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Unlocking India’s Entrepreneurial Potential: A Legal Exploration of Equity Crowdfunding

Startups and small businesses in India are continually looking for reliable sources of funding. At the same time, small investors are looking to diversify their portfolios and bet on promising new ventures. This, combined with the rising popularity of the startup environment as a result of TV series such as Shark Tank, has resulted in the emergence of numerous platforms that allow companies to interact with investors and crowdsource their financial needs. However, equity crowdfunding in India operates in a regulatory grey area because there are no clear statutes, rules, or regulations governing it. 

The absence of regulatory clarity provided an opportunity for certain equity crowdfunding platforms to construct creative instruments that are not securities in and of themselves, but have a monetary value comparable to the issuing company’s shares. These platforms enable firms to raise cash from small retail investors using a “community subscription offer plan” (CSOP). A CSOP is an investment plan enabling retail investors to invest in exchange-traded funds and a type of instrument for acquiring shares or rights. 

 

INTRODUCTION: 

The path to funding in the form of venture capital and angel investments is difficult to navigate because the latter favour investments, particularly those of significant size. Because of this, many start-ups miss out on the opportunity to introduce a promising idea to the market. Traditional banking sources are unable to meet the specific needs of small business owners. As a result, a lot of startups and small businesses look to alternate funding sources to get by.  

One such alternative funding source that offers small enterprises and start-ups a workable solution for raising capital is crowdfunding. As its name suggests, crowd fundraising is the process of raising modest sums of money from a large number of investors.  

Crowdfunding obtains funds from the general public, as opposed to traditional business financing, which is mostly provided by affluent individuals and institutional investors. There are two varieties of crowdfunding models: equity-based models and non-equity based models. Absence of Equity Online donations or purchases of goods or experiences in exchange for contributions are known as crowdfunding.  

 

UNDERSTANDING CROWDFUNDING: 

Funding for a crowdfunding offering is open to everybody. If you are an accredited investor, investment crowdfunding is limitless; if not, there are limits on the amount you can invest depending on your income or net worth. Final regulations for the Jumpstart Our Business Startups Act (JOBS Act) were released by the Securities and Exchange Commission (SEC) in 2016. These regulations made it possible for a larger range of investors to participate in crowdfunding in the United States, provided that the necessary regulatory framework was in place. 

Businesses and entrepreneurs can ask for crowdsourcing to finance debt, equity, and real estate purchases. The possibility of losing your entire investment is one risk, as is the lack of liquidity resulting from the difficulty of rapidly reselling crowdfunded shares. Another risk is that your shares are already somewhat diluted and may become even more so if additional funding rounds are held. 

 

EQUITY INVESTMENT CROWDFUNDING: 

Equity investment crowdfunding is a means of investing funds and acquiring shares in companies, most of which are in their early stages. Companies pique your interest by describing their company goals through web channels. You have a variety of spending options, each with a gradation of percentage investment in the company. These shares increase in value in the event that the business does well, just like ordinary equities do. That being said, given the rather uncertain future of startups, there is risk associated with your ownership position. 

 

DEBT INVESTMENT CROWDFUNDING: 

Crowdfunding for investments can also be used to swap loans for stock or interest payments. As a debt investor, you can interact with a sizable organisation that serves as a microloan provider. You’ll be able to evaluate the terms of the loan, such as the length of the loan, the interest rate, and the predicted credit rating of the borrower, through the platform that you use. 

When traditional borrowing is either too expensive or unavailable, borrowers may turn to this source of funding. In order to obtain seed money to launch a new company, entrepreneurs usually borrow money from banks, friends, and family, or they provide stock ownership in exchange for investments from angel and venture capital investors, as well as from friends and family. When alternative options for fundraising are either unavailable or prohibitively expensive, a firm can use investment crowdsourcing to seek relatively small investments from numerous backers. 

 

MERITS OF CROWDFUNDING: 

One of the fundamental goals of crowdfunding is to close the funding gap for small- to medium-sized businesses and startups by utilising social media and technology through crowdfunding platforms. This lessens the physical distance between the investors and the entrepreneur. By spreading the word about the idea to numerous potential investors online, it serves as a means of accelerating investments and is more effective than the conventional method of borrowing money from friends and relatives. It addresses the issue caused by traditional investment sources’ high interest rates, which frequently make it impossible for small firms to produce a consistent cash flow to pay them back. Additionally, the lack of liquid assets to use as security limits access to a variety of kinds of funding.  

  • Low Entry Barrier: Equity-based crowdfunding, a relatively new financing model, lowers the entry barriers for entrepreneurs by enabling them to acquire capital from a far wider range of possible investors than ever before. Businesses can now obtain capital considerably more quickly and readily than in the past thanks to the ease of access to a wider pool of investors.  
  • Minimal Risk: By utilising equity-based crowdsourcing, investors can benefit from the possibility of large returns without assuming the same degree of risk associated with conventional investing. The risk is capped at the amount invested by the investor because they are not required to make any upfront payments. 
  • Low Cost: In comparison to more conventional financing methods, equity-based crowdsourcing is also significantly less expensive. Paying fees or commissions to a third party is not necessary because the investment is made directly to the business. 
  • Diversification: Portfolio diversification can be achieved by investing in a variety of companies through equity-based crowdsourcing. Both risk and possible profits may be decreased in this way. 

 

DEMERITS OF CROWDFUNDING: 

Depending on the platform, crowdfunding campaigns fail somewhere between 69% and 89% of the time. From the viewpoint of investors as well as entrepreneurs looking to raise money, crowdfunding carries a number of dangers. Because crowdsourcing is primarily internet-based, money can be raised from people all over the world, which may cause issues with local laws in the various nations. 

  • When in need of money for medical help, turn to crowdsourcing as a final option. Delays in receiving prompt medical attention may result from persons trying to sell their possessions or apply for medical loans. 
  • Contrary to popular belief, crowdfunding is not just for new or established companies. Charity, NGOs, and individual causes can all benefit from crowdfunding. 
  • The general public’s perception also holds that internet crowdfunding is limited to raising little sums of money. Yet, other fundraising initiatives have brought in millions of dollars for beneficiaries’ social, medical, or personal causes. 
  • Furthermore, a common misconception is that no one uses crowdfunding platforms to make donations. This is untrue. Many fundraisers have noticed a notable outcome after sharing their campaign on social media with their friends and family; nobody, not even complete strangers, has donated to their campaign. 

 

EXAMINING CROWDFUNDING FROM A LEGAL PERSPECTIVE 

USA- 

The Jump Our Business Start-ups Act, 2012 (also known as the “JOBS Act”) was introduced in the United States on April 5, 2012, with the goal of enabling small businesses to sell their securities to the public through the internet. The act did this by amending the Securities Laws that were in place at the time. However, these regulations only went into effect on May 16, 20161. 

In terms of crowdfunding exemptions, the Securities Act of 1933’s Sections 4(a)(6) and 4-A include the majority of the legal criteria. Moreover, all transactions must be carried out via intermediaries registered with the SEC, which might be a registered broker or a “funding portal.”2 

 

ITALY- 

One of the first nations to develop a crowdfunding regulation23 was Italy in 2013. However, the regulations that were created were overly onerous, which prevented the market for equity crowdfunding from expanding3 The regulation was originally intended exclusively for “innovative start-ups,” but it was later broadened to include “innovative SMEs” that wanted to raise money via crowdfunding.  

The regulation contains several significant provisions, such as the requirement that online portals be registered with CONSOB, which is then tasked with the assigned task of shareholder protection; the requirement that controlling shareholders and individuals performing managerial and supervisory functions declare their integrity and adhere to professional standards; and the requirement that information obtained from investors by the portal manager be kept confidential. It is the responsibility of the platforms to educate novice investors about the dangers of investing through equity crowdfunding and to verify the veracity of the claims made by companies looking to raise money through this method.  

 

CHINA- 

In China, the crowdfunding landscape is extremely active and changing quickly4 The lack of governing restrictions, which in turn allows for the setting up and quick start of operations, is the reason for this rapid expansion. Because of the legal ambiguity, crowdfunding in China has taken on a more “sale-oriented” form. This indicates that investors purchase the product at an advanced stage of production, prior to it being manufactured5. Because this helps to transfer the risk from investors to entrepreneurs, the portals that employ this strategy have lower fees overall.  

Similar to the international Crowdfunding platforms, the investors in China likewise need to accept a standard service contract while they open an account with the portal and this contract emphasises on the intermediate role played by the portal between the investors as well as the entrepreneurs. 

 

CROWDFUNDING IN INDIA- 

Prior to delving into the complexities of India’s crowdfunding laws, let’s examine the Sahara India Real Estate Ltd. v. Securities and Exchange Board of India6 case, which examined crowdfunding perceptions for the first time. 

FACTS:  

During an EGM of SIRECL, a special resolution was passed with the aim of raising capital through the issuance of unsecured OFCDs through a private placement. The two unlisted companies under the control of the Sahara Group of Companies are Sahara India Real Estate Corporation Limited (henceforth “SIRECL”) and Sahara Housing Investment Corporation Limited (henceforth “SHICL”). 

The offer details were contained in the Red Herring Prospectus, which the Sahara Group believed needed to be submitted to the Registrar of Companies. It made it very evident that the only people who could invest in the OFCDs were those who had received the Information Memorandum (IM) and/or those who were connected to or associated with the Sahara Group.  

The Sahara Group was also said by the RHP to have no intention of listing. they believed that the RHP would need to be filed with the ROC rather than the Securities and Exchange Board of India in order to list the supplied securities on any recognised stock exchange. 

The fundraising activities of two firms, SIRECL and SHICL, which had raised money by issuing OFCDs to a significant number of people for a considerable amount of time, were the subject of several complaints and concerns from the public. These activities were not included in the DHRP of SPCL. 

Consequently, SEBI requested explanations from Sahara Group, but they declined to reply. Sahara Group argued that as the firms were not intended to be listed on any stock exchange, SEBI was not permitted to request information for the same reason, as stated in the RHP. However, SEBI authorised an investigation to look into if anyone has broken any rules or board directives regarding the securities market since it is concerned about protecting investors.  

JUDGMENT- 

The Supreme Court reviewed Act Section which addressed the issuance of debentures to the general public. The proviso of Section 67(3), which specifies that an offer made to fifty or more people will be deemed a public offer and fall under the purview of this section, was highlighted by the court. Regarding this matter, the Court determined that the OFCDs do not fit under the private placement category because they were distributed to the broader public.  

The Court decided that the requirements of Section 73, which included requirements for the required listing of the shares on stock exchanges, would be addressed after determining that the contested offer qualified as a “public offer.” As a result, SEBI was directed to receive a refund of the money received through the RHP, along with 15% interest, from SIRECL and SHICL, whose offers were ultimately deemed to be public offers.  

 

RECENT TRENDS AND WAY FORWARD: 

Due to a lack of rules, there is currently uncertainty in India over the legality of crowdfunding. However, SEBI has a strong position against equity crowdfunding and has declared it unlawful in a Caution Press Release. The release states that SEBI has become aware of fundraising activities taking place through Private Placement on unapproved online platforms (such as websites and other internet-based online portals) in violation of the Securities Contract (Regulation) Act, 1956 and the Companies Act, 2013.  

As a result, it is unlawful to issue securities in India through these unapproved web platforms. Following the press release previously indicated, SEBI sent show-cause notifications to a number of crowdfunding platforms operating in India, requesting details regarding the platforms’ legitimacy’s fund-raising process. Following these platforms’ violations of the private placement guidelines, SEBI received notifications, and as a result, the companies queued up to register as Alternate Investment Funds (AIF) with SEBI.  

The scope of crowdfunding will be significantly limited if the crowdfunding platforms are brought under the AIF, which means they will be subject to the SEBI (Alternate Investment Fund) Regulations, 2012 (also known as the “AIF Regulations”).  

Although the fundamentals of crowdfunding are quite sensible, only investors with a minimum net tangible asset value of two crore rupees are permitted to participate because of AIF regulations. A programme requires a minimum investment of 20 crore rupees, while the minimum investment required from an investor is 1 crore rupees (unless they are employees or directors of funded entities).  

Also, there is a cap of 1,00064 investors at any one time (and the Companies Act, 2013 will apply if the AIF is a corporation). Due to the strict AIF laws that will control the crowdfunding process, it may be concluded from the aforementioned provisions that the fundamental principles of crowdfunding are deteriorating. 

“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.” 

 

Written by Riddhi S Bhora. 

 

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Global Capability Centres (GCCs): Handling the Digital Era — An in-depth exploration of developments, approaches, and regulatory frameworks

ABSTRACT: 

In the dynamic landscape of global business, Global Capability Centers (GCCs) emerge as strategic powerhouses, reshaping how organizations operate, innovate, and scale. This article unravels the multifaceted journey of GCCs within the Indian context, where India’s leadership shines brightly. From inception to execution, this article aims to delve into the intricate steps involved in running GCCs on Indian soil, emphasizing legal compliance, talent fusion, and strategic autonomy.  

The canvas extends to various metropolitan cities and states in the subcontinent., encompassing rural ecosystems and equitable growth. As data guardians and cultural bridge-builders, GCCs navigate complexities, leveraging innovation and safeguarding sensitive information. This study attempts to shed light on the complex web of myths and beliefs surrounding the GCCs by evaluating the historical background, legal provisions, investigation difficulties, and prosecution barriers. 

 

KEYWORDS: 

GCCs, Global Capability Centres, India, Innovation, Technology, Legal Compliance, Regulatory Authorities, Data protection, Expansion of business, MNCs, Corporate Structure, Diversification, Legalities. 

 

INTRODUCTION 

India has established itself as a centre for innovation and R&D in recent years. An increasing number of international corporations are considering looking to India as a means of propelling their corporate growth into the next phase, given its well-established reputation as a hub for outsourcing and offshore, particularly in the technology industry.  

The nation is leading the way in tech-driven innovation because to the fast changing services industry, which has made global capability centres essential hubs for business strategies, new technologies, and transformation. These hubs enable organisations to remain flexible in a very dynamic setting. 

 

EMERGENCE AND EVOLUTION: 

In order to reduce costs and meet the operational needs of a foreign organisation (referred to as a “Foreign Entity”) in its service offerings, global capacity centres, or “GCCs,” were first established in the Indian banking sector as offshore global in-house centres, or “GICs.” India’s knowledgeable workforce (large potential base) and reasonable operating expenses have helped it become recognised as a desirable location. With 1.66 million1 workers as of FY 2022–2023, India employed roughly 1,580 GCCs, and this figure is rising quickly. 

By generating excellent job opportunities and boosting the GDP of the nation, these centres have been crucial to India’s economic development. These global corporations in India, known as GCCs, are present in a variety of industries, such as technology, engineering, consulting, and many more. Indeed, India has become the go-to location for many of these innovation clusters due to its abundance of highly trained and bright workers, affordability, and government regulations that encourage them. 

The most sought-after locations are Bengaluru, Hyderabad, Delhi NCR, Mumbai, Pune, and Chennai; with their strong infrastructure, talent pool, and encouraging climate, these cities provide an ideal setting for global capabilities centres in India. The majority of the operational GCC footprint in India’s top 6 cities is made up of US-headquartered companies, with European companies making up the remaining 35%2. With the support of local unicorns, the percentage of GCCs with an APAC base is now very low but is rapidly increasing. Furthermore, the total amount of office space occupied by GCCs in the top six cities has surpassed 200 million square feet and is increasing quickly over time. 

 

INDIA’S CONTRIBUTION TO GLOBAL COMPETENCE CENTRES: 

The development of global captive centres in India has been influenced by a multitude of growth drivers, both past and present. They consist of:  

  • ABILITY: The presence of highly skilled labour in India’s global capability centres is one of their main advantages. Every year, millions of people graduate from India, with a large percentage having studied business management, computer science, or engineering. These graduates have a strong sense of motivation, outstanding technical proficiency, and a solid grasp of global business procedures. As a result, multinational corporations operating in India can take use of this talent pool to offer a broad range of services to their clientele worldwide. 
  • AFFORDABLE FACILITIES: An additional benefit of global capability centres in India is their cost-effectiveness. Compared to industrialised nations like the US and the UK, running a captive centre in India is far less expensive. This is because of better exchange rates, lower real estate expenses, and lower salaries. Thus, by setting up a GCC in India, multinational corporations can drastically cut their operating costs. Indian towns entice multinational corporations to establish their global inhouse centres because they provide occupiers with comparatively lower rentals for Grade A workplaces, and institutional landlords are pushing for better services and higher-quality real estate. 
  • GOVERNMENT SUPPORT: In an effort to draw in international investment, the Indian government has supported the establishment of global competence centres by offering a number of programmes and incentives. Businesses can establish their GCCs in special economic zones (SEZs) created by the government, where they can also take advantage of a number of additional advantages and tax breaks. Additionally, the government has put policies in place to support R&D and innovation, which has assisted captive centres in India in creating cutting-edge services and technology. 

 

ENACTING OR RUNNING A GCC IN INDIA: LEGAL AND REGULATORY ASPECTS: 

Every federal, state, and municipal law that a foreign entity intends to establish a GCC in India must be complied with. Compliance with contract laws to regulate the GCC’s contractual relationships (such as intergroup agreements and vendor/supplier contracts), corporate structuring, regulatory interventions, dispute mitigation techniques, etc., are all included in this.  

Additionally, compliance with corporate laws specifies the type of legal entity that must be established in order to incorporate the GCC. In addition, the GCC would be exposed to some legal risks due to the fact that different jurisdictions may have different legal positions on matters like as minimum compensation, non-compete agreements, data protection, permanent establishment, and reporting structure. 

These include various factors like: 

INITIAL STAGE: COMPLIANCES AND SETTING UP- 

Prior to incorporating the GCC in India, the foreign entity would need to decide what kind of legal entity to create. It could be an office, a partnership, a limited liability partnership, a business, or a joint venture. It would next have to decide on the corporate structure for the GCC.  

This could fall into one of two extremes in terms of the ownership and control that the Foreign Entity has over the GCC in India: Choose the conventional or “do-it-yourself” model (also known as the “DIY Model”), in which the foreign entity establishes the GCC while maintaining total ownership and management. Specialised jobs requiring local assistance or advice are then outsourced. Adopt the “build-operate-transfer” model (also known as the “BOT Model”), in which a third-party service provider establishes the GCC/GIC, runs the centre, and then progressively hands over ownership and control to the foreign entity. 

Getting to the section on compliances, The standards for compliance before and after setup vary based on how the GCCs are set up in India. For example, the GCC would have to adhere to a number of requirements if it were to become a company under the Companies Act, 2013, as well as its regulations. These would include deciding on reporting lines, reviewing and preparing company policies and charter documents, preparing routine and event-based reporting and filings, and more. 

 

SECOND STAGE: GEOGRAPHICAL AREA- 

The special economic zones (SEZs) and international financial services centres (IFSCs) are the two tools that regulate GCCs and GICs established in controlled territories; nevertheless, there is no specific legislation or regulation that governs GCCs generally. GCCs and GICs established in Special Economic Zones (SEZs) are subject to regulations outlined in the Special Economic Zones Act, 2005 (“SEZ Act”).  

Any “GIC” setup at an international financial services centre (IFSC) is governed by the International Financial Services Authority (Global at-House Centres) Regulations, 2020 (“GIC Regulations”). To maximise “ease of doing business,” SEZs and IFSCs provide regulatory exemptions to businesses operating within its borders. These exemptions include non-fiscal (such as simplified licencing) and fiscal (such as labour legislation and tax relaxations). 

 

THIRD STAGE: RESOURCING- 

Due to the centre’s operations in India, employment and/or labour regulations in India would apply to anyone hired or recruited to work for the GCC, regardless of their citizenship. One of the main reasons foreign entities establish GCCs in India is because of the availability of diverse “human capital.”  

Therefore, the centre must ensure proactive compliance, which includes, but is not limited to, putting in place the required policies and systems to prevent and handle employee-related grievances at work. In addition to hiring foreign nationals, the GCC is permitted to hire Indian people, but it must carefully manage the extra compliances associated with doing so. Recruiting from the Indian labour force appears to be a goal, based on the current enormous and heightened recruitment activities3. 

 

STAGE 4: TAXES- 

Evaluating various corporate proposals requires constant assistance on transfer pricing, GST-related issues, and taxation (including employee incentives, property, etc.) due to India’s strict tax system and the GCC’s global servicing model.  

Since the Indian tax department would review and evaluate the GCC in terms of its control, supervision, and management by the foreign entity—specifically, how employees in India report to the employee at the foreign entity—the foreign entity should also take precautions to avoid any risks from being classified as a “permanent establishment.” 

From a theoretical perspective, this is the last or “final” stage overall. To survive in this fiercely competitive market, there are still numerous steps to take. Maintaining the regulatory authorities is the primary goal. 

 

OUTSOURCING OF GCCs: 

To elaborate on the previously mentioned point, there are two strategic models available for setting up a GCC in India: (1) the traditional or do-it-yourself model (also known as the “DIY Model”), wherein the foreign entity establishes the GCC (by incorporating an entity in India) and maintains full control and ownership (while outsourcing specialised tasks requiring local support/advising); and (2) the build-operate-transfer model (also known as the “BOT Model”), wherein a third-party service provider either fully or partially establishes the GCC, runs the centre, and gradually transfers ownership and control to the foreign entity4. 

A service agreement with a professional employer organisation (PEO) or employer on record (EOR) is one of the numerous hybrid models. In this arrangement, the foreign entity enters into a contract with an EOR/PEO to engage employees who will work directly for the foreign entity under the EOR/PEO’s supervision and execute services that the foreign business would typically expect from the GCC. This usually lasts only temporarily, until the foreign company establishes procedures for directly onboarding staff and incorporates its GCC in India. 

 

BENEFITS: 

  • TALENT: Having access to a global talent pool allows businesses to customise their dream team by finding experts with specialised knowledge and abilities. Combining creativity, problem-solving, and operational excellence in this way yields optimal results. 
  • AFFORDABLE: Capitalising on areas with reduced labour costs is a wise financial decision for GCCs. Because of the large savings in infrastructure, salaries, and operating costs that result from this, firms are better able to manage their resources for improved financial health and competitiveness. 
  • FLEXIBILITY: GCCs offer businesses the amazing capacity to instantly scale up or down in response to market conditions. Therefore, GCCs maintain organisations competitive and nimble, whether it’s managing unexpected demand spikes or taking on exciting new projects. 
  • SCOPE FOR INNOVATION: GCCs enable businesses to concentrate on innovation and core competencies. By assigning regular duties to these centres, organisations can free up resources for things like product development, market expansion, and strategic projects. This emphasis strengthens the company’s competitive advantage, fosters a culture of continuous innovation, and moves the business in the direction of steady growth and adaptation. 

 

DRAWBACKS:  

Although they have numerous advantages, Global Capability Centres (GCCs) also have some difficulties and disadvantages. Let us investigate a few of these: 

  • Lack of Executive Sponsorship: Strong executive sponsorship is frequently necessary for GCCs to form and grow successfully5. Delays in decision-making and operational inefficiencies could occur in the absence of high-level support. Insufficient comprehension of expenses, ROI, and the operational framework may impede the efficacy of the Gulf Cooperation Council. 
  • Complex Setup and Resource Intensiveness: Legal compliance, infrastructure preparation, and hiring talent are just a few of the many tasks involved in establishing a GCC. Budgeting, coordinating resources, and ensuring they are in line with corporate objectives may all be challenging. 
  • Cultural Differences: There are difficulties while working in multicultural environments. It takes extra work to effectively communicate, grasp local customs, and bridge cultural divides. 
  • Data Privacy and Security Risks: Adherence to data protection rules is crucial when managing confidential information. Making sure there are strong security protocols and privacy protections is crucial. 
  • Legal and Regulatory Compliance: It can be difficult to navigate local tax laws, labour legislation, and intellectual property rights. Legal ramifications and reputational harm could result from noncompliance. 

 

CONCLUSION: 

GCCs are strong promoters of innovation and growth in the complex world of international business. They do face some legal challenges along the way, though. Under the guidance of strategic foresight and legal caution, organisations must use caution when they create and maintain these centres. Global Capability Centres (GCCs) facilitate innovation and progress in the complex world of global business. But they also have to deal with issues including complicated setup, cultural disparities, and privacy concerns pertaining to data.  

Ensuring compliance with labour regulations, data security, and contractual accuracy are all critical aspects of legal compliance. Strategic independence, talent fusion, and a global vision are essential as GCCs traverse these boundaries. Under the direction of a peaceful future and superior legal standards, India’s position as a leader among the GCC states keeps changing. 

 

“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.” 

 

Written by Riddhi S Bhora. 

 

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Directors/Officers of a company are Still liable even if the company is under a moratorium: Supreme Court

Case title: Ansal crown heights flat buyers association vs m/s. Ansal crown infrabuild Pvt. Ltd. & Ors.

Case no.: Civil Appeal No. 4481 of 2023

Decided on: 17.01.2024

Quorum: Hon’ble Justice Abhay S. Oka, Hon’ble Justice Ujjal Bhuyan.

 

FACTS OF THE CASE:

The National Consumer Disputes Redressal Commission (NCDRC) issued an order that is the basis for this appeal. It directs the Developer to finish the project in its entirety and give Association of Homebuyers members possession of the assigned flats or apartments within the time frame that the home buyers were given.

The appellants sought to execute this direction by filing execution applications. The developer is the company against which the National Commission issued the aforementioned directive. The aforementioned company is the subject of the proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016. The National Company Law Tribunal has admitted the petition filed against the company under Section 9 of the IBC. The appellants sought to carry out the National Commission’s directions against both the company and other respondents.

The National Commission decided that because of the moratorium under Section 14 of the IBC, the decree could not be implemented against the company and said it would be improper to carry out the same execution against the opposing parties Nos. 2 to 9 in light of the company’s moratorium.  It was also noted that Nos. 2 to 9, the other parties opposing the execution application, were not involved in the primary complaint.

LEGAL PROVISIONS:

Section 9 of the Insolvency and Bankruptcy Code, 2016 deals with “Application for initiation of corporate insolvency resolution process by operational creditor.”

The section 32A(1) second provision states that “Provided further that every person who was a designated partner as defined in clause (j) of section 2 of the Limited Liability Partnership Act, 2008, or an officer who is in default, as defined in clause (60) of section 2 of the Companies Act, 2013, or was in any manner in charge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor notwithstanding that the corporate debtor’s liability has ceased under this sub-section.”

ISSUES:

Whether the directors/officers of the company are liable while the company is under moratorium?

APPELLANTS CONTENTION:

The appellant argued that Section 14 of the IBC, which places a moratorium on actions against the company’s directors and officers, does not forbid such actions. Section 32A(1) of the IBC was also cited by the appellant. The court also decided that the directors’ and officers’ liability, if any, would continue despite the moratorium, based on its rulings in the P. Mohanraj v. Shah Bros. Ispat (P) Ltd. case. The court determined that the moratorium under Section 14 of the IBC would not prohibit the petitioners from initiating proceedings against the promoters of the first respondent Corporate Debtor in order to enforce the settlements reached before this Court in the case of Anjali Rathi and others vs. Today Homes and Infrastructure Pvt. Ltd. and Others.

RESPONDENTS CONTENTION:

The respondents contended that the order sought to be executed imposes no liability on respondent Nos. 2 to 9. According to the submission, the National Commission determined that respondent Nos. 2 to 9 were not parties to the main complaint.

Their main contention was that in the case of Anjali Rathi, this Court made a departure by allowing the appellants to proceed against the company’s promoters, who were only subject to a moratorium because they reached an agreement before this Court.

COURT ANALYSIS AND CONCLUSION:

The Court accepted the decision in P. Mohanraj’s case and allowed the appellants to proceed expressly against the company’s promoters despite the fact that the company was subject to a moratorium under Section 14 of the IBC.

The court ruled that just because the company is subject to a moratorium under Section 14 of the IBC, it cannot be said that no proceedings against respondent Nos. 2 to 9 for execution can be initiated, provided that they are otherwise obligated to abide by and comply with the order issued against it. The moratorium will not protect the company’s directors and officers.

The court remanded the execution application to the National Commission and overturned the contested rulings and orders. The execution of respondents from 2 to 9 to the execution application will go on.

 

“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”

 

Written by – Surya Venkata Sujith

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The Three Major and Developments in Indian Corporate Law

Abstract

This paper explores three interconnected topics influencing the evolution of corporate India. Part 1 examines the landmark Supreme Court verdict on tribunalisation of company law in India, highlighting the debate over legislative competence, separation of powers, and the constitutionality of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). Part 2 delves into the concept of independent directors, underscoring the need for redefining their roles, responsibilities, and selection processes. It discusses the challenges in maintaining true independence and suggests measures to enhance their effectiveness. Part 3 analyzes the position of statutory auditors in companies, particularly whether they hold an “office of profit.” It examines legal principles, corporate structure, and implications of appointing auditors without shareholder resolutions. By addressing these themes, the paper sheds light on critical facets shaping the trajectory of corporate India.

 

Introduction

The corporate landscape in India is undergoing transformative changes due to global market shifts, economic growth, power dynamics, and climate concerns. This paper delves into three interconnected topics that are shaping the evolution of corporate India. Part 1 focuses on the Supreme Court’s watershed judgment on tribunalisation of company law, discussing its implications, challenges, and debates. Part 2 examines the concept of independent directors and their role in corporate governance, suggesting reforms to enhance their efficacy. Part 3 analyzes the position of statutory auditors and the question of whether they hold an “office of profit” under the Companies Act.

Part 1: Tribunalisation of Company Law in India:

The Supreme Court’s judgment on the establishment of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) is a critical development in the evolution of corporate India. This judgment has sparked debates about legislative competence, separation of powers, and the constitutional framework. The court’s decision to uphold the legislative competence of the Parliament to create NCLT and NCLAT is a significant validation of its authority to reform corporate justice. However, the judgment has also deemed specific aspects of the tribunal’s structure unconstitutional, necessitating amendments. This held in the case of Union of India v. R. Gandhi[1].

The question of legislative competence revolves around the constitutional provisions of Article 323A and 323B, which deal with tribunals’ establishment. Some argue that the court’s interpretation of these provisions can lead to potential conflicts with the principles outlined in Schedule VII of the Constitution. While the court’s judgment suggests a harmonious interpretation, concerns are raised about the potential erosion of separation of powers and the independence of the judiciary. This debate prompts reflection on the delicate balance between administrative efficiency and safeguarding the core principles of governance.

The issue of vesting judicial functions in technical members of the tribunal also draws significant attention. While the court acknowledges the importance of domain expertise, questions arise about the potential compromise of judicial independence. The requirement of technical members to possess certain qualifications might inadvertently dilute the tribunal’s decision-making autonomy. This leads to contemplation on whether expertise can genuinely replace the attributes of impartiality, judicial wisdom, and protection against external influences.

In the case of State of UP v. McDowell & Co.[2], a three-judge bench of the Supreme Court underscored that a law enacted by the legislature could only be invalidated based on two specific grounds: (1) lack of legislative competence, and (2) contravention of any fundamental right enshrined in Part III or other constitutional provisions. These two aspects form the core of the author’s argument, with the remaining aspects being extraneous to the present discussion.

However, the judgment does not definitively clarify whether the Parliament possesses the requisite competence or whether its actions run afoul of Article 323B of the Constitution. An additional concern revolves around the involvement of non-judicial individuals as adjudicators.

In this context, the foundational principle of the “separation of powers,” an inherent element of our constitutional framework, appears to be in jeopardy. While this concern is intuitively comprehensible, the author refrains from delving further into this extensively addressed topic.

Part 2: Independent Directors and Corporate Governance:

The concept of independent directors is integral to maintaining corporate governance and stability. However, the practical implementation often falls short of expectations. The definition of independent directors, as outlined by SEBI in Clause 49, is considered inadequate in ensuring genuine independence. The Enron case, where even the Dean of Stanford Business School failed to detect irregularities, and the Satyam fraud, which exposed gaping weaknesses in governance, underscore the urgency for reform.

The suggestion of statutory protection against arrest for independent directors becomes crucial in light of cases like Nagarjuna Finance, where arrests of former independent directors raised concerns. The fear of legal action can deter competent professionals from accepting directorships, leading to a potential shortage of qualified candidates. Transparency in the selection process, minimizing cozy relationships between boards and independent directors, and addressing conflicts of interest are all necessary steps to enhance the effectiveness of independent directors.

Furthermore, the paper’s recommendation for retirement policies for independent directors is based on the idea of maintaining fresh perspectives and preventing entrenchment. While concerns about industry experience are valid, the role of independent directors as enlightened generalists cannot be understated. Striking a balance between experience and a forward-looking approach is essential for a robust governance framework.

Part 3: Position of Statutory Auditors in Companies:

The role of statutory auditors in corporate financial irregularities has prompted discussions about their liability and accountability. The question of whether they hold an “office of profit” under the Companies Act raises pertinent issues. By examining legal principles and corporate structure, it becomes evident that statutory auditors are appointed by shareholders, indicating a distinction from the company itself. The intention of ensuring independence and an unbiased audit process reinforces the argument against considering them to hold an “office of profit.”

The term “office of profit” remains undefined within the Constitution of India. Through a series of judicial pronouncements[3], the Supreme Court of India has established a set of criteria to determine whether a given position qualifies as an office of profit under the government. These criteria encompass:

  1. The origin of the appointment, whether it emanates from the government;
  2. The authority vested in the government to terminate or dismiss the incumbent;
  3. The source of remuneration, whether disbursed by the government;
  4. The nature of duties undertaken by the holder, including their alignment with government functions;
  5. The extent of control exercised by the government over the execution of these responsibilities.

However, Section 314 of the Companies Act presents a challenge. This section requires shareholder approval for appointments to offices of profit, leading to potential conflicts with the role of statutory auditors. The paper highlights the need for careful consideration of these conflicts and their implications on auditor independence. Balancing the regulatory framework to prevent undue interference while maintaining transparency and accountability is essential.

While assuming an office inherently implies wielding some degree of authority, whether significant or subordinate, on behalf of a company, the assumption of a position or role need not invariably entail exercising authority. [4]In light of this context, it is not legally sustainable to assert that statutory auditors of a company hold a position of profit within the company. According to Section 314(1), the appointment of specified individuals to an office or position of profit necessitates shareholder approval through the passage of a special resolution during a general meeting. This requirement applies to instances like the appointment of a relative of an Independent Director to a position of profit within the company.

Taking into consideration the aforementioned rationale and in conjunction with Section 314 of the Companies Act, it becomes apparent that a statutory auditor can be designated without necessitating a shareholder resolution, even in cases where the auditor has a relationship with one of the Directors. Such a scenario could potentially compromise the autonomy of the Statutory Auditor, undermining their ability to function independently, devoid of undue influence from the company itself

Conclusion

the evolution of corporate India is at a critical crossroads, driven by factors spanning economic shifts, legal transformations, and ethical considerations. The analysis of tribunalisation, independent directors, and statutory auditors exemplifies the intricate landscape that shapes the future of Indian corporates.

The Supreme Court’s stance on tribunalisation highlights the delicate equilibrium between judicial autonomy and operational efficiency. Debates over legislative jurisdiction, separation of powers, and technical expertise underscore the need for a balanced approach that upholds legal principles while accommodating modern business complexities.

Within the realm of independent directors, fundamental challenges arise, evident in cases like Enron and Satyam. Calls for safeguards against unwarranted arrest, transparent selection processes, and well-defined tenures emphasize the urgency to foster a cadre of directors capable of championing robust corporate governance.

Amidst these debates, the role of statutory auditors emerges as a linchpin. The question of whether they hold an “office of profit” intertwines legal interpretation, corporate autonomy, and accountability. As the nexus between shareholder appointments and auditor insulation from direct company influence counters such categorization, their interplay with Section 314 necessitates nuanced consideration.

Overall, these deliberations encapsulate the convergence of legal doctrines, economic realities, and ethical imperatives in the corporate landscape. The pursuit of regulatory oversight while preserving entrepreneurial vigor stands paramount. As India strides forward, these issues signify not just legal concerns, but essential societal benchmarks. They underscore that the transformation of corporate India is not just a process of change, but a profound reimagining. The amalgamation of law, economics, and ethics constitutes a complex mosaic, posing challenges alongside transformative prospects for India’s corporate trajectory.

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Written by- Ankit Kaushik

[1]  Civil Appeal No. 3067 of 2004 with Civil Appeal No. 3717 of 2005, unanimous, judgment dated May 11, 2010, per Justice Raveendran)

[2] (1996)3SCC 709

[3] See Maulana Abdul Shakur v. Rikhab Chand and another (1958) SCR 387; M Ramappa v. Sangappa & others, (1959) SCR 1167; Guru Govinda Basu v. Sankari Prasad Ghosal & Others, (1964) 4 SCR 311; and Shivamurthy Swami Inamdar & another v. Agadi Sanganna Andanappa & Another, (1971) 3 SCC 870, Pradyut Bardolai v. Swapan Roy, JT (2001) 1 SC 136.

[4] Rendell v. Went [1964]2 All ER 464(HL)