India: Between The Lines - June, 2016

Last Updated: 14 June 2016
Article by Vaish Associates Advocates


With a view to simplify business concerning share-purchase transactions involving foreign investment, the Reserve Bank of India (RBI) on May 20, 2016 notified amendments in the Foreign Exchange Management (Transfer Or Issue Of Security By A Person Resident Outside India), 2000 ('Principal Regulations') by Foreign Exchange Management (Transfer Or Issue Of Security By A Person Resident Outside India) (Seventh Amendment) Regulations, 2016. This amendment allows, under the automatic route, the deferment in payment consideration under an escrow mechanism and permits seller to give indemnity in respect of share-purchase transactions involving foreign investment. Under the erstwhile regime of foreign investment under automatic route, the deferment of purchase consideration was not permitted. Escrow mechanism was for indemnity obligations was not provided for in the Principal Regulations and any such escrow required RBI approval.

In the Principal Regulations, Regulation 10A has been inserted which reads as following:

"10A. In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more than twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement. For this purpose, if so agreed between the buyer and the seller, an escrow arrangement may be made between the buyer and the seller for an amount not more than twenty five per cent of the total consideration for a period not exceeding eighteen months from the date of the transfer agreement or if the total consideration is paid by the buyer to the seller, the seller may furnish an indemnity for an amount not more than twenty five per cent of the total consideration for a period not exceeding eighteen months from the date of the payment of the full consideration:

Provided the total consideration finally paid for the shares must be compliant with the applicable pricing guidelines."

The following aspects are being introduced by the amended regulation:

  1. Provision related to deferred payments:

    The amendment allows deferment of purchase consideration in share purchase transactions involving foreign investment (inbound and outbound). This deferment can be up to a maximum of 25 (twenty five) percent of the total amount of consideration as specified under the purchase agreement. The time period for which this deferment is allowed is for a maximum duration 18 (eighteen) months from the date of definitive agreement.

    It is noteworthy that the reference date for commencement of the 18 months period for deferment mechanism is the execution date i.e. the date on which the share-purchase agreement was entered into and not the Closing date i.e. the date on which the seller transfers his shares to the purchaser and the consideration is paid by the purchaser for the same and vice versa.
  2. Provision for escrow account.

    Pursuant to the amendment, both the parties to the transaction can enter into an agreement for escrow mechanism and open an escrow account. This account has to be opened in India. This escrow amount can be up to a maximum of 25 (twenty five) percent of the total amount of transaction. The time period for which this deferment is allowed is for a maximum duration 18 (eighteen) months from the date of definitive agreement.

    The flexibility conferred by the RBI through this amendment in the provisions of escrow account has several merits, namely, facilitating the purchaser in securing its indemnity rights; providing an effective remedy in case the purchaser decides to act against the breach of warranty by the seller; holding of consideration by the purchaser in the escrow mechanism would facilitate 'post-closing purchase price adjustment', etc.
  3. Indemnity by seller.

    The amendment also throws light on the circumstances in which the purchaser has paid complete consideration to the seller. In this case, the seller shall provide indemnity to the purchaser for a maximum period of 18 (eighteen) months. However, the indemnity can only be for a maximum amount of 25 (twenty five) percent of the total consideration of the share-purchase transaction. This indemnity shall commence from the date of "closure" or the date on which the seller transfers his shares to the purchaser and the consideration is paid by the purchaser for the same.

In all the cases, the total consideration finally paid for the shares must be compliant with the applicable pricing guidelines prescribed by RBI.

VA View

Deferred consideration mechanism and indemnity escrows form an integral part of the mergers and acquisition transactions and play an important role in structuring the transaction. The amended regulation caps the indemnification amount in share transfer agreements at 25% of total consideration and time period for claiming indemnification is capped at 18 months.

Currently, in most share transfer agreements between residents and non-residents for sale and purchase of shares there are indemnification provisions for breach of representations, warranties and covenants. The cap on indemnification could vary from 25% to 100% of the consideration and is generally unlimited for representations relating to title of shares, authority to execute, etc. Similarly the time period for validity of indemnities could vary from 12 months to limitation period available under applicable law. For tax indemnities, time period for indemnification could be 7 to 8 years. Parties do not approach RBI for approval whilst signing share purchase agreements but will approach RBI for approval for remittance if at all an actual indemnification claim arises.

In case of share purchase agreements (i) where the indemnity provided for breach of representations, warranties and covenants exceeds 25% of consideration or (ii) where the time period for claiming the indemnity exceeds 18 months, it is not clear if the parties should approach RBI for approval at the time of signing of the share purchase agreement or as and when the indemnification claim arises.

However, this amendment by the RBI is a welcome and a much necessary step towards ensuring some protection for purchasers in cross-border transactions.


The Supreme Court in the case of Messer Holdings Ltd. vs. Shyam Madanmohan Ruia and Ors. (decided on April 19, 2016) ("Messer 2016 case") came down heavily on the parties and imposed exemplary costs for wasting judicial time on litigation which could have been avoided. The apex Court did not express any definitive opinion on certain issues related to share transfer agreements as outlined below.

Before turning to the facts and decision in Messer 2016 case, it will be relevant to briefly consider two important cases decided by the Bombay High Court, namely, (i) Messer Holdings Limited vs. Shyam Madanmohan Ruia and Ors. and Goyal MG Gases (P) Limited vs. Shyam Madanmohan Ruia and Ors. (decided on September 1, 2010) ("Messer 2010 case"); and (ii) Bajaj Auto Ltd. vs. Western Maharashtra Development Corporation Ltd. (decided on May 8, 2015) ("Bajaj Auto case"). In Messer 2010 case, the Bombay High Court observed that Section 111A of the Companies Act, 1956 (which inter alia, provides that shares or debentures and any interest therein of a company shall be freely transferable) does not expressly restrict the right of shareholders to enter into consensual arrangement/agreement in respect of shares held by them. In the Bajaj Auto case, a Division Bench of the Bombay High Court, inter alia, concurred with the view taken in Messer 2010 case and reiterated that a shareholder of a public company can arrive at a consensual agreement/arrangement (either by way of sale, pledge, pre-emption etc.) with a third party or another shareholder, which is in conformity with the Articles of Association, the Companies Act and rules, and any other governing laws. The Bombay High Court also made a note of Section 58 of the Companies Act, 2013 which now explicitly provides that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. It may be noted that the other High Courts like the Delhi High Court have adopted a different view on this matter.

The Bombay High Court in Bajaj Auto case also considered several other judgments including the judgment of the Supreme Court in V.B. Rangaraj vs. V.B. Gopalakrishnan and others (decided on November 28, 1991), where the Court had observed that the agreement which imposes additional restrictions on the member's right to transfer his shares which are contrary to the provisions of the articles are not binding either on the shareholders or on the company. In M.S. Madhusoodhanan and Anr. vs. Kerala Kaumudi Pvt. Ltd. and Ors. (decided on August 1, 2003), Supreme Court distinguished the decision in V.B. Rangaraj's case (supra) and opined, inter alia, that the parties who had consciously entered into the agreement regarding the transfer of their parents shares are obliged to act in terms of the agreement. It may be noted that these cases involved private companies.

In Messer 2016 case, which was an appeal to decision in Messer 2010 case, the Supreme Court has not mentioned any view in respect of restrictions on share transfer. In this case, the apex Court made note of several litigations pending in various Courts. The Court made stern observations that almost a period of 18 years had been spent on litigation, the conduct of none of the parties to the litigation was wholesome and therefore refused to express its opinion, blaming and holding the parties responsible for such long- drawn out litigation. The Court imposed exemplary costs of ` 25,00,000/- (Rupees Twenty Five Lakhs only).

VA View

As the judgment in Messer 2016 case does not contain any definitive view in respect of restrictions on share transfer, one would have to wait for the decision in the appeal [SLP (Civil) 27194-27195 of 2015] against judgment of the Bombay High Court Division bench in the Bajaj Auto case pending before the apex court. However, it is to be noted that uncertainty has been laid to rest partially by the provision in the Companies Act, 2013 which expressly provides that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.


The Ministry of Corporate Affairs ("MCA") has notified certain key provisions relating to National Company Law Tribunal ("NCLT") and National Company Law Appellate Tribunal ("NCLAT") under the Companies Act, 2013 ("2013 Act"), constituting NCLT and NCLAT with effect from June 1, 2016.

NCLT and NCLAT are now constituted with effect from June 1, 2016 by MCA notification dated June 1, 2016. Government has constituted eleven benches of NCLT in ten cities across the country to exercise jurisdiction over the area as specified by another notification dated June 1, 2016. From June 1, 2016, all matters pending before the Company Law Board stand transferred to the NCLT.

With the constitution of NCLT and NCLAT, MCA simultaneously notified certain provisions of 2013 Act by notification dated June 1, 2016 which could not come into force for long time as the NCLT and NCLAT had not been constituted.

Provisions regarding oppression and mismanagement are now notified, which may open the floodgates of litigation in this area before NCLT. It is to be remembered that NCLT has been given wider powers to deal with cases of oppression and mismanagement under the 2013 Act by giving it discretion to waive (i) the requirement of minimum number of shareholders required to make an application; (ii) the requirement for establishing existence of 'just and equitable' circumstances; and (iii) the requirement of providing 'security' while allowing such an application.

The 2013 Act also granted additional powers which can be exercised by NCLT while making orders in case of oppression and mismanagement such as:

  1. restrictions on the transfer or allotment of the shares of the company;
  2. removal of the managing director, manager or any of the directors of the company;
  3. recovery of undue gains made by any managing director, manager or director during the period of his appointment and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;
  4. the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company;
  5. appointment of such number of persons as directors, who may be required by the NCLT to report to the NCLT on such matters as the NCLT may direct; and
  6. imposition of costs as may be deemed fit by the NCLT.

Another important provision notified is Section 245 of the 2013 Act which provides for class action suits, a completely new introduction under the Act. Such number of member or members, depositor or depositors, as specified in said Section can now file an application before NCLT on behalf of the members or depositors for seeking orders such as to restrain the company from committing an act which is ultra vires the articles or memorandum of the company, to restrain the company from committing breach of any provision of the company's memorandum or articles, to restrain the company from taking action contrary to any resolution passed by the members, etc. if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors.

VA View

Constitution of NCLT will surely usher in a new era in company law enforcement and adjudication in the country.

It is pertinent to note that with regard to cases of oppression and mismanagement, certain powers of the NCLT under the 2013 Act have not been notified such as power of NCLT to provide for consequent reduction of company's share capital in case of purchase of its shares by the company under clause (c) of sub-section (2) of Section 242 and to order setting aside of any transfer, delivery of goods, payment, execution or other act as per clause (g) of sub-section (2) of Section 242.

However, there are identical provisions in the Companies Act, 1956 conferring such powers on the NCLT which are not expressly repealed. Thus, there is a lack of clarity on the purpose proposed to be served by not notifying the said provisions of the 2013 Act.


As the economy is on the digital frontier and is evolving at a rapid pace, it has become essential for developing nations to formulate a tax framework to bring within its purview the taxation of digital transactions. "Equalisation levy" or what is popularly known as "Google Tax" was introduced in the recent Finance Act of 2016 ("the Act") with an objective to tax digital business to business (B2B) cross border transactions. The provisions relating to imposition and collection of Equalisation levy incorporated as Chapter VIII of the Act comes into force from the 1st of June, 2016. Subsequently, the Central Board of Direct Taxes notified the Equalisation Levy Rules 2016 which enumerates the procedural framework for the implementation of this levy.

As per the Chapter VIII of the Act, an Equalisation levy at the rate of 6 (six) per cent is charged on the amount of consideration for any specified service received or receivable by a person being

  1. A person resident in India and carrying on business in India.
  2. A non- resident having a permanent establishment in India.

In order to avoid double taxation, a new clause (50) has also been inserted in section 10 to provide that any income arising from specified services provided on or after the date on which the provisions of Chapter VIII of the Act comes into force and chargeable to equalisation levy under that Chapter shall be exempt. The Chapter VIII of the Act defines "specified service" to mean an online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement. Further the Central Government may notify any services that may be considered as specified service under the said definition.

The subjects of this levy are the non-resident service providers. The Act carves out three exceptions when a non-resident shall not be charged, namely,(i) if the non-resident providing such specified services, has a permanent establishment in India; (ii) if the aggregate amount of such services received or receivable does not exceed Rupees 100,000; or iii) where such amounts received are not for the purposes of carrying out business or profession.

Further, the compliance obligations are to be shouldered by the Indian resident who is availing such specified services. The Act provides for furnishing a statement by the assessee in respect of all specified services during such financial year.

Penalty in case of non-compliance:

The Act has also brought penalty provisions for ensuring stricter compliances. Such penalties include interest and fines for failure to file statements or failure to deduct or deposit after deduction of the amount of Equalisation levy. However, in the event a false statement is filed the person may be subject to imprisonment of a term of up to three years and a fine.

VA View

In view of the challenges faced by India in terms of characterization of income arising from the digital economy as well as the likely difficulties faced in attributing profits under existing rules, Equalisation levy appears to be a solution to all these issues, in the form of a simple, clear and predictable tax rule that unambiguously defines the tax liability of digital enterprises, reduces their tax risk and contingent liabilities, and minimizes disputes. It would be a definite step forward for the Indian economy if successfully implemented. Equalization levy has been recognized and accepted in the BEPS Report on Action 1 as one of the options that can be resorted to by countries under their domestic laws. It brings India at par with international taxation practices and most importantly secures huge amount of revenue for India. One of the noticeable developments is that like in the past for imposition of similar taxes on transactions, like the Securities Transaction Tax, the Service Tax, the government has recognized the advantage to keep the Equalisation levy separate from the Income Tax Act. However, the adverse impact it will have on online start-ups cannot be overlooked.

© 2016, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Vaish Associates Advocates
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.