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SBO Rules and its impact on ownership structures of Indian companies

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Indian Law Updates March 2019 | Regulatory Practice

Aadhaar and other Laws (Amendment) Ordinance, 2019

Aadhaar and Other Laws (Amendment) Ordinance, 2019 has received the Presidential assent on March 4, 2019. The Ordinance effects changes to the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, the Indian Telegraph Act, 1885 and the Prevention of Money-laundering Act, 2002. Certain salient changes effected by the Ordinance is as follows:

  • Deletion of Section 57:Earlier, the Supreme Court of India in the case of Justice Puttaswamy (Retd.) & Anr. vs. Union of India, had held Section 57 of the Aadhar Act to be partly unconstitutional, in so far as it enabled use of Aadhar number for establishing identity of an individual for any purpose by the State or a body corporate or a person pursuant to any law or any contract. The Ordinance removes Section 57 entirely from the statute but allows private entities to use Aadhaar or alternate virtual identification for authentication based on a framework of safeguards set out in the Ordinance.
  • Definition of Aadhaar ecosystem:The Ordinance defines the Aadhaar ecosystem, to include enrolling agencies, Registrars, requesting entities, offline verification-seeking entities and other entities which may be specified by regulations within the ambit of an Aadhaar ‘ecosystem’. Persons who qualify as part of the ecosystem will be governed and bound by the be directions and regulations by the UIDAI.
  • Creation of an alternate virtual id:An alternative virtual id which is connected to each Aadhaar number. Those who do not wish to provide Aadhaar number can provide a virtual id for electronic authentication. Each virtual id is connected to one Aadhaar number. The UIDAI may decide whether an entity can use Aadhaar number or must restrict itself to the virtual id for authentication.
  • Offline verification:Introduction of offline verification process to establish identity which does not involve authentication using biometric or electronic means. The Ordinance however does not spell out the offline verification methods but leaves such processes to be spelt out by UIDAI through separate regulations.
  • Voluntary option to provide Aadhaar number:A voluntary process for providing Aadhaar number for authentication to private entities, such as telecom and banking companies. Such use is only with the informed consent of the Aadhaar number holder.
  • Conditions for authentication by an entity: Section 4 has been amended to allow an entity to perform authentication if it is satisfied that the requesting is compliant with standards of privacy and security which are specified by regulations and permitted to offer authentication services under the provisions of any law made by Parliament or a purpose prescribed by the Central Government.
  • Purposes for use/ disclosure of information to be specified in writing at the time of data collection: Section 29(3) has been amended to clarify that any entity which requests authentication or offline verification shall not use or disclose any information available with it for any purpose, other than purposes informed in writing to the individual at the time of submitting information for authentication or offline verification.
  • Stipulation of regulation-making power of UIDAI:The UIDAI will now have power to make regulations governing the Aadhaar ecosystem, biometric and demographic information and the process of collecting the same, standards of privacy and security, etc
  • Other updates:There are other updates such as provision for children to cancel their Aadhaar number on attaining the age of eighteen years, prevention of denial of services for refusing to undergo authentication, establishment of a Unique Identification Authority of India Fund, provision of civil penalties, etc.

Analysis

The Ordinance which has been assented to by the President after the Aadhaar Amendment Bill lapsed in the Rajya Sabha. While, the Ordinance may be welcomed by banks and telecom companies, it does appear that other financial services players such as mutual funds, wealth managers will not benefit from the ability to use Aadhaar data immediately. Such intermediaries will need to firstly, determine based on rules and regulations the nature of processes than can be used for authentication of Aadhaar data and rationalise their KYC rules with the amendments to the money laundering regime effected by the Ordinance.

Further, and more importantly the Ordinance may be subject to constitutional challenge. The Ordinance disregards the judgment of the Supreme Court which held that the use of Aadhaar information by private parties enabled commercial surveillance and was therefore unconstitutional. The Ordinance may be further scrutinized in light of the judgment of the Supreme Court as it has been passed in the absence of a comprehensive data privacy law, which in the view of the Supreme Court enhanced the level of privacy rights violations of the original Aadhaar legislation.

The Aadhar Ordinance – an analysis

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Indian Law Updates March 2019 | Regulatory Practice

Aadhaar and other Laws (Amendment) Ordinance, 2019

Aadhaar and Other Laws (Amendment) Ordinance, 2019 has received the Presidential assent on March 4, 2019. The Ordinance effects changes to the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, the Indian Telegraph Act, 1885 and the Prevention of Money-laundering Act, 2002. Certain salient changes effected by the Ordinance is as follows:

  • Deletion of Section 57: Earlier, the Supreme Court of India in the case of Justice Puttaswamy (Retd.) & Anr. vs. Union of India, had held Section 57 of the Aadhar Act to be partly unconstitutional, in so far as it enabled use of Aadhar number for establishing identity of an individual for any purpose by the State or a body corporate or a person pursuant to any law or any contract. The Ordinance removes Section 57 entirely from the statute but allows private entities to use Aadhaar or alternate virtual identification for authentication based on a framework of safeguards set out in the Ordinance.
  • Definition of Aadhaar ecosystem: The Ordinance defines the Aadhaar ecosystem, to include enrolling agencies, Registrars, requesting entities, offline verification-seeking entities and other entities which may be specified by regulations within the ambit of an Aadhaar ‘ecosystem’. Persons who qualify as part of the ecosystem will be governed and bound by the be directions and regulations by the UIDAI.
  • Creation of an alternate virtual id: An alternative virtual id which is connected to each Aadhaar number. Those who do not wish to provide Aadhaar number can provide a virtual id for electronic authentication. Each virtual id is connected to one Aadhaar number. The UIDAI may decide whether an entity can use Aadhaar number or must restrict itself to the virtual id for authentication.
  • Offline verification: Introduction of offline verification process to establish identity which does not involve authentication using biometric or electronic means. The Ordinance however does not spell out the offline verification methods but leaves such processes to be spelt out by UIDAI through separate regulations.
  • Voluntary option to provide Aadhaar number: A voluntary process for providing Aadhaar number for authentication to private entities, such as telecom and banking companies. Such use is only with the informed consent of the Aadhaar number holder.
  • Conditions for authentication by an entity: Section 4 has been amended to allow an entity to perform authentication if it is satisfied that the requesting is compliant with standards of privacy and security which are specified by regulations and permitted to offer authentication services under the provisions of any law made by Parliament or a purpose prescribed by the Central Government.
  • Purposes for use/ disclosure of information to be specified in writing at the time of data collection: Section 29(3) has been amended to clarify that any entity which requests authentication or offline verification shall not use or disclose any information available with it for any purpose, other than purposes informed in writing to the individual at the time of submitting information for authentication or offline verification.
  • Stipulation of regulation-making power of UIDAI: The UIDAI will now have power to make regulations governing the Aadhaar ecosystem, biometric and demographic information and the process of collecting the same, standards of privacy and security, etc.
  • Other updates: There are other updates such as provision for children to cancel their Aadhaar number on attaining the age of eighteen years, prevention of denial of services for refusing to undergo authentication, establishment of a Unique Identification Authority of India Fund, provision of civil penalties, etc.

The Ordinance which has been assented to by the President after the Aadhaar Amendment Bill lapsed in the Rajya Sabha. While, the Ordinance may be welcomed by banks and telecom companies, it does appear that other financial services players such as mutual funds, wealth managers will not benefit from the ability to use Aadhaar data immediately. Such intermediaries will need to firstly, determine based on rules and regulations the nature of processes than can be used for authentication of Aadhaar data and rationalise their KYC rules with the amendments to the money laundering regime effected by the Ordinance.

Further, and more importantly the Ordinance may be subject to constitutional challenge. The Ordinance disregards the judgment of the Supreme Court which held that the use of Aadhaar information by private parties enabled commercial surveillance and was therefore unconstitutional. The Ordinance may be further scrutinized in light of the judgment of the Supreme Court as it has been passed in the absence of a comprehensive data privacy law, which in the view of the Supreme Court enhanced the level of privacy rights violations of the original Aadhaar legislation.

NCLT Takes A Detour From IBC For A ‘Workable Solution’ In SBM Paper Mills Case

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Our partner Murtaza Somjee shared his views with Bloomberg, on the implications of the landmark ruling of the Mumbai bench of the NCLT in SBM Paper Mills. In this matter the NCLT, allowed the promoters of the company which was the subject of resolution proceedings to withdraw from the resolution process, effectively rescinding the approval that the committee of creditors had provided for the resolution plan submitted by a third party applicant, but at the same time facilitating the most optimal resolution for the creditors of the company. The jury is still out on whether the ruling can be used as a “one size fit all” solution in other insolvency resolution processes

Read More :https://www.bloombergquint.com/law-and-policy/nclt-takes-a-detour-from-ibc-for-a-workable-solution-in-sbm-paper-mills

Regulatory Updates – February 2019

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Indian Law Updates February 2019 Corporate Practice

The Companies (Amendment) Ordinance, 2019:

Whilst the Companies (Amendment) Bill, 2018, is still pending to be passed by the Rajya Sabha, the Companies (Amendment) Ordinance, 2019 has been promulgated, with effect from 12 January 2019, to continue the applicability of the provisions contained in the Companies (Amendment) Ordinance, 2018, relating to rearrangement of penalties for offences in the Companies Act, 2013 (the Act) and easing up compliance procedure in some respects. The pending bill shall become an Act post the approval of the Rajya Sabha and receipt of presidential assent and shall be effective from the date of notification in the Gazette. Once that happens, the amendments brought in by the Companies (Amendment) Ordinance, 2019 will also be crystallized in the Act.

While the inserted Section 10A prohibits all companies (whether public or private) from commencing business before they bring in the subscribers’ funds (the outer limit for which is within 180 days), file a declaration by the directors to this effect and report the registered office of the company within 30 days of commencement, Section 12(9) empowers the registrar to cause a physical verification of the registered office. On failure to file the declaration relating to the funds and verification of registered office, the registrar can initiate proceedings to remove the name of the company from the register under Chapter XVIII. This can act as a deterrent for shell companies since a physical office and receipt of funds is now mandatory.

Following are some provisions which ease up procedural requirements:

  • Change in the financial year of a holding, subsidiary or associate company of a company incorporated outside India and the conversion of a public company into private company, which earlier required the approval of National Company Law Tribunal (NCLT) can now be approved by the Central Government.
  • Section 197(7) which stated that an independent director will not be entitled to stock options and can receive remuneration in the form of sitting fees and reimbursements has been removed, adding a bit of flexibility to the payment mechanisms for independent directors.
  • The maximum amount of penalty which can be compounded by the Regional Director has been increased to twenty-five lakhs rupees.

Provisions where the fines / additional fees have been rearranged include:

  • The minimum fine for the issue of shares at discount is fixed as the amount raised through the issue of such shares, the maximum fine is capped at five lakhs rupees and the company shall have to refund the monies received with 12 percent interest from date of issue.
  • The initial period for registration of charges has been increased from 30 to 60 days, but the extension which can be granted by the registrar has been brought down from 300 to 60 days. Further, the fees for extension have been changed from additional to ad valorem, which means high value charges will have higher fees, rather than a time-based slab.
  • Wilfully furnishing false information or suppressing material information in relation to charges will now invite penalty equivalent to fraud, which can extend to fifty lakh rupees.
  • Section 90 relating to significant beneficial owners, which had been significantly amended by the Companies (Amendment) Act, 2017 provides that NCLT, at the request of the company, can make an order restricting the rights on the shares owned by a person who is believed to be the beneficial owner, but who is not registered as a beneficial owner. A person who is aggrieved by this order can apply to NCLT for the restrictions to be removed, but the time period for this application has now been restricted to one year. If the application is not filed within one year, the shares can be transferred to the authority constituted for the administration of Investor Education and Protection Fund.
  • Continuing penalties per day of default have been brought in such as one hundred rupees per day for non-filing of financial statements and annual return, five hundred rupees per day for non-filing of resolutions and agreements under Section 117 of the Act and one thousand per day for not complying with the requirement to appoint key managerial personnel in accordance with Section 203.
  • Maximum fine for frauds not involving public interest or less than ten lakhs rupees or one percent of the turnover have been increased to fifty lakhs rupees from twenty lakhs rupees.
  • Amendments in Section 454 relating to imposition of penalty by adjudicating officer or regional director now bring into its purview ‘any other persons’, apart from the company itself and officers in default.
  • If the same offence for which the penalty was imposed by adjudicating officer or regional director is repeated, the penalty would then be twice the amount of penalty provided for such default.

Regulatory Updates – January 2019

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Indian Law Updates January 2019 Regulatory Practice

SEBI Circular on Artificial Intelligence (AI) and Machine Learning (ML) applications and systems offered and used by market intermediaries:

SEBI, through its circular released on 4 January 2019 has asked all registered stock brokers and depository participants using AI / ML based systems to submit the details of such systems in a prescribed form on a quarterly basis to the stock exchanges and the depositories. The stock exchanges and depositories shall further submit a consolidated quarterly report of all registered intermediaries using AI / ML applications and systems in a soft copy at prescribed email addresses to SEBI. The stock exchanges and depositories are also required to make necessary amendments to their bye laws, rules and regulations, make the provisions of the circular known to members and participants and communicate the status of implementation in their Monthly Development Report to SEBI.

The reporting is required if such systems are used by intermediaries to facilitate investing and trading or to disseminate investment strategies and advice or to carry out compliance operations / activities and where AI / ML is portrayed as a part of the product offering or for compliance or management purposes.

The circular also contains a list of systems which are deemed to be based on AI / ML systems. These include natural language processing systems such as robo chat bots, neural networks – systems modeling the brain such as some systems used for anomaly detection, machine learning such as those based on decision tree, systems using statistical heuristics, feedback mechanism or knowledge representation.

SEBI (Foreign Portfolio Investors) (Third Amendment) Regulations 2018:

These regulations, notified on 31 December 2018 seek to prohibit registration of foreign portfolio investors (FPIs) who are predominantly owned or controlled by non resident Indians (NRIs) or overseas citizens of India (OCIs) or resident Indians. For being eligible to register as FPI, the contribution to the corpus of the FPI from a single NRI/OCI/resident Indian is required to be less than 5% and the aggregate from all NRIs/OCIs/resident Indians is required to be less than 50% of the total contribution and the NRIs/OCIs/resident Indians should not be in control of the FPI. The definition of control has been brought in the regulations and includes the right to appoint majority directors or to control management or policy decisions. However, the disqualification does not apply to offshore funds in certain cases or non investing FPIs or FPIs investing only in units of schemes floated by mutual funds in India.

The regulations also prohibit registration of, and therefore investment from FPIs which are mentioned in the United Nations Security Council Sanctions List or FPIs which are from a high risk jurisdiction in terms of Anti-money laundering (AML) or combating the financing of terrorism (CFT) measures as identified by the Financial Action Task Force. FPIs with underlying investors of more than 25% corpus falling in the above criteria will also be barred from registering.

An applicant or an existing FPI which is predominantly controlled by NRIs / OCIs / resident Indians is mandated to comply with the above criteria within a period of two years from the effective date of the regulation or date of registration whichever is earlier. Existing FPIs which do not satisfy the sanctions / AML / CTF requirements are required to comply within a period of three months of the effective date of the regulation.

In order to be categorised as Category I FPI, government agencies will mean entities in which more than 75% ownership or control is held by Government of a foreign company.The transfer of offshore derivative instruments to entities disqualified from being registered as FPIs is also prohibited.

The investment limits of multiple FPIs having common ownership of more than 50% or common control will be clubbed, with the exception of FPIs which are public retail funds themselves or are regulated by public retail funds in certain cases.

SEBI (Substantial Acquisition of Shares and Takeovers) (Third Amendment) Regulations, 2018:

By virtue of these regulations dated 31 December 2018, SEBI has exempted housing finance companies (HFCs) registered with the National Housing Bank and systemically important non banking financial companies (NBFCs) recognised as such by the Reserve Bank of India from the requirement to make disclosures in relation to the shares aggregating to five percent or more of the shares of the target company taken as pledgee, where the shares have been pledged for securing indebtedness in the ordinary course of business. Such disclosures were earlier required to be made by the HFCs or NBFCs within two days of taking the shares as an encumbrance to the target company itself and the stock exchanges where the target company is listed.

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.