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Companies Bill – Of public offers and private companies

The inclusion of two definitions — “private company” and “listed company” — in the Companies Bill, 2012 (“Bill”) raises some questions. Our current understanding of company law suggests that the two terms cannot apply to the same company at the same time. Let us see how the Bill has changed that.

Private company

Under Section 3(1)(iii) of the Companies Act, 1956 (“Act”), a “private company” cannot have more than fifty members. The definition in Clause 2(68) of the Bill says a “private company”:

… means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred…

So the Bill has proposed that the limit on the maximum number of members that can constitute a private company be increased from fifty to 200.

When is a public offer necessary?

There is a problem when this proposal is read with Clause 42 of the Bill. Clause 42 is part of Chapter III, which deals with the allotment of securities by companies and features in Part II of Chapter III, where private placement is discussed. It states that:

42. (1) Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issued of a private placement offer letter.

(2) Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.

Explanation I. – If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.

Publicoffer_PrivateCompanyClause 42(2) will therefore create a contradiction when it becomes law. Private companies are permitted to have more than fifty members but any offer to more than fifty people will amount to a public offer and trigger all the requirements to be fulfilled under Part I of Chapter III of the Bill, which deals with public offers.

Listed company

Another question arises when we consider the definition of “listed companies” in the Bill. Currently, Section 2(23A) of the Act defines the term “listed public companies”. The Bill, however, defines the term “listed company” in Clause 2(52), thus proposing an increase in the scope of the current definition. The new definition is not limited to public companies and includes any company that has any securities listed on a recognised stock exchange.

Securities-LawThe proposed change will impact companies that have so far listed securities like debentures without technically falling within the ambit of the definition of “listed public companies”. Additionally, where such companies are private companies and have offered these securities to more than fifty people, it will be difficult to determine how they are to be treated under the proposals of the Bill.


The proposed definitions therefore, can create a dichotomy in the law — a company can be a private company and still be forced to make a public offer, while remaining a private company under the provisions of the same law. Until this position is clarified, it remains to be seen how securities lawyers and companies issuing securities will tackle it once the bill is notified.

(Deeksha Singh is part of the faculty on myLaw.net.)

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Corporate

Companies Bill brings in changes to mergers and amalgamations regime

DeepaMookerjee_CompaniesBillThe Companies Bill, 2012 (“Companies Bill”) proposes a number of key changes to the manner of implementing mergers and amalgamations in India. Let us have a look at Clauses 230 to 240, the provisions that impact the mergers and amalgamations regime as a whole.

Recognition of the forms of business restructuring

In the explanation to Clause 232(8), the Companies Bill has recognised, for the first time, the various forms of business restructuring used in the market.

A merger by absorption: The undertaking, property, and liabilities of one or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to another existing company.

A merger by formation of new company: The undertaking, property, and liabilities of two or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to a new company.

A scheme: The undertaking, property, and liabilities of the company in respect of which the compromise or arrangement is proposed, are to be divided among and transferred to two or more — existing or new — companies.

Regulatory approval for mergers and de-merger schemes

The Companies Bill has also proposed replacing the High Court with the National Company Law Tribunal (“NCLT”). All merger and de-merger schemes would now have to be filed before the NCLT for approval. While the creation of a single forum for approving mergers and amalgamations is welcome, it is still to be seen when the NCLT will be established. After all, even the Companies Act, 1956 (“Companies Act”) had provided for its establishment. Till the NCLT is formed, the power to approve schemes will continue to lie with the High Courts.

Currently mergers between listed companies need prior approval from the securities regulator, the Securities and Exchange Board of India (“SEBI”) (Feb 4, 2013 SEBI circular), and certain combinations need approval from the competition regulator, the Competition Commission of India (“CCI”). Clause 230 (5) of the Companies Bill, makes it mandatory that a notice for a merger or de-merger to be sent to the:

  • Central Government,
  • Income tax authorities,
  • Reserve Bank of India (“RBI”),
  • SEBI,
  • Registrar,
  • Stock exchanges,
  • CCI,
  • official liquidator, and
  • any other sectoral regulator.

These notices need be sent only if the particular regulator has jurisdiction over the deal. For instance, a merger between two unlisted companies need not be notified to the stock exchanges or the SEBI. However, depending on the market share in question, it may need to be notified to the CCI. Each regulator has also been given a time period of thirty days to file any representations or objections it may have. Once the thirty-day period expires, it is deemed that the regulator has no objections.

It will be interesting to see how these provisions tie in with the current notification requirements under the Competition Act, 2002 and the SEBI regulations. The Companies Bill does not remove the requirement for notification under the other laws. Notification requirements under the Companies Bill therefore, may amount to an additional procedural step. It is however a step in the right direction because an attempt has been made to consolidate different requirements under one main law.

NCLT can dispose of a creditors meeting

Another interesting proposal is to empower the NCLT to dispense with creditors meetings. Under the Companies Act, all schemes must be approved at a shareholders and creditors meeting, by a majority in number, representing three-fourths of the value, of those present and voting. While this requirement has been retained, given the serious nature of a merger or de-merger, the NCLT can now dispense with calling of a meeting of creditors or a class of creditors where those creditors or class of creditors, having at least ninety per cent value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement (Clause 230(9), Companies Bill).

This should go a long way in simplifying the process for a merger or de-merger, while at the same time ensuring that a majority of the creditors agree to such a fundamental change in the company.

Fast-track amalgamations

The new Companies Bill seeks to simplify the merger process for a certain types of companies. In a “fast-track approval”, companies need not file schemes with the NCLT. The Central Government has the power to approve the scheme. Once approved, the scheme may be filed with the Registrar of Companies within thirty days. On registration, the scheme will be effective.

Clause 233 of the Companies Bill permits fast-track mergers or de-mergers, between:

  • Two or more small companies;
  • A holding company and a wholly-owned subsidiary company; and
  • Such other classes of companies as may be prescribed.

A small company has been defined to mean a ‘private company’ that has paid-up capital that does not exceed Rupees Fifty lakh (or higher amount as may be prescribed but not be more than Rupees Five crore), or turnover (as per its last profit and loss account) that does not exceed Rupees Two crore (or higher amount as may be prescribed but not more than Rupees Twenty crore) (Clause 2(85), Companies Bill).

This definition is important because the Companies Bill does not provide this exemption to small companies that are public companies. Only small private companies that are merging with each other are entitled to this relaxation.

Cross-border mergers

Clause 234 of the Companies Bill permits mergers and amalgamations between Indian and foreign companies subject to rules prescribed by the Central Government in consultation with the RBI. A foreign company can, subject to the prior approval of the RBI, merge, or amalgamate into an Indian company or vice-versa. The Companies Act on the other hand, only permitted a merger of a foreign company with an Indian company.

Mergers-and-Acquisitions-LawThese are just a few of the broad changes proposed in relation to mergers and amalgamations. In the next post, we will explore the law in relation to the acquisition of minority interests in mergers and amalgamation schemes, and how these changes affect other aspects of M&A law.

(Deepa Mookerjee is a member of the faculty at myLaw.net.)

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In dereliction of a fundamental duty

Contrary to popular belief, the Indian Constitution is not the longest written constitution in the world. That distinction goes to the State of Alabama whose colossal constitution laughs at our constitution’s puny 117,369 words, roughly one-third of its (Alabama’s) 340,136. But, inappropriate “size matters” jokes aside, India does have the longest national constitution in the world and that means that even in the single most important document in our country, some provisions tend to get lost or ignored until the need to invoke them arises.

Clearly, the superstars among the 488 Articles in the Indian Constitution are the ones contained in Part III – the Fundamental Rights, the cornerstone of our democracy, carefully and lovingly gathered by the drafters of our Constitution from such epochal, paradigm-shifting documents as England’s and U.S.’s Bills of Rights and France’s Declaration of the Rights of Man. You could say our Fundamental Rights were more than 250 years in the making, the culmination of enlightenment and the humanist awakening after the dark ages.

Comparatively then, the Articles contained in Part IV-A of our Constitution are young upstarts, Johnnies-come-lately, having been inserted into the Constitution twenty-six years after it came into effect. Fundamental Duties? Seriously, who cares? They aren’t even legally enforceable. Ask lawyers or law students about our Fundamental Rights, and they will rattle off the whole list, perhaps verbatim, along with case citations. Ask them about the Fundamental Duties and you will be met either with perplexed expressions or quick dismissal.

Fundamental Duties Article 51A Constitution of India

I mean come on, reading Article 51-A is like getting a short lecture on how to live your life by a slightly preachy granduncle who was alive during the British Raj. The language is vaguer than 2004’s ‘India Shining’ campaign. For example, “to cherish and follow the noble ideals which inspired our national struggle for freedom”? What does that really mean? Let’s be honest with ourselves, different people had different motivations to fight for our independence, and while most of them were noble, there were some who wanted the freedom to create a Hindu mega-state, others who wanted partition, there were vested interests, political games, and intrigue. Wouldn’t it be easier to just name these ‘noble ideals’ we’re all supposed to aspire to specifically? Then there’s “to value and preserve the rich heritage of our composite culture”. What exactly is “our composite culture”? India has several cultures; is this some kind of strange Captain Planet reference? (With your powers combined, I am Composite Culture!) My favourite one is, “to strive towards excellence in all spheres of individual and collective activity so that the nation constantly rises to higher levels of endeavour and achievement”. Um… ok. Right. I’ll make sure I do that. Whatever that is. What it’s supposed to mean, I think, is do your best at whatever you’re doing. Which is what your mommy and daddy told you before sending you off to pre-school. Do we really need it in the Constitution?

So why have these seemingly superfluous provisions at all? Because today, more than ever before, we need to be reminded of a very basic and simple fact: that we need be good people. In a country racked by communalism, parochialism and violence against women, we need our nation-building document to tell us that we must “promote harmony and the spirit of common brotherhood amongst all the people of India transcending religious, linguistic and regional or sectional diversities” and renounce practices derogatory to the dignity of women”. I especially like that last bit. Rather than using paternalistic phrases like “protect our mothers/daughters/sisters” or “modesty of women” (like we’re doing them a favour!), it tells us to introspect, evaluate our actions and renounce practices that hurt the dignity of women. In a country where we turn a blind eye to the worst mining practices, pollution on an industrial scale, indiscriminate poaching, and deforestation in the name of “development”, our Constitution tells us “to protect and improve the natural environment including forests, lakes, rivers and wild life, and to have compassion for living creatures”.

LemonandGreenChilli_Superstititon_IndiaAnd in a country historically mired in superstition, ignorance, and blind religious bigotry, where even those who have had the advantage of a decent education believe that certain people are inferior by birth, that drinking untreated water from a polluted ‘holy river’, and eating the soil over which a ‘holy man’ has walked will cure a disease, we need our Constitution to remind us “to develop the scientific temper, humanism and the spirit of inquiry and reform”. Dr. Narendra Dabholkar was the champion of this fundamental duty, the pursuit of logical, rational thought in the face of unquestioning belief, before he was gunned down so ruthlessly in Pune. It’s ironic that the very next clause in the Article urges citizens to “abjure violence”.

We are all quick to scream about our fundamental rights, and we definitely should – that’s the very basis of a robust democracy. But, as law students learn quite early on in their academic careers, every right has a corresponding duty. When criticised for promoting superstition and dangerous archaic beliefs, the accused tend to turn immediately to Articles 25 and 19. Well yes, they have the right to say what they want. I believe that the freedom of expression is a right that should not be touched, but that is predicated on the belief that every person has the intelligence to judge and evaluate what s/he is hearing, seeing, or reading and make a reasoned decision about it. It is also predicated on the idea that every person has a duty to respect the other’s freedom of expression and right to criticise. It works both ways.

Our Fundamental Duties, ambiguous and inconsequential as they may seem, are our Constitution’s hope for a better, more mature, more intelligent body of people. The Constitution is almost like a living, breathing being which is on a mission to make our lives better. It keeps giving and when it feels it is failing us, it changes and improves itself. It asks for little in return. And to our complete and unending shame, we let our Constitution down again and again, until it lies bleeding and lifeless in the form of a tireless worker for reform, rationalism, and progress while we watch and shake our fists with impotent rage and walk away.

(Sayak Dasgupta wanders around myLaw.net looking for things to do.)

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But I don’t want to dumb down my writing!

PlainEnglishwithTDOne of the most enduring objections to the use of plain English is that it would ‘dumb down’ writing, or at the very least, make it incredibly boring. This objection is understandable when you consider the ways in which we usually use the word ‘plain’. If food tastes ‘plain’, or your outfit is described as ‘plain’, well, that’s usually not a compliment. When it comes to writing, however, the use of plain language can be a very good thing indeed.

To illustrate, let me take you on a scattered journey, through some of my favourite examples of excellent plain English writing, both in the legal world and outside.

For me, one of the joys of living in India has been discovering the vast range of Indian authors writing in English. They have given me insights into the country, its people, and its history, that I would never have otherwise had. In that vein, how can one go past A Suitable Boy? That sweeping epic somehow managed to examine the minutiae of a ghazal performance and the tragedy of communal riots with the same deft hand, and with language as simple and powerful as this: VikramSeth_ASuitableBoy_extract

Another obvious example of great Indian writing comes from the nation’s most famous lawyer, Gandhi ji himself. His speeches and writings show, again and again, how deceptively simple statements can wield great power. Eye_for_an_eye_MKGandhiIf we keep travelling down the path of great leaders, we can turn to examples such as Martin Luther King Jr., whose famous “I Have a Dream” speech is rightly renowned as a masterpiece of rhetoric.Martin_Luther_King_I_have_a_dream

Activism and calls for change are, of course, fertile ground for stirring rhetoric. But what of the slightly more ordinary, more everyday? Again, examples are all around, and often only as far away as a newspaper column or magazine article. Renowned academic Upendra Baxi, for example, has not only published countless books and articles, but has written columns in the Indian Express.

And if we delve into different jurisdictions around the world, we can see that the plain language movement is being embraced in many places. In California, the Judicial Council has adopted award-winning, plain language jury instructions. When a judge is talking to a jury about the reliability of witnesses, instead of saying “Failure of recollection is common. Innocent misrecollection is not uncommon.” – a statement that actually involves a triple negative – he or she should say, “People often forget things or make mistakes in what they remember.” So simple, it’s almost a Homer Simpson “d’oh” moment, right?

Believe it or not, there are also many judges who prepare judgments of elegance and simplicity. Famous examples include Lord Denning, of the House of Lords, and Justice Scalia, of the Supreme Court of the United States. Whilst poles apart in philosophy and approach to the law, many of their judgments display a unique gift for prose—whether you agree with their decisions or not.

Justice Scalia’s style is eminently readable, and demonstrates his decision-making process lucidly. We can see this in his reply to Justice Stevens in the case of Baze v. Rees, a 2008 case about the constitutionality of the death penalty in the U.S.A.

AntoninScalia_BazeversusRees_deathpenalty

Lord Denning often starts his judgments by setting the scene, and continues in that vein throughout—an example of how storytelling can be such a powerful tool for a writer. LordDenning_Miller_v_Jackson_villagecricket

And with that rather lovely vision of a village cricket ground in the evening light, I’ll stop these wanderings. Safe to say that these examples are merely drops in the ocean of all the great writing and oratory that has been done in plain language. I hope you are now even more inspired to keep reading and writing!

(Tennille Duffy is part of the faculty at myLaw.net.)

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Murder of the spirit of inquiry and reform

RIP, Narendra Dabholkar.NarendraDabholkar_RIP_51A