A Round Up of a Rollercoaster Year

As 2012 began, several
BRICS economies that showed immense promise began to face slower growth. This
was also influenced by developments elsewhere (including the crisis in Europe).
India was affected by the same phenomenon.
The Indian
situation was also marred by several policy-related issues that continued to
remain for nearly two-thirds of the year. This includes the “policy paralysis”
that afflicted Government decision-making for most of the year. More so, the
Government’s harsh reaction to Supreme Court’s Vodafone judgment and the
introduction of the general anti-avoidance rules (GAAR) as also the fallout of
the 2G scam lowered the buoyancy of the economy and the capital markets.
However, towards
the last quarter of 2012, the Government stepped in to take some corrective
measures. Its bold moves to reintroduce foreign direct investment (FDI) in the
multi brand retail sector, to postpone the introduction of GAAR, and to
introduce reforms in company law and banking legislation have spurred some
interest in the economy. While these measures have introduced some element of
optimism as we usher in 2013, it would be too much to expect big bang reforms
in that year. Given that the next general elections are due in 2014, one can
expect next generation reforms to occur only after that. The hope is that a
steady course is maintained until then with no adverse policy decisions.
In this post, we
recapitulate some of the key developments of the year in the business law
sphere, and ponder over what lies in store for the year ahead.
Corporate Law and Governance
Clearly, one of
the significant events of the year is the approval
of the Companies Bill, 2011 by the Lok Sabha. This brings company law reforms,
which have been pending for over a decade now, closer to reality. The Bill
requires the approval of the Rajya Sabha and the assent of the President before
it can become law, and these are expected to occur early next year.
Surprisingly, the sticking point on the Bill for most of this year was the
provision on corporate social responsibility (CSR). While the Parliamentary
Standing Committee on Finance kept insisting
on mandatory CSR spending, the final
reflects a “comply or explain” approach. When the company law
reforms are implemented (next year), it will represent a sea change in the way
companies operate, and both companies and their advisors will have to come to
terms with a new regime and adapt themselves towards that.
From a corporate
governance perspective, the year has not seen wide ranging reforms. However,
one aspect that stands out is the move towards greater participation on the
part of the shareholders. SEBI has made e-voting
for top listed companies. Apart from governmental effort, the
market has adapted itself towards greater shareholder activism through
involvement of proxy advisory firms and even activist hedge funds adopting a
combative approach towards some Indian companies, all of which are sought to be
documented in this working paper.
Foreign Direct Investment
Given that the
Government had proposed FDI in the multi brand retail sector in 2011 and had to
immediately withdraw it, the sentiment for foreign investment was not so
positive going into 2012. The initial months also witnessed policy paralysis
that resulted in substantial outflow of foreign investment in the country.
However, the big bang reforms witnessed towards the end of the year brings some
economic cheer. The Government reintroduced
that allow FDI in the multi brand sector, and also eased the
conditions for FDI in the single brand retail sector. The FDI reforms were made
through executive action and also put to vote in Parliament where
assent was received.
Among other
changes, the introduction of a new
for foreign investment in the form of the qualified foreign investor
(QFI) scheme is noteworthy. This permits foreign individuals and corporations
to invest in a portfolio of Indian stocks without specific registration.
Despite the fanfare with which this scheme was introduced, it is yet to make
any significant impact and fund flows are still very thin.
Securities Regulation
This area has
witnessed enormous activity in 2012, most of which has come in the form of
enforcement initiatives by the Securities and Exchange Board of India (SEBI)
and somewhat less so in the form of legislative/regulatory initiatives.
Capital markets
in India have had a lackluster year, with very few primary offerings to speak
of. Globally, however, the Facebook IPO stirred the markets but with some
different outcomes in the end. Not only has it been difficult since for the
company’s stock price to be sustained at IPO levels, but it also resulted in
regulatory actions against some of Facebook’s investment bankers for selective
release of information during the IPO process.
Back in India,
SEBI’s legislative initiatives that are noteworthy include its norms on alternative
investment funds
and those on consent
order norms
(which have substantially tightened the scope and process).
SEBI has also been insistent on ensuring that listed companies comply with the
minimum public float norms by 2013, and has prescribed additional methods for
achieving the same, including offer
for sale through the stock exchange
, and the institutional
placement programme
It is on the
enforcement side, however, that SEBI has had an extremely busy year. It
returned from the Supreme Court with resounding success in the Sahara
. Disappointingly, however, the saga continues with disputes between
SEBI and the Sahara group regarding the submission of documents and return of
monies to investors going back and forth between various fora including the
Supreme Court and the Securities Appellate Tribunal (SAT). Any meaningful
conclusion can be expected only next year.
SEBI’s push on
securities frauds has been met with mixed success. Several appeals on matters
such as insider trading and front running have been decided by SAT during the
year, with a few of them in favour of SEBI and many against it. Noteworthy
among them include the insider trading cases involving the Jaypee
, a director
of Ranbaxy Laboratories
and Rasi
Electrodes Limited
. SAT’s decisions
on cases
involving front running and the SEBI adjudicating officer’s response
leave the matter wide open, with some action possible in the next year to
resolve issues. Contrast this with the successful prosecution, conviction
and sentencing
of Rajat Gupta (and earlier of Raj Rajaratnam) in the US, which has triggered a
on whether that is likely to mount severe pressure on SEBI’s enforcement
mechanism and resources on cases involving securities frauds.
While there is
every reason to expect SEBI’s enforcement push to continue into next year,
there is at least one pending issue where SEBI’s legislative or regulatory
intervention is overdue and is remaining on the industry’s wish list. That
pertains to the open question regarding the enforceability
of put and call options
. While there was some clarity from the Bombay High
Court in the MCX
, that matter was settled before the Supreme Court leaving the question
of law open. It is hoped that SEBI will clarify the position in the new year.
Mergers & Acquisitions (M&A)
2012 turned out
to be a bit of a lackluster year for M&A. While there were indeed a handful
of mega deals, the overall level of activity was nowhere near the pre-crisis
levels. Inbound deals appear to be more prominent than outbound deals. Part of
the drop in activity may also be attributable to the fear psychosis created by
the post-Vodafone events in the form of budget announcements and GAAR. The
M&A sphere has been dogged by tax uncertainties, which are enumerated in
the next section below.
There have been
no significant legislative developments in this area to speak of. The SEBI
Takeover Regulations were overhauled in the previous year, and are only yet being
fully tested. Given the enhanced threshold of 25% for mandatory public offers,
there is more room for investors to acquire stakes in listed companies without
triggering such offers.
The year is
significant for the complete acceptance of competition law implications as an
integral part of M&A deal making. The Competition Commission of India (CCI)
has made its presence strongly felt in a positive way. The initial resistance
from industry towards merger control regulations due to possible impediments
and delays from CCI has given way to a more optimistic outlook given the recent
track record of the CCI clearing proposals at such regulatory speeds hitherto
unknown. Since its existence, the CCI has already handled over
100 proposals
in the M&A sphere. There is a sense that all the cases
before the CCI thus far have been fairly straightforward, and the CCI would be
fully tested when more complex situations begins to emerge. Nevertheless, it
has been a good start.
Taxation issues
pertaining to M&A transactions caused a major upheaval this year that
affected not only M&A specifically but also the investor sentiment in the Indian
economy more generally. The corporate community welcomed the Supreme Court’s
decision in the Vodafone
with much relief. But, that was only to be short-lived. The subsequent
response of the Government by introducing retrospective
to the Income Tax Act during the budget
of 2012
caused substantial uncertainty on taxation of M&A transactions
that also resulted in a negative outlook for India among foreign investors. The
threat of imposing
further exacerbated the issue. However, more recent efforts have been
taken by the Government to assuage corporate concerns. The Shome committee was appointed
to examine these in detail, which provided its report that
recommended among other things that the scope of GAAR be restricted when
introduced. This, along with the deferral of GAAR, has brought some cheer to
The whole issue
of taxation of M&A transactions, believed to have been resolved by the
Vodafone case, has resurfaced in yet another form (coincidentally in a case
involving another transaction of Vodafone). This case involves a demerger
scheme proposed by Vodafone Essar Gujarat and several other companies. While
the scheme was approved by several High Courts, it was rejected
by a single judge
of the Gujarat High Court due to objections from the tax
authorities. This decision was reversed
on appeal by a division bench
of the Gujarat High Court, which ruled in
favour of Vodafone Essar. The tax authorities have now appealed to the Supreme
Court. Interestingly, the Supreme Court is not expected only to decide on this
specific issue, but the Government has sought for the entire issue of “tax
avoidance” to be dealt with
afresh by a larger bench
of the Supreme Court. This is an area that
requires a close watch in the new year given the likelihood that an issue of
immense importance is likely to be dealt with de novo, and could be a game changer as such.
Commercial Dispute Resolution
The problems of
delay that plague the Indian court system have not dissipated. A recent
finds that while the new caseload at the lower courts is decreasing,
at the higher courts it is increasing at a rapid pace, thereby creating a
bottleneck at the topic of the justice system. Interestingly, a number of cases
relating to matters such as company law, arbitration and taxation are being
admitted at the highest courts, including the Supreme Court. This research also
supports anecdotal evidence of several cases in these fields that have gone all
the way up the Supreme Court in a very short period of time, many of which have
been discussed in this very post.
The conventional
approach to bypass the difficulties of the court system is to opt for
arbitration instead. However, in the past, that approach has encountered
difficulties due to the inability of parties to enforce arbitration awards
(particularly in international commercial arbitration) due to a string of
decisions of the Supreme Court, notably in the case of Bhatia International. However, those difficulties have been put to
rest (at least going forward) in the landmark
decision of Balco
that was
pronounced by the Supreme Court this year. This will give the much needed
fillip to arbitration of commercial disputes, although the judgment also leaves
some difficult questions, such as its prospective overruling of Bhatia International and on the ability
to approach Indian courts for interim reliefs in international commercial
arbitration with a foreign venue.
Finally, the
SAT, an active adjudicator of securities law disputes arising from orders of
SEBI, finds itself in an odd situation at the end of the year without the
necessary quorum. A lot
has been written
about this issue and a petition
has also been filed
before the court, and it is hoped that immediate steps
will be taken to remedy the situation.

Overall, 2012 has been an
eventful year in the business law area in India. While some of the developments
may rather be forgotten, they provide valuable lessons for the future.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • The IT Dept as well as critics of the SC judgment in Vodafone case cast it as a `tax avoidance device'. This sounds strange as in the typical tax planning / avoidance (depending on how one looks at it), the parties would go to great lengths to hide the economic substance of the transaction and make it appear something else. Here the SPA etc. clearly mentioned the purpose to be transfer of Hutch’s Indian telecom business to Vodafone! I think the Department’s argument here (capitalizing on the word `indirect’ in Section 9), was more akin to the `conduct and effects’ test adopted by some US Circuit courts in the context of securities fraud till it was junked by the US SC in the Morrison case (2010). In effect, the Dept. seems to have argued that the `conduct’ (buying a single share in…) was abroad, but its `effect’ (transfer of the telecom business to Vodafone) was in India, which no party ever denied. In my opinion, the SC correctly refused to buy this by pointing out that `indirect’ qualifies transfer, not situate in India.

    Does all this make a difference? I think it does. Strip the issue of its `device’ colour, and the moral outrage disappears. Then this case becomes a purely technical one implicating the interpretation of Section 9, and there is no issue reg. the alleged intention to `deceive’.

    -Mangesh Patwardhan

  • Many developments in the fields relating to, either impacting or impairing, the national economy, falling within the ambit of financial and fiscal policies aiming at reforms have been sought to be rolled into and fairly summed up.

    Two of the areas so focussed on pertain to Taxation and Commercial Dispute Resolution. The significance of and important role the machinery of arbitration could play in resolving commercial disputes has been touched upon.

    It may be added that, similar recourse to international arbitration is no less significant or important hence might go a long way in resolving taxation disputes, particularly in respect of cross-border transactions, as well.
    In the mentioned vodafone case, as lastly reported in the media, a move had been made to take the matter forward in that direction, for a speedier and effective resolution; in one's opinion rightly so.

    Refer Vodafone seeks international arbitration in India tax case – CIO

  • With regard to SEBI there were several primary market reforms and these reforms are very significant from the perspective of shareholders. These reforms needs special mention.

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