DECLARATION BY SIGNIFICANT BENEFICIAL OWNER UNDER THE COMPANIES ACT, 2013 – PITFALLS FOR CORPORATE SHAREHOLDERS

DECLARATION BY SIGNIFICANT BENEFICIAL OWNER UNDER THE COMPANIES ACT, 2013 – PITFALLS FOR CORPORATE SHAREHOLDERS

Ministry of Corporate Affairs (“MCA”) has recently notified certain provisions relating to disclosure of significant beneficial owner in the Companies Act, 2013 (“Act”) through Companies (Amendment) Act, 2017 and simultaneously notified relevant rules in this regard. Notification of the said new provisions has not only raised concerns amongst the stakeholders but also caused a lot of confusion due to certain likely conflicts in the provisions of the Act vis-à-vis rules as mentioned above. The new provisions, requiring disclosure by significant beneficial owner, has been notified by substituting section 90 of the Act with a completely new section.

It may be pertinent to note that the Act already had the provisions relating to disclosure by beneficial owner under section 89. The said section requires declaration to be made by a person entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares. Similarly, the person who holds or acquires a beneficial interest in share of a company is also required to make a declaration to the company in a prescribed form.

What is Beneficial Interest in shares?

Presently, the Act does not define ‘beneficial interest”. However, through the Companies Amendment Act, 2017 it is proposed to add the following definition of ‘beneficial interest” in sub-section (10) of the section 89 of the Act:

“beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to-

(i)         exercise or cause to be exercised any or all of the rights attached to such share; or

(ii)        receive or participate in any dividend or other distribution in respect of such share.”

As the above definition is not exhaustive so the ambit of definition can be much wider.

Who is a significant beneficial owner?

With the amendment of section 90 through the Companies Amendment Act, 2017, MCA has introduced the concept of significant beneficial owner. MCA further notified Companies (Significant Beneficial Owners) Rules, 2018 (“Rules”) on 13th June, 2018. The term “Significant Beneficial Owner” has been defined both under the said section 90 as well as under the Rules.

Section 90 refers to an individual as “significant beneficial owner” who holds (alone or together, or through one or more persons or trust) beneficial interests of not less than 25% per cent or such other percentage as may be prescribed, in the shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined under section 2(27) of the Act, over the company. Whereas Rules while defining the term “significant beneficial owner” refers to an individual as referred to in section 90 holding ‘ultimate’ beneficial interest of not less than 10%, but whose name is not entered in the register of members of a company as the holder of such shares.

The Rules further provides that where no natural person is identified, the significant beneficial owner is the relevant natural person who holds the position of senior managing official. The Rules, however, does not make it clear senior managing official of which entity should be treated as significant beneficial owner where there are more than one entity in the chain of shareholding structure of the registered shareholder. Further, the term senior managing official has not been defined and is left open for interpretation.

Applicability of the provisions where registered and beneficial owner is a company or a corporate

After reading provisions of section 90 and the Rules, a question arises ‘whether there is a requirement to make disclosure under the said provisions where shares are held by a corporate entity in its own name as a beneficial owner’. In other words, whether there be a requirement to find individual(s) who is ultimate beneficial owner of the shares, so held by a corporate, as beneficial owner of those shares.

The answer to above appears to be “yes”. Provisions under section 89 already deals with disclosure by a nominee as well as the person holding beneficial interest in shares irrespective of the percentage of shares so held. The object of section 90 appears to be to go beyond the corporate entities who are registered as beneficial owner of those shares and identify natural person(s) holding ultimate beneficial interest in the shares through those corporate entities.

There is another school of thought which interprets that provisions of section 90 will be applicable only to those cases where disclosure has already been made under section 89. In that case it can be a point of argument that if a disclosure has already been made under section 89 then why there is a need to make another disclosure under section 90 of the Act.

In light of above discussion, it may reasonably be interpreted that the provisions of both section 89 and 90 of the Act are independent of each other and will accordingly require disclosures under respective sections, as applicable. There may be a situation, where filings will be required under both section 89 as well as section 90 in respect of same shareholding.

The wordings of the section and Rules could have been better to obviate the scope for different interpretations. Now, MCA has done away with form BEN-1 as notified initially and will be coming out with a new form soon. It is expected that there will be more clarify on the applicability once the said new form is notified.

JUDICIAL INTERPRETATION OF 2015 AMENDMENTS TO INDIAN ARBITRATION & CONCILIATION ACT

JUDICIAL INTERPRETATION OF 2015 AMENDMENTS TO INDIAN ARBITRATION & CONCILIATION ACT

2015 amendment to Arbitration & Conciliation Act (“Act”) brought about serious overhaul to the justice delivery system through arbitration. Indian Courts have interpreted the amendments in the same spirit and have brought about clarity to the objective of the amendments. This Article focuses on the recent developments and the judicial interpretation thereof.

A very interesting recent development is that while referring the disputes to arbitration the Courts in India are now required, only to make a prima facie assessment as to the existence of the arbitration clause. This change has been brought by the recent Amendment to the Act[1]. This new development reduces the time required by Court to apply its judicial mind before the disputes can travel to arbitration and gives primacy to the principle of kompetenz kompetenz recognized globally. An example of how readily courts are now referring disputes to arbitration is a recent judgment of the Supreme Court of India, where even a non-party to arbitration, in the peculiar circumstances of the case, could be referred to arbitration, owing to the presence of an umbrella contract containing the arbitration clause[2].

To ensure impartiality and transparency in the arbitration proceedings, another important development is the manner of appointment of arbitrators. It is now mandatory for every arbitrator to disclose all such information, which establishes existence of any relationship or interest of any kind which is likely to affect his neutrality or ability to complete the proceedings within the specified time.[3] There are descriptive schedules to the Act, which specify such relationships which would automatically create a bar or likelihood of bias such as present or past employment, advisory services etc.

Another important development is increasing the enforceability and efficaciousness of an interim order passed by the tribunal. Under the amended Act, the lacunae of making the order of the arbitral tribunal being un-enforceable has been removed and now arbitral tribunal has the same powers that are available to a court under Section 9 and that the interim order passed by an arbitral tribunal would be enforceable as if it is an order of a court.[4]  The new amendment also adds that if an arbitral tribunal is constituted, the Courts should not entertain applications for injunction under Section 9 unless it thinks that the remedy by arbitral tribunal is not efficacious.[5] Hence, after 2015, the arbitral tribunal has more autonomy with respect to the cases filed before it than before.

Another fear of parties coming to India for dispute resolution is the time taken to resolve disputes. In order to make the arbitration process quicker the 2015 Amendment Act has added Section 29A and Section 29B. Section 29A makes it mandatory to complete the proceedings within 12 months (additional 6 months, in some circumstances) from the date arbitral tribunal enters upon the reference. Section 29B, on the other hand allows parties to agree on a fast track procedure to dispose off the proceedings within 6 months.

Another extremely relevant development is the availability of an interim measure, even where the seat of arbitration is outside India[6]. This resolves the dilemma which various foreign parties face, that if the seat of arbitration is outside India, then how can one secure assets of a party located in India, in case there is a fear of disposal. It is of course, open to parties to agree to exclude the provisions of interim relief in India[7].

To expedite enforcement of awards and to discourage parties from prospective litigations, the automatic stay on execution of awards, on mere filing of an objection petition has also been discontinued[8]. Indian Courts post 2015 amendment require the award debtor to first satisfy that a stay on enforcement is warrantied and which is now usually granted on deposit of the award amount or a substantial portion of it. This has greatly reduced unnecessary challenge to awards and given even more authority to the award of an arbitrator. However, this provision has been held to be prospective in nature[9].

Party autonomy has also gained lot of importance for selection of seat of arbitration, wherein earlier, there were a string of judgments that in case of two Indian parties, they were not permitted to have a foreign seat. Indian courts have now held that even where there were two Indian parties, they could have a for their dispute resolution.

All of these developments point to the fact that India has embraced arbitration as the primary mode for settlement of commercial disputes. Foreign investment is being boosted greatly by projecting India as an investor friendly country having a sound legal framework and ease of doing business. Although foreign law firms are still not permitted to practice in India[10], it definitely points to great cooperation between Indian firms and foreign firms, especially in arbitrations seated in India, or at least those, where the substantive law of contract is India.

[1] The Arbitration and Conciliation Amendment Act, 2015, amendments in Section 8 and Section 11.

[2] Ameetlal Chand Shah v. Rishabh Enterprises

[3] Section 12 of the Arbitration  and Conciliation Act, 1996.

[4] Section 17 of the Arbitration and Conciliation Act, 1996.

[5] Section9.

[6] Section 2(2) of the Arbitration and conciliation Act, 1996.

[7] Aircon Beibars FZE v. Heligo Charters Pvt. Ltd. 2017 SCC OnLine Bom 631

[8] Section 36 of the Arbitration and Conciliation Act, 1996.

[9] Anuradha Bhatia v. M/s Ardee Infrastructure Ltd. (2017) 1 HCC (Del) 137

[10] Bar Council of India v. AK Balaji & Ors. (2018) 5 SCC 379

KEY CONSIDERATIONS IN FOUNDERS’AGREEMENT

KEY CONSIDERATIONS IN FOUNDERS’AGREEMENT

Ravi Singhania & Arjun Anand


21/9/2018 [socialsharesinghania]

 

A founders’ agreement (“Agreement”) is contract that is executed between all the co-founders of a company. The Agreement sets forth the ownership, rights, responsibilities, dispute resolution and other terms to be executed between the founders and the company.

Key Terms of the Agreement

  1.  Equity ownership

One of the most important terms of the Agreement is determining the proportion of equity ownership of each of the co-founders of the company. The equity ownership of the co-founders of the company is determined taking into consideration multiple factors such as the monetary investment, experience, existing intellectual property, know-how and network in the industry. Also, the equity ownership is pertinent to ascertain the voting rights that the co-founder may exercise.

Significant Questions:

How much money is being invested and at what stage in the life cycle of the company? Is the founder also bringing other intangibles along with the money, such as experience, industry connects and credibility?

  1. Vesting

One of the important considerations to be taken note of while drafting the Agreement is providing a mechanism to deal with a situation where any of the co-founders exits or is ousted from the company. For this purpose, a vesting structure shall be incorporated in the Agreement detailing the manner in which the shares shall be taken up by the founders.

The vesting of the shares may done in the following manner:

  • Time Based Vesting

Under time based vesting, the shares owned by the founder shall be vested in proportion to the time spent by the founder in the company. In the event, the founder decides to quit from the company before the expiry of his term, the remaining shares of such founder shall be returned to the company. The Agreement shall state a time period post which the vesting of shares shall begin, say, 6 (six) months or 1 (one) year (“Cliff Period”). One potential problem with the time-based method of vesting is that performance of the founder is not taken into consideration.

  • Milestone Vesting

 The vesting of shares in milestone vesting takes place when the milestones set out in the Agreement are achieved by the company. This type of vesting rewards performance of the business as a whole. In the event, the founder leaves the company before the milestones are achieved, the shares earmarked for such founder does not vest in him.

Significant Questions:

Whether the vesting of the shares shall be time based or milestones based? What happens if one of the co-founders decides to leave before the expiry of the term of the Agreement?

  1. Demarcation of the roles and responsibilities

The Agreement should clearly demarcate the roles and responsibilities of each of the co-founders of the company. Broadly, the roles and responsibilities of the co-founders can be divided as operations, marketing, administration and finance.

Significant Questions:

What are the different roles and responsibilities that each of the co-founders will perform? How will be the accountability fixed?

  1. Restriction on transfer of shares

 Another important aspect to be taken into consideration in the Agreement is the rights and restrictions of the founders to transfer their shares in the company. The Agreement may provide for a lock-in clause prescribing the number of years before the expiry of which the co-founder is not permitted to transfer the shares owned by him in the company. The Agreement shall provide for a mechanism to deal with a situation where the co-founder wants to exit the company before the expiry of the lock-in-period. It is pertinent to ascertain the method of valuation of the shares and the anti-dilution rights attached to the shares.

One of the ways to ensure that the equity of the company is not transferred to outsiders is by providing the right of first refusal to the shareholders. The right of first refusal will require the founders to transfer their shares to outsiders only once the same has been refused to be taken up by the other shareholders of the company.

The High Court of Judicature at Bombay in Bajaj Auto Ltd v. Western Maharashtra Development Corporation Limited (CDJ2015 BHC 1305) held that in the event there is an agreement inter se the shareholders containing restrictions on transfer of shares of the company, then even if such a company is a public company the restrictions on transfer of shares will be enforceable.

Significant Questions:

What kind of restriction on transfer of shares may be imposed by the company? What shall be the lock-in period of the shares?

  1. Intellectual property assignment

In general business practice, the ideas, inventions and other intellectual property developed by a person remains the property of that person. While drafting the Agreement it must be taken care that the intellectual property rights of the co-founders are assigned to the company and the same do not remain the property of an individual. It is not uncommon for companies to obtain trademarks, patents and domain names in the name of one or more of the co-founders initially which later may be transferred in the name of the company. The valuation of the company is affected by the intellectual property owned by it. Further, the Agreement shall contain a clause stating that the intellectual property developed by the co-founders in the course of their association with the company shall always be owned by the company. In specialized high technology sectors, the founder can consider sharing the intellectual property jointly with the company. However, this needs to be well thought out and documented properly.

Significant Questions:

Whether the intellectual property developed by the founder shall be fully transferred to the company or shall it be shared between the company and the founder? How will the valuation of the intellectual property to be transferred done?

  1. Value additions by the founders

The co-founders may make value additions in the form of bringing in intellectual property rights, technical know-how, marketing rights or similar value additions in the company. It is important that there is a clear understanding between the co-founders with respect to the nature of such value additions, the monetary value of such value additions, time periods at which such value additions would be made and the compensation to be paid to the co-founders for bringing in such value additions. At times, the co-founders are issued shares against the value additions made by them. The Agreement should clearly lay down the number of shares to be issued, percentage shareholding and the method of valuation of such shares, so that there is no ambiguity pertaining to the same.

Significant Questions:

How many shares are to be issued against the value additions? How shall the value of the shares be determined?

  1. Non-compete

The co-founders of the company are expected to maintain strict confidentiality of the business activities of the company and shall refrain from engaging in any business that conflicts with the business of the company. There should be a clear agreement between the co-founders prohibiting them from engaging in activities that are in conflict with the objectives of the company during their association and for a period of a certain number of years after the termination of the Agreement.

It is pertinent to note that section 27 of the Indian Contract Act, 1872 (Contract Act) provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The courts in India have taken varied views in enforcing such a clause. It can be inferred that while dealing with disputes relating to non-compete clause under an employment agreement, the Indian courts have considered the pre-termination period of the employment distinct from the post termination period of the employment. Whilst the courts have been tolerant about the application of the non-compete clause, they have walked an extra mile to ensure that such a clause does not have an effect after the cessation of employment and have held that such a clause would fall within the mischief of section 27 of the Contract Act.

In Taprogge Gesellschaft MBH v. IAEC India Ltd (AIR 1988 Bom 157), the Bombay High Court held that a restraint operating after termination of the contract to secure freedom from competition from a person, who no longer worked within the contract, was void. The court refused to enforce the negative covenant and held that, even if such a covenant was valid under German law, it could not be enforced in India.

In Gujarat Bottling Company Ltd and Ors. v. Coca Cola Co. and Ors. [1995 (5) SCC 545 it has been held that “There is a growing trend to regulate the distribution of goods and services through franchise agreements providing for the grant of franchise by the franchiser on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchiser and it cannot be regarded as in restraint of trade.”.

Significant Questions:

What constitutes a competing business? What shall be the period of non-compete so that it is not considered as unreasonable?

  1. Confidentiality

The founders by the very nature of their association with the company have knowledge of a lot of confidential information about the company some of which may constitute trade secrets. The founders should be contractually restricted from disclosing any confidential information obtained by such co-founder during the course of his/her association with the company as the same may cause irreparable harm to the business of the company.

Significant Questions:

Whether the company shall sign a separate non-disclosure agreement with the founders? What constitutes the confidential information of the company? What shall be the duration for which the confidentiality obligations will subsist post the expiry of the Agreement?

In Fairfest Media Ltd. v. ITE Group PLC (2015 (2) CHN 704), the Petitioner, an organizer of travel trade shows entered into a non-disclosure agreement with the respondent for a period of 6 (six) months in anticipation of entering into a joint venture agreement with the respondent on a later date. As per the terms of the non-disclosure agreement, the respondent was restrained from disclosing the confidential information for a period of 2 (two) years from the date of the termination of the non-disclosure agreement. The nature of information for which the petitioner was seeking protection related to marketing strategy, customer base, costing and profitability of organizing travel trade shows. Subsequently, when the parties failed to conclude the negotiations, the petitioner prayed for an order of injunction from the court to prevent the respondent from utilizing the confidential information for a period of 2 (two) years from the date of termination of the non-disclosure agreement. The High Court of Kolkata held that business information such as cost and pricing, projected capital investments, inventory, marketing strategies and customer lists may qualify as trade secrets and passed an order of injunction restraining the respondent from sharing any information concerning the marketing strategy and customer base received from the petitioner for a period of 2 (two) years from the date of termination of the non-disclosure agreement thereby enforcing the non-disclosure agreement post termination. In enforcing the non-disclosure agreement post termination, the court also relied on the principle that a person who has obtained confidential information cannot use it as a springboard for activities detrimental to the person who has made the confidential information. Further, in determining what shall constitute confidential information the court relied on the rule laid down in an English case Saltmen Engineering Co. v. Campbell Engineering Co. Ltd. [1963 (3) All ER 413] which states that an information can only be said to be confidential information when it has been made by the maker who has applied his brain and produced a result which cannot be produced by another without going through the same process.

  1. Employment

Generally, the co-founders are required to be in whole time employment of the company. There must be a clear understanding amongst the co-founders with respect to their terms of employment, designation, compensation and benefits to be paid to each of them. The Agreement may contain general understanding between the co-founders pertaining to the same and a separate employment contract shall be entered into providing the detailed terms of employment of the co-founders including the benefits to be provided to each of the co-founders. The employment contract of the co-founder shall contain a non-compete clause that prohibits the co-founder to solicit clients or employees of the company to other entities post his departure from the company.

Significant Questions:

What shall be the designation, roles and responsibilities of the founder? How much compensation and other benefits shall be provided to the founder? What shall be the mechanism for termination of the employment contract?

  1. Future financing

The Agreement should clearly contain the detailed provisions for contribution of additional finances by the co-founders for the growth of the company, i.e., whether the additional finances shall be contributed by the founders as equity or as debt, the method of valuation of equity in case the financing is through equity and the rate of interest to be paid by the company in case the financing is a debt financing.

Significant Questions:

Whether the additional finances shall be contributed by the founders as equity or as debt? What shall be the method of valuation of equity in case the financing is done through equity and the rate of interest to be paid by the company in case the financing is a debt financing?

  1. Decision making

In the day-to-day functioning of the business, the company may be required to take complex decisions. The Agreement shall clearly state the manner of exercise of simple as well as the substantial decisions. Further, the structure of the board of directors of the company shall be determined. The day-to-day decision making is allocated to the chief executive officer who is appointed by the board of directors of the company. The Agreement is also required to prescribe the procedure which is to be adopted by the company in the event that there is a deadlock in decision making.

Significant Questions:

What shall be structure of the board of directors? How will the simple and complex decisions be made? What will be the mechanism adopted in case there is a deadlock in decision making?

  1. Termination and dispute resolution

The Agreement shall lay down the rights of the company as well the co-founders to terminate the Agreement. The Agreement may be terminated upon occurrence of a particular event, i.e., for cause or without any cause by a party or by mutual consent of the parties. Further, the Agreement shall provide a clear mechanism for resolution of disputes between the company and the co-founders with respect to any matter stated in the Agreement, i.e., mediation, conciliation and arbitration. The parties shall agree on the governing law of the Agreement and the exclusive jurisdiction of the courts to which the disputes under the Agreement may be referred to.

Significant Questions:

Under what circumstances shall the Agreement be terminated? How will the dispute between the parties be resolved? Which court shall have the exclusive jurisdiction to try any dispute arising n connection with the Agreement.

THE “APPROPRIATE COURTS” IN FOREIGN SEATED ARBITRATION: AN INDIAN PERSPECTIVE

THE “APPROPRIATE COURTS” IN FOREIGN SEATED ARBITRATION: AN INDIAN PERSPECTIVE

Ravi Singhania & Gunjan Chhabra


7/6/2018 [socialsharesinghania]

Arbitration has slowly gained ground as the most preferred mode of dispute resolution with a high focus on speedy dispute resolution, preference to party autonomy and minimal intervention of Courts. Although the law related to domestic arbitration is clear as to which courts would have jurisdiction to supervise these arbitrations, there is still some amount of ambiguity as far as International Commercial Arbitrations1 are concerned.

As far as the procedural law of Arbitration is concerned, it is often said that Parties to the agreement make their own law owing to the preference to party autonomy given in these circumstances. However, this does not mean that International Commercial Arbitrations take place in a vacuum. Even rules decided by Parties need the sanction of law if they are to be enforceable. In this context it is important to understand that the relevant law which governs the procedural and curial aspects of Arbitrations is  known as the law of the seat or place of arbitration and is called the “lex arbitri”.

Foreign Seated Arbitration

To understand what a Foreign Seat is and what the implication of a foreign seat is, it is important to understand the different systems of law which govern an agreement. In any arbitration containing a foreign element, there are three different systems of law which govern the arbitration2:

  1. The law governing the substantive law of the contract3 – this is the law which governs the substantive issues in dispute in the contract. Also referred to as “applicable law”, “governing law”, “proper law of the contract” or “substantive law”.
  2. The law governing the existence and proceedings of the arbitral tribunal4 – This is the law in which the arbitration proceedings have to be conducted and is also referred to as the “curial law”. This is the law which is derived from the seat of arbitration.
  3. The law governing the recognition and enforcement of the award5 – This is the law which governs the enforcement, as well as filing or setting aside of the award and is also the law which governs the arbitrability of the dispute.

Furthermore, in absence of any other stipulation in the contract, proper law is the law applicable to the arbitral tribunal itself6. Furthermore, the lex arbitri and the law governing the recognition and enforcement of the award are also one and the same in absence of an intention/stipulation to the contrary7. Thus the place of the arbitration generally specified in a contract determines the seat of arbitration unless contrary intention is apparent from the contract. In other words the seat of arbitration is dependent on several factors and is that which has the closest and most real connection with the agreement to arbitrate8.

Therefore, any arbitration where the seat of arbitration is outside India is a foreign seated arbitration. From the above discussion, it is evident that it is important to gather the seat of arbitration from the agreement between the parties, as it has an implication of determining the curial law and the lex arbitri of the arbitration. This in turn has an impact on determining which courts can be approached for which remedy in case of a Foreign Seated Arbitration.

The Applicability of Part I to a Foreign Seated Arbitration

As far as Indian law is concerned, it is now well settled, that the seat of arbitration is governed by the following factors:

  1. The place of arbitration is usually determinative of the seat of arbitration, i.e. the courts having supervisory jurisdiction empowered to give interim reliefs.
  2. The place of arbitration can be different from the seat of arbitration, if a different intention appears from the intention of the parties. In such a case, the seat of arbitration would be the jurisdiction which would have the closest and most real connection with the arbitration agreement9.
  3. Part I of the Arbitration and Conciliation Act, 1996 (hereinafter called “the Act”), which is the curial law in India, is excluded for Foreign Seated Arbitrations barring the exception provided in Section 2(2) of the Act which would be discussed in the latter part of this Article.

Interim Relief from Court

In India, the Section which governs interim relief in cases containing an arbitration clause is Section 9 of the Act. Article 9 of the UNCITRAL Model Law10 on which the Act is based, deals with the power of courts to grant interim measures of protection. where a party is permitted to apply to Court for certain interim measures, before, during or after making of the award by the Tribunal. A recent amendment has taken place in the Act11, which has substantially changed this position regarding seeking of interim relief from Court.

Before the amendment of 2015, the law with regard to the applicability of Part I was governed by the judgment of BALCO12BALCO laid down prospectively (from 06.09.2012), that in a foreign seated arbitration neither Section 9 nor any other provision of Part I would be applicable. Prior to BALCO, the law laid was as laid down in Bhatia International13 Bhatia International laid down, that the provisions of Part I would apply even to arbitrations held outside India, unless it was expressly or impliedly excluded by parties. It is pertinent to note, that Bhatia International still continues to govern the law as far as arbitration agreements pre-dating BALCO are concerned.

The Amendment of 2015, in effect, nullifies the law laid down in BALCO to some extent and holds that even in an International Commercial Arbitration having a foreign seat, a party can approach Indian courts under Section 9 and get appropriate relief, provided there is no agreement to the contrary, thus reviving the law of Bhatia International to a limited extent.

Therefore as far as Interim Measures from Court are concerned, the parties are allowed to approach Indian Courts, even in Foreign Seated arbitrations. This is particularly helpful in cases where assets of Indian Parties are located in India and there is a fear of disposal. Similarly, the Appeal against an Order passed in a Petition filed under Section 9 would also lie to Indian Courts only as per the amendment14.

Application for Appointment of Arbitrators

Section 11 of the Act governs the provisions for appointment of Arbitrators in India, Article 11 being the concomitant provision of the UNCITRAL Model Law. As regards the appointment of Arbitrators, in a Foreign Seated Arbitration, Part I of the Arbitration Act has no application and there is no exception carved out in the act itself. However, in certain cases, where even though the place of Arbitration has been named to be outside India, the closest and most real connection of the agreement lies in India. For instance in the case of Enercon15.

Apart from this exception, the application for Appointment of Arbitrators, failing the agreement of parties would inevitably lie in the Country where the seat of Arbitration is located.

Application for challenging/enforcement of the Award

Parties can approach India for enforcement of an Award in two scenarios which are described as under:

  1. Scenario 1 – Where the seat/place of Arbitration and award is outside India and where the real most close connection of the agreement also lies in the same place.
  2. Scenario 2 – Where the seat/place of Arbitration and award is outside India but where the real and closest connection of the agreement lies in India.

Scenario 1

In Scenario 1, despite the seat being outside India, the parties could want to come to India for enforcement owing to the fact that the assets of the Indian party might be located in India etc. For this purpose if the award is passed in a territory which is signatory to the New York Convention, and with which a reciprocal arrangement has been made by the Indian Central Government, then such an award is enforceable in accordance with Part II of the Act16. Any challenge to the award would lie under Section 48, Part II of the Act. Out of the 196 countries in the world only 48 countries have been notified by the Central Government as reciprocating countries, with the most recent addition being Mauritius17.

However, if the award is made in a territory which is either not a party to the New York Convention, or India does not have a reciprocal arrangement with  that territory, or if both conditions are not fulfilled then the following would have to be considered:

  1. Where the award passed in the territory concerned, is considered to be the decree of that Court, then parties can come to India directly. In case the award is not automatically a decree in the concerned territory, then the parties would need to first make the award a rule of Court in the concerned territory, and then only can they approach India for execution of the award as a Foreign Decree.
  2. Once the award is considered to be a Foreign Decree then Section 44 of the Code of Civil Procedure, 1906 (Hereinafter called the CPC) would become applicable. Section 2(2) of the CPC defines foreign judgment as “the judgment of a foreign Court”. Parties can approach Indian Courts for enforcement under Section 44.
  3. Next it needs to be checked whether the award to be enforced has been passed in a reciprocating territory18. In case the territory is a reciprocating territory then directly an Execution Petition can be filed in India and the award can be executed as a decree of a foreign Court.
  4. However, if the country in which the foreign decree/award has been passed is not a reciprocating country, then a further complication arises, wherein a fresh suit would have to be filed in India to get the foreign decree/award enforced. This is basically a fresh adjudication and time consuming process.

Scenario 2

Where the seat/place of Arbitration and award is outside India but where the real and closest connection of the agreement lies in India, then in such a case, Part I of the Act would become applicable and an application for execution can be directly filed in India. Any party intending to object to the award would also have to approach Court under Part I, Section 34 of the Act and not under Part II, Section 48 of the Act.

Appeals arising from orders of Interim Reliefs or orders of enforcement of foreign awards

In accordance with the discussion above, in case an interim relief is given under Section 9 or enforcement of foreign award is made as per Part I, then automatically an appeal against such Orders would lie to Indian Courts under Part I, Section 37 of the Act. Similarly, in case an order of an Indian Court in respect of a challenge to a foreign award under Part II, needs to be appealed, Section 50 of Act would become applicable and again the Appeal would lie in India.

However, in a scenario, where neither Part I of the Act is applicable, nor Indian Courts have been approached for execution/enforcement/challenge from the Foreign Award, then Indian Courts would not have any role to play in the appeal process either.

Denouement

To conclude it may be said, that different courts play different roles in Foreign Seated Arbitrations. Firstly, it needs to be determined which is the seat of arbitration, after which the closest and most real connection needs to be analysed. Thereafter for different remedies, different Courts can be approached. Moreover, the 2015 amendment has given more leeway to Indian Courts as far as Interim reliefs are concerned, thus providing additional protection to foreign investors vis-s-a-vis Indian players. In view of the above, India is fast becoming an arbitration and foreign investor friendly country.


Section 2(f) of the Arbitration and Conciliation Act, 1996 (the Act) defines “International commercial arbitration” as “an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is- (i) An individual who is a national of, or habitually resident in, any country other than India; or (ii) A body corporate which is in corporate in any  country other than India; or (iii) An association or a body of individuals whose central management and control is exercised in any country other than India; or (iv). The Government of a foreign country;”

 

3 Reliance Industries Ltd. v. Union of India (2014) 7 SCC 603.

4 Reliance Industries Ltd. v. Union of India (2014) 7 SCC 603.and Sumitomo Heavy Industries Ltd. v. ONGC Ltd. (1998) 1 SCC 305

5 Sumitomo Heavy Industries Ltd. v. ONGC Ltd. (1998) 1 SCC 305

6 Yograj Infrastructure Ltd. v. Ssangyong Engineering & Construction Co. Ltd. (2012) 12 SCC 359

7  Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc (2012) 9 SCC 552; Enercon (India) Ltd. and Ors. v. Enercon Gmbh and Anr. (2014) 5 SCC 1

8; Roger Shashoua v. Mukesh Sharma, Supreme Court, decided on 4th July, 2017; Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc (2012) 9 SCC 552; Enercon (India) Ltd. and Ors. v. Enercon Gmbh and Anr. (2014) 5 SCC 1

9 An example of such a scenario is the judgment of Enercon – where despite the venue being specifically provided as London, the seat was held to be India. This was because, after taking various factors into consideration including applicable law as the Indian Arbitration Act, 1996 and all three laws i.e., Law governing Contract, Law governing Arbitration Agreement, Law governing Curial Laws/ Lex Arbitri were Indian, the real and closest connection of the Agreement was held to be that with India.

10 United Nations Commission of International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, 1985.

11 Arbitration and Conciliation (Amendment) Act, 2015

12 Bharat Aluminum and Co. vs. Kaiser Aluminium and Co. (2012) 9 SCC 552.

13 Bhatia International v. Bulk Trading S.A. (2002) 4 SCC 105.

14 Section 2(2) of the Act makes the appeal provision of Section 37 also applicable to International Commercial Arbitrations, even if the place of arbitration is outside India.

15  Refer Footnote 9

16 Section 49 of the Act.

17 Australia; Austria; Belgium; Botswana; Bulgaria; Central African Republic; Chile; China (including Hong Kong and Macau) Cuba; Czechoslovak Socialist Republic; Denmark; Ecuador; Federal Republic of Germany; Finland; France; German Democratic Republic; Ghana; Greece; Hungary; Italy; Japan; Kuwait; Mauritius, Malagasy Republic; Malaysia; Mexico; Morocco; Nigeria; Norway; Philippines; Poland; Republic of Korea; Romania; Russia; San Marino; Singapore; Spain; Sweden; Switzerland; Syrian Arab Republic; Thailand; The Arab Republic of Egypt; The Netherlands; Trinidad and Tobago; Tunisia; United Kingdom; United Republic of Tanzania and United States of America.

18 “Reciprocating territory” means any country or territory outside India which the Central Government may, by notification in the Official Gazette, declare to be a reciprocating territory for the purposes of Section 44A of the Civil Procedure Code. Countries which have been officially recognized as “reciprocating countries” by the Central Government of India include:- Aden; Bangladesh; Federation of Malaya; Fiji Colony; Hong Kong; New Zealand; Cook Islands and Western Samoa; Papua New Guinea; Republic of Singapore; Trinidad and Tobago; United Kingdom of Great Britain and Northern Ireland; and Victoria.

FOREX MANAGEMENT IN CROSS-BORDER MERGERS

FOREX MANAGEMENT IN CROSS-BORDER MERGERS

Ravi Singhania & Arjun Anand


5/29/2018 [socialsharesinghania]

The Indian companies law currently allows Indian companies to merge with foreign companies and vica- versa (Cross Border Mergers/Merger). Further, on March 20th, 2018, the government notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Merger Regulation) which attempt to provide clarity regarding Cross Border Mergers from a foreign exchange law perspective. In this background this article examines the key aspects of the Merger Regulation and its implications.

 

For-EX management in Cross-border Mergers

INBOUND MERGERS

Inbound Merger means when an Indian company (IC) acquires assets and liabilities of a foreign company consequent to a Cross Border Merger. In this regard, the Merger Regulations are allowing transfer of securities to a foreign shareholder, subject to compliances applicable to a foreign investor under the foreign direct investment regulations (FDI Regs). This effectively means that such Cross Border Mergers cannot result in any contravention of any restriction applicable to foreign direct investment into India, per the FDI Regs. Illustratively, an IC cannot issue shares, as result of a Cross Border Merger, to a person resident outside India if such IC is engaged in a sector prohibited for investment under the FDI Regs.  Similarly, the Merger Regulations have stated that a Cross Border Merger resulting in transfer of securities of a joint venture (JV) or a wholly owned subsidiary (WS) of an IC, situated in a foreign jurisdiction, shall be subject to compliances such as pricing of shares in a specified manner, any outstanding’s owed to the IC being clear prior to such transfer, etc.  set out under the Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004) (ODI Regulation). Further, the Merger Regulations mandates that if the Cross Border Merger results in acquisition of a stepdown subsidiary (situated in a foreign jurisdiction) of the JV/WOS, by an IC, then certain additional conditions laid down in the ODI Regulations will need to be complied with. One such conditions requires inter-alia the IC to (a) be regulated by a financial sector regulator (b) have earned net profit during the preceding three financial years from the financial services activities; if such stepdown subsidiary (situated in a foreign jurisdiction) is engaged in the financial sector.

The Merger Regulation has also stipulated certain compliances for the IC, on overseas borrowings, to be acquired by the IC, in connection with such Cross Border Merger. One such compliance requires the IC to ensure that the overseas borrowings of the foreign company, proposed to be taken over by it, are compliant with the provisions of the overseas borrowing regulations under Indian law (Overseas Borrowing Regs) within a period of 2 years from the date of sanction of the scheme pertaining to such Cross Border Merger by the relevant authority. However, the IC cannot remit any moneys from India for repayment of such overseas borrowings, as part of ensuring compliances with Overseas Borrowing Regs, during such 2-year period. Further, it is to be noted that the Overseas Borrowing Regs inter-alia stipulate specified interest rates, maturity, end use restrictions, on borrowings, from overseas, by an Indian company (however, end use restrictions are not applicable to an IC per the Merger Regulations).

While the intent is to ensure smooth transition, it may possibly bring the relevant parties to the drawing board as the interest rates and maturity etc. stipulated in the Overseas Borrowing Regs may not tie in with the commercial intent of such borrowings. Secondly, the restriction on repayment of such overseas borrowings during the 2 year period may create hurdles for the Cross Border Merger.

OUTBOUND MERGERS

Outbound Merger is exactly the opposite of an Inbound Merger i.e. a foreign company (FC) acquiring assets and liabilities of an IC. While it is assumed that the law applicable in the jurisdiction where the FC is situated will regulate such Cross Border Merger, the Merger Regulations also stipulate certain conditions such as guarantees or outstanding borrowings of the IC which shall, as a result of such Cross Border Merger, become guarantees or borrowings of the FC. This however is subject to the FC not acquiring any such guarantee or outstanding borrowing, in rupees payable to Indian lenders, non-compliant with the relevant foreign exchange law in India (Applicable Law). Considering rupee borrowings by Indian entities from Indian lenders may not always be compliant with Applicable Law, such a restriction will need to be examined by the FC from a balance sheet perspective.

CONCLUSION

This notification will enable companies to consolidate and re-structure their business in the most efficient and business friendly manner. However, the challenges discussed above may need to be ironed out by the relevant regulators.

INTERNATIONAL COMMERCIAL ARBITRATION BETWEEN INDIA AND UNITED STATES OF AMERICA

INTERNATIONAL COMMERCIAL ARBITRATION BETWEEN INDIA AND UNITED STATES OF AMERICA

Ravi Singhania & Gunjan Chhabra


9/5/2018 [socialsharesinghania]

Introduction

The importance of transnational commercial arbitration has been recognized the world over. The aim is to achieve the sole objective of resolving the dispute timely and efficiently with minimum intervention of a Court of Law so that the trade and commerce is not affected on account of litigations before a Court.

India USA Arbitration

One of the most important choices to be made by parties to an international commercial contract when they include an arbitration clause is that of the seat of the arbitration. It is indeed the seat of the arbitration which determines the procedural rules applicable to the arbitration, the extent to which the ordinary courts will be involved or will interfere in the arbitral process, as well as the degree to which an arbitral award is subject to challenge. The choice of the seat will also have impact on the duration and costs of the proceedings. Party autonomy being one of the cornerstones of international arbitration, parties are free to agree on the seat of arbitration. It is even open to parties to have a separate seat of arbitration and have a separate law governing the law applicable to the substance of the disputes.

While Indian arbitration law has undergone a rapid evolution in recent years, and the Indian government has taken steps towards developing India as an arbitration- and foreign investor-friendly country, Indian parties may not always be able impose a seat in India on their foreign counterparts, which usually prefer the arbitration to be seated outside India, often in a jurisdiction considered neutral to both parties. There might also be practical or tactical advantages for Indian parties themselves in choosing a seat outside India, including in terms of the duration and costs of the arbitral process.

This article specifically focuses on a U.S. seated arbitration with the governing law as Indian law.

Why arbitration?

In a dispute concerning an Indian party and a party from the USA, it might be relevant to note why arbitration is specifically preferred as a dispute resolution mechanism over a regular civil proceedings.

The recognition and enforcement of foreign judgments and decrees in India are governed by Section 44A, read with Section 13 of the Code of Civil Procedure 1908. A foreign judgment which is conclusive under Section 13 of the code can be enforced by:

  • Instituting execution proceedings under Section 44-A, read with Section 13 of the code in the case of ‘reciprocating territories’; or
  • Instituting a civil suit on the judgment in the case of a non-reciprocating country.

This implies that executing a judgment from a non-reciprocating territory requires a civil suit on the foreign judgment to be filed before the competent court. Therefore, execution of a judgment from a non-reciprocating territory would be completely inefficient, time consuming as well as costly as it involves the prolonged procedural hassles of a civil suit.

On the other hand, since the USA and India are both parties to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards and The United States of America is among the countries notified by India under the New York Convention, the arbitration award passed in the USA is recognized in India as a decree of court. The vice versa is also true. This means, that instead of re-instituting a civil suit, a party, after crossing certain limited hurdles provided under the Arbitration and Conciliation Act, 1996 itself, can directly move for execution of the award.  Hence arbitration is the best mechanism that can be adopted for dispute resolution. The hurdle to a foreign award is also discussed in the latter part of this article.

Systems of Law Applicable to Arbitrations:-

  • Law Applicable to Arbitration Agreement

The law applicable to the arbitration agreement is relevant both for the interpretation and assessing the validity of the arbitration agreement. Under the Indian Arbitration Act, the law governing the substantive disputes is the same as the law applicable to the arbitral tribunal itself[1], unless specifically provided in the contract between the parties, for instance ICC Rules.

  • The law governing the recognition and enforcement of the award

In India, the recognition and enforcement of a foreign international arbitral award is governed by Part II of the Indian Arbitration Act which, inter alia, implements the New York Convention.[2]

Part II of the Indian Arbitration Act applies to

Section 48 of the Indian Arbitration Act deals with the conditions requisite for enforcement of foreign awards, which also provides the ground for challenging a foreign award. Section 48 mirrors the grounds to challenge the enforcement of a foreign award set out in Article V of the New York Convention. The conditions for enforcement include party incapacity, invalidity of agreement under the law of the seat, absence of proper notice to the party regarding appointment, or inability of a party to represent his case, non arbitrability of the dispute, matters beyond scope of arbitration, wrong composition of tribunal, or that the award has not become binding as per the law of the seat. The only distinct ground which is available to the Court to refuse enforcement of the award is the award being against the public policy. This new ground has also been added by way of the 2015 Amendment.

The enforcement of a foreign award in India is a process which begins by filing an execution petition. At first, a court would determine whether the award complies with the requirements of the Act. Once an award is found to be enforceable it may be enforced like a decree of the particular court. At this specific stage parties would have to be mindful of the various challenges that may arise such as frivolous objections taken by the opposite party, and requirements such as filing original/ authenticated copy of the award and the underlying agreement before the court.

If the Indian enforcement court is satisfied that a foreign award is enforceable under Part II, Chapter 1 of the Indian Arbitration Act, the award will be deemed to be a decree of that court[3] . Accordingly, the award can be executed under Order XXI of the Code of Civil Procedure, 1908 in the same manner as a judgment from an Indian court.

Interim Relief

The procedure for obtaining interim relief and the type of relief available also varies according to the seat of the arbitration.

In India, Section 9 of the Indian Arbitration Act deals with the power of the courts to grant interim relief. It is based on Article 9 of the UNCITRAL Model Law. Under Section 9 of the Indian Arbitration Act, a party may apply to Indian courts for certain interim measures, before, during or after the award has been rendered by the arbitral tribunal.

For a limited period of time, from 2012 to 2015, interim relief pursuant to Section 9 of the Indian Arbitration Act was not available to parties to an arbitration seated outside India. This was the result of a judgment rendered by the Supreme Court of India in in 2012 in the case of Bharat Aluminum and Co. vs. Kaiser Aluminium and Co. (BALCO), in which it held that Part I of the Indian Arbitration Act (including Section 9 governing interim relief) did not apply to any foreign seated arbitration. However, the situation changed with the entry into force of the 2015 Amendment. The 2015 Amendment abrogates the case law laid down in BALCO to a limited extent as it expressly provides that, even in relation to an international commercial arbitration with a foreign seat, a party can seek appropriate interim relief from the Indian courts under Section 9 of the Indian Arbitration Act. The type of measures available under Section 9 of the Indian Arbitration Act are generally for the protection, preservation or interim custody of goods, assets, properties, securing the amounts in dispute, appointment of interim receivers etc.

An interim relief ordered by the Indian courts under Section 9 is subject to appeal under Part I, Section 37 of the Indian Arbitration Act.

Conclusion

The recent developments in India’s arbitration law, in particular the entry into force of the 2015 Amendment, offer parties to an international arbitration additional tools and protection by allowing them to seek interim relief before Indian courts even if the arbitration is seated outside of India.  This can be particularly useful if one of the parties has assets in India.

The Indian courts might also be seized with an application to enforce award rendered by an arbitral tribunal seated in USA. The enforcement of such an award in India is greatly facilitated by the fact that both USA and India are signatories of the New York Convention. As a result, the grounds on which Indian courts may refuse to enforce an arbitral award rendered in USA are limited.

 

 

 

[1] Yograj Infrastructure Ltd. v. Ssangyong Engineering & Construction Co. Ltd. (2012) 12 SCC 359

[2] Judgments of the Supreme Court of India in the cases of Sumitomo Heavy Industries Ltd. v. ONGC Ltd. (1998) 1 SCC 305, Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc (2012) 9 SCC 552, Enercon (India) Ltd. and Ors.v.EnerconGmbh and Anr. (2014) 5 SCC 1.

[3] Section 49 of the Indian Arbitration Act.