India: Between The Lines...

Last Updated: 20 December 2016
Article by Vaish Associates Advocates

I. Relief for foreign investors: Supreme Court of India sets aside the Bombay High Court ruling in IDBI Trusteeship Services case

The Supreme Court of India in the case of IDBI Trusteeship Services Limited vs. Hubtown Limited (decided on November 15, 2016) set aside a Bombay High Court ruling which had garnered quite a lot of attention among the foreign investors and in the legal circles.

Nederlandse Financierings –Maatschappij voor Ontwikkelingslanden N.V. ("FMO") had invested in certain equity shares and compulsorily convertible debentures ("CCDs") of Vinca Developer Private Limited ("Vinca"). Such investment by FMO was utilized by Vinca to subscribe to certain optionally partially convertible debentures ("OPCDs") issued by Rubix Trading Private Limited ("Rubix") and Amazia Developers Private Limited ("Amazia"). The Plaintiff was appointed as the debenture trustee vide two debenture trust deeds.

An unconditional, absolute and irrevocable corporate guarantee in favour of the Plaintiff was issued by the Defendant inter alia for the benefit of Vinca (the "Guarantee"). The Plaintiff alleged that Amazia and Rubix committed several defaults under the said debenture trust deeds and notices were issued by the Plaintiff regarding the same. As the defaults were not rectified, the Plaintiff issued redemption notices to Amazia and Rubix. Amazia and Rubix however failed to pay the sums due and payable in terms of the said debenture trust deeds. Demand certificate for the enforcement of the guarantee came to be issued by the Plaintiff which remained unanswered.

The defence to the allegations as above was that the structure of the transaction was not lawful as it violated the Foreign Exchange Management Act, 1999 and regulations thereunder ("FEMA") read with the Foreign Direct Investment Policy (the "FDI Policy") and was also opposed to public policy. To elaborate a little on the defence adopted, the FDI Policy and FEMA permit foreign direct investment only by way of equity investments and instruments which are fully and compulsorily convertible into equity. Any other form of investment (non- equity) with an assured return/rate of return is not permitted. It was pointed out that the nature of the transaction in this case enabled a fixed rate of return for FMO on its investments in violation of FEMA and the FDI Policy.

The learned Single Judge of the Bombay High Court took the view that structure adopted in the instant case, which enabled routing of FMO's foreign direct investment to Amazia and Rubix through Vinca was a colourable device which was structured only to enable FMO to secure repayment through Vinca of its invested sums with interest in contravention of FEMA and the FDI Policy. The learned Single Judge thus found the Guarantee as illegal and unenforceable and passed certain orders.

The learned Counsel for the Plaintiff argued before the Supreme Court that there was no violation of FEMA as there was no possibility of funds going out of India, its purpose being for the benefit of an Indian company, Vinca.

The Supreme Court observed, inter alia, that there was no contravention of FEMA as the payment under the Guarantee was to the debenture trustee which was an Indian company for and on behalf of Vinca which was another Indian company. The Court further observed, "Based on the aforesaid, it cannot be said that the defendant has raised a substantial defence to the claim made in the suit. Arguably at the highest, as held by the learned Single Judge, even if a triable issue may be said to arise on the application of the FEMA Regulations, nevertheless, we are left with a real doubt about the Defendant's good faith and the genuineness of such a triable issue."

The Court held that it was possible to grant leave to defend the suit to the Defendant only if it was ready to deposit the principal sum of INR 418 Crores invested by FMO or give security for the said amount. Appeal was allowed and the Bombay High Court judgment was set aside.

VA View

To fully understand the implications of the Supreme Court ruling in this case, it is pertinent to refer to the Bombay High Court observations. The view taken by the Bombay High Court was that Vinca was only a nominal recipient of foreign direct investment inflow and it had routed the amount to Rubix and Amazia for which optionally convertible debentures carrying fixed rate of interest came to be issued. This was, as was noted by the Bombay High Court, in violation of the foreign direct investment regime for the sector which permitted foreign direct investment only by way of equity or compulsorily convertible instruments in Indian companies.

The Supreme Court pointed out that permission of the Reserve Bank of India was warranted if FMO wished to have the funds repatriated. If the approval was not granted, there could be no violation of FEMA. It may be inferred that Courts would not go into alleged violations of FEMA and the FDI Policy in case of foreign direct investments in the absence of any specific prohibition in so far as such investments are within the purview of and regulated by the Reserve Bank of India.

In view of the uncertainty created by the decision of the Bombay High Court, this ruling by the apex court gives a respite to foreign investors in respect of their foreign direct investments in India.

II. SEBI clarifies on contra trade restriction under the Insider Trading Regulations

The Securities and Exchange Board of India ("SEBI") issued interpretative letter dated November 25, 2016 in the matter of SBI Capital Markets Limited ("SBICAP") under the SEBI (Informal Guidance) Scheme, 2003. This informal guidance was in relation to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the "PIT Regulations").

SBICAP had submitted that as an intermediary, the PIT Regulations were applicable to it only in case it was in possession of Unpublished Price Sensitive Information ("UPSI") or if it was within the purview of the definition of connected person with respect to the company whose shares were traded by it. SBICAP had further submitted that it was maintaining a restricted list as required under the PIT Regulations in which names of all companies for which SBICAP was handling assignment and was privy to USPI were listed. SBICAP and its employees were barred from trading in the shares of companies in the restricted list.

"Insider" is defined under Regulation 2(1)(g) of the PIT Regulations as i) a connected person; or ii) in possession of or having access to unpublished price sensitive information. SBICAP's submission to SEBI with regard to companies not in its restricted list was that it was not an "insider" with respect to such companies as it was not a connected person and was not in possession of UPSI with regards such companies.

Schedule B of the PIT Regulations titled "Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders" provide certain minimum standards which should be incorporated in the code of conduct which is required to be formulated under Regulation 9 of the PIT Regulations.

Clause 3 of said Schedule provides that, "Employees and connected persons designated on the basis of their functional role ("designated persons") in the organisation shall be governed by an internal code of conduct governing dealing in securities. The board of directors shall in consultation with the compliance officer specify the designated persons to be covered by such code on the basis of their role and function in the organisation. Due regard shall be had to the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation."

Further, clause 10 of the said Schedule provides, "The code of conduct shall specify the period, which in any event shall not be less than six months, within which a designated person who is permitted to trade shall not execute a contra trade. The compliance officer may be empowered to grant relaxation from strict application of such restriction for reasons to be recorded in writing provided that such relaxation does not violate these regulations. Should a contra trade be executed, inadvertently or otherwise, in violation of such a restriction, the profits from such trade shall be liable to be disgorged for remittance to the Board for credit to the Investor Protection and Education Fund administered by the Board under the Act."

SBICAP put forth its view that as it was not a connected person for companies not in its restricted list, SBICAP and its employees could not come under purview of "designated persons" as per clause 3 of said Schedule. With regards the contra trade restriction under clause 10 of said Schedule, the view of SBICAP was that the restriction was applicable to companies in its restricted list and not to other companies.

The query raised by SBICAP before SEBI was, "Whether the restriction on SBICAP or any of its employees, of not executing a contra trade within six months as provided in clause 10 of Schedule B of PIT Regulations, is applicable on securities which are not in their restricted list?". SEBI cited relevant provisions under the PIT regulations in its letter and opined that with regards trading in securities of listed companies not in the restricted list of SBICAP, contra trade restriction on SBICAP or its employees was dependent on the connection between SBICAP or its designated employee with the concerned listed company and subsequent possession of or access to UPSI.

SEBI's view in the matter was that, "If SBICAP or its employee is a connected person with a listed company and possess or have access to UPSI, such restriction shall be applicable, while on the other hand, for securities of the listed companies where no connection and possession or access to UPSI is envisaged, there may not be a need to impose the above restriction."

VA View

With this informal guidance issued by SEBI, it becomes clear that contra trade restriction becomes applicable to a company or its employees only if they are connected persons and are privy to UPSI. Therefore, with respect to companies which do not find mention in the restricted list maintained under the PIT Regulations, applicability of contra trade restriction with regards these companies depends on whether the tests of being a connected person and having access to UPSI are satisfied.

III. SICA finally repealed, BIFR and AAIFR dissolved; plus other related developments

The Ministry of Finance issued two Notifications, both dated November 25, 2016, whereby it appointed December 1, 2016 as the date on which the provisions of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 ("Repeal Act") shall come into force and as the date for the purposes of clause (b) of section 4 of the Repeal Act. The effect is that the Sick Industrial Companies (Special Provisions) Act, 1985 (the "SICA") has been repealed. The Board for Industrial and Financial Reconstruction (the "BIFR") and the Appellate Authority for Industrial and Financial Reconstruction (the "AAIFR") stand dissolved.

Provisions of the Insolvency and Bankruptcy Code, 2016 (the "Code") have been notified by the Government in parts. By Notification dated November 15, 2016 issued by the Ministry of Corporate Affairs, provisions related to Insolvency Professional Agencies and Insolvency Professionals under the Code are now in force. With Section 255 of the Code being notified by this notification, Chapter XIX (Sections 253 to 269) of the Companies Act, 2013 laying down separate set of provisions for revival and rehabilitation of sick companies stands omitted.

Insolvency Professional Agencies and Insolvency Professionals play a vital role with respect to proceedings under the Code. The Insolvency and Bankruptcy Board of India has notified the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 by Notification dated November 23, 2016 with effect from November 29, 2016 and the Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies) Regulations, 2016 by Notification dated November 21, 2016 with effect from the same date. These regulations provide for the qualifications, eligibility criteria, registration details, etc. With these regulations being notified, the registration process is set to slowly but steadily gain pace in the coming days.

Corporate insolvency process under the Code is set to kick start as the provisions related to corporate insolvency are in force with effect from December 1, 2016 and related to liquidation process are in force with effect from December 15, 2016. The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 have been notified as well.

VA View

After the passage of more than a decade since the enactment of the Repeal Act, the SICA has finally been repealed. The SICA, which remained in the statute book for more than three decades, was subject to criticism for its misuse as the SICA was quite often resorted to in order to delay and defeat the process of debt recovery.

Another important aspect to note is that all proceedings before the BIFR and the AAIFR stand abated and now the jurisdiction lies with the National Company Law Tribunal. The Government seems very keen to implement various provisions under the new regime at the earliest.

IV. Challenges ahead for several companies as compromise, arrangements and other matters stand transferred to NCLT

The Ministry of Corporate Affairs ("MCA") issued notifications S.O. 3676(E) and 1119(E) dated December 7, 2016 (collectively "Notifications"), pursuant to which the proceedings relating to arbitration, compromise, arrangements and reconstruction as well as certain winding up matters ("Matters") stand transferred from the concerned High Courts to relevant National Company Law Tribunal ("NCLT") with effect from December 15, 2016.

With respect to such matters which are pending before various High Courts, these Notifications have thrown up several difficulties and challenges, some of which are listed as under:

  • Change in jurisdiction: Earlier, the High Courts of a state where the registered office of the applicants/petitioners were located had jurisdiction to adjudicate the Matters. This position now changes and pending cases before various High Courts stand transferred to the NCLTs as specified by the Government.
  • Legal fees and official liquidator: Fees payable to the High Court is lower than fees payable to NCLT with regards compromise, arrangements and reconstruction. Notifications do not clarify on the payment of fees in case of pending matters. Also as official liquidator associated with the concerned NCLT will now take charge, several problems are bound to arise especially in cases where service of notice on the official liquidator associated with the High Court has already been completed.
  • Hearing of matters and staff crunch: If NCLT insists on fresh hearing of Matters transferred to it, it will lead to unexpected delays in disposal of Matters. Delays will also be caused by the lack of staff at the NCLT and their relative inexperience in dealing with the new procedures.
  • Stamp duty and other costs: As a court order sanctioning a scheme, is chargeable to stamp duty under respective state laws, change in jurisdiction will require re-working of the same leading to change in budget estimations. Also, services of lawyers and other professionals will need to be hired for dealing with the cases transferred to the concerned NCLT, which will further add to costs.
  • Missing deadlines: Matters may get indefinitely prolonged and the petitioner/applicants may miss crucial deadlines due to delays in transfer of case papers more so when there are no prescribed timelines for such transfers and also on account of the inherent risk of the case papers being misplaced, destroyed or lost in transit.

VA View

Although this is a welcome step, the implementation of these notifications has impeded the smooth completion of compromise or arrangements transactions, reconstruction matters under Sections 391 to 394 of the Companies Act, 1956. Some of these matters which have already progressed and/or are nearing completion will now come to a standstill. Some clarifications to remove the difficulties enumerated above will be in order.

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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions