india business law journal - r.viswanathan october 2011.pdf · 44 correspondents expert advice from...

India Business Law JournalYour partner in legal intelligence

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Due diligence: what lies beneath?Keeping up with competition laws

The legal risks of securities trading2011 survey of law firm billing rates

October 2011Volume 5, Issue 4

Surveying the fieldPredators empowered by new takeover code

Contents

India Business Law Journal 1October 2011

17

Predators eyeing India’s listed companies have been empowered by new takeover rules

3 LeaderMore brickbats than bouquets?

4 Inbox5 News

Bhushan assaulted for Kashmir commentsIndian Energy finds power buyerIndo-Swiss DTAA revised

10 The wrapLegislative & regulatory update: page 10Court judgments: page 13

16 Vantage pointOpportunities beckon Latin America offers unprecedented opportunities for Indian businesses, says R Viswanathan

17 Cover storySurveying the field

24 Spotlight Risky business

What are the legal risks associated with trading in securities in India?

27 What lies beneath?

30 What’s the deal?Keeping up with the competition A case study reveals how to ride the regulatory waves created by India’s new competition regime

35 Intelligence reportSurvey of law firm billing rates

Surveying the field

44 Banking & finance Trilegal45 Canada-India trade & investment Bennett Jones46 Capital markets Khaitan & Co47 Competition & antitrust Chitale & Chitale Partners48 The courtroom Singhania & Partners49 Dispute resolution Bharucha & Partners50 Inbound investment S&R Associates51 Infrastructure & energy Trilegal52 Intellectual property Lex Orbis

44 Correspondents Expert advice from India Business Law Journal’s correspondent law firms

53 International capital markets DLA Piper54 Media & entertainment Lall Lahiri & Salhotra55 Mergers & acquisitions Amarchand Mangaldas56 Middle East-India trade & investment Afridi & Angell57 Real estate Vidhii Partners58 Regulating corrupt business practices Mulla & Mulla & Craigie Blunt & Caroe59 Regulatory developments Phoenix Legal 60 Taxation & transfer pricing Economic Laws Practice

What lies beneath?

Investors are diving deeper to rigorously assess their business targets before sealing a deal

27

35

Legal fees are stagnant, but clients are worried

about transparency and value for money

Survey of law firm billing rates

Editorial board

India Business Law Journal2 October 2011

Correspondent law firms

Subscription information

India Business Law Journal is published 10 times a year and has a subscription price of US$790 for one year or US$1,264 for two years. To subscribe, please call +852 3622 2623, email [email protected] or subscribe online at www.indilaw.com.

Vijaya SampathGroup General

CounselBharti Enterprises

Pravin AnandManaging PartnerAnand and Anand

Robert L Nelson JrPartner

Akin Gump Strauss Hauer & Feld

Rohan WeerasinghePartner

Shearman & Sterling

Amit Anant MoghayDeputy General

Counsel HSBC Securities &

Capital Markets (India)

Amarjit SinghManaging Partner

Amarjit & Associates

Mysore R PrasannaIndependent Consultant

Pallavi ShroffManaging Partner

Amarchand Mangaldas

Premnath RaiFounding PartnerPRA Law Offices

Shardul ThackerPartner

Mulla & Mulla & Craigie Blunt & Caroe

Shruti SodhiVice President & Senior Counsel

American Express (India)

Bhavna ThakurDirector - Head of Transaction

Execution, IndiaCitigroup

Shamnad BasheerProfessor in IP Law

National University of Juridical Sciences

Lalit BhasinManaging Partner

Bhasin & Co

Himavat ChaudhuriExecutive Director & Senior CounselTurner General

Entertainment Networks

Toby Greenbury Consultant

Mishcon de Reya

Fali S NarimanSenior Counsel

N KiniGM & Corp. SecretaryHindustan Coca-Cola

Beverages

RS LoonaManaging PartnerAlliance Corporate

Lawyers

Martin RogersPartner

Clifford Chance

Jagannadham Thunuguntla

Strategist & Head of Research

SMC Global Securities

India Business Law Journal


ISSN: 1994-5841

Contact usEditorial

Email: [email protected]: +852 3622 2681

Subscriptions & customer serviceEmail: [email protected]

Telephone: +852 3622 2623Fax: +852 3006 5377

www.indilaw.com

Editor

Vandana Chatlani

Deputy editor

Rebecca Abraham

Consultant editor

Simmie Magid

Contributors

Mathew Chacko

Manish Hathiramani

Nandini Lakshman

Suzanne Rab

Raghavendra Verma

R Viswanathan

Production editorPun Tak Shu

Head of marketing

Kennis Fung

Associate publisher

Tina Tucker

Executive editor

Chris Hunter

PublisherJames Burden

Printed in Hong Kong

Vantage Asia Publishing Limited21/F Gold Shine Tower

346-348 Queen’s Road CentralHong Kong

Telephone: +852 3622 2673Fax: +852 3006 5377

Email: [email protected]

DirectorsJames Burden, Kelley Fong,

Chris Hunter

Disclaimer and conditions of sale

© Vantage Asia Publishing Ltd, 2011

Vantage Asia Publishing Limited retains the copyright of all material published in this magazine. No part of this maga-zine may be reproduced or stored in a retrieval system without the prior writ-ten permission of the publisher. The views expressed in this magazine do not necessarily reflect the views of the pub-lisher, its staff or members of the editorial board. The material in this magazine is not offered as advice and no liability is assumed in relation thereto. The publish-er, staff and all other contributors to India Business Law Journal disclaim any liability for the consequences of any action tak-en or not taken as a result of any material published in this magazine.

Jane NivenRegional General

CounselJones Lang LaSalle

Manik KaranjawalaPartner

Karanjawala & Co

Sunil SethSenior PartnerSeth Dua & Associates

• Banking & finance: Trilegal• Canada-India trade & investment: Bennett Jones • Capital markets: Khaitan & Co• Competition & antitrust: Chitale & Chitale Partners• The courtroom: Singhania & Partners• Dispute resolution: Bharucha & Partners• Inbound investment: S&R Associates• Infrastructure & energy: Trilegal• Intellectual property: Lex Orbis• International capital markets: DLA Piper• Media & entertainment: Lall Lahiri & Salhotra• Mergers & acquisitions: Amarchand & Mangaldas & Suresh A Shroff & Co• Middle East-India trade & investment: Afridi & Angell• Real estate: Vidhii Partners• Regulating corrupt business practices: Mulla & Mulla & Craigie Blunt & Caroe• Regulatory developments: Phoenix Legal• Taxation & transfer pricing: Economic Laws Practice• Technology & cyberlaw: Naik Naik & Co

Leader

India Business Law Journal 3

Opinion

October 2011

Balancing conflicting interests while maintaining a semblance of transparency can be a thankless task. It often draws more brickbats than bouquets

F or, while public participation in the process of policy making is on the rise, scepticism about whether India’s regulators and bureaucrats can get it right

persists. This is in part thanks to the internet, which lays bare the pushes and pulls exerted by interest groups and so reveals the undercurrents that sway policy decisions.

The recent rewriting of rules for the takeover of listed companies was pre-ceded by a public consultation. Indeed, one of the first tasks of a committee set up to suggest improvements to the reg-ulations was to ask the public for their views. But what is curious is that while this committee, the Takeover Regulations Advisory Committee (TRAC), proposed regulations that “recognize and accord primacy to the goal of protection of the interests of the public sharehold-ers in takeover situations”, there is little talk of that now that the regulator, the Securities and Exchange Board of India (SEBI), has finally revealed its hand. Were SEBI and TRAC moving on paral-lel tracks? And do public consultations really count for much?

An in-depth look at the new takeover regulations in this issue’s Cover story (Surveying the field, page 17) reveals that the changes may embolden predators circling India’s listed companies. Does this mean the rules are pro-acquirer with not much in them for public shareholders, or for that matter for groups that currently control India Inc? If so, these groups will do well to take note of advice from Vijaya Sampath at Bharti Enterprises: “Promoters with low holdings may need to be watchful since the new limits allow the acquirer a 51% stake.”

The new rules enable significant players to increase their shareholdings in listed companies and this could see them scrambling for funds. Madhurima Mukherjee at Luthra & Luthra sees the new thresholds as good for private equity investors, while Sandip Bhagat at S&R Associates believes the changes will prompt more foreign direct investment.

This issue’s first Spotlight (Risky Business, page 24) offers a look at another side of the securities market: what happens when a trade fails. This timely article examines India’s payment and settlement systems and what can be done to lower risks associated with events such as the bankruptcy of a counterparty or intermediary. As recent global events have shown, no risk can be ruled out.

This is just the kind of eventuality that investors work hard to avoid. As a result, and as highlighted in this issue’s second Spotlight (What lies beneath, page 27), today’s savvy investor demands a “more nuanced and sophisticated due diligence product”. Can firms that provide these services deliver? And if so, does the information they provide give investors the insights they really need? Our report reveals that they can, and while some of the risks they detect may be “legally remote”, they may also be difficult to repair. Evidently there is a lot to be said for looking – as deep as you can – before you leap.

Writing in this month’s Vantage point (Opportunities beckon, page 16) India’s ambassador to Argentina, R Viswanathan, urges Indian investors and businesses to turn their sights to the new Latin America. He points out

that the region’s markets have become more resilient and less vulnerable to external shocks and that Latin American policymakers have become more prag-matic and pro-business. This, combined with a natural synergy in spirit between the new mindset of Indians and Latin Americans, provides tremendous scope for investors.

But maintaining investments in sev-eral countries comes with the respon-sibility of complying with laws and rules in multiple jurisdictions. This can be a challenge. In What’s the deal? (Keeping up with the competition, page 30), we provide practical tips on how to simul-taneously comply with competition regulations in the UK, the US, the EU and also India. A case study written by Suzanne Rab, a partner at King & Spalding, demonstrates how this bal-ancing act can be achieved.

India Business Law Journal has long sought to lift the shroud of secrecy that often surrounds law firm billing practices, and as the response to our fifth annual billing rates survey demonstrates, we are having some suc-cess. Forthy four firms – a record high – consented to have their billing rates published in this year’s survey (page 35). This is a 10% increase on the number of firms that agreed to participate last year and 76% more than in 2007, when our first survey was first conducted. Yet, once again India’s largest law firms are conspicuous by their absence. We hope this will not be for much longer.

Our survey reveals that billing rates for most cat-egories of lawyer have plateaued. The prevailing “fee sensitivity” has even triggered modest drops in billing rates for some lawyers, including senior partners and managing partners. This is the first drop in rates for sen-ior partners since India Business Law Journal started its billing rates survey.

Interestingly, the decreasing rates for top-level lawyers have been offset by an increase in the rates for junior lawyers. What will this do for their lot? We hope it will mean more bouquets. g

More brickbats than bouquets?

India Business Law JournalYour partner in legal intelligence

www.indilaw.com

Due diligence: what lies beneath?Keeping up with competition laws

The legal risks of securities trading2011 survey of law firm billing rates


Surveying the fieldPredators empowered by new takeover code

Inbox Letters to the editor


Insightful and educational

Dear Editor,

Thank you very much for the very insightful article titled The many faces of arbitration in your September issue. I especially appreciated the section called “Changing rules” as it sheds much deserving light on the constant improvements institutions are making to serve the arbitration community more efficiently.

As a director of one of the leading arbitration institutions, I would like to add a few more facts to make the article a bit more comprehensive and complete for your readers.

Birth of “emergency measures of protection”: The inability to obtain emergency relief prior to the appoint-ment of an arbitral tribunal tradition-ally meant that parties had to resort to local courts, wherever that may be.

This resulted in additional expenses and time on top of unpredictability due to inconsistent standards employed by courts in various jurisdictions. To remedy this, in 1999, the American Arbitration Association (AAA) cre-ated a rule called “Optional Rules for Emergency Measures of Protection”

in its commercial dispute resolution procedures.

Improving and internationalizing the emergency measures: In 2006, the International Centre for Dispute Resolution (ICDR), the international division of AAA, significantly improved the existing rule by removing the sepa-rate election requirement and adopting the new and improved version in its article 37 of International Arbitration Rule. Since 2006, article 37 has been serving the international community well and set high standards for such applications. As mentioned in your article, ICC (in 2011) and SIAC (in 2010) have adopted similar rules. The Stockholm Chamber of Commerce has also done so.

As of today, the ICDR has received 19 cases under article 37. Parties involved in the process were from all around the world including Australia, Canada, China, Georgia, Germany, Mexico, Netherlands, Norway, Pakistan, Sweden, Taiwan, United Kingdom and the US. The emergency arbitrators were from Belgium, Brazil, Canada, Chile, Singapore, South Korea, Switzerland, the United Kingdom and the US.

Fees for filing article 37 emergency measures: The ICDR charges no additional fee for filing for emergency measures. Parties are only responsi-ble for emergency arbitrator’s com-pensation based on their hourly rate,

often slightly lower than their normal rate.

Your continuing effort and insightful report on the international arbitration community is essential to educate the users and to keep us on the edge. On behalf of the industry, if I may, I thank you very much.

Michael D LeeDirector, ICDR, International

Division of American Arbitration Association, Singapore

A story to be preserved

Dear Editor,

I compliment Rebecca Abraham on her crisp Cover story, The many faces of arbitration, in the September issue of India Business Law Journal. The article brings special insights into domestic and foreign arbitral insti-tutions and their India profile. It is packed with original research and tell-ing comments.

Certainly something to be kept and preserved for future use by seasoned practitioners and newcomers alike.

Sumeet KachwahaManaging Partner

Kachwaha & PartnersNew Delhi

Avoiding brand casualty

Dear Editor,

I read the opinion piece Changing a mindset in the September issue of India Business Law Journal with interest.

Indeed, changing a mindset in the legal market is difficult, all the more so if there are established names, for many of them are “persistent con-ventional marketers” who believe in a static medium of messaging. Assuming a know-it-all position and ignoring the need to collaborate with marketing experts is the root cause of “brand casualty”.

The distinction between market-ing and business development is hazy. Having said that, there is whole new breed of mid-sized and upcom-ing firms, who have understood the importance of the two functions and

are making conscious efforts towards streamlining their marketing and busi-ness development processes.

From my experience I have found that many law firms face problems while trying to package information to fit a client’s needs. So, they cre-ate a separate department to churn out useful information, which they are constantly sharing with their clients.

Some law firms understand that it’s not enough to only have brand identification elements (logos, pro-files, websites etc). They seek profes-sional assistance to put together well thought out marketing campaigns while reaching out to and persuading decision makers and other influential individuals of their abilities.

Some of the many ways in which firms reach out are: newsletters and policy alerts, commentaries in trade journals, industry-specific fact sheets on important recent developments and possible trends. Participating in conferences is also a good way to

showcase expertise. Law firms are coming to realize that

the only thing that differentiates one firm from another is a brand name (whether of an individual or a collec-tive). And although at present, the concept of marketing the services of a law firm is still at its initial stages, it is bound to grow and become more strategic in years to come.

Vivek DasConsultant

Legal League ConsultingNew Delhi

ArbitrAtion

LAw firm mAnAgement

India Business Law Journal welcomes

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edited for style, readability and length,

but not for substance. Due to quantity

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News

October 2011

A shok Chawla, a former bureau-crat, has been appointed as the new cha i rman o f the

Competition Commission of India (CCI) for a five-year term. During a simple swearing-in ceremony at the office of the minister for corporate affairs on 20 October, Chawla said he would strive for the commission to be “a body which ensures effective competition in the new India”.

Chawla’s appointment has been long anticipated, coming four months after the previous CCI chairman, Dhandendra Kumar, left the post. Man Mohan Sharma, the former additional registrar of the CCI and currently the head of competition law and policy at Delhi-based law firm Vaish Associates, believes Chawla is best suited for the job.

“In his previous position as finance secretary [from which he retired in January this year] he had a fair under-standing of all the sectors of the econ-omy and the slow pace at which the Indian government wants to introduce the free market economy,” Sharma told India Business Law Journal. He empha-sized that “the new chairman should be willing to listen to experts and other stakeholders with an open mind”.

Chawla has said he wants to gain an on-the-job understanding of various facets of the task before outlining his vision for the CCI. However, industry groups and the legal community already have their wishlists. “I am approaching Chawla on behalf of PHD [Progress-Harmony-Development] Chamber of Commerce and Industry to discuss various urgent issues that the commis-sion must address,” said Sharma. “On the top of the list are the grey areas of the Competition Act, particularly those relating to mergers and acquisitions.”

A n o t h e r i n d u s t r y b o d y, t h e Confederation of Indian Industry (CII), has repeated its demand for amend-ments to the Competition Act, asserting the need for the inclusion of a manda-tory timeline for the prima facie review of combinations. In a statement issued on 24 October, the CII said that the long waiting period of 210 days for the CCI’s orders on combinations will put “Indian business houses to a regulatory disadvantage, especially in global M&A transactions based on competitive bidding”. It also said that “the commis-sion must have the power to exempt classes of transactions which are not

likely to have an appreciable adverse effect on competition”.

Other priority areas, said Sharma, should be the framing of guidelines for abuse of dominance and building awareness about the new competition law. He said that the CII needs to focus on efforts to raise awareness as various government departments still do not understand the competition laws.

Accessing the services of experi-enced industry experts is also a big problem for the CCI. While the chair-man earns a monthly salary of `300,000 (US$6,000) and the six members get

`250,000 each, all the other officers and staff are appointed on central govern-ment salaries, which are much lower.

Sharma said that for this reason, the CCI is mostly staffed by govern-ment employees on secondment from their parent organizations. The CCI has recently started engaging independent experts, but due to low salaries, he said, “only freshers from law colleges have joined as attorneys or associ-ates”. The Securities and Exchange Board of India, which operates under different rules, can create its own pay scales.

Relief as CCI appoints new chairman

News


infrAstructure & power

mergers & Acquisitions

Indian Energy finds power buyer

Infrastructure India has completed its takeover of Indian Energy, an inde-pendent power producer which oper-ates wind farms in India. The transac-tion, through a scheme of arrangement, was valued at US$13 million.

The process for the all-share takeo-ver began in December 2010, when Indian Energy began looking for suit-able buyers or investors which could provide it with additional funding. Indian Energy decided that it would

benefit from joining a larger group such as Infrastructure India, which has investments in a wider range of power and infrastructure projects.

Indian energy owns and operates two wind farms: the Gadag Plains wind farm in Karnataka and the Theni wind farm in Tamil Nadu. It intends to build a portfolio of wind farms with a total generating capacity of 300 MW by 2013. It is listed on the London Stock Exchange’s alternative invest-ment market (AIM).

Infrastructure India is incorporated in the Isle of Man and is also an AIM-listed company. It focuses largely on energy and transport projects in India.

Partners Mahesh Madan Bhat and Talha Salaria at Bangalore-based MMB Legal acted as Indian legal counsel for

Infrastructure India. Taylor Wessing, led by partner Tandeep Minhas, was the company’s international counsel. Minhas was assisted by senior asso-ciate Edward Hooper and associate Katie Bennett.

A team from Covington & Burling in London advised Indian Energy on the sale. The team was led by part-ner Simon Amies, with assistance from associates Brett Hopcroft and Alexandra Smith. Channel Islands firm Carey Olsen was Indian Energy’s legal counsel in Guernsey. Carey Olsen senior associate Tony Lane advised on corporate and regulatory matters, while litigation partner Tim Corfield and associate Sarah Cakebread advised on court proceedings in relation to the scheme of arrangement.

GE invests in clean energy

GE Energy Financial Services has signed an agreement to invest US$50 million in India-based clean energy developer Greenko Group to support wind projects in India. This is GE’s first renewable energy investment in the country.

G reenko i s deve lop ing w ind projects in Maharashtra, Andhra Pradesh, Karnataka and Rajasthan. The projects will be owned by a new subsidiary, Greenko Wind Project Private Limited.

A 65-megawat t w ind fa rm in Maharashtra is Greenko’s first project and is scheduled for completion in December. The project will use GE’s 1.6-megawatt turbines, which have been designed specifically for low and medium wind speeds. GE and Greenko aim to jointly develop a port-folio of wind projects with a combined generating capacity of 500 mega-watts, which could potentially create enough renewable electricity to power 875,000 average Indian households.

GE Energy Financial Services has experience in wind projects and other areas of renewable energy as a result of its US$6 billion portfolio of renew-able energy investments worldwide.

MC & Associates in Hyderabad represented Greenko Wind Project Private Limited and Greenko Energies

Private Limited on the deal. London-based law firm Lawrence Graham advised Greenko as international counsel. Amarchand Mangaldas, led by partners Santosh Janakiram and

Vandana Pai Bharucha, advised GE Financial Services on the investment.

The deal was signed on 7 October and closing is expected on or before 5 December.


News

October 2011

Radico attacks Carlsberg brand

Delhi High Court has rejected claims of trademark exclusivity filed by Indian liquor manufacturer Radico Khaitan against Carlsberg India.

Radico sought to restrain Carlsberg from using the figure 8 in its trademark, accusing the brewery group of passing off its Palone 8 trademark as Radico’s trademark 8 PM. Radico has used the mark 8 PM for its brand of whisky with much success in the Indian market. Radico obtained registrations for the mark 8 PM as well as several 8 PM formative marks in many classes.

Carlsberg began using the mark Palone 8 for one of its beer products at the beginning of the year.

Carlsberg argued that the figure 8 was used extensively by various entities in the liquor business, both nationally and internationally, with several instances of use predating Radico’s adoption of

the 8 PM mark. It also maintained that Radico had been granted registration of 8 PM under part B of the register under the Trade Merchandise and Marks Act, 1958 (replaced in 2003 by the Trade Marks Act, 1999), a category reserved for marks considered non-distinctive or descriptive.

Carlsberg further argued that Radico had not registered the mark 8 PM for beer and also held no registration for the figure 8 per se. Carlsberg said that its use of the figure 8 was descriptive and denoted the strength of the beer.

The court rejected Radico’s claim of exclusivity, but Justice Manmohan Singh stated: “I find some substance in the sub-mission of the plaintiff about its grievance that the defendant is using the mark-8 in similar writing style and also in the golden colour which may be avoided.”

He ordered Carlsberg to use Palone and the figure 8 together in the same line, size and font to avoid any confu-sion between the two products. He also ordered Carlsberg to use the figure 8 in any other colour but not “golden

colour” to “avoid any bleak chances of misrepresentation”.

Remf ry & Sagar rep resen ted Carlsberg in the dispute and K&S Partners represented Radico.

Trilateral trade target set at US$25b

Trade ministers from India, Brazil and South Africa have agreed to address visa issues, trade barriers, and maritime and air connectivity to boost invest-ment opportunities among the three countries.

The India Brazil South Africa (IBSA) business forum is a trilateral trade initia-tive aimed at encouraging south-south cooperation. Set up in 2003, IBSA is committed to developing a “new inter-national architecture” through coopera-tion and partnerships among developing economies. IBSA views collaboration among India, Brazil and South Africa as ideal in terms of their shared economic vision, democratic principles and com-mon development struggles.

Trilateral trade has been healthy, despite financial tremors that have

shaken economies worldwide. The group set a target of achieving US$10 billion in intra-IBSA trade by 2010. “In fact we achieved that in 2009, in the midst of the first wave of global eco-nomic recession,” said Rob Davies, South Africa’s minister of trade and industry.

At meeting in Pretoria on 18 October, Davies, India’s minister of commerce and industry, Anand Sharma, and Brazil’s industry secretary, Fernando Pimentel, discussed plans for a trilateral free trade agreement. Davies and Sharma also

Patent office to hire 250 examiners

T h e I n d i a n g o v e r n m e n t h a s announced plans to appoint 250 addi-tional patent examiners by April 2012 to expedite the approval process for the grant of patents. The additional staff will take the total number of examiners across India up to 400.

“By 2015-16, we will be able to examine a patent in one year,” PH Kurian, the control ler general of

patents, designs and trademarks and geographical indications, told the Press Trust of India. “We would like to bring down the duration of the entire process, from filing of applica-tion to the approval, to nearly one year. Currently, in some instances, the time taken is nearly 36 months.”

Lawyers and IP rights owners alike have criticized the trademark and pat-ent offices in India for their inefficien-cies in handling IP filing and protection procedures. The shortage of human resources has been highlighted as a serious impediment, not just because of low numbers of examiners, but also due to inadequate training.

Some observers are not convinced

inteLLectuAL property

internAtionAL trAde

that the new hires will make a differ-ence. “Personally speaking, there is no point in increasing the number of examiners if the quality of patents being granted is not good and if the grants are resulting in non-enforceable patents being piled up,” Tarun Khurana, a partner at Khurana & Khurana, told India Business Law Journal.

“It would be better to focus on improving the qualitative teamwork between the examiners and the agents so that applications can purely be examined on merits and patentability standards to ensure that the paten-tees actually get patents which would have some valuation when litigated or licensed,” Khurana added.

News


explored the possibility of entering into long-term contracts for the purchase of raw materials and commodities. The ministers plan to hold annual trilateral trade meetings and hope to achieve a combined trade target of US$25 billion by 2015.

Official areas of cooperation among the three countries include agriculture, culture, defence, education, energy, environment and climate change, health, human settlements, science and technology, social development, trade, transport and tourism.

Companies like Tata Consultancy Serv ices, Ranbaxy, Dr Reddy’s L a b o r a t o r i e s , G l e n m a r k Pharmaceuticals, ONGC, Suzlon and Wipro Technologies all have a presence in Brazil. Last year, Indian sugar pro-ducer Shree Renuka Sugars acquired Brazil’s Grupo Equipav Açúcar e Álcool for US$329 million.

Indian investments into South Africa have been equally buoyant. Companies such as Tata, Godrej, the UB Group, Aurobindo Pharmaceuticals, Mahindra & Mahindra, the State Bank of India, ICICI and Cipla have all made investments in

the country. South African companies are eyeing Indian targets too. South African financial services group Sanlam announced last month its plans to pay

`1.9 billion (US$39 million) for a 26% stake in India’s Shriram Capital, a com-pany with which it already has joint ventures.

Court permits release of Azaan

Bombay High Court has denied interim relief to two parties objecting to the release of the Hindi film Azaan. The theme of the film is biological warfare.

The first objection came from a party claiming to be in charge of marketing and distributing the film. This party requested interim relief until arbitration proceedings against the producers of the film were concluded.

The second objection, in the form of a criminal writ petition, came from Mumbai Samajwadi Party vice-pres-ident Farookh Ghosi. Ghosi filed a

entertAinment

poLitics

Bhushan assaulted for Kashmir views

On 12 October, civil liberties law-yer and Supreme Court advocate Prashant Bhushan was physically assaulted in his office. Bhushan was brutally beaten by three men who were reported to be aggravated by certain comments he had made about

the state of Jammu and Kashmir.He was thrown to the ground and

then slapped, kicked and punched repeatedly by the attackers. Two men escaped while another was caught and dragged away. Bhushan blamed a right-wing group for the assault, saying they opposed his views on a referendum in Kashmir. “They were Sri Ram Sene activists,” he told the Indo-Asian News Service. “They are intolerant.”

Lal i t Bhasin, the pres ident of the Society of Indian Law Firms, expressed outrage over the attack. “We were all very disturbed over the brutal physical attack on Mr Prashant Bhushan, a very respected and emi-nent lawyer of the country,” he told India Business Law Journal.

“One may or may not agree with Mr Bhushan’s views on Kashmir,” Bhasin said, “but no one can indulge in expressing their dissent by physi-cal assault in breach of not only ethi-cal and proper norms but also in total breach of law. The offenders have committed gross offences under the Indian Penal Code and they ought to be dealt with severely.”

Bhushan is a strong advocate of the Jan Lokpal Bill, a piece of legislation to fight corruption, which he and other

Prashant Bhushan

civil society representatives drafted. The Jan Lokpal Bill is an alternative to the Indian government’s Lokpal Bill, which also seeks to eradicate rampant corruption. Civil society rep-resentatives have criticized the gov-ernment’s version of the bill because it exempts the prime minister and senior judges from its purview.


News

October 2011

Indo-Swiss DTAA revised

The agreement for the avoidance of double taxation (DTAA) between India and Switzerland has been amended to allow India access to information about bank accounts held in Switzerland for tax purposes under cer ta in circumstances.

A protocol amending the India-Switzerland DTAA was signed in August 2010. The process of ratifying it in the Swiss parliament was com-pleted on 7 October. The provisions apply to income arising in India after 1 April 2012 and in Switzerland after 1 January 2012. This is because the Swiss financial year begins in January, while India’s financial year begins in April. The earlier version of the DTAA only permitted India to access bank-related information from Switzerland in cases of tax fraud.

The amended DTAA will allow India to request specific information related to bank accounts in Switzerland from 1 January 2011. “It is true that the exchange of information shall apply retroactively,” Mukesh Butani, a partner at BMR Advisors told India Business Law Journal.

“There is a proposal to amend India’s income tax law to enhance the limit of

tAxAtion

Telecom firms under fire after auditIndia’s Department of Telecommunications (DoT) plans to issue notices to

five telecom operators after auditors revealed they were misreporting revenue figures in an attempt to avoid paying higher licence fees to the government.

Licence fees vary from 6% to 10% of revenue annually, depending on the service areas in which a telecom carrier operates.

The audits, which examined the revenue accounting systems of the tel-ecom providers between April 2006 and March 2009, were conducted by the Comptroller and Auditor General (CAG) of India. “There is ambiguity in the way gross revenue is to be computed,” Vaibhav Parikh, a partner at Nishith Desai Associates, told India Business Law Journal. “The definition is too simplistic and leaves a lot of scope for ... [companies] take advantage of this. The DoT does not like that and tries to force companies to pay as per the CAG audit.”

Bharti Airtel, Idea Cellular, Reliance Communications, Tata Teleservices and Vodafone Essar are to receive notices from the DoT, according to the Wall Street Journal.

teLecommunicAtions

petition to obtain a first information report against Azaan’s producers, actors and director for “exploiting” the use of the word azaan (the Muslim call to prayer) for commercial gain.

Ghosi contended that azaan was a pious word that could not be used as a title for a film depicting violence and terrorism. He launched the petition after Naeem Akhtar Azmi, the chief priest of Sunni Darul-Uloom Mohammediya Minara Masjid, issued a fatwa (an Islamic religious ruling) declaring that no film could be called azaan.

Bombay High Court refused to grant interim relief to either party and has directed that the matters take their regular course in court.

Juris Corp partner Mustafa Motiwala and advocate Jay Joshi represented the producers in both cases. The petitioners were represented by Sean Wassoodew in the first case and Awadhesh Pandey and Manoj Singh in the second case.

reopening of assessments [from four to eight years] specifically to deal with offshore bank and income tax cases,” he said. “I would imagine that if infor-mation is made available prospec-tively, it would be a sufficient basis for the tax man to open and reopen past cases.”

The agreement also provides for a most-favoured nation clause. “If India were to grant to another OECD member state lower withholding tax rates on dividends, interest payments, royalties or service fees than currently to Switzerland [all are limited to 10%], then those lower rates shall be appli-cable with regard to Switzerland, too,” Philippe Reich, a partner at Baker & McKenzie in Zurich, told India Business Law Journal. “If India, however, were

to limit the scope of royalties or fees for technical services in an agreement with another OECD member state, then the Swiss/Indian Treaty would be amended in that respect, too.”

Other changes include the following: Recognised pension funds will be •considered as tax resident and thus treaty entitled;Profits and capital gains derived from •the operation of ships in international maritime traffic to be taxable only in the state of residence.The difference in tax rate on profits •between local companies and permanent establishments of Swiss companies in India may not exceed 10%. The latter are currently subject to a higher tax rate than local companies.

The wrap


Legislative and regulatory update

corporAte debt

New FII norms for infrastructure bonds

The Securities and Exchange Board of India (SEBI) has revised the norms for foreign institutional investment in long-term corporate bonds issued by infrastructure companies.

Foreign institutional investors (FIIs) are permitted to invest up to US$25 bil-lion in long-term infrastructure bonds. However SEBI has clarified that:

Qualified foreign investors (QFIs) may 1. invest up to US$3 billion in mutual fund debt schemes which invest in the infrastructure sector.FIIs may invest up to US$5 billion in 2. bonds that have an initial maturity of five years or more at the time of issue and a residual maturity of one year at the time of their first purchase. These investments are subject to a lock-in period of one year. During this period FIIs can trade among themselves, but they cannot sell to domestic investors.FIIs can invest up to US$17 billion 3. in long-term infrastructure bonds which have an initial maturity of five years or more at the time of issue and a residual maturity of three years at the time of their first purchase. These investments are subject to a lock-in period of three years. During the lock-in period, FIIs are permitted to trade among themselves, but may not sell to domestic investors. In addition, investment by FIIs in infrastructure debt fund (IDF)schemes will be counted towards this US$17 billion limit.SEBI clarified that for bonds which

have embedded call or put options, the date of such options will be used to calculate residual maturity.

The following table outlines the investment routes and caps for long-term infrastructure bonds as applicable on 12 September.

The debt limits are allocated to the FII or sub-accounts in an open bidding platform or on a first-come first-served basis as periodically notified by SEBI. This is with the exception of long-term

infrastructure bonds which have an ini-tial maturity of five years or more at the time of issue and residual maturity of three years at the time of first purchase by an FII.

FIIs in this category can enjoy the debt limits without SEBI’s approval

until the overall FII investment reaches 90% of US$17 billion (US$15.3 bil-lion). After reaching this limit, a bidding process will be initiated to allocate the remaining limits. Successful bids will be based on the bid price (which will be expressed in basis points).

Type of investment route Monetary cap

Total investment in long-term infrastructure bonds US$25 billion

QFI investment in debt (including investment in IDF) US$3 billion

One-year lock-in with one-year residual maturity by FIIs US$5 billion

Three-year lock-in with three-year residual maturity by FIIs (including investment in IDF)

US$17 billion


The wrap

October 2011

teLecommunicAtions

New regulations from TRAI set anti-spam tome

Mobile phone users in India can now hope to see a reduction of spam mes-sages sent their way with the imple-mentation on 27 September of new regulations to curtail transmissions by advertisers.

The Telecom Regulatory Authority of India (TRAI) has brought into force the Telecom Commercial Communications Customer Preference Regulations, 2010, which provide for the setting up of a National Customer Preference Register.

The erstwhile National Do Not Call Registry was renamed National Customer Preference Register earlier this year. The new register will be a national database with a list of the telephone numbers of all subscribers who have registered their preferences regarding receipt of commercial com-munications. Subscribers can indicate their preference by registering either under the fully blocked category or the partially blocked category.

In the fully blocked category, a sub-scriber opts not to receive any types of commercial communication, while the partially blocked category enables subscribers to receive commercial communications only in the categories they have chosen.

Subscribers under the partial ly blocked scheme may choose from a selection of categories including: banking, insurance, financial products and credit cards; real estate; educa-tion; health; consumer goods and automobiles; communication, broad-casting and entertainment; IT; and tourism.

Subscribers who had registered with the National Do Not Call Registry are automatically placed in the fully blocked category.

Transactional information, however, has been exempted from both the partially and fully blocked categories. Therefore, messages containing infor-mation related to the following can be transmitted:

Account information sent to 1. customers by a licensee, bank, financial institution, insurance company, credit card company, or depositories registered with

Securities and Exchange Board of India or direct-to-home (DTH) operators; Information given to passengers by 2. airlines or Indian railways regarding travel schedules, ticketing and reservations; and Information from a registered 3. educational institution sent to its students, or their parents or guardians.

100-message limitNo person apart from a telemarketer registered with the TRAI will be allowed to send commercial communication via text message. To ensure compli-ance with this provision, the TRAI has imposed a limit of 100 messages per day per SIM card. However, registered telemarketers will not be subject to this limit.

Access providers, including basic telephone service providers, cellular mobile telephone service providers and unified access service provid-ers, are obliged to ensure that no one apart from a registered telemarketer is allowed to send more than 100 mes-sages per day.

The following, however, are exempt from the 100-message limit:

Dealers of the telecom service 1. providers and DTH operators, who may send requests for electronic recharge on mobile numbers; E-ticketing agencies, which may 2.

respond to e-ticketing requests made by customers; Social networking sites such as 3. Facebook, Twitter, Orkut, LinkedIn and GooglePlus, which may contact their members about activities relating to their accounts;Agencies providing directory 4. services – Justdial, Zatse, Callezee, Getit and Askme.

Penalties for breachThe TRAI will use a “six strike” policy to penalize companies that breach the regulations. Under the policy, telemar-keters that send unsolicited commer-cial communication to any subscriber whose telephone number appears in the National Customer Preference Register will have to pay a penalty ranging from `25,000 (US$500) for the first strike to `250,000 for the sixth strike.

The penalties will be deducted from a security deposit that telemarket-ers will need to pay to their access provider and will be deposited into an account specified by TRAI. Additional security deposits will need to be paid after a first or a third strike.

Telemarketers who receive six notices in one calendar year will have their telecom resources disconnected. The agency that maintains the National Telemarketer Register will put them on a blacklist for two years and their registration as telemarketers will be cancelled.

The wrap


Foreign investment

DIPP unveils revised FDI policy

The Department of Industrial Policy and Promotion (DIPP) has released its revised consolidated foreign direct investment (FDI) policy (circular 2 of 2011). The new FDI policy, effective from 1 October, supersedes the previ-ous version of the policy, which took effect on 1 April.

The key changes are outlined below.

Options to lose equity characterThe new FDI policy restricts the exit rights that are typically available to foreign investors so that neither “put options” nor “call options” can be used for FDI purposes. Clause 3.3.2.1 of the new FDI policy states that any “options” attached to equity instruments offered to foreign investors will cause such equity instruments to lose their equity charac-ter and will need to comply with external commercial borrowing regulations.

Construction project exemptionsInvestors involved in building educa-tional facilities or homes for the elderly have been exempted from meeting the conditions which apply to construction projects in other sectors. The exemp-tion means educational projects and homes for the elderly will not need to have a minimum built-up area, minimum capitalization and a lock-in period of three years.

Timelines for conversion relaxedApplications for the conversion of expenses for imported capital goods/machinery into FDI can be made within 180 days from the date of ship-ment of goods. Applications to con-vert pre-operative/pre-incorporation expenses to equity instruments can be made within 180 days from the date of incorporation of the company. Foreign investors can pay a company directly for pre-operative/pre-incor-poration expenses, or pay through their own bank account opened by in accordance with the Foreign Exchange Management (Deposit) Regulations, 2000.

Pledge of sharesA promoter of an Indian company can pledge his shares to secure a loan obtained under an external commercial borrowing, provided that the author-ized dealer (AD) is satisfied that certain

conditions with respect to the loan agreement are met. These include obtaining a loan registration number. A non-resident shareholder in an Indian company can also pledge his stake in the company in favour of the AD to secure a credit facility for the company. The lending bank then will have to comply with section 19 of the Banking Regulation Act, 1949.

The pledge may also be made in favour of an overseas bank to secure credit facilities extended to non-resident promoters or shareholders of the resi-dent Indian company whose shares are pledged, provided such loans are used solely for business purposes overseas.

Escrow accountsInvestors may now obtain approval from AD category-I banks to open and maintain non-interest-bearing escrow accounts in India on behalf of non-resi-dents (denominated in rupees) for pay-ment of share purchase consideration, or for keeping securities. Prior approval from the Reserve Bank of India is no longer needed.

Single brand product tradingForeign investors can invest up to 51% in single brand retail. However, a new condition under the new FDI policy states that the foreign investor must be the owner of the brand.

Industrial parksThe meaning of “industrial activity” as used in the definition of “indus-trial park” has been expanded to include basic and applied research and development in biotechnology, pharmaceutical sciences and life sciences.

FM radio sectoral cap increasedFDI limits in terrestrial broadcasting and FM radio have been increased from 20% to 26%.

The legislative and regulatory update is com-piled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at [email protected]. Readers should not act on the basis of this information without seeking professional legal advice.


The wrap

October 2011

Court judgments

empLoyment LAw

Court laments exploitation by employers

Dismissing an appeal in Bhilwara Dugdh Utpadak Sahakari S Ltd v Vinod Kumar Sharma, a two-judge bench of the Supreme Court lamented “the unfortunate state of affairs prevailing in the field of labour relations in the country”.

The primary issue before the court was the interpretation of section 10 of the Contract Labour (Regulation and Abolition) Act, 1970, and situations where employers try to show that their own employees are, in fact, the employ-ees of a contractor. The appellant, Bhilwara Dugdh Utpadak Sahakari S, was the employer in question. Section 10 of the act deals with the prohibition of employment of contract labour.

The Supreme Court affirmed the judgment of Rajasthan High Court, which had found that the plea of the employer that the respondents were employees of a contractor was not cor-rect and that they were employees of the appellant.

The Supreme Court observed that “labour statutes were meant to protect the employees/workmen because it was realized that the employers and the employees are not on an equal bargaining position” and the protection of employees was required so that they are not exploited.

The judgment went on to say: “this new technique of subterfuge has been adopted by some employers in recent

years in order to deny the rights of the workmen under various labour statutes by showing that the concerned work-men are not their employees but are the employees/workmen of a contrac-tor, or that they are merely daily wage

or short term or casual employees when in fact they are doing the work of regular employees. Globalization/liberalization in the name of growth cannot be at the human cost of exploi-tation of workers”.

compAny LAw

Reduction of share capital not a buyback

Ruling in the matter of M/s Reckitt

Benckiser (India) Ltd, Delhi High Court recently held that under the Companies

Act, 1956, a scheme for reduction of share capital is distinct from that for buyback of share capital. The condi-tions in the act for reduction of share capital – in sections 100 to 104 – “can-not be imported into or made appli-cable to a buyback” provided for in section 77A and vice versa, as they “operate in independent fields”.

The court was considering a petition filed under sections 100 to 105 of the Companies Act, read with rule 46 of

the Companies (Court) Rules, 1959, to confirm the reduction of share capital of Reckitt Benckiser, which was being objected to by a lone shareholder.

The shareholder argued that the company was proposing a “forcible acquisition” of shares of public share-holders, which was in fact a buyback of shares. He also said that the gov-ernment policy of removing caps on foreign investment in personal care and the health sector was illegal and that

The wrap


civiL procedure

Court requires `200m deposit to hear appeal

Bombay High Court recently agreed to hear an appeal against a defama-tion order on condition that the appel-lant, Times Global and its associated companies, deposit part of the dam-ages it had been asked to pay by a lower court.

The case – Times Global Broadcasting Co Ltd and Anr v Parshuram Babaram Sawant (PB Sawant) – is a first of its kind in India and concerns the responsibilities and liabilities of televi-sion channels. Times Global runs the English news channel Times Now.

Bombay High Court asked Times Global to deposit `200 million (US$4 million) in the high court registry in rela-tion to the defamation suit filed against it by PB Sawant, a former Supreme Court judge. The company was also directed to furnish bank guarantees for `800 million.

Justice Sawant had sued the televi-sion channel for wrongly displaying his photo for 15 seconds during a news report telecast on 10 September 2008 about a provident fund scam allegedly involving a Calcutta High Court judge. The report also said several members of the higher judiciary were involved in the scam.

Despite telephone calls from Justice

Sawant’s secretary on the same day and a letter sent to the channel eight days later, a clarification was carried only on 23 September 2008. The former judge was not satisfied and moved a Pune court to claim `1 billion in damages. On 26 April a civil judge of the senior division at Pune issued

a decree asking the company to pay `1 billion as damages for defaming the judge.

Although this is an interim order, the case has wide implications for television journalists and news chan-nels and the proceedings are being followed closely.

the scheme of reduction was a product of these wrong economic policies.

Rejecting these objections, the court allowed the scheme of reduction of share capital, which 99.9% of share-holders had approved. The court held that section 100 expressly permits a company to reduce its share capi-tal after a special resolution passed for that purpose is sanctioned by the court, provided that the reduction is authorized under the company’s arti-cles of association. The ruling also made clear that courts do not interfere with economic policy unless it is found to be arbitrary or illegal.

Reckitt Benckiser had delisted itself between 2003 and 2005, after which it undertook a scheme of reduction of shares. This was to be the company’s second scheme of reduction of shares.


The wrap

October 2011

right to informAtion

Privacy ruling good news for third parties

Interpreting section 11 of the Right to Information (RTI) Act, 2005, a division bench of Delhi High Court recently held that confidential information regarding a third party cannot be divulged by a public authority “without notice or without hearing the third party’s point of view”. Doing this “serves a salutary purpose and ensures that there is a fair and just decision”.

Section 11 deals with third party information that has been treated as confidential by that third party.

Ruling in Arvind Kejriwal v Central Public Information Officer & Ors, the court held that information should be released under the RTI Act only after examining “whether the information can be treated and regarded as being of a confidential nature, if it relates to a third party or has been furnished by a third party”.

Kejriwal, who was challenging the interpretation of section 11 in an earlier judgment, had argued that the first part of the expression “relates to or has been supplied by a third party and has been treated as confidential by that third party” in section 11(1) of the act should be read as “relates to and has been supplied”. In other words, the

word “or” used in section 11(1) should be read as “and”.

The court observed that it is permis-sible to read the word “or” as “and” and vice versa if the legislative intent

is clear. But if the word “or” is read as “and” in the present case it may lead to problems, including invasion of the right of privacy and confidentiality of a third party.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at [email protected] or [email protected]. Readers should not act on the basis of this information without seeking professional legal advice.

pubLic interest LitigAtion

Court notes threat to security of judiciary

On 28 September the chief jus-tice of Delhi High Court issued an interim order taking cognizance of the instances of terrorism, mentioned in a public interest litigation (PIL), that have affected the independence and security of the judiciary. The order also directed the central government and the government of the national capital territory (NCT) of Delhi to divulge their secrets and strategy in countering such acts of terrorism.

The PIL, which was filed by the

Society of Indian Law Firms (SILF) on 22 September, alleged lack of proper security and safety measures in the capital city and expressed concern about the security and safety of the citizens of Delhi in light of the recent terrorist attack at Delhi High Court.

SILF, through its president, senior counsel Lalit Bhasin, sought an order from the court directing both the cen-tral government and the government of the NCT and the Delhi Police to implement measures necessary to deal with the threat to citizens from terrorist attacks.

SILF also asked the court to direct the government to maintain a cen-tralized system of intelligence and a battle-ready unit of special police, and also to disclose to the court the steps taken as well as the time frame and the funding required. In addition,

the petition sought to implement the setting up of specific infrastructure and apparatus to combat terrorism, like installing closed-circuit television cameras at all courts and strategic locations in Delhi.

Although this is an interim order, it is significant as it acknowledges the efforts made by the legal fraternity in securing the right to a terror-free environment as a fundamental right for the citizens of the capital city of Delhi.

Vantage point Opinion


A confident and optimistic Latin America is embark-ing on a growth decade. The region’s markets have undergone a paradigm shift in the past two decades,

emerging decisively from the twin curses of instability and cycles of boom and bust that had plagued many countries.

As a result macroeconomic fundamentals have become more resilient and less vulnerable to external shocks. This is evident from the manner in which Latin America has with-stood the global crisis, growing by an impressive 6% in 2010. GDP growth in 2011 is projected to be more than 4%.

There has been a fundamental change in the mindset of Latin American policy makers, who have become more pragmatic and pursue balanced, pro-business policies of inclusive development. In doing so, they are following the model adopted by Luiz Inacio Lula da Silva, Brazil’s popu-lar president who stepped down at the start of this year.

Latin American businesspeople have started looking beyond the crisis-ridden markets of the US and Europe and are focusing instead on large growth markets, such as India. Indian businesses need to recognize the new market of Latin America and the new mindset of Latin Americans and explore the unprecedented opportunities for trade and investment.

India’s trade with Latin America reached US$23 billion in 2010, up from US$2.6 billion in 2001. Indian exports to the region rose from US$1.5 billion in 2001 to US$9 billion in 2010. This can be increased to US$20 billion by 2015 if Indian exporters systematically target this market.

Latin America is a regular source of crude petroleum, edible oil and copper, which account for three-quarters of India’s imports from the region. India is likely to increase these imports in future to fill the gap between demand and domestic production and to fuel economic growth.

Indian companies have invested about US$12 billion in the region in information technology (IT), pharmaceuticals, energy, agrochemicals, steel, mining, agribusiness and other sectors. Two dozen Indian IT companies have established software development, business process outsourcing (BPO), knowledge process outsourcing and call centres employing 20,000 people in 14 Latin American countries. Almost all the operations are run by Latin American managers. There is tremendous scope for India to increase its trade with and investment in Latin America. Some opportunities that Indian businesses should immediately focus on are:

Projects and supply of materials in Brazil for the World •Cup 2014, the Olympics 2016 and other infrastructure development; the five-year plan of Petrobras to spend US$220 billion in the petroleum sector (currently the world’s largest corporate investment plan); and the proposed investment of US$270 billion over the next two

decades in the mining sector, to triple the production of gold, iron and copper by 2030; Investments in commercial forestry and paper pulp in •Argentina, Brazil, Uruguay and Chile; Oil sector investments in Colombia, which expects •investments of US$28 billion over the next four years to increase its oil production to 1.4 million barrels a day by 2014 from 963,000 barrels a day in 2010;Mining investments in Peru, which attracted US$4 •billion in 2010. Peru is the hottest destination for such investments these days; andInvestments in agribusiness to source edible oil, pulses •and biofuels. Encouraged by high prices and demand triggered by long-term global concerns about food and energy security, Argentina, Brazil, Uruguay and Paraguay are increasing agricultural output and expanding the area devoted to agriculture. What about the challenges for business with Latin

America? Indians think of distance as the first barrier. This is passé. Today, Indian BPO companies are using dis-tance as an advantage by doing 12 hours of work in Latin America followed by another 12 hours in India.

High freight charges and long shipping times? Not to worry. As the volume of trade grows, these are coming down. In any case, Indian products are competitive even with these factors in comparison to the products of devel-oped countries.

Complicated legal and regulatory regimes? These give Indian business a competitive edge, as Indians are used to navigating such regimes at home.

Chinese competition? The Latin American enthusiasm for China has peaked and the region’s people now understand the risks of overdependence. Latin American businesspeo-ple want to visit Mumbai on the way back from Shanghai.

India offers a “comfort zone” for Latin Americans, millions of whom practice yoga and follow Indian gurus. The India story of high growth with a vibrant democracy resonates with them. Latin Americans find Indians understandable, reliable and likeable. Similarly, the Indians who visit Latin America go back not only with contracts, but also happier and younger.

The synergy in spirit between the new mindset of Indians and Latin Americans supplements the comple-mentarity between the markets of the new Latin America and the new India. g

Latin America offers unprecedented opportunities for Indian businesses to explore, says R Viswanathan

Opportunities beckon

R Viswanathan is India’s ambassador in Buenos Aires. The views ex-pressed are personal and do not reflect those of the government of India.

Cover story


Takeover code

October 2011

F or some years now, the growing challenges and complexities confronting companies globally have seen regulators tweak laws and regulations to pro-

mote competition and attract investments. In September 2009 India’s markets regulator, the Securities

and Exchange Board of India (SEBI), set up a Takeover Regulations Advisory Committee (TRAC). The 12-member committee was headed by a former presiding officer of the Securities Appellate Tribunal, C Achuthan, and its remit was to suggest amendments to the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

TRAC submitted its report in July 2010, fuelling widespread debate over impending changes to the regulations.

A new era

On 23 September SEBI notified the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, triggering a much-awaited makeover of mergers and acquisitions (M&A).

While the new regulations – effective from 23 October – will change the corporate landscape of India, they have also raised the threat of hostile takeovers for listed companies.

“The new code, most certainly overdue, is a step in the right direction, seeking to address objectives ranging from alignment with international takeover norms, more realistic percentage for trigger and open offer, minority

Surveying the field

Predators eyeing India’s listed companies have been empowered by new takeover rules

Nandini Lakshman in Mumbai reports on key changes

Cover story

India Business Law Journal18

Takeover code

October 2011

protection measures and various gaps developed in the existing code implementation,” says Rohit Berry, a part-ner and leader of the M&A practice at professional serv-ices firm BMR Advisors, which provides tax, risk and M&A advice.

Others also believe that India needed to realign its policies. “As a growing economy, India had to align its investment and takeover laws in accordance with global best practices,” says Madhu Nair, president, legal and secretarial, at Piramal Healthcare. Triggering change

The game changer of the new takeover code is the initial open offer trigger, which has been raised to 25% of voting rights of a target company. Under the earlier regulations the open offer trigger was 15%, but as TRAC observed, it “had been fixed in an environment where the shareholding pattern in corporate India was such that it was possible to control listed companies with holdings as low as 15%”. Shareholding patterns have changed and the 15% trigger was found to have outlived its relevance.

As a result of the upward revision of the open offer trig-ger, investors – especially strategic investors who have yet to make up their mind about taking over a company – may acquire up to 24.9% of a listed company without being obliged to make a mandatory open offer.

This is significant because unlike in the West, where most companies are widely held, most of India Inc is still held by the promoters who founded the company. Only a small minority of companies – HDFC, ICICI, ITC and Larsen & Toubro, to name a few – are widely held.

Easy targets?

The changed initial offer trigger will make many Indian companies vulnerable to hostile takeovers.

According to TRAC, which studied 4,054 listed compa-nies before it submitted various proposals to SEBI in July 2010, promoter stakes were below 25% in 594 companies and below 15% in 340 companies. Of the 459 companies with a market capitalization of over `10 billion (US$200 million), the promoter holding was below 15% in 15 com-panies, and below 25% in 31 companies.

On the Bombay Stock Exchange 500 index, promoter

holdings in 210 companies are 51% or less, and in 24 companies they are below 26%. As a result, these com-panies are ideal buyout targets. Shoring up

In the short term, the changes could send promoters and significant shareholders scrambling for funds as they try to raise themselves above the 25% threshold. A mandatory open offer requires an acquirer to put in place firm financial arrangements for the entire amount payable in the offer.

“Companies like Mahindra & Mahindra, the Mumbai-based automotive and farm equipment major, whose promoter shareholding is below 25%, will have to contend with the fact that the new law does not have a ‘grand-fathering’ provision that would give them time to cross that threshold without triggering an open offer,” says Madhurima Mukherjee, a New Delhi-based partner at the law firm Luthra & Luthra.

Minority investors too will be significantly affected: “The 25% threshold enables much more private equity invest-ment to take place, which would formerly have been hin-dered by the prospect of an open offer,” adds Mukherjee.

Lying low

There is also a consolidation trigger in the 25% to 75% band of a target company. A shareholder who already holds at least 25% of the target company can consoli-date its holding through a 5% creeping acquisition each financial year till they reach the 75% voting rights mark. They can do this through preferential allotments, negoti-ated transfers, or non-market transactions and do not need to make an open offer while they are making such an acquisition.

Observers remark that the two bands – below 25% and 25% to 75% – give acquirers who are at both ends of the spectrum substantially improved headroom.

Upping the consolidation limits is likely to boost pro-moter and investor confidence to commit more capital. “The increasing threshold will encourage existing inves-tors holding less than 15% to shore up, and it’s a larger limit for the new guys resulting in more FDI,” says Sandip Bhagat, a Mumbai-based partner at S&R Associates.

The new code, most certainly overdue, is a step in the right directionRohit BerryPartnerBMR Advisors

As a growing economy, India had to align its investment and takeover laws … with global best practicesMadhu NairPresident, Legal Piramal Healthcare

Cover story


Takeover code

October 2011

Foreign collaborators and minority foreign partners too are expected to flex their muscles to increase their stakes in listed companies without triggering an open offer.

Level field?

The regulator has also augmented the minimum size of an open offer to 26% from the previous 20%. This pro-vides an easier exit for investors and also ensures that those who hold 25% in a listed company can acquire control by making an open offer of 26% to reach 51%.

“This move will bring in serious and strategic acquirers,” says Dev Bajpai, who is executive director (legal) at Hindustan Unilever (HUL). He says that the 26% offer size provides a level playing field for Indian and foreign investors.

But there is no guarantee that the increased 26% offer size will give public shareholders a complete exit, even if they tender all their shares. “The acquirer is under no obligation to acquire more than 26% of the voting capi-tal,” adds Bajpai.

One of TRAC’s main recommendations was a 100% mandatory offer as a means to address the concerns of minority shareholders.

“Should a shareholder desire to exit a target company at the offer price mandated under the takeover regulations, there ought to be no reason for the law to pre-empt him from a complete exit,” said TRAC, observing that such a requirement would be “equitable, just and fair”. TRAC also pointed out that this is the norm in several international jurisdictions.

However, this was not to be and corporate executives say they are glad that SEBI did not accept this recom-mendation. If it had, Indian promoters would have strug-gled to raise funds for a huge public float, as banks in India are not allowed to fund the acquisition of shares.

Inherent risks

Despite the consolidation limits, experts predict that buyouts will become a reality because the thresholds in the new code make it easier for an acquirer to obtain a control-ling stake in a target company.

“Promoters with low holdings may need to be watchful since the new limits allow the acquirer a 51% stake [25% plus open offer for 26%],” says Vijaya Sampath, group general counsel and company secretary at Bharti Enterprises.

Neeta Sanghavi, a partner at Mumbai law firm Wakhariya & Wakhariya, adds: “Increasing the open offer size provides the acquirer the ability to block special resolutions, which are mandatory for critical corporate decisions.”

Even a high-profile company like Infosys would be vul-nerable as the promoters of the Bangalore-based tech major hold barely a 16% stake. But while technically the Infosys promoters’ low holding leaves the door ajar for an acquirer, the company’s war chest of over US$3 bil-lion and a market capitalization of US$25 billion could inhibit acquirers. “To fork out that kind of money is no joke. Only a foreign investor like IBM may be able to pull it off,” says an investment banker.

But is this change in regulation really pro-acquirer? Not if you read the fine print of the regulations, argues Somasekhar Sundaresan, a Mumbai-based partner at J Sagar Associates in a column in Business Standard. Sundaresan, who was a member of TRAC and one of only two lawyers on it, points to the little publicized fact that the new regulations prohibit delisting for a period of twelve months. As such, an acquirer whose stake crosses 75% purely because he had to make an open offer for 26%, will be forced to first sell down his share-holding and then build it up again if he chooses to delist after 12 months. This is “in fact a punishment to the acquirer for having done a transaction that triggered an open offer”.

Creeping into control

The new regulations for creeping acquisitions also pro-vide an avenue to increase holdings in a venture. The old regulations restricted promoter groups with stakes of at least 55% but less than 75% to a one-time 5% per cent acquisition. They too can now take their shareholding to 75% by creeping up by 5% every year.

“The new law is more logical. Once the law has decided that 25% is enough public shareholding for liquidity, then there should be no room for half measures like the earlier mezzanine ceiling at 55%,” says Mukherjee at Luthra & Luthra.

What happens if promoters are cash strapped? This is clearly the case with PRS Oberoi, the son of the founder

The 25% threshold enables much more private equity investment to take placeMadhurima Mukherjee Partner Luthra & Luthra

The increasing threshold will encourage existing investors … to shore up, and it’s a larger limit for the new guys resulting in more FDISandip BhagatPartnerS&R Associates

Cover story


Takeover code

October 2011

On 23 September the Securities and Exchange Board of India (SEBI) notified the new SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. These regulations, – known as the takeover code – are effective from 23 October, ushering in the following key changes.

The threshold for the initial open offer trigger has •been increased from 15% to 25%.To ensure fair value for all shares tendered in an •open offer, the minimum price payable has to be the highest of the following: (i) the negotiated price triggering the open offer; (ii) the volume-weighted average price paid by the acquirer in the preceding 52 weeks; (iii) the highest price paid by the acquirer during the preceding 26 weeks; or (iv) the market price based on volume-weighted average market prices in the preceding 60 trading days. Shareholders holding shares entitling them to •exercise 25% or more of the voting rights in the target company may, without breaching minimum public shareholding requirements under the listing agreement, voluntarily make an open offer to consolidate their shareholding (minimum 10%).The minimum open offer size has been increased •

from 20% of the total issued capital to 26%.Provisions regarding non-compete fees have been •scrapped, so that all shareholders are given an exit at the same price.In cases of competing offers, the successful bidder •is allowed to acquire shares of other bidders after the offer period without attracting open offer obligations.The board of the target company is required to make •a mandatory recommendation on the offer.An indirect acquisition of a company will be treated •as a direct acquisition for all purposes if the indirectly acquired target company is a predominant part of the business or entity being acquired, comprising at least 80% of the target company’s assets or net sales or market capitalization.

Analysis of three changes

Increase in the mandatory offer threshold from 15% to 25%: This will align the takeover code in India with regulations in places such as the UK and Hong Kong (where it is 30%). As a result, existing share-holders and new investors can invest up to 24.99%

Defending your turfAs India’s new takeover regulations take root, Akil Hirani provides practical tips for corporate counsel

Practitioner’s perspective in a listed company without triggering the takeover code. However, they will still have to ensure that their acquisition does not give them de facto control of the company. If it does, a mandatory open offer will be automatically be triggered.

The higher threshold significantly increases the risk of hostile takeovers. Financially strong promoters hold-ing below 25% will be able to acquire more shares and increase their hold, but promoters who cannot afford to do this may be at risk. In such cases, strategic acquir-ers will be able to easily acquire up to 24.99% and then consolidate their holding by negotiating an open offer with minority shareholders.

Increase in the open offer size from 20% to 26%: An increase in the initial threshold to 25% and the open offer size to 26% creates the possibility of an acquirer getting a simple majority and control (51%).

While the Reserve Bank of India does not permit Indian banks to finance acquisitions on the strength of a target’s balance sheet, a foreign acquirer with access to foreign debt is not restricted in this man-ner. This means that foreign acquirers may find it easy to initiate acquisitions in India and gain control over Indian companies.

Change in size of voluntary offers: To facilitate the consolidation of holdings in excess of 5% (creep-ing acquisition) by substantial shareholders (holding 25% or more), SEBI now allows voluntary offers for a stake of 10% or more. This will provide flexibility to shareholders to increase their shareholding without being obliged to make an open offer for an additional 26% stake. However, as open offers are often not fully subscribed, companies will have to watch as a desired increase in shareholding may not be fully achieved.

The way forward

In-house counsel of companies in which the promot-ers have a low holding will have to focus on takeover defences. For a starter, they will have to assess competi-tors in the industry, both in India and abroad, and check on the financial capacity of each one. They will also need to closely monitor trading patterns.

After an initial assessment, such companies may wish to put poison pills in place. These can be in the form of options under employee stock ownership plans to be converted into shares as soon as a certain number of shares are acquired by any third party. The issue of rights or bonus or discounted shares to shareholders can also have the same effect. In addition, shares with different voting rights can be introduced, thereby making it difficult for an acquirer to get voting control over a company.

Golden parachutes are another option. These involve giving senior management significant cash and stock grants in the case of a hostile takeover, which will make it expensive for an acquirer to run the company post-acquisition. Companies can also amend their charter documents to introduce a supermajority vote requirement for approval of an acquisition, instead of the 51% vote that is usually needed.

Eventually, white knights may need to be brought in to defend the company. In the Indian context, if the sector is restricted and requires government approval for foreign investment, the foreign acquirer may be subject to regula-tory delay. This can work in favour of the target and give it time to defend itself.

Akil Hirani is the managing partner and head of the transactions practice at Majmudar & Co. The firm has offices in Mumbai, Banga-lore, New Delhi, Hyderabad and Chennai.

of East India Hotels (EIH) who is currently its chairman. Oberoi holds a 34.6% stake in EIH, which owns and oper-ates the Oberoi chain of hotels. When tobacco-to-hotels major ITC began buying the EIH stock, Mukesh Ambani

of Reliance Industries stepped in as a white knight and bought stock held by the Oberoi family. Today, Reliance and ITC each have stakes of nearly 15% in EIH. With EIH shares trading below `90 in a volatile market and the promoter’s low holding, the company makes an easy takeover target.

ITC, which has been purchasing peer stocks from the market over the past three years and has a 12.96% stake in Hotel Leela Ventures, has already indicated it is hungry for more. At ITC’s annual general meeting in Kolkata in July, its chairman, YC Deveshwar, said he is open to rais-ing the company’s stake in other hotel companies if the opportunity arises and the price is good.

Armed with over US$1 billion in liquid funds, ITC can increase its stake in rival hotels to 25% without trigger-ing the open offer and then either stay put or do creeping acquisitions. “Even at this level ITC could be a major nuisance value to the EIH and Leela promoters,” says Krishnava Dutt, a partner at Argus Partners.

Clarification on creeping

The new code provides an important clarification with respect to how the 5% annual creeping acquisition limit is computed. Under the old code, one could argue that a

Promoters with low holdings may need to be watchful since the new limits allow the acquirer a 51% stakeVijaya Sampath Group General CounselBharti Enterprises

Cover story


Takeover code

October 2011

public offer should not be triggered if a promoter with a 40% stake acquired an additional 10% via a preferential issue, but sold 5% in a parallel secondary deal, leaving him at 45%. The new code does not permit this, as the 5% acquisition is based on a gross acquisition of 5% voting rights and disregards sales or dilutions.

A key change has been made to assist shareholders with a stake of at least 25% to consolidate their holding. Under the new code, such shareholders can voluntar-ily make an open offer for a minimum of 10% of voting rights in a target company, provided their final stake does not exceed 75%.

“This minimum size is to ensure that the takeover code is used as a consolidation platform only through serious offers,” says Sundaresan at J Sagar Associates.

Under the previous rules, shareholders with a stake of at least 55% could make a voluntary open offer as long as they did not breach the minimum public shareholding requirement.

Non-compete fees

Significantly, the new code has done away with “non-compete fees” to any of the selling shareholders, includ-ing promoters, in an open offer. The new regulation

states that if any additional payment is made to the pro-moters, it needs to be factored into the open offer price, and paid uniformly to all the selling shareholders.

On 23 September the Securities and Exchange Board of India (SEBI) notified the new SEBI (Substantial Acquisition of Shares and Takeovers) Regulations. These regulations, – known as the takeover code – are effective from 23 October, ushering in the following key changes.

The threshold for the initial open offer trigger has •been increased from 15% to 25%.To ensure fair value for all shares tendered in an •open offer, the minimum price payable has to be the highest of the following: (i) the negotiated price triggering the open offer; (ii) the volume-weighted average price paid by the acquirer in the preceding 52 weeks; (iii) the highest price paid by the acquirer during the preceding 26 weeks; or (iv) the market price based on volume-weighted average market prices in the preceding 60 trading days. Shareholders holding shares entitling them to •exercise 25% or more of the voting rights in the target company may, without breaching minimum public shareholding requirements under the listing agreement, voluntarily make an open offer to consolidate their shareholding (minimum 10%).The minimum open offer size has been increased •

from 20% of the total issued capital to 26%.Provisions regarding non-compete fees have been •scrapped, so that all shareholders are given an exit at the same price.In cases of competing offers, the successful bidder •is allowed to acquire shares of other bidders after the offer period without attracting open offer obligations.The board of the target company is required to make •a mandatory recommendation on the offer.An indirect acquisition of a company will be treated •as a direct acquisition for all purposes if the indirectly acquired target company is a predominant part of the business or entity being acquired, comprising at least 80% of the target company’s assets or net sales or market capitalization.

Analysis of three changes

Increase in the mandatory offer threshold from 15% to 25%: This will align the takeover code in India with regulations in places such as the UK and Hong Kong (where it is 30%). As a result, existing share-holders and new investors can invest up to 24.99%

Defending your turfAs India’s new takeover regulations take root, Akil Hirani provides practical tips for corporate counsel

Practitioner’s perspective in a listed company without triggering the takeover code. However, they will still have to ensure that their acquisition does not give them de facto control of the company. If it does, a mandatory open offer will be automatically be triggered.

The higher threshold significantly increases the risk of hostile takeovers. Financially strong promoters hold-ing below 25% will be able to acquire more shares and increase their hold, but promoters who cannot afford to do this may be at risk. In such cases, strategic acquir-ers will be able to easily acquire up to 24.99% and then consolidate their holding by negotiating an open offer with minority shareholders.

Increase in the open offer size from 20% to 26%: An increase in the initial threshold to 25% and the open offer size to 26% creates the possibility of an acquirer getting a simple majority and control (51%).

While the Reserve Bank of India does not permit Indian banks to finance acquisitions on the strength of a target’s balance sheet, a foreign acquirer with access to foreign debt is not restricted in this man-ner. This means that foreign acquirers may find it easy to initiate acquisitions in India and gain control over Indian companies.

Change in size of voluntary offers: To facilitate the consolidation of holdings in excess of 5% (creep-ing acquisition) by substantial shareholders (holding 25% or more), SEBI now allows voluntary offers for a stake of 10% or more. This will provide flexibility to shareholders to increase their shareholding without being obliged to make an open offer for an additional 26% stake. However, as open offers are often not fully subscribed, companies will have to watch as a desired increase in shareholding may not be fully achieved.

The way forward

In-house counsel of companies in which the promot-ers have a low holding will have to focus on takeover defences. For a starter, they will have to assess competi-tors in the industry, both in India and abroad, and check on the financial capacity of each one. They will also need to closely monitor trading patterns.

After an initial assessment, such companies may wish to put poison pills in place. These can be in the form of options under employee stock ownership plans to be converted into shares as soon as a certain number of shares are acquired by any third party. The issue of rights or bonus or discounted shares to shareholders can also have the same effect. In addition, shares with different voting rights can be introduced, thereby making it difficult for an acquirer to get voting control over a company.

Golden parachutes are another option. These involve giving senior management significant cash and stock grants in the case of a hostile takeover, which will make it expensive for an acquirer to run the company post-acquisition. Companies can also amend their charter documents to introduce a supermajority vote requirement for approval of an acquisition, instead of the 51% vote that is usually needed.

Eventually, white knights may need to be brought in to defend the company. In the Indian context, if the sector is restricted and requires government approval for foreign investment, the foreign acquirer may be subject to regula-tory delay. This can work in favour of the target and give it time to defend itself.

Akil Hirani is the managing partner and head of the transactions practice at Majmudar & Co. The firm has offices in Mumbai, Banga-lore, New Delhi, Hyderabad and Chennai.

Increasing the open offer size provides the acquirer the ability to block special resolutions, which are mandatory for critical corporate decisionsNeeta SanghaviPartner Wakhariya & Wakhariya

Cover story


Takeover code

October 2011

Dutt at Argus Partners believes that putting promoters on par with minority shareholders isn’t fair. “Unlike the US and UK where managements take home whopping salaries, Indian managements hardly get anything. They have to be rewarded for their sweat and toil,” he says.

Others think that not discriminating between promot-ers and shareholders is good. Sanghavi at Wakhariya & Wakhariya says: “It’s a bonanza for the public sharehold-ers. This provision has been made after observing the payments made to the promoters in the guise of non-compete fees under the old takeover regime.”

This impending change had an impact on the non-compete clause in the recent Cairn-Vedanta deal, where Cairn PLC, which owned 62.36% of Cairn India, sold 51% of its stake to the London-based metal conglomer-ate Vedanta. Apart from paying `355 a share to Cairn’s shareholders for the mandatory open offer, Vedanta was to pay Cairn’s promoters an additional `50 per share as a non-compete fee. With the acquisition plunging into a political quagmire, Cairn waived the non-compete fee to sweeten the deal for Vedanta. Making a call

To enhance corporate governance, the new code requires independent directors appointed by the board of a potential target to provide a reasoned recommenda-tion to shareholders about an open offer. The directors are allowed to seek external professional advice.

“This is in line with the practice and regulation in most economies including some countries in Africa,” says Sampath at Bharti Enterprises. Last year, Bharti Airtel acquired the sub-Saharan assets of Zain Telecom to expand its global footprint.

Bajpai at HUL also sees this as a positive change. “This is a fair and transparent initiative in the regulations in the interest of the shareholders,” he says.

Acquire and delist?

In a bid to protect minority shareholders, the new regu-lations have made it tougher for companies to delist. This has been prompted by acquirers who have on occasion

used the benefit of a fixed offer price to consolidate their shareholding to the maximum possible under the open offer, only to launch a delisting offer later.

In May 2008, Hong Kong and Shanghai Banking Corporation (HSBC) acquired a controlling (73.21%) stake in IL&FS Investmart, making it the first foreign bank to control an Indian retail brokerage. The bank subse-quently made an open offer to public shareholders for an additional 20% and raised its stake to 93.86%.

According to the regulations then in force, HSBC had to dilute its stake below 90%, or initiate delisting. In June 2009 the board of IL&FS Investmart informed the Bombay Stock Exchange and the National Stock Exchange of India that it was delisting. Two months later the company was renamed HSBC InvestDirect.

But a similar delisting attempt by BOC India, a Kolkata-based industrial gas company, failed when it was launched in January. BOC had been acquired by Linde of Germany. Market analysts attributed the poor showing to growing shareholder resistance to multinational firms that take their local subsidiaries private.

Now, following an open offer, if the acquirer’s share-holding exceeds 75%, the acquirer cannot make a vol-untary delisting offer for a year after the completion of the offer. Promoters have to reduce their shareholding to 75% before launching a delisting offer. Observers say the new rule is a deterrent to delisting as it pushes up costs and is time consuming.

Early concerns

While it is too early to tell if the new takeover code will pass muster, a few provisions have already raised concerns.

Mukherjee at Luthra & Luthra mentions “inherent con-tradictions” surrounding open offers. These are triggered by any breach by an individual shareholder of the 25% threshold, irrespective of its impact on the aggregate shareholding of the shareholder and persons acting in concert. This could lead to a situation where an increase in the holding of an individual shareholder will trigger an open offer even though the increase is within the 5% creeping acquisition limit when aggregated with persons acting in concert with the shareholder.

[Promoters of Indian companies] have to be rewarded for their sweat and toilKrishnava DuttManaging PartnerArgus Partners

This minimum size [for voluntary offers] is to ensure that the takeover code is used as a consolidation platform only through serious offersSomasekhar SundaresanPartner J Sagar Associates

Cover story


Takeover code

October 2011

The new code also says that an open offer is triggered when the holding of individual shareholders increases due to their non-participation in a share buyback, unless they vote against or abstain from voting on the resolution relating to the buyback or sell within 90 days in order to bring their holding below the 25% threshold. Observers say that it seems to be inherently unfair to force an exist-ing shareholder to sell out in the event of a buyback, or to acquire an additional 26% under an open offer.

Overlap in regulations

There is also inconsistency between the various regulations that will come into play during an acquisi-tion, lament practitioners. For instance, the Competition Commission of India (Procedure in regard to the transac-tion of business relating to combinations) Regulations, 2011, under the Competition Act, 2002, require a notifi-cation on acquiring 15% of the shares of a listed enter-prise. This has to be harmonized with the increase in threshold limits under the new takeover code.

“There is a need for all connected regulations to be consistent and rational, so that adhering to one does not lead to an absurd situation in another which was never intended,” says Bajpai.

Under competition law, a combination that is created by way of acquisition of shares and is above specific asset or turnover thresholds cannot take place unless the Competition Commission of India (CCI) approves it.

This will mean that any open offer made under the new takeover code cannot be implemented until it is cleared by the CCI.

Despite problems like this professionals working in the M&A sphere agree that the new takeover code will go some way in levelling the field for all shareholders. And most would agree with Bhagat at S&R Associates when he says: “Let’s wait and see how it plays out.” g

There is a need for all connected regulations to be consistent and rationalDev BajpaiExecutive Director (Legal)Hindustan Unilever

Spotlight


Capital markets

October 2011

F ailed trades – trades in securities that are not settled on the contracted settlement date – are a global phe-nomenon. They arise when a seller or a purchaser of a

security does not deliver the security or funds, as promised. Portfolio investors have become increasingly sensitive to the risks of a failed trade following a spate of high-profile failures to settle trades on the sidelines of the financial crisis.

While India was not the epicentre of the financial turmoil, the global nature of portfolio flows demands that the Indian payment and settlement system be evaluated in order to mitigate any risk associated with failed trades.

In the process of settling a trade, both the title to the secu-rities and the consideration are exchanged. In India, as in many other common law jurisdictions, legal title to securities and any corresponding consideration is transferred only on settlement and no right, title or interest is transferred prior

to settlement. A purchaser of securities does not obtain any beneficial right over the security purchased, even if the trade is matched. Short delivery

In the event of a short delivery of securities, the Bombay Stock Exchange (BSE) or the National Stock Exchange of India (NSE) debits the price of the securities from the coun-terparty that has failed to deliver the securities and conducts an auction to rectify the short delivery. If the auction price is higher than the amount debited from the counterparty, the shortfall is debited from the defaulting counterparty.

With regard to the short delivery of funds, both the NSE and the BSE maintain a settlement guarantee fund. However, the BSE has some discretion in using its settlement guarantee

Risky businessWhat are the legal risks associated with trading in securities in India?

Mathew Chacko explains

Spotlight


Capital markets

October 2011

fund to make good any loss arising out of the short delivery of funds, while the NSE is obliged to step into the shoes of the defaulting party. Further, the BSE’s settlement guarantee fund is thinly capitalized and so may expose a potential pur-chaser to an element of risk in the event of a failed trade.

Bankruptcy risks

The bankruptcy of a counterparty to a trade, the custo-dian, the broker or the clearing house increases the risk of a failed trade.

Bankruptcy of the counterparty: Since title to the secu-rity and funds are transferred on settlement, an investor is not subject to settlement risks on account of the bank-ruptcy of the counterparty. In the event of a short delivery of funds or securities, the auction process described above would take place.

Investors trading on the BSE bear the risk of an auc-tion being unsuccessful, in which case, an investor’s only recourse would be to participate in bankruptcy proceed-ings. If investors are trading on the NSE, its clearing house would make good any loss suffered.

The short delivery of shares and auction penalties are practical problems that all equity traders may face. To avoid the risk of a short delivery, what anyone who trades shares in India really needs is a sense of discipline.

One of the golden rules of trading is that one should never sell shares one does not own. This rule applies only to cash trades. In the case of derivatives, there are no risks with regard to the short delivery of shares or the auction of securities. In that market, everything is contract-based. Avoiding trouble

The Securities and Exchange Board of India requires that settlement of market trades in listed securities take place in dematerialized (demat), or electronic, form. Investors must open a demat account with a deposi-tory participant that is authorized to offer depository services to investors. Banks and other financial institu-tions, custodians and stockbrokers that comply with the prescribed requirements can be registered as depository participants.

An investor who purchases equity shares should see those shares reflected in their demat account before giv-ing a broker or institution the order to sell them. The stock exchange in India follows a system known as T+2, which means that securities that have been purchased from the secondary market must be received within two days after the day of trade (T).

If the T+2 deadline passes and a buyer’s shares have not come into their account, the stock exchange will penalize the party that sold those shares to the buyer. This penalty is 1% of the transaction value plus the auction price at which shares are bought to deliver to the investor.

This process can be nerve-racking, especially because traders are keen on short-term gains. With this in mind, it is essential for investors to avoid selling shares even after T+2 without confirming that the shares are reflected in their account.

The dangers of a quick buck

This leads to another aspect of trading which has underlying risks of short delivery. Since the Indian

equity markets are particularly volatile, brokerage houses frequently recommend to their clients stocks which they expect to rise within 24 hours; in essence, to buy on one day and sell it the next day. This is popu-larly known as “buy today sell tomorrow” (BTST). This practice is profitable for the brokerage house since the buy/sell transaction attracts costs. The client, on the other hand, endeavours to make an extra buck overnight.

However, it is crucial to understand that by purchas-ing on one day and selling the next morning, investors are essentially ignoring the T+2 concept. With effi-cient technology it is expected that the shares will be reflected in the buyer’s account by the next morning but this is like playing with fire.

A brokerage takes no responsibility once the BTST call has been made and executed. Therefore, if a seller fails to deliver the next day, the loss is entirely their own. For this reason, it is advisable to avoid BTST trad-ing. Investors should treat trading like a business rather than a gamble. The strike rates may be tempting, but one auction cost could more than wipe out all of an investor’s profits. Technology and discipline

Traders should exercise diligence and responsibility in executing the delivery of shares. Having access to online demat accounts means traders are not required to physically go to a bank or institution to effect a share transfer or delivery.

Care is required when inserting details on the deliv-ery instruction. Along with this, one must not delay in effecting the transfer. An error on these fronts could result in the delivery being rejected by the automated systems of the stock exchange.

If traders are unaware of the deadlines of the system, they should call their depository participant and obtain the details they need.

Falling shortManish Hathiramani shares some practical tips to avoid the hazards of short deliveries

Manish Hathiramani is a proprietary trader and technical analyst at Deen Dayal Investments in Kolkata. He can be contacted at [email protected].

Spotlight


Capital markets

October 2011

Bankruptcy of intermediaries: Intermediaries such as stockbrokers and custodians are required to maintain investor funds and securities in segregated accounts. The funds and securities continue to be the property of the investor and are operated by intermediaries under an obligation of trust.

As such, other claimants would not have access to these properties in the event of the bankruptcy of the intermediary. However, the investor would not be able to freely transfer the funds or securities and would have to obtain an order of the court authorizing any such transfer.

Bankruptcy of the clearing house: Indian law does not specifically contemplate the bankruptcy of a clearing house. As private limited companies, National Securities Clearing Corporation Limited (the NSE’s clearing house) and BOI Shareholding Limited (the BSE’s clearing house) are subject to India’s bankruptcy law.

National Securities Clearing Corporation Limited is a party to trades on the NSE, so an investor’s claim in the event of the bankruptcy of the clearing house would receive priority over the claims of secured creditors. BOI Shareholding Limited is not a party to trades on the BSE and as such, an investor’s claims in the event of BOI Shareholding’s bankruptcy may be junior to those of other unsecured creditors.

However, both these clearing houses are majority owned by public-sector banks and therefore the chances of bankruptcy are minimal.

Investor protection

In the event of a failed trade, the Indian legal sys-tem promises significant levels of investor protec-tion. However, despite the BSE being the oldest stock exchange in Asia, the effectiveness of the settlement and payment system in the context of the bankruptcy of a party or intermediary to a trade remains substantially untested. An investor’s rights to funds or securities on the bankruptcy of a counterparty, the clearing house or any other intermediary depend on the application of legal principles that have not been previously visited by Indian courts in a similar context and is uncertain to that extent.

One may be tempted to conclude that the non-appli-cation of these principles is a testament to the efficiency of the payment and settlement system and an indication that the risks are minimal – a conclusion that, after the adventures of the past few years, many would hesitate to make. g

Mathew Chacko is a legal manager at Tan Peng Chin LLC in Singa-pore. He is licensed to practice Indian law and worked at one of India’s largest firms before joining Tan Peng Chin LLC. He advises clients on investments into India and has represented corporate clients, invest-ment and commercial banks and private equity funds on a variety of transactional and related corporate matters. He can be contacted at [email protected].

Spotlight


Due diligence

October 2011

H igh-profile corruption cases have left investors feeling jittery about inking deals in India. Accounting irregu-larities, financial mismanagement and corrupt deal-

ings have stifled corporate appetites for quick deals, forcing investors to take extra care when making assessments of the companies they intend to partner with, or purchase.

Instead of just relying on traditional accounting and law firms for due diligence when evaluating prospective invest-ment opportunities in India, many companies are turning to forensic accounting firms and other investigative agencies to uncover potential investment risks.

“Clients are asking for a more nuanced and sophisticated due diligence product in addition to the usual financial and legal due diligence,” says Mumbai-based Richard Dailly, managing director of the consulting services group of New York-based investigative consultancy firm Kroll.

“There is a huge market for background checks on pro-moters and we have [retired] professionals from the police or intelligence bureau to do due diligence work,” says Vikram Hosangady, an executive director of KPMG in Mumbai. Over the last four to five years, Hosangady says consultants have begun investigating business issues, rather than just legal and financial factors that could affect a deal. “Ten years ago we were [unconcerned] about business forecasts ... today we even analyse political risks, like the fallout of the demand for

a separate Telangana state in Andhra Pradesh,” he says. “We are not just checking business figures, but finding out what is driving those numbers.”

Assessing the fundamentals

However, companies still focus largely on financial and legal assessments – the most basic forms of due diligence – to examine the foundations of any deal. Buyers are keen to secure the accounting files of a target company to analyse its financial stability and compliance track record.

The b ig four in ternat iona l account ing f i rms, PricewaterhouseCoopers (PwC), KPMG, Ernst & Young, and Deloitte Touche Tohmatsu, have a presence in India and have all conducted due diligence assessments for for-eign investors looking to seal deals in the region.

Shashank Jain, an associate director of the transactions group at PwC India, says that some foreign companies have made use of accounting and tax diligence to optimize the deal value of their recent investments in India. Among these are McCormick, a US processed food company; American Tower Corporation, a wireless communication sites operator; Astro All Asia Networks, a Malaysian media group; Legrand, a French electrical components manufacturer; and Valeo, a French auto components maker.

What lies beneath?Investors are diving deeper to rigorously assess their

business targets before sealing a deal

Raghavendra Verma reports from New Delhi

Spotlight


Due diligence

October 2011

Foreign companies are particularly interested in a target company’s quality of earnings (the proportion of income it earns from its main business activity), its computation of net assets, working capital, various forms of debt, accounting discipline and control, and key factors affect-ing revenue and cost. From Jain’s experience, aggressive tax positions, inadequate investment in controls systems and personnel, and off-the-books sales are some of the problems that have been identified during a regular due diligence exercise.

In a normal due diligence exercise, says Gautam Khaitan, the managing partner at OP Khaitan & Co, all transactions involve executing the term sheet, conducting due diligence, negotiating, drafting and finalizing the business transfer agreement and the share sale purchase agreement, and handing over the closing documents.

Legal and financial due diligence are conducted paral-lel to one another, which makes the assessment process a collaborative one. “If we spot a dispute, we pass it on to the law firms, and [law firms send us queries if they come across any issues] where a liability is probable,” says Sanjay Mehta, a partner at BMR Advisors in Gurgaon.

Mehta explains that lawyers will evaluate the probable outcome of the dispute in order to help accounting firms compute their financial impact. “Lawyers help us under-stand disputes, litigation or any open issues that could be a matter of claim,” he says.

Digging deep

The initial background checks on a target company and its promoters begin with searches on the internet and commonly available databases. Dailly says some-times individuals within the target company and industry experts are approached. “The key risk factors in India are corruption-focused where middlemen – particularly those with government backgrounds – are involved,” he says. “Sectors which involve land and licensing are considered to be of high risk.”

Khaitan says that alarm bells ring during the due dili-gence process with the discovery of unusual transactions, discrepancies in accounting records, activities or transac-tions which are outside a target company’s normal course of business, companies failing to pay employee benefits, and tax evasion.

Other issues that are picked up on include contingent liabilities, money laundering, ghost employees, support for banned charities, underworld links, overvaluation of sales and underreporting of profits.

The level of investigation required for any deal depends on the objectives of the investor. Strategic buyers with a long-term perspective that want to integrate a target com-pany with their core business “evaluate their synergies in much more detail”, says Mehta at BMR Advisors. Private equity firms on the other hand, tend to look only for the possibility that a target company can grow and guarantee promising returns, although they too appear to be taking a more stringent approach towards due diligence than in the past. A family affair

Mehta says that it is often harder to properly evaluate companies that are family owned or promoter driven: “It is a challenge to properly understand their business with all its variables as they have issues of corporate governance, transparency and decision making.”

It can be tricky even to obtain data from some of these companies. Mukesh Bajaj, a partner at CreditCheck Partners, a due diligence consultancy firm in Mumbai, sug-gests that poor transparency standards are to blame. In addition, the availability of data at many Indian companies is relatively limited and so due diligence professionals are left with no choice but to visit the companies concerned in order to access their operational systems and interact with the employees.

PwC India conducted a financial due diligence exercise on a promoter-driven Indian auto components manufactur-ing company and discovered that employees’ retirement benefits had not been adequately covered, and both depreciation calculations and capitalization of expenses were incorrect. The company was unable to understand why these non-cash accounting adjustments would lead to a reduction in its valuation.

According to Ashish Sonal, the CEO of Orkash, a Gurgaon-based operational risk management firm, some family owned companies also struggle with succession issues, power sharing and sibling rivalry, which can “lead to disruptions in business operations or problems during the transfer of titles”.

Clients are asking for a more nuanced and sophisticated due diligence product Richard DaillyManaging Director Kroll

There is a huge market for background checks on promotersVikram HosangadyExecutive DirectorKPMG

Spotlight


Due diligence

October 2011

Investigating listed companies

According to Rabindra Jhunjhunwala, a partner at Khaitan & Co, insider trading regulations of the Securities and Exchange Board of India require that no unpublished price sensitive information (UPSI) of a target which is listed may be provided to the acquirer. These regulations are meant to prohibit deal-ing in securities that are based upon UPSI of a target entity.

SEBI has proposed an exception to this rule in a concept paper on the regulation of alternative investment funds pub-lished on 1 August. It suggests that private investments in public equity funds, commonly known as PIPE funds, looking to acquire securities, could be given access to non-public information under a confidentiality agreement for the purpose of conducting due diligence.

Sectors at risk

Financial, accounting and corporate irregularities often threaten to derail real estate and infrastructure deals in India.

A major Indian infrastructure company was planning to invest in a 100-kilometre highway project in south India and hired Orkash to investigate unexpected protests launched by local villagers against the project. The project had been underway for years and there had been no reported dis-content among the local population. Orkash’s investigation revealed that the protests were “organized by an influential local politician who wanted to make imprudent financial gains from the project,” says Sonal.

While this politician was in power, he had routed the high-way through his electoral constituency and purchased large areas of farmland around the proposed road using “benami” or false identities. He had expected the price of the land to shoot up once the project was completed, but a new govern-ment assumed power and changed the routing.

After receiving Sonal’s report, the Indian construction com-pany was convinced that the protests were not genuine and thus went ahead with the project.

Timelines, costs and teams

Mehta estimates that 85% of commercial deals signed in India are valued between US$50 million and US$150 million

and financial due diligence for such deals takes four to six weeks. Deals over US$500 million could take eight to 12 weeks. A typical due diligence exercise involves three to four partners who handle financial, business and tax due diligence separately. The number of analysts under these partners depends on the scale and complexity of the investigation.

Khaitan says legal due diligence can take between two to six weeks to complete. A typical team, he says, would consist of six to 10 lawyers, but the team size depends largely on the transaction and the size of the law firm being engaged.

From Mehta’s experience, fee structures for due diligence are normally customized and depend on how long the work takes. He says that financial due diligence costs US$80-100 per hour, which is less than one-third of the rate one would expect to pay in Europe. Rohitashwa Prasad, a Gurgaon-based partner at J Sagar Associates, says that law firms are more agreeable to fixed fees for due diligence rather than hourly charges.

Prasad says that due diligence exercises are becoming more process driven thanks to the improvement in general record maintenance at many Indian companies. Operations at these companies are more streamlined and management teams have become more adept at interacting with, and responding to the queries of, diligence teams. In terms of legal due diligence, Prasad says “it now takes relatively less time than five years ago.”

One of the biggest reported due diligence teams was put together by Reliance Industries in 2009, in relation to its proposed US$14 billion acquisition of LyondellBasell, a financially troubled Luxembourg- based chemical company. According to documents filed with a US bankruptcy court in southern district of New York, Reliance and its advisers requested more than 1,000 items from LyondellBasell, which constructed an electronic data room that was accessed by hundreds of Reliance’s advisers and personnel.

The filing also said that LyondellBasell and its advisers made “full teams available to guide in-person visits [by Reliance] to over 20 of the company’s key facilities world-wide”. However in the end, Reliance’s offer was rejected by the target company despite an increase in the offer price, with LyondellBasell contending that its own restructuring plan to exit bankruptcy was “superior” to Reliance’s offer. Moving forward

Lawyers, accountants, investigators and others involved in due diligence processes all emphasize that the aim of the exercise is not to scuttle a deal. “We try to identify key risk areas and work with clients on mitigating and lowering the risk,” says Dailly. “Very often, information which we uncover can be used by investors as a negotiating tool.”

Findings during the due diligence process may alter an investor’s view of the value of a deal, leading to more rounds of negotiations between the parties. For example, says Mehta, if a target company has a huge receivable and an acquirer is not confident that it will be collected, the target company can put the same amount in an escrow account and if the receivable is not collected in, say, six months, the money in the account will be turned over to the buyer.

However, there are also situations that demand can-celling a proposed deal. Khaitan says: “Some risks may be legally remote but difficult to repair, and if a target is seriously flawed, the acquirer should be prepared to look elsewhere.” g

[Family owned and promoter-driven companies] have issues of corporate governance, transparency and decision making Sanjay MehtaPartner BMR Advisors

What’s the deal?


Competition law

October 2011

T he introduction of India’s new competition law has sparked great debate and analysis. Domestic com-panies in India are studying the law in an effort to

understand how it may affect business operations. For Indian companies with a global footprint or international companies with assets or operations in India, this task may be much trickier, particularly because of the increasing pen-etration of competition law worldwide.

Over 100 countries have laws to regulate agreements, commercial practices and mergers that may affect competi-tion. It is vital for businesses to take both a local and a global approach when assessing commercial practices for compe-tition law compliance because practices taking place in one country may be caught by the competition laws of another.

Individual countries may be inspired in their legal develop-ments by international laws but they tailor their approach to suit their needs.

So despite areas of convergence, differences remain in the detail. In areas of doubt or where there is no clear guidance in a particular situation, experiences that businesses and their advisers have gained internation-ally can be useful in addressing challenges in a new environment where the law and practice are emerging. This article addresses the practical implications of India’s competition law for international businesses with opera-tions in, or which may affect, India, or those planning to do business in India.

Through an international comparative analysis, the article

A case study reveals how to ride the regulatory waves created by India’s new competition regime as well as

similar laws in the UK, the US and the EU

By Suzanne Rab

Keeping up with the competition

What’s the deal?


Competition law

October 2011

identifies the implications of the applicable rules for cross-border commercial practices and the steps that can be taken to address them.

Insights are drawn from the UK, EU and US competition regimes, which have, in varying degrees, influenced the development of the new competition law regime in India.

The article begins with a brief look at the competition law that has been adopted in India. It then illustrates the new rules through the example of a typical yet hypothetical case that potentially could have effects in India, the UK, EU and US. The article concludes with some tips that businesses may want to consider when managing competition law risk and opportunity in India and beyond.

Introduction to India’s competition law

Common to most modern competition regimes, India’s Competition Act, 2002, regulates the following areas:

Agreements: Section 3 of the Competition Act prohibits •two categories of agreements: horizontal agreements (between businesses at the same level in the supply chain, such as two manufacturers); and vertical agreements (between businesses at different levels in the supply chain, such as a manufacturer and retailer). The provisions are broadly analogous to the provisions on anti-competitive agreements under article 101 of the Treaty on the Functioning of the European Union (TFEU) and section 1 of the Sherman Act 1890 in the US.India’s competit ion authority, the Competit ion Commission of India (CCI), has sufficiently wide jurisdic-tion to catch agreements and arrangements taking place outside India, provided that they have an “appreciable adverse effect” on competition in India (AAE). Abuse of market power: Section 4 of the Competition •Act prohibits companies with market power (a dominant position) from abusing that position. As in the EU, it is not the holding of a dominant position that is unlawful; only its abuse.Companies with a significant market position in India will therefore need to consider whether they may be found dominant and, if so, whether their commercial practices may be considered abusive. Examples of such poten-tially abusive conduct include predatory (below cost) pricing, discriminatory pricing, denial or restriction of market access, and tying or bundling.Merger control: M&A transactions that meet certain •specified turnover or asset-based tests must be notified to the CCI for approval. Merging parties cannot close their transaction before CCI clearance has been given. The criteria that will trigger a merger filing in India relate to either the turnover or assets of: the acquirer and the target (the parties); or the group to which the merged entity will belong after the acquisition. In total, there are eight possible permutations of threshold, so applying the tests is not entirely straightforward.The CCI has a set period of 30 days from a notifi-cation being accepted in which to conduct an initial assessment and deliver a prima facie opinion as to whether the combination will, or is likely to, have an AAE. However, if the CCI raises initial concerns which cannot be resolved by remedies which the parties are able or willing to offer, a further in-depth review may be launched. The CCI will endeavour to clear all transactions within a waiting period of up to 180 days. The substantive test for whether a merger is approved

(with or without remedies) is whether the transaction will, or is likely to, have an AAE in the relevant market in India.

A case study in context

The hypothetical case study below explores a series of commercial practices and the potential competition issues raised. The facts are for illustrative purposes and the comments are intended to highlight issues for further investigation rather than to provide a definitive assessment. In any particular case, the analysis must be based on spe-cific facts and supported by economic evidence and legal arguments.

The focus is on the main similarities and differences in the treatment of practices under the different legal regimes. Although the case study focuses on manufacturers and component suppliers, many of the principles are transfer-able across industries.

The facts

There are several manufacturers in the industry and several suppliers of components that meet the needs of those manufacturers. Gamma is both a manufacturer and a supplier.

Manufacturers Market share worldwide (%)

Market share India (%)

Alpha 50 40

Beta 25 40

Gamma 15 10

Other smaller players 10 10

Suppliers of components

Worldwide market share for professional product components (%)

Worldwide market share for consumer product components (%)

Delta 45 40

Epsilon 25 25

Gamma 20 20

Other smaller players

10 15

A trade association meeting

Tom and Joyce, the heads of sales at Alpha and Beta, respectively, meet at the annual meeting of their trade asso-ciation in New Delhi and discuss the market conditions affect-ing their industry in India, Europe and the US, including the increasing pressure on margins.

Was it (a) unlawful, (b) unwise, or (c) OK, for them to dis-cuss the adverse conditions affecting their industry?

It was not unlawful to speak about adverse conditions affecting the industry. General discussions about the busi-ness environment are not unlawful and trade associations

What’s the deal?


Competition law

October 2011

can freely provide a legitimate forum to share ideas on com-mon issues affecting an industry.

However, it was probably unwise to talk about margins generally, given the risk that this could eas-ily slip over into a discussion about actual margins, pricing and other commercially sensitive information, which should not be exchanged between competitors. The Indian, UK, EU and US competition laws all take a similar approach, which tends to focus on the effects on the market and the behaviour of market participants.

Agreements or practices occurring outside a territory can be caught by the competition laws of another jurisdiction, broadly, where they appreciably affect competition in that territory or are implemented there (e.g. if the agreement affects customers located in another territory). For exam-ple, exchange of information on pricing outside India could be caught by Indian competition law if it is likely to reduce uncertainty for independent market players in relation to their future competitive behaviour in India.

Contract tenders

Six months later, Tom emails Joyce saying that times were better when Beta focused on the India market and Alpha could concentrate on the EU and US. When the next major tender comes up to supply a leading business in India with products for the next five years, Alpha does not bid and Beta wins the contract.

Was this conduct by Tom and Joyce lawful or unlawful?

This action could be regarded as an attempt to allocate markets and maintain prices because Tom has signalled that Beta should focus on the India market and Alpha should focus on the EU and US in order to keep prices up. It is not clear that Joyce has intimated that Beta would actually comply with the suggestion that Beta should not compete in the EU and US.

However, the fact that Tom and Joyce have met in the past and discussed challenges to their industry and pressure on prices and margins and potential solutions, could provide some evidence supporting a finding of infringement of the competition law prohibitions on restrictive agreements.

In certain countries, including the UK and US, criminal sanctions can be imposed on individuals found guilty of serious anti-competitive activity such as price fixing, market allocation and bid rigging. The possible sanctions include fines and imprisonment.

Does it matter that Joyce did not reply to the email from Tom?

An agreement may be formal or informal and can be implied from conduct. It does not matter that Joyce did not reply to the email if there is other evidence of an agreement or arrange-ment, the aim or effect of which is to restrict competition.

Could the CCI, the European Commission (which has the power to investigate violations of EU competition rules) or another competition authority use the email from Tom to Joyce as evidence of a competition law violation?

In recent competition cases internationally, emails have often been used as evidence of an anti-competitive agreement. Relevant information may be found in hard

copy or electronic form including hard drives, optical media (CD-ROM, DVD), removable media (secure digital cards, memory sticks, floppy disks), mobile phones and personal digital assistants. Emails are often easy to detect and can also be restored by IT specialists in a competition investigation.

Competition authorities have extensive powers to request or demand the production of documents relevant to their investigation. The European Commission has the task of ensuring compliance with EU competition laws.

The European Commission is entitled to carry out unan-nounced inspections at the premises of a company if it suspects that the company has been involved in a cartel to fix prices or to share markets or has otherwise infringed EU competition law. Such visits are known as “dawn raids”.

On a dawn raid under EU competition law, officials from the European Commission are empowered to: (i) search the premises, examine and copy materials that fall within the scope of an investigation (except legally privileged material); (ii) require an explanation of issues arising from documents found during the search and factual clarification of the subject matter of the investiga-tion; (iii) enter domestic premises if used in connection with business or if business documents are kept there. The US Department of Justice Antitrust Division is respon-sible for the investigation and prosecution of criminal viola-tions of antitrust laws in the US. The Antitrust Division often works closely with the Federal Bureau of Investigation and other federal criminal investigatory agencies in the conduct of investigations. It often obtains warrants for the search of corporate premises and the homes of corporate executives for evidence of criminal conduct.

In India, the Competition Act contemplates that the direc-tor general (the investigating arm of the CCI) will conduct unannounced inspections which could resemble the dawn raids undertaken by other international regulators, includ-ing the European Commission. However, in the absence of detailed and specific provisions in the Competition Act or elsewhere, it is unclear how such an unannounced inspec-tion might be conducted in practice and what the specific obligations of an enterprise might be in this situation.

Pricing strategies

Gamma threatens in a letter to report Alpha to the compe-tition authorities in the EU, the US and India for abusing its dominant position in the market by selling at less than cost.

Is Alpha dominant in a relevant market?

EUDominance concerns typically arise where a com-

pany has a market share of above 40%. A company with a market share of less than 25% would generally not be considered dominant (although there could be exceptional cases). A company with a market share of 50% or more would generally be presumed dominant. Alpha has market shares of 50% (worldwide) and 40% (India). Shares of this level would typically raise dominance concerns. However:

A company may only be found dominant in a correctly •defined economic product and geographic market. Further consideration would need to be given, for example, to whether there is a relevant market for the segment where Alpha has large shares or whether the market might be more

What’s the deal?


Competition law

October 2011

narrowly or widely defined and the relevant geographic scope of that. A key question when defining the market is substitution – would customers switch to product B if the price of product A increased by, say, 5-10% over a year? If so, the two products are likely to be in the same market.Although a company’s market share may be a good •indication of dominance, it is important to understand that a large market share does not necessarily mean that a company is dominant. The following factors may also be relevant to the assessment of whether a company is dominant: (i) the relative strength of the competitors and their market shares; (ii) the extent of buyer power; (iii) the potential for other companies to enter and expand in the market; and (iv) intellectual property rights.

USMonopoly power is broadly defined as the power to

control prices or exclude competition. Monopoly may be inferred if a company has a dominant share of a relevant market that is protected by entry barriers.

Although there are no precise market-share boundaries, many federal courts have taken the position that a 50% market share is a prerequisite to prove monopoly. Monopoly is gener-ally presumed if a company’s market share is above 70%. Companies may rebut the presumption of monopoly, however, by showing the absence of any significant entry barriers.

IndiaThe Competition Act defines dominance as “a position of

strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to (i) operate independently of competitive forces prevailing in the relevant market; or (ii) affect its competitors or consumers or the relevant market in its favour”.

This definition is similar to that adopted under EU com-petition law. There is no clearly defined market share test for determining dominance under Indian competition law. It is expected that the approach taken under EU competition law will be relevant to the assessment in the absence of detailed Indian precedents at this stage.

What consequences would flow from Alpha being found dominant?

EUMerely having a dominant position is not unlawful.

However, various types of pricing and other conduct may amount to an abuse of dominance if carried out by a dominant company, or jointly dominant company, and may therefore be unlawful.

Such conduct includes predatory (below cost) pricing, excessive pricing and discriminatory pricing. Those found guilty of abuse of dominance could face financial penalties or orders to modify their commercial practices.

US Section 2 of the Sherman Act makes it illegal to “monopo-

lize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations”.

To prove a monopolization offence under section 2, courts require the plaintiff to prove two elements: (i) possession of monopoly power in the relevant market; and (ii) the wilful acquisition or maintenance of that power, as distinguished

from growth or development as a consequence of a supe-rior product, business skill or historical accident.

To prove an attempted monopolization offence, a plaintiff must prove that the defendant has engaged in predatory or anti-competitive conduct, with a specific intent to monopo-lize, and a dangerous probability of success in achieving monopoly power.

Section 2 of the Sherman Act thus addresses the method by which a company obtains and maintains, or attempts to obtain, a monopoly (and not simply how the company exploits monopoly power). Therefore, a non-dominant com-pany that becomes dominant through predatory or exclu-sionary conduct can violate section 2 of the Sherman Act.

IndiaAs under EU law, merely having a dominant position is not

unlawful – only its abuse. The Competition Act sets out in section 4(2) a list of illustrative activities that may constitute an abuse of dominance. The list largely follows the illustrative categories of abuse identified under the EU competition law prohibition of abuse of dominance in article 102 of the TFEU. This includes “directly or indirectly imposing unfair or dis-criminatory conditions or prices in purchase or sale (including predatory prices) of goods or services”.

In relation to abuse of dominance, there is no strict require-ment for proof or a likelihood of an AAE, either in legislation or interpretative guidance of the CCI at the time of writing. An exception is where an enterprise: (i) indulges in a practice or practices resulting in denial of market access in any manner; or (ii) uses its dominant position in one relevant market to enter into, or protect, other relevant markets. With appropriate evidence, Alpha may seek to rely on a “meeting competition” defence for its below cost pricing.

Merger

Alpha proposes to acquire 100% of Delta and source all its components requirements from Delta. The following prelimi-nary information is available on the parties’ turnover.

Turnover Alpha Delta

Worldwide €2 billion (US$2.7 billion)

€600 million

US US$200 million US$80 million

EU €350 million €90 million

UK £250 million (US$390 million)

£75 million

India US$1 billion US$200 million

Does the transaction need to be notified to a competi-tion authority? What further information would you need to determine filing requirements?

To confirm filing requirements, as an initial stage a full breakdown of the turnover (and potentially assets) of Alpha and Delta by geographic destination of turnover and loca-tion (in the case of assets) should be obtained. In view of the turnover information available, at least the UK, EU, US and India would need to be considered for potential filings.

What’s the deal?


Competition law

October 2011

Other national merger control filing requirements may need to be considered depending on the geographic allocation of the parties’ turnover and assets. Market share informa-tion may also be relevant in some countries. In all cases it is important to consider whether exemptions from filing may apply and seek local counsel advice in appropriate cases.

Does the transaction raise any competition concerns?

In assessing the competitive impact of the transaction, it will be necessary to consider the effect of the transaction in the relevant countries and markets. As a starting point each authority is likely to focus on the effect of the transaction on its own local market, even if there are arguments that the relevant markets may be wider (and even where potentially worldwide markets may be involved).

The potential issues to consider initially are:The relevant directly or indirectly affected markets in 1. their product and geographic dimensions, including: (a) manufacturing markets; (b) components markets; (c) any related or neighbouring markets.Whether there is any market power at any level in the 2. supply and distribution chain.The degree of potential foreclosure of rivals at each level 3. in the market. Delta has the leading market position in the supply of components. Potentially, all of these could be sold captively to Alpha in the future. However, other manufacturers (Beta, Gamma and smaller manufacturers) will have other sources of components that may be able to meet their needs. Alpha has 50% or 40% of the manufacturing market, depending on whether this is considered worldwide or national (i.e. India). Delta will likely fulfil all of Alpha’s consumption needs after the merger. However, other component suppliers (Epsilon and smaller component makers) may, in principle, be in a position to sell to the other manufacturers.The competitive significance of Gamma as a vertically 4. integrated company that competes for sales to end customers as well as supplying its own components needs.The impact on downstream customers.5.

Practical steps

It is encouraging that competition authorities interna-tionally are moving towards greater convergence in their approaches. Such cooperation has been facilitated through bodies such as Organization for Economic Co-operation and Development and the International Competition Network.

Against this background, one approach to international

competition compliance in the case of agreements and commercial practices may be to adopt the strictest approach to competition compliance wherever a company does business based on the most stringent competition laws that apply where it operates. At the other extreme, a company may want to seek a more focused approach, jurisdiction by jurisdiction, creating flexibility where local rules may be more permissive.

Where merger control is concerned, each case needs to be treated on its facts since each competition regime will adopt a different threshold test as to the transactions that are caught by its rules. A company operating internationally may also want to consider maintaining and updating annually a bank of information on its turnover and assets by jurisdiction and identifying the “go to” business and legal personnel in each jurisdiction who are familiar with the local market.

Timing, cost and strategic benefits can also be obtained through appointing a central coordinator for merger control filings, who can liaise with appropriate external counsel. The choice of approach will depend on the scale and scope of the company’s operations, its approach to risk manage-ment and the nature and extent of the competition law risks it faces. g

Suzanne Rab is a partner in the antitrust practice at King & Spalding in London. She has particular experience advising on transactions and behavioural matters, including in proceedings before the UK competi-tion and regulatory authorities and the European Commission. She can be contacted by telephone on +44 (0) 20 7551 7581 or by email at [email protected]. The information contained in this article is for general information only and is not intended to provide legal advice. The infor-mation is based on our understanding of the key changes to Indian law as relevant in an international context.

Top three traps to avoid Top three tips to consider

One size fits all: Following the same 1. approach where a company has a competition compliance programme in all regions and not considering a more tailored approach adapted to the local situation and recognizing that multiple laws may be engaged on similar facts.

Competition compliance red tape approach: 2. Involving only compliance officers and lawyers in developing and implementing competition compliance initiatives and not also senior businesspeople or employees on the ground.

False economy: Cutting the compliance 3. effort when financial pressures would tend to create incentives for the very practices (e.g. collusion) which tend to violate competition laws. Investment in preventative measures needs to be set against the consequences of infringement. For example, fines of up to 10% of turnover may be imposed for violation of competition law in the EU, UK and India. Criminal sanctions may be imposed in the US and UK.

Fit for our purpose: Start with 1. an approach that works best for the company in one business or geographic region and seek guidance from experts on whether it is suitable for another compliance area and what modifications may be needed.

Top down and bottom up: 2. Seek input from all levels in the business; encourage a culture where everyone in the company can come forward with their issues without fear. This may reveal areas where the business may compete with more flexibility (e.g. where the company is non-dominant in a relevant market).

Easy wins: Adopt some basic 3. ground rules in obvious risk areas (e.g. cartels, distribution, trade associations) as a basis for continuous improvement and enhancement.

Intelligence report


Law firm billing rates

October 2011

Survey of law firm

billing rates

Legal fees have plateaued, but clients have misgivings over

billing arrangements, transparency and the value for money they receive

Vandana Chatlani reports

Editorial analysis: page 36

Billing rates at a glance: page 42

India Business Law Journal’s 2011

Intelligence report



October 2011

India’s top 100 companies are expected to increase their legal spending to US$555 million this year, an 11% rise from last year, according to London-based RSG Consulting. In three years’ time, RSG estimates that this number will surpass US$1 billion.

Pharmaceuticals company Wockhardt, for example, spends about US$5 million a year globally on legal fees, and that excludes its patent-related expenditure.

Bharti Enterprises also runs up large legal bills. “Last year was rather high; around US$8.5 million on account of a large deal,” says Vijaya Sampath, the company’s group CEO. “However, the real costs are in litigation where there is no control of any nature and cases can drag on for years with adjournments.”

In spite of the spiralling legal bills being run up by Indian companies, the hourly rates charged by the coun-try’s law firms have changed little in the last year. Sawant Singh, a partner at Phoenix Legal, says that legal fees have been at a standstill. “Fee sensitivity is high,” he says.

The fragmented nature of India’s legal market is one of the factors keeping fees in check. “There is constant undercutting in the market,” says Singh. “Rates are being driven down, even at big firms. [If this continues] they’ll start pushing each other out of the market.”

Flat fees, rising transparency

India Business Law Journal’s fifth annual survey of law firm billing rates, which was conducted in September, confirms Singh’s observations. Law firm billing rates appear to have plateaued. The average cost of hiring an Indian lawyer is US$201 per hour, unchanged from last year. Just 38% of Indian law firms increased their fees in the past 12 months. 12% lowered them and 50% of firms have kept them the same.

Forty four law firms participated in this year’s bill-ing rates survey, 10% more than last year and a 76% increase on the number of participants in our first survey in 2007.

Participating firms disclosed their standard hourly fees for lawyers of five levels of seniority, ranging from junior associates up to the managing partner. They also shared information about their use of alternative billing practices.

The growth in the number of participants indicates that while billing rates may not have increased over the last year, transparency certainly has. Leading the charge were India’s IP boutiques, which accounted for 41% of survey responses.

Once again, India’s largest law firms were conspicuous by their absence. Firms such as Amarchand Mangaldas, AZB & Partners, J Sagar Associates, Khaitan & Co, Luthra & Luthra and Trilegal have yet to participate in the survey. Whether they will bow to client pressure and do so in future years remains to be seen. “Publishing hourly rates is certainly a good idea,” says GSRK Rao, a legal adviser at CRISIL, the largest credit rating agency in India.

In the absence of any billing data from India’s largest law firms, it’s important to note that the findings are not necessarily representative of the entire legal market. More than 200 law firms were invited to participate, but the results are based solely on the 44 firms that consented. A list of these firms and the full billing details of each one can be found on pages 42 and 43.

Independent advocates, who are the majority of legal practitioners in India, were not invited to participate. Neither were law firms that do not represent a significant number of commercial clients.

There is constant undercutting in the market. Rates are being driven down, even at big firmsSawant SinghPartnerPhoenix Legal

Very few law firms provide the right mix of cost-effectiveness, solutions and the killer instinct to achieve successDebolina Partap Vice President, LegalWockhardt

Publishing hourly rates is certainly a good ideaGSRK RaoLegal AdviserCRISIL

Intelligence report



October 2011

Senior lawyers’ fees fall

Senior partners and managing partners have experi-enced decreases in their billing rates over the past year. The average hourly rate billed by senior partners fell 4.3% to US$245, while managing partners’ fees are down 1.3% to US$293 per hour. Significantly, this is the first time since India Business Law Journal started its billing rates survey in 2007 that a drop has been recorded in the hourly fees of senior partners (the rates charged by managing partners also fell in 2009).

Falling rates at senior levels have been balanced by some increases in the prices charged by more junior lawyers. The average fees for junior partners rose by 2% to an average of US$209 per hour, while senior associ-ates, whose average hourly rate jumped 11.1% last year, remained unchanged at US$159 per hour. The average hourly rate for junior associates climbed 4.8% to US$109. This follows a 7.2% jump in junior associates’ billing rates last year.

The average billing rates of lawyers of all levels of seniority are shown in the graph below.

In search of value

Of course billing rates alone do not determine a client’s choice of law firm. Low fees don’t always translate into good value for money and discounted rates are meaning-less if delivery is delayed or the advice is imprecise or long-winded.

Despite spending around US$5 million per year on legal services, Debolina Partap, the vice-president of legal at Wockhardt, is far from satisfied with the value for money that law firms provide. “Very few law firms provide the right mix of cost-effectiveness, solutions and the killer instinct to achieve success,” she says.

On some occasions the value proposition of engaging a law firm fails completely. Partap recounts one incident where she had to deal with “a partner telling me one night before the deal was signed that he did not represent us”.

Other clients report similar experiences. Rajeev Jain,

the general manager of corporate affairs at The Hindustan Times, recalls an incident when “a senior advocate was paid hefty fees in advance and did not turn up in court on time in a critical matter”.

Litigation is a thorny issue when it comes to receiving value for money. Paharpur Cooling Towers in Kolkata spends up to US$200,000 per year on legal fees, but the company’s CFO, Arun Singhania, says that when it comes to court-related expenditure, “most of the money and valuable management time is wasted”. Singhania cites four key reasons for this: “(a) the law firm is not prepared with the case on the date; (b) the counsel is unavailable on the date; (c) the court frequently does not function due to strikes, absenteeism or other causes; and (d) long court holidays both in summer and winter.”

Judging the quality and value of legal services is a complex task. “It is difficult to generalize that all firms do or do not offer value for money,” says Sampath at Bharti Enterprises. “Sometimes the quality is quite erratic and uneven within the same firm.

“Our worst experience with Indian firms [is receiving] 20-page-long opinions, out of which 10 pages are disclaim-ers, three pages are extracts of the relevant laws and only two paragraphs are devoted to analysis and opinion,” Sampath says, “and the opinion does not amount to much”.

Lawyers react to such horror stories by stressing the importance of choosing the right law firm. “Competence and a history of service delivery is what matters,” says Singh at Phoenix Legal.

Hiroo Advani, the managing partner of Advani & Co, suggests it is at “tier two firms that the best value for money can be found,” while Seema Jhingan, a partner at LexCounsel, believes that smaller firms are best placed to offer a winning mix of low fees and high partner involve-ment. “The legal fees charged by larger Indian firms are sometimes excessive,” she says. “The fees are commen-surate with the brand of the firm rather than the seniority of the lawyer working on the matter, or the quality of serv-ices delivered.”

Other observers say that smaller firms are not always in a position to offer lower fees. “There may not be signifi-cant difference in legal fees between small firms and large firms, especially where a smaller firm is able to deliver high

How much should you pay for legal advice?

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Our worst experience with Indian firms [is receiving] 20-page-long opinions … out of which only two paragraphs are devoted to analysis and opinionVijaya SampathGroup CEOBharti Enterprises

Intelligence report



October 2011

quality of work, often with better efficiency and turnaround time as compared to a larger firm,” says Sandeep Parekh, the founding partner of Finsec Law Advisors.

Perceptions of transparency

Opinions on the transparency of Indian law firms’ billing practices vary markedly.

“We do not find transparency in the price of legal services in India,” says Shireen Sethna Baria, the managing partner of Vakils Associated in Secunderabad.

Singhania agrees: “There is complete lack of transparency and except for a few firms, you really do not know the number of man hours spent on a matter.”

Others are generally satisfied. “The level of transparency is very high,” says Partap. “I think [India Business Law Journal’s billing rates survey] is a very good idea and brings in more transparency as well as competitiveness.”

TC Arora, an adviser at Astonfield Renewables, says “law

firms generally regard their billing rates, hourly or otherwise, as wholly confidential. The willingness to publish hourly billing rates by law firms is certainly a good beginning. This would help facilitate decision-making in the choice of a law firm.”

Alternative billing models

While hourly billing has long been the favoured method of charging for legal advice, it has some inherent drawbacks. Many clients worry that it incentivizes inefficiency by reward-ing lawyers who work slowly. It also makes it very difficult for clients to budget upfront for the legal costs they will incur during a project.

“It would be good if law firms were finally to realize that we, as a corporation, also need to work with budgets and forecasts,” says Sven Deimann, the senior legal counsel at Bombardier Transportation in Montreal. “We cannot accept fee structures that provide for automatic and unilateral increases in hourly rates after so many months, or because this or that

Do not go simply by the name of the firm, but also by the quality of the partner who is made available for cli-ent servicing. There are a number of law firms which can give quality advice but there a very few law firms which will deliver on time. To get value for money, clients should survey the rates of competing law firms and keep a check on the number of lawyers deployed to handle their matter.Bomi Daruwala, partner, Vaish Associates

Discuss matters thoroughly in-house and reach a common consensus across departments before engaging outside counsel. This ensures a more streamlined approach to the matter and can result in significant cost savings.Essenese Obhan, managing partner, Obhan & Associates

Set up, implement and continue to monitor a strict and robust compliance system for good corporate govern-ance. Ensure business associates receive regular edu-cation on legal and regulatory issues. In difficult times have a solution-oriented approach rather than a belliger-ent one. Debolina Partap, vice president of legal, Wockhardt

If clients strategize with attorneys beforehand, then a lot of legal expenses can be saved. A clear understanding of timelines and strategies should be discussed at an early stage.Chander Lall, managing partner, Lall & Sethi

Avoid outsourcing of non-core issues to external counsel.Seema Jhingan, partner, LexCounsel

We usually advise our clients to understand their requirements upfront; clearly set out the scope of work for the firm; be thorough and prepared so discussions are succinct and not drawn out; provide feedback in a timely and appropriately detailed manner to avoid duplication of work; and work with the firm as a part of its own internal team as opposed treating it as an outsider.PM Thimmaiah, owner, MD&T Partners

Focus on the accountability of the lawyer rather than fees.Manish Desai, managing partner, Vidhii Partners

It is always favourable to stay with one lawyer or law firm for business needs. A lawyer may be willing to provide discounts on their billing rate if a client can guarantee consistent amounts of work.Diljeet Titus, managing partner, Titus & Co

A bad settlement is better than a successful but pro-tracted litigation.Lalit Bhasin, managing partner, Bhasin & Co

Be discriminate in your choice of counsel. If you know an expert, even at slightly higher hourly rates, will do the job in a day that somebody will do in two and using his or her whole team, go with the expert. Sven Deimann, senior legal counsel, Bombardier Transportation

Get your documents drafted in-house and vetted by the law firms. This will reduce costs.Arun Singhania, CFO, Paharpur Cooling Towers

Balancing cost and qualityLegal practitioners and in-house counsel share their tips

on getting value for money from law firms

Intelligence report



October 2011

associate has acquired more seniority and advanced to senior associate status.”

Sampath is also critical of hourly billing and looks forward to the day when alternative models take root in India. “Hourly billing rates are dying a slow death overseas and the same will happen in India over time,” she says.

Some law firms are already beginning to embrace alterna-tive billing (see Hourly rate v alternative billing, below). India Law Offices, for example, has introduced “milestone-based fixed fee rates” for some of its corporate work. “This helps our clients realize value and pushes both our team and the client to conclude the process in the most efficient manner,” says Gautam Khurana, the firm’s managing partner.

“For litigation we use a mix of fixed rates for drafting work and bill clients on the basis of appearances and further draft-ing. This keeps the process transparent for the client and does not put too much pressure for payment at the time of initiating the litigation process,” Khurana adds.

Chennai-based IP boutique Selvam & Selvam uses hourly billing for only 10% of its cli-ents. “Primarily we follow flat fixed fees so as to keep our cli-ents aware of the total costs, or we cap the fee in cases involv-ing research or litigation,” says Raja Selvam Pannir, an attorney at the firm.

Many alternative billing mod-els offer the comfort of predict-ability. “We find that clients, especially Indian clients, are not comfortable with an hourly bill-ing rate and prefer to have an estimate of costs upfront,” says Essenese Obhan, the manag-ing partner at IP firm Obhan & Associates. “The use of alternate billing practices is now standard for a majority of our clients.”

Sometimes, a mixture of fixed and hourly billing is a worka-ble combination. “We use fixed rates for routine work,” says Gopal Trivedi, an attorney at IP firm Chadha & Chadha in New

Delhi. “We charge a fixed amount for initial filing of a litigation case and … subsequent drafting and hearings are charged on hourly or per hearing basis.”

However, alternative billing is sometimes tricky during litigation “where the nature, scope and volume of work may change over time, but the agreed fee remains fixed,” says PM Thimmaiah, the owner of MD&T Partners in Bangalore.

Another common billing practice is the retainer model. This is especially practical for clients who are comfortable using one law firm for a variety of legal matters, both routine and unique. Firms vary in how they structure their retainer models. To benefit from fixed fees at Titus & Co, clients must com-mit to engaging the firm for a full year. The specified work is included in the fixed fee and clients are automatically billed each month. If a client terminates the agreement before the end of the 12-month period, it will be expected to pay a three-month termination fee.

At Vaish Associates, the retainer arrangement consists of a monthly fixed fee based on a certain number of person-hours or a number of assignments to be undertaken. Fixed fee arrangements are offered within a specific timeline. If the work extends beyond that timeline, the firm will charge hourly rates for the extended period.

Differential pricing

The law firms that participated in India Business Law Journal’s billing rates survey were required to state standard prices for each category of lawyer and place this information in the public domain – where it is easily accessible to their clients. This posed a dilemma for many participants, not least because it is common practice for firms to charge different rates to different clients.

Like most businesses, law firms will reward loyalty and high volumes of repeat work with lower fees. But there is also the tendency to charge each client the highest rate that the law-yers think it will be able and willing to pay.

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There is complete lack of transparencyArun SinghaniaCFOPaharpur Cooling Towers

Intelligence report



October 2011

“When reviewing our clients’ legal requirements, we quickly came to the conclusion that clients wanted different things from us,” says Richard Price, a senior partner at CMS Cameron McKenna. “Often the same clients wanted alternative levels of support in different areas of their business. There was no concept of one size fits all.”

Using this as its basic premise, CMS Cameron McKenna devised a scorecard to assess the needs of individual clients and the expectations they have of their law firms

(see below). The scorecard is also a useful tool for clients seeking to identify areas in which they can save money on their legal bills without compromising the quality of service they receive in their “core priority” areas.

The scorecard allows clients to carefully consider what they want from their lawyers. Armed with this knowledge, Price says, the client and the law firm can “engage in a sensible, constructive discussion and be open about the corresponding impact their requirements may have on fee levels”.

A tool of the tradeUK-based law firm CMS Cameron McKenna has devised an innovative

scorecard to help clients identify what they want from their legal advisers and plan their budgets accordingly

Scoping the best price for your organization

Volume of workWe are one of our legal provider’s largest clients

How to use this table

Score each statement from 1 to 5.

(5 = completely agree, 1 = would have great difficulty agreeing.)

The higher your overall score, the greater the savings your organization can

expect to make with your preferred advisers.

We can give a significant percentage of our work to one provider (e.g. more than 33%)

We can provide work across the organization’s offices and practice groups

We can accurately predict the split between what we perceive internally to be low-value/high-value work

Management of workWe would be happy to have a large portion of our work managed by an associate

We will allow the firm we appoint complete flexibility over the resourcing of our work in terms of the level of qualification and location of the lawyers who undertake it

We are happy to take some risk on unimportant matters and direct our law firm appropriately

We are experienced in scoping work and instructing external counsel, and are realistic about the key variables to any deal/project

We are able to differentiate between the low-value and high-value work that we place externally

Added-value servicesWe don’t expect to receive added-value services e.g. secondees/tailored training

Client serviceWe will accept a basic service level agreement

We don’t expect a firm to adopt our bespoke reporting/billing/instruction protocols

FinancialWe can pay our bills within 14 days

Brand valueWe will let the firm leverage off the back of our name, reputation and work done

Intelligence report



October 2011

“We have created process flows that encourage clients to instruct on all procedural and administrative issues at one go and we offer significant cost savings for such processes,” says Obhan. “We also discount rates for smaller companies, startups and individual clients,” he adds.

LexCounsel is open to offering lower rates for “clients that are startups, not-for-profit entities, those engaged in entre-preneurial initiatives, small and medium-sized enterprises needing assistance for growth and clients committing bulk work,” says Jhingan.

At Vaish Assciates, all fees are derived from a standard “rack rate”, but adjusted to reflect the identity of the client and the nature of the work. Bomi Daruwala, a partner at the firm, explains: “In determining the rates, we keep the fol-lowing factors in mind: (a) quantum of work; (b) complexity of the matter; (c) the advantage of the experience that such work will bring; and (d) the work pressure in the office.”

Vidhii Partners, meanwhile, customizes its billing model “to suit the paying capacity and the comfort of our clients,” says Manish Desai, the firm’s managing partner.

One client that has no trouble driving down legal costs is the Indian government. “Mostly we use the same rates for all of the clients except when we are advising various govern-ment entities,” says Ravi Bishnoi, a partner at SRGR Law Offices.

Knowing that the government makes price a key criterion in the selection of legal advisers, most law firms will quote substantially lower fees than those offered to private clients. They are particularly happy to slash their rates if it enables them to secure a role on a prestigious or high-profile gov-ernment project. Disinvestments of large state-owned com-panies, for example, require extensive legal and financial expertise.

Loosening the purse strings

Private clients have no such luxury and must be prepared to part with larger sums of money if they want to secure the services of a leading adviser. IP boutique Anand and Anand, for example, charges around US$500 an hour for a senior partner if the work involves advanced and emerging complexities, such as patent litigation for pharmaceutical agrochemical companies. For an hour of the managing part-ner’s time, this amount rises to US$700. Clients could also

face bigger invoices “for complex due diligence, as these … involve very intricate issues,” says Safir Anand, a senior partner at the firm.

Deimann says he is willing to spend more for specialist expertise as long as it comes hand in hand with visibility on how a matter is being handled. “Our experience – not just in India – has been that sometimes it pays off to work with acknowledged specialists if they are efficient.”

Rao at CRISIL is of a similar mindset. “If I am convinced of the sharpness and ability of the solicitor to handle a transac-tion, the fees will be a secondary consideration,” he says.

Who are you paying for?

Clients may be happy to pay higher fees for well-respected senior lawyers, but do they really know who is doing the work? For while it is common for them to be wooed by the stature, charisma and reputation of a high-profile partner during an initial meeting, there is no guarantee that the same partner will play any role in their assignment.

Deimann emphasizes the importance of visibility in terms of knowing how partners distribute work within their firms and which aspect of the file is dealt with by whom. “In that context, it is important for us always to see a justification in terms of value-added” he says. “It is probably easier to say in this context what is definitely not ‘value for money’ for us: large teams working collectively on a file and several associ-ates writing up hours that we as a client can no longer verify because it is not clear who worked on what and why.”

One worrying trend is a growing tendency among some firms to outsource work to third parties without the client’s knowledge. This is particularly prevalent in the intellectual property field.

Amarjit Singh, the managing partner of Amarjit & Associates, explains that some IP firms market themselves heavily in a bid to win work that they will never undertake. Instead they act as agents, winning mandates from clients and farming them out to other service providers. “In most cases, foreign clients are not even aware of such arrange-ments as the entire correspondence and interaction with the clients is handled by the agency firms,” he says. “Clients are neither informed about the arrangements nor do they get to know about such arrangements till something serious hap-pens to their rights.” g

It would be good if law firms were finally to realize that we, as a corporation, also need to work with budgetsSven DeimannSenior Legal CounselBombardier Transportation

We use the same rates for all of the clients except when we are advising various government entitiesRavi BishnoiPartnerSRGR Law Offices

Intelligence report



October 2011

Law firm Main office Nature of firmNumber of

lawyersJunior associate (US$ per hour)

Advani & Co Mumbai General practice 47 75

ALMT Legal Mumbai General practice 90 150

Altacit Global Chennai IP boutique 24 50

Amarjit & Associates New Delhi IP boutique 21 90

Anand and Anand Noida IP boutique 80 100-120

ARA Law Mumbai Specialist firm 18 150

Ascentialls New Delhi IP boutique 7 75

ASM Law Offices New Delhi IP boutique 4 100

Atman Law Bangalore, Chennai General practice 11 70

Bhasin & Co New Delhi General practice 42

Brus Chambers Mumbai General practice 22 81

Chadha & Chadha New Delhi IP boutique 23 120

DH Law Associates Mumbai General practice 25 150

Finsec Law Advisors Mumbai General practice 4 120

India Law Offices New Delhi General practice 38 55

Intelligere Noida IP boutique 12 100

Inttl Advocare New Delhi IP boutique 20 100

IP Gurus Delhi IP boutique 6 175

Kachwaha & Partners New Delhi General practice 16 150

Kaden Boriss Legal Gurgaon General practice 33 60

Khurana & Khurana Noida, Pune IP boutique 13 50

Lall & Sethi New Delhi IP boutique 20 120

Lall Lahiri & Salhotra New Delhi IP boutique 42 150

LexCounsel New Delhi General practice 35 120-150

Lexcellence Noida General practice 10 150

MD&T Partners Bangalore General practice 10 90

N South Gurgaon General practice 15 85

Obhan & Associates New Delhi IP boutique 10 70

Ranjan Narula Associates Gurgaon IP boutique 14 100

RK Dewan & Co Mumbai IP boutique 24 75-125

R K Law Offices New Delhi General practice 8 90

Sand Hill Counsel Mumbai General practice 7 150

Selvam & Selvam Chennai IP boutique 5 80

Seth Dua & Associates New Delhi General practice 38 138-165

Singh & Associates New Delhi General practice 60 75

Singhania & Co (Mumbai) Mumbai General practice 14 80-120

Singhania & Partners New Delhi General practice 69 100

SKS Law Associates New Delhi IP boutique 6 150

SRGR Law Offices NCR of Delhi General practice 15 125-150

Sushant M Singh & Associates New Delhi IP boutique 12 60

Thiru & Thiru Bangalore General practice 56 100-200

Titus & Co New Delhi General practice 70 100

Vakils Associates Secunderabad General practice 15 120

Vidhii Partners Mumbai General practice 25 50

Average 2011 109

Average 2010 104

Average 2009 97

Average 2008 90

Average 2007 90

2007-2008 average increase 0.0%




Hourly billing rates of Indian law firms

The above information was supplied by participating law firms with their consent for it to be published in India Business Law Journal. Law firms that declined to have their rates published are not included. The figures quoted are the average hourly billing rates for each category of lawyer. Actual rates may vary depending on the nature and complexity of work. Law firms may sometimes bill on a project basis rather than an hourly rate.

Senior associate (US$ per hour)

Junior partner (US$ per hour)

Senior partner (US$ per hour)

Managing partner (US$ per hour)

Law firm average(US$ per hour)

125 200 350 350 220

190 250 300 350 248

75 100 150 150 105

120 175 275 375 207

150-200 300 400-450 500-600 312

250 300 N/A 400 275

100 110 125 150 112

150 200 200 200 170

90 N/A 150 150 115

Flat “firm rate” of US$250 per hour based on hours of most senior lawyer involved 250

108 171 171 171 140

200 250 350 450 274

200 250 300 300 240

165 220 N/A 275 195

90 125 175 200 129

150 210 260 320 208

200 250 330 400 256

N/A 300 N/A 300 258

150-250 N/A 300 350-400 272

90 140 190 275 151

75 100 150 175 110

150 180 200 250 180

200 300 450 500 320

200-220 N/A 250-275 N/A 202

150 N/A 200 200 175

130 N/A N/A 150 123

125 N/A 175 175 140

100 125 175 175 129

150 200 250 300 200

200-400 N/A N/A 300-600 283

120 140 200 225-250 158

200 250 295-325 295-325 244

135 155 180 200 150

192-220 248-302 330-440 N/A 255

90 N/A 100 150 104

125-150 N/A 150-200 N/A 138

175 200 300 275 210

250 N/A N/A 350 250

175 200 250 250 202

120 N/A N/A 300-500 193

300 400 500 600 390

150 200 250 300 200

155 210 330 N/A 203

125 150 150 300 155

159 209 245 293 201

159 205 256 297 201

143 195 256 288 188

132 189 252 298 192

130 175 230 275 180

1.5% 8.0% 9.5% 8% 7%

8.3% 3% 1.6% 3.4% decrease 2% decrease

11.1% 5.1% 0.0% 3.1% 6.9%

0.0% 2.0% 4.3% decrease 1.3% decrease 0.0%

Intelligence report



October 2011

Law firm Main office Nature of firmNumber of

lawyersJunior associate (US$ per hour)

Advani & Co Mumbai General practice 47 75

ALMT Legal Mumbai General practice 90 150

Altacit Global Chennai IP boutique 24 50

Amarjit & Associates New Delhi IP boutique 21 90

Anand and Anand Noida IP boutique 80 100-120

ARA Law Mumbai Specialist firm 18 150

Ascentialls New Delhi IP boutique 7 75

ASM Law Offices New Delhi IP boutique 4 100

Atman Law Bangalore, Chennai General practice 11 70

Bhasin & Co New Delhi General practice 42

Brus Chambers Mumbai General practice 22 81

Chadha & Chadha New Delhi IP boutique 23 120

DH Law Associates Mumbai General practice 25 150

Finsec Law Advisors Mumbai General practice 4 120

India Law Offices New Delhi General practice 38 55

Intelligere Noida IP boutique 12 100

Inttl Advocare New Delhi IP boutique 20 100

IP Gurus Delhi IP boutique 6 175

Kachwaha & Partners New Delhi General practice 16 150

Kaden Boriss Legal Gurgaon General practice 33 60

Khurana & Khurana Noida, Pune IP boutique 13 50

Lall & Sethi New Delhi IP boutique 20 120

Lall Lahiri & Salhotra New Delhi IP boutique 42 150

LexCounsel New Delhi General practice 35 120-150

Lexcellence Noida General practice 10 150

MD&T Partners Bangalore General practice 10 90

N South Gurgaon General practice 15 85

Obhan & Associates New Delhi IP boutique 10 70

Ranjan Narula Associates Gurgaon IP boutique 14 100

RK Dewan & Co Mumbai IP boutique 24 75-125

R K Law Offices New Delhi General practice 8 90

Sand Hill Counsel Mumbai General practice 7 150

Selvam & Selvam Chennai IP boutique 5 80

Seth Dua & Associates New Delhi General practice 38 138-165

Singh & Associates New Delhi General practice 60 75

Singhania & Co (Mumbai) Mumbai General practice 14 80-120

Singhania & Partners New Delhi General practice 69 100

SKS Law Associates New Delhi IP boutique 6 150

SRGR Law Offices NCR of Delhi General practice 15 125-150

Sushant M Singh & Associates New Delhi IP boutique 12 60

Thiru & Thiru Bangalore General practice 56 100-200

Titus & Co New Delhi General practice 70 100

Vakils Associates Secunderabad General practice 15 120

Vidhii Partners Mumbai General practice 25 50

Average 2011 109

Average 2010 104

Average 2009 97

Average 2008 90

Average 2007 90





Senior associate (US$ per hour)

Junior partner (US$ per hour)

Senior partner (US$ per hour)

Managing partner (US$ per hour)

Law firm average(US$ per hour)

125 200 350 350 220

190 250 300 350 248

75 100 150 150 105

120 175 275 375 207

150-200 300 400-450 500-600 312

250 300 N/A 400 275

100 110 125 150 112

150 200 200 200 170

90 N/A 150 150 115

Flat “firm rate” of US$250 per hour based on hours of most senior lawyer involved 250

108 171 171 171 140

200 250 350 450 274

200 250 300 300 240

165 220 N/A 275 195

90 125 175 200 129

150 210 260 320 208

200 250 330 400 256

N/A 300 N/A 300 258

150-250 N/A 300 350-400 272

90 140 190 275 151

75 100 150 175 110

150 180 200 250 180

200 300 450 500 320

200-220 N/A 250-275 N/A 202

150 N/A 200 200 175

130 N/A N/A 150 123

125 N/A 175 175 140

100 125 175 175 129

150 200 250 300 200

200-400 N/A N/A 300-600 283

120 140 200 225-250 158

200 250 295-325 295-325 244

135 155 180 200 150

192-220 248-302 330-440 N/A 255

90 N/A 100 150 104

125-150 N/A 150-200 N/A 138

175 200 300 275 210

250 N/A N/A 350 250

175 200 250 250 202

120 N/A N/A 300-500 193

300 400 500 600 390

150 200 250 300 200

155 210 330 N/A 203

125 150 150 300 155

159 209 245 293 201

159 205 256 297 201

143 195 256 288 188

132 189 252 298 192

130 175 230 275 180

1.5% 8.0% 9.5% 8% 7%

8.3% 3% 1.6% 3.4% decrease 2% decrease

11.1% 5.1% 0.0% 3.1% 6.9%

0.0% 2.0% 4.3% decrease 1.3% decrease 0.0%

These figures are indicative of hourly rate billing only. The average rates for each law firm have been calculated as the mean average of the billing rates provided for each category of lawyer. India Business Law Journal has not verified the accuracy of the billing rates supplied by participating firms.

Correspondents


Banking & finance

October 2011

During the last week of September, the Reserve Bank of India (RBI) issued several notifications liber-

alizing its external commercial borrowing (ECB) policy, in particular for the infra-structure sector.

ECB limits under the automatic route have been enhanced for the real sector (industrial and infrastructure sectors) from US$500 million to US$750 million per financial year and for the hotel, hos-pital and software sectors from US$100 million to US$200 million per financial year.

Infrastructure solutions

Refinancing of rupee loans: Companies in the infrastructure sector can now, under the approval route, use 25% of a fresh ECB to refinance existing rupee loans for capital expenditure of completed infrastructure projects. The remaining 75% must go towards capital expenditure in infrastructure projects.

One significant limitation of this provi-sion is that each infrastructure project is typically housed in a standalone special purpose vehicle (SPV). Such SPVs can-not apply loan proceeds in this split fash-ion across two projects.

Bridge finance: Companies in the infrastructure sector are now permitted to import capital goods using short-term credit (including buyers’/suppliers’ credit) as bridge financing subject to this being replaced with a long-term ECB. Such bridge financing may be obtained under the approval route. The replacement of the bridge financing with a long-term ECB also requires the RBI’s approval.

Interest during construction: “Interest during construction” has been included as a permissible end-use of ECBs, sub-ject to the condition that such interest is capitalized and is a part of the project cost. This is extremely useful as many companies were seeking to fund such

interest through ECBs instead of through up-front equity.

Structured obligations: Foreign equity holders can now provide credit enhancement to companies engaged in the development of infrastructure and to infrastructure finance compa-nies for domestic debt raised through capital market instruments. Minimum equity holding thresholds are imposed as qualifying criteria to provide such credit enhancement – 25% and 51% for direct and indirect equity holders, respectively.

Renminbi funding: Infrastructure sec-tor companies can now obtain ECBs in renminbi under the approval route, with an annual cap of US$1 billion. It will be interesting to see the demand for renminbi given the involvement of some infrastructure sectors with Chinese suppliers.

Liability-equity ratio

Previously, ECBs from foreign equity holders exceeding US$5 million attracted a maximum debt-equity ratio. This has been clarified and rephrased as “ECB liability-equity ratio”. The objective: other debt should not be included while com-puting the ratio and only total ECBs (out-standing and proposed) from the foreign equity holder are counted.

Separately, free reserves (including share premium received in foreign cur-rency from foreign equity holders) will also be counted as equity while deter-mining the ratio.

Access to shareholder funding has also been relaxed through the introduc-tion of the following changes:

Earlier, a foreign equity holder to be •eligible as a lender was required to directly hold at least 25% of the paid-up capital of the borrower. ECBs may now also be taken from indirect equity holders (subject to a minimum 51% equity holding) and group companies

(provided the borrower and the lender are subsidiaries of the same parent). Prior RBI approval is however required for these ECBs. All service-sector units have now •been recognized as eligible borrowers under the approval route for ECBs from foreign equity holders. Previously, eligible service-sector borrowers were limited to hotels, hospitals and software.ECB liability-equity ratio in the above •cases should not exceed 7:1. Where funding is from a group company, the ratio is tested against the equity of the common parent.ECBs from foreign equity holders can •now be designated in rupees.

Does it work?

While the relief in some cases will be felt immediately, the big question is: will all of this work on the ground? Some of the current and previous changes still need refinement or further clarity. Take-out financing is a classic example of a previous relaxation that has not been fully tapped on account of regulatory ambiguity despite deep interest in the market. The same could hold true for some of the changes introduced through these notifications.

While the RBI clearly intends to relax policy in response to the global and local economic scenario, for the full ben-efit of these changes to be felt, the RBI must actively engage with market partici-pants to provide clarification or practical changes wherever these are warranted.

Ameya Khandge ([email protected]) is a partner at Trilegal in Mumbai where Siddharth Saxena ([email protected]) is an associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Banga-lore and Hyderabad and has over 140 lawyers.

By Ameya Khandgeand Siddharth Saxena, Trilegal

BangaloreThe Residency, 7/F133/1, Residency RoadBangalore – 560 025IndiaTel: +91 80 4343 4646Fax: +91 80 4343 4699

MumbaiOne Indiabulls Centre 14th Floor, Tower OneElphinstone RoadMumbai – 400 013IndiaTel: +91 22 4079 1000Fax: +91 22 4079 1098

Latest liberalization of ECB policy welcomed

Correspondents


Canada-India trade & investment

October 2011

I n the past few years the international oil and gas industry has committed billions of dollars to the development

of shale hydrocarbon opportunities in Canada, primarily in British Columbia.

Rich finds

Two areas in northeastern British Columbia have caught the interest of international producers. These areas are also uniquely positioned to meet Asian energy demand as they are near the closest North American port to Asia. This can save approximately 60 hours of transpacific sailing time, relative to ports in California.

The Horn River Basin play covers around 1.28 million hectares with esti-mated reserves of 109,000 billion cubic feet of gas, of which 29% is conven-tional gas and 71% is shale gas. The Montney play is located in the Peace River Regional District and encompasses seven municipalities.

Exploration companies have spent more than US$2 billion to acquire drilling rights from the government and as of July 2009, 234 horizontal wells were produc-ing an average of 376 million cubic feet per day. Even though official reserve esti-mates have not been finalized, they are estimated to be between 80,000 billion and 700,000 billion cubic feet of gas.

Uniqueness of shale

Several factors distinguish large-scale shale development from more traditional gas transactions. Besides the relatively larger scale of a shale gas development, the nature of the shale reservoirs requires a relatively expensive drilling pattern and stimulation through fracturing.

Secondly, there is often existing infra-structure for which parties need to nego-tiate arrangements to obtain the benefit of their share of production.

Thirdly, shale development often occurs in areas that do not have sig-nificant midstream infrastructure. As a result, the parties need to anticipate the need for significant capital expenditures associated with midstream develop-ment, including gathering and process-ing, which can often result in a second related joint venture.

Transaction structure

An entity such as a limited liability com-pany or limited liability partnership that is co-owned by investors is less common than a joint venture in the development of large-scale shale gas plays. In a joint venture, each participant owns an undi-vided percentage of working interest in the project assets and is responsible for its participating interest share of produc-tion and all liabilities and obligations.

In addition, farmouts of large-scale shale development often include an upfront payment and an upfront convey-ance of a working interest to the farmee. If all of the transactional consideration is not paid up front, the remainder is typi-cally paid as a carry. Where some of the total transaction consideration is payable subsequent to closing, the beneficiary party may require the party with such an obligation to provide credit support.

Tax and similar attributions vest directly with each participant according to their participating interests. In Canada, tax hurdles make structuring traditional far-mout arrangements more difficult. For tax reasons, the use of a partnership to co-own these types of projects is frequently considered, as the vending company can contribute assets into a partnership in which it is a partner on a “rollover” basis, thus avoiding the tax result that would be associated with the outright sale of an interest in the project.

Complications often arise where the joint venture partners are resident in

different jurisdictions – especially if one partner is resident where the assets are located. Under such circumstances, the local partner generally avoids investing in a separately taxable company, prefer-ring instead a fiscally transparent entity such as a partnership.

Governance

Large-scale shale ventures often employ standard form operating agree-ments in conjunction with other project documents, including joint development agreements or participation agreements or both. This is in contrast to traditional gas joint ventures, which typically rely on standard form operator agreements where the conduct of the joint operations is determined by the operator.

A challenge unique to larger-scale developments is the extent to which the failure to agree gives rise to the right to undertake sole risk or independent oper-ations, and the extent to which there are any restrictions on a right to undertake such operations.

Large-scale joint ventures typically deal with certain matters among the parties and establish a decision-making body to consider important issues. This body should endeavour to balance the need for legal certainty and rigour that will withstand less than amicable cir-cumstances with a practical desire for efficient and timely governance.

The joint development agreement will address most of the larger overarching joint venture issues. It must be carefully linked to the operating agreement to make sure that the suite of documents work together as the parties intended.

Pat Maguire and Vivek Warrier are partners at Bennett Jones LLP. Bennett Jones is a leading Canadian law firm with over 400 lawyers in offices throughout Canada and in the UAE.

Structuring shale gas development agreements

By Pat Maguire and Vivek Warrier,Bennett Jones LLP

Suite 3400, 1 First Canadian Place P.O. Box 130

Toronto, Ontario M5X 1A4Tel: +1 416 777 4804Fax: +1 416 863 1716

Website: www.bennettjones.com

Correspondents


Capital markets

October 2011

MumbaiOne Indiabulls Centre, Tower 1, 13/F, 841 Senapati Bapat Marg,

Elphinstone Road, Mumbai - 400 013, IndiaTel: +91 22 6636 5000Fax: +91 22 6636 5050


Testing the waters with SME listings

The small and medium enter-prises (SMEs) sector contributes significantly to India’s economy.

In value terms, this sector accounts for about 45% of the manufacturing out-put and 40% of the total exports of the country. In addition, about 59 million people are employed in over 26 million SME units across the country.

The Securities and Exchange Board of India (SEBI) has excogitated the international experience where sepa-rate exchanges or trading platforms list securities of SMEs to provide ease of entry and less onerous dis-closure requirements. These include the Alternative Investment Market in London, the Growth Enterprises Market in Hong Kong and the Market of the High-growth and Emerging Stocks in Tokyo.

Enabling an SME listing

Recognizing the growing need for finance for SMEs and to enable them to access capital markets with ease and at lower costs, on 13 April 2010 SEBI added chapter XA (to be read as chapter XB following a 23 September notification) to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).

Subsequently, through a circular dated 17 May 2010, SEBI provided all stock exchanges with a model SME equity listing agreement. It was hoped that together these moves would encourage promotion of dedicated exchanges for listing and trading of securities issued by SMEs.

The specifics

Accordingly, an issuer whose post-issue paid-up capital is `100 mil-lion - `250 million, can list its securi-ties under chapter XB on the SMEs’

exchange. Additional relaxations for SME issuers under chapter XB of the ICDR Regulations and under the model SME equity listing agreement are as follows:

While making a public issue or rights •issue the issuer does not have to file a draft offer document with SEBI;The minimum number of allottees •is 50. This is in sharp contrast to a normal issue where allotments in a public issue are not allowed for less than 1,000 prospective allottees.Migration to the main board is •allowed if the SME meets with the eligibility requirements prescribed by Bombay Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE) and if the issuer obtains the approval of the shareholders for such migration. Similarly, migration to the SME exchange is allowed if a listed issuer’s post-issue paid-up capital is less than `250 million, subject to the approval of its shareholders and compliance with the eligibility criteria laid down by the SME exchange.Minimum issue application size •is `100,000 per application. In contrast, the minimum application for an initial public offer of a normal issuer is between ̀ 5,000 and ̀ 7,000 per application;Merchant bankers, who will play •a larger role for SME listings, will be the market makers for the companies for a period of three years and will have to underwrite the total issue size. They can bring in external investors for 85% of the issue, but will need to underwrite 15% on their own. Periodic financial results to be •submitted on a half yearly basis instead of quarterly basis.SMEs will not be required to publish •their financial results (as required

for other companies) and can make them available on their website.Companies listed on the SME •exchange will need to send their shareholders a statement containing the salient features of all the documents prescribed in section 219(b)(iv) of the Companies Act, 1956, instead of sending a full annual report.

Market concerns

SEBI’s initiative of developing a mar-ket for SMEs in India is a welcome step. However, concerns exist. These include (i) an inherent risk for market-ing these issues, given the low visibility of SMEs and their brand name; (ii) merchant bankers may find it difficult to create a good demand; (iii) inves-tors may see SME issuers as high risk and so may not invest; (iv) liquidating the investment may be difficult if such stock is infrequently traded; and (v) SMEs may be vulnerable to competi-tion and market conditions.

It is important to remember that the OTC Exchange of India set up in 1990 and INDO Next Platform of the BSE launched in 2005 failed to attract small companies.

BSE and NSE received final approval from SEBI on 28 September and 15 October, respectively, and plan to start SME exchanges soon. It will be inter-esting to see how SME issuers react and if there is demand for their stock, and also if despite all this, SME issuers prefer to list on the main board, rather than starting off on SME exchange and then migrating – only time will tell.

By Madhur Kohli,Khaitan & Co

Madhur Kohli is a senior associate at Khaitan & Co. Khaitan & Co is a full-service law firm with offices in Bangalore, Kolkata, Mumbai and New Delhi.

Correspondents


Competition & antitrust

October 2011

Missing links: the DLF order

On the 12th of August the Competition Commission of India (CCI) imposed a penalty

of `6.3 billion (US$126 million) on a major real estate developer, DLF, for abuse of dominant position.

The CCI began its enquiry under section 4 of the Competition Act, 2002, on receiving a complaint from an apartment owners’ association. The complaint alleged that DLF was abus-ing its dominant position by including discriminatory and abusive clauses in the allotment agreements.

Taking a close look

On finding that there existed a prima facie case of abuse of dominant posi-tion, the CCI directed the director gen-eral (DG) to investigate into the matter.

The DG concluded that DLF has a dominant position as it enjoys an eco-nomic advantage over other players operating in the market. As such it can operate independently of competitive forces and can also influence consum-ers in its favour. The DG concluded further that DLF has abused its domi-nant position by imposing costly exit options, one-sided agreements and unfair conditions on the consumers.

Weighing up facts

After considering the DG’s report and hearing both parties, the CCI con-cluded that the relevant geographic market in this case is Gurgaon and the relevant product market is the market for high-end apartments. The CCI agreed with the DG’s opinion that DLF had abused its dominant position.

In addition to imposing a fine of `6.3 billion, the CCI passed a cease and desist order directing DLF not to for-mulate and impose unfair conditions

in its agreements with buyers in the city of Gurgaon and to modify the conditions of the existing agreements within three months of the date of receipt of the order.

Critique of the order

A detailed review of the order shows that the CCI had based its conclusions on erroneous findings. The CCI erred in holding that Gurgaon was the rel-evant geographical market. The test of substitutability for luxury apartments could not have been the basis for determining the relevant geographical market.

The CCI further erred in not appre-ciating the distinction between those who purchase property for residential use and those who purchase it as an investment. This is significant as the relevant product market does not con-sist only of the residential market, but also the market for investment, appre-ciation and rentals.

The CCI further failed to note that DLF was not holding a dominant posi-tion within the meaning of section 4 explanation (a) of the Competition Act. Further, there was no basis to assume that it was operating inde-pendent of competitive forces. The existence of a large number of real estate companies offering high-end residential premises constituted com-petitive forces in the market. There was nothing to show that DLF’s con-duct had resulted in the elimination of competition.

Erroneous conclusion

The CCI’s finding that DLF was abus-ing its dominant position is not based on cogent reasoning. In the absence of any finding on the relevant indications of abuse, such as predatory pricing or

refusal to supply, it would be incorrect to conclude that DLF was abusing its dominant position so as to have an appreciable adverse effect on the market.

If the CCI had come to the same conclusion citing lack of exit options for apartment buyers due to the alleged restrictive conditions in the buyer’s agreement, it could at best have been a case of restrictive condi-tions in a contract. This is because the imposition of unfair conditions in the purchase or sale of goods or services by itself is not proof of the abuse of a dominant position.

Further, there is nothing to show that the competitors (other real estate companies) in the market do not adopt similar practices or that such practices are perpetrated by DLF alone.

The CCI was also wrong in how it computed the fine, which amounts to 7% of the average turnover of the entire business of DLF for the three preceding financial years. As the fine is for an alleged abusive act in rela-tion to one building complex, if a penalty was to be imposed it should have been on the basis of either the turnover in relation to the particu-lar project, i.e. Belaire Residences, or the turnover of DLF in the rel-evant geographical market, which is Gurgaon. Imposing the fine on the basis of DLF’s entire turnover with respect to all its businesses across India is incorrect.

DLF has appealed to the Competition Appellate Tribunal against the order.

By Suchitra Chitale,Chitale & Chitale Partners

Suchitra Chitale, the managing partner of Chi-tale & Chitale Partners, heads the competition team of the firm, which advises and acts on the behalf of clients in Indian competition law mat-ters. She has been in practice for more than 24 years.

C-83, Neeti BaghNew Delhi - 110049, India

Tel: +91 11 4164 2965 / 66 / 67Fax: +91 11 4164 2964


Chitale & Chitale Partners

Correspondents


The courtroom

October 2011

S&P HouseH 186, Sector 63,

Noida 201301, IndiaTel: +91 120 463 1000Fax: +91 120 463 1001Email: [email protected]

Website: www.singhania.in

Does a competent authority who is appointed under the National Highways Act, 1956 – to deter-

mine what compensation is payable to land owners when land is acquired – have the power to make a supple-mentary award that nullifies an earlier award?

The act is silent on this question and as a result there had been a great deal of ambiguity and uncertainty about the role of a competent authority in this regard. As such, Karnataka High Court resolved an important issue when earlier this year it ruled that a competent authority has no power under the act to make a second award on a subject on which it had already made an award. It went on to say that the concept of a supplementary award is “a total misnomer”.

The court also ruled that a compe-tent authority could make a supple-mentary award for a portion of land or structures or trees on it that had not been included in the original award.

Factual background

The National Highways Authority of India (NHAI) filed a writ petition, through its counsel Singhania & Partners, challenging a series of sup-plementary awards made by a com-petent authority appointed under sec-tion 3(a) of the act. These awards had enhanced the compensation to be paid for land acquired, exorbitantly.

The central government had issued a final notification under section 3D of the act to acquire land. The com-petent authority had made awards for specific acquisitions by exercising its powers under section 3G (1) to (4) of the act.

Compensation for the land acquired had been awarded according to the provisions of section 3G (7) of the act.

However, af ter the award had been passed, the owners of the acquired lands made representations to the competent authority stating that the award had been wrongly determined.

They argued that they were entitled to be paid the market value for non-agricultural land, as the land was not agricultural as classified in the origi-nal award.

Various owners pointed out that their land was situated within the municipal limits or had been con-verted to non-agricultural use before a preliminary notification for its acqui-sition was issued.

After considering the representa-tions of the land owners and examin-ing several judgments on valuation of land by the Supreme Court, the com-petent authority made supplementary awards.

Heart of the matter

The primary issue was whether the competent authority could pass a supplementary award with respect to subject matter that is covered by the original award.

The NHAI relied on three judgments that dealt with the Land Acquisition Act. Principal among them was a deci-sion of a full bench of Gujarat High Court in Kanchanbhai Jhaverebhai and Another v The State of Gujarat and Others that dealt with the power of a land acquisition officer to pass a sup-plementary award.

In it the court held that under sec-tion 12 of the Land Acquisition Act an award becomes final with regard to the area of land for which it was made. Therefore the question of a supplementary award in respect of the same area or a part of it did not arise.

The decision

After considering the supplementary award passed, the court held that what the competent authority actu-ally did was not something that was supplementary to the original award. Instead what it had done was to review its decision and arrive at a fresh award that nullified the earlier award.

The competent authority had con-ducted a fresh enquiry and made a new award. In doing so it treated the land differently from when the origi-nal award was made. As such, the court held that this exercise could not be seen as making a supplementary award.

The court further held that a supple-mentary award by its very name sug-gests something that was not done earlier, which is attempted by way of a fresh exercise.

This is not uncommon when the original award has not dealt with the determination of compensation for a certain part of a piece of land or struc-tures or trees on it. This might be due to non-availability of a valuation report by an expert valuator. In such cases, the court held that a supplementary award could be passed for the por-tion that is not included in the earlier award.

However, it held that passing an award in place of an earlier award can-not be permitted as it will introduce “total uncertainty and chaos”. As such, the supplementary awards made by the competent authority were quashed as they were without jurisdiction.

Rewriting an award is untenable and illegal

Shilpa Shah is a senior partner and Sharan Kukreja is an associate at Singhania & Partners, which is a full-service national law practice. The firm has offices in New Delhi, Noida, Bangalore, Hyderabad and Mumbai.

By Shilpa Shah and Sharan Kukreja, Singhania & Partners

Correspondents


Dispute resolution

October 2011

Bharucha & Partners Advocates & SolicitorsCecil Court, 4th Floor, MK Bhushan Road

Mumbai-400 039India.

Tel: +91-22 2289 9300Fax: +91-22 2282 3900

E-mail:[email protected]

Do treaties make statesresponsible to investors?

By Vivek Vashi and Nitisha Bishnoi,Bharucha & Partners

Of the plethora of treaty-based claims initiated against India in the mid-2000s, White Industries’

arbitration claim is the only known trea-ty-based arbitration claim pending to date. A commercial affair between two companies has been elevated as an international claim and has enmeshed the government of India.

The dispute dates back to 1989, when White Industries and its Indian joint-venture partner, the state-owned Coal India, entered into a contract for the supply of equipment and develop-ment of coal mines at Piparwar (now Jharkhand). The 1989 agreement was governed by the International Chamber of Commerce (ICC) Arbitration Rules and the contract purportedly excluded the operation of the Indian Arbitration Act, 1940.

Disputes arose in relation to cer-tain entitlements to bonuses that were granted to White Industries under the agreement. White Industries referred the disputes to arbitration. In 2002, the arbitral tribunal awarded A$4.1million (US$4.2 million), plus interest and expenses, to White Industries.

Delay an abuse of rights?

Later in 2002, White Industries applied to Delhi High Court for enforce-ment of the ICC award. However, Coal India applied to Calcutta High Court to set aside the arbitral award under sec-tion 34 of the 1940 act.

The Calcutta High Court, by an order passed in 2004, adjudicated against White Industries on the grounds that the 1989 Agreement was signed and performed in India and that its choice of law provisions were premised upon Indian law. Today, seven years later, the Calcutta High Court’s order is still pending appeal before the Supreme Court.

Denial of justice?

Faced with difficulties in enforcing an award in its favour in India, and driven by the conviction that the Indian courts were not promptly performing their obli-gations under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, on the basis that the courts were open to consider setting aside a commercial arbitration ruling rendered outside India, White Industries commenced arbitration proceedings against India under the Australia-India Bilateral Investment Treaty (BIT) in 2010.

The treaty between India and Australia, on promotion and protec-tion of investments, acknowledges that investments by investors of one the contracting parties in the territory of the other contracting party would be made within the framework of laws of the other contracting party.

The present arbitration was invoked based on the well-established approach of prohibition of denial of justice, which has been considered to be an essential component of the “fair and equitable treatment” provision in the BITs.

Proceedings in London

The additional solicitor general of India, who is a former advocate general of Madhya Pradesh, represented India in the international arbitration proceed-ings in London. Explaining the delay in arriving at a decision with regard to enforcement of the foreign arbitral award in favour of White Industries in India, it was contended that the delay was a result of the wrong legal strategy adopted by White Industries despite knowledge of the fact that an argument under section 34 of the act was main-tainable in the circumstances.

White Industries argued that it had obtained a favourable international

commercial award and then been denied the legal and/or investment protections guaranteed under the BIT for investment made by an investor of one contracting party in the territory of the other.

White Industries pleaded that the award could not be challenged in India and that justice has been denied by the Indian judicial system, which is evident from the passage of nine years without a final decision on the maintainability of the claim against setting aside the award in favour of White Industries. According to White Industries, India has to take responsibility for non-implementation of the award and the entire claim has to be paid by the Indian state.

The arbitrat ion proceedings in London have been completed and the decision has been reserved. An order is expected in December.

The White Industries BIT case throws up a rather odd situation. A state’s responsibility for the failure of its courts to enforce an arbitral award to the detriment of a foreign investor should be engaged only in cases where the “denial of justice” is gross. If cases where awards have been made and challenged in accordance with the law in Indian courts are considered a denial of justice, the floodgates are likely to open, with every disgruntled investor pursuing BIT arbitrations against India.

This might adversely affect India’s position in such cases, as India has entered into 137 BITs with various countries across the globe. Therefore, lowering the bar any further would result in treaty tribunals acting as unau-thorized international appellate courts, which would mar the legitimacy of the international investment law regime.

Vivek Vashi is a partner in the litigation depart-ment at Bharucha & Partners where Nitisha Bishnoi is an associate

Correspondents


Inbound investment

October 2011

Offers of foreign securitiesneed careful structuring

Companies incorporated out-side India may seek to raise funds by offering securities to

investors resident in India. As outlined below, a private placement exemption and the foreign exchange regulations in India need to be considered in con-nection with such offers and sales.

Exemption and regulations

The Companies Act, 1956, sets out an exemption for the private placement of securities. Section 67(3) states that no invitation or offer shall be treated as made to the public if the offer or invita-tion can be regarded as (i) not being calculated to result in it becoming avail-able for subscription or purchase by persons other than those receiving the offer or invitation, or (ii) can be regarded, in all circumstances, as being a domes-tic concern of the persons making and receiving the offer or invitation.

Section 67(3) also clarifies that any offer or invitation made to 50 persons or more will be construed as being made to the public. Accordingly, a for-eign entity needs to ensure that an invi-tation or offer is not made to more than 49 persons in India. The 49-person limit does not differentiate between retail and institutional investors and regu-lates both “invitations” and “offers”.

Unless otherwise permitted under the foreign investment regulations, any investment in the securities of a foreign entity by a person resident in India needs the prior approval of the Reserve Bank of India (RBI). The regulations for investments made by an individual and a corporate entity differ and some of the differences are summarized below.

Investments by individuals

The Foreign Exchange Management Act, 1999 (FEMA), permits an Indian

resident to acquire foreign securities using funds legitimately held by the resident in a bank account outside India or funds held outside India which were inherited from a non-resident.

An Indian resident is also permitted, under certain specified circumstances, to open a “resident foreign currency account” and acquire foreign securities using funds from such an account.

The RBI also permits Indian resi-dents to pay up to US$200,000 a year to acquire securities of any listed or unlisted company incorporated outside India, other than entities incorporated in Bhutan, Nepal, Pakistan, Mauritius and countries identified by the Financial Action Task Force as non-cooperative countries.

A person resident in India is also permitted to acquire foreign securities as part of an employee stock option scheme or as a gift from a person resi-dent outside India.

Investments by Indian entities

Investment by listed Indian compa-nies: Regulations under the FEMA per-mit listed Indian companies to invest in securities issued by a foreign entity (other than an entity in the financial services sector) which is listed on a recognized stock exchange outside India. However, such investment must not exceed 50% of the net worth of the Indian entity.

Investment in the financial services sector: Under the FEMA regulations, only Indian entities that are engaged in the financial services sector can invest in foreign entities that are engaged in financial services. Further, an Indian entity that intends to invest in foreign entities in the financial services sector must comply with certain additional conditions relating to net profit, regis-tration with and approval of a financial

services regulator, and compliance with certain prudential norms.

Investment by mutual funds: Mutual funds in India that are regis-tered with the SEBI are permitted to invest up to a specified limit in various foreign securities. These securities include American and global deposi-tary receipts of foreign companies, shares of overseas companies listed on recognized stock exchanges, and debt instruments rated not below investment grade of foreign entities incorporated in countries with fully convertible currencies.

Investment by venture capital funds: Venture capital funds registered with the SEBI are permitted to invest in equity and equity-linked instruments of offshore venture capital undertakings, subject to an overall limit and with the SEBI’s permission.

Indian companies are also permit-ted to make direct investments in joint ventures or wholly owned subsidiaries outside India subject to certain condi-tions, including meeting a net worth criterion. However, this route excludes portfolio investments and may not be directly applicable.

The above is not an exhaustive list of permitted investments under the FEMA. Also, there may be filing requirements under the foreign invest-ment regulations, and resales of for-eign securities acquired by persons resident in India may be subject to further restrictions. Offers of foreign securities in India need to be struc-tured carefully to comply with all the restrictions.

Bhakta Patnaik and Sarayu Pani are lawyers at S&R Associates, a law firm based in New Delhi and Mumbai. The views expressed above are those of the authors and not a sub-stitute for legal advice.

New Delhi64 Okhla Industrial Estate Phase IIINew Delhi 110 020IndiaTel: +91 11 4069 8000Fax: +91 11 4069 8001 By Bhakta Patnaik

and Sarayu Pani,S&R Associates

MumbaiOne Indiabulls Centre 1403, Tower 2, B Wing841, Senapati Bapat Marg, Lower ParelMumbai 400 013Tel: +91 22 4302 8000Fax: +91 22 4302 8001

Correspondents


Infrastructure & energy

October 2011

The Jawaharlal Nehru National Solar Mission set an ambitious target of installing and commis-

sioning projects, in three phases, to generate 20,000 MW of solar power in India by 2022. The first phase envis-ages selection and development of a total capacity of 1,000 MW, com-prising 500 MW each of solar photo voltaic (PV) and solar thermal power. While the entire 500 MW of solar ther-mal projects was awarded in the first round of bidding, a total of 37 solar project developers successfully bid for only 150 MW of PV projects.

Making it attractive

The Ministry of New and Renewable Energy, through NTPC Vidyut Vyapar Nigam (NVVN), recently issued guide-lines for selection of a second batch of PV projects. Key changes brought about under these guidelines are out-lined below.

Capacity allocation: A project developer (including its parent, ulti-mate parent, affiliate and group com-pany) can bid for a total capacity of 50 MW, subject to a maximum of three PV projects with no single project being more than 20 MW. In the first batch a project developer could only bid for 5 MW.

Net worth: A bidder must have net worth of at least `30 mil l ion (US$610,000) per MW of the PV project capacity up to the first 20 MW being bid for, and `20 million for each MW above 20 MW. Bidders in the first batch needed net worth of at least 150 million, irrespective of the project capacity.

Compulsorily convertible prefer-ence shares and debentures and share premium also count towards net worth. Successful bidders are required to capitalize project special

purpose vehicles up to the net worth requirement before the power pur-chase agreement (PPA) is executed. Depending on the size of the underly-ing project, the amount that a suc-cessful bidder may have to put into the special purpose vehicle up front could be significant.

Restrictions remain

Control: A bidding company or con-sortium cannot change its sharehold-ing until the PPA is signed. After that the bidding company or lead member must remain as the controlling share-holder for one year after the com-mercial operation begins. Controlling shareholding has been increased from a minimum of 26% (under the first batch guidelines) to more than 50% of the paid-up share capital (including any compulsorily convert-ible preference shares or debentures or both) and voting rights.

The equity lock-in requirements for solar power projects have proved to be one of the main reasons for the slow growth of the sector.

Domestic content: The guidelines for the first batch required that at least 30% of the equipment be sourced domestically. Now, photovoltaic mod-ules made from thin film technologies or concentrator photovoltaic cells can be sourced from other countries, but all other material must be sourced domestically. The cost of setting up recycling units for plants using this technology and potential environ-mental compliance costs still need to be addressed.

Conditions eased

Timelines: The timelines for achiev-ing financial closure and commission-ing of PV projects have been increased

by one month each. Helpfully for project developers, financial closure refers only to lining up funds (by way of sanction of a loan) and does not require conditions precedent for drawdown to be met.

Bank guarantees and liquidated damages: In case of commissioning delays caused by reasons other than default by NVVN or force majeure events, NVVN can encash the bank guarantee provided by the project developer in proportion to the uncom-missioned capacity of the PV project. Bank guarantees can be invoked for up to 16 months from the date of the PPA, after which the project developer will be liable for liquidated damages to NVVN at the rates given in the PPA.

If the PV project capacity is not commissioned 18 months after the PPA is signed, the contracted capac-ity under the PPA will be reduced by the uncommissioned quantity and the PPA (to that extent only) will be terminated. The entire project capac-ity will not stand terminated, as in the first batch.

As can be seen, the government has attempted to increase investment by liberalizing conditions on invoca-tion of bank guarantees, timelines and financial arrangements. However, restrictions on change in control and domestic content requirements, which are seen as bottlenecks, remain. This may affect the success of projects in the second batch.

Saurabh Bhasin is a partner at the Delhi office of Trilegal where Arnav Joshi is an associate. Trilegal is a full service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 140 law¬yers, some of whom have experience with law firms in the United States, the UK and Japan.

BangaloreThe Residency, 7/F133/1, Residency RoadBangalore – 560 025Tel: +91 80 4343 4646Fax: +91 80 4343 4699E-mail: [email protected]

New DelhiA-38, Kailash ColonyNew Delhi – 110 048IndiaTel: +91 11 4163 9393Fax +91 11 4163 9292E-mail: [email protected]

Solar mission guidelinesamended for batch two

By Saurabh Bhasin and Arnav Joshi,Trilegal

Correspondents


Intellectual property

October 2011

Tempest in a teapot:the row over Darjeeling

Calcutta High Court has dis-missed an appeal by the Tea Board, India, against the refusal

by a single judge of the court to grant an interlocutory injunction in its suit against ITC Limited. The Tea Board had filed the suit, based on the Trade Marks Act, 1999, and the Geographical Indications of Goods (Registration and Protection Act, 1999 (GI Act), to restrain ITC from using the name Darjeeling Lounge at its ITC Sonar hotel.

The suit also sought to restrain ITC from in any way conducting the hotel’s business or marketing the hotel using any other name or mark or word which is phonetically or structurally similar or identical or deceptively similar to the registered geographical indica-tion “Darjeeling”, or from passing off or attempting to pass off its business or services so as to discredit the fame of Darjeeling tea, or misleading or confusing people as to the nature of the beverages sold at the ITC Sonar hotel by alluding to a nexus with the Darjeeling geographical indication.

Tea Board marks

The Tea Board is the registered owner of two sets of marks in con-nection with tea. One is the word Darjeeling and the other is a round device featuring the profile of a woman holding two leaves and a bud with the word Darjeeling spelled out on the edge running from the 9 o’clock to the 12 o’clock position. The word and device marks are independently regis-tered as a geographical indication and as a certification trademark.

In the dispute, the Tea Board asserts exclusivity over “Darjeeling” and ITC maintains that there is more to “Darjeeling” than the tea that is grown there.

The court, with an observation on the scope of investigation in an appeal against a decision on a discretion-ary order such as an interim injunc-tion, proceeded to determine whether the single judge in the facts of the present case was justified in refusing the interim relief during the pendency of the suit.

The court questioned whether by virtue of registrations under the geo-graphical indications and trademarks acts, the Tea Board can restrain ITC from naming one of its hotel lounges the Darjeeling Lounge, noting that tea and other items which are not necessarily from Darjeeling are also served.

Sections vary

After considering the cited case law and comparing the provisions on trademarks and certification marks, the court opined that infringement of the rights conferred under section 28 of the Trade Marks Act cannot have any application when infringement of the rights conferred under section 78 of the act are alleged.

Sections 28 and 29 of the Trade Marks Act deal with rights conferred by registration and infringement of reg-istered trademarks respectively, and sections 75 and 78 deal with infringe-ment of certification trademarks and rights conferred by registration of cer-tification trademarks.

The court considered section 29(5), only to observe that a corresponding provision is absent in section 75 and hence the application of section 29 to rights conferred under section 75 is unfounded. Section 29(5) says that a registered trademark is infringed by a person who uses such a trademark as a trade name or part of a trade name, or name or part of the name of a

business concern dealing in goods or services in respect of which the trade-mark is registered.

On the allegation of passing off, the court held that the Tea Board does not make a prima facie case. As the board is neither a trader of tea nor does it render hospitality services, it is not its case that ITC, by naming one of its lounges the Darjeeling Lounge, is trying to proclaim itself as an agent or authorized representative of the Tea Board.

Rights limited

In the geographical indications domain, the court upheld the observa-tion of the single judge that the protec-tion accorded to Darjeeling tea under the GI Act, which seeks to protect indications identified on account of quality or reputation or other charac-teristics attributable to their geograph-ical origin, cannot be extended to any right over Darjeeling as a geographical name.

The court also found it apparent that ITC in using the word Darjeeling does not falsely assert that it has the right to certify that the tea served in its lounge is grown in Darjeeling.

The court concluded the Tea Board had prima facie failed to prove vio-lation of its registered certification trademark in terms of section 75 of the Trade Marks Act as it had not regis-tered as holder of the mark Darjeeling in respect of the hotel business but for the purpose of certification of tea as grown in Darjeeling, and so the benefit of sections 28 and 29 of the Trade Marks Act is not available.

By Manisha Singh Nair, Lex Orbis IP Practice

709/710 Tolstoy House, 15-17 Tolstoy MargNew Delhi - 110 001

IndiaTel: +91 11 2371 6565Fax: +91 11 2371 6556


Manisha Singh Nair is a partner at Lex Orbis IP, a New Delhi-based intellectual property prac-tice.

Correspondents


International capital markets

October 2011

The fiscal year ended 31 March was exceptional for the Indian capital markets. Primary equity

issuances provided record levels of capital, and secondary market issues reached new highs. International capital inflows were also at record levels.

However, Indian markets have not been immune to the volatility in the global financial markets in fiscal 2012, triggered primarily by concerns over the economic outlook for the United States and Europe. The SENSEX fell 23% from its 52-week high of 21,108.64 on 5 November 2010 to a low of 16,141.67 on 19 August 2011.

Spillover effect

Increased market volatility has had an adverse impact on investor demand for equity investments in emerging markets. Many large Indian initial public offerings (IPOs) expected to take place late in fis-cal 2011 or early in fiscal 2012 have been delayed or cancelled. This was despite Indian IPO deal volume remaining stable in the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012 versus the same period in the prior year – the six months ended 30 June saw a total of 59 IPOs compared to 58 in the same period in 2010. Notably, there has been a significant decline in qualified institutions placements (QIPs), which fell from 58 in fiscal 2010 to 41 in fiscal 2011.

Despite this, the government of India’s (GoI) need to finance the develop-ment of infrastructure and other capital expenditure plans has not diminished. Further, recent amendments to the Securities Contracts (Regulation) Rules, 1957, (2010 Amendments) requiring listed companies to maintain a pub-lic shareholding of at least 25%, may also necessitate many companies to sell equity or risk losing their listing. The tension between recent market

developments and these two factors make for interesting times for Indian capital markets.

Disinvestment

The GoI’s disinvestment programme – through which it has partially financed its capital expenditure programmes – raised approximately `221.44 billion (US$4.79 billion) in fiscal 2011, including the US$3.4 billion raised from the Coal India IPO, which was India’s largest ever IPO. Other successful disinvestments include offerings by Power Finance Corporation, MOIL and Power Grid Corporation. As would be expected, international investors provided sig-nificant amounts of the capital in these offerings.

The GoI’s divestment target for fis-cal 2012 has been reported to be approximately `400 billion, which is 80% more than in fiscal 2011. Major l is ted publ ic sector enterpr ises (PSEs), including the Steel Authority of India (SAIL) and Oil and Natural Gas Corporation (ONGC) are report-edly working on large public follow on offerings, while Rashtriya Ispat Nigam Limited Minerals (RINL) and National Buildings Construction Corporation (NBCC), among others, have been reported to be planning IPOs. These transactions will require significant support by international investors to meet the GoI’s objectives.

Increasing shareholdings

The 2010 Amendments require all companies listed in India to have a mini-mum public float of 25%. Companies that do not meet this threshold must increase their public holding each year by a minimum of 5%, until the 25% requirement is satisfied. To do this they would need to sell shares and this will

depend on retail demand for equity investments.

The public float requirement was amended in August 2010 to provide that listed companies are not required to go to the market immediately for an additional 5% public holding, but still must comply with the 25% public float requirement within three years. The public shareholding requirement for PSEs was reduced to 10%, which must also be achieved within three years. While these amendments may tempo-rarily ease the pressure on some listed companies impacted by the regulations, the benefit will be relatively short-lived.

Influence on markets

There was a rush of capital to Indian companies in fiscal 2011, but fiscal 2012 may be different. While most forecasts of GDP growth have continued to hover around 8%, many of the economies of countries where the large institutional investors that invest in emerging market opportunities are located have been adversely impacted. This has resulted in a downturn in capital markets activity in many emerging markets.

Therefore, a large group of PSEs and privately owned companies will all com-pete for what is currently a declining sup-ply of international investors and capital for market attention. Companies that are unable to attract sufficient investor sup-port may see their plans being adversely affected if they are cannot raise the funds necessary. It will be interesting to see how these market dynamics play out during the remainder of fiscal 2012.

Stephen Peepels, a partner in the corporate group in Hong Kong, heads the US capital mar-kets team for Asia. DLA Piper is the world’s larg-est legal practice with more than 4,200 lawyers in 76 offices across 30 countries.

Interesting times for Indian capital markets transactions

By Stephen Peepels,DLA Piper

17th Floor, Edinburgh Tower, The Landmark15 Queen’s Road Central

Hong KongTel: +852 2103 0808Fax: + 852 2810 1345


Correspondents


Media & entertainment

October 2011

Personality rights is a colloquial term for the right to publicity. It refers to the right of individu-

als to control the commercial use of aspects related to their identity. The basis of these rights is that a famous person has a right over their image and reputation, and is entitled to reap the fruits of their labour.

The right to publicity can be seen as an extension of intellectual property rights for a commercially marketable image must be viewed as a product created by the famous person through sustained effort in a chosen field. A third party who tries to benefit com-mercially from a famous person’s rep-utation without permission or by not adequately compensating the person is guilty of violating that individual’s personality rights.

Among the many unique legal issues affecting famous people, the most important arise from the right to pub-licity. The term was coined in 1953 in the US by Justice Jerome Frank in Haelen Laboratories v Topps Chewing Gum, one of the first cases that rec-ognized the economic interest of a celebrity in their personality.

What lies within

Personality rights, which are a mix of privacy and publicity rights, have economic and moral aspects. The publicity aspect of personality rights aims to protect the economic value of a person’s reputation in the same way as the protection of a trademark. As a famous person has an exclusive right to exploit their personality com-mercially, any unauthorized links to a famous person that may harm their reputation would amount to a violation of their rights.

The privacy aspect of personality rights does not allow celebrities to

completely control information about themselves and there are limits on what can be done to prevent informa-tion from entering the public domain. A delicate balance needs to be main-tained between personal information and public interest in the dissemina-tion of information relating to celebri-ties. This balance is maintained by determining whether the information is worthy of any public interest before such an interest is seen as an unnec-essary invasion into someone’s per-sonal life.

Gaining recognition

In the US, the right to publicity is a widely accepted right, which arose as an offshoot of the right to privacy. The courts gradually recognized that there could exist a separate right pertaining to a person’s commercial interest in their personality.

Initially, attempts were made to bring the right to publicity under the ambit of the laws on privacy, trademark and unfair competition. Since then, US courts and state legislatures have recognized the need for a separate legal basis for the right to publicity and several US states have some form of statutory or judicial recognition of personality rights.

In India, personality rights are almost unheard of. There is no major judi-cial precedent recognizing or reject-ing personality rights, or any legisla-tion expressly granting such rights. However, a defamation suit can be filed against someone who makes an imputation concerning a celeb-rity, knowing that such imputation will harm the person’s reputation.

Further, a passing-off action can be filed against a third party who attempts to create a false associa-tion between a celebrity and certain

products by making unauthorized representations that the celebrity endorses the product. As the celeb-rity’s personality and the goodwill it commands can be treated as a commodity, it can be argued that the marketing of a wrongful association has adversely affected the celebrity’s brand value.

Initial attempts

In 2003, an iconic south Indian actor, Rajnikanth, issued a legal notice before the release of his film Baba to prevent anyone from using the character, pictures and acces-sories used in the film for commercial gain. Owing to Rajnikanth’s popularity in south India, his mannerisms and dialogues have often been replicated and by issuing such a legal notice, he was attempting to assert his person-ality rights.

In the recent Montblanc luxury pens case in India, the launch of pens with Mahatma Gandhi’s image on the nib was met with opposition based on the protection under the Emblems and Names (Prevention of improper use) Act, 1950. Montblanc was forced to withdraw its pens from the market.

While the 1950 act was brought into force to ensure that people of Gandhi’s stature are not treated with disrespect, it also indicates that personality rights have a long history in India. With the US, UK and several other jurisdic-tions providing explicit recognition of personality rights, it is time for India to provide judicial and legislative recog-nition to this new type of intellectual property.

Shabnam Khan is a managing associate at Lall Lahiri & Salhotra, which is an IP boutique based in Gurgaon.

LLS House, Plot No. B-28, Sector - 32, Institutional Area,

Gurgaon - 122001, National Capital Region, India

Tel: +91 12 4238 2202 / +91 12 4238 2203 Fax: +91 12 4403 6823 / +91 12 42384898

Website: www.lls.in

Recognizing rights whena person is the brand

By Shabnam Khan,Lall Lahiri & Salhotra

Correspondents


Mergers & acquisitions

October 2011

Amarchand Towers 216 Okhla Industrial Estate - Phase III

New Delhi - 110 020 Tel: +91 11 2692 0500 Fax: +91 11 2692 4900

Managing Partner: Shardul ShroffEmail: [email protected]

By Mrinal Kumarand Shruti Garg, Amarchand & Mangaldas & Suresh A Shroff & Co

Th e L a n d A c q u i s i t i o n , Rehabilitation and Resettlement Bill, 2011, has been cleared by

the cabinet and has been introduced in parliament. The bill seeks to make far reaching changes in the archaic Land Acquisition Act, 1894.

The major changes proposed by the bill include the provision for rehabilita-tion and resettlement of the displaced persons. Like the act, the bill also ena-bles the government to acquire land and transfer it to private companies for public purposes.

The bill’s provisions relating to reha-bilitation and resettlement apply not only where the government acquires land for private companies but also where the independent purchase by private companies through private negotiations with land owners results in the purchase of more than 100 acres of land in rural areas and more than 50 acres in urban areas.

Critics of the bill argue that all direct private purchases of land must be out-side the ambit of the mandatory pro-visions relating to rehabilitation and resettlement of the displaced persons. The bill also provides for compensa-tion and resettlement for not only land owners, but also all those whose liveli-hood is affected by the acquisition of land. There are concerns that this would make the acquisition of land costly and cumbersome.

Public purpose defined

The most awaited change proposed by the bill relates to the definition of “public purpose”. The bill attempts to chalk out the acts that are classified under the definition of public purpose.

Where land is acquired for private companies, the consent of at least 80% of the project affected people must be obtained.

One of the major criticisms of the current act arises from the provision that enables the government to acquire land for a public purpose without fol-lowing the due process of land acquisi-tion on the grounds of urgency.

There were various instances where farm land that had been acquired by the government by invoking the urgency provisions was allotted to pri-vate developers for the construction of residential and commercial units.

In a recent case, the apex court observed that the acquisition of land for residential, commercial, industrial or institutional purposes can be treated as an acquisition for a public purpose but does not justify the exercise by the government of its power to invoke the urgency provisions. In this regard, the bill proposes to bring sweeping changes by mandating that the urgency provisions can be invoked only in cases of the defence of India, national secu-rity or emergencies arising out of natu-ral calamities.

Acquisition reversed

Another important aspect of the bill can be illustrated by considering the following example. Land at Singur, West Bengal, was acquired from the land owners and allotted to Tata Motors for setting up a car factory by invoking the provisions of the act. However, early this year, the West Bengal government enacted the Singur Land Rehabilitation and Development Act, 2011, to return the acquired land to the original land owners.

Tata Motors opposed this and, by a motion in Calcutta High Court, challenged the constitutional mer-its of the Singur Land Rehabilitation and Development Act and the Land Rehabilitation and Development Rules framed under this act. Calcutta High

Court recently ruled that the act and the rules framed under it were consti-tutional and valid, and ordered that the land be returned to the original land owners.

This leads one to ponder that an act that is considered to be serving a public purpose at one point of time, by one government, can become an anathema with a change in govern-ment. It is hoped that the bill, through its definition of public purpose, will help to minimize if not completely eradicate this anomaly.

Preserving farm land

Lastly, it may be noted that at present, more than 68 million hectares of land are lying as wastelands in India. The emphasis by the govern-ment and the private sector must be on the acquisition of these wastelands for development, instead of acquiring prime agriculture land.

The bill provides that only 5% of the total irrigated multi-crop land in any district can be acquired. The acquisition of wastelands would not only reduce resistance from land owners but at the same time ensure that the extent of cul-tivable farm land is not diminished.

Some critics have said the bill is one-sided and pro land owners. Although the bill proposes to bring in far reach-ing changes, that fact remains that the increased cost of acquisition may in turn be passed on to the end-users.

Mrinal Kumar is a partner and Shruti Garg is a senior associate with Amarchand & Man-galdas & Suresh A Shroff & Co. The views ex-pressed in this article are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas. The authors can be contacted at [email protected] and [email protected].

Balancing of rights in land acquisition

Correspondents


Middle East-India trade & investment

October 2011

Level 35 - Jumeirah Emirates TowersSheikh Zayed Road, Dubai

P.O. Box 9371United Arab EmiratesTel: +971 4 330 3900Fax: +971 4 330 3800

Email: [email protected]: www.afridi-angell.com

Project cancellationshit Dubai developers

Dubai’s Real Estate Regulatory Authority (RERA) has completed a programme that reviewed the

emirate’s real estate projects, seeking to establish the viability and likelihood of completion of each project.

The Dubai Prospectus posted on the London Stock Exchange website states that: “In the last two years, RERA has … completed a review of more than 450 projects and, of these reviewed projects, 237 are expected to be completed in due course. 217 registered projects have been can-celled by RERA as at 31 May 2011.”

Concerns have been voiced by some commentators that there is oversupply to the Dubai real estate market and that this is driving down unit prices. The cancellation of projects that are unlikely to be completed is one way to help stabilize the market and to pro-vide more clarity about the completed units that will be released to the mar-ket in future. This could in turn lead to lead to recovery in price levels.

Decree 6

Dubai’s Decree 6 of 2010 gives RERA the power to cancel a project after giving consideration to a techni-cal report on the project. RERA started to exercise that right in May this year and issued cancellation notices to a variety of projects across the retail, commercial and residential sectors during May and June.

There are several different circum-stances in which RERA is entitled, under Decree 6, to cancel a project. These include where the developer is bankrupt, where the developer has breached Dubai’s Escrow Account Law, and where the developer has failed (without an acceptable excuse) to commence construction.

Decree 6 sets out a spec i f ic

procedure that RERA must follow to cancel a project. Given the seri-ous consequences of cancellation, a developer whose project RERA is seeking to cancel can be expected to carefully study the facts to establish if the procedure was correctly followed.

Cancellation procedure

RERA must notify the developer in writing of the decision to terminate. Starting from the date on which the developer is notified of the cancel-lation, the developer then has seven working days to challenge RERA’s decision.

If the developer challenges the can-cellation, the challenge must be in writing and must state the developer’s arguments why cancellation is invalid. Arguments that are often put forward by developers are:

• The developer has opened anescrow account and deposited all monies into that account as required by law;

•Thedeveloperhaspaid themas-ter developer the purchase price for the plot and has taken possession as required by law; and

• The developer has obtained allnecessary consents and licences in order to commence construction, but the developer is being prevented from starting construction due to some fac-tor beyond its control.

If the developer makes a timely challenge to the cancellation, RERA must then consider the challenge and issue its decision within seven working days of the date of submission of the challenge.

The consequences are uncertain where RERA is unable to comply with the seven working day dead-line. Indeed, for some projects RERA has ordered a whole new report on

the project, perhaps reviewing the conclusion of the original report that led to the cancellation notice being issued.

Consequences of cancellation

In the event the developer’s chal-lenge is rejected, the developer is obliged to provide all unit purchasers with a full refund of all monies paid. The refund must be made within 60 days of RERA’s cancellation deci-sion, although RERA may extend that deadline.

If the developer fails to make the nec-essary refund, RERA has the power to take “whatever procedures necessary to protect purchasers’ rights, including referring the matter to the competent judicial authorities”.

Decree 6 does not provide that, in the event a project is cancelled, the contract under which the developer bought (from the master developer) the plot of land on which the project was to be built is also terminated. Accordingly, and subject to further action by either party, that contract remains in place and the developer is not entitled to a refund from the mas-ter developer.

The obligation under Decree 6 for the developer of a cancelled project to give a full refund to unit purchas-ers is onerous. It is therefore antici-pated that developers will be increas-ingly focused on enforcing their rights against master developers, ideally securing a refund of monies paid for the plot of land on which the project was to be built.

Andrew Yule is an associate at Afridi & Angell, a UAE-based law firm. He can be contacted at [email protected]. Afridi & Angell has of-fices in Abu Dhabi, Dubai and Sharjah.

By Andrew Yule, Afridi & Angell

Correspondents


Real estate

October 2011

Big battles and small cars: the Singur judgment

I n a high profile judgment delivered in September, Calcutta High Court upheld the constitutional validity

of the Singur Land Rehabilitation and Development Act, 2011.

The judgment validates the West Bengal government’s move to return 400 acres of land to its original owners.

This was done as the Land Acquisition Act, 1894, does not provide for return of land to its original owners. (For a detailed discussion see Land acquisi-tion: time to return a little, on page 84 of the July/August 2011 issue of India Business Law Journal)

Origins of dispute

In March 2007, the West Bengal government leased 654.67 acres of land in Singur to Tata Motors to set up a factory to manufacture its small car, the Nano. The land was acquired under the Land Acquisition Act and leased to Tata for 90 years, on the condition that the lease could be extinguished if the land remained unused for over three years. Not long after, in 2008, political agitation at the site forced Tata to relocate to Gujarat.

In June 2011, the West Bengal gov-ernment passed the Singur Act. It provided for the transfer of leased land to the state and return of 400 acres to “unwilling owners” – those who had not accepted compensation when the land was acquired.

The government justified the act on two grounds: the land had been unu-tilized for more than three years and therefore the object of the lease had failed; in addition public dissatisfac-tion had to be ameliorated.

As soon as the act was passed, the state government rather impetu-ously took possession of the leased

land. This triggered two writ petitions in Calcutta High Court challenging the validity of the Singur Act and the action of the state.

For and against

Tata argued that the Singur Act is in conflict with the Land Acquisition Act. Crucially, it was still to receive the assent of the president of India as the power to make laws covering acquisi-tion of property can only be exercised under the concurrent list of the con-stitution of India. It also argued that the acquisition was in exercise of powers of “eminent domain” which can be only be for public purpose and return of land to its unwilling owners did not qualify.

Tata also argued compensation has to be paid immediately on re-possession, but the Singur Act failed to specify how it would be calculated and paid.

Finally it pointed out that the pro-vision in the Singur Act directing Tata to restore vacant possession contained unguided power that did not mean taking possession without notice.

Defending its stand the state said there was a presumption of consti-tutionality of a statute and the court should at the first instance interpret the act so as to support it. It also argued that the subject matter of the Singur Act was in the state list and distinct from the Land Acquisition Act as it dealt with extinguishment of leasehold interest.

The state relied on three local acts that provided for extinguishment of interest of a tenant without payment of compensation. It also said that any need of a section of people, in this case, the unwilling owners, could be termed as public purpose.

The judgment

Calcutta High Court held that the Singur Act was, at least, partly in exercise of the power of eminent domain. It held that the acquisition can be of an interest in land that is not owned by the state, which in this case was the remainder of Tata’s 90 year lease and hence covered under the concurrent list.

The court concluded that the Singur Act disclosed sufficient public pur-pose, but did not go into whether the act was in conflict with the Land Acquisition Act which disallows return of land. The court on the contrary jus-tified it by holding return of land quali-fied as public purpose for acquisition.

The court held that the act con-tained some vagueness and uncer-tainty about compensation. But using a “purposive interpretation” of its pro-visions – as in Seaford Court Estates, Ltd v Asher, which the Supreme Court approved in State of Bihar v Bihar Distillery Ltd – it held that the word compensation in the act meant com-pensation as contained in sections 23 and 24 of the Land Acquisition Act. Hence there is no reason for strike down the act on that count.

The court also concluded that the state exceeded its powers in tak-ing possession of the land without any notice and appointed special officers to ensure a safe and smooth transition.

Will this judgment mark the begin-ning of a long court battle or is a watershed in land acquisition laws in India? Either way, its repercussions will be enormous.

By Deepti Mohan,Vidhii Partners

Mumbai 102-A, Prathmesh Tower Premises Co-op. Society Ltd. Raghuvanshi Mills CompoundSenapati Bapat Marg, Lower Parel, Mumbai 400 013, IndiaTel: +91 22 4355 8555Fax: +91 22 4355 8550Email: [email protected].

Deepti Mohan is a partner at Vidhii Partners and can be reached at [email protected].

Kolkata Ambassador Apartments,Flat No. 13, Block B,First Floor, 61A, Park Street,Kolkata 700 016, IndiaTel: +91 33 4001 4224Fax: +91 33 4001 4225E-mail: [email protected]

Correspondents


Regulating corrupt business practices

October 2011

Money laundering is an act or attempted act to conceal the identity of illegally obtained pro-

ceeds from drug trafficking, terrorist activ-ity or other serious crimes. Laundered money appears to have originated from legitimate sources.

Money laundering occurs in three steps: first, cash is introduced into the financial system by some means (placement); second, complex financial transactions are carried out to camouflage the illegal source (layering); finally, wealth generated from transactions using the illicit funds is acquired (integration).

Varying forms

Structuring, also known as “smurfing”, •is a method of placement by which cash is broken into smaller deposits to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.Bulk cash smuggling involves •physically smuggling cash to another jurisdiction with greater bank secrecy or less rigorous money laundering enforcement, and depositing it in a financial institution (offshore bank).Cash-intensive businesses typically •receive cash and use the businesses’ accounts to deposit both legitimate and criminally derived cash, claiming all of it as legitimate earnings. Such businesses may have no legitimate activity.Trade-based laundering involves under •or overvaluing invoices to disguise the movement of money.Shell companies and trusts disguise •the ownership of money. Trusts and corporate vehicles, depending on the

jurisdiction, need not disclose their true, beneficial, owner.Bank capture means money launderers •buy a controlling interest in a bank, preferably in a jurisdiction with a weak money laundering regime, and move money through the bank without scrutiny. Real estate may be purchased with •illegal proceeds and then sold. The proceeds from the sale appear to be legitimate income.

Global initiative

The Financial Action Task Force (FATF) is an intergovernmental organization founded in 1989, whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. The FATF works to generate the neces-sary political will to bring about legislative and regulatory reforms in these areas.

India’s Prevention of Money-Laundering Act, 2002, came into effect on 1 July 2005. The act obliges banks, other finan-cial institutions and intermediaries: to maintain records detailing the nature and value of prescribed transactions, whether they comprise a single transaction or a series of integrally connected transac-tions which take place within a month; to furnish information on transactions within a prescribed time to the Financial Intelligence Unit (FIU); and to maintain records of the identity of their clients. The records must be retained for 10 years.

Role of financial institutions

Financial institutions globally are required to identify and report trans-actions of a suspicious nature to their country’s FIU. A bank must verify a cus-tomer’s identity and, if necessary, monitor transactions for suspicious activity. This is termed know your customer (KYC).

KYC begins with knowing a customer’s identity and understanding the kinds of transactions in which the customer is likely to engage. By knowing their cus-tomers, financial institutions will often be able to identify unusual or suspicious behaviour, termed anomalies, which may be an indication of money laundering.

The Reserve Bank of India’s extensive anti-money laundering (AML) guidelines have been in effect since March 2006. The AML norms such as KYC emphasize that banks must keep a record of their cus-tomers’ backgrounds in order to reduce and control the risk of money laundering. Bank employees are trained in anti-money laundering and are instructed to report activities that they deem suspicious.

AML software filters customer data, classifies it according to level of suspi-cion, and inspects it for anomalies. Such anomalies would include any sudden and substantial increase in funds, a large withdrawal, or moving money to a bank secrecy jurisdiction. Smaller transactions that meet certain criteria may also be flagged as suspicious.

The software will flag names that have been placed on government “blacklists” and transactions involving countries that are thought to be hostile to the host nation. Once the software has mined data and flagged suspect transactions, it alerts bank management, who must then deter-mine whether to file a report.

An effective AML policy requires a juris-diction to criminalize money laundering; give the relevant regulators and police the powers and tools to investigate and to share information with other countries as appropriate; and require financial institu-tions to identify their customers, establish risk-based controls, keep records, and report suspicious activities.

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe

Money laundering spursglobal and local response

Mulla House51, Mahatma Gandhi Road, Flora Fountain

Mumbai 400 001, INDIA Tel: +91 22 2262 3191 / +91 22 6634 5496

Fax: +91 22 6634 5497 Email: [email protected]

Shardul Thacker is a partner at Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.

Correspondents


Regulatory developments

October 2011

New DelhiSecond Floor, 254, Okhla Industrial Estate, Phase III, New Delhi-110020IndiaTel +91 11 4983 0000Fax: +91 11 4983 0099Email: [email protected]

Are foreign investorsrunning out of options?

By Siddharth Hariani and Davis Kanjamala,Phoenix Legal

I n the minds of foreign investors, doing business in India used to con-jure up images of long queues, tedi-

ous paperwork and dealing with an endless bureaucratic maze. Much water has flowed under the bridge over the past decade with the Indian government’s initiatives to create an investor-friendly clime yielding rich dividends.

The publication of the biannual con-solidated foreign direct investment (FDI) policy, which acts as a one-stop guide on foreign investment in India, is one such recent initiative. In this column, we sum up the highlights of Circular 2 of 2011.

Good news and bad news

Education and real estate: FDI up to 100% is currently permitted under the automatic route in townships, housing and built-up infrastructure, subject to certain conditions. That means there is no requirement to obtain prior approval from the Reserve Bank of India (RBI) if the conditions are fulfilled.

However, certa in projects are exempted from these conditions, to which list construction in the education sector and old-age homes have been added. Besides increasing the projects which need not comply with the condi-tions, limitations on FDI in the educa-tion sector have been eased.

Since 2008, the construction and development of industrial parks had to meet a separate set of conditions. The definition of “industrial activity” in an industrial park has now been expanded to include “research and development in bio-technology, pharmaceutical and life sciences”, thereby indirectly provid-ing a boost to the real estate sector.

Multi-brand retail: Circular 2 comes as a damp squib, dashing hopes that the government would finally open the

multi-brand retail sector to FDI, which has been allowed only in cash-and-carry wholesale trading and condition-ally permitted in single-brand product retailing. The sole change is the imposi-tion of an additional condition requiring a foreign investor to own the brand in case of single-brand retail.

Consideration for shares: The pre-vious FDI policy, under the approval route, conditionally permitted a com-pany to issue equity against the import of capital goods and machinery as well as pre-operative and pre-incorpo-ration expenses payable to non-resi-dents. Circular 2 has clarified certain procedural aspects of this process by stating that an application for such capitalization needs to be filed with the Foreign Investment Promotion Board (FIPB) within 180 days from the date of shipment of goods or incorporation of the company, as the case may be.

This ends confusion over whether the importer needed to obtain ex post facto approval from the FIPB, which persisted because such a condition was not expressly stated even in the RBI circular issued on this matter.

Escrow accounts: The circular states that non-interest-bearing rupee-denominated escrow accounts may be opened by AD Category-I banks on behalf of non-residents without the prior sanction of the RBI. This reflects changes effected by the RBI in a cir-cular dated 2 May, which liberalized India’s escrow account mechanism. Reduction of procedural formality for this vital element in tranched invest-ment structures is welcome news for foreign investors.

Threat to options

While the press release from the Ministry of Commerce and Industry accompanying Circular 2 highlighted

the less-than-remarkable changes dis-cussed above, it remained silent on the one change which has grave ramifica-tions for FDI in India.

It was recently reported that, in response to an investor query, the RBI had taken the view that foreign investment agreements containing exit options at a fixed price would be classi-fied as debt rather than equity. Circular 2 goes one step further by stating that only equity instruments not linked to in-built options of any kind will qual-ify as eligible instruments under FDI. This places all instruments carrying an option under the umbrella of debt and requires them to be compliant with the external commercial borrowing regulations.

Options are not one-dimensional tools used to facilitate investor exit. In sectors where FDI is capped, investor agreements often include clauses which reserve the right of the foreign inves-tor to acquire shares of the domestic company upon a future policy change (e.g. a rise in the permissible ceiling of investment in the terrestrial broadcast-ing/FM radio sector to 26% from its previous level of 20% made by Circular 2). However, the wording of Circular 2 suggests that even such options will be ineligible as FDI instruments.

While the overall sentiment in FDI circles is still predominantly optimistic, the government must act fast to clarify the exact meaning and scope of the term “in-built options” in Circular 2. Otherwise, in addition to the economic risk faced by foreign investors, they will also lose their recourse to any kind of options, which may be a serious set-back for FDI inflows into the country.

Siddharth Hariani is a partner and Davis Kan-jamala is an associate at the Mumbai office of Phoenix Legal.

MumbaiFirst Floor, CS-242, Mathuradas Mill Compound,NM Joshi Marg, Lower Parel Mumbai - 400 013, IndiaTel: +91 22 4340 8500Fax: +91 22 4340 8501Email: [email protected]

Correspondents


Taxation & transfer pricing

October 2011

The Indian tax and regulatory regime governing cross-border transactions has recently under-

gone several changes. While amend-ments to the foreign direct investment policy initially restricted exit rights (in the nature of options) for investments into India and have been quickly back-tracked on, the realm of indirect taxes has witnessed significant developments, a few of which are captured below.

DEPB subsumed into DBK

The foreign trade policy earlier pro-vided for two duty remission schemes: duty drawback (DBK) and duty entitle-ment passbook (DEPB). While the DBK scheme neutralizes customs duty and excise duty on inputs used for products exported, the DEPB scheme provided duty-free scrips based on the value of goods exported which could be used for paying import duties on subsequent procurements. From 1 October, the DEPB scheme has been subsumed into the DBK scheme and as a result importers no longer have a choice: 2,130 items under the DEPB scheme have been incorporated into the DBK schedule, and in some cases, the rates of benefit were reduced.

Post clearance audit

Until now customs law, unlike central excise and service tax laws, did not provide for audits in premises of import-ers and exporters. The Finance Act, 2011, introduced self-assessment to the Customs Act, 1962. Thereafter, on 4 October, the On-site Post Clearance Audit at the Premises of Importers and Exporters Regulations, 2011 (OSPCA), were notified. The self-assessment scheme, coupled with the mechanism for post-clearance audit, aims for faster clearance of goods.

Under the OSPCA, the assessee must maintain and make available specified documents for five years from the date of import or export of the goods; failure to do so would attract a penalty.

So far, the OSPCA applies only to importers registered under the Accredited Client Programme, who are to be audited annually. Its coverage is to be widened subsequently. As audits can be time-consuming and no time limit has been prescribed for its com-pletion, the OSPCA has given rise to concerns, especially administrative.

Negative list for services The Central Board of Excise &

Customs (CBEC) has floated a concept paper and is seeking comments on a proposal to tax services based on a negative list. This novel approach seeks to define the term “service” for the first time and to make everything that falls within its sweep taxable, in contrast to the present scheme where each tax-able service is defined specifically.

As per the proposed definition of service, everything other than the sup-ply of goods, money or immovable property is a service. Its scope includes the right to use an immovable property, specified construction activities, tem-porary transfer or permitting the use or enjoyment of any intellectual property (IP) right, and an obligation to do or refrain from an act, including tolerating a particular act or situation, lease or hire of goods and the right to enter any premises.

Activities of restraint or forbearance do not, however, constitute services in themselves. Classifying them as such would bring arrangements such as non-compete contracts within the purview of service tax. Also, as transfers of the right to use IP (considered as “goods” for sales and value added taxes) are

already taxed by the states, levying a service tax on the same transaction would result in duality. Similarly, a serv-ice tax on the right to enter premises, without defining the term “premises”, may have wide implications, especially where such entry is already subject to another tax, for example, entertainment duty.

As this approach for taxing services may precede the expected introduction of a goods and services tax in India, the scope and coverage of the inclusions and exclusions must be suitably clari-fied. Further, to avoid disputes, clarity on the precise scope of the negative list of services is imperative.

Import of services

On 30 June 2010, the CBEC clarified that while services received in India from a foreign service provider were liable to service tax from 1 January 2005, services received outside India from a foreign provider would attract service tax only from 18 April 2006, when section 66A of the Finance Act, 1994, came into force.

However, taking account of judicial precedents, the CBEC has changed its position. On 26 September, it has been clarified that prior to the enactment of section 66A, no liability to service tax arises for services provided by a foreign provider to an Indian recipient, irrespective of the place such services are rendered. This settles the ongoing dispute as regards taxation of import of services, which stand clarified as tax-able with effect from 18 April 2006.

Economic Laws Practice is a full-service law firm headquartered in Mumbai with offices in New Delhi, Pune and Ahmedabad. Ranjeet Mahtani is a senior associate at the firm and Anuradha Mo-hanty is an associate.

Economic Laws Practice1502 A Wing, Dalamal Towers

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Changes in taxation: the order of the day?

By Ranjeet Mahtani and Anuradha Mohanty,Economic Laws Practice

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