VOL II                                                                 ISSUE NO. 10                                                   May 08, 2017    

In This Issue

Government grants Projects relief, issues Notification Allowing Six-Month Window for Grant of Environmental Clearance

The Ministry of Environment, Forest and Climate Change (hereinafter referred to as the “Ministry”) issued a notification dated March 14, 2017 granting relief to projects and expansion to existing projects by allowing them to apply for environmental clearance within six months from the date of the notification.

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Merger and Amalgamation of Indian Companies with Foreign Companies

Under Section 394 of the erstwhile Companies Act 1956, the merger of a Foreign Company with an Indian Company (Inbound Merger) was allowed but the merger of an Indian Company with a Foreign Company (Outbound Merger) was not allowed.

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Tata Docomo Case: A coping Mechanism or a Cop Out Plan?

There has always been a binary truss between enforcement of and maintaining sanctity of private contracts and complying with sometimes “overzealous” laws of the country. In the recent case of NTT Docomo Inc. v. Tata Sons Limited the Honorable Delhi High Court addressed similar concerns and denied the Reserve Bank of India’s (hereinafter referred to as the ‘RBI’) right to intervene in enforcement of foreign arbitral awards.

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Government grants Projects relief, issues Notification Allowing Six-Month Window for Grant of Environmental Clearance

 

 

Source: www.edie.net

 

The Ministry of Environment, Forest and Climate Change (hereinafter referred to as the “Ministry”) issued a notification dated March 14, 2017[1] granting relief to projects and expansion to existing projects by allowing them to apply for environmental clearance within six months from the date of the notification.

 

Background

 

The Environmental Impact Assessment Notification, 2006 was issued on September 14, 2006 which stated that new projects and expansion of existing projects, whose capacity addition goes beyond the limits specified for the project’s sector, shall require prior environmental clearance from the concerned regulatory authority before the initiation of the new project or expansion.

 

In furtherance of the Environmental Impact Assessment Notification, 2006, two Office Memoranda (hereinafter referred to as “OM/ OMs”) were issued by the Ministry dated December 12, 2012[2] and June 27, 2013[3] which laid down processes for grant of environmental clearances for new projects or expansions which had been initiated before being granted the environmental clearance.

 

Overview of the OM

 

The OM dated December 12, 2012 laid down the processes by the Ministry to be taken in case of violation of the provisions of the Environmental Impact Assessment Notification, 2006 by a project proponent. The project proponent was required to submit a written commitment to the Ministry stating that the violation would not be repeated by them. Further, the details of the project proponent committing the violation and a copy of the written commitment would be displayed on the Ministry’s website. The OM dated June 27, 2013 granted further powers to the Ministry to issue directions to the project proponent in respect of violations and compliances.

 

Validity of the OMs

 

In the case of Hindustan Copper Limited v. Union of India[4] the question of the validity of the OMs was put before the Jharkhand High Court. The High Court vide its order dated November 28, 2014 held that the conditions laid down under OM dated December 12, 2012 in paragraph No. 5 (i) and 5 (ii) were illegal and unconstitutional. The High Court further held that action for alleged violation would be an independent and separate proceeding and therefore, consideration of proposal for environment clearance could not await initiation of action against the project proponent. Further, the High Court observed that a proposal for environment clearance must be examined on its merits, independent of any proposed action for alleged violation of the environmental laws.

 

Subsequently, the National Green Tribunal in S.P. Muthuraman v. Union of India and Ors.[5] , quashed the OMs with the Tribunal holding that the Environmental Impact Assessment Notification, 2006 provides for prior environmental clearance and, therefore, no procedure for post environmental clearance can be laid down through OMs. The Tribunal further observed that the OMs had been issued without proper application of mind, were supplanting the Notification of 2006 and were in complete derogation to the laws in force. Therefore, they could not withstand the legal scrutiny and resultantly were liable to be quashed.

Notification dated March 14, 2017

 

The Ministry has continued to receive proposals under the Environmental Impact Assessment Notification, 2006 for grant of Terms of Reference and Environmental Clearance for projects which have started work on site, expanded the production beyond the limit of environmental clearance or changed the product mix without obtaining prior Environmental Clearance. The Ministry has, therefore, issued the present notification to bring such projects under compliance to ensure that such projects do not remain unregulated and unchecked. The projects have a six month window from the date of the notification to apply for the environmental clearance.

 

Features of the present Notification

  • The notification lays down the steps to be taken in case projects that require prior environmental clearance under the Environment Impact Assessment Notification, 2006 are undertaken in any part of India without obtaining prior environmental clearance from the Central Government or the State Level Environment Impact Assessment Authority, as the case may be.

  • Such projects will be treated as cases of violations and the respective State Pollution Control Boards will have the power to take action against the project proponent under Section 19 of the Environment (Protection) Act, 1986. Further, the consent to operate or occupancy certificate cannot be issued to such projects.

  • The Expert Appraisal Committee (hereinafter referred to as “Committee”), constituted under Section 3 of the Environment (Protection) Act, 1986, shall appraise the cases of violations to assess whether such projects are permissible under prevailing laws and expansion is done in accordance with environmental norms and safeguards.

  • If the report of the Committee is negative, then closure of the project will be recommended and actions under law will be initiated against the project proponent.

  • If the report of the Committee is positive, then the Committee shall prescribe appropriate Terms of Reference to undertake Environment Impact Assessment and preparation of an Environment Management Plan. The Environment Management Plan will include an assessment of ecological damage, a remediation plan and a natural and community resource augmentation plan that shall be prepared as an independent chapter in the Environment Impact Assessment Report.

  • The project shall have to submit a bank guarantee as determined by the Committee to the State Pollution Control Board prior to the grant of environmental clearance. The amount of the bank guarantee will be equivalent to the amount that needs to be spent as part of the remediation plan and natural and community resource augmentation plan.

Conclusion

 

The Ministry has not for the first time sought to provide project proponents with an opportunity to take environmental clearance post initiation of the project. The notification has been criticized by environmentalists for making it possible for violators to go ahead with their projects even in the absence of prior environmental clearance and later obtain clearances by paying a fine and additional conditions. It will be interesting to see whether the NGT allows the Notification to stand in its present form or quash it as it has previously done with the OMs

 

 

 

[1] S.O. 804(E), available at: http://envfor.nic.in/content/so-no-804e-violation-ec-cases 

[2] Available at: http://www.moef.nic.in/assets/om-12122012-b.pdf

[3] Available at: http://www.moef.nic.in/sites/default/files/om-270613.pdf

[4] W.P. (C) No. 2363 of 2014

[5] Original Application No. 37 of 2015

 

 

 

 

 

 

 

 

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Merger and Amalgamation of Indian Companies with Foreign Companies

 

Source: www.benzinga.com

Under Section 394 of the erstwhile Companies Act 1956, the merger[1] of a Foreign Company with an Indian Company[2] (Inbound Merger) was allowed but the merger of an Indian Company with a Foreign Company (Outbound Merger) was not allowed.

 

On April 13, 2017, the Central Government amended the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016 and inserted rule 25A.[3] Further, through S.O. 1182(E) dated April 13, 2017, Section 234 of the Companies Act, 2013 also came into effect[4] , which allows the merger of an Indian company with a Foreign company. This means that, now both inbound and outbound mergers are allowed.

 

New Rules related to Cross Border Merger

  • In cases of cross border merger, prior approval of the Reserve Bank of India (hereinafter referred to as “RBI”) is mandatory.

  • The notification imposes responsibility on Transferee Company to have valuation of merger by professional of recognized professional body and to ensure that such valuation is as per internationally accepted accounting and valuation principles. Also declaration of that shall be attached at the time of making application to the RBI.

  • The company shall file application to the jurisdictional National Company Law Tribunal (hereinafter referred to as “NCLT”) as per provisions of Section 230-232 of the Companies Act 2013 and Companies (Compromises[5], Arrangement and Amalgamations[6]), Rules 2016.

Jurisdictions in which Outbound Mergers are allowed

  1. A jurisdiction whose securities market regulator is a signatory to the International Organisation of Securities Commission’s Multilateral Memorandum of Understanding or a signatory to a bilateral MoU with Securities and Exchange Board of India; or

  2. A jurisdiction whose Central Bank is a member of the Bank of International Settlements; or

  3. A jurisdiction, not identified in the public statement of the Financial Action Task Force as:

    1. Jurisdiction having a strategic anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply; or

    2. Jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

Compliance under Section 230-232 of Companies Act 2013 and Companies (Compromises, Arrangement[7] and Amalgamations[8]), Rules 2016.

  • Firstly, the Company, seeking to undergo such Cross-Border Merger, must be authorized to carry out amalgamation through its Memorandum of Association. If it is so authorized then a draft scheme for amalgamation is to be prepared for approval in Board Meeting.

  • After obtaining prior approval of the Board, followed by approval from the RBI, an application for should be filed by the Indian Company with the NCLT in form NCLT-1 seeking an order in favour of calling a meeting of members/creditors for approving the proposed Merger and Amalgamation. Copy of the scheme, affidavit verifying petition and notice of admission along with material disclosures relating to company such as latest financial position, latest auditor’s report, and pendency of proceeding against company is also required to be submitted. The Tribunal has the right to either accept or dismiss the application.

  • It is pertinent to note that if a Scheme of corporate debt structuring is to be filed, the same should be accompanied with documents such as inter alia the Creditor Responsibility Statement, valuation report in case of shares, tangible, intangible asset by a registered valuer.

  • Once the Tribunal allows the Company to hold the meeting of members/ creditors, notice of such meeting along with scheme, details of company, details of board meeting, impact of such merger etc. is to be given to each member/creditor/debenture holder not less than 30 days before date fixed for meeting. Such notice shall also be published in newspapers, on the website of the company, Stock Exchanges, The Securities and Exchange Board of India (hereinafter referred to as “SEBI”).

  • It is pertinent to note that notices must mandatorily be given to the statutory authorities such as Central Government, Registrar of Companies, and Income Tax authorities. Notices may also be sent to RBI, SEBI, and other sectoral authorities as may be required by the Tribunal so that they may make a representation 30 days from date of receipt of notice.

  • Members may vote on the matter within 30 day of receipt of notice vote in the meeting through person, proxy, postal ballot or electronic means. The report of the results of meeting shall be filed with the Tribunal within 3 days. If the scheme is approved by the majority of members/creditors, then a Petition for confirming compromise, arrangement shall be made to the Tribunal within 7 days of filing of report of result.

  • The Tribunal after being satisfied that the procedure specified has been complied with, shall pass the order to sanction the scheme and make provisions related to matters such as transfer of whole or part of undertaking, property, liability of Transferor company to Transferee Company, allotment of shares by transferee company, payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, transfer of legal proceedings, transfer of employees, dissolution of transferor company etc. The Company should file such order of the Tribunal with the Registrar of Companies within 30 days.

Conclusion

 

The notification is a welcome move and has opened many blocked doors for outbound merger of Indian Companies with Foreign Companies in specified jurisdiction. This should assist domestic companies in expanding their operations globally and list their securities abroad. It is pertinent to note that this revision in merger jurisprudence will also require changes in existing rules and regulations of Income Tax laws and Foreign Exchange Management Laws.

 

[1]Absorption of one company by other. 

[2]Company or body corporate incorporated outside India whether having place of business in India or not. 

[3]https://www.mca.gov.in/Ministry/pdf/CompaniesCompromises_14042017.pdf 

[4]http://www.mca.gov.in/Ministry/pdf/section234Notification_14042017.pdf

[5]All modes of reorganizing share capital. 

[6]Combination of two or more independent business into single business. 

[7]All modes of reorganizing share capital. 

[8]Combination of two or more independent business into single business. 

 

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The Tata Docomo Case: A Coping Mechanism or a Cop Out Plan?

 

Source: telecom.economictimes.indiatimes.com

There has always been a binary truss between enforcement of and maintaining sanctity of private contracts and complying with sometimes “overzealous” laws of the country. In the recent case of NTT Docomo Inc. v. Tata Sons Limited[1] the Honorable Delhi High Court addressed similar concerns and denied the Reserve Bank of India’s (hereinafter referred to as the ‘RBI’) right to intervene in enforcement of foreign arbitral awards.

 

Though the judgment given by the Delhi High Court is seen by many as a positive message for foreign investors ensuring that the sanctity of private contracts and enforcement of foreign arbitral awards are safeguarded in India, it also highlights an anomaly between the Foreign Exchange Management Mechanism (hereinafter referred to as ‘FEMA’) in India and the global trend of creating contracts with pre-determined exit clauses.

 

Background of Facts

 

NTT Docomo, Inc. (hereinafter referred to as ‘Docomo’) the Japanese telecom giant bought 26 % stakes in Tata Teleservices Limited (hereinafter referred to as ‘TTSL’) in 2009 for USD 2.7 billion.

 

In furtherance of the same, a Shareholders Agreement (hereinafter referred to as ‘SHA’) was entered into between Docomo and TTSL. Clause 5.7 of SHA stated that if in any case, TTSL fails to comply with certain ‘Second Key Performance Indicators’, Docomo could request Tata to find a buyer for its stake at a fair market price or 50% of its acquired price, whichever was higher. In other words, under the SHA, if TTSL failed to touch upon certain mentioned performance targets, the TATA group would either have to find a buyer for Docomo’s shares or buy the shares themselves at minimum 50% acquisition price, which amounted to a price of INR 58.45 (USD 0.91) per share.[2]

 

There was also an option wherein Tata could acquire the shares at the fair market price of INR 23.44 (USD 0.36), which was eventually deemed unacceptable by Docomo.

 

On March 31, 2014, TTSL failed to comply with the terms of the agreement, and Docomo had sent them a notice for enforcement of their contract obligations. The dispute arose when Tata failed to fulfill its obligation due to RBI’s objections.

 

The matter was thereby placed before the London Court of International Arbitration (hereinafter referred to as ‘LCIA’) on January 3, 2015.

 

The Award

 

The LCIA heard the parties and unanimously held that there existed absolute obligation on Tata for performance of Clause 5.7 of the SHA. In view thereof, Tata was under an obligation to either find a new buyer for Docomo’s Stake or procure/acquire those stakes itself. Therefore, the requirement of seeking special permission from RBI did not arise.

 

In view of the foregoing, the LCIA held that since Tata failed to fulfill its obligation it resulted in a breach of contract and Tata was liable to pay damages to Docomo and therefore, Docomo is entitled to damages in the amount claimed, namely US$ 1,172,137,717.

 

As under the aforementioned Award, Tata was obligated to pay Docomo the stated dues within 21 days of passing of the award which included interest impositions at rate of 3.5%.

 

Enforcement of the Award

 

For enforcing the Award, Docomo moved to the Delhi High Court wherein Tata had approached the RBI for obtaining its approval under the FEMA regime. The Award was vehemently opposed and the transaction was ultimately denied by the RBI. In the court proceedings, Tata cited its inability to make the payment because of RBI’s refusal of enforcing the buyback provisions mentioned in the SHA.

RBI’s plea was that, it is beyond the provisions of the Foreign Exchange Management Mechanism to allow any guaranteed return on equity investment. RBI filed intervention plea[3] stating that as per Foreign Exchange Management Act (hereinafter referred to as the ‘Act’) overseas share transfer, being a capital account transaction requires approval of RBI. RBI also objected to the SHA and stated that it was illegal and void in accordance of Indian Contract Act, 1872.

 

RBI also objected to the consent terms arrived between parties and therefore, asked that no damages could be awarded.

 

The Delhi High Court’s Decision

 

The Delhi High Court rejected the RBI’s plea of intervention in the case as the Arbitration and Conciliation Act, 1996 does not allow intervention of any entity not a party to the award, with regard to enforcement of such award. Section 48 (1) of the Arbitration and Conciliation Act,1996 mentions that the enforcement of foreign award can be refused only by a party against whom it has been passed, and as per section 2 (h) of the legislation, “party” means party to the arbitration agreement. Therefore, the RBI not being party to the agreement, had no right to object to the enforcement of arbitral award.

 

The court further held that the consent terms between TTSL and Docomo as valid and not contrary to any provisions of the Indian Contract Act, 1872. The court was also of the opinion that non fulfilment of a valid contract with a foreign party will impact the country’s reputation internationally and consequently impact Foreign Direct Investment and international business relations.

 

Also, as per the court’s view, FEMA contains no absolute prohibition on contractual obligations. Therefore, the relevant clause of Agreement was capable of being performed with the mere general permission of RBI. The Court held that Tata could have lawfully performed its obligation to find a buyer at any price, including at a price above the shares' market value. However, it’s failure to do so was, according to the tribunal, a breach entitling Docomo to damages.

 

Further, it was held that the award is for damages for breach of contract and not for overseas purchase of shares. The Court held that no purchase of shares is taking place, so question of taking RBI’s permission did not arise.

 

On April 28, 2017[4] , the Court ordered enforcement of arbitral award and allowed them to take all steps and provide all documents as required for remitting funds, after deducting taxes, if any and ordered transfer of shares of Tata Teleservices Limited from Docomo to Tata. The Court allowed any of the party to apply to the Court in case of any difficulty in complying with the directions. Docomo was asked to withdraw any other similar proceeding subject to compliance of obligations by Tata.

 

Concluding Remark

 

In a similar judgement in the case[5] of Mauritius based Cruz City 1 Maruti Holdings and Unitech Limited it was held that the enforcement of the foreign award will make favorable impact on Foreign Direct Investment in India, as it will show India’s commitment to enforce arbitral awards given outside its jurisdiction.

 

However, it is also pertinent to note that at present there is an anomaly between the global trend wherein companies enter into agreements with a defined put option with agreed valuation that the FEMA and RBI Regulations vehemently bars. Therefore, many private equity and insurance firms were looking at exercising the option of easy exits.[6] In view of the same, the former RBI Governor, Mr. Raghuram Rajan had affirmed[7] that FEMA needs to be in sync with the global trend of accepting contracts with pre-determined exits wherein the investors would be allowed to exit with a stop loss clause. In all, this judgment presents a remarkable example wherein the jurisdiction of a Regulatory Authority is not only challenged but ruled over by the Judiciary, suggestive of a possible change in the existing laws.

 

 

[1]O.M.P. (EFA) (COMM.) 7/2016 

[2]TATA Sons to Seek Competition Commission of India, I-T Nod for Dcocmo Payout, THE ECONOMICS TIMES, May 2, 2017.  

[3]IA No. 14897 of 2016 

[4]http://lobis.nic.in/ddir/dhc/SMD/judgement/28-04-2017/SMD28042017OMPENFCOMM72016.pdf  

[5]http://lobis.nic.in/ddir/dhc/VIB/judgement/12-04-2017/VIB11042017EX1322014.pdf  

[6]Tata Docomo Case: Here’s how Delhi HC order will help similar stalled deals, BUSINESS STANDARD, April 29, 2017. 

[7]Supra note 6. 

 

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