Wednesday, January 18, 2017

SEBI Enhances Oversight on Schemes of Arrangement

Since 2013, the Securities and Exchange Board of India (SEBI) has exercised oversight in respect of schemes of arrangement proposed by listed companies, including schemes such as amalgamation, demerger, reduction of capital and the like (see here and here). Such oversight has now been enshrined in regulations 11, 37 and 94 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. By virtue of this, SEBI and the stock exchanges possess and exercise the power of reviewing schemes of arrangement in order to ensure that they comply with the appropriate securities and listing regulations. Such a power was expressly provided for in view of previous uncertainties in case law that questioned the jurisdiction of SEBI over schemes of arrangement that are otherwise implemented under the Companies Act.

In a more recent development, the board of SEBI extended its oversight to schemes arrangement such as mergers and demergers between listed companies and unlisted companies. Furthermore, SEBI has sought to impose additional conditions on schemes of arrangement between listed and unlisted companies. The motivation behind the enhanced jurisdiction of SEBI is largely to prevent backdoor listings by unlisted companies through mergers with listed companies in a manner that might adversely affect the interests of the public shareholders of the listed companies.

In this regard, the board of SEBI has proposed various measures as follows:

1.          In the case of the merger of an unlisted company with a listed company, the unlisted company is required to comply with the requirement of disclosing material information as specified in the format for abridged prospectus. This is essentially to ensure that unlisted companies do not circumvent the disclosure requirements (and attendant legal risks and liabilities) that accompany an initial public offering (IPO) of such a company.

2.        Following the merger, the public shareholders of the listed entity and the qualified institutional buyers (QIBs) of the unlisted company must together not less than 25% shares in the merged company. This is to ensure that the shareholding following the merger is widespread, and would accordingly prevent the merger of a very large unlisted company into a small listed company.

3.        The merger would have to ensure that the listed company is listed on the stock exchange having nationwide terminals. 

4.        The issue of shares as part of the scheme of arrangement must comply with the pricing formula prescribed under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. This is to prevent select groups of shareholders from receiving undue benefits under the scheme.

5.         Lastly, public shareholders have been given additional rights whereby their approval through e-voting must be obtained in the following cases:

a.        Where an unlisted company is merged into a listed company, which results in a reduction of the shareholding percentage of the pre-scheme public shareholders to less than 5% of the merged entity;

b.        Where the scheme involves the transfer of whole or substantially the whole of the undertaking of a listed company where the consideration is provided in a form other than listed equity shares;

c.        Where the scheme involves the merger of an unlisted subsidiary with a listed holding company and the shares of the unlisted subsidiary have been acquired by the holding company from the promoters.

The above three scenarios involve transactions that might impinge upon the rights and interests of public shareholders, and hence the requirement for obtaining their specific approval.

In all, these efforts by SEBI would enhance the scrutiny of reverse mergers such as those between unlisted companies and listed companies that are carried out with a view to achieving a backdoor listing of such unlisted companies. In several jurisdictions, these issues are dealt with specifically through stock exchange listing rules. It is somewhat surprising that the situation remained exposed in the Indian context, but at least now it has received specific treatment, both from the perspectives of securities regulation generally and minority shareholder protection specifically.

Sunday, January 15, 2017

NALSAR Student Law Review Vol. XII: Call for Papers

[The following announcement is posted on behalf of the NALSAR Student Law Review]

The NALSAR Student Law Review (NSLR) is now accepting submissions for its upcoming Volume XII. NSLR is an annual, student-edited, peer-reviewed law review that is the flagship publication of NALSAR University of Law, Hyderabad, India.

Submissions may be in the form of Articles (5000-8000 words), Notes (3000-5000 words), Case CommentsLegislative Comments or Book Reviews (1500-2500 words). The word count is inclusive of footnotes. Submissions are required to be in Times New Roman font, double-spaced and word-processed compatible with Microsoft Word 2003 and 2007. The main text should be in font size 12 while footnotes in font size 10. Please use only footnotes (and not end-notes or other forms of citation) in the submission. All submissions must conform to the Bluebook (20th edition) system of citation. Finally, all submissions are required to carry a 250 word abstract that encapsulates the gist of the paper.

Submissions are to be emailed to under the subject heading ‘Volume XII - NSLR Submission’. The email should indicate which category the paper is intended for. Further, it should also contain the name of the author, qualifications, title of the manuscript and contact information. Please do not include any information that could identify the author in the manuscript itself. Co-authorship is allowed, provided that all authors are students at the time of submission of the manuscript. The deadline for submissions is May 14, 2017. All submissions must be submitted electronically.

Saturday, January 14, 2017

Measuring outputs v. outcomes: Did the restriction on foreign investment in local debt achieve the intended outcome?

[The following guest post is contributed by Anurag Dutt, Arpita Pattanaik and Bhargavi Zaveri, who are researchers at the Finance Research Group at the Indira Gandhi Institute of Development Research, Mumbai.]

A good policymaking process requires significant regulatory capacity. Before the policy is enacted, the State must (a) identify a market failure and an appropriate intervention to address it, (b) conduct a cost benefit analysis of the intervention, and (c) conduct an effective public consultation where the public knows about (a) and (b). Even after the policy is enacted, the policy by itself is merely an 'output'. After allowing for a reasonable lag for transmission, the State must identify whether the intended outcome of the policy has been achieved. For example, the intended outcome of the Insolvency and Bankruptcy Code (IBC) is to improve the debt recovery rates in India. The IBC was enacted in May 2016, and most of its provisions were notified in November 2016. The IBC is an output. Allowing a medium term horizon for the impact to play out, an impact assessment exercise will be due in November 2020 to assess whether the debt recovery rates have improved. The impact on debt recovery rates would be the outcome.

In the field of capital controls in India, we find that State interventions are almost never accompanied with the steps mentioned above (Burman and Zaveri (2016)). An ex-post impact assessment of interventions in this field is unheard of. We wrote an article measuring the impact of a regulatory intervention in February 2015, which banned Foreign Portfolio Investors (FPIs) from investing in onshore bonds with a maturity period of less than three years. Our findings of this research are summarised below.

The intervention

On 3 February 2015, the Reserve Bank of India (RBI) prohibited FPIs from investing in (a) debt instruments with a maturity period of less than three years (such as corporate bonds with less than 3 years maturity and commercial papers), and (b) money market and liquid mutual fund schemes (as these schemes invested in corporate debt with less than 3 years maturity). In this post, for ease of reading, we call the onshore bonds with a maturity period of less than three years "prohibited instruments", and onshore bonds with a maturity period of at least three years "permitted instruments". The restriction was effective from 4 February 2015. However, FPIs were allowed to continue holding the prohibited instruments that they already held on 4 February 2015. Also, no lock in period was imposed on instruments acquired by FPIs after the date of the intervention, that is, FPIs could invest in and sell bonds with a maturity period of at least three years, well before they matured.

The RBI circular did not specify what the market failure was or what the intervention was intended to achieve, except that the intervention was to bring consistency between the rules for FPI investment in corporate bonds at par with FPI investment in Government securities. It was not accompanied with a cost benefit analysis of the intervention, and it was not preceded by a public consultation process. We are not aware if RBI or the Central Government proposes to undertake an ex-post impact assessment of this measure.


Due to the absence of a specific desired outcome in the RBI circular, we relied on statements made by RBI to the press. These statements, as well as our conversations with RBI employees on public forums since the intervention, indicate that the intervention was intended to 'nudge' FPI investment in long-term debt in India. Our analysis is, therefore, limited to the following questions:

Question 1: Whether the regulatory intervention led to an increase in FPI investment in the permitted instruments?

Question 2: Whether the regulatory intervention led to any change in the behaviour of FPIs in relation to the permitted instruments?


We use the daily holdings data from NSDL to identify the kind of debt instruments held by FPIs from January 2014 until March 2016. With this data, we identify the change between (a) the percentage of permitted instruments held by FPIs during 12 months before the intervention; and (b) the percentage of permitted instruments held by FPIs during 14 months after the intervention. We take a long time-frame for the study, which helps in filtering out the effect of other macroeconomic conditions and monetary policy changes that could have caused short term fluctuations in FPI participation in the Indian corporate debt market. Our findings, on the basis of this data and methodology, are summarised below:

Question 1: We find that after the intervention, there is a marginal increase of 0.47% in the annual average FPI investment in the permitted instruments.

Question 2: We find that there is no change in the behaviour of FPIs in relation to their holding of permitted instruments, before and after the intervention. From anecdotal conversations with market participants, we know that FPIs do not hold their local currency debt until maturity, especially where such debt is of a long-term nature. We notice this finding even in our data. We observe that even after the intervention, they continue to sell-off the permitted instruments held by them shortly after listing.


An ex-post impact measurement exercise measures whether an intervention has achieved the intended outcome. It helps analyse whether any changes must be made to the intervention or the manner of its implementation, to make it more effective. For example, if an ex-post impact assessment of the IBC in 2020 shows that there has been no improvement in the debt recovery rates in India, it should be a sufficient ground to re-visit the design of the law. It is to facilitate such an exercise that the Indian Financial Code drafted by the Justice Srikrishna-led Financial Sector Legislative Reforms Commission requires every regulation to be reviewed three years after its enactment.

Our ex-post impact analysis of the intervention of restricting FPI investment in corporate debt with a maturity period of less than three years finds no evidence of having achieved its intended outcome of channelising foreign capital from the short to long end of the corporate bond market. We find that neither do FPIs increase their participation in long term bond holdings as a result of the intervention nor do they alter their behaviour by holding the long term corporate debt securities until maturity.

We find that an attempt to centrally plan the allocation of foreign capital inflows did not have the intended effect on at least one occasion. On the other hand, the intervention withdrew foreign capital from the most liquid part of the Indian debt market. Pandey and Zaveri (2016) show that a substantial proportion of the bond issuances in similarly placed economies, such as Indonesia and South Korea, belong to the maturity bracket of one-three years. None of these economies prohibit foreign portfolio investment in local currency debt of this maturity bracket. In India too, before the intervention there was significant FPI interest in the bond market with a maturity profile of less than three years. This is evident from the rapid utilisation of the debt limits for CPs. The reason for this is simple. It is easier to price currency and credit risk in debt of this maturity profile. For small to mid-sized Indian companies which are not known to foreign investors, it is easier to raise debt in this maturity profile from foreign investors. Globally, being able to raise foreign debt in local currency is a boon for debtors, as the currency risk is taken by the foreign investor. At a time when India is struggling to set up its corporate bond market, the intervention has resulted in depriving the relatively more liquid part of the market of significant participation.

- Anurag Dutt, Arpita Pattanaik & Bhargavi Zaveri


Regulatory Responsiveness in India: A normative and empirical framework for assessment, Anirudh Burman and Bhargavi Zaveri. IGIDR Working Paper IGIDR Working Paper WP-2016-025, October 2016.

Radhika Pandey and Bhargavi Zaveri, Time to inflate economy's spare tyre, Business Standard, 18 April 2016.

Monday, January 9, 2017

Et tu Tata!

[The following guest post is contributed by Professor Bala N. Balasubramanian, who is an Adjunct Professor at the Indian Institute of Management, Ahmedabad]

Recent developments at the Tata Group in general and Tata Sons particularly have shaken corporate India in terms of standards of good governance in companies. The group had meticulously built a reputation over the years for ethical and responsible corporate behavior that went far beyond the basic mandatory compliance requirements. Almost overnight, that reputation appears to have taken a beating after the news that the board of Tata Sons (the parent company of the group) had removed its chairman, Cyrus Mistry (CM) from his position for his non-performance; and the return, albeit temporarily, of the immediate past chairman, Ratan Tata (RT) as the board chief. Unsurprisingly, this was responded to by CM questioning his removal and highlighting several process and governance related deficiencies, besides also ‘exposing’ many bad management decisions in the company and its associates during the reign of RT as board chair. This latter charge is unlikely to pass muster as CM was himself on the board when those decisions were taken (apparently with no evidence of recorded dissent by him), and even more importantly, the judiciary is usually loathe to second-guessing business decisions unless some palpably fraudulent intent behind such decisions was apparent. As for the board decision to replace its chair, it would seem at least legally to be in order since such power does indeed vest in the board; if there are some procedural lapses, clearly they could perhaps be rectified without any collateral damage to the decision itself.

More than the legalities of the situation, the case has attracted attention in the media and the markets precisely because this happened at the Tata group, something not expected from the bellwether beacon of good governance. And as more allegations and counter-allegations were traded by the warring camps, even inappropriate actions and decisions that would have otherwise been overlooked as minor got exacerbated under public scrutiny. Boards of some of the big listed group companies deciding to retain CM as their chair and expressing their confidence in his leadership and so on have not helped the Tata cause either. One is also left with the uneasy feeling as to whether what was now in public domain could just be the tip of a rather huge and potentially dangerous ice berg, not only in the Tata group but across the board in the listed company population in the country, dominated as it is by similar concentrated ownership and dominant control regimes.

The focus of this post is to analyse some of the governance related issues that are discernible in this episode and to explore whether there may be a case for further regulatory interventions.

Board vs Shareholder Primacy                                                

The issue of primacy in corporate governance is a much debated topic; if shareholders are the principals (in the agency theory construct), then the body of directors they elect must be accountable to them and this position is fortified by the fiduciary obligations that the directors owe to the company to act in the interests of all its shareholders. On the other hand, the board ought to have freedom to act (through and with the assistance of the executive) in the interest of the company and its shareholders (and in India, now, also other statutorily specified stakeholders); this must necessarily limit shareholder interventions to the bare minimum. Even so, Indian corporate law, overall, tends to lean more strongly towards shareholder primacy on many issues than for example the comparable situation in the US.

If the principal shareholders (the several Tata Trusts) with a commanding majority equity holding in Tata Sons wished to exercise their primacy to decide who should be the board chair, the best forum would have been a shareholders’ meeting (to remove CM as a director and consequently as the board chair), but that did not happen. The principal shareholders apparently had CM removed from chairmanship by the company’s board of directors. Prima facie the board was well within its rights to do so, but if media reports were to be believed, that decision was based on the fact that the principal controlling shareholders, the Tata Trusts had lost confidence in CM. The question is how did the unaffiliated, “independent” directors on Tata Sons board conclude that CM was not fit to be their board chair any longer. Were they being swayed by the views of the controlling shareholders? Were they discharging their fiduciary duty to the company to act in the interests of all the shareholders of Tata Sons while removing CM from chairmanship or were they (as happens when directors are “captured” by the controlling shareholders or the executive management) serving the interests of the controlling shareholders alone? It is axiomatic that the directors of a company ought to perform in the exclusive interest of its shareholders even if that meant not aligning with the interests of the “group” or the “parent” company. Did the directors of Tata Sons conscientiously decide that the continuance of CM as the board chair would militate against the interests of the company and all its shareholders? If they did, and if they had convincing reasons to do so, It would be difficult to question their decision or to second-guess their motives unless some prima facie evidence was offered to the contrary.

Role Confusion

CM was the executive chairman which meant he was also the CEO of Tata Sons. There is usually some confusion between the roles of Board chair and CEO when the two jobs are combined in one person. If CM's "performance" was found unsatisfactory, as Tata Sons avers, the question is whether he was sacked as CEO (and collaterally as board chair) or was his performance as board chair unsatisfactory.

If the proximate cause for dismissal was his failure as board chair, then the mandatory performance evaluations should have highlighted this deficiency, in which case his removal could have been more civilly handled than by an abrupt dismissal. If his performance as CEO was unsatisfactory, then the Remuneration and Nomination Committee would have discussed it with him and recorded in the minutes; even then the removal could have been more orderly than was the actual case. Of course, the Tatas have maintained this removal was not as abrupt as is made out and had been brewing for some time, but CM has denied such was the case!

There may be a strong case for companies as well as the media to use in all reporting and communications the appropriate designation depending upon its subject or context: this would require the person to be referred to as the CEO or Managing Director in respect of all executive matters, leaving the title ‘Chairman’ to be used only in regard to board related matters being reported upon.  

Controlled Company Governance

The third dimension of these developments relates to the governance of "controlled" companies, especially where they are listed or deemed equivalent in law. The concept of controlled companies is well recognised in the US regulatory regime and in some other jurisdictions but in most of those countries such “controlled” companies are the exception, but in India (and a vast majority of other countries around the world) where concentrated corporate ownership is predominant, such companies (like Tata Sons and its subsidiaries including many of the affiliates) they are the rule. The challenge now is that in the interests of harmonisation with global (read US) best practices we are trying to apply the rules of a diversified share ownership regime to a predominantly concentrated share ownership dispensation. This approach inevitably leads to a situation of what the famous economist John Galbraith had called “innocent frauds” where gaps between conventional wisdom and actual reality are consciously accepted and ignored! Regulatory requirements in countries such as, for example, Canada (another jurisdiction with a predominantly concentrated ownership regime) may offer some more appropriate options to cope with such comparable situations.

Concept of Corporate Parents

Fourth, the concept of "groups" is well accepted in India now (unlike in the hey days of our left-of-centre orientation in the 1950s and 60s when “large” business houses and concentration of economic power were anathema) and one cannot escape the reality of controlling parents or shareholders having a greater and quicker access to privileged and often price-sensitive information, and managerial influence on the subsidiaries and associates in the group. If the Tata trusts were receiving information from Tata Sons and other companies in the group, it will be nothing but a natural consequence of their control over management (and no different to multinational parents or the government ministries receiving briefings and information from their subsidiaries and associates); the natural corollary is that in such controlled companies, we are bound to have "agency type II" issues (protecting the interests of minority shareholders not only from the hired executive but also from co-shareholders in management control) besides the usual type I problems ( protecting the interests of the shareholders from the hired executive, as in case of dispersed ownership regimes).

It would be unrealistic to ignore the inevitability of such a situation; at best, regulatory requirements may help contain the potential abuse of such privileged access by the controllers. To some extent, this is already being attempted on issues like insider trading but to expect that parental influence could be totally eliminated would be bordering on being myopic.

Block Holders not in Operational Control

Fifth is the issue of inter-se relationships between block holders who are in management control and those that are not; in Tata Sons, there is one such significant player, the Shapoorji Pallonji group which reportedly owns some 18% of the equity. In theory, such outside block holders have the potential to play kingmakers, opening up avenues for special rent-seeking from the controlling shareholders. CM was and is in a catch-22 situation, belonging as he does to the Shapoorji Pallonji group and yet in a management position in the company. State-owned Life Insurance Corporation is another block holder being an institutional investor; its independent judgment on such matters will most likely be presumed to be subject to government intervention. It is not a simple coincidence that both RT and CM had written to / met with the Prime Minister immediately after the event (here again, the parent’s primacy issue is obvious). The chances are that such institutional investors, unless directly impacted, will take a neutral stand and abstain from voting (as indeed, post these developments in the parent company, LIC reportedly did in the shareholders’ meeting of one of the Tata companies, on the issue of removing CM from its board of directors).

Institution of Independent Directors

Not unexpectedly, the role of independent directors on the boards of Tata Sons and some of the other large listed group companies has had to face up to adverse comment. Such directors are nearly always in the unenviable position of being “damned if they do and damned if they don’t” and one should stoically bear this proverbial Cross! One possible regulatory improvement is to mandate that such independent directors be elected by a majority of the non-controlling shareholders. There is conceptual merit in this proposal since a major (even if not the only) role of such directors is to ensure that the controlling shareholders do not unduly abuse their advantageous position. While such a regulation would strengthen the bulwark of the institution of independent directors, it may not be an impregnable shield against “capture” of directors by vested interests; and yet, to the extent it can help in containing (even to a limited extent) such undesirable practices, it will be a welcome step.

To conclude

As undisputed reputational leaders, Tatas cannot avoid bearing the reputational consequences of any slippage from the high norms they had set for themselves virtually from their inception. The extent of such reputational erosion and its impact on group companies is hard to predict; one thing is certain: redressing this slippage and regaining the reputational high ground will be time–and-effort-consuming.

- Bala N. Balasubramanian