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Enforcement of Pre-Emption Rights made easier

Securities and Exchange Board of India ("SEBI") vide its notification dated 3rd October 2013 rescinded its earlier notification number S.O. 184 (E), dated the 1st March, 2000 thereby easing the earlier restrictions on Pre-Emption Rights, Put and Call Options. In the light of the new notification, the position now is as under:

  1. The status of the spot delivery contracts remains the same as before, i.e., they are permitted.

  2. Contracts for sale or purchase of securities or contracts in derivatives are permissible to the extent  permissible under the Securities Contracts (Regulation) Act, 1956  or the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made under such Acts and rules, regulations and bye-laws of a recognized stock exchange.

  3. Contracts for pre-emption including right of first refusal, or tag-along or drag along rights contained in shareholders agreements or articles of association of companies or other body corporate are permissible.

  4. Contracts in shareholders agreements or articles of association of companies or other body corporate, for purchase or sale of securities pursuant to exercise of an option contained therein to buy or sell the securities (such as call and put options), are permissible where-

    1. the title and ownership of the underlying securities is held continuously by the selling party to such contract for a minimum period of one year from the date of entering into the contract;

    2. the price or consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained therein, is in compliance with all the laws for the time being in force as applicable; and

    3. the contract is settled by way of actual delivery of the underlying securities:

  5. All the permissible contracts, however, must be Foreign Exchange Management Act, 1999 compliant.

  6. Also, this notification will be applicable prospectively and not retrospectively.

  7. Moreover, the explanation to the notification clarifies that the aforementioned contracts would be valid without regard to anything contained in section 18A of the Securities Contracts (Regulation) Act, 1956, which refers to exchange traded contracts. In other words, such pre-emption rights and option contracts would be permissible even though they are entered into on an over-the-counter (OTC) basis and not traded on the stock exchange.


Directly listing on Foreign Stock Exchanges permitted for unlisted Indian Companies

Vide notification dated 27th September 2013 issued by the Finance Ministry, the Government of India has allowed the Indian companies to directly list at the overseas markets without having to first or subsequently list on the Indian markets.

The approval to list abroad is subject to the following conditions:

  • Unlisted companies may be allowed to list abroad only on exchanges in IOSCO/FATF compliant jurisdictions or those jurisdictions with which SEBI has signed bilateral agreements;

  • The Companies shall file a copy of the return which they submit to the proposed exchange/regulators also to SEBI for the purpose of Prevention of Money Laundering Act (PMLA). They shall comply with SEBI’s disclosure requirements in addition to that of the primary exchange prior to the listing abroad;

  • While raising resources abroad, the listing company shall be fully compliant with the FDI Policy in force;

  • The capital raised abroad may be utilised for retiring outstanding overseas debt or for operations abroad including for acquisitions;

  • In case the funds raised are not utilised abroad as stipulated above, such companies shall remit the money back to India within 15 days and such money shall be parked only in AD category banks recognised by RBI.


New Tribunal under Companies Act 2013 to re-hear Company Law Board cases

As per the Companies Act, 2013 National Company Law Tribunal (“NCLT”) will now be adjudicating on all matters related to company law and therefore as soon as it is established it shall take up and re-hear all the matters reserved by the Company Law Board (“CLB”), so far. CLB will cease to exit once NCLT comes into existence and therefore, all the matters being heard by CLB will be transferred to NCLT.

To appeal before the National Company Law Appellate Tribunal (“NCLAT”), the decision needs to come from the NCLT. NCLAT on its own will not be entertaining such an appeal against the already decided order of CLB. Therefore, the NCLT will have to re-hear the matter and all such matters where the judgment has been reserved by CLB and provide an order based on the new hearing. In an event where a party is aggrieved by the order of the NCLT, it can file an appeal before the NCLAT. This is a technical requirement of the new legal system.


Institutional Trading Platform for SMEs

On 8th October 2013, Securities and Exchange Board of India ("SEBI") issued Securities and Exchange Board of India (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013 (the "Regulations"), which enables small and medium enterprises ("SMEs") to list on the stock exchanges without having to make an initial public offering (IPO). This is done to provide better capital building opportunities, more liquidity and easier exit options to SMEs and their investors such as Angel Investors, Venture Capital Funds, Private Equities, etc. However, this facility can only be availed by SMEs if they meet the following criteria:

  • The company, its promoter, group company or director does not appear in the wilful defaulters list of Reserve Bank of India (“RBI”) as maintained by Credit Information Bureau (India) Limited;

  • There is no winding up petition against the company that has been admitted by a competent court;

  • The company, group companies or subsidiaries have not been referred to SEBI for Industrial and Financial Reconstruction within a period of five years prior to the date of application for listing;

  • No regulatory action has been taken against the company, its promoter or director, by SEBI, RBI, Insurance Regulatory and Development Authority (“IRDA”) or Ministry of Corporate Affairs (“MCA”)within a period of five years prior to the date of application for listing;

  • The company has not completed a period of more than ten years after incorporation and its revenues have not exceeded one hundred crore rupees in any of the previous financial years;

  • The paid up capital of the company has not exceeded twenty five crore rupees in any of the previous financial years;

  • The company has at least one full year’s audited financial statements, for the immediately preceding financial year at the time of making listing application;

  • The company satisfies any one of the following criteria:

    • At least one alternative investment fund, venture capital fund or other category of investors/lenders approved by SEBI  has invested a minimum amount of fifty lakh rupees in equity shares of  the company, or

    • At least one angel investor who is a member of an association/group of angel investors which fulfils the criteria laid down by the recognised stock exchange, has invested a minimum amount of fifty lakh rupees in the equity shares of the company through such association/group, or

    • The company has received finance from a scheduled bank for its project financing or working capital requirements and a period of three years has elapsed from the date of such financing and the funds so received have been fully utilized, or

    • A registered merchant banker has exercised due diligence and has invested not less than fifty lakh rupees in equity shares of the company which shall be locked in for a period of three years from the date of listing, or

    • A qualified institutional buyer has invested not less than fifty lakh rupees in the equity shares of the company which shall be locked in for a period of three years from the date of listing, or
    • A specialized international multilateral agency or domestic agency or a public financial institution as defined under section 4A of the Companies Act, 1956 has invested in the equity capital of the company.

Apart from the above eligibility criteria there is a provision of minimum promoter lock-in of 20% shares for a 3-year period on listing.

As far as the disclosure requirements go, the concerned SME is required to prepare an information document containing prescribed disclosures, which would then be hosted on the website of the concerned stock exchange. Thus, the disclosure requirements are much relaxed than compared to an IPO. However, the said information document is subject to the usual liability provisions of the Companies Act and relevant SEBI regulations in case of any misstatement.

The concerned SME may also exit from the institutional trading platform at any time after passing a special resolution whereby 90% of its shareholders and a majority of non-promoter shareholders have voted in favour of an exit. Also, it may be required to exit from the institutional trading platform under certain circumstances such as upon the expiry of a 10-year period from listing or when it ceases to be an SME.


Reviewed Trade Credits for Import into India

Reserve Bank of India ("RBI") on 24th September 2013 notified the revised Trade Credits for Import into India. It now stands as follows:

  1. Companies in all sectors will be allowed to avail of trade credit not exceeding USD 20 million up to a maximum period of five years for import of capital goods as classified by Director General of Foreign Trade (DGFT). Also, the ab-initio contract period is now relaxed from 15 (fifteen) months to 6 (six) months, for all trade credits.

  2. AD Category - I banks are, however, not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years.

  3. All other aspects of Trade Credit policy will remain unchanged and should be complied with. The amended Trade Credit policy will come into force with immediate effect and is subject to review based on the experience gained in this regard.



This newsletter is compiled and prepared from the information available in public domain. Nothing in this newsletter should be deemed as legal advice and India Juris shall have no liability, whatsoever, with respect to the content published herein. India Juris is licensed to practice in India only. In other regions, whenever required, it closely works with the local law firms and attorneys.


16 October 2013
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