Newspapers recently reported about a writ petition in Madras High Court which alleges that brokers are selling LLB degrees in the state for meager amounts. One can get these degrees even without attending classes as long as they pay a few thousand rupees. For those who are familiar with the legal system at the grassroots level, this would not be very surprising. In any lower court, and sometimes even at higher courts, you can find thousands of lawyers who just work as agents of other lawyers. Their role is limited to finding clients. For this, they are ready to make all sorts of unrealistic promises. Rarely one gets any quality legal representation from these so called lawyers who have been licensed to practice in our courts.

The legal education system itself is failing in a big way. Syllabuses and textbooks have remained the same over the decades and do not reflect the realities of the legal practice any more. One well known Vice Principal of a Mumbai law college once lamented to me about how the syllabus of Mumbai University has remained more or less the same for the last 25 years, and why he cannot teach what ought to be taught to the budding lawyers. He tries his best to supplement their learning through as many extra seminars he can arrange, but with the core curriculum being what it is, he is fighting a losing battle.

If this is the situation in Mumbai, imagine what is happening in the hundreds of rural law colleges of the country. Out of 90,000 law graduates coming out of 900+ law colleges every year, barely a fraction is ready to serve clients even in the most basic matters. Except for a fraction, the rest is not even close to being employable. Lack of good faculty and irrelevant theory based syllabus that depend on rote learning and writing exams is the main reason for this. Law students learn to crack some exams, but have no idea how they can earn an honest livelihood after they get their degree.

This means they must learn the ropes of the profession from other practicing lawyers. Very few are fortunate to find successful lawyers who are willing to and can spare the time to teach juniors about the craft of legal practice. The rest try to learn by being in the marketplace and observation. How many of them succeed is anybody’s guess.

Realizing the steady decline of the legal profession in India, visionary chairman of the Bar Council of India Gopal Subramaniam introduced the All India Bar Exam, despite massive protests and an array of legal challenges. Nothing exposes the sorry tale of Indian legal education more clearly than the results of the All India Bar Exam.

The Bar Exam itself is very easy. Students are asked questions on about half of what is the BCI syllabus mandatorily taught in law colleges. Students are allowed to carry any books, notes or material to the examination hall that they may like (electronic devices are not allowed). The questions themselves are elementary and just require one to flip through pages and find the correct answers. Questions are all multiple choice based, and objective questions. Many of the questions are so easy, that any self-respecting Indian citizen who has received higher education will be expected to know the answers. Even then, 1 in every 3 persons who wrote the Bar Exam since 2010 has failed in it.

Who gets to become a lawyer is not only the business of lawyers. If incompetent degree holders are given free license to practice law – we weaken the rule of law and the justice system, and we oppress the people who suffer at the hand of incompetent lawyers.

The Bar Exam is a unique opportunity to set right much of what is wrong with the Indian legal system as well as the legal education system. It can set standards for the law colleges and universities doling out useless law degrees for money. If too many of their students fail the bar exam, they should be taken to task. The Bar Exam can also guide the law students themselves towards the right direction. It can also save the common people from having to suffer the injustice of poor quality of legal representation.

However, for this we would need a well thought out curriculum for the Bar Exam, which tests necessary skills of young lawyers, rather than legal trivia in an open book exam. The open book exam itself is not bad – but combined with the kind of questions that are being asked in the Bar Exam, it has lost its meaning.

Full disclosure: I started the only online training program for the All India Bar Exam called BarHacker. This may make me potentially biased towards wanting a more difficult exam, although I have attempted to present my case in the most logical and unbiased way as I could. Also, my attachment with BarHacker caused me to follow the evolution of the Bar Exam very closely, and led me to research on the Bar Exams in various other countries which helped me to understand the Bar Exam at home better.

In this blog post, Tanvi Amlani, a student of GGSIP University, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the permissible sources for funding overseas direct investment. 

Overseas direct investment: meaning

Overseas Direct Investment in general terms simply means to create investments abroad by way of either contributing to the capital of another nation or by having oneself subscribed to the Memorandum of Association of a foreign entity.

This may also be considered as a method to expand business and create a market outside the home state. Statistical data show that major investments from India are in manufacturing or service sectors. It may ultimately lead to creating brand image overseas and boosting economic ties and financial cooperation between the home state and the host state.

Laws governing Indian overseas direct investments

1. Foreign Exchange Management Act, 1999.
2. Foreign Exchange Management (Transfer or Issue of Security) Regulations, 2000.
3. Master Circulars issued by RBI from time to time relating to dealings in foreign account transactions.

Overseas direct investment takes place through

1. Investing through Stock Exchanges of foreign entities.
2. Private placement in foreign entities.
3. Market Purchase.
4. Investment in a Joint Venture or Wholly owned subsidiary abroad.

Meaning of certain relevant terms

1. Joint Venture: It’s a business arrangement in which two or more entities come together and invest in the same as decided previously by them to accomplish a particular task. However, the identities of parties coming together remain distinct.
2. Wholly Owned Subsidiary: Under this, there are two entities, subsidiary and the parent company. The parent company holds 100% common stock (a security that represents ownership incorporation, it determines the control of such stockholders. They have a right to vote board of directors by the corporate policy) in the subsidiary company.
3. Indian Party: It is a company incorporated in India or a body created under an Act of Parliament or a partnership registered under the Indian Partnership Act, 1932 or a Limited Liability Partnership incorporated under The Limited Liability Partnership Act, 2008 making an investment in a joint venture or a wholly owned subsidiary abroad.

What are the permissible sources for funding overseas direct investment?

Since overseas direct investments define the long-term interests in foreign entities and have a direct blow on the economic growth of a nation, they are highly regulated in India. There are clearly affirmed routes and limits. The sources of such funding have also been specified under the Masters Circulars issued by RBI regarding the same.

A brief discussion on Section 6(3) (a) of FEMA, 1999

The legislative intention of the Act is clearly defined in its preamble which states the purpose of the Act. It has been drafted to regulate foreign exchange by facilitating external trade and payments and promote the orderly development of the foreign exchange market in India.

The definition of Capital Account Transaction as stated means any transaction which alters the assets and liabilities overseas of any person residing in India or of any persons residing outside India but having long-term investments within India. It also includes within its ambit all transactions covered under Sub-section 3 of Section 6 under the same Act.

Section 6 of the Act mentions the requirements for permissible capital account transactions and also the need for an authorized officer for conducting the same. The Reserve Bank of India in consultation with the Central Government of India is authorized to specify the permissible class or classes of the transaction and also the admissible limits for these transactions. The Reserve Bank of India has a right to prohibit, regulate and restrict transfer and issue of foreign securities within and outside India of persons that come under the provisions of the act. It also regulates borrowings, lending, imports and exports, guarantees and securities, and even acquisitions and takeovers.

A brief discussion on Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004

In exercise of powers conferred to RBI by FEMA, 1999, it has made certain regulations directing the Overseas Direct Investment. There are various definitions given under the Act such as ADR (American Depository Receipt), GDR (Global Depository Receipt) which are directly related to the overseas direct investment.

The term direct investment overseas has also been defined in the Regulation; it has been stated that such investments do not include Portfolio Investments (investments made by a person not directly involved in the management of the company).

Part I of the Regulations deal with Direct Investments outside India which says that transactions should be held with prior approval from the RBI. It has also been stated that total financial commitment of the Indian Company must not exceed 100% of its net worth according to the last audited balance sheet. There are much more relevant conditions attached to it which may be referred for more details.

We would now come to the Permissible Sources for going ahead with these overseas direct investment: –

RBI prescribes ceilings for such funding from time to time. The investments abroad are allowed to be funded out of the following resources either alone or in contribution with each other:

1. Drawl of foreign exchange from an Authorized Dealer Bank in India.
2. Capitalization of Exports.
3. A swap of shares according to the valuations specified.
4. Proceeds of External Commercial Borrowings/ Foreign Currency Convertible Funds.
5. In exchange of ADRs and GDRs according to the schemes and guidelines.
6. Balance held in Exchange Earner Foreign Currency Account of the Indian Party.
7. Proceeds of foreign currency fund through ADR/GDR issue

In respect of 6^th and 7^th, the limit of financial commitment would not apply. General Permissions have also been granted to person resident in India for purchase or acquisition of securities in the following manner:

1. Out of funds held in Resident Foreign Currency Accounts.
2. As bonus shares on existing holdings of Foreign Currency Shares.
3. Out of foreign currency resources outside India in the case when the party is not permanently residing in India.

Conclusion

Overseas Direct Investments involve huge amounts of capital account transactions that greatly impact the economic well-being of a place where such financial commitment begins. Therefore, there have been provisions installed in FEMA Act, 1999 to regulate them along with the regulations that prohibit and restrict transactions having an adverse effect on the economy. The Master Circulars issued by the RBI play a great role in providing directions to the mode of investing abroad, procedures and permissible sources for funding along with the routes such as Automatic Route and Approval Route that need to be adopted and kept in mind while planning such direct investments at an international level.

In this blog post, Vyoma Mehta, a student of NMIMS, School of Law, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the circumstances under which the government can cancel the registration under FCNR.

The current volatility of the Indian rupee calls for better investment options for the non-resident Indians, without worrying about currency risks. One such available option is the Foreign Currency Non-Resident Account. An FCNR account is a term deposit account which can be maintained by non-resident Indians and persons of Indian origin in foreign currency. It is imperative to note that the FCNR account is a fixed deposit account and not a savings account. The primary necessity concerning the FCNR account is that the funds deposited in the said account must come from overseas funds.[1]

Initially before 2011, the foreign currency deposits could be maintained in six currencies – US Dollar, Japanese Yen, Australian dollar, Pound sterling, Canadian dollar, and Euros. However, after October 2011, the Reserve Bank of India decided that an authorized dealer bank could accept foreign currency deposits in any permitted currency (a foreign currency which is freely convertible).[2] The interest rates on an FCNR account are different from currency to currency as well as among the various banks. Example: the interest rate for the US dollar would be in the range of 2.5-3% whereas for the Australian dollar, it would be anywhere between 5-6%, for a given year. The interest on the FCNR account in India is tax-free, but it is imperative to note that a person may be subject to tax in the country of their residence for such interest. There are several ways in which a foreign currency non-resident account can be opened[3]:

• Funds from an overseas bank account can be transferred directly to open an FCNR account. The transfer may be that of a wire transfer or cheque transaction.
• Funds can be transferred from an existing non-resident external rupee account.
• A foreign currency non-resident account can also be opened by using foreign currency notes or traveler cheques when one visits India.

A FCNR account can be opened for a minimum period of a year and maximum period of five years. In the case of a foreign currency deposit, a premature withdrawal is permissible. However, the same will be subject to a penalty being an interest of 1%.

Procedure for opening a FCNR account

An FCNR account can be opened from a foreign country after all the necessary conditions are fulfilled. To open a term deposit account, the following documents are to be submitted to the particular bank[4]:

• The account opening form with the signature which is verified by the overseas bank or the Indian embassy/ consulate/ high commission or a notary public.
• Passport size photographs.
• Copies of passport and visa duly attested.
• Proof of foreign address.
• Initial remittance.

Several other documents such as a canceled cheque, overseas bank statement, income documents may be required. The requirement regarding the documents may also vary from country to country and between banks.

The FCNR funds can be raised in foreign countries by banks. Further, the banks can sell the foreign currency for Indian rupees in accordance with the existing exchange rate and use the Indian rupees for domestic lending. The time, at which a foreign currency deposit becomes due for maturity, banks would need foreign currency to pay the depositor. Waiting until the last moment to purchase foreign currency would leave the banks open to an exchange rate risk and thus to protect themselves from the risk, banks hedge their foreign currency commitments by entering into forward contracts.

Powers of the Reserve Bank of India

The Reserve Bank of India under the Banking Regulation Act has the power to prohibit or caution banking companies generally or any banking company in particular against entering into any particular transaction or class of transactions and give advice to any banking company. [5]Thus, to open an FCNR deposit account, every bank has their terms and conditions which are to be followed and a procedure for opening the term deposit account. However, under the Banking Regulation Act, the Reserve Bank of India given certain powers,  may advise the banking companies to proceed in this particular area with caution as if a bank is ready to deal with in foreign currency open a foreign currency non-resident account then there are exchange rate risks which the banking company is signing up to take. To keep the banking industry in check, the Reserve Bank of India may forbid certain banks from transacting in foreign currency matters.

Foreign Contribution Regulation Act

The Foreign Contribution Regulation Act is an Act which consolidates the law to regulate the acceptance and utilization of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilization of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for any matters which are connected therewith and incidental thereto.[6]

The Foreign Contribution Regulation Act is a concept which is a little different from that of a FCNR deposit. Under the Foreign Contribution Regulation Act, a contribution can be made in foreign currencies by individuals, companies or associations which are not residing in India.

The Act imposes restrictions on acceptance of foreign hospitality by certain specified persons. It mandates that no member of a Legislature or office-bearer of a political party or Judge or Government servant or employee of any corporation or any other body owned or controlled by the Government shall, while visiting any country or territory outside India, accept, except with the prior permission of the Central Government, any foreign hospitality.[7] However, such permission would not be necessary for an emergent medical aid needed on account of sudden illness contracted during a visit outside India. The term ‘foreign hospitality’ is defined to mean any offer, not being a purely casual one, made in cash or kind by a foreign source for providing a person with the costs of travel to any foreign country or territory or with free boarding, lodging, transport or medical treatment.[8]

Apart from this, the Central Government is empowered to prohibit any person or organization not specified in the Act from accepting any foreign contribution and to require any person or class of persons, not specified in the Act to obtain prior permission of the Central Government before accepting any foreign hospitality.

The Act mandates that except as otherwise provided in the Act, no person having a definite cultural, economic, educational, religious or social program shall accept a foreign contribution unless such person obtains a certificate of registration from the Central Government. In case a person falling in the above category is not registered with the Central Government, it can accept foreign contribution only after obtaining prior permission of the Central Government. [9]

The Act imposes a prohibition, on persons registered and granted a certificate or who have obtained prior permission under the Act, from transferring such contribution to any other person, unless such other person is also registered and had been granted a certificate or obtained the prior permission under the Act.[10] Certain restrictions have been imposed on the utilization of the foreign contribution received, and the Act mandates that the foreign contribution shall be utilized only for the purposes for which contribution was received. No foreign contribution or any income arising out of it can be used for speculative purposes. The Act has restricted the use of a foreign contribution for defraying administrative expenses.

The Act empowers the Central Government to prohibit any person or organization not specified in Section 3 from accepting any foreign contribution and also to require any person or class of persons not specified in Section 6 to obtain prior permission of the Central Government before accepting any foreign hospitality.

Footnotes:

[1] http://timesofindia.indiatimes.com/nri/other-news/All-you-wanted-to-know-about-FCNR-accounts/articleshow/17955437.cms – Deepa Venkatraghavan. (20th April 2016)

[2] http://timesofindia.indiatimes.com/nri/other-news/FCNR-swap-deal-What-it-means-for-NRIs/articleshow/23309748.cms (20th April 2016)

[3] Supra Note 1

[4] Supra note 1

[5] Section 36, Banking Regulation Act, 1949

[6]http://lawmin.nic.in/ld/regional languages/THE%20FOREIGN%20CONTRIBUTION%20(REGULATION)%20ACT,2010.%20(42%20OF%202010).pdf

[7] https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7327#7

[8] Id

[9] Section 11, Foreign Contribution Regulation Act, 2010

[10] Section 7, Foreign Contribution Regulation Act, 2010

In this blog post, Subhalagna Choudhury, a student of Department of Law, University of Calcutta, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, deliberates on whether FIPB approval is required for 100% EOUs involving Foreign Direct Investment.

A Brief of FIPB

The Foreign Investment Promotion Board (FIPB) as the name suggests deals with foreign investments in India. In fact, it can be said that this is the most significant player in dealing with Foreign Direct Investment, more popularly known as FDI in India. FIPB has essentially been structured and set up by the Government of India to expand the flow of Foreign Direct Investments into the country and give foreign trade a greater push towards its growth. The most important function of this board is to undertake activities that promote foreign investment, in particular. The Chairman of the FIPB is the secretary industry of the Department of Industrial Promotion and Policy, Government of India. To put it in a nutshell, apart from identifying the sectors that require foreign direct investment, the board approves the foreign investment proposals as well as reviews the FDI policies, to encourage its expansion in various sectors of the country. The board communicates with the governmental as well as non-governmental organizations and the Foreign Investment Promotion Council to increase the flow of direct investment into the country.

The concept of EOU

To bridge the increasing deficit in the balance of trade, it is imperative to step up the growth of foreign trade. The Export Oriented Unit (EOU) scheme which had been introduced in the early 1980s, by the Ministry of Commerce continues to be in the forefront when it comes to export production schemes. Under the scheme, the units that undertake to export the entire production of goods are allowed to be set up. The units may be engaged not just in the production of goods, but also in services, trading, manufacture, engineering, horticulture, biotechnology, etc.  A 100 % EOU is an industrial unit offering for export, its entire production which excludes the domestic tariff area sales for the manufacture of goods, including repair, remaking, reconditioning, re-engineering and rendering of services. Trading units do not fall under this scheme. The Development Commissioner usually issues a letter of permission for its activities. 100% EOUs fall under three categories:

• EOUs that are established anywhere in India and that which is exporting 100% products except the certain fixed percentage of sales in the domestic tariff area which may be permitted under the policy.
• Units in the Free Trade Zones in the Special Economic Zones and which exports 100% of their products.
• EOUs that have been set up in software technology parks and electronic hardware technology parks of India for the development of software and electronic hardware.

EOU and its approval (special focus on Foreign Investment and Promotion Board)

For setting up EOUs in different parts of the country, the government has prescribed certain formalities:

• The intending entrepreneurs are required to make an application to the Secretariat (Ministry of Industry) for industrial approvals.
• Once the approval for setting up the unit is received, the unit is required to execute a legal bond before the Jurisdictional Development Commissioner of the export processing zone. The details of the export process have to be annexed to the bond.
• While the 100% EOUs may be exempted from complicated registration and licensing formalities, however, approval is required from the Jurisdictional Superintendent of Central Excise according to the prescribed format by the FIPB.
• If, where the EOU is situated, is not declared as a warehousing station, the EOU is required to obtain approval from the Chief Commissioner of Control and Central Excise, declaring the village or the panchayat (the case may be)as a warehousing station.
• In the case of 100% EOUs, the unit is required to make an application to the Assistant Commissioner of Customs for granting a license for private bonded warehouse under Article 58 of the Customs Act.
• To procure indigenous capital good a separate bond is to be executed before the Assistant Commissioner of Central Excise having jurisdiction over the said unit.

Once the above requirements have been complied with, the unit is free to import capital goods, raw materials, components and intermediates from abroad free of customs duty and install them in the premises.

Foreign investment is the investment that originates from other countries. It should be mentioned here that FDI is not a mere investment of finance but goes a long way in determining the economic growth and financial stability of the country. In light of this view, the Indian Government has brought to the fore many reforms and industrial policies with the objective of attracting the major investors of the world. FDI is allowed in India through different kinds of collaborations like financial collaborations, joint venture collaborations, preferential allotments, etc. Foreign investment is, by and largely routed via 100% Export Oriented Units (EOUs). Proposals for FDI are usually directed through the Reserve Bank of India and the Foreign Investment and Promotion Board. The foreign investment promotion board, processes cases of EOU involving FDI, where the proposed activity involving investment does not fall within the ambit of the automatic route because the sectors under automatic route do not require any prior approval from FIPB and are subjected only to sectoral laws (non-automatic approval). The time taken by the FIPB for approving the proposals of Foreign Direct Investment in India is between four to six weeks. FIPB is not a very strict board regarding functioning and hence it accepts most of the proposals, thus rejecting very few. Significant FDI approvals have taken place in the telecom, real estate, banking and insurance sectors. In recent years, information technology sector, integrated township, export-oriented manufacturing has also been allowed by foreign investors. Applications for 100% EOU has to be submitted to the SIA (Secretariat of Industrial Assistance), under The Department of Industrial Policy and Promotion.  It should be noted that—

• Applications can be made in form FC-IL (composite form for Foreign Collaboration and Industrial License) or a plain paper with all the details mentioned in it.
• Those proposals approved by FIPB do not require further approval by the RBI.
• The regional office of RBI should be informed about the transfer of shares to the foreign investors, within a period of 30 days.

Concluding note

In 2002, Toyota (Kirloskar Auto Parts Private Limited) had filed an application with the Foreign Investment and Promotion Board seeking permission to set up 100% EOU, near Bangalore. The EOU scheme is complimentary to the SEZ policy. It adopts the same production regime but offers a wide option in locations concerning factors like raw materials, ports of export, availability of technological skills and the need for a larger area of land. EOUs involving FDI has been showing a positive trend over the recent years.  The Hindu recorded that in 2005-2006, exports from WOUs were of the order of Rs. 47225.67 crore as compared to the export of Rs. 37288.38 crore during 2004-2005, thereby vividly portraying a growth of 26.51 percent.

In this blog post, Saurodeep Dutta, a student of University of Calcutta, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the special reliefs given for the acquisition of shares of software company employees of Joint Venture/Wholly Owned Subsidiaries abroad.

Introduction

Good Employees in the current era often are often hard to find, and harder to retain. The cause of this has been the ever growing opportunity that a professional has. In many cases, employers attempt to keep their prized employees by a method of incentivising, so that they are not only recompensed with salaries, but they get further incentives from the employers, so that they are less liable to be “poached” by other companies coveting their skill set. This has been especially felt by the software industries, with many high profile employees leaving and joining competitors, leaving to make an entirely new firm on their own.

A popular method of incentivising is Employee Stock acquisitions of the company, with the employee gaining methods of acquiring shares from the companies they are part of. This has led to many of the top tech company executives turning into millionaires by receiving employee stock options from the companies they work for.[1]

Employee Stock Option Plans in India were once unheard of, but now it has received immense backing and is not uncommon. The software industry has adopted this readily, being one of the earliest industries being affected by the brain-drain issue.

Guidelines related to Employee Stock Options (ESO) in foreign countries

Foreign Security is regulated by the Reserve Bank of India. The RBI controls the sale, purchase, holding of any foreign security by an Indian citizen. In a case of its approval, the movements of the fund from/to India required for it is also approved. In most cases, repatriation to India is required, unless there is a specific exception. In all these cases, the permission of the Reserve Bank of India is an extremely important part. The award cannot progress beyond the permission of the Reserve Bank of India. The RBI entertains the applications of residents of foreign companies, and their joint ventures and wholly-owned subsidiaries in which the foreign company has not less than a 51% stake.

Special concessions to software companies[2]

To facilitate the promotion of the Indian industries that are related to knowledge, the government has attempted to ensure that the issue of stocks following the ADR/GDR route in such industries is smoother. The permission that is ordinarily required from the RBI in these cases has been dispensed with, and the companies engaged in this business can issue such ESOs without any requirement for the compulsory RBI permission. Only the industries falling under software and information technology has been allowed this opportunity.

Eligibility condition

There are however eligibility criteria that must be followed for the company to qualify for this unique exception. The most obvious is the fact that the company has to be engaged in the field of software and information technology. The company is also required to have at least 80% of its revenues come exclusively from this field.

Other conditions

This facility is available to all resident and non-resident employees of the company, including Directors. This is not available to Promoter Directors and their family members who are employed by the company. The company may also not issue more than 10 % of its paid up capital. The Stock Options must not be provided at a discount of more than 10% of its market value. The ADR/GDR acquired during such transfer is freely transferable, but the stocks itself, are not. These ADR/GDRs will qualify for concession under Section 115AC of the Income Tax Act. The sale of these securities, as mentioned above, must be repatriated back to India unless RBI permission has been taken to ensure they have kept abroad.

Indian employee ESO in Indian Parent’s Company, JV, WOS

In a similar manner to the above form of stock options, an Indian employee also has the right to gain the stocks of the JV/WOS of the Indian parent software company, which has been set up abroad. Remittance for such options will not be more than $ 10,000 per employee for a company each five years. Another condition for the implementation of the said stock option is that the acquiring of stock options by the Indian employee must not reduce the overall shareholding of the company in the foreign company, below what was present earlier.

Footnotes:

[1] Google CEO SundarPichai had been awarded stocks in the Company worth $100 million.

http://money.cnn.com/2016/02/09/investing/sundar-pichai-google-stock/

[2] Investment Banking: An Odyssey in High Finance, Pratap G Subramaniam, Tata McGraw-Hill Publishing Co. Page 367-368.

In this blog post, Shivali Wal, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the benefits for Indian companies intending to invest in Joint Ventures/Wholly Owned Subsidiaries in Netherlands.

What are Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS)?

A joint venture is a type of business agreement wherein two or more parties collectively agree upon blending and sharing their resources for acquiring a common interest for a stipulated time. A new joint venture (JV) can exist in the form of a new business project or activity.

In a joint venture (JV), the burden of profits, losses and costs are incurred by each of the participants of the venture. However, this venture, in form is independent of the participating members’ other interests in business, making it an entity of its own.

A wholly owned subsidiary (WOS) is a company whose common stock is completely owned by another company. In a regular situation, 51-99% of the subsidiaries are in the ownership of a parent company. The company holding the stocks is called a parent company, and the company whose stocks are being held is called a Host company. It is possible for a company to convert into a WOS through acquisition or through spin-off from the parent company. This form of an investment is widely popular in for overseas investments.

What is direct investment outside India?

Direct investment outside India are those investments which are either under the Approval Route (prior sanction from Reserve Bank of India is mandatory) or the Automatic route (no prior sanction from Reserve Bank of India is required), this can be done by way of making a contribution to the capital of the country or by purchasing existing shares of a foreign entity by various modes such as:

1. market purchase
2. private placement
3. through stock exchange as a long-term interest in the foreign entity (JV or WOS).

What is the Importance of overseas direct investments?

Globalization of trade and commerce is a process which requires multiple forces to pull together and lend a helping hand to each other. For the sake of growth of the Indian economy in conjunction with the rest of the world, it is essential that India gets involved in overseas investments.

Joint Ventures/Wholly Owned Subsidiaries abroad is thus a great option as it gives rise to economic co-operation between India and the host countries. There is an exchange of research and development, sharing of skills and technology, entry into a global market, the introduction of employment opportunities, efficient and adequate use of raw materials, heightened exports of goods and services from India into the host countries, earnings through the goods and services provided, etc.

Hence, it is safe to say that such an investment is a win-win situation for both the participating countries, with the pooling of the resources these countries are using their strengths and potentials in an efficient fashion. The concept of borrowing fills the space for any lack of expertise. These countries co-operate and empower each other with their strengths, and the end product is a healthier global economy.

What is ‘financial commitment’?

As defined by the Reserve Bank of India, “Financial commitment means a number of direct investments outside India by an Indian Party –

1. by way of contribution to equity shares or CCPS of the JV/WOS abroad
2. contribution to the JV/WOS as preference shares (for reporting purpose to be treated as a loan)
3. as loans to its the JV/WOS abroad
4. 100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS and
5. 50% of the amount of performance guarantee issued on behalf of its overseas JV/WOS
6. bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV / WOS of the Indian party, which is backed by a counter guarantee / collateral by the Indian party
7. Creation of charge (pledge/mortgage/hypothecation) on the movable/immovable property or other financial assets of the Indian party/its group companies.”

Criteria for an Indian company to make an investment in a JV/WOS abroad in the financial services sector

For an Indian company to invest in a JV/WOS abroad in the financial services sector, it has to be involved in the financial sector within the territory of India as well. Additionally, the following conditions must also be fulfilled.

1. It has made a net profit for the three years preceding the date of investment in a financial service sector.
2. For the sake of conducting financial services related activities, it must be regulated by an appropriate regulatory authority in India.
3. It has taken approval for carrying out such services from the appropriate authority in India and the country that the company intends to invest in.
4. It has satisfied the norms in regards to the capital capacity under the advice of  the regulatory authority  in India

Benefits involved with Joint Ventures

A joint venture acts as a catalyst for accelerating the growth of the business and the efficiency of the business, multiplying the profits that an ordinary business has to offer a joint venture which, if successful, can contribute in the following ways:

• Access to new markets and distribution networks:

Increasing the scope of the market not only increases the chances of sales and profits but provides an underlying safety and security for the consumption and use of the goods and services. It also promises better local market intelligence provided by indigenous joint venture partner.

• Increased capacity:

In a joint venture, the participating companies are willing to co-exist to increase their capacities as a joint effort. This, in turn, increases the scope of achievement.

• Sharing of risks and costs:

Since the participating parties share the capital outlay, the capital shock incurred at the time of loss or the cost of goods and services is a common interest to the parties. The burden of incurring costs and losses is hence distributed.

• Increased access:

Increased access to greater resources thereby increasing the scope of either party. Such access may include specialized staff, technology, finance, skills, raw materials, knowledge, etc.

• Reduced risk:

There is less government intervention if case of an alliance being formed with an indigenous and local business as opposed to how much it may be in case of the business existing solely in a foreign country.

• Closer control over production, marketing, and other business operations.

Joint ventures often save the trouble to look for outside investors. The partners in a JV have access to each other’s database, enabling the partners to use the same to market products of their own or offer one partner’s good and services to another’s customers. A joint venture is also very flexible in nature. For instance, joint venture can exist for a stipulated frame of time and work jointly only on a portion of a larger business thus setting a point of limitation on the both the parties

Risks involved with joint ventures

Partnering with another business could be complicated. A balanced relationship is a product of invested time and efforts by the parties. A misunderstanding arising between the parties is the biggest threat to the functionality of a joint venture; it can happen due to the following reasons:

• There is a lack of communication, or there is an ambiguous form of communication between the parties.
• The objectives of the joint venture were mistaken, and they differ from party to party
• There is a difference in the potential of the partners regarding the skills, expertise, capital, etc.
• There is a difference in the manner of operating and conducting business between the partners thus creating friction.
• Proper care and commitment had been lacking in the founding stage of the business, making the business weak at its foundation.

Advantages and disadvantages of a WOS

Advantages

The most relevant advantage of WOS is that the parent company can exercise control in operational and functional matters over its subsidiaries. The level of this control, however, fluctuates with a reduction in the intensity with the passing time.

For the management of the subsidiaries, the parent company may send over its executive which ensures a controlled and a standard level of work for the companies. The intellectual property is firmly secured, and thus there is a check over anti-competitive activities. This is since the parent can access the data and security protocols. Cost sharing is a feature because a parent and its subsidiaries could make use of same financial bodies, administrative bodies and jointly develop marketing programs.

Disadvantages

The establishment of a subsidiary can turn out to be an expensive affair. It is not doubtful that hiring of a local company can strengthen the scope of the parent company by ensuring many advantages such as market entry, the cost that the parent company must incur for the payment of its assets could be exorbitant, especially in case of a bidding war. Although the local companies may facilitate the relationship between the parent company and the local suppliers and purchasers, the establishment of a relationship between the two is time consuming.

The parent company may also find it difficult to hire local employees as the cultural barrier may come in the way. The burden of representation of a parent body for its subsidiaries could be a big liability especially in the matter involving a legal suit against the subsidiaries where in the parent company is vicariously liable.

Benefits of Indian company Investing in Netherlands

Strategic Location

Due to the strategic geographical position of Netherlands, it opens its bay to more than 95% of Europe, thus targeting a large consumer population.

Investing in Netherlands will thus enable India to expand its operations through Europe without having to incur major costs as it may have to in the case of investing in a country with poor networking. Owing to its great connectivity along the coast (port of Rotterdam being the second largest in Europe), Netherlands gives access to over 500 million consumers spread across in Western Europe.

International Business Climate

Roughly 50% of the Dutch GDP is generated from overseas and international business, being the host to more than 8,000 foreign companies. Netherlands is a pioneer in exercising a balanced business climate with the due amount of rigidity and flexibility. The connectivity of Netherlands is commendably proven by being the No.1 country on DHL’s Global Connectedness Index.

The Netherlands Foreign Investment Agency provides free and confidential assistance to potential investors to enable smooth and functional operations of a company that has just started or is expanding in the Netherlands.

Superior Infrastructure

Netherlands is ranked No.2 in the world for an overall performance of logistics, which directly reflects upon their convenient connectivity. With several seaports, well-located airports and an in-exhaustive system of roads and highways, it offers a competitive infrastructure that will serve as a strong foundation.

Highly Educated, Multilingual Workforce

With the majority of the Dutch population being highly educated, vocationally trained and skilful in their respective fields, the Dutch population is undoubtedly very versatile. Moreover, 90% of the population speaks fluent English, preventing any lingual barriers in the way of business. Thus, the Dutch population is a perfect blend of European work ethics and great communication skills, both being essentials in determining the efficiency of a workforce.

Effective government

The Netherlands is an efficient parliamentary democracy and it is given credit all over the world for its honesty and efficacy. As per the World Bank, the Netherlands is one of the most efficient worldwide.

The Netherlands foreign investment agency (NFIA)

The Netherland Foreign Investment Agency is available for assisting the companies that are potential investors. As an operational unit of the Ministry of Economic Affairs, it offers various guidelines, models, and instructions to help companies establish themselves in Netherlands or expand within Netherlands.

Conclusion

The nature of benefit arising out of an investment will greatly depend on the structure of the investment. Hence, as discussed above, a JV or WOS has its benefits and drawbacks. The best way to ensure the maximum efficiency of a business model would vary from situation to situation. Hence it is vital to understand every aspect of the business, including its nature, the costs involved, demanded expertise, scope, and need for expansion.

India, to a large extent, would benefit from making an overseas investment in Netherlands. In the past, India has had a series of tie-ups with the Dutch, Tata Consultancy finds its operations in Netherlands, to name a few.

With the sharing of resources of both the nations and combined strategies, both the Nations could benefit with one and other. On June, 2015 the concluding statement of the IMF on the investigations held by them on the economy of Netherlands has stated that the economy of Netherlands is constantly recovering and improving in an escalating fashion, Thus assuring that the Netherlands provides a safe environment for overseas investments, if proper care is observed along with the requisites of a successful business.

In this blog post, Amrita Dasgupta, a Final Year, B.A.LL.B. student at South Calcutta Law College, University of Calcutta and Diploma in Entrepreneurship Administration and Business Laws by NUJS describes the dissolution procedure for a private trust. 

Unlike a public trust or a private charitable trust, a private trust is defined under Section 3 of the Indian Trust Act, 1882. It is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.[1]

Private trust confers the right of ownership to the trustee for the benefit of a particular class of person or any specific person, and not for public at large. For example, ‘X’ transfers a certain property to ‘Y’ and tells that the profit arising out of it should be spent for ‘C’s education. Here, X is the author of the trust or settlor, Y is the trustee, C is the beneficiary, and the corpus or the subject matter transferred is the trust property. The beneficiary is the equitable owner after the property is transferred to the trustee.

Essentials of Private Trust/Conditions for Creation of Private Trust

• Private trust should be lawful, i.e., it should not be fraudulent, opposed to public policy, involves injury to another person or is opposed to the law. For example, if A bequeaths his property to B and tells that the profit arising out of the property should be given for C’s gambling business; the trust is void as it is unlawful.
• The trust property must be in existence and must be explicit.
• The author of the trust must not be in control of the trust property after conferring it to the trustee.
• The trustee must not use the trust property for his benefits, but for the specified beneficiary (ies).
• The intention of the author of the trust must be absolute and unambiguous, and it shall be properly conveyed to the trustee by will or by a written instrument or orally. In the case of immovable property, a non-testamentary instrument must be signed by the settlor to make it a valid trust and in the case of movable property; the transfer of the property should be made to create trust.
• The beneficiary must be specified properly.
• The purpose for which the trust is created must be certain.
• If a part of the trust is lawful and the other part is unlawful, it shall be considered unlawful as a whole.

If these conditions are not fulfilled, no trust is created.

Dissolution of Private Trust

A private trust created may either be inter vivos or ambulatory (revocable). A private trust may get dissolved or extinguished on certain grounds:

• When the purpose of the trust is complete[2]. For example, A conferred a property on B and told him to use the trust-property for C’s marriage. Then after C’s marriage, the purpose of the creation of trust ends, and thus the trust gets dissolved.
• If a certain period is mentioned in the trust instrument, then trust shall end after the expiry of such period.
• If the property is not used for the purpose for which trust is made. If A gives property to B for the purpose of C’s education, but the property is used as a capital for business, then the settlor may dissolve the trust.
• If the purpose becomes unlawful[3] after the introduction of a new legislation.
• If the trust property is destroyed[4], and
• When the trust is expressly revoked by the settlor[5].

The trust which has been created inter vivos cannot be revoked unless it was declared revocable in the trust instrument or will when the trust was created. No trust that is wholly constituted can be modified or revoked by the settlor. The conditions on the basis of which trust may be revoked are:

• If the beneficiaries are sui juris,e., legally competent to contract, then by their consent trust can be revoked.
• If it was expressly declared in the non-testamentary instrument or orally that the trust may be revoked by the author of the trust.
• In the case of the payment of debts, the author of the trust property may revoke the trust at any time before it is conveyed to the creditors.
• If the settlor feels that there will be no certainty of trust property, then he can revoke the trust. For example, the husband transferred property as a trust to his wife for her lifetime, and before her death, she will appoint two persons or their “heirs at law” as the beneficiaries of the trust. The settlor and his wife later revoked the trust as it will not constitute as a trust after their death, because what will remain as a trust property is not certain.[6] This is similar to Bhaidas v. Bai Gulam Case[7].
• The trust may be revoked if it was obtained by undue influence or any fraudulent activity.
• If the execution of the trust is under a fundamental mistake or misapprehension as to its effect[8].
• The author of the trust may also revoke illusory trusts[9].

In the case of an irrevocable trust, it cannot be done without the consent of the settlor and the beneficiary. If the settlor is not alive, then the consent of the beneficiary is needed, and it should be done by the intervention of the court.

In the case where the private trust is created through will, then the trust may be revocable or may be modified at any time during the lifetime of the author of the trust. After the death of the settlor, the trust cannot be revoked by anyone.

Conclusion

In Trustees of Gordhandas Govindram Family Trust, Bombay v. C.I.T., Bombay[10], the Supreme Court held that when the primary purpose of the settlor is to benefit his family and not the public as a whole, then it is considered to be a private trust and not a public trust or a charitable trust.

References:

• http://thismatter.com/money/wills-estates-trusts/trust-modification-termination.htm

[1] Section 3 of the Indian Trust Act

[2] Section 77(a)

[3] Section 77(b)

[4] Section 77(c)

[5] Section 78 and 79 of the Indian Trust Act

[6] Botzum v. Havana National Bank

[7] 1921

[8] Strauss v. Sutro, 1948; Bullock v. Lloyds Bank Ltd., 1955; Equity, Trusts and Specific Relief by B.M.Gandhi

[9] Equity, Trusts and Specific Relief by B.M. Gandhi

[10] 28^th November 1972; Hedge J., K.S. J.

In this blog post, Nabarun Roy, Superintendent of Central Excise and Customs, Export Refund Section, Central Excise, Kolkata – I Commissionerate, Kolkata under the Dept. of Revenue, Ministry of Finance, Government of India, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the legal validity of put options in different types of companies as well as the latest developments in the field. 

Introduction

The enforceability of put options has always been a matter of debate with conflicting views on this subject. Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as SCRA) under Section 20 originally sought for the prohibition of options in securities. In 1969 Government of India issued a notification in which under section 16 of the SCRA, all forward contracts in securities had been banned excepting ready forward transactions. Thereafter, the Government of India revoked the 1969 notification and delegated the powers to Reserve Bank of India under section 16 of the SCRA for regulating contracts in government securities, money market securities, gold-related securities, and derivatives based on these securities.

Further in June 1969, the Indian government issued a notification in which it was clearly mentioned that all contracts which include sale and purchase of securities other than spot delivery contracts or contracts settled through stock exchange are void. In 1995 Government of India omitted Section 20 of SCRA which states that options in securities shall be illegal and void. On such omission of section 20 of SCRA, Securities Exchange Board of India (SEBI) took a viewpoint that puts are illegal as these options do not qualify as valid derivative contracts and also as a valid spot delivery contract. Later in 2000, the 1969 notification was itself revoked, but it was mentioned that no person could enter into any contract for sale or purchase of securities other than spot delivery contract or contract for cash or hand delivery or special delivery. Thus again it raised the issue of enforceability of put options and in such circumstances SEBI took a view that such options did not qualify as spot delivery contracts under section 2(i) of SCRA and also did not qualify as legal and valid derivative contracts regarding Section 2(a) of SCRA.

Legal Provisions and Regulatory Bodies

In India, there are many legal provisions and regulatory bodies which are protecting the Indian securities market. Among these, the SEBI is responsible for regulation and growth of the securities market in India. RBI is responsible for the monetary policy which also includes foreign exchange regulation. The third body is Government of India, who administers the legal framework of put options. The main reason for opposing the put options given by the Reserve Bank of India (RBI) is that the use of these options is made by foreign investors in Indian market increasing the outflow of foreign exchange. Input option RBI has passed guidelines prohibiting the securities issued by the Special Purpose Vehicle (SPV) from having any put options provided either by the originator or by third parties. The RBI vide letter dated October 4, 2006, to the Indian Banks’ Association allowed third parties to provide put options. SEBI also did not consider put options as authenticated for a transaction of an asset as mentioned in the clause of the agreement made between private parties. Also in the past, SEBI asked contracting parties to delete these options from their agreements, including in the Cairn-Vedanta deal and more recently in the deal involving Diageo and UB Group’s United Spirits Ltd.

A put option provides a facility of exit from the investment to the investor from the company of investee before buyback or lock in period. Private equity investors make investments in all kinds of companies, including private firms and public limited companies whether such company is listed or unlisted. While the provisions of SCRA apply only to public limited companies whether such company is listed or unlisted but such provisions, do not apply to private limited companies. Therefore, any put option provided to a private equity investor for investment or for existing from such investment in a private limited company had no concern and would not be enforceable withstanding adverse views of SEBI regarding such options. Such kind of issue of enforceability of these options came up before the Hon’ble Bombay High Court in SEBI v MCX Stock Exchange case in which an order of SEBI was challenged. Three following issues were raised in this case,

1) Whether the buyback arrangements constituted a forward contract, which would be construed to be illegal;

(2) Whether SCRA was also applicable to unlisted public companies; and

(3) Whether the options violated section 18A of the SCRA as put options are not traded and settled through a stock exchange.

On the first issue, the court observed that a buyback would come into existence only at a future point in time on the date which is decided by the company to buy back the shares, in the eventuality of the party that is granted an option exercising it. Once such option is exercised, the contract would be concluded only by the spot delivery method or through another mode that is considered lawful. On the second issue, the court concurred that the SCRA would also be applied to unlisted public companies. Hon’ble Court refused to give its justification on the third issue by giving a reason that such issue is not cited on procedural grounds. SEBI filed an appeal against the order in the Hon’bleSupreme Court. In the apex court, the parties agreed to consent terms with SEBI stating that the view of the Hon’ble Bombay High Court is not binding on it. This diluted the decision of the Hon’ble Bombay High Court.

The SEBI has permitted Listed Companies to use put options as a clause in their contract agreement of sale and purchase of the share. It also provided rights to sell or purchase a security at a future date at a pre-determined price, in Merger and acquisition (M&A) transactions. SEBI has also allowed using other popular preferential clauses such as ‘right of first refusal, tag along and drag along. ‘A Right of first refusal in M&A is given to a body for the first right to purchase shares whenever they are offered for sale. Tag-along gives the right to a minority shareholder to sell its shares or not when a majority stakeholder shares are kept its stake for sells in the market, while drag-along clause forces a minority shareholder to its sell their shares with a majority shareholder. Many Experts also said that new norms approved by the law ministry would be beneficial for the both domestic and foreign corporate houses. The approved norms will also benefit institutional investors like Private Equity Investors and Foreign Institutional Investors (FIIs).The SEBI (Alternative Investment Funds) Regulations, 2012 which is a primary regulation to govern FIIs in India doesn’t provide any provision with regard to permissible modes of exits from portfolio companies.

Presently put options are valid subject to the following conditions:

1. No assured return or exit price can be guaranteed to the investor.
2. A minimum lock-in on foreigner’s shareholding of one year and more if a higher lock-in is prescribed under the FDI for certain sector, and
3. The new pricing guidelines of the RBI must be complied with.

The RBI pricing guidelines released in Jan’14 are as follows:

1. The price of equity shares must be capped by a specific method known as the return on the equity method.
2. Listed securities on which options are exercised will be transferred on the market price, and
3. The price of any convertible instruments must be arrived at in accordance with internationally accepted pricing methodology.

Though the put option is held as valid from the SEBI regulations perspective but the perspective of Companies Act, 1956 put options still suffered ambiguity. There was always a view from the companies Act perspective that the put option restricts the free transferability of shares in case of public companies and hence it should be considered as void. However, the Companies Act 2013 specifically permits enforcement of contracts for the transfer of securities privately amongst shareholders. Also, put options granted to foreigners could also lead to a violation of Foreign Exchange Management Act (FEMA). The FDI policy circular issued in 2011 of the government contained a clause stating that inbuilt options of investment transactions, which appeared to include put options are not permitted. However, the said clause was later withdrawn vide a corrigendum. Also, certain put options, which appear to promise a guaranteed rate of return, may be considered similar to debt and in which case, they will constitute External Commercial Borrowings (ECB) and will have to comply with the provisions of ECB regulations.

A major development has recently occurred from the law ministry in its proposal to hold put options valid. After such approval, the proposal will now go to the finance ministry, and if approved an amendment may be brought to the SEBI laws to hold that such put options are valid and enforceable. And this will also bring clarity to the enforcement of options and private equity investors will be able to enforce such options with complete certainty even in public companies irrespective of whether such company is listed or unlisted.