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Department of Industrial Policy and Promotion Press Note No. 2 (2018) regarding FDI in e- commerce

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The Department of Industrial Policy and Promotion (DIPP) released a press note on December 26, 2018 (PN 2/2018), bringing into place some conditions related to e-commerce activities of entities which have FDI. PN 2/2018 will be effective from February 1, 2019.

The 2017 FDI policy prohibited the e- commerce entity from having more than 25% of sales value from the marketplace on financial year basis from one vendor or their group companies. This was undertaken with the intention of distributing the sales value of the e-commerce entity amongst many vendors and ensuring that sales are not predominantly concentrated in an entity controlled by the e- commerce marketplace. This was set as the criteria to ensure that the model does not become an ‘inventory’ based model, which was not permitted.

However, PN 2/2018 shifted the 25% restriction from the e-commerce entity to the vendor. It states that if more than 25% of purchases of a vendor are from the marketplace entity or any of its group companies, inventory of the vendor shall be deemed to be controlled by the e-commerce marketplace entity, and this would turn the business into an inventory based model, which is not allowed. It also expressly prohibits a marketplace from mandatorily requiring a vendor to exclusively sell products on its platform.

These restrictions may impact several exclusive sales tie-ups with specific brands, and even for new product launches exclusively on a particular marketplace. Also, the e-commerce entity will be required to demonstrate that a vendor has less than 25% of its total sales on that platform. The requirement increases data collection requirements for the e-commerce operator as it requires it to obtain total sales information of each vendor.

PN 2/2018 also provides that where the e- commerce marketplace entity or its group companies has / have an equity stake in an entity or exercises control over such entity, such entity will not be permitted to sell its products on the platform run by such marketplace entity. Further, an entity cannot sell its products on an e-commerce platform if its inventory is controlled by that e-commerce entity.

The third change in the FDI policy requires the ecommerce marketplace entity to provide other services such as logistics, warehousing, etc. on a fair and non-discriminatory basis. Thus, preferential treatment for one or more sellers will no longer be feasible. The provision clarifies that provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed to be unfair and discriminatory.

Further, cash backs provided by the group companies of the e-commerce entity must be fair and non-discriminatory i.e. other vendors must be permitted to provide similar terms. As per PN 2/2018, guarantees, warranties and after-sales services are to be provided by sellers. Payments can be facilitated by the e- commerce entity only in accordance with methods and guidelines of the Reserve Bank of India (RBI). The e-commerce marketplace entity will be required to furnish a report of compliance to the RBI annually by September 30 of each year, for the previous financial year.

Potential Impact: In addition to the impact as set out above, these modifications (a) could result in limiting the deep discounts provided by large e-commerce companies, (b) prohibit exclusive arrangements with a particular market place, (c) will result in e-commerce market place entities disposing their equity participation in selling entities.

SEBI norms for Debt Raising, RBI relaxation on Securitsation Norms

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SEBI Circular on issuance of debt securities by ‘Large Corporates’

With a view to providing an impetus to corporate bonds and being consistent with budget announcements, SEBI, on November 26, 2018 released guidelines for mandatory issue of debt securities by a Large Corporate, a term used for listed entities which have:

a) specified securities or debt securities or non-convertible redeemable preference shares listed on recognized stock exchanges (RSEs); and
b) which have outstanding long term borrowings of Rs 100 crores or above, with original maturity of more than one year (excluding ECBs and inter corporate borrowings between parent – subsidiary (ICBs)); and
c) which have a credit rating of AA and above for unsupported bank borrowings and plain vanilla bonds.

Notably, the term ‘Listed Entities’ also refers to those entities which have debt securities listed on the debt segment of the RSE. Therefore, this circular appears to apply to private companies whose debt securities are listed, if such company also fulfills the other criteria referenced in the circular.

The circular mandates a Large Corporate (LC) to meet at least 25% of its incremental borrowings, during the financial year subsequent to the financial year in which it is identified as an LC, by way of issue of debt securities. There is no minimum amount specified for the incremental borrowings and it covers all borrowings with maturity of 1 year or more (excluding ECBs and ICBs). This may be restrictive for entities since they might be required to incur the cost of public issue or privately placing debt securities even for smaller amounts of incremental borrowings.

The requirement to meet incremental borrowing norms by way of issuing debt securities shall be applicable for FY2020 and FY2021 on an annual basis, and if the LCs are unable to comply, the shortfall shall be explained to the stock exchange. Therefore, for entities following the April-March as their financial year, the framework shall come into effect from April 1, 2019.

However, from FY2022, the requirement must be met over a contiguous block of 2 years and a shortfall (i.e. amount required to be raised through debt securities but not so raised) shall be subject to a penalty of 0.2% of the shortfall. The penalty shall be paid to the stock exchanges, who will remit this amount to SEBI Investor Protection and Education Fund.

The Large Corporates are required to disclose the fact of their being Large Corporates as per the circular and the incremental borrowings during the financial year to the stock exchanges as well as to include the disclosures in their audited annual financial results. The disclosures made by the Large Corporates are to be certified both by the Company Secretary and the Chief Financial Officer of the Large Corporate.

Relaxation in NBFC Securitization Guidelines

The Reserve Bank of India vide circular dated November 29, 2018 (“RBI Circular”) relaxed the Minimum Holding Period (MHP) for certain transactions to facilitate assignment of loans / receivables by NBFC’s.

As per the RBI Circular, the MHP requirement for originating NBFCs, in respect of loans of original maturity above 5 years, has been reduced to receipt of repayment of six monthly instalments or two quarterly instalments (as applicable). Therefore, the MHP has effectively been reduced from 1 year to 6 months. Provided however, Minimum Retention Requirement for such securitisation/assignment transactions are to be 20% of the book value of the loans being securitised/20% of the cash flows from the assets assigned.

The above dispensation is only applicable to securitisation/assignment transactions carried out during a period of six months from the date of issuance of the RBI Circular.

SEBI Circular on Alternative Investment Funds (AIFs) in International Finance Service Centres (IFSCs)

These guidelines provide for the setting up of AIFs in an International Financial Service Centre (IFSC) (so far, only Gujarat International Finance Tec-City or GIFT) by incorporation as a trust, company, LLP or body corporate. The AIFs can apply for registration under SEBI AIF Regulations, 2012. Non-residents and resident institutional or individual investors eligible under FEMA to invest offshore can invest in these AIFs as per SEBI IFSC Guidelines, 2015. These AIFs can now invest in India through the FVCI / FDI route, in addition to the Foreign Portfolio Investment route. Some requirements in relation to such AIFs can be tabled as under:

Minimum scheme corpus USD 3mn.
Minimum investment from an investor (other than employees / Directors of AIF or Manager) USD150000
Minimum investment from employees or Directors of AIF or Manager USD40000
Minimum continuing interest of Manager or Sponsor (except for category III AIF) Two and half percent of corpus or USD750000 whichever is lower
Minimum continuing interest of Manager or Sponsor for category III AIF Five percent of the corpus or USD1.5mn whichever is lower

It is mandatory for a category III AIF to appoint a SEBI registered custodian, while for category I and II AIFs, it is mandatory to appoint a custodian if the corpus is more than USD70mn.

The circular also provides for Angel Funds to be set up in IFSCs, with the following requirements:

Minimum Corpus USD750000
Minimum net tangible assets of an individual investor who invests in an angel fund (excluding value of his principal residence) USD300000
Minimum net tangible assets of a corporate angel investor USD1.5mn
Minimum investment in angel fund by an angel investor USD40000 up to maximum 5 years
Minimum continuing interest of Manager or Sponsor Two and half percent of corpus or USD80000 whichever is lesser

IIFL and Morgan Stanley Private Equity Fund invests in Kogta Financial (Retail lending NBFC)

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Retail focused NBFC entity, Kogta Financial (India) Limited, raised a fresh round of funding from the existing investor, IIFL Seed Ventures and the new investor, Morgan Stanley Private Equity Asia-managed fund. The total investment size was INR 154 crores (approximately USD 22 million) wherein IIFL invested INR 40 crores and Morgan Stanley invested INR 114 crores.

Role – Jerome Merchant + Partners advised IIFL Seed Ventures
Members of JM+P team: The team was led by partner Sameer Sibal along with associates Anna Liz Thomas and Rishabh Amber Gupta.

Other Legal advisor 1: Trilegal advised the Company (Kogta Financial (India) Limited)
Members of Trilegal team: The team was led by partner Kunal Chandra along with senior associate Harshil Dalal and associates Akshat Shrivastava and Akriti Gupta.

Other Legal advisor 2: Shardul Amarchand Mangaldas (SAM) advised Morgan Stanley
Members of SAM team: The team was led by partner Nivedita Tiwari along with associate Rajashree Ravi.

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M&A in India-London

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On November 15, 2018, Jerome Merchant + Partners (JMP), in association with the City of London Corporation (COLC), the Confederation of Indian Industry (CII) and PWC convened a roundtable event on “M&As in India”. The event was by invitation only to a select audience from corporates based in London.

The roundtable kicked off with JMP Partner Sameer Sibal, welcoming the audience to the iconic Guildhall and providing them with a background to the record level of investment activity in India. India has seen an increase of deals in 2018 – both in value as well as the number of deals – and these transactions have already surpassed the number for the entire year of 2017.

The theme of the session was to discuss the legal, policy, tax and regulatory amendments which have facilitated the increase in investment activity in India, including through the introduction of the Insolvency Code in India or by way liberalization of certain FDI sectors.

Manish Singh, the Minister (Economic Affairs) of the High Commission of India to the United Kingdom, spoke on the policy initiatives taken by the Government of India to facilitate and enhance trade and investment between the UK and India. Manish Singh referred to the push provided by the Indian government to digitalization and the impact it could have on the growth in the market in India. He highlighted the introduction of India’s new insolvency law and an integrated goods and services tax regime as game changers which will bear fruit in the mid to long term. Manish Singh also said that he would be open to taking back the outcomes of the roundtable to the appropriate policy makers.

The historic bilateral investment ties between the India and UK (popularly known as the India-UK corridor) formed the theme of the Head of the CII (London) Lakshmi Kaul’s address to the audience. Ms. Kaul informed the audience that the UK remains India’s largest G-20 FDI investor and trade ties between the two countries ensures employment for over a million people in India
and the UK. The CII’s London chapter has been instrumental in handholding Indian investors into the UK and promoting government and industry interactions across all regions of the United Kingdom.

The roundtable was structured to ensure maximum audience participation after each of the topics was introduced by a lead speaker. The other key outcomes or takeaways from the discussions are set out in this document.

Regulatory Changes and Challenges – Vishnu Jerome, Partner, JMP:

  • Further liberalization in key growth sectors such as retail trading, financial services, defence and pharma have ensured reasonable amount of FDI in such sectors.
  • Efforts to diversify the capital pool from, and instruments by which investment into India can be made were welcomed. However, challenges for Indian companies to access such capital pools and for investors to be reasonably certain of returns on such instruments remain on account of Indian exchange control regulations, which place restrictions on pricing, valuation and exit norms. Absent such regulatory changes, hybrid equity like instruments that are prevalent in the market do not provide absolute enforceability certainty to investors and hence is an obstacle to investments into India.
  • A constraint faced by many strategic and financial investors into India is the regulatory bar on acquisition financing by Indian banks. Access to debt for funding M&A activity in India would again enhance the level of M&A in India.

The Insolvency Code; Judicial Reform –Murtaza Somjee, Partner, JMP:

  • The Indian Insolvency and Bankruptcy Code, 2016 (“IBC”) has spurred M&A activity in the distress space over the last 12 – 15 months. The IBC process provides an opportunityfor Indian founders, with distress companies but remunerative assets, to undertake US Chapter XI type restructuring with strategic third parties, pre-packs and cross border re- structuring.
  • Given that the IBC is still relatively nascent in India, further collaboration with experts on UK insolvency laws were mooted, given the depth of experience that such UK practitioners have had in this area.
  • Increased effectiveness by courts in India in enforcing contracts and foreign arbitral awards, the introduction of the Commercial Courts Act, 2016, amendments to the Arbitration and Conciliation Act, 1996 along with the Government’s initiative to encourage institutional arbitration were welcomed as incremental first steps in judicial reforms.
  • The institution of commercial courts in almost all states in India means that disputes of a commercial nature may be completed on an expedited basis and by judges who are more well versed in commercial matters. The amendments to the Arbitration Act in respect of timelines for completion of arbitrations will require to be tested to assess its practical effectiveness.

Taxation Regime – Harshal Kamdar, Partner, PWC:

  • The taxation regime in India, remains opaque as regards interpretation and implementation of tax laws by officers at the department and is therefore still subject to signification litigation risk.
  • The Government’s revised bilateral investment treaty (“BIT”) which seeks to remove taxation related disputes from being arbitrable under the BIT, unless all judicial remedies have been exhausted has caused a significant degree of concern amongst foreign investors.
  •  Sub-classification and multiple distinctions between financial investors as a class lead to further subjectivity in interpretation and hence litigation risk for foreign investors in the Indian M&A market.

Doing Business in India – Othman Shaukat, Managing Director, Salonica:

  • Differing laws in various states, such as in matters related to property, stamp duties, entertainment and employment was highlighted as a key constraint for investors in evaluating the Indian market.
  • The need to invest resources and time in undertaking all forms of diligence is essential for all investments into India.
  • Liaising with government in certain sectors is important as it allows one to understand the perspective or view of the government and hence if possible modify aspects of the business accordingly.

City of London – Role and Initiatives on Insolvency – Amar Mistry, City of London Corporation

Amar Mistry highlighted the role of COLC, which represents the UK financial services sector and is active in the UK – India channel. One key piece of work that the COLC undertakes is showcasing UK legal expertise and supporting the Indian regulators with framework development. In this regard, as the new Insolvency and Bankruptcy Code is based on the English model, COLC has been actively engaging with the IBBI – the Indian insolvency regulator. The COLC has built a consortia of legal firms that are keen to share their expertise with the IBC and help the team shape the Indian Insolvency regime as it evolves, has been very valuable for them. COLC’s next step is to engage with firms that are willing to put together and present case studies directly to the IBBI, on the following topics:

• Enforcing the Law of Contract
• Resolution of cross border insolvencies especially in light of EC Insolvency Regulation. • Treatment of contingent proofs of claim in insolvency proceedings.
• Liability of group companies acting as guarantors in any restructuring of the insolvency entity.
• Treatment of ‘ipso facto’ clauses in insolvency proceedings.
• Resolving insolvency of a group simultaneously through one process rather than multiple parallel process/RPs/CoCs
• Restructuring a company which has many disparate verticals – by doing a piecemeal sale/ resolution rather than a composite sale to a single buyer; which is allowed under UKIA but not under IBC and leads to companies like Lanco, which had significant interest for discrete portions/verticals on a going concern basis but no interest for the composite company, and so will likely go into liquidation

• Resolving conflicts between RP’s and the Committee of Creditors (CoC) – as the CoC appoints the RP in current and future mandates, the RP can be under a lot of pressure from the CoC whereas he is required to act in the interests of all stakeholders

Any UK law firm interested in working with COLC on the above, please get in touch with

Reserve Bank of India (RBI) issues guidelines for enabling interoperability of Prepaid Payment Instruments (PPIs)

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In accordance with the road map provided earlier by its Master Direction, the RBI has issued the consolidated guidelines on October 16, 2018 for enabling interoperability between Prepaid Payment Instruments (PPIs).

These guidelines enable wallet to wallet transfers and is likely to increase the use and acceptability of the payment wallets. PPIs issued in the form of wallets will be entitled to enable interoperability through UPI. Further, participating PPI’s will have to adhere to the technical specifications / standards / requirements as well as the reconciliation and grievance redressal mechanisms of National Payments Corporation of India (NPCI), which will facilitate the PPI issuers’ participation.

PPIs which are issued in the form of cards, will be entitled to enable interoperability in association with card networks. It opens up the whole domain of card payments to them, though such PPI Issuers will be required to follow all the technical requirements of the card networks such as membership type and criteria, merchant onboarding etc. PPI issuers operating in specific segments such as meal, gifts and money transfer services may also implement interoperability.

PPIs which have been issued in the form of wallets are required to adhere to the requirements of the sponsor bank arrangements in the UPI for settlement purposes.

Certain other salient provisions of the guidelines are:

a) PPI issuers are required to have a board approved policy for achieving interoperability.

b) Interoperability shall be facilitated on all KYC compliant accounts.

c) The new PPIs issued in form of cards would need to be EMV chip and PIN compliant. Participants will have to ensure that re-issuance / renewal of PPIs in form of cards is also EMV chip and PIN compliant. However, gift cards and cards for Mass Transit Systems (MTS) can be issued with or without EMV chip and PIN enablement.

For interoperability through UPI, PPI issuers shall link only their own customers’ wallets to the handle issued by NPCI and shall onboard only their own customers and not of any bank or other PPI issuer. The authentication i.e. checking the user’s identity will be completed by the PPI holders as per their existing wallet credentials and hence the transaction will be pre-approved before it reaches the UPI.

JM+P advised on a fresh fund raising by on-demand food delivery platform Faasos Food Services

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JM+P advised on a fresh fund raising by on-demand food delivery platform Faasos Food Services from new investors including Evolvence India Fund.

Role – Jerome Merchant + Partners advised Evolvence India Fund.
Members of JM+P team: The team was led by Partner Murtaza Somjee along with Associate Minal Sangatwani.

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JM+P advised Centrum in its proposed acquisition of the supply chain finance business of L&T Finance

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JM+P advised Centrum in its proposed acquisition of the supply chain finance business of L&T Finance.

Centrum Financial Services Ltd, the NBFC arm of the Centrum Group, entered into an agreement with L&T Finance Ltd for the acquisition of L&T Finance’s supply chain finance business comprising a loan book of approximately Rs 800 crore.

Role – Jerome Merchant + Partners advised Centrum Financial Services Ltd.

Members of JM+P team: The team was led by partners Sameer Sibal and Vishnu Jerome along with associates Ankur Gupta, Anna Liz Thomas, Ravishankar M and Rishabh Amber Gupta.

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Personal Data Protection Bill 2018

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The Ministry of Electronics and Information Technology (“MeitY”) has released a draft of the Personal Data Protection Bill, 2018 (“Bill”), which was prepared by a committee constituted under the Chairmanship of Justice B.N. Srikrishna

Applicability: The Bill applies to processing of personal data if such data has been used, shared, disclosed, collected or otherwise processed in India, by a private or a government entity. In respect of processing by fiduciaries that are not present in India, the Bill shall apply if such processing is in connection with any business carried on in India activities such as profiling of data principals in India. The Bill extends to any personal data collected, used, shared, disclosed or otherwise processed by anybody corporate incorporated under Indian law or an Indian citizen will be covered, irrespective of whether it is actually processed in India.

Data Protection: Data protection is the process of safeguarding personal information from corruption, compromise or loss.

The Data Protection Authority of India (DPA): will be an independent regulatory body is responsible for the enforcement and implementation of the law.

Data Principal: the individual, who’s personal data is being processed, stored or collected.

Data Fiduciary: the entity who is in possession of the personal data of the data principal, for the purposes of storing, collecting and processing such principal’s data. Data fiduciaries are not limited only to persons who are processing data electronically, but even those persons who are processing, collecting or storing data physically.

Processing: The DPA will issue specific guidelines for processing of various categories of personal data and sensitive personal data in various contexts. Sensitive personal data will include passwords, financial data, health data, official identifier, sexual orientation, biometric and genetic data, and data that reveals transgender status, gender, caste, tribe, religious or political beliefs or affiliations of an individual.

Consent: Consent will be a lawful basis for processing of personal data. For consent to be valid it should be free, informed, specific, clear and capable of being withdrawn.

As a general rule, a copy of all personal data must be stored in India. The Government may issue rules specifying that certain categories of data can only be stored or processed in India.

Obligations of data fiduciaries: All processing of personal data by data fiduciaries must be fair and reasonable and for purposes which are clear, specific and lawful. A data fiduciary is obliged to provide notice to the data principal at the time of the collection of her personal data. The DPA will be notified when there is a data breach and in certain circumstances, to the data principal also.

Data principal rights: The right to confirmation, access, correction and data portability. The right to be forgotten provides a data principal the right against the disclosure of her data when the processing of her personal data has become unlawful or unwanted.

Transfer of personal data outside India: Other than critical personal data, all cross-border data may be transferred or processed on the basis model contract clauses containing key obligations. Critical personal data, as notified by the central government, will be subject to the requirement to process only in India. Personal data will however have permitted to be transferred for reasons of prompt action or emergency, such as for medical reasons.

Exemptions: Processing of personal or sensitive personal data if it is necessary in the interest of the security of the state, and for prevention, detection, investigation and prosecution of contraventions of law, are exempted. For enforcing a legal right or claim, for seeking any relief, defending any charge, opposing any claim or for obtaining legal advice from an advocate in an impending legal proceeding would be also exempted from the application of the Bill.

A mandatory approval requirement has been imposed on data processors who process data which carries a risk of significant harm to data principals. Such processors are required to implement Trust Scores, Data Audits as well as a Data Protection Impact Assessment.

The Bill introduces the concept of “privacy by design”, where privacy principles prescribed by the Bill are to be built into technology and operating systems of data fiduciaries and not be implemented as a reaction to new legal or other contractual requirements.

Appeals: An appellate tribunal will hear any appeal against an order of the DPA. Appeals against orders of the appellate tribunal will lie with the Supreme Court of India.

Penalties: Significant penalties of up to 2%-4% of global turnover in some cases and other monetary penalties in the range of USD 728,000 and USD 21,85,000, depending on the nature of harm and type of data which has been breached, may be imposed on data fiduciaries and compensation may be awarded to data principals for violations of the data protection law. In addition, the Bill also imprisonment for certain types of data violations. A person aggrieved by any action in violation of the Bill may also apply to the DPA seeking compensation for the harm caused.

Impact: The Bill is a welcome step towards the establishment of a statutory framework for privacy protection in India. However, the nature of obligations imposed on the data fiduciaries is in many instances ambiguous and onerous. The Bill contemplates the issuance of further guidelines and codes of conduct by the Government to facilitate the implementation of the Bill. This could lead to misalignment between genuine principles of data protection and commercial consequences such as costs and compliance required to satisfy future directions by the Government. MeitY will be required to have a wide range of discussions with stakeholders on the Bill so as to provide data fiduciaries with certainty as to the obligations that are required to be satisfied. MeitY, it is hoped, will also provide a sufficient window for data fiduciaries to put in place systems for complying with the provisions of the Bill.