Corporate Law Brief-September 2023

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We warmly welcome our valued readers as we take immense pride in introducing our newsletter. This edition brings to light the most recent happenings in the arena of India’s corporate legal domain for the month of September 2023. Our team has diligently gathered an array of news and insights covering regulatory advancements thereby ensuring your continuous awareness and knowledge. Stay ahead with our meticulously curated newsletter, encompassing regulatory updates and insights. Get comfortable, enjoy your favorite drink, and travel through India’s corporate legal landscape.

Recent Updates:

• India is set to relax its Foreign Direct Investment (FDI) policy for the space industry, allowing up to 74% overseas ownership through the automatic route and up to 100% through the government route. The FDI limits have been liberalized, enabling Indian enterprises to engage in a range of space-related operations with cutting-edge global technologies. The new FDI rules for the space sector will soon be notified by the Department for Promotion of Industry & Internal Trade (DPIIT), which is working closely with IN-SPACe, the Ministry of Communications and Information Technology, and the Department of Space (DoS).

• The Ministry of Finance (MoF) has made amendments to the existing Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 vide notification dated September 04, 2023 which are as follows:

1. The ‘principal officer of a reporting entity’ must be an ‘officer at the manager level’, prior to the amendment, entities could appoint any officer at their discretion.
2. The shareholding percentage criterion for beneficial owners of a partnership firm has been reduced from 15% to 10% to prevent ‘benami’ activities and the operations of a shell company. The amended definition also incorporates shareholders who own less than 10% of the capital or profits but exercise control over management or policy decisions.
3. Reporting entities are required to determine if a client is acting on behalf of a beneficial owner and verify the beneficial owner’s identity when establishing an account-based relationship. Reporting entities must now maintain records of transaction analysis and due diligence, in addition to the previously required records of identification, account files, and business correspondences, to ensure more rigorous compliance and monitoring.

• Over-the-top (OTT) players or applications (Apps) will not be regulated by the Department of Telecommunications (DoT) as the draft Telecom Bill drops the OTT/ Apps from the definition of telecommunication services making the Ministry of Electronics and Information Technology (MeitY) and the Ministry of Information and Broadcasting (MIB) the nodal ministries to regulate OTT. According to the DoT, the existing definition of telecommunication services is adequate, therefore there is no need to include OTT in the new bill.

• On September 15, 2023, the Central Government notified the Mediation Act, 2023 (Act) in India. The Act has been introduced to promote and facilitate mediation, especially institutional mediation, for resolution of disputes, commercial or otherwise, enforce mediated settlement agreements, provide for a body for registration of mediators, encourage community mediation, and to make online mediation an acceptable and cost-effective process.

• The Central Board of Indirect Taxes and Customs has notified Central and Integrated GST rules for imposing 28% Goods and Services Tax (GST) on online money gaming and casinos which will come in effect from October 1, 2023. As per the amendment, online gaming, casinos, and horse racing will henceforth be treated as ‘actionable claims’ like lottery, betting, and gambling and subject to 28% GST on full face value of bets. The platforms operating from outside India shall also be required to have GST registration for operating in India.

• On September 22, 2023, the Ministry of Home Affairs made amendments to the Foreign Contribution Regulation Rules, 2010 (FCRA) by modifying Form FC-4 which mentions annual returns required to be submitted by registered Non-Governmental Organizations. The revised Form FC-4 now mandates the inclusion of details of assets generated out of foreign contributions as of March 31 of the Financial Year.

Tax Updates:

• The Central Board of Direct Taxes (CBDT) has modified Rule 11UA for the valuation of shares for the purposes of Section 56(2)(vii)(b) of the Income Tax Act, 1961 on September 25, 2023. These amendments provide for the expansion of the valuation methodologies to include globally accepted methodology and provide a broad parity to resident and non-resident investors under the abovementioned Section. The key highlights of the amended Rule 11A are as follows:

• Five more valuation methods namely: Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method, have been added for non-resident investors in addition to the existing two methods i.e., Discounted Cash Flow and Net Asset Value.

• Subject to certain conditions where any consideration is received for the issue of shares from any non-resident entity notified by the Central Government, the price of the equity shares corresponding to such consideration may be taken as the Fair Market Value (FMV) of the equity shares for resident and non-resident investors.

• Price matching for resident and non-resident investors would be available with reference to investment by Venture Capital Funds or Specified Funds.

• Valuation methods for calculating the FMV of Compulsorily Convertible Preference Shares have also been provided.

• Safe harbor of 10% variation.

• The deadline for submitting an audit report (Form 10B/ Form 10BB) for the financial year 2022–2023 has been extended from September 30 to October 31, 2023 by the CBDT. Additionally, it has also extended the deadline for submitting the income tax return (Form ITR-7) for charitable and religious trusts, religious institutions and professional bodies, and other institutions by one month till November 30, 2023.

Reserve Bank of India (RBI) Updates:

• RBI has issued new directions to address issues in the release of movable and immovable property documents by banks and non-banking finance companies (Regulated Entities (REs)) to the borrowers which will be effective from December 01, 2023. Upon full repayment or settlement of personal loans by the borrower, the RE(s) shall release all the original movable / immovable property documents and remove charges registered with any registry within a period of 30 days. In case of a delay on the part of the REs, compensation at the rate of Rs. 5000/- per day should be given to the borrowers.

• RBI on September 21, 2023, released the draft of the ‘Treatment of Wilful Defaulters and Large Defaulters Directions, 2023’ (Directions) on which the comments have been invited till October 31, 2023. While expanding the scope for RE(s) which can classify borrowers as wilful defaulters, the Directions broadens the definition of wilful default, refines the identification process and mandates a review and finalisation on wilful default aspects within 06 (six) months of an account being classified as a non-performing asset. The Directions also addresses the treatment of wilful default loans sold to Assets Reconstruction Companies and their status under the Insolvency and Bankruptcy Code.

Securities Exchange Board of India (SEBI) Updates:

• SEBI has started the mechanism for making online payments to its Investor Protection and Education Fund (IPEF). The use of online mode has been made mandatory and the facility is now active under the head ‘click here to make payment to SEBI IPEF’ on the website of SEBI. The step is aimed at streamlining the payment process and enhancing accessibility for all the contributors to the fund.

• In order to streamline, enhance clarity, and provide comprehensive information, SEBI has introduced a revised format for the abridged prospectus. As per the regulatory mandate, this new abridged prospectus format is now a mandatory attachment alongside any public issue application form, effective from October 1, 2023. The revised prospectus must incorporate a QR (quick response) code on both the front and last pages, linking to either the complete prospectus or the abridged prospectus, as relevant. This requirement ensures easy access to comprehensive information for investors as per their preference.

• SEBI has issued two separate notifications on September 11, 2023, stipulating that unitholders who collectively hold a minimum of 10% of the total outstanding units in a Real Estate Investment Trust (REIT) or Infrastructure Investment Trust (InvTS) are entitled to nominate a director to the respective manager’s board. Furthermore, a comprehensive framework for exercising the right to nominate a director has been provided. The notification also makes it mandatory for the REIT’s manager or the Investment Manager to review the eligibility of unitholders who have exercised their right to nominate a director.

• SEBI vide notification dated September 19, 2023, has inserted Regulation 62A  in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 making listing of  subsequent issuances of Non-Convertible Debt securities (NCDs) compulsory on or after January 1, 2024. Listed companies are now responsible for disclosing all essential information related to NCDs to the stock exchanges. As per newly inserted Regulation 62A, all existing unlisted NCDs have the option to be listed at the discretion of the listed entity. Certain categories of NCDs are exempt from this requirement, including bonds issued under Section 54EC of the Income Tax Act 1961, NCDs resulting from agreements with multilateral institutions, and those issued under court orders or regulatory mandates from financial sector regulators such as SEBI, RBI, Insurance Regulatory and Development Authority of India (IRDAI), or Pension Fund Regulatory and Development Authority (PFRDA).

• SEBI vide circular dated September 27, 2023, has extended the timeline for the requirement of nomination/ opting out of nomination for all the existing individual unit holder(s) holding mutual fund units either solely or jointly, from September 30, 2023 to January 01, 2024 , failing which the portfolios shall be frozen for debits.

• In order to provide investors with the convenience of addressing their complaints and disputes online using a unified platform, SEBI has released a circular that establishes a connection between the SEBI Complaint Redressal (SCORES) platform and the Ministry of Electronics and Information Technology’s (MeitY) as Online Dispute Resolution (ODR) platform.

Ministry of Corporate Affairs (MCA) Updates:

• With effect from September 27, 2023, the MCA has withdrawn Version 2 (V2) Master Data Services.

• MCA has allowed companies to conduct their Annual General Meetings (AGMs) and Extraordinary General Meetings (EGMs) through virtual mode. Companies with AGMs scheduled for 2023 or 2024 are allowed to hold their AGMs via Virtual Conferencing (VC) or Other Audio-Visual Means (OAVM) until September 30, 2024. This circular does not alter the statutory timelines for AGM under the Companies Act, 2013. Additionally, companies are now allowed to convene EGMs using VC or OAVM and conduct transactions via postal ballot.

• MCA has extended the tenure of the Company Law Committee (CLC), which was constituted in 2018 to examine and make recommendations to the government on various provisions and issues under the Companies Act 2013, and the Limited Liability Partnership Act 2008 by 01 (one) year i.e., until September 16, 2024.

• MCA is considering a regulatory framework for big unlisted companies that may have systemic implications. The latest move is triggered by irregularities at the ed-tech firm Byju’s where auditors resigned. The possibility of enacting harsher requirements for ‘bigger’ unlisted corporations is being deliberating upon to make them more accountable. CLC. and is likely to define ‘bigger’ in terms of turnover and size.

Upcoming Nuggets:

• The Department of Consumer Affairs (DoCA) has released Draft Guidelines for Prevention and Regulation of Dark Patterns, 2023 (Draft Guidelines) and invited public comments until October 5, 2023. Earlier, the Advertising Standards Council of India (ASCI) issued Guidelines for Online Deceptive Design Patterns in Advertising, which came into effect on September 01, 2023. Dark patterns are actions that intentionally take advantage of internet users, such as adding products to a shopping cart when a user has not requested it, or changing the price of a product as a customer is checking out, or even feigning urgency to encourage a purchase.

From the Docket:

• The Bombay High Court in the matter of Anupam Mittal v. People Interactive (India) Pvt. Ltd. and others has held that “…if such an injunction of the foreign Court is offensive to the domestic public policy, enforcement of the same can be resisted and the principle of comity of Courts cannot be used as a weapon to leave a litigant completely remediless. Such an oppressive situation for a litigant cannot be countenanced under any circumstances…”. The court temporarily stayed the enforcement of an anti-suit permanent injunction order issued by the Singapore High Court (SHC) against the petitioner Mr. Anupam Mittal. The SHC order prevented him for filing his claim with the National Company Law Tribunal (NCLT) Mumbai Bench. Thereafter, Mr. Mittal filed a complaint against the order in the Bombay High Court and the bench ruled in his favour. 

We trust that this edition of our newsletter has proven to be an enlightening and valuable resource for your professional endeavors. If you have any questions about any of these developments or would like to see something different next month in your inbox, we warmly encourage you to reach out to us at knowledge@sarthaklaw.com.

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