach than ever before. Also, at this juncture employees and customers are increasingly becoming sensitive about their privacy rights. So, legal framework was required to include policies that support innovation, but which, simultaneously protects individuals and entities from risks associated with data. Thus, data privacy measures are both critical and can provide companies a real business advantage if handled well.

The Ministry of IT, Govt. of India (“MeitY”) constituted a committee of experts chaired by Justice Sri Krishna for issues related to data protection in India on July 31, 2017 (the “Sri Krishna Committee”). It submitted its report titled “Free and Fair Digital Economy, Protecting Privacy and Empowering Indians” (“Report”) and also the Personal Data Protection Bill, 2018 (“PDPB 2018”) on July 27, 2018.

The Report says that legal regime must aspire to the common public good of both a ‘free’ and ‘fair’ digital economy. The Free implies autonomy of the individual with regard to their personal data. And the Fairness pertains to developing a regulatory framework where the existing inequalities in bargaining power between individual and the entities that process such personal data is mitigated.

In August 2017, the Supreme Court in K. S. Puttaswamy v. Union of India (the “Judgement”) recognised right to privacy as a Fundamental Right. The court stated that every person should have the right to control commercial use of their identity. The Judgement, therefore, established that people (citizens and non-citizens) could assert their individual rights against unlawful government invasions to their privacy and it also imposed an obligation on the state to protect the individual’s right to privacy by private entities.

Globally, the enactment of the EU General Data Protection Regulation (“GDPR”) in 2016 which came into force in May, 2018 established a global norm in personal data protection. The PDPB 2018 reflects principles contained in the GDPR, while simultaneously attempting to bespoke the law to Indian needs.

Now, finally, the Government has tabled a modified Personal Data Protection Bill, 2019 (the “PDPB 2019”) in the parliament on December 11, 2019. It has been sent to 20 members Joint Parliamentary Committee for further deliberations. The Committee is expected to submit its Report in the budget session (i.e., February, 2019).

Monday, 21 October 2019

FEMA guidelines for FDI in e-commerce entities

FEMA guidelines for FDI in e-commerce entities

E-commerce’ means buying and selling of goods and services including digital products over digital & electronic network.

‘E-commerce entities’ are the following entities conducting the e-commerce business:
  •    a company incorporated under the Companies Act, 1956 or the Companies Act, 2013.
  •   a foreign company covered under section 2 (42) of the Companies Act, 2013.
  •   an office, branch or agency in India owned or controlled by a person resident outside India.

There are three models in which e-commerce entities conduct their business activities which are as mentioned below:

a.     B2B E-commerce: The entities conducting B2B e-commerce would engage only in Business to Business (B2B) e-commerce and not in retail trading, inter alia implying that existing restrictions on FDI in domestic trading would be applicable to e-commerce as well. Guidelines on cash and carry wholesale trading apply to B2B e-commerce activities also.

b.  ‘Inventory based model of e-commerce’ means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.

    It is noteworthy that foreign investment is not permitted in Inventory based model of e-commerce.

c.     ‘Market place model of e-commerce’ means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

    It is pertinent to mention here that 100% foreign investment under automatic route is  permitted in ‘Market place model of e-commerce’.

    Further there are certain other conditions which need to be complied by ‘Market place model of e-commerce’ which are as follows:

(i)     Digital & electronic network mentioned above will include network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles etc.
(ii)    Marketplace e-commerce entity is permitted to enter into transactions with sellers registered on its platform on B2B basis.
(iii)    Marketplace e-commerce entity is permitted to provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services. Order fulfilment services relate to receiving, processing and delivering orders to end customers.
(iv)      Marketplace e-commerce entity cannot exercise ownership or control over the inventory i.e. goods purported to be sold.

            Explanation: Inventory of a vendor will be deemed to be controlled by marketplace e-commerce entity if more than 25% of purchases of such vendor are from the marketplace e-commerce entity or its group companies which will render the business of marketplace e-commerce entity into inventory based model, in which FDI is not permitted.

(v)      An entity having equity participation by e-commerce marketplace entity or its group companies or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.  

It means that the market place e-commerce entity will not sell the products of any vendor on its platform where (i) the marketplace entity or its group companies has contributed in the share capital of such vendor company or (ii) where more than 25% of purchases of such vendor are from the marketplace e-commerce entity or its group companies.

In this connection it may pertinent to point out that prior to amendment to FDI regulations on 31 January, 2019, which came into force from 1 February, 2019, as per earlier FDI regulations, E-commerce entity providing a marketplace could not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory was to render the business of the marketplace entity into inventory based model. Further, an e-commerce entity was not to permit more than 25 percent of the sales value on financial year basis affected through its marketplace from one vendor or their group companies.

In other words, as per amended regulations, the marketplace e-commerce entity is not permitted to own any shares of the vendor company. Earlier there was no concept of control of the vendor company by the marketplace e-commerce entity. As per amended regulations the marketplace e-commerce entity which the owns (in part or full) the vendor company or controls the inventory of the vendor company, is not allowed to sell the products a such a vendor on the platform run by such marketplace entity.

(vi)     For the goods/ services that are made available for sale electronically on website, marketplace e-commerce entity is required to clearly provide name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer satisfaction is the responsibility of the seller.
(vii)   Payments for sale may be facilitated by the marketplace e-commerce entity in conformity with the guidelines issued by the Reserve Bank in this regard.
(viii)     Any warranty/ guarantee of goods and services sold is also the responsibility of the seller.
(ix)         E-commerce entities providing marketplace will not, directly or indirectly, influence the sale price of any goods or services and shall maintain level playing field. Services should be provided by e-commerce marketplace entity or other entities in which e-commerce marketplace entity has direct or indirect equity participation or common control, to vendors on the platform at arm’s length and in a fair and non discriminatory manner.

Explanation: Such services will include but not limited to fulfilment, logistics, warehousing, advertisement/marketing, payments, financing etc. Cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. For the purposes of this clause, provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.

Prior to amendment the relevant regulation read as under: E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.

It did not talk of the provisions of services to the vendors in fair and non-discriminate manner.
(x)         No e-commerce marketplace entity can mandate any seller to sell any of their product exclusively on its platform.
(xi)      All existing investments are mandated to be in compliance with the above conditions with effect from 1 February, 2019.

Annual Compliances under FEMA:

The e-commerce entity is now required to annually furnish a certificate along with a report of statutory auditor to the Reserve Bank of India, confirming compliance of the e-commerce guidelines.

While the e-commerce sector in India has seen tremendous growth in the past few years, it will be interesting to see how much impact these policy measures will have in the long run and how the e-commerce giants will comply with these norms.

Friday, 4 October 2019

Core Investment Company

Core Investment Companies, (CIC) are those non-banking financial companies which have their assets primarily as investments in shares of group companies but not for trading, and also do not carry on any other financial activity.

The RBI directions applicable to the Core Investment Companies are contained in the Master Direction - Core Investment Companies (Reserve Bank) Directions, 2016 dated August 25, 2016 (as updated on June 07, 2018).As per the above referred Master Direction, Core Investment Company (CIC) means:

Core Investment Company (CIC) is a non-banking financial company carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet:-

i. it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;
ii. its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies and units of Infrastructure Investment Trust only as sponsor constitute not less than 60% of its net assets as mentioned in clause (i) above;
Provided that the exposure of such CICs towards InvITs shall be limited to their holdings as sponsors and shall not, at any point in time, exceed the minimum holding of units and tenor prescribed in this regard by SEBI (Infrastructure Investment Trusts) Regulations, 2014, as amended from time to time.
iii. it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;
iv. it does not carry on any other financial activity referred to in Section 45I(c) and 45I (f) of the Reserve Bank of India Act, 1934 except
(a) investment in
(i) bank deposits,
(ii) money market instruments, including money market mutual funds and liquid mutual funds
(iii) government securities, and
(iv) bonds or debentures issued by group companies,
(b) granting of loans to group companies and
(c) issuing guarantees on behalf of group companies.

As per the above referred Master Direction:
  1. Core Investment Companies (CIC) with an asset size of less than Rs. 100 Crore will not be required to register themselves with Reserve Bank of India.
  2. Core Investment Companies (CIC) having total asset size of 100 Crore or more either individually or in aggregate along with other CICs in the Group and which raises or hold public funds will be regarded as Systemically Important Core Investment Companies (CICs-ND-SI) and shall be required to get themselves registered with Reserve Bank of India .
Besides registration, there are also certain other provisions which are only applicable on Systematically Important Core Investment Companies (CICs-ND-SI).

One such provision applicable only to CICs-ND-SI is contained in Paragraph 27 of the above Master Directions which provides that a systemically important CIC shall require prior written permission of the Reserve Bank of India for any change in the management of the CICs which results in change in more than 30 per cent of the directors, excluding independent directors. There is some ambiguity regarding the calculation of the percentage prescribed by the Reserve Bank of India in the above direction. For example, a CIC was having three directors. A new director had to join the CIC. The management of the CIC did not seek prior approval of Reserve Bank of India, because as per their understanding, addition on one director to the existing three directors in the company would amount to 25% change and therefore did not require prior approval of the Reserve Bank of India. But when the company subsequently intimated the Bank regarding the change in their directors, Reserve Bank of India advised them the addition of fourth director amounted to change in more than 30 per cent of the directors of the company and as such they should have taken prior written permission of the Reserve Bank of India for that change.

In this connection, paragraph 46 of the above Regulations provides that ‘the interpretation of any provision of these Directions given by the Bank shall be final and binding on all the parties’. 

Thus, the company was required to explain to the RBI the reason for their not seeking prior permission of the RBI for the change in the number of directors of the company, as also to seek post facto approval of the Reserve Bank of India for change their number of directors from three to four.

Another point that baffles the NBFCs relates to the compliance and reporting requirements.It is pertinent to mention here that though the directions applicable to Core Investment Companies are contained in Master Direction - Core Investment Companies (Reserve Bank) Directions, 2016 dated August 25, 2016 (as updated on June 07, 2018). In addition to these directions, there are certain other directions which are applicable to Core Investment Companies as are mentioned in other Master Directions issued by Reserve Bank of India from time to time which are equally important and should be adhered to.Further, sometimes the NBFCs are asked to comply with the directions and report to RBI which as per their understanding, are not related to their NBFC. The NBFCs are however obliged to comply with the RBI directions, as per the provisions of Section 45M of the Reserve Bank of India Act, 1934, they are duty-bound to follow RBI comply with the directions given to them by RBI.

Section 45M is reproduced below for perusal:

45M. Duty of non-banking institutions to furnish statements, etc., required by Bank.
It shall be the duty of every non-banking institution to furnish the statements, information or particulars called for, and to comply with any direction given to it, under the provisions of this Chapter. 

Accordingly, Core investment companies should not only comply with the directions contained in the Master Direction - Core Investment Companies (Reserve Bank) Directions, 2016 dated August 25, 2016 (as updated on June 07, 2018), they should not miss out on other relevant directions as applicable to them contained in other NBFC Directions issued by Reserve Bank of India from time to time.

GD Chugh
Associate Partner

Friday, 18 May 2018

Implementation of System for Monitoring of Foreign Investment in Listed Company

The Foreign Investment in India is regulated in terms of clause (b) of sub-section 3 of section 6 and section 47 of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017 issued vide Notification No. FEMA 20(R)/2017-RB dated November 7, 2017.

FEMA prescribes the various foreign investment limits in listed Indian companies for Foreign Portfolio Investors, Non-Resident Indians and sectoral gaps & compliance thereof.

Brief Introduction of measures by SEBI and RBI

As a purposive drive of Indian Government for keeping the track over the foreign Investment in India and related compliances thereto, the Securities Exchange Board of India (SEBI) in consultation with Reserve Bank of India (RBI) has introduced a new system for Monitoring of Foreign Investment limits in listed companies and prescribed guidelines w.r.t. the necessary infrastructure, data to be provided by listed Indian companies and other related matters.
In nutshell, the SEBI on 5th April, 2018 had issued circular directing market regulators to put in place a new system for depositories to monitor the foreign investment limits in listed Indian companies and such Indian company to submit the required information for FDI received till date within the specified date.
The circular provided that the last date for submission of data as 30th April, 2018, however, the stated day has been extended as for submission of information by companies by 15th May, 2018 and operationalizing the monitoring mechanism by depositories to 18th May, 2018.

Why monitoring system to be implemented

  • The objective is to enable listed Indian companies to ensure compliance with the various foreign investment limits;
  • To maintain the data of investment received within the allowed limit of FDI by the foreign investors in India;

 Compliance under the Circulars

For depositories

  • The National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) shall put in place the necessary infrastructure and IT systems for operationalizing the monitoring mechanism described in Annexure A of SEBI’s circular IMD/FPIC/CIR/P/2018/61 dated 5th April, 2018.
  • Depositories shall provide an interface where the company shall submit the requisite information including company identification number, name, date of incorporation, PAN number, Permissible Aggregate Limit for investment by FPIs and Permissible Aggregate Limit for investment by NRIs

 For Stock Exchanges

The Stock Exchanges (BSE, NSE and MSEI) shall also put in place the necessary infrastructure and IT systems for disseminating information on the available investment headroom in respect of listed Indian companies.

For Listed Companies

  • In accordance with Para 6 of Annexure A of the circular dated April 05, 2018 which provides the Architecture of the System for Monitoring Foreign Investment Limits in listed Indian companies, requires all listed Indian companies to provide the specified data/ information on foreign investment to the depositories latest by 30th May, 2018 which has been extended to 15th May, 2018.  
  • The company shall appoint any one depository to act as a Designated Depository for the purpose of monitoring the foreign investment limit.
  • In an event of any change in any of the details pertaining to the company, such as increase or decrease of the aggregate FPI or NRI limits or the sectoral cap or a change of the sector of the company, the firm needs to inform such changes along with the supporting documentation to its designated depository.
Activation of Red Flag Alert

The circular provides that the  system  shall  calculate  the  percentage  of  NRI  &  FPI  holdings and other investment in the Company
If the total foreign investment in a company is within 3% or less than 3% of the sectoral cap, then a red flag shall be activated for that company, where the same shall be displayed by depositories and stock exchanges. Such data shall be updated on day to day basis.

Breach of foreign investment limits

In case of breach of aggregate NRI/FPI investment limits or the sectoral cap for a given company, the depositories shall inform the exchanges about the breach, the exchange issue circular/notification on its website and halt further purchases by FPIs, if the aggregate FPI limit is breached, NRIs, if the aggregate NRI limit is breached or All foreign investors, if the sectoral cap is breached. The circular further provides for manner of disinvestment so as to bring the excess FDI within the limit.

Therefore, in concluding remark it is to be stated that the Circular codifies the process of monitoring foreign investment limits. In case any FPIs/ NRIs who has breached the FDI limit, shall be required to disinvest in the manner as stated in the circular, where such breach will be informed through the custodians/ AD banks respectively along with the method for disinvestment which can opt in accordance with provisions of law.

Relevant links:

Circular by NSDL no. Ref No: NSE/CML/2018/11 dated 25th April, 2018-

RBI Notification no.: - RBI/2017-18/172 A.P. (DIR Series) Circular No. 27 [(1)/20(R)] dated 3rd May, 2018-

 Compiled by Ms. Deepika Sharma
(Senior Associate at Factum Legal Advocates & Solicitors)