Wednesday 27 May 2020

COMPETING OFFERS UNDER SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011 (HEREINAFTER REFERRED AS ‘TAKEOVER REGULATIONS’)

The term ‘Competing Offer’ refers to an offer given by any other person (Competing Acquirer) after an offer has already been given by an Acquirer to the shareholders of the Target Company to acquire the shares held by them.  The Takeover Regulations permits all persons other than the original acquirer to make a competing offer and does not restrict even the Person Acting in Concert (PAC)  of the acquirer from making a competing offer.
Legal Provision
Regulation 20 of Takeover Regulations governs and deals with the concept of Competing Offer.
Size of Competing Offers
Competing offer shall be for such number of shares which, when taken together with shares held by the acquirer and the PAC, shall be at least equal to the aggregate holding of the acquirer who has made the first public announcement including the shares proposed to be acquired by such acquirer under the offer and thee agreement that has triggered the first open offer.
 In case of a competing offer, the subsisting mandatory offer’s size can be increased up to 1 working day prior to the commencement of the tendering period.
 In case of a competing offer, the subsisting voluntary offer’s size can be increased within a period of fifteen working days from the public announcement of a competing offer.
Timing of the Competing offer


Competing offer can be made within 15 working days from the date of Detailed Public Statement made by the acquirer who makes the first Public Announcement.

No person shall be entitled to make a public announcement of an open offer for acquiring shares, or enter into any transaction that would attract the obligation to make a public announcement of an open offer for acquiring shares under the Takeover regulations, after the period of fifteen working days from the date of first public announcement and until the expiry of the offer period for such open offer.
Number of Competing Offer
The Takeover Regulations does not impose any restriction on the number of competing offers provided all the offers are made within the timeframe prescribed.
Conditional Offer
Competing offer can be conditional as to the minimum level of acceptances only if the original open offer conditional as to the minimum level of acceptances.
Competing offer does not constitute as Voluntary Offer
Though a competing offer under the Takeover Regulations is made by the acquirer voluntarily, a competing offer shall not constitute voluntary offer under the Takeover Regulations. Therefore, the conditions applicable to a voluntary offer under the Takeover Regulation shall not be applicable to a competing offer.
Revision of offer
Acquirers who have made the first public announcement, as well as competing acquirers, shall be allowed to revise the terms of their offers as long as these revisions are favourable to the target shareholders.
Induction of new director
No induction of any new director to the board of directors of the target company during the pendency of competing offers, provided that in the event of death or incapacitation of any director, the vacancy arising therefrom may be filled by any person subject to approval of such appointment by shareholders of the target company by way of a postal ballot.
Prohibitions on Competing Offers in Certain Cases
In view of Takeover Regulation 20 (7), making a following competing offer, or entering into a transaction which would trigger an obligation to make a following competing offer is not permitted, until after the expiry of the offer period, in the following cases:
1.      where the original open offer is for the acquisition of shares pursuant to a disinvestment in terms of Regulation 13(2) (d); or
2.      where the open offer is pursuant to a relaxation granted by the SEBI pursuant to Regulation 11(2) from strict compliance with the various open offer obligations set out in Chapters III and IV under Regulation 11(2), SEBI may grant such a relaxation where the Central Government or a State Government or any regulatory authority has superseded and replaced the board of the target company or where it is otherwise satisfied that such a relaxation will be in the interests of the public, investors and the securities market.
Person Restricted from making competing offer
No person who is a fugitive economic offender can make a competing offer for acquiring any shares or voting rights or control of a target company.
Conclusion
The Takeover Regulations do not regulate or impose any restrictions on the target company from soliciting competitive bids from other potential bidders. The Regulations have been designed in such a manner which provides equal opportunity to all the shareholders to choose either to remain with the new promoter or to exit. Competing offers have a special feature of providing public shareholders an opportunity for accepting more favourable price as well as an opportunity to determine the controlling shareholders of the target company.
This Article has been Compiled by Swati Garg (Senior Associate)
You can direct your queries or comments to the author at swati@factumlegal.com

Disclaimer-
The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.








Thursday 21 May 2020

BONUS ISSUE

A Bonus Issue by a company refers to the further issue of shares to its’ existing shareholders, without consideration,  in proportion to the voting rights or pro-rata of their holding of shares in the company.
Source for Issue of Bonus Shares:
As per Section- 63(1) a company may issue fully paid up bonus shares to its members out of following:
  • Free Reserves;
  • Securities Premium Account; or
  • Capital Redemption Reserve Account

No bonus shares can be issued by capitalizing reserves created by the revaluation of assets.
Provision in Articles of Association
Issue of bonus share should be authorised by article of association of the Company. However if the company has adopted the Table F, then by relaying on regulation 39 and 40, the company can issue the bonus shares. In case the company has not adopted the table F and there is no specific provision in its articles then, it should amend its articles before issuing the bonus shares.
Restriction on Listed Companies
To issue bonus shares the listed companies are required to comply with certain conditions and restrictions as imposed by SEBI through various regulations. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 imposed the following additional restrictions:
  • The listed company should reserve portion of bonus shares to the outstanding compulsorily convertible debt instruments in proportion to their convertibility.
  • The said reserved portion of bonus shares should be issued at time of conversion on the same terms or same proportions at which the bonus shares were issued;
  • The bonus shares should be issued out of free reserves created out genuine profits or securities premium collected in cash. As restricted by the section, these regulations also prohibit issue of bonus shares from reserves created by revaluation of fixed assets.
  • Bonus shares shall not be issued in lieu of dividends;
  • Bonus issue on the SR equity shares shall carry the same ratio of voting rights compared to ordinary shares and the SR equity shares issued in a bonus issue shall also be converted to equity shares having voting rights same as that of ordinary equity shares along with existing SR equity shares. 
Completion of a bonus issue in case where:
  • Shareholders’ approval not required: Bonus issue shall be implemented within 15 days from the date of board approval for bonus issue, where shareholders approval is not required for capitalisation of profits or reserves for making the bonus issue;
  • Shareholders’ approval is required: Bonus issue shall be implemented within 2 months from the date of board meeting wherein the decision to announce the bonus issue was taken subject to shareholders’ approval

Implementation of bonus issue
The date of commencement of trading shall be considered as ‘implemented’ for the purpose of bonus issue.
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
As per Regulation 29 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed company needs to give prior notice to Stock Exchanges about the Board Meeting where the proposal for issue of Bonus shares is part of the Agenda.
Further, as per Regulation 42, the listed entity needs to intimate the record date of issue of Bonus shares to the Stock Exchanges, at least 7 working days in advance of record date.
Tax Implications
A bonus share issue is most commonly not taxed as a dividend, even if it is charged to retained earnings. Bonus shares, are not to be taxed on the allotment, but on sale. As decided in Sudhir Menon HUF Vs. ACIT 162 TTT 425 ( Mumbai ), Section 56 (2) (vii) of Income Tax Act, 1961 does not apply to the issue of Bonus shares because there is a mere capitalization of profits by the issuing company and there is neither an increase or decrease in the wealth of the shareholder nor any change in the percentage shareholding. There was no receipt of any property by the shareholder and what stood received by the shareholder was the split shares out of its own holdings. Thus, the cost of acquisition of shares to the investor in ‘Nil”. Bonus shares would be subject to capital gain tax depending on the holding period only when sold.
Reporting under Foreign Exchange Management Act, 1999 (‘FEMA’) on issue of bonus shares
As per Master Direction no. 18/2015-16 (RBI/FED/2015-16/13) dated January 1, 2016 issued by RBI, the following form is required to be submitted under FEMA:-
Filing of form FC-GPR: Indian company issuing capital instruments to a person resident outside India, and where such issue is reckoned as Foreign Direct Investment under FEMA 20(R), shall report such issue in Form FC-GPR in the Single Master Form not later than thirty days from the date of issue of the capital instruments
Offence
Section 63 (i.e. Bonus issue) of the Companies Act, 2013, does not prescribe any penal provision for contravention of the said section. However section 450 of the Companies Act, 2013 will be applicable. Accordingly, the punishment for contravention, the company and every offer of the company who is in default shall be punishable with a fine upto Rs.10,000, if the contravention continues then the fine shall be Rs. 1,000 every day after the first during which the contravention continues.

This Article has been Compiled by Swati Garg (Senior Associate)
You can direct your queries or comments to the author at swati@factumlegal.com

Disclaimer-
The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

Monday 18 May 2020

Summary of Supreme Court judgement on Preferential, Undervalued Transaction under Section 43, 44 and 45 of IBC, 2016

Case Name
Anuj Jain Interim Resolution Professional For Jaypee Infratech Limited Vs. Axis Bank Limited Etc. 
Case Citation - 164(IBC)129/2020)
Corporate Debtor
Jaypee Infratech Limited
Appellant
Anuj Jain (Interim Resolution Professional) For Jaypee Infratech Limited
Respondent

 Axis Bank Limited Etc
Date of Judgement

26 Feb,2020

1.    That the impugned transactions had been of transfers for the benefit of JAL, who is a related party of the corporate debtor Jaypee Infratech Limited and is its creditor and surety by virtue of antecedent operational debts. The impugned transactions have the effect of putting JAL in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53 of the Code. Thus, the corporate debtor Jaypee Infratech Limited has given a preference in the manner laid down in sub-section (2) of Section 43 of the Code.
2.    The transactions in question had been of deemed preference to related party JAL by the corporate debtor Jaypee Infratech Limited during the look-back period of two years and have rightly been held covered within the period stated under Section 43(3) of the Code. The transactions are not of excepted transfers in terms of Section 43(3) of the Code.

ISSUES OF THE CASE

1.   One, as to whether the transactions in question deserve to be avoided as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Code

2.  Whether the respondents (lender of JAL) could be recognized as financial creditors of the corporate debtor Jaypee Infratech Limited on the strength of the mortgage created by the corporate debtor, as collateral security of the debt of its holding company JAL.

FACTS OF THE CASE:

Jaiprakash Associates Limited (JAL) is stated to be a public listed company with more than 5 lakh individual shareholders. Jaiprakash Associates Limited (JAL) was awarded the rights for construction of an expressway from Noida to Agra. A concession agreement was entered into with the Yamuna Expressway Industrial Development Authority. Finance was obtained from a consortium of banks against the partial mortgage of land acquired and a pledge of 51% of the shareholding held by JAL.

Jaypee Infratech Limited (JIL) had mortgaged 858 acres of land parcels as collateral to secure debt owed by its holding company – Jaiprakash Associates Limited (JAL) to various lenders (mortgage transactions).

Jaypee Infratech Limited was declared NPA by Life Insurance Corporation of India on 30.09.2015 and by some of its other lenders on 31.03.2016. Then, IDBI Bank Limited instituted a petition under Section 7 of the Code before NCLT, seeking initiation of CIRP against Jaypee Infratech Limited, while alleging that Jaypee Infratech Limited had committed a default to the tune of Rs. 526.11 crores in repayment of its dues.

On 09.08.2017, NCLT passed an order under Section 7 of the Code and appointed an IRP.

The IRP made an application on 06.02.2018, seeking directions that the transactions entered into by the directors and promoters of corporate debtor creating mortgages of 858 acres of immovable property owned by it to secure the debts of Jaiprakash Associates Limited are preferential, undervalued, wrongful, and fraudulent; and hence, the security interest created by corporate debtor, Jaypee Infratech Limited in favour of the lenders of Jaiprakash Associates Limited (JAL) be discharged and such properties be deemed to be vested in corporate debtor.
The NCLT allowed the said application on 16.05.2018 with respect to six of the impugned transactions covering about 758 acres of land. On the appeals filed by lenders of Jaiprakash Associates Limited, NCLAT, by its impugned order dated 01.08.2019, set aside the order passed  by NCLT and held that such lenders of Jaiprakash Associates Limited (JAL) were entitled to exercise their rights under the Code.

DECISION BY NATIONAL COMPANY LAW TRIBUNAL (NCLT)

NCLT with respect to section 43 held that, the transactions of creating a security interest by means of mortgage in favour of lenders of JAL, without any consideration or counter guarantee cannot be treated as the transfer in ordinary course of business. The NCLT, stated that the impugned transactions have fulfilled the definition under preferential transactions as defined in section 43(2) (a) of the Code as it is clear that the mortgage of land of Jaypee Infratech Limited in favour of lenders of JAL, amounts to transfer of interest in property of Jaypee Infratech Limited for the benefit of its creditor i.e. JAL and putting it in a beneficial position. Pursuant to which section 45 is also applicable. It is true that the collateral security is common practice in loan transactions. Also it has been stated in the facts of the case that the Corporate Debtor was under liquidity crunch and its accounts were declared NPA by LIC and other creditors. The Corporate Debtor entered into the transaction even without taking prior approval of Joint Lender Forum and mortgaged its unencumbered land in favour of the lenders of the JAL.

It is also clear that these transactions have taken place during the relevant period of 2 years from the date of initiation of Corporate Insolvency Process as provided under section 46(1) (ii) of the Code. The transactions were executed within the look back period of two years before the commencement of Insolvency proceeding and is therefore covered U/s 43(4) (a). Further, transaction cannot be treated is in ordinary course of business or financial affairs of Corporate Debtor and is not excluded U/s 43(3).

Therefore, NCLT had allowed the appeal of the IRP and had also ordered that under Section 48(a) of the Code,the properties mortgaged by way of preferential and undervalued transactions shall from now on be deemed to be vested in the Corporate Debtor.


DECISION BY NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT)

Preferential Transaction (Section 43 of the Insolvency & Bankruptcy Code)
The Hon’ble National Company Law Appellate Tribunal stated, that the ‘Corporate Debtor’ has created interest on the property of the Corporate Debtor but not in favour of any creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the Corporate Debtor as stated under Section 43 (2) (a) of the Insolvency and Bankruptcy Code. Therefore the interest on the property of the Corporate Debtor has been created in regard to financial debt given by the Appellants to Jaiprakash Associates Ltd and not the corporate debtor or the appellants.

Therefore, NCLAT  held that Section 43(2)(a) is not applicable in any of the case of the Appellants Bank, thereby any of the Appellants Bank does not come in the ambit of the meaning of ‘deemed to have given a preference’, as used in Section 43. Therefore, the mortgage(s) created in their favour cannot be annulled on the ground of preferential transaction in terms of Section 43 (2) (a) of the Code.

That Section 43(2) (b) of the Code relates to transfer under Section 43(2) (a), which puts the creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with Section 53. As Section 43(2) (a)is not applicable, therefore  the question of applicability of Section 43(2)(b) does not arise.

Under Section 43(3) (a) states “a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the Corporate Debtor or the transferee”. The mortgages in question which were made in favour of the Appellants-Banks and Financial Institutions have been made in ordinary course of business and financial affairs of the transferee, as apparent from the relevant facts. Therefore, Section 43 is not attracted to any of the transaction/mortgage(s) made in favour of the Appellants.

Undervalued Transaction (Section 45 of the Insolvency & Bankruptcy Code)

Under Section 45(2), the transaction shall be considered “undervalued”, where the Corporate Debtor makes a gift to a person or enters into a transaction with a person which involves the transfer of one or more assets by the Corporate Debtor for a consideration the value of which is significantly less than the value of the consideration provided by the Corporate Debtor and such transaction has not taken place in the ordinary course of business of the Corporate Debtor”.
 In the present case the transactions have been made in the form of mortgage in favour of the Appellants as and when made against the amount payable by Jaiprakash Associates Limited (borrower), the amount is not payable by the Corporate Debtor. Therefore, Section 45(2) is not applicable. Also, Section 43(2) (b) & Section 45 are also not applicable as the transactions stated in the facts are not related to any payment due from the Corporate Debtor.

NCLAT held “As Section 44 is not attracted, it is not necessary to notice Section 46 which is not attracted and, therefore, the Adjudicating Authority has no power to pass any order under Section 48 of the ‘I&B Code’”.

Fraudulent Trading or Wrongful Trading (Section 66 of the Insolvency & Bankruptcy Code)
The Hon’ble NCLAT observed that the corporate debtor (one of the group company), like a guarantor, had executed mortgage deeds in favour of the lender banks and financial institutions and the transactions were in the ordinary course of business of the corporate debtor, therefore NCLAT did not had any contrary evidence to show that the mortgages were made to defraud the creditors of the corporate debtor or for any fraudulent purpose. Further, it was not open to the Adjudicating Authority to hold that the mortgage deeds in question were made by way of transactions within the meaning of ‘fraudulent trading’ or ‘wrongful trading’ under Section 66.
National Company Law Appellate Tribunal, therefore, allowed the appeals and set aside the impugned order passed by NCLT on 16.05.2018

DECISION BY SUPREME COURT ON THE FIRST ISSUE

Analysis on Section 43, 45 & 66 of the Insolvency & Bankruptcy Code

Supreme Court stated that Section 43 states that if a transaction entered into by a corporate debtor is not falling in either of the exceptions provided under Section 43(3) and satisfies the three-fold requirements of sub-sections (4) and (2), it would be deemed to be a preference during a relevant time, whether or not in fact it were so; and whether or not it were intended or anticipated to be so.

The Supreme Court had also acknowledged few situations:
The Hon’ble Supreme Court stated that whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. The provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor.

The supreme court held “We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority.”

DECISION BY SUPREME COURT ON   THE SECOND ISSUE

The Hon’ble Supreme Court stated that lenders of JAL, on the strength of the mortgages in question, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the Code and hence, such lenders of JAL do not fall in the category of the ‘financial creditors’ of the corporate debtor Jaypee Infratech Limited

CONCLUSION

1) The impugned order dated 01.08.2019 as passed by NCLAT in the batch of appeals is reversed and is set aside. It comprised of two appeals filed by the lenders of JAL, being Comp. App (AT) (Ins) No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018 that were preferred against the orders passed by NCLT on 09.05.2018 and 15.05.2018 respectively, whereby NCLT approved the decision of IRP rejecting the claims of such lenders of JAL to be recognized as financial creditors of the corporate debtor JIL on the strength of the mortgage created by the corporate debtor, as collateral security of the debt of its holding company JAL.

2) The appeals preferred before NCLAT against the order dated 16.05.2018, as passed by NCLT on the application filed by IRP, are dismissed; and consequently, the order dated 16.05.2018 so passed by NCLT is upheld in regard to the findings that the transactions in question are preferential within the meaning of Section 43 of the Code. The directions by NCLT for avoidance of such transactions are also upheld accordingly. The NCLAT had quashed the verdict of NCLT, Allahabad, which on May 16, 2018 had held that the mortgage of properties of JIL, which was facing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), in favour of the lending financial institutions of holding firm JAL cannot be countenanced.

   The NCLT had also held that the lenders of JAL do not fall in the category of the "financial creditors" of corporate debtor JIL just because of the mortgage of JIL's properties in favour of JAL.

 3) The appeals preferred before NCLAT against the orders passed by NCLT dated 09.05.2018 and 15.05.2018 on the applications filed by the lender banks are also dismissed and the respective orders passed by NCLT are restored with the findings that the applicants are not the financial creditors of the corporate debtor Jaypee Infratech Limited.

This Article has been Compiled by Richa Singh
You can direct your queries or comments to the author at richa@factumlegal.com

Disclaimer-
The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.


Monday 11 May 2020

Analysis of the "Foreign Exchange Management (Non debt Instruments) (Second Amendment) Rules 2020"


Introduction

The Ministry of Finance (Department of Economic Affairs) has notified the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 dated 17 October 2019 (Principal Rules) in supersession of erstwhile Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018.

An Overview of Amendments

The Ministry of Finance has come out with amendment notification, i.e. Foreign Exchange Management (Non debt Instruments) (Second Amendment) Rules, 2020 S.O. 1374(E).dated 27th April, 2020, (Amended Rules) which inter-alia include:
  • Acquisition after renunciation of rights;
  • Applicability of sourcing norms on Single brand retail trading;
  • 100% investment under automatic route in Intermediaries or insurance intermediaries, subject conditions;
  • Divestment by foreign Portfolio Investor (FPI) under conditions as prescribed by SEBI.

An Insight

  1. Acquisition by a person resident outside India (PROI) after renunciation of rights by other shareholder

Insertion of new rule 7A which inter-alia states that whenever a PROI acquired a right towards offered shares from a person resident in India (who has renounced it), may acquire equity instruments of an Indian Company (other than share warrants)by exercising such right subject to pricing guidelines specified under Principal Rules.

It is pertinent to state here that under the Principal Rules, there was an explanation to Rule 7 which laid down  that the conditions specified in Rule 7 are also applicable in case a non-resident made an investment in the equity instruments (other than share warrants) pursuant to exercise of right renounced by the person to whom it was offered. These conditions inter-alia states that:
  • Offer made by the India company should be compliance of the Companies Act, 2013, compliance of sectoral cap, as applicable,
  • the existing shares pursuant to which shares have been offered, should have issued in compliance Principal Rules,
  • pricing conditions for listed company as well unlisted company.

Now, the amendment rules has deleted the aforesaid explanation appended to Rule 7, and rule 7A has been inserted, resultant, non-resident can now subscribe to renounced shares in a rights issue, which have been renounced by a resident in its favour, subject to the pricing guidelines prescribed under the Principal Rules.

  2. Applicability of sourcing norms on Single brand retail trading

Amendment in the Principal Rules, in Schedule 1, in the Table, which read as:
Pursuant to the stated amendment the period from which the sourcing norm would become applicable would be 3 years from commencement of the first store or start of online retail, whichever is earlier. 

In the Principal Rules, before the amendment, said period for applicability of sourcing norms was 3 years from the commencement of business which meant opening of the first store by such entity engaged in single brand retail trading of such products having 'state-of-art' and 'cutting-edge' technology and where local sourcing is not possible.

  3. 100% FDI in Intermediaries or insurance intermediaries

In line with the 2019/20 budget presented on 5 July 2019 and amendment in Indian Insurance Companies (Foreign Investment) Rules, 2015, dated 2nd September 2019, limit of foreign direct investment in insurance intermediaries increased to 100% from previous limit of 49%, aligning with the budget and stated amendment, the Department of Economic Affairs has amended the Principal Rules. Accordingly, now the intermediaries or insurance intermediaries including insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third party administrators, surveyors, loss assessors, and such other entities as may be notified by the Insurance Regulatory and Development Authority of India (IRDAI) would be eligible to receive 100% FDI under the automatic route subject to fulfilment of appended conditions.


Further to this if an insurance intermediary that has majority shareholding of foreign investors shall undertake the following:
  • be incorporated as a limited company under the provisions of the Companies Act, 2013;
  • at least one from among the Chairman of the Board of Directors or the Chief Executive Officer or Principal Officer or Managing Director of the insurance intermediary shall be a resident Indian citizen;
  • such insurance intermediaries are not permitted to make payments to a foreign group or promoter or subsidiary or interconnected or associate entities beyond the limits prescribed by the IRDAI.
  • the intermediaries are to make relevant disclosures in the prescribed format; and
  • they are required to bring in the latest technological, managerial and other skills. 

 4.Divestment by foreign Portfolio Investor (FPI), subject to further conditions as prescribed by SEBI

In case of breach of investment limits by an FPI, the divestment of holdings by the FPI and the reclassification of FPI investment as foreign direct investment shall be subject to further conditions, if any, specified by the Securities and Exchange Board of India and RBI, in this regard.

Key consideration:

Rule 7 itself state that price in case of rights issue to persons resident outside India shall be a price determined by the company and in case of an unlisted Indian company, it shall not be at a price less than the price offered to persons resident in India, however, by virtue of Rule 7A bringing additional pricing condition as specified under rule 21 applicable on acquisition of shares by exercising the renounced right , there would be duel pricing provisions applicable.

Further, this notification has been issued by Department of Economic Affairs with an intent to ensure ease of doing business, however, compliance of numerous additional conditions by insurance intermediary in case it has majority shareholding of foreign investors (foreign owned and control entity). Also, unwanted restrictions on payments to be made to related parties, repatriation of dividends, board composition etc. on such insurance intermediary would deteriorating frequent FDI in such entities.  

This Article has been Compiled by Deepika Sharma  (Senior Associate)

You can direct your queries or comments to the author at deepika@factumlegal.com
  
 Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.