[Guest post by Nikunj
Agarwal, a fifth-year B.A., LL.B (Hons.) student at Dr. RML National Law
University, Lucknow]
Agarwal, a fifth-year B.A., LL.B (Hons.) student at Dr. RML National Law
University, Lucknow]
In recent years, India witnessed
a steady increase in foreign investment in the Indian economy. The preceding
year also saw many private equity funds and other institutional investors
making an exit through the initial public offering (IPO) route. However, legal issue
amounting to a deal-breaker of sorts has arisen in relation to disclosures relating
to foreign promoters under the regulations governing public issue of securities
in India.
a steady increase in foreign investment in the Indian economy. The preceding
year also saw many private equity funds and other institutional investors
making an exit through the initial public offering (IPO) route. However, legal issue
amounting to a deal-breaker of sorts has arisen in relation to disclosures relating
to foreign promoters under the regulations governing public issue of securities
in India.
SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009 (the Regulations) constitute the principle disclosure regime for
public issue of securities. In regulation 2(1)(za) the
term ‘promoter’ is defined as an entity which is in ‘control’ of the issuer, or
the person or persons who are instrumental in the formulation of the plan
pursuant to which the offer to public is being made, or the entity named in the
offer document as promoter, subject to the provided exceptions. In so defining,
Indian law does not differentiate between domestic and foreign promoters.
Regulations, 2009 (the Regulations) constitute the principle disclosure regime for
public issue of securities. In regulation 2(1)(za) the
term ‘promoter’ is defined as an entity which is in ‘control’ of the issuer, or
the person or persons who are instrumental in the formulation of the plan
pursuant to which the offer to public is being made, or the entity named in the
offer document as promoter, subject to the provided exceptions. In so defining,
Indian law does not differentiate between domestic and foreign promoters.
Therefore, foreign
investors can be classified as promoter under the Regulations, which classification
would be applicable largely at the time of public issue of securities, even
where the intention at the time of initial investment in the issuer was not to
become an entity classified as a promoter. The duty to disclose contained under
Indian law, which works well in relation to a domestic promoter, might result
in complete paralysis of an IPO by an issuer having a promoter that is required
to comply with laws other than Indian laws. These promoters can be either
foreign promoters or, Indian entities having operation outside India.
investors can be classified as promoter under the Regulations, which classification
would be applicable largely at the time of public issue of securities, even
where the intention at the time of initial investment in the issuer was not to
become an entity classified as a promoter. The duty to disclose contained under
Indian law, which works well in relation to a domestic promoter, might result
in complete paralysis of an IPO by an issuer having a promoter that is required
to comply with laws other than Indian laws. These promoters can be either
foreign promoters or, Indian entities having operation outside India.
Schedule VIII of the
Regulations requires disclosure of all
actions by statutory or regulatory
authorities, outstanding litigation and material developments involving, inter alia, the promoters of the issuer.
The term action has not been defined
under the Regulations. Therefore, a situation might arise where any proceeding
against a promoter initiated by a foreign authority is considered an action by the Securities and Exchange
Board of India (SEBI), the Indian market regulator, thereby triggering a duty
of disclosure in India even though such proceeding is not classified as a
regulatory or statutory action in the
foreign jurisdiction where the action was
in fact initiated. Thus, we have a two-fold problem here: first, identification
of what proceedings against a promoter in any jurisdiction outside India
qualify as an action under Indian
law, and, second, management of the disclosure obligation in respect of such actions.
Regulations requires disclosure of all
actions by statutory or regulatory
authorities, outstanding litigation and material developments involving, inter alia, the promoters of the issuer.
The term action has not been defined
under the Regulations. Therefore, a situation might arise where any proceeding
against a promoter initiated by a foreign authority is considered an action by the Securities and Exchange
Board of India (SEBI), the Indian market regulator, thereby triggering a duty
of disclosure in India even though such proceeding is not classified as a
regulatory or statutory action in the
foreign jurisdiction where the action was
in fact initiated. Thus, we have a two-fold problem here: first, identification
of what proceedings against a promoter in any jurisdiction outside India
qualify as an action under Indian
law, and, second, management of the disclosure obligation in respect of such actions.
In some jurisdictions, certain
regulatory or statutory proceedings are classified as material non-public in
nature and hence cannot be disclosed by the entity against which the action has been initiated. Disclosure of
such action requires prior permission
of the authority which initiated the action.
In a situation where permission is refused, the entity cannot disclose this
information to any third party. This implies that a promoter entity is also
restrained from communicating this information to the issuer. Therefore,
compliance with the disclosure obligation under the Regulations becomes
difficult in such situations.
regulatory or statutory proceedings are classified as material non-public in
nature and hence cannot be disclosed by the entity against which the action has been initiated. Disclosure of
such action requires prior permission
of the authority which initiated the action.
In a situation where permission is refused, the entity cannot disclose this
information to any third party. This implies that a promoter entity is also
restrained from communicating this information to the issuer. Therefore,
compliance with the disclosure obligation under the Regulations becomes
difficult in such situations.
Further, disclosure of actions pending against the promoter,
but which have not acquired a material threshold, can have disproportionate
impact on the promoter in multiple jurisdictions. A premature disclosure could result
in a promoter facing financial repercussions and, in some cases, also expose it
to avoidable litigation. The promoter might also have entered into third party
contracts which require prior consent or impose a restriction on disclosure of certain
type of non-public information.
but which have not acquired a material threshold, can have disproportionate
impact on the promoter in multiple jurisdictions. A premature disclosure could result
in a promoter facing financial repercussions and, in some cases, also expose it
to avoidable litigation. The promoter might also have entered into third party
contracts which require prior consent or impose a restriction on disclosure of certain
type of non-public information.
If the issuer is not
aware of an action against the
promoter and proceeds with the IPO without consequently disclosing the foreign action, it may expose itself to
enforcement proceedings by the market regulator in India if a confidential foreign
action against the promoter is publicly
disclosed subsequently anywhere in the world. This is because ‘all’ statutory
and regulatory actions against the
promoter are required to be disclosed. The due diligence teams must inquire from
the promoters of the issuer if it is possible that there might be a
confidential regulatory or statutory action against the entity in any
jurisdiction outside India. Based on the disclosure regime, diligence here
should not be in form of a question objectively asking whether any confidential
action ‘does exist’, but it can be
about ‘a risk’ of whether such action
‘can exist’.
aware of an action against the
promoter and proceeds with the IPO without consequently disclosing the foreign action, it may expose itself to
enforcement proceedings by the market regulator in India if a confidential foreign
action against the promoter is publicly
disclosed subsequently anywhere in the world. This is because ‘all’ statutory
and regulatory actions against the
promoter are required to be disclosed. The due diligence teams must inquire from
the promoters of the issuer if it is possible that there might be a
confidential regulatory or statutory action against the entity in any
jurisdiction outside India. Based on the disclosure regime, diligence here
should not be in form of a question objectively asking whether any confidential
action ‘does exist’, but it can be
about ‘a risk’ of whether such action
‘can exist’.
The issuer can, as
abundant caution, state in the prospectus that there might be confidential actions against the promoter of the
issuer and the issuer might neither have information nor means to inquire about
any such actions against the
promoter. As a corollary, it should also not state anywhere in the prospectus
that all statutory and regulatory actions
against the promoter have been disclosed in the prospectus, where the risk
has been identified. However, the compliance risk would still subsist given the
duty to disclose all actions
irrespective of notice or knowledge. Whether the qualifications of ‘notice’ or
‘knowledge’ can be read into the disclosure requirement for actions requires regulatory
clarification.
abundant caution, state in the prospectus that there might be confidential actions against the promoter of the
issuer and the issuer might neither have information nor means to inquire about
any such actions against the
promoter. As a corollary, it should also not state anywhere in the prospectus
that all statutory and regulatory actions
against the promoter have been disclosed in the prospectus, where the risk
has been identified. However, the compliance risk would still subsist given the
duty to disclose all actions
irrespective of notice or knowledge. Whether the qualifications of ‘notice’ or
‘knowledge’ can be read into the disclosure requirement for actions requires regulatory
clarification.
Alternatively, the promoter can make a
confidential disclosure to the market regulator and thereafter the regulator
can take a call on whether the information is required to be publicly disclosed
through the issuer’s prospectus. But, whether the promoter can make such
confidential disclosure is again contingent on the law applicable to foreign action and if prior permission is
required for such disclosure.
confidential disclosure to the market regulator and thereafter the regulator
can take a call on whether the information is required to be publicly disclosed
through the issuer’s prospectus. But, whether the promoter can make such
confidential disclosure is again contingent on the law applicable to foreign action and if prior permission is
required for such disclosure.
The Regulations do
empower the market regulator to relax their strict enforcement. However, it
remains to be seen whether the regulator would be willing to exercise the power
to exempt disclosures of foreign actions as
raised at present. It is important to note that the market regulator has
held that the disclosure requirements under the Regulations are mandatory in
nature and the issuer, the bankers to the issue and other prescribed entities
need to make a declaration along with the prospectus that they have complied
with the disclosure requirements contained in the Regulation.
empower the market regulator to relax their strict enforcement. However, it
remains to be seen whether the regulator would be willing to exercise the power
to exempt disclosures of foreign actions as
raised at present. It is important to note that the market regulator has
held that the disclosure requirements under the Regulations are mandatory in
nature and the issuer, the bankers to the issue and other prescribed entities
need to make a declaration along with the prospectus that they have complied
with the disclosure requirements contained in the Regulation.
The decision that the market regulator and
lawyers working on the issue have to take is whether disclosure of such an action is so important for the investor that
it would alter the total mix of information available to the market in such a
way that the investment decision could be influenced by the disclosure. The answer
to this question would reveal how far the market regulator would be willing to
provide an exemption from the strict and wide ambit of the disclosure
requirement or whether a confidential disclosure to the regulator would be
permissible and whether the suggested risk statement would be sufficient to
overcome the lack of information with the issuer so that the issuer is not
exposed to an action by the market regulator in future.
lawyers working on the issue have to take is whether disclosure of such an action is so important for the investor that
it would alter the total mix of information available to the market in such a
way that the investment decision could be influenced by the disclosure. The answer
to this question would reveal how far the market regulator would be willing to
provide an exemption from the strict and wide ambit of the disclosure
requirement or whether a confidential disclosure to the regulator would be
permissible and whether the suggested risk statement would be sufficient to
overcome the lack of information with the issuer so that the issuer is not
exposed to an action by the market regulator in future.
– Nikunj Agarwal
