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Authored by Padma Akila

Recent growth in the startup sector, with the local modern ventures going overseas, the government through the Department for Promotion of Industry and Internal Trade (DPIIT), had made startup friendly amendments to the various intellectual property rules. In our previous articles we had summarized the amendments featuring provisions and rules for startups under the Draft Patents (Amendment) Rules, 2021 and the Designs (Amendment) Rules, 2021 in our intellectual property blog. SEBI has followed these footsteps to approve the certain startup friendly decisions in its board meeting dated 25thMarch, with respect to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and SEBI (Alternative Investment Funds) Regulations, 2012

Note: To address the availability of capital from the public market for startups and for their listing, SEBI had introduced the Innovators Growth Platform (IGP).

Approvals under   SEBI (Issue   of   Capital   and   Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”):

1. Eligibility: At present eligibility requirement under IGP is for an issuer to have 25% of pre-issue capital held by eligible investors for two years period, is reduced to one year as per rule 283 of ICDR Regulations.

2. IGP Investors: The term ‘Accredited Investor’ for the purpose of IGP under rule 283 is renamed as ‘Innovators Growth Platform Investors’.

3. Pre-issue shareholding percentage: At present, pre-issue shareholding of such investors for meeting eligibility, is considered for only 10%, (as given in the explanation to rule 283) which is now increased and shall be considered for the entire 25% required for meeting eligibility norms.

4. Discretionary allotment: In terms of present IGP provisions, Issuer Company is not permitted to make discretionary allotment. Post amendment, Issuer Company can allocate up to 60% of the issue size on a discretionary basis, prior to issue opening, to eligible investors with a lock in of 30 days on such shares.

5. Superior Voting Rights: Companies with Superior Voting Rights (SR) equity shares for promoters/ founders shall be allowed to do listing. This is in line with the mainboard IPO.

6. Triggering open offer: Stipulation for triggering open offer requirement for companies listed under IGP has been increased from 25% to 49% of the total equity. However, an open offer will still be triggered if there is a direct or an indirect change in control.

Authored by Padma Akila

In our earlier article we had summarised the decision of the AO in the WhatsApp leak case wherein the financial results of companies like Bata India Limited, Asian Paints Limited, Mindtree Limited & Wipro Limited among others were forwarded through WhatsApp by certain individuals (“Noticees/Appellants”) employed in stock broking companies, who according to SEBI violated provisions of the SEBI (Prohibition of Insider Trading) Regulation, 2015 (“PIT Regulations, 2015”), and construed the information circulated as UPSI. The Securities Appellate Tribunal (SAT) by an Order dated 22nd March 2021 set aside the AO’s order in this matter. In this article we tabulate the key points from decision of the Securities Appellate Tribunal (SAT) following appeal on the same case.

S.no Contention of the Noticees Decision of the AO Decision of SAT and Rationale behind the same
1.       The information circulated through WhatsApp does not qualify to be UPSI, as there was no connection between the Noticees and the Companies or its promoters/management. The leaked information, was the same as the announcements subsequently made by the companies to the stock exchanges, and the inability to trace the source of the leaked information within the companies is irrelevant in the determination of such information being UPSI or otherwise SAT overturned the decision of the AO for the reason that despite great efforts by SEBI to find out the source of information or to find out leakage of the information from the respective companies, no information could be recovered. Further, time and again the AO himself had expressed the inability in this regard in his order.
2.       The Noticees had circulated the information to other individuals based on the estimates projected by stock broking companies which is available in the public domain and thus the circulated information fails to be qualified as UPSI. There was no evidence implying that the information circulated was based on market research which was in turn based on generally available information, and such market research was accessible to the public on a non-discriminatory basis and hence the leaked information qualified to be UPSI. SAT rejected the reasoning of the AO and held that the AO failed to take into consideration that there were numerous other messages of similar nature received and forwarded by the Appellant which did not at all match with the published information.

The information can be branded as an UPSI only when the person getting the information had a knowledge that it was UPSI. In this regard, SAT relied on its own judgement in the case of Samir Arora vs. SEBI (2004) SCC Online SAT 90 wherein it had rejected the arguments of SEBI that there is no need for linkage between the potential source of the UPSI and the person allegedly in possession of the alleged UPSI.

3.       The Noticees had not violated the provisions of Sections [1]12A(d) & [2]12A(e) of the SEBI Act, 1992 and Regulation [3]3 (1) of SEBI (PIT) Regulations, 2015 The Noticees had violated the provisions mentioned in the previous column SEBI failed to prove any preponderance of probabilities that the impugned messages were UPSI, that the Appellants knew that it was UPSI and with the said knowledge they or any of them had passed the said information to other parties thereby concluding that the Appellants had not violated the provisions of PIT Regulations, 2015 as alleged by SEBI

[1] Regulation 12A(d) – No person shall directly or indirectly engage in insider trading

[2] Regulation 12A(e) – No person shall directly or indirectly deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder.

[3] Regulation 3(1) – No insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.

Authored by Aishwarya Lakshmi V.M

SEBI at its action-packed Board Meeting held on 25th March 2021 approved several changes to the securities law regime in India. One of the crucial regulations within the domain of SEBI is the SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015 [hereinafter, LODR]. With a view to maintain consistency throughout LODR, to harmonize it with the Companies Act, 2013 and to strengthen corporate governance practices in addition to easing compliance burden on listed entities, it approved several amendments to LODR. Some of the key amendments are discussed hereunder.

I. Formulation of Dividend Distribution Policy:

Existing Law: As per Regulation 43A of the existing LODR Regulations, the top 500 listed entities based on market capitalisation are required to formulate a dividend distribution policy inter alia including details about the circumstances when the shareholders may or may not expect dividend, financial parameters, internal and external factors that may be considered at the time of declaring dividend etc. and disclose the same in their annual report and website. The earlier regulation also permitted compliance with this provision on a voluntary basis.

Approved Amendment: This requirement under Regulation 43A is proposed to be extended to the top 1000 listed entities based on market capitalisation.

II. Disclosure of Financial Results:

Existing Law: A conjoint reading of Regulation 30, 33 and Clause 4 of Para A of Part A of Schedule III stipulates that financial results of a listed entity ought to be disclosed to the Stock Exchange within 30 minutes from the closure of the meeting, where such financial results were considered.

Approved Amendment: Considering a scenario that a single Board Meeting is held on more than one day, SEBI has approved the amendment wherein the disclosure requirement with regard to financial results shall be complied with by the listed entity within 30 minutes of end of the board meeting for the day on which the financial results are considered.

III. Continuous Applicability:

Existing Law: The applicability of various provisions of LODR is based on criteria including market capitalization, paid up capital and net-worth thresholds. These are monetary figures that keep varying year-on-year.

Approved Amendment: SEBI has approved an amendment wherein those provisions of LODR which become applicable to a listed entity based on the threshold of market capitalization shall continue to be applicable even if the entity falls below the prescribed threshold. Some provisions that become attracted based on market capitalization include –

a. Formulation of dividend distribution policy.

b. One-way live webcast of proceedings of AGM.

c. Composition of the Board, including Independent Woman Director and Non-executive Chairperson.

d. Quorum for Board Meetings.

e. Risk Management Committee.

Also SEBI has approved an amendment that wherever the provisions become applicable based on Paid up share capital and net-worth thresholds, such provisions shall continue to apply unless the paid-up capital or net-worth falls and continues to remain below the threshold for a consecutive period of 3 years.

IV. Name Change for Listed Entity:

Existing Law: Regulation 45 of the LODR elaborates a detailed procedure where the approval of Stock Exchange has to be obtained for change of name of the listed entity.

Approved Amendment: The requirement to obtain approval of the stock exchange for change of name is dispensed with.

V. Streamlining timelines for submission of periodic reports:

Existing Law: As per Regulation 27(2) of LODR, the report on Corporate Governance has to be filed within 15 days from the end of each quarter, while as per Regulation 13(3) and 31(1), the statement on investor complaints and the shareholding pattern ought to be filed within 21 days from the end of each quarter.

Approved Amendment: SEBI has approved an amendment such that all the aforementioned periodic disclosures / reporting shall be made within 21 days from the end of each quarter.

VI. Frequency of 40(9) Certificate:

Existing Law: As per Regulation 40(9), the listed entity shall ensure that the share transfer agent or the in-house share transfer facility provider, shall produce a certificate from a practicing company secretary within one month of the end of each half of a financial year, certifying that all certificates have been issued within thirty days of the date of lodgment for transfer, sub-division, consolidation, renewal, exchange or endorsement of calls/allotment monies.

Approved Amendment: The Board has approved an amendment wherein this half yearly compliance has now been made as an annual compliance.

VII. Dispensing certain newspaper advertisements:

Existing Law: As per Regulation 47 (1) of LODR, notice of meeting where financial results are to be discussed and quarterly statement on deviation or variation of use of fund ought to be advertised in one English newspaper and one regional language newspaper.

Approved Amendment: This requirement to advertise the notice of the meeting and quarterly statement on deviation has been dispensed with.

Authored by Aishwarya Lakshmi V.M

In our earlier article on the consultation paper circulated by SEBI for re-classification of promoters, we had outlined the changes that SEBI had proposed in it. At its action-packed Board Meeting held on 25th March 2021, the mater relating to this was tabled, and SEBI has approved certain amendments based on the said consultation paper, to Regulation 31A of SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015.

We update the changes that have been approved and also mark those that were proposed in the consultation paper, for which no changes have been made by SEBI.

S. No. Relevant Requirement Existing Proposed Rationale for proposing the change Change Approved or not
1 Condition pertaining to minimum threshold of voting rights – by promoters seeking reclassification and those related to promoters seeking reclassification. 10% 15% Persons who may have been promoters but are no longer in day-to-day control having shareholding of less than 15% may “opt-out” from being classified as “promoters”, without having to reduce their shareholding. No decision taken on this proposal that was part of the consultation paper.
2 Minimum time period between board meeting and general meeting 3 Months 1 Month The minimum time gap of three months is too long increasing the total time taken in the process. Change proposed in the consultation paper has been approved.
3 Reclassification pursuant to an order / direction of Government or regulator Applicable to Resolution Plan under S.31 of the IBC, 2016. Expanding the scope to order / direction of Government / regulator Since it’s a natural consequence to undergo reclassification pursuant to an order / direction of Government or regulator the proposed limit eases the process. Change proposed in the consultation paper has been approved.
4 Reclassification of existing promoter pursuant to open offer under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2015 [SAST Regulations] No existing provision 1.

The intent of the existing promoter(s) to re-classify is disclosed in the letter of offer

 

 

2. Reclassification if the promoter is non-traceable or non-cooperative and the Company has taken efforts to contact the promoter.

1. The requirement of promoter making an application for reclassification is a mere procedural formality since the fact is disclosed in the Letter of Offer and the information is already present in the public domain.

 

2. The non-traceability and non-cooperation of promoters results in the continued classification of the concerned as promoter despite losing actual control of the company.

The first proposal in the consultation paper relating to re-classification when the intent of the existing promoter is disclosed in the letter of offer, has been approved, if (a) the outgoing promoter is not in control; and (b) if he is not represented on the board.

 

No decision has been taken relating to the other suggestion that was proposed, relating re-classification in case of non-traceability of promoter.

5 Time period to place the reclassification request before the board of directors No existing provision Within one month of receiving the request from the promoter / promoter group. There are cases where the request is not placed before the Board thus ceasing the process in its initial phase itself. No decision taken on this proposal that was part of the consultation paper.
6 Disclosure of Names of Promote Group Entities in the shareholding pattern. No existing provision All entities falling under promoter / promoter group shall be disclosed even in case of “NIL” Shareholding.

 

 

 

Listed entities to obtain quarterly declaration from their promoters specifying the names of entities / persons that form part of the ‘promoter group’.

Though Regulation 31 clearly prescribes the disclosure of ‘all entities’ there are cases where listed companies have not been disclosing names of persons in the promoter / promoter group with “Nil” Shareholding. No decision taken on this proposal that was part of the consultation paper.

Authored by Praveen Pandian

Earlier in December 2020, SEBI had issued a consultation paper regarding Risk Management Committee which we had summarized here. SEBI at its Board Meeting dated 25th March 2021 approved the following amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 in relation to applicability, constitution and role of the Risk Management Committee of listed entities.

Applicable Regulation: Regulation 21 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 deals with Risk Management Committee.

Subject Existing Law Approved Amendment
Applicability Top 500 listed entities based on market capitalization. Top 1000 listed entities based on market capitalization.
Composition Majority members from the Board of directors. Minimum of three members where majority of them being member of the board of directors, including at least one independent director.
Quorum No specific provisions for quorum were prescribed. Two members or one third of the members of the committee, whichever is higher, with at least one director in attendance.
Role As defined and delegated by the Board including reviewing risk management plan. In addition to the existing role the Committee is also tasked with formulation of risk management policy, monitoring and reviewing its implementation; review of the appointment, removal and terms of remuneration of Chief Risk officer (if any).

Authored by Aishwarya Lakshmi V.M

Background: As per Regulation 24A of SEBI (LODR) Regulations, 2015, every listed entity and its material unlisted subsidiaries shall undertake secretarial audit and annex with its annual report, a secretarial audit report given by a company secretary in practice. As per SEBI Circular No.CIR/CFD/CMD1/27/2019 dated February 08th 2019, the annual secretarial compliance report shall be in the format as specified in Annex-A to the circular and shall be submitted to the stock exchange where the entity is listed within 60 days from the end of the financial year. This filing with the stock exchange has been only in PDF format, till date.

Update: As per the Notice from BSE dated 31st March 2021, dated Notice No.20210331-2, it has been made mandatory to file the Annual Secretarial Compliance Report in BOTH PDF AND XBRL MODE. The timelines shall be the same.

Authored by Adit Bhuva

The Securities and Exchange Board of India (“SEBI”) has at its board meeting held on 25th March 2021, decided to introduce new requirements for sustainability reporting by listed companies, to be called the Business Responsibility and Sustainability Report (“BRSR”), replacing the existing Business Responsibility Report (“BRR”).

The BRSR shall be applicable to top 1000 listed entities (by market capitalisation), for reporting on a voluntary basis for FY 2021-22 and on a mandatory basis from FY 2022-23.

Brief background on the introduction of BRSR:

1. SEBI had introduced non-financial reporting in the form of BRR as part of annual reports for the top 100 listed companies in the year 2012.

2. Applicability of BRR extended to top 500 listed companies in the year 2016

3. Applicability of BRR extended to top 1000 listed companies from the financial year 2019-20.

4. The existing format of BRR is based on ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business’ (“NVGs”) issued by the Ministry of Corporate Affairs (“MCA”), Government of India.

5. In keeping with global developments and domestic changes, these NVGs were revised and released as the National Guidelines on Responsible Business Conduct (“NGRBCs”) in March 2019.

6. A committee was formed by MCA to align the existing BRR formats in line with the NGRBCs and provide new formats (“Committee”).

7. The Committee had prescribed a revised format in its report dated 8th May 2020 and to reflect the intent and scope of reporting requirement, the Committee recommended that the BRR be called the Business Responsibility and Sustainability Report (“BRSR”).

8. SEBI on 18th August 2020 issues a consultation paper, inviting public comments on the format of BRSR by 18th September 2020.

9. On 25th March 2021, SEBI decides to make the BRSR applicable to top 1000 listed entities (by market capitalisation), for reporting on a voluntary basis for FY 2021-22 and on a mandatory basis from FY 2022-23.

Status on the notification of the Format of BRSR by SEBI:

It is to be noted that SEBI is yet to notify the format of BRSR. However an overview on the format of BRSR as suggested by the Committee is provided below:

(a) Principles under which the BRSR to be done:

The non-financial disclosures which are from an Environmental, Social and Governance (“ESG”) perspective, are sought under 9 principles for measuring the performance of the businesses in the area of business responsibility and sustainability:

(i) Businesses should conduct and govern themselves with integrity in a manner that is ethical, transparent and accountable

(ii) Business should provide goods and services in a manner that is sustainable and safe

(iii) Businesses should respect and promote the well-being of all employees, including those in their value chains.

(iv) Business should respect the interest of and be responsive to all its stakeholders

(v) Businesses should respect and promote human rights

(vi) Business should respect and make efforts to protect and restore the environment

(vii) Business, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent.

(viii) Businesses should promote inclusive growth and equitable development

(ix) Businesses should engage with and provide value to their consumers in a responsible manner

(b) The BRSR lays considerable emphasis on quantifiable metrics, which allows for easy measurement and comparability across companies, sectors and time periods.

(c) Further, the disclosures on environmental and social (employees, consumers and communities) related issues of a listed entity have been significantly enhanced and made more granular.

(d) The disclosures under the aforesaid principles are categorised under

(i) Essential (mandatory) indicators; and

(ii) Leadership (voluntary) indicators.

(e) The BRSR format contains a section on management and process disclosures, which will help businesses demonstrate the structures, policies and process put in place towards adopting the aforestated principles, wherein the businesses are required to disclose the policies adopted by them to cover each of the above stated principles and review of the implementation of such policies.

Authored by Padma Akila

Registrations of trademarks as a series have recently gathered momentum and are fairly new to the trademark game. Series trademarks are believed to have potential to offer next level of protection to powerful Industries and brands.

A trademark owner may use a variety of marks with a common prefix, suffix or syllable or for instance in case of a beverage brand with various flavours of the drink, the trademark may remain constant with only few variables such as that of the specific flavour name of the drink or the colour and theme of the representation etc. In this case the overall impression of the trademark on the consumer does not change and remains constant.

The mark can prove its strength by establishing that it has a family of marks, all of which have a common prefix, suffix or syllable. Series of trademarks basically means multiple variations of a trademark that fall under one single family of marks. Section 15 of the Trademarks Act, 1999 deals with trademark as a series which states that if the proprietor of a trademark claims to be entitled to the exclusive use of any part thereof separately, he can apply to register the whole and the part as separate trademarks. Series marks help form an association among the products under a single range or brand as they fall within the same family of marks and distinguish them from the other range of products. One must know that trademarks as a series only differ either in colour, quality, flavour in case of food stuff, location, etc.

These series of marks can be registered within one application whereby certain characters that form part of the trademark can be granted additional protection, thus acquiring distinctiveness and exclusive right over them. Under a trademark series, any variation in the non-distinctive features of each mark must have their visual, oral and conceptual identity largely the same and any variation in those material particulars should not affect the visual and conceptual identity of each of the mark in the series. Scrutiny falls on that part of the mark that is being changed each time. If the part that is being altered is descriptive or non-distinctive, and does not substantially affect the identity of the trademark, the series may be accepted. The alternative to applying for a series trademark is to apply for multiple trademarks application for each mark but it may not offer a broader protection.

Some of the examples of series trademarks include Uber’s, UberEats, UberPool and UberX and McDonald’s family of trademarks including Egg McMuffin, McChicken, McDonuts, McPizza, McCafe, Chicken McNuggets, McDouble Chicken McBites etc.

Authored by Padma Akila

In a recent interim order passed on the 9th March 2021, in the matter of Sanjay Soya Private Limited V Narayani Trading Company, the Hon’ble High Court of Bombay held that registration of a copyright is not mandatory for the purposes of filing an infringement action under the Copyright Act, 1957.

If a brand owner’s logo has original, creative and artistic characteristics, it is advisable for such brand owners to additionally seek a copyright protection over the same under the provisions of the Copyright Act, 1957 as an artistic work apart from seeking a trademark registration over the same under the Trademarks Act, 1999. This additional protection under the Copyright Act, 1957 also entitles such brand owners to enforce their proprietary rights and seek remedies available under the Copyright Act, 1957 in case of any infringement by third parties. Registration of logos can greatly benefit brand owners and have high evidentiary value in both, trademark and copyright enforcement and infringement prosecutions. Therefore, an ideal plan of action for a brand owner, would be to seek protection of their original and unique logos under both the laws. While it is compulsory for a trademark to be registered for filing an infringement action under the Trademarks Act, 1999, registration of an artistic work (logo) as a copyright is not mandatory for the same purpose under the Copyright Act, 1957, and this was confirmed by the Hon’ble High Court of Bombay in the aforesaid matter. Hon’ble Justice GS Patel while delivering the judgment emphasized on the literal interpretation of Section 51 of the Copyright Act (Section 51 defines infringement of copyright) which read with Section 45 (1) (which says that the owner of copyright may apply for registration) establishes that copyright infringement lies in the unlicensed use of original works, in which the author has a range of exclusive rights and that registration is not a prerequisite. The Court also declared that two of the earlier single bench decisions of the Bombay High Court in Hiraj Dharamdas Dewani v. Sonal Info Systems Pvt Ltd & Ors., 2012 (3) Mh LJ 888, and Gulfam Exporters & Ors. v. Sayed Hamid & Ors. (unreported) have not followed the correct interpretations of the provisions under the Copyright Act, 1957 nor have they considered authoritative precedents that had interpreted the law on the subject matter rightly.

In this regard, it is stated the Indian Courts have on various occasions held time and again that a registration under the Copyright Act, 1957 merely raises a prima facie evidence of ownership of the registrant in respect of the particulars entered in the Register of Copyright and the presumption is however not conclusive. It is pertinent to note that a Copyright subsists as soon as the work is created and given a material form even if it is not registered.

Authored by Praveen Pandian

Brief Background on Annual Return under Companies Act, 2013:

An annual return is a yearly return to be filed by all the companies with the Registrar of Companies, certifying the compliances with the provisions of companies act and in which the companies are required to make detailed disclosures such as details of shareholders and directors and the changes in them during the financial year, the dates of Board and general meetings and attendance of directors and shareholders and various other disclosures.

This annual return is required to be filed with the Registrar of Companies in e-Form MGT-7, within a period of sixty days from the conclusion of annual general meeting or sixty days from which such annual general meeting should have been held.

Amendments with respect to annual return:

The Ministry of Corporate Affairs on 5th March 2021, has notified certain amendments (“Amendment”) in provisions relating to annual return the brief of which is provided in the below table:

S. No. Particulars Prior to Amendment Post Amendment

 

1 Requirement of filing annual return in form MGT-7 All companies including Small companies and one person company were required to file annual return in form MGT-7 Small companies and one person company are required to file annual return in MGT- 7A

 

Other Companies will continue to file annual return in form MGT-7

2 Extract of annual return on Board’s report An extract of annual return in form MGT-9 was required to be provided in Board’s report, in case of Companies not having a website. This requirement is done away with
3 Disclosure on indebtedness of the Company All companies were required to disclose the details of indebtedness in form MGT-7 This requirement is done away with.

Effective date:

The changes prescribed above are to be incorporated while filing annual return in Form MGT-7 or MGT-7A as the case may be for the financial year 2020-21 onwards.

Reference:

  1. http://www.mca.gov.in/Ministry/pdf/CommencementNotification_11032021.pdf
  2. http://www.mca.gov.in/Ministry/pdf/CompaniesMgmtAdminAmndtRules_11032021.pdf

Authored by Padma Akila

Registrations of trademarks as a series have recently gathered momentum and are fairly new to the trademark game. Series trademarks are believed to have potential to offer next level of protection to powerful Industries and brands.

A trademark owner may use a variety of marks with a common prefix, suffix or syllable or for instance in case of a beverage brand with various flavours of the drink, the trademark may remain constant with only few variables such as that of the specific flavour name of the drink or the colour and theme of the representation etc. In this case the overall impression of the trademark on the consumer does not change and remains constant.

The mark can prove its strength by establishing that it has a family of marks, all of which have a common prefix, suffix or syllable. Series of trademarks basically means multiple variations of a trademark that fall under one single family of marks. Section 15 of the Trademarks Act, 1999 deals with trademark as a series which states that if the proprietor of a trademark claims to be entitled to the exclusive use of any part thereof separately, he can apply to register the whole and the part as separate trademarks. Series marks help form an association among the products under a single range or brand as they fall within the same family of marks and distinguish them from the other range of products. One must know that trademarks as a series only differ either in colour, quality, flavour in case of food stuff, location, etc.

These series of marks can be registered within one application whereby certain characters that form part of the trademark can be granted additional protection, thus acquiring distinctiveness and exclusive right over them. Under a trademark series, any variation in the non-distinctive features of each mark must have their visual, oral and conceptual identity largely the same and any variation in those material particulars should not affect the visual and conceptual identity of each of the mark in the series. Scrutiny falls on that part of the mark that is being changed each time. If the part that is being altered is descriptive or non-distinctive, and does not substantially affect the identity of the trademark, the series may be accepted. The alternative to applying for a series trademark is to apply for multiple trademarks application for each mark but it may not offer a broader protection.

Some of the examples of series trademarks include Uber’s, UberEats, UberPool and UberX and McDonald’s family of trademarks including Egg McMuffin, McChicken, McDonuts, McPizza, McCafe, Chicken McNuggets, McDouble Chicken McBites etc.

Authored by Aishwarya Lakshmi VM

In the matter of: Thomas Cook (India) Limited

Date of the order: 11.02.2021.

Provisions involved

(a) Regulation 28 of SEBI (Buy Back of Securities) Regulations, 2018.[i]

(b) Regulation 24(i)(d) of SEBI (Buy Back of Securities) Regulations, 2018.[ii]

(c) Regulation 5(ii) of SEBI (Buy Back of Securities) Regulations, 2018.[iii]

(d) Sections 68, 69 and 70 of the Companies Act, 2013.

Facts of the case

1. On February 26, 2020, the Board of Directors of TCIL had approved the proposal for a buy–back of up-to 2,60,86,965 equity shares (which was 6.90% of paid-up share capital as on 31.12.2019) of the face value of ₹1 each at a price of ₹57.50 per equity share.

2. On March 06, 2020 vide a letter, TCIL filed a Draft Letter of Offer (DLOF) for buy-back with SEBI.

3. Owing to the onset of Covid-19 pandemic, TCIL corresponded with SEBI seeking deferral of the buyback to the quarter ended June 2020.

4. On September 28, 2020, the request for deferral was withdrawn and an application was made seeking withdrawal of the buy-back.

Applicant’s Submissions

1. The Company being in the tourism and travel business industry was severely affected by the onset of Covid-19 pandemic in March 2020.

2. The consolidated and standalone financial figures as on June 30, 2019 and June 30, 2020 were as follows:

  As on 30.06.2019 (in INR) As on 30.06.2020 (in INR)
  Standalone Consolidated Standalone Consolidated
Earnings Before Tax 548 million 399 million (27 million) (1361 million)

The Company also had a severe cash burn of INR 1460 million during the 3-month period from March 2020 to June 2020. The fixed costs were an aggregate of INR 220 million per month.

3. As on the date of making the application the company did not have any surplus and in fact, they wanted to raise more funds either by way of equity or debt. Hence to protect the interest of the investors and to ensure going concern nature of the business, the Company made an application for withdrawal.

Issue:

Whether the mandatory obligations/compliances flowing from the statute/regulations, can be dispensed with in unforeseen situations such as the Covid–19 pandemic?

Decision of the WTM

1. As per the provisions of the Companies Act, 2013 and the Buyback Regulations, 2018 an offer for buyback has to be completed within one year from the date of passing the resolution. As per Regulation 24(i)(d) of the Buyback Regulations, 2018 the company shall not withdraw letter of offer after filing the draft with SEBI.

2. Under Regulation 28(i) of the Buy–back Regulations, 2018, the Board may relax the strict enforcement of any requirement of the Buy-back Regulations in the  interest  of  investors  and  the  securities market, if the Board is satisfied that inter alia the requirement may cause undue hardship to investors.

3. It is an established principle that law cannot compel the performance of impossible events, evidenced through the Latin maxim “lex non cogit ad impossibilia”/”impotentia excusat legem”.

4. The fundamental tests involved to ensure the applicability of the maxim are as follows:

a) Whether the event was caused beyond the control of the person?

b) Whether the event occurred without the fault of any person?

c) Whether the event resulted in impossibility?

5. In the Order, SEBI observed that all the three conditions were satisfied, and constituted a valid ground for seeking relaxation from ensuring compliance with the Buyback Regulations, and that continuing with the buyback during this substantial financial deterioration will only result in disturbing the interest of the investors.

6. Considering the uniqueness of the situation and on the subjective conditions that the submissions were true and fair, and that there were no fraudulent unfair trade practices in the matter, SEBI permitted the withdrawal of buyback in the interest of the investors and the securities market and also expressly stated in its order that this does not intend to serve as a precedent.

Regulatory issues that are to be noted from this decision of WTM
1.     The law does not compel the performance of impossibilities which are caused due to events beyond the control of the person, without any fault of his own.

2.     SEBI has rightly exercised the power given to it to relax strict compliance with the provisions of the Regulations.

[i] Regulation 28(i): The Board  may,  in  the  interest  of  investors  and  the  securities market,   relax   the   strict   enforcement   of   any   requirement   of   these regulations except the provisions incorporated from the Companies Act, if the Board is satisfied that:

(a)the requirement is procedural in nature; or

(b)the requirement may cause undue hardship to investors.

[ii] Regulation 24(i)(d): the company  shall  not  withdraw  the  offer  to  buy-back  after  the draft   letter   of   offer   is   filed   with   the   Board   or   public announcement of the offer to buy-back is made.

[iii] Regulation 5(ii): Every buy-back shall be completed within a period of one year from the date of  passing  of  the  special  resolution  at  general  meeting,  or  the resolution  passed  by the board  of  directors of  the  company,  as  the case may be.

Authored by Praveen Pandian

Applicant: KCP Limited.

Date of the Guidance: 08.02.2021.

Factual Background:

1. KCP Limited (hereinafter referred to as Applicant) is a Public Limited Company, whose equity shares are listed on National Stock Exchange and permitted to trade on BSE Ltd.

2. Jeypore Sugar Co Limited (hereinafter referred to as JSCL) (now in liquidation) was managed by the relatives of the promoters of the Applicant and were classified as belonging to the Promoter Group. JSCL has 2,78,370 (0.22%) equity shares in the Applicant Company as investment

3. JSCL went into liquidation and the Official Liquidator of JSCL in the process of realising the investments has made a proposal for sale of shares of the applicant held by JSCL and Dr. V. L. Indira Dutt, Promoter and Chairperson-cum-Managing Director (hereinafter CMD) of the Applicant Company, has agreed to purchase the shares at market price.

4. KCPL has closed the trading window from 1st January 2021 till 48 hours on declaration of financial result for the quarter ended 31st December 2020.

Guidance sought:

1. Whether the CMD of the Applicant company can acquire 2,78,370 shares from the Liquidator of JSCL at market price, during the closure of trading window as off-market sale, as JSCL is also a promoter group of the Applicant and both are considered as insiders and both of them have confirmed that there is no material information about the company and that they are making a conscious and informed trade decision.

2. Whether the compliance officer can give clearance for sale of shares during the closing period of trading window?

3. What are the other declarations/confirmations required to be obtained from the Liquidator of JSCL and promoter & CMD of the Applicant company for the sale?

Provisions Involved:

Regulation 4(1)[i] read with Clause 4(3) of Schedule B[ii] of the SEBI (Prohibition of Insider Trading) Regulations, 2015(hereinafter referred to as ‘PIT Regulations’)

Informal Guidance by SEBI:

1. Since the promoter CMD and the promoter company are ‘insiders’ in terms of Regulation 2 (1) (g) of PIT Regulations, SEBI expressed that the transaction will be construed to be an inter-se insiders (indicating no information asymmetry) and come within Regulation 4 (1) (i) of PIT Regulations so long as there is no breach of Regulation 3 of PIT Regulations.

2. Hence, it was expressed by SEBI that the promoter CMD may buy/acquire equity shares of the Applicant company from the Liquidator of JSCL subject to pre-clearance by the Applicant ‘s compliance officer under Regulation 4(1) r/w Clause 4(3) of Schedule B and Regulation 3 of the PIT Regulations.

3. With regard to the third query, SEBI while reiterating, that the compliance officer has the power to give pre-clearance for a transaction covered In Cluse 4(1)(i) of PIT, advised that compliance officer may seek declarations/confirmations that the proposed transaction is in compliance with the provisions of the Insolvency and Bankruptcy Code, 2016.

The letter of SEBI can be read at: https://www.sebi.gov.in/enforcement/informal-guidance/feb-2021/in-the-matter-of-kcp-ltd-under-sebi-prohibition-of-insider-trading-regulations-2015_49050.html

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI and is also not an Order u/S 15T of SEBI Act, 1992.

[i] Regulation 4(1),SEBI(Prohibition of insider trading) Regulation:

4 (1) No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:

Provided that the insider may prove his innocence by demonstrating the circumstances including the following:

(i) the transaction is an off-market inter-se transfer between insiders who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision.

Provided further that such off-market trades shall be reported by the insiders to the company within two working days. Every company shall notify the particulars of such trades to the stock exchange on which the securities are listed within two trading days from receipt of the disclosure or from becoming aware of such information.

[ii] Clause 4(3) of Schedule B of the SEBI (Prohibition of insider trading) Regulations, 2015:

The trading window restrictions mentioned in sub-clause (1) shall not apply in respect of –

(a) transactions specified in clauses (i) to (iv) and (vi) of the proviso to sub-regulation (1) of regulation 4 and in respect of a pledge of shares for a bona fide purpose such as raising of funds, subject to pre-clearance by the compliance officer and compliance with the respective regulations made by the Board.

Authored by Padma Akila.

Date(s) of Order: 3rd February 2021

Purported contravention committed: Noticees were involved in trading by Associate Company in shares of Future Retail Limited (“FRL/Company”) on the basis of Unpublished Price Sensitive Information (“UPSI”) before the demerger decision of certain businesses of the company was made public [“Transaction”].

Person charged and who is he: Future Corporate Resources Private Limited (Resultant entity which had emerged on merger of Future Corporate Resource Limited (FCRL) [‘Noticee 1’]), Kishore Biyani (CMD and Promoter of FRL [‘Noticee 2’]), Anil Biyani (brother of Noticee 2- [‘Noticee 3’]), FCRL Employee Welfare Trust (Trust formed by the Future Group [‘Noticee 4’]), Rajesh Pathak (Company Secretary of Noticee 1 [‘Noticee 5’]), Rajkumar Pande (Chief Financial Officer of FCRL [‘Noticee 6’]), Virendra Samani (compliance officer as well as the Deputy Company Secretary of FRL during the investigation period [‘Noticee 7’]), Arpit Maheshwari (Deputy Manager of FRL [‘Noticee 8’])

Companies in which insider trading had been committed: Future Retail Limited

BACKGROUND OF THE CASE:

1. Sometime between March and April 2017, FRL started consolidating its offline home retail business (Hometown Business) with its online home retail business (FabFurnish Business) [UPSI]. The merger was finalised on 10th March 2017 and was subsequently announced on the stock exchange on 20th April 2017.

2. Pursuant to investigation by SEBI, it was found that members of the Biyani family as well as other Noticees, had purchased shares of FRL during the period of UPSI i.e., 10th March to 20th April 2017. According to SEBI, these trades were authorised by Noticee 1 & 2.

3. Subsequently it was found that following the announcement of the merger to the stock exchange, FRL’s stock prices had progressed positively.

4. Based on the above SEBI issued Show Cause Notices (SCN) to the Noticees, which lead up to all the Noticees to be penalised for violation of Sections [1]12A(d) and (e) of the SEBI Act, 1992 and [2]Regulation 4 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations).

CONTENTION OF THE NOTICEES:

The Noticees in response to the SCN inter alia submitted the following:

1. Information about the Transaction was “generally available”, across various media platforms and do not constitute UPSI. Information about the transaction was not price sensitive, even if it was assumed that such information was not “generally available”, because the HomeTown Business and the FabFurnish Business constituted a significantly minuscule portion of FRL’s overall business and was unlikely to contribute significantly to the price movement of the FRL shares and there were other industry-wide factors such as, demonitisation, imposition of GST, D-Mart IPO, which significantly contributed to price movement in the shares of FRL and other retail companies in India during that period.

2. Noticee 3 cannot be construed to be an “insider” just because Noticees 2 and 3 were directors of Noticee 1, as there was nothing on record to suggest any communication between Noticees 3 and 2, either in connection with FRL’s business, or with respect to decisions to trade in shares of FRL. Also, no business of FRL was ever discussed or considered at any board meetings of Noticee 1.

3. Noticee 4 was not a “person” for it to be a `connected person’ for a trust was not a legal entity such as a company, and it was not a body corporate and was merely the name of the relationship between the trustee and the beneficiary in respect of application and use of the trust property.

4. Noticee 5 and Noticee 6 were not connected with FRL in any manner as they were vested with the responsibilities of being part of the company secretarial or finance function at other promoter group companies of the Biyani family and had no association with FRL.

5. The trading window in respect of the transaction was not required to be closed since the information in question was not UPSI. However, as per in the FRL Code of Conduct, designated persons working on the transaction executed undertakings pursuant to which the trading window was deemed to be closed for such persons and such undertakings had been executed by the relevant FRL personnel. Therefore, there was no requirement for the Noticee 7 to have issued a separate notice in relation to the closure of the trading window.

FINDINGS BY THE WOLE TIME MEMBER (“WTM”):

1. In order to contend that a particular PSI was “generally available” and thus, it was not UPSI, it had to be proven that it was generally available in non-discriminatory manner, in the same form along with all material particulars, in which it had been disclosed to stock exchange as UPSI, in terms of either PIT Regulations, 2015 or LODR Regulations, 2015. Interviews or news reports based on such interviews could not be said to be containing the concrete information or disclosed on non-discriminatory basis as the said information on the news reports was very fluid and nebulous as it was bereft of specific details as to how this restructuring/merger was to ultimately be executed.

2. The scrip of FRL did not experience average daily previous day close to trading day variation either during 20 trading days prior to April 20, 2017 or 20 days afterwards. Therefore, it was clear that despite existence of claimed sector specific positive developments, the corporate announcement had its own appreciable impact on the price of the shares of FRL and thus, information was price sensitive.

3. The Noticees were “insiders” and “connected persons” as per Regulation 2(1)(g) and 2 (1)(d) of PIT Regulations 2015 based on their designations, nature of work and their direct or indirect participation in the discussions regarding PSI during the UPSI period.

4. As per clause 5 of FRL-code of conduct, relied upon by the Noticee 7, “deemed closure” became operative against only those designated persons of FRL who were working on the demerger whereas other designated persons of FRL were free to seek pre-clearance of trade, as there was no notice of actual closure of trading window. Further, clause 4 of the Code of Conduct mandates closure of trading window, in respect of all the designated officers of the company when there was UPSI in the company, irrespective of the fact that whether all the designated persons had access to such UPSI or not.

DECISION OF THE WTM

1. Noticees 1, 2, 3, 5, 6 and 8 have been prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market for one year and have been restrained from buying, selling or dealing in the securities of FRL for two years.

2. Ordered disgorgement of profits made by Noticees 1,2, 3, 4 and 8, and to be remitted to Investor Protection and Education Fund (IPEF) referred to in Section 11(5) of the SEBI Act, 1992.

3. Noticee 7 was imposed with penalty.

4. During the period of restraint, the existing holding of securities including the units of mutual funds, of the concerned Noticees, are to remain under freeze. Debarment/restraint/freeze imposed in this order will not apply to those existing holding of securities of such debarred entities, in respect of which any scheme of arrangement under [1]Section 230-232 of the Companies Act, 2013, was approved by NCLT, requiring extinguishment of such securities and/or receipt of other securities in lieu of such securities.

The Securities Appellate Tribunal (SAT) on 15th February 2021, stayed SEBI’s debarment order in this matter and directed the appellants to deposit a sum of 11 crore. We may have to await SAT’s decision on this matter.

[1] 12A requires a person not to:

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of SEBI Act;

(d) engage in insider trading;

(e) deal in securities while in possession of UPSI or communicate such UPSI to any other person.

[2] Regulation 4 prohibits any insider from trading in securities that are listed or proposed to be listed on a stock exchange while in possession of UPSI

[1] Sections 230- 232 talk about the tribunal’s power to, compromise or make arrangements with creditors and members, enforce compromise or arrangement and the tribunal’s powers and duties over Merger and amalgamation of companies.

Authored by Aishwarya Lakshmi VM

Date of Order: 12th February 2021.

Forum: Hon’ble Kerala Court.

Purported contravention committed:

a) Provisions applicable to issue of debentures to more than 50 persons not complied with;

b) Chartered Accountant(s) (not registered with SEBI) were appointed as the Debenture Trustee in respect of the debentures issued by an NBFC.

BACKGROUND OF THE CASE:

1. Sometime in the year 2017, in the awareness programme conducted by the regional office of SEBI in Cochin, few shareholders had complained about one BRD Securities Limited, RBI registered NBFC that it has stopped buying back it shares from its investors.

2. On enquiry by SEBI, it has come to know that the said NBFC has been making debenture issue by way of private placement from the year 2001 till 2010, and such private placement has resulted in allotment being made to more than 50 persons [under erstwhile Companies Act, 1956, issue of securities to 50 or more persons was construed to be public issue. Under Companies Act, 2013, this number is 200.]

3. SEBI had sought for certain information from the NBFC, and wasn’t satisfied with its responses, and hence sought for further information, which were not provided.

4. Also, it was noticed that two chartered accountants, were appointed as a Debenture Trustee for the debentures issued by the NBFC.

5. Since, the NBFC did not provide further information, SEBI issued show-cause notice which inter alia included

(a) non-compliance of public issue provisions for the issue of debentures to more than 50 persons;

(b) non-appointment of debenture trustee as per the SEBI (Issue and Listing of Debt Securities) Guidelines; and

(c) Appointment of unregistered Debenture Trustees thereby violating SEBI Act and SEBI (Debenture Trustee) Regulations.

The NBFC and the two chartered accountants who acted as the debenture trustees and the NBFC (in a separate writ petitions) challenged the show cause notice.

GROUNDS OF CHALLENGE OF THE SHOW CAUSE NOTICE (“SCN”):

The SCN issued by SEBI was challenged on the following grounds:

1. SEBI does not have jurisdiction in the matter since supervisory powers over NBFCs is vested with the RBI.

2. The SCN has been issued on the presumption that it has supervisory powers under Ss. 55A, 117B and 67 of Companies Act, 1956, and with the repeal of Companies Act, 1956 by Companies Act, 2013, the SCN is unsustainable.

The SCN issued in 2019, covers a period beginning in 2001 and ending in 2010, and after expiry of nine years, that pertain to events that happened 19 year back. Hence, the SCN has been issued after inordinate delay and laches.

DECISION OF THE HIGH COURT:

The Court dismissed all the three writs and

1. With respect to the delay in the issue of the SCN, the court said that the information sought for are those that are statutorily maintained by the NBFC, and that there was no prejudice caused to the company, and that if it has been incapacitated in providing the information, the same can be stated to SEBI. The court while observing that the NBFC wasn’t questioning the jurisdiction of SEBI in issuing the SCN, observed that since the matter was only in the show cause stage, it would be inappropriate of it to interfere in the proceedings.

2. The Court rejected the contention of the Petitioner that the jurisdiction over an NBFC vested only with RBI and that SEBI did not have any role to play. Categorically it was laid down that, “Even though the company is an NBFC, as far as regulation of issue of Debentures and Non-Current Bonds is concerned, it is the bounden duty of SEBI to protect the interest of the investors in securities”.

3. Since NBFCs are not specifically excluded from the purview of SEBI, they will continue to be regulated by RBI and SEBI.

4. With respect to the two Chartered Accountants who acted as debenture trustees, the court observed the existence of prima facie violation of S. 12 of SEBI Act, read with regulations pertaining to debenture trustees.

Authored by Ammu Brigit

We all recognise cosmetics as any products used on or applied to human body with the intention of personal care and beautification. The manufacture, distribution and import of cosmetics in India is governed by Drugs and Cosmetics Act 1940(DCA). The Ministry of Health and Family Welfare (MoHFW) has notified the Cosmetics Rules 2020 (“Rules”) which apply to the import, manufacture for sale or for distribution of cosmetics.

Summary of the Rules

The Rules are divided into nine chapter, thirteen schedules and appendixes containing the formats of the forms required for the registration under DCA. The Rules determines the licensing authorities with respect to cosmetics and also provides for the constitution of central cosmetics laboratory. The Rules also comprehensively sets out the procedure for the registration for the import of cosmetics, manufacture of cosmetics for sale and distribution, permission of sale or manufacture of a new cosmetic in India, standards in relation to labelling, packing of cosmetics for the sale and distribution of cosmetics, procedure for sampling of tests of analysis, seizure and report and approval of laboratory for carrying out test in cosmetics and raw materials.

Highlights of the Rules.

Licensing Authority

The Drug Controller General of India (DGCI) is the central licensing authority responsible for the import of all categories of cosmetics and also the coordination with state authorities. The state drug controller of the respective state shall be the state licensing authority and shall be responsible for manufacture for sale or distribution, sale, stock, exhibit or offer for sale or distribution of all categories of cosmetics and for granting of approval of to the laboratory for carrying out tests on cosmetics and their raw materials.

Constitution of Central Cosmetic Laboratory

The Rules provides for the constitution of Central Cosmetic Laboratory for analysing and testing of samples sent. The Rules also give power to the Central Government to designate or notify any laboratory which is duly accredited by National Accreditation Body for Testing and Calibration Laboratories as a central cosmetic laboratory for carrying out tests and evaluation of cosmetics.

Import, Manufacture for Sale or for Distribution

A cosmetic product can be manufactured or imported to India only after the obtaining the license from the respective licensing authority with the required document and paying the required fees. For the manufacturing of cosmetic products, a license has to be sought from the respective state licensing authority and for import of cosmetics to India, the licensing authority is DGCI.

Labelling and Packing Standards

The Rules prohibits the selling or distribution of any cosmetic of Indian origin unless it is manufactured by a licensed manufacturer and labelled and packed according to the conditions given under the Rules and also false and misleading claims on cosmetic products. The Rules principally lays out the manner of labelling and packaging and also the standards if cosmetics imported.

Conclusion

Effective from 15th December 2020, the intention of the new Rules is to revise and codify separately the rules pertaining to the import, manufacture for sale or for distribution of cosmetics in India and have accordingly amended the provisions in Drugs and Cosmetics Rules 1945 (DCR) to omit cosmetics from the purview of DCR.

Authored Padma Akila

The Ministry of Commerce and Industry on February 09, 2021 has published the Draft Patents (Amendment) Rules, 2021 to amend the Patents Rules, 2003, for public opinion.

The draft rules seek to place educational institutions established by an act of parliament or state legislature, government owned educational institutions and government aided educational institutions [those that receive funding from the government of Rs. 25 Lakhs or more; or receive government funding to an extent of 75% or more of its total expenditure], on par with natural persons, small entities and start-ups with respect to matters related to reduced fees and for seeking expedited prosecution.

Presently natural persons, small entity and start-up alone are eligible for concessional fees. An MSME would come within the meaning of a small entity.

Documentary proof in Form 28 to be filed: –

Just as a small entity and startups, the eligible educational institutions must submit their documentary evidence in Form 28.

NAAC and Patents

With the National Assessment and Accreditation Council (“NAAC”) giving 25% weightage to Universities for “Research, Innovation & Extension” activities, and 11% weightage for such activities to affiliated colleges, the reduced fees would encourage government owned, and government aided educational institutions to increase their patent filing and foster further invention.

PS: The Draft Amendment Rules are open to objections/suggestions for a period of 30 days from the date of the notification.

Authored by Praveen & Adit

Import Export Code (IEC) Import Export Code (IEC) is mandatory for export/import from/to India.

DGFT issues Import Export Code in electronic form (e-IEC).

Amendment: 1. An IEC holder has to ensure that details in its IEC are updated / confirmed (if there are no changes) electronically every year, between April and June.

Failure to update / confirm the details results in deactivation of IEC and can be reactivated only upon successful updation of the same.

2.  An IEC may also be flagged for scrutiny.  IEC holders are required to ensure that any risk flagged by the system is addressed within the stipulated time, failing which the IEC shall be de-activated.

Timeline: Every year between 1st April and 30th June.
Date of Notification: 12th February 2021

Authored by Praveen & Adit

The Ministry of Corporate Affairs, vide its notification dated 19th February 2021, has specified the following classes of companies which shall not be considered as listed companies for the purpose of Companies Act, 2013.

(a) The public companies which have not listed their equity shares on a recognized stock exchange but have listed their :-

(i) non-convertible debt securities issued on private placement basis in terms of SEBI (issue and listing of debt securities) regulation, 2008; or

(ii) non-convertible redeemable preference shares issued on private placement basis in terms of SEBI (issue and Listing of Non- convertible Redeemable Preference Shares) Regulations, 2013; or

(iii) Both categories of (i) and (ii) above

(b) The private companies which has listed their non-convertible debt securities on private placement basis on recognised stock exchange in terms of SEBI (Issue and Listing Of Debt Securities) Regulation, 2008;

(c) Public companies which have not listed their equity shares on recognised stock exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section 23 of the Act.

Effect of this amendment:

The Companies Act, 2013 make certain provisions specifically applicable to “Listed Companies”.

Prior to this amendment, every Company which had its securities other than equity shares listed on any stock exchange was also considered as a “Listed Company” for the purpose of Companies Act, 2013. This meant that these companies, even though not equity listed entities, were still required to comply with those provisions which are made applicable to “Listed Companies”.

Hence after this amendment, the classes of companies specified above will not be required to comply with such provisions which are specifically applicable to “Listed Companies”

Authored by Praveen & Adit

(A)  REQUIREMENT OF MANDATORY CONVERSION OF ONE PERSON COMPANY (“OPC”) TO PRIVATE COMPANY DONE AWAY WITH

Background of One Person Company (“OPC”):

Under erstwhile Companies Act, 1956, to incorporate a private limited company, at least 2 shareholders and 2 directors are required. The Irani Committee, which was set up by the Ministry of Corporate Affairs to advise the Government on the new Company law, identified the need to provide a simpler form of entity for entrepreneurs, which will not necessarily be required to be formed with association of persons. With this background, the concept of One Person Company was introduced under Companies Act, 2013, wherein, unlike a private limited company, which requires at least 2 members and 2 directors, a OPC to be incorporated as a limited Company required only one member and one director.

However, the OPC was required to mandatorily raise the number of shareholders and directors to at least two and thereby converting it to a private company, in case, the paid-up capital or turnover of the OPC crossed Rs. 50 lakhs or Rs. 2 Crores respectively.

Removal of the requirement of Mandatory conversion:

The Government felt that this requirement of compulsory conversion, placed restrictions on the start-ups and innovators and thereby defeating the purpose of OPC. Hence in order to incentivise the incorporation of OPC, the Government, in its Union Budget 2021, decided to remove this requirement of compulsory conversion of OPC.

(B) NRI’S ALLOWED TO INCORPORATE OPC:

Only Indian Citizens residing in India were allowed to incorporate a OPC. However the Government, in its Union Budget 2021, had announced that the Non-Resident Indians (NRIs) will also be allowed to incorporate a OPC.

(C) Criteria of a minimum number of days in India, to be considered as resident in India for the purpose of OPC, has been relaxed from a minimum of 182 days to a minimum of 120 days.

All the aforementioned amendments are effective from 1st April 2021.

Authored by Praveen & Adit

Brief background:

The Ministry of Corporate Affairs (‘MCA”), had in Companies Act, 2013 (“ the Act”), recognised that certain companies below a specified threshold of paid-up capital and turnover, be considered as small companies and exempted or provided relaxation to such small companies from certain requirements under the Act.

The threshold which was provided earlier was that any private limited company (other than a Company which is a holding or a subsidiary company, section 8 company or a company or boby corporate governed by any special act) which has a paid-up capital of Rs. 50 lacs or less and turnover of Rs. 2 Crores or less will be considered as a small company.

Enhanced thresholds:

However the Government has now increased these threshold limits. Now, any private limited company (other than a Company which is a holding or a subsidiary company, section 8 company or a company or body corporate governed by any special act) which has a paid-up capital of Rs. 2 Crores or less and turnover of Rs. 20 Crores or less will be considered as a small company.

Hence with these enhanced threshold limits, many private limited companies will come within the ambit of a small company and can enjoy the benefits/relaxations available to small companies under the Act.

BENEFITS/RELAXATIONS AVAILABLE TO SMALL COMPANIES:

S. No. Category Compliance requirements for Companies other than Small Companies Benefits for small companies
(1) BOARD RELATED
(a) Board Meetings At least 4 board meetings are required to be held in a calendar year ·       Small Companies may hold only 2 board meetings in a calendar year i.e. one Board Meeting in each half of the calendar year with a minimum gap of ninety days between the two meetings.
(2) DISCLOSURES RELATED
(a) Disclosures in Board’s report Elaborate disclosures are required to be made in the Board’s report Abridged form of board’s report with lesser disclosures has been specified for small companies.
(b) Cash Flow Statement Cash flow statement is required to be prepared as part of annual financial statements The small companies are exempted from drawing up a cash flow statement.
(3) CERTIFICATION RELATED
  Professional’s certification on returns to be filed with RoC The returns required to be filed with the Registrar of Companies are required to be certified by a practising professional The returns are not required to be certified by a practising professional
(4) PENALTIES RELATED
  Lesser penalties for Small Companies under the Companies Act, 2013 The Companies Act, 2013 provides for penalty on a Company or an officer in default for non-compliance of any of the provisions of Companies Act, 2013. A small company or its officer in default, in case of non-compliance, will be liable to a penalty of less than one half of the penalty specified in respective sections under the Act.

 

However, the penalty is capped at Rs. 2 lakhs for the small company and Rs. 1 lakh for an officer in default.

(5) AUDITOR’S REPORT RELATED
  Reporting on internal financial controls with reference to financial statements Auditors of Companies are, in its audit report, required to report on internal financial controls with reference to financial statements and the operating effectiveness of such controls. The auditors of small companies are not required to report on the internal financial controls.

The Ministry of Corporate Affairs, vide its notification dated 19th February 2021, has specified the following classes of companies which shall not be considered as listed companies for the purpose of Companies Act, 2013.

(a) The public companies which have not listed their equity shares on a recognized stock exchange but have listed their:

(i) non-convertible debt securities issued on private placement basis in terms of SEBI (issue and listing of debt securities) regulation, 2008; or

(ii) non-convertible redeemable preference shares issued on private placement basis in terms of SEBI (issue and Listing of Non- convertible Redeemable Preference Shares) Regulations, 2013; or

(iii) Both categories of (i) and (ii) above

(b) The private companies which has listed their non-convertible debt securities on private placement basis on recognised stock exchange in terms of SEBI ( Issue and Listing Of Debt Securities) Regulation, 2008;

(c) Public companies which have not listed their equity shares on recognised stock exchange but whose equity shares are listed on a stock exchange in a jurisdiction as specified in sub-section (3) of section 23 of the Act.

Effect of this amendment:

The Companies Act, 2013 make certain provisions specifically applicable to “Listed Companies”.

Prior to this amendment, every Company which had its securities other than equity shares listed on any stock exchange was also considered as a “Listed Company” for the purpose of Companies Act, 2013. This meant that these companies, even though not equity listed entities, were still required to comply with those provisions which are made applicable to “Listed Companies”.

Hence after this amendment, the classes of companies specified above will not be required to comply with such provisions which are specifically applicable to “Listed Companies”

Authored by Praveen & Adit

(A)  REQUIREMENT OF MANDATORY CONVERSION OF ONE PERSON COMPANY (“OPC”) TO PRIVATE COMPANY DONE AWAY WITH

Background of One Person Company (“OPC”):

Under erstwhile Companies Act, 1956, to incorporate a private limited company, at least 2 shareholders and 2 directors are required. The Irani Committee, which was set up by the Ministry of Corporate Affairs to advise the Government on the new Company law, identified the need to provide a simpler form of entity for entrepreneurs, which will not necessarily be required to be formed with association of persons. With this background, the concept of One Person Company was introduced under Companies Act, 2013, wherein, unlike a private limited company, which requires at least 2 members and 2 directors, a OPC to be incorporated as a limited Company required only one member and one director.

However, the OPC was required to mandatorily raise the number of shareholders and directors to at least two and thereby converting it to a private company, in case, the paid-up capital or turnover of the OPC crossed Rs. 50 lakhs or Rs. 2 Crores respectively.

Removal of the requirement of Mandatory conversion:

The Government felt that this requirement of compulsory conversion, placed restrictions on the start-ups and innovators and thereby defeating the purpose of OPC. Hence in order to incentivise the incorporation of OPC, the Government, in its Union Budget 2021, decided to remove this requirement of compulsory conversion of OPC.

(B) NRI’S ALLOWED TO INCORPORATE OPC:

Only Indian Citizens residing in India were allowed to incorporate a OPC. However the Government, in its Union Budget 2021, had announced that the Non-Resident Indians (NRIs) will also be allowed to incorporate a OPC.

(C) Criteria of a minimum number of days in India, to be considered as resident in India for the purpose of OPC, has been relaxed from a minimum of 182 days to a minimum of 120 days.

All the aforementioned amendments are effective from 1st April 2021.

Authored by Praveen & Adit

Brief background:

The Ministry of Corporate Affairs (‘MCA”), had in Companies Act, 2013 (“ the Act”), recognised that certain companies below a specified threshold of paid-up capital and turnover, be considered as small companies and exempted or provided relaxation to such small companies from certain requirements under the Act.

The threshold which was provided earlier was that any private limited company (other than a Company which is a holding or a subsidiary company, section 8 company or a company or boby corporate governed by any special act) which has a paid-up capital of Rs. 50 lacs or less and turnover of Rs. 2 Crores or less will be considered as a small company.

Enhanced thresholds:

However the Government has now increased these threshold limits. Now, any private limited company (other than a Company which is a holding or a subsidiary company, section 8 company or a company or boby corporate governed by any special act) which has a paid-up capital of Rs. 2 Crores or less and turnover of Rs. 20 Crores or less will be considered as a small company.

Hence with these enhanced threshold limits, many private limited companies will come within the ambit of a small company and can enjoy the benefits/relaxations available to small companies under the Act.

BENEFITS/RELAXATIONS AVAILABLE TO SMALL COMPANIES:

S. No. Category Compliance requirements for Companies other than Small Companies Benefits for small companies
(1) BOARD RELATED
(a) Board Meetings At least 4 board meetings are required to be held in a calendar year ·       Small Companies may hold only 2 board meetings in a calendar year i.e. one Board Meeting in each half of the calendar year with a minimum gap of ninety days between the two meetings.
(2) DISCLOSURES RELATED
(a) Disclosures in Board’s report Elaborate disclosures are required to be made in the Board’s report Abridged form of board’s report with lesser disclosures has been specified for small companies.
(b) Cash Flow Statement Cash flow statement is required to be prepared as part of annual financial statements The small companies are exempted from drawing up a cash flow statement.
(3) CERTIFICATION RELATED
Professional’s certification on returns to be filed with RoC The returns required to be filed with the Registrar of Companies are required to be certified by a practising professional The returns are not required to be certified by a practising professional
(4) PENALTIES RELATED
Lesser penalties for Small Companies under the Companies Act, 2013 The Companies Act, 2013 provides for penalty on a Company or an officer in default for non-compliance of any of the provisions of Companies Act, 2013. A small company or its officer in default, in case of non-compliance, will be liable to a penalty of less than one half of the penalty specified in respective sections under the Act.

 

However, the penalty is capped at Rs. 2 lakhs for the small company and Rs. 1 lakh for an officer in default.

(5) AUDITOR’S REPORT RELATED
Reporting on internal financial controls with reference to financial statements Auditors of Companies are, in its audit report, required to report on internal financial controls with reference to financial statements and the operating effectiveness of such controls. The auditors of small companies are not required to report on the internal financial controls.

Authored by Lakshmi Rengarajan

SEBI had vide circular SEBI/HO/CFD/DIL2/CIR/P/2020/78 dated 06th May 2020 had provided relaxations pertaining to opening of rights issue under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 till 31st December 2020.

In this regard SEBI has vide circular SEBI/HO/CFD/DIL1/CIR/P/20 dated January 19, 2021 further provided extension till 31st March 2021 with regard to use of alternate non-cash mechanism to ASBA facility to accept applications form the shareholders in relation to rights issue. However while opting for alternate mechanism the issuer and the lead manager shall ensure the following;

(a) The mechanism(s) shall only be an additional option and not a replacement of the existing process As far as possible, attempts will be made to adhere to the existing prescribed framework.

(b) The mechanism(s) shall be transparent, robust and have adequate checks and balances. It should aim at facilitating subscription in an efficient manner without imposing any additional costs on investors. The issuer along with lead manager(s), and registrar shall satisfy themselves about the transparency, fairness and integrity of such mechanism.

(c) An FAQ, online dedicated investor helpdesk, and helpline shall be created by the issuer company along with lead manager(s) to guide investors in gaining familiarity with the application process and resolve difficulties faced by investors on priority basis.

(d) The issuer along with lead manager(s), registrar, and other recognized intermediaries (as incorporated in the mechanism) shall be responsible for all investor complaints.

Authored by Lakshmi Rengarajan

SEBI vide the circular SEBI/HO/CFD/CMD 2/CIR/P/2021/11 dated 15th January 2021, has extended the relaxations provided to listed companies in relation to sending of annual report in physical form and appointment of proxies in relation to Annual General Meeting(“AGM”) till 31st December 2021.

Pursuant to Covid and the relaxations provided by the Ministry of Corporate Affairs for conduct of general meetings, SEBI had issued a circular SEBI/HO/CFD/CMD1/CIR/P/2020/79 dated 12th May 2020 providing various relaxations to listed companies for the conduct of AGM till 31st December 2021.

In this regard the current circular provides a further extension till 31st December 2021 with respect to the following items of the May 2020 circular in relation to AGM conducted only through electronic mode;

1. Listed companies are dispensed from sending hard copies of annual report in relation to their shareholders,

2. Listed Companies are dispensed from sending proxy form to the share/security holders as the appointment of proxy will not be applicable when the AGM is held only through electronic mode.

Authored by Padma Akila

In our earlier article, we had written about the Consultation Paper of SEBI proposing disclosure requirements about the approved resolution plans in respect of listed companies that are admitted for corporate insolvency resolution process under the Insolvency & Bankruptcy Code, 2016 and also proposing certain minimum public shareholding in such companies.

Changes related to approved Resolution Plan

SEBI on 8th January 2021 has brought in amendments in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 [“LODR”], bringing in disclosure requirements which are as under:

Companies that have a resolution plan approved by NCLT would have to disclose the same as a material event under Regulation 30 of LODR. The disclosure would have to be made within 24 hours of its approval as per Regulation 30(6), and in case of delay the same would have to be explained while making the disclosure.

The information to be disclosed as a material event to the stock exchanges is the specific features and details of the resolution plan as approved by NCLT, not involving commercial secrets, including details such as:

(i) Pre and Post net-worth of the company;

(ii) Details of assets of the company post CIRP;

(iii) Details of securities continuing to be imposed on the companies’ assets;

(iv) Other material liabilities imposed on the company;

(v) Detailed pre and post shareholding pattern assuming 100% conversion of convertible securities;

(vi) Details of funds infused in the company, creditors paid-off;

(vii) Additional liability on the incoming investors due to the transaction, source of such funding etc.;

(viii) Impact on the investor revised P/E, RONW ratios etc.;

(ix) Names of the new promoters, key managerial persons(s), if any and their past experience in the business or employment. In cases where promoters are companies, history of such companies and names of natural persons in control;

(x) Brief description of business strategy.

Disclosure related to Minimum Public Shareholding

While in the Consultation Paper, there were certain proposals on Minimum Public Shareholding in companies that have a new promoter coming in consequent to the resolution plan, SEBI by the amendments made on 8th January 2021 has limited it to requiring those companies to make disclosure as a material event, the following:

(i) Proposed steps to be taken by the incoming investor/acquirer for achieving the MPS;

(ii) Quarterly disclosure of the status of achieving the MPS; and

(iii) The details as to the delisting plans, if any approved in the resolution plan.

Authored by Aishwarya Lakshmi VM

ApplicantManaksia Aluminium Company Limited.

Date of the guidance19.09.2020

Factual Background:

(i) The Applicant is a listed entity with a board composition of 8 directors of which there is 1 Managing Director (promoter) and 1 Executive Director (non-promoter). All the others are Non-Executive Directors. The Managing Director (hereinafter, MD) and the Executive Director (hereinafter, ED) are paid remuneration as per Schedule V of the Companies Act, 2013. The remuneration of the sole promoter executive director is within the ceiling of Rs. 5 crores or 2.5% of the net profit (whichever is higher) being the upper limit as per Regulation 17(6)(e)(i) of the SEBI (LODR) Regulations, 2015.

(ii) The Applicant proposes to induct an additional ED from the Promoter group in its Board, who will also be paid remuneration as per Schedule V of the Companies Act, 2013.

(iii) The Applicant taking a view that the limits of 5% of net profits under in clause (ii) of Regulation 17(6)(e), if the company has more than one promoter executive director would become applicable only if pays “fees or compensation” and not “customary salary”, sought guidance of SEBI, whether it would still be required to take approval of the shareholders by way of special resolution if the salary of the two promoter executive directors would be beyond 5% of its net profits.

Guidance sought:

(i) Whether Regulation 17(6)(e) will be applicable to the Applicant if another Executive director from the Promoter group is appointed by passing an Ordinary Resolution and receiving only customary monthly salary (and not any fees or compensation) in adherence with Schedule V of Companies Act, 2013?

(ii) Is upper limit of INR 5 Crore mentioned in clause (i) of Regulation 17(6)(e) also applicable to remuneration paid to more than one ED as per Clause (ii) of Regulation 17(6)(e)?

(iii) Whether company is required to pass a special resolution under Clause (ii) of Regulation 17(6)(e) of LODR Regulations for appointment of one or more executive promoter director if the aggregate remuneration payable to all executive promoter director exceeds 5% of the net profits or an absolute limit of INR 5 crore.

Provisions Involved

Regulations 17(6)(e) of SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015. [i]

Informal Guidance by SEBI

(i) Relying on the definition in Section 2(78) of Companies Act, 2013 SEBI provided that the term ‘remuneration’ being an all-inclusive term, unless otherwise expressly excluded, would include salary, fees, commission, stock option etc. or any money or its equivalent in whatever manner given to any person for the services rendered.

(ii) If the remuneration exceeds the limits of 5% of the net profits of the Applicant, even though as per the Companies Act, 2013 only an Ordinary Resolution is required, the Applicant should also pass a special resolution to comply with Regulation 17(6)(e) to comply with the SEBI (LODR) Regulations, 2015, which is valid only until the expiry of the term of such directors.

(iii) Unlike clause (i) of the said Regulation which has a ceiling limit of either INR 5 Crores or 2.5% of the net profits, whichever is higher, clause (ii) has only a doubled ceiling limit of 5% of the net profits. The limit of INR 5 Crores is not applicable to Clause (ii).

The letter of SEBI can be read at: https://www.sebi.gov.in/sebi_data/commondocs/nov-2020/SEBI%20IG%20letter%20MACL_p.pdf

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[i] Regulation 17(6)(e), SEBI (LODR) Regulations, 2015: The fees or compensation payable to executive directors who are promoters or members of the promoter group, shall be subject to the approval of the shareholders by special resolution in general meeting, if –

(i) the annual remuneration payable to such executive director exceeds rupees 5 crore or 2.5 per cent of the net profits of the listed entity, whichever is higher; or

(ii) where there is more than one such director, the aggregate annual remuneration to such directors exceeds 5 per cent of the net profits of the listed entity: Provided that  the  approval  of  the  shareholders  under  this  provision  shall  be  valid  only till the expiry of the term of such director.

Authored by Padma Akila

Date(s) of Order: 11th December 2020

Purported contravention committed: Promoters of the Company sold more than 25000 shares and failed to make requisite disclosures in terms of regulation 13(4A) of SEBI (PIT) Regulations,1992 r/w 13(5) of SEBI (PIT) Regulations,1992 r/w Regulation 12 of the SEBI (PIT) Regulations, 2015.

Persons charged and who are they: Promoters of the company namely; Smita D Gandhi (Noticee 1), Yogesh Shah (Noticee 2) and Yogeshbhai Shah HUF (Noticee 3)

Company which did not fulfil the disclosure requirements: Global Securities Limited.

BACKGROUND OF THE CASE:

1. Pursuant to an investigation by SEBI in the scrip of Global Securities Limited, to examine the matters relating to preferential allotment process and utilization of preferential issue proceeds, disclosure requirements in terms of SEBI (Prohibition of Insider Trading) Regulations, 1992 (“PIT Regulations, 1992”) and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST Regulations, 2011”) and Listing Agreement by the company during the period from May 1, 2010 to April 30, 2014, it was observed that the Noticees had sold more than 25000 shares and failed to make requisite disclosures in terms of [1]Reg 13(4A) of PIT Regulations, 1992 r/w 13(5) of PIT Regulations,1992 r/w [2]Reg 12 of PIT Regulations, 2015.

2. The Noticees neither replied to the SCN issued to them nor did they attend the personal hearing on the scheduled date, till the passing of the order.

3. The scrip was listed only on BSE and was suspended for trading with effect from January 07, 2015 due to non-payment of Annual Listing Fees

FINDINGS BY THE ADJUCATING OFFICER (“AO”):

1. The AO, on perusal of the shareholding pattern of the promoters available on the BSE website during the investigation period, observed that the names of the Noticees did not appear in the shareholding pattern from September 2012 quarter onwards. Further, it was observed that there was a reduction in the shareholding of the Noticees by more than 25000 shares during this quarter.

2. The AO further identified that, vide email dated December 20, 2019, BSE confirmed that the exchange was not in receipt of any disclosures under SAST Regulations and PIT Regulations from the Noticees in September 2012 quarter. Therefore, the AO concluded that the Noticees did not make the required disclosures for the aforesaid changes in their shareholding.

3. The AO observed that the Noticees had simultaneously failed to file quarterly shareholding pattern for June 2013 and September 2013 quarters as required under Clause 35 of the Listing Agreement r/w [1]Reg 103 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and [2]section 21 of the SCRA, 1956.

4. The AO found it pertinent to draw attention to the matter of Coimbatore Flavors & Fragrances Ltd. vs SEBI (Appeal No. 209 of 2014 order dated August 11, 2014), wherein the Hon’ble SAT observed that “Undoubtedly, the purpose of these disclosures is to bring about more transparency in the affairs of the companies. True and timely disclosures by a company or its promoters are very essential from two angles. Firstly; investors can take a more informed decision to invest or not to invest in a particular scrip secondly; the Regulator can properly monitor the transactions in the capital market to effectively regulate the same.”

5. Referring to the judgment in the matter of SEBI vs. Shriram Ram Mutual Fund (2006 SCL 216(SC)), wherein Hon’ble Supreme Court held that; “In our opinion, mens rea is not an essential ingredient for contravention of the provisions of a civil act. In our view, the penalty is attracted as soon as contravention of the statutory obligations as contemplated by the Act is established and, therefore, the intention of the parties committing such violation becomes immaterial. In other words, the breach of a civil obligation which attracts penalty under the provisions of an Act would immediately attract the levy of penalty irrespective of the fact whether the contravention was made by the defaulter with any guilty intention or not. We also further held that unless the language of the statute indicates the need to establish the presence of mens rea, it is wholly unnecessary to ascertain whether such a violation was intentional or not”, the AO concluded that the Noticees had violated abovementioned provisions and were fit to be imposed with a monetary penalty.

[1] Continual disclosure

13.(4A) Any person who is a promoter or part of promoter group of a listed company, shall disclose to the company and the stock exchange where the securities are listed in Form D, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been a change in such holdings of such person from the last disclosure made under Listing Agreement or under sub-regulation (2A) or under this sub-regulation, and the change exceeds Rs. 5 lakhs in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower.

(5) The disclosure mentioned in sub-regulations [(3), (4) and (4A)] shall be made within [two] working days of:

(a) the receipts of intimation of allotment of shares, or

(b) the acquisition or sale of shares or voting rights, as the case may be.

[2] Reg 12 is the Repeal and savings regulation of PIT Regulation 1992.

[1]103 (1) On and from the commencement of these regulations, all circulars stipulating or modifying the provisions of the listing agreements including those specified in Schedule X, shall stand rescinded.

(2) Notwithstanding such rescission, anything done or any  action taken or purported to have been  done  or  taken  including  any  enquiry  or investigation  commenced  or  show  cause notice  issued  in  respect  of  the circulars  specified  in sub-regulation  (1) or  the Listing Agreements, entered into between stock exchange(s) and listed entity, in force prior to the commencement of these regulations, shall be deemed to have been done or taken under the corresponding provisions of these regulations.

[2] 21. Where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange.

Authored by Aishwarya Lakshmi VM

In the matter of: CNBC Awaaz ‘Stock 20-20’ Show co-hosted by Mr. Hemant Ghai

Date of the interim order: 13.01.2021

Provisions invoked

(a) Sections 11(1),[i] 11(4),[ii] and 11D[iii] of the Securities Exchange Board of India Act, 1992.

(b) Regulation 3(c), 3(d)[iv] and 4(1)[v] of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.

Facts of the case:

1. Hemant Ghai was the co-host of ‘Stock 20-20’ aired in CNBC Awaaz from 7:20 A.M to 7:50 A.M. The show gave buy and sell recommendations for intra-day trading in stocks.

2. The trading account of the wife and mother of Mr. Hemant Ghai viz., Ms. Jaya Hemant Ghai and Ms. Shyam Mohini Ghai were preliminarily examined by SEBI and it was found that between January 1, 2019 to May 31, 2020 the trading accounts had made prima facie earnings of INR Two Crore and Ninety Five Lakhs merely through the BTST (Buy Today Sell Tomorrow) trading pattern.

3. As per investigation, the scrips traded in these accounts were the ones recommended by Mr. Hemant Ghai in his show. The investigation concluded that the modus operandi was to acquire the shares on the previous day through the trading accounts of Ms. Jaya Hemant Ghai and Ms. Shyam Mohini Ghai, and they were recommended Mr. Hemant Ghai in his show the following day. On the day of recommendation the scrips purchased the previous day were sold in the market at a profit.

4. SEBI preliminarily examined the issue and found a connection between the persons by relying on the KYC details submitted to the Registrar and Share Transfer Agents and Banks. Also details such as number of calls made to the equity analyst and the duration of such calls were used to corroborate the events and establish a preponderance of probabilities which may possibly involve the three persons.

Issues considered for preliminary examination:

1. Whether there is a repeated trading pattern in the previous day buying and post-recommendation selling in the trading accounts of Ms. Jaya Ghai and Ms. Shyam Mohini Ghai based on the recommendations of Mr. Hemant Ghai in the show he hosts?

2. If yes, whether the trading amounts to a ‘prima facie scheme, device or artifice’ in violation of the SEBI Act and Regulations?

3. Whether Mr. Hemant Ghai, his wife and mother are liable for proceeds of such prima facie violations?

4. If yes, whether urgent directions are to be issued?

Interim Order of the AO

1. SEBI relied on several cases of the Hon’ble Apex Court that reiterate the importance of a level playing field to keep the sanctity of the securities market intact and also the need for using circumstantial evidence to establish a plausible scheme that may have been adopted by the concerned persons.

2. SEBI passed an ex-parte interim order in the matter by deriving its power from Sections 11(1), 11(4) and 11D of the SEBI Act, 1992 for violation of Section 12A of the SEBI Act, 1992 and Regulations 3 and 4 of the SEBI (PFUTP) Regulations, 2003.

3. The directions issued by SEBI in the ex-parte ad interim order are as follows:

(i) The three persons were restrained from buying, selling or dealing in securities until further orders.

(ii) Hemant Ghai was ceased and desisted from undertaking, directly or indirectly, any activity related to giving investment advice, sell or buy recommendations, publishing of research reports etc., related to the securities market.

(iii) The bank account was impounded and the proceeds to be transferred to a joint escrow account.

(iv) Hemant Ghai, Ms. Jaya Hemant Ghai and Ms. Shyam Mohini Ghai were directed to provide a full inventory of all assets held in their name, jointly or severally, whether movable or immovable, or any interest or investment or charge on any of such assets, including details of all bank accounts, demat accounts and mutual fund investments.

(v) They were directed not to dispose of or alienate any of their assets.

(vi) A copy of the said order was sent to the Agent, the channel concerned and the News Broadcasting Standards Authority.

Regulatory issues that are to be noted from this decision of AO
1.     SEBI views violation of market sanctity in a very strict manner and any kind of scheme or device or artifice that may result in fraudulent and unfair trade practice is prohibited.

2.     SEBI has the power to impound and retain fraudulent proceeds even pending investigation and after completion of investigation or enquiry.

[i] 11. Functions of the Board: (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.

[ii] 11(4): This clause provides the list of measures that can be taken by SEBI, either pending investigation or on completion of investigation or inquiry. These include suspending the trading account, restraining the persons from accessing securities market, impounding and retaining proceeds pending investigation etc.

[iii] 11D. Cease and Desist Proceedings: If the Board finds, after causing an inquiry to be made, that any person has violated, or is likely to violate, any provisions of this Act, or any rules or regulations made there under, it may pass an order requiring such person to cease and desist from committing or causing such violation.

[iv] 3. Prohibition of certain dealings in securities

(c)    employ any device, scheme or artifice to defraud in connection with dealing in or  issue of securities  which  are  listed  or  proposed  to  be  listed  on  a  recognized  stock exchange;

(d)  engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made thereunder

[v] 4. Prohibition of manipulative, fraudulent and unfair trade practices

(1)  Without prejudice to the provisions of regulation 3, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities markets.

 

Authored by Padma Akila

The Madras High Court on 7th December 2020 passed an interim injunction order in favour of Naidu Hall Family Store, the Plaintiff, restraining the Defendant from infringing the mark “Naidu Hall” belonging to the Plaintiff. The Court opined that the Plaintiff is a well-known and reputed partnership firm, which was founded in the year 1939, primarily dealing with textiles and has established goodwill and reputation in the said trade. Further, they have also obtained registration of the trademark for ‘Naidu Hall’ which has been registered in Class 24 in Trademark No.2793271 and in Class 25 in Trademark No.2582196. The Plaintiff has also registered the domain name vnhnaiduhall.com which contains the trademark ‘Naidu Hall’. The order stated that the Defendant appeared to be in the same trade and also using the same mark ‘Naidu Hall’ with a slight addition namely, ‘A Moham Venture’.

The counsel for the Plaintiff contended that there was every possibility of the general public being misled to believe that the Defendant could be a branch of the Plaintiff and/or that the Defendant’s products are the products of the Plaintiff as the Defendant also happened to be in the same line of business.

The Court stated that a Caveat had been entered by the Defendant and the counsel for the Caveator was served with all the relevant papers. Thereafter, when the matter was again taken up for hearing, the counsel who appeared on behalf of the Defendant / Caveator, stated that the Defendant had not come forward to give any instructions. Taking this into account the Court held that the Defendant was deliberately trying to take advantage of the Court proceedings and that the intentions of the Defendant appeared to be malafide to defeat the rightful claims of the Plaintiff.

The Court further stated that in the registration of the mark, the Plaintiff has made out a prima facie case and that the Defendant has adopted surreptitious measures to somehow or the other to deny the grant of interim order. It was further held that the balance of convenience is in favour of the Plaintiff and that the Plaintiff would suffer immense loss, if the Defendant is permitted to continue with their business under the offending trademark. The Court was of the opinion that the Defendant has adopted the very same mark as that of the Plaintiff. In view of these facts, the court held that a prima facie case has been made out by the Plaintiff and that the balance of convenience was also certainly in favour of the plaintiff.

Authored by Padma Akila

On 18th October 2019, the Department for Promotion of Industry and Internal Trade (DPIIT) of the Ministry of Commerce, had, wide a notification, published the draft amendment to Design Rules, 2001, inviting objections and suggestions from the public. In furtherance to the same, the Central Government, vide notification dated 25th January 2021, notified the Designs (Amendment) Rules, 2021 (“New Rules”). Some of the key highlights of the said amendment are as under:-

1. A new definition of the word “Startup”[1] is included under the New Rules under clause (eb) as below:

‘(eb) “startup” means-

‘(a) an entity in India recognised as a startup by the competent authority under Startup India initiative; and

(b) in case of a foreign entity, an entity fulfilling the criteria for turnover and period of incorporation or registration as per Startup India Initiative and submitting declaration to that effect.

Explanation: In calculating the turnover, reference rates of foreign currency of the Reserve Bank of India shall prevail.’

2. In rule 4, under the proviso, e-mail address and mobile number of the applicant or the agent of the applicant is now required to be included in respect of the address for service, while the previous proviso under the old rules required only the email or digital address of the applicant.

3. Rule 5 (2) (e) has been substituted which now says that in case where an application that was originally processed by a natural person and/ or startup and/ or small entity is fully or partly transferred to a person other than a natural person, startup or small entity, then the difference in the scale of fees shall be paid by the new applicant filing the request for transfer.

4. Further an explanation to Rule 5 (2) (e) has been included wherein it has been stated that, no difference in scale of fees shall be payable if a Startup entity, having filed an application for a design, ceases to be a startup or a small entity due to following reasons:

(i) lapse of the period during which it is recognised by the competent authority, or

(ii) its turnover subsequently crosses the financial threshold limit as notified by the competent authority.

5. In rule 10, under sub-rule (1), for registration of designs, articles shall be classified as per current edition of “International Classification for Industrial Designs (Locarno Classification)” published by World Intellectual Property Organization (WIPO).

6. Having included the rules for startups, the new rules also inserted a revised fee Schedule for the same, which substitutes the First Schedule in the old rules.

[1] It is pertinent to note that under the Startup India initiative, a startup is one which shall have an annual turnover not exceeding Rs. 100 crores for any of the financial years since its Incorporation.

Authored by Adit N Bhuva & Sri Vidhya Kumar

The Ministry of Corporate Affairs (“MCA”), had on 5th May 2020, allowed  companies to conduct their Annual General Meetings (“AGM”) by way of Video Conferencing (“VC”) till 31st December 2020.

The procedure for conducting the general meetings by VC can be accessed in the following link – http://eshwars.com/blog/clarification-on-passing-of-shareholder-resolutions-during-covid-19-conduct-extra-ordinary-general-meeting-egm-of-shareholders-remotely.

In addition to the procedure provided in the aforesaid link, the Companies will have to comply with the procedure provided in the circular of the MCA dated 5th May 2020.

Now the MCA has allowed the companies, whose AGMs were due to be held in the year 2020 or become due in the year 2021, to conduct their AGMs by way of video conferencing till 31st December 2021.

However, the Companies will have to hold the AGMs within the timelines prescribed under Companies Act, 2013.

Authored by Adit N Bhuva & Sri Vidhya Kumar

Brief background:

The Ministry of Corporate Affairs, had on 30th March 2020, introduced Companies Fresh Start Scheme 2020, to provide companies with an opportunity to make good any filing related defaults, irrespective of duration of default and make a fresh start as a fully compliant company.

The Scheme was in force from 1st April 2020 till 30th September 2020 and further extended to 31st December 2020.

The details of the Scheme can be accessed in http://eshwars.com/blog/opportunity-to-file-delayed-belated-returns-with-registrar-of-companies/.

Application for immunity:

The Companies which had filed belated returns/forms with the ROC under this Scheme, are required to file a form CFSS-2020, in order to get immunity from any prosecution or penalties for filing belated returns with ROC.

Time limit for filing the form CFSS-2020:

The Companies which had filed belated returns/forms with the ROC under this Scheme, has to file the form CFSS-2020 before 30th June 2021.

Authored by Aishwarya Lakshmi VM

Regulation 11 of SEBI (SAST) Regulations, 2011 [hereinafter, SAST Regulations], empowers SEBI to grant specific exemptions from the requirement of making an open offer, if the same gets triggered under Regulations 3, 4 and 5 of SAST Regulations. Here we present an analysis of the exemptions that were granted by SEBI during the calendar year 2020.

Tracing the Trajectory of Exemption Orders in 2020:

Split up of Exemption Orders granted by SEBI in the Calendar Year 2020
Exemption Orders to Family Trusts or Foundations 25
Exemption Orders to other entities 2
Total number of Exemption Order 27

 

The two exemptions that were granted to other entities were to:

1. The Government of Jammu and Kashmir for acquiring the stake in Jammu and Kashmir Bank Limited, and

2. To Greenway Advisors Private Limited for acquiring the stake in Sturdy Industries Limited.

Both these exemption orders were based on the recommendations of the Takeover Panel.

Exemption in Jammu and Kashmir Bank Ltd.

In the Jammu and Kashmir Bank Limited matter, the Government of Jammu & Kashmir proposed to infuse Rs.500 Crores as capital towards the recapitalisation of the Target Company and to maintain the Capital Adequacy Ratio as per RBI Guidelines. Towards this transaction, shares were proposed to be issued on a preferential basis. Post preferential allotment, the J&K Government’s shareholding was to increase by more than 5% thereby attracting Regulation 3(2) of the Takeover Regulations. Since there was to be no change in the control of the Target Company, and the minimum public shareholding requirement was also not getting affected, the same was approved by an exemption order.

Exemption in Sturdy Industries Ltd.

In the Sturdy Industries matter, Punjab National Bank and Allahabad Bank had acquired 51% of the equity share capital in the Target Company.  In accordance with the Strategic Debt Restructuring (SDR) Scheme the lender banks were to disinvest at least 26% of the equity shares held by them and this was proposed to be undertaken by transferring the shares to Greenway Advisor Private Ltd., the Acquirer. The transaction was approved by the Target Company and by the lenders since it was pursuant to RBI directions. There was a delay in documentation process from Allahabad Bank and hence a portion of the transfer was pending, while the portion from Punjab National Bank was completed before due date. Hence, exemption was granted to the acquirer to acquire the shares from Allahabad bank without having to go through the rigors of open offer and public announcement.

Notable exemptions granted to Family Trusts

Some of the exemptions granted to Family Trusts include the exemption for acquiring:

a. Alembic Pharmaceuticals Ltd., Alembic Limited and Paushak Limited (all three by CRA Family Trust),

b. Lux Industries Ltd. (by Ashok Todi Family Trust and 3 other Family Trusts),

c. Vadilal Industries Ltd. (by Shree Devarsh Trust and IVG Family Trust),

d. Borosil Glass Works Ltd. (by Pradeep Kumar Family Trust and Bajrang Lal Family Trust),

e. Globus Spiritus Limited (by Yamuna Family Trust),

f. Motilal Oswal Financial Services Limited (by Motilal Oswal Family Trust) and

g. IndiaBulls Housing Finance Limited (by Sameer Gehlot IBH Trust).

Why family trusts?

The rationale of granting such exemption to Family Trusts is that it streamlines succession planning making it easier for the promoter group to not undergo the rigours of a public announcement of an open offer. Promoters often choose Family Trust as a haven considering the possible reintroduction of estate taxation and to keep creditors at bay for personal guarantees given by the promoters for the company’s debts. It is interesting to note that even in 2020 SEBI received most applications for exemption orders from Family Trusts in accordance with the 2017 General Circular.

2017 General Circular of SEBI:

 SEBI vide General Circular No. SEBI/HO/CFD/DCR1/CIR/P/2017/131 dated 22nd December 2017 provided a standard format with instructions for the Acquirers to make an application under Regulation 11(1). In the Schedule of the said General Circular, SEBI had outlined additional compliance requirements for Family Trusts based on the recommendations of the Takeover Panel of SEBI. Exemption Orders had been granted only if the Trust Deed expressly mentions that:

1. The Trust in its substance is only a mirror image of the promoter’s holdings.

2. Only individual promoters, their relatives and lineal descendants are part of the trustees and beneficiaries.

3. The beneficial interest is not in any way be transferred / encumbered / alienated / pledged / mortgaged / assigned in the future.

4. In case of the dissolution of the Trust, the assets will be distributed only to the beneficiaries of the Trust or their legal heirs.

5. The Trustees are not entitled to delegate / transfer their powers to anyone except one among themselves.

In addition, there should not be any layering in terms of Trustees / Beneficiaries. The Trusts also ought to give undertakings relating to annual disclosure to SEBI regarding its compliance status, event-based disclosure if there arises any change in the trustees / beneficiaries and any change in ownership or control of shares or voting rights held by Trust within 2 days.

Conclusion:

Internal re-alignment of holdings which are non-commercial in nature such that the resultant shareholding pattern will neither in any way change the overall promoter or promoter group holding nor reduce the public shareholding or prejudicially affect their interests were granted exemption by SEBI under Regulation 11(1) of the SAST Regulations, and the family trusts based structures have only found favour from SEBI for grant of exemptions.

Authored by Vignesh Kumar

Date(s) of Order  27th November 2020
Purported contravention committed Delay in disclosure with respect to disposal of shares.
Provision breached Regulation 7(2)(a) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015
Person charged and their designation Mr. P. Selvamani – Executive Vice President- Legal – Equitas Small Finance Bank Ltd
Company in respect of whom the adjudication order relates to Equitas Holdings Limited

INTRODUCTION: The Securities and Exchange Board of India (“SEBI”) had received references from Equitas Holdings Limited (hereinafter “the Company”) pertaining to dealing in scrip of the Company by certain officials of the company, including Mr. P. Selvamani (hereinafter “the Noticee”) during the month of October 2018, based on which an investigation was conducted by SEBI for violation of PIT Regulation.

BACKGROUND OF THE CASE:

1. The Noticee had availed a loan for exercising his ESOP (26,460 shares), and also a personal loan. The shares allotted under ESOP and free shares held in the demat account of the Noticee was pledged to the lender ( “the Pledgee”) as security.

2. The pledge agreement required the Noticee to maintain a margin of twice the loan outstanding, and if during the pendency of the loan the value of pledged securities fell below 1.9 times of the loan amount then the Noticee was required to prepay the loan immediately. The agreement further also stipulated that the Pledgee had the right to sell the pledged shares lying in Designated DP account without any further notice to the Noticee if the value of the pledged securities fall below 1.7 times of the loan obligations.

3. On October 26, 2018, the share prices of the Company fell, due to which the margin fell below 1.7 times of the loan, consequent to which the Pledgee had invoked the pledge and sold 36,325 shares aggregating to Rs. 32,45,275 to recover the shortfall in margin.

4. The Noticee disclosed to the Company, the sale on 7th November 2018.

5. On 19th November 2018, internal committee of the Company for Monitoring and Prevention of Insider Trading levied a penalty of Rs. 5000 on the Noticee for contravening PIT Regulations, and for breach of their Internal Code of Conduct for Prevention of Insider Trading.

6. After the same was reported to SEBI, it commenced adjudication proceedings on the Noticee.

DEFENCE OF THE NOTICEE:

1. The Noticee was not a designated person under PIT Regulations and was not in possession of any UPSI, the mistakes did not have any detrimental impact on the Company or its investors even in terms of the PIT Regulations.

2. On 26.10.2018, the representatives from office of the Pledgee had communicated the shortfall of margin to the Noticee and before the Noticee could arrange for funds, the Pledgee had sold 36,325 shares without consent of the Noticee and utilised the proceeds to prepay loan and maintain the required margin.

3. The Noticee received intimation from the Pledgee with respect to sale of shares only on 05.11.2018 and the same was intimated to the Company on 07.11.2018.

FINDINGS BY THE ADJUDICATING OFFICER (“AO”):

1. The Pledgee intimated the Noticee about the shortfall in the margin due to the fall in the price of the shares of the company pledged on October 26, 2018 and had asked the Noticee to recompense for the shortfall. This contradicts the stand of the Noticee that hardly any notice was given to the Noticee before the pledge was invoked and the shares were disposed of.

2. The Noticee was aware of the terms and conditions of the pledge agreement, and the disposal of shares from his account by invocation of the pledge, despite intimation him regarding shortfall of margin, prior to the invocation cannot be said to have happened without the consent of the Noticee.

3. When the pledge was invoked CDSL had sent SMS to the Noticee on the same at 13:20:26 hours.

4. The Noticee by his 15th November 2018 letter to the Company had stated that when the share price fell on 26/10/2018, the Pledgee had called him about the shortfall in margin, which contradicts with his stand that he came to know of the sale only after 7 days i.e. 2nd November 2018.

5. The AO took certain statements from the written submission to hold it against the Noticee for the delay in making disclosure under PIT Regulations:

a. His submission that he had inadvertently failed to look into the compliance requirements prescribed under the PIT Regulations.

b. He was under acute pressure and failed to calculate and keep track of exceeding the Rs. 10 lakh limit as prescribed under Reg. 7(2) of the PIT Regulations.

c. He was aware of the need to intimate the company about sale of shares, but completely missed his mind in view of the mental distress that he was undergoing.

d. Delay in intimation to the Company is solely attributable inadvertence and unintentional oversight.

e. Any act of imposing additional penalty for the technical mistake in delay in reporting to the company of such sale of shares would add further damage and put the Noticee into irreparable damage.

f. He has already been penalised by the internal committee and the same has been complied with.

6. From the submissions the AO observed that the Noticee had accepted the findings of the internal committee of the company holding him liable of violation of the norms of disclosure and had already paid the penalty levied by the company for the said violation.

7. The disclosure with respect to sale of shares of the Company held in the name of the Noticee was intimated to the company on 7th November 2018. This was clearly beyond the statutory time period of two working days from October 29, 2018, the date on which the Noticee had come to know of the sale transaction from the intimation received pursuant to the confiscation of shares from his demat account.

DECISION OF THE AO:

1. The AO concluded that the sale of shares took place with knowledge of the Noticee. He ought to have intimated the company within two working days of the same, and has violated Reg. [1]7(2)(a) of PIT Regulations.

2. No allegation of insider trading has indeed been levelled against the Noticee in the show cause notice. The question of deriving any profit or loss is wholly irrelevant to the violation committed in the present case as the question in the present case only pertains to the delay in disclosure of sale of shares of the Company held by the Noticee as required under PIT Regulations.

3. A penalty of Rs. 1,00,000/- was levied on the Noticee.

OBSERVATIONS FROM THE ORDERS OF AO:

a. In the present context of a disclosure-based regime of the securities market, any default in making requisite disclosures is not considered lightly.

b. Since the Noticee did not make any profit from the sale transaction was a mitigating factor in determining the quantum of penalty, but does not nullify the conduct of regulatory non-compliance on the part of the Noticee.

c. Employees need to exercise caution before borrowing for exercise of ESOPs, and should do the same based on the inherent strength of their company.

[1] Regulation 7(2)(a) of SEBI (PIT) Regulations – Every promoter, employee and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified

Authored by Padma Akila

Date(s) of Order  11th December 2020
Purported contravention committed Noticee bought Futures of the Company hours before announcement of PSI, and charged for violation of Reg 4(1) of PIT Regulations, 2015; (ii) Non-obtaining of pre-clearance of the trade and was charged with violation of Clause 6 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders as specified in Schedule B r/w Reg 9(1) of PIT Regulations, 2015; and (iii) Did not make disclosure for trade value that exceeded Rs. 10 lakhs and was charged to have violated Reg 7(2)(a) of PIT Regulations, 2015.
Person charged and who is he Mr. Srinivas Maddineni [Assistant General Manager, Designated Person in the Company who directly reported to the whole time director of the Company] “Noticee
Companies in which insider trading and fraud had been committed Divi’s Laboratories Limited

BACKGROUND OF THE CASE:

1. Pursuant to an investigation by SEBI, it was observed that the Company had made announcement to stock exchanges on July 10, 2017 around 11:50 am, as a material event under [1]Regulation 30 of SEBI (LODR) Regulations, 2015 titled “USFDA to Lift Import Alert 99-32 on the company’s Unit-II at Visakhapatnam”, which had material impact on the price of the scrip of the Company. This announcement was construed as UPSI by the investigation.

2. Investigation revealed that the whole time director (to whom the Noticee reported) was aware of UPSI, and that the Noticee was not only an Assistant General Manager (AGM) and a Designated Person in the Company, but also reported directly to the whole time director. Therefore, it was alleged in the SCN that the Noticee was a connected person who had reasonable access to the UPSI, and had traded only on the scrip of the Company during the UPSI period thereby indulging in “insider trading”, in terms of Regulation 4(1) of PIT Regulations, 2015.

3. It was also observed from the submission of the Company that the Noticee did not obtain pre-clearance for his aforementioned trade. Further, the Noticee vide email dated September 04, 2019 had accepted that he did not take any pre-clearance from the Company for the aforementioned trade. Hence, according to the SCN, the Noticee had allegedly violated [2]Clause 6 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders as specified in Schedule B read with [3]Regulation 9(1) of PIT Regulations, 2015.

CONTENTION OF THE NOTICEE:

1. The Noticee submitted that there was no internal communication or information regarding UPSI to him through any means and that he had not received any sort of information on the UPSI from the whole time director.

2. The trades were executed by the Noticee without knowing about the UPSI and thus said trade was purely co-incidental and not because of knowledge of the UPSI.

FINDINGS BY THE WOLE TIME MEMBER (“WTM”):

1. The Noticee was an ‘insider’ in terms of Regulation 2(1)(g)(i) and Regulation 2(1)(g)(ii) and a ‘Connected Person’ in terms of Regulation 2(1)(d)(i) of PIT Regulations, 2015. The Noticee was in employment with the Company since 1995, and was an AGM in the Environment, Health and Safety Department at the Company, during the UPSI Period. Thus, the Noticee was directly associated with the Company and thus a ‘Connected Person’ in terms of Regulation 2(1)(d)(i) of PIT Regulations, 2015

2. Under Regulation 4(2) of PIT Regulations, 2015, the burden of proof to establish that a ‘Connected Person’ is not in possession of UPSI lies on the ‘Connected Person’, as trades by Connected Person in the securities of that company when there was a UPSI, gives rise to a reasonable inference that such person has traded when in possession of UPSI.

3. The Noticee in this matter had merely made a bald statement that he was not in possession of and did not have access to any UPSI without providing any corroborating evidence. By virtue of being a ‘Connected Person’ coupled with his conduct, he had taken positions in the futures contracts of the Company approximately 2.5 hours before the UPSI becoming public and thereafter squared off his position on UPSI becoming public, a strong presumption was created that the Noticee, by virtue of his association with the Company was reasonably expected to have access to UPSI. Hence, it was concluded that the Noticee being an insider of the Company and on being connected person, has traded in the scrip of the Company when there was UPSI.

4. In addition the Noticee had not disputed his reporting relationship with the whole time director (who was in receipt of the UPSI), and he had also not presented any reliable explanation supported by cogent evidence of not having any access to the UPSI. Therefore, from the trading pattern of the Noticee, coupled with his direct and frequent relationship with the whole time director, who had access to UPSI, it was concluded that the Noticee was in possession of UPSI when he traded in the scrip of the Company before it was disclosed to stock exchanges and became public.

5. The Noticee, being a Designated Person and having executed trades in the scrip of the Company over a value of Rs. 10 Lacs, was required to disclose to the Company the number of such securities acquired or disposed of within two trading days of such transactions. However, the Noticee has failed to do so and in his reply had acknowledged his failure to make the required disclosure in terms of[1]Regulation 7(2)(a) of PIT Regulations, 2015.

6. As regards, pre-clearance, the order reasoned that the question of pre-clearance of trades did not arise when the designated person possess of UPSI as there is a prohibition from trading in the scrip of the company under Reg 4(1) of PIT Regulations, 2015. In this case, the Noticee had been found to have violated Reg 4(1) of PIT Regulations, 2015 for trading in the scrip of the Company when in possession of UPSI. Thus, the question of obtaining pre-clearance for the impugned trades does not arise.

DECISION OF THE WTM:

Having concluded that the Noticee  had indulged in ‘insider trading’, and had also not  disclosed the transaction, taking note of his wrongful gain of Rs.1,83,000, the same was ordered to be disgorged and a penalty of Rs. 1 lakh levied, and was also debarred from the securities market for a specified period.

[1] Regulation 30 of SEBI (LODR) Regulations, 2015 states “Every listed entity shall make disclosures of any events or information which, in the opinion of the board of directors of the listed company, is material…..”

[2] No designated person shall apply for pre-clearance of any proposed trade if such designated person is in possession of UPSI even if the trading window is not closed.

[3] Regulation (1) mandates a company to formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons, in compliance with PIT Regulations, 2015.

[1] 7(2)(a)- Disclosures by certain persons:

(2) Continual Disclosures.

(a) Every promoter, member of the promoter group, designated person and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified;

Authored by Aneeruth Suresh & K. Ramasubramanian 

Introduction

Compounding is a process to facilitate those who have not complied with the provisions of Foreign Exchange Management Act, 1999 and the rules/ regulations/ notification/ orders/ directions/ circulars issued thereunder (“FEMA”/ “Act”). When the provisions of FEMA are not complied with by the person using foreign exchange, he is committing a contravention. He must have an avenue to rectify the contravention. To facilitate this rectification FEMA prescribes a method for compounding the contravention. Thus, contravention is a breach of the provisions of the FEMA. Compounding refers to the process of voluntarily admitting the Contravention, pleading guilty and seeking redressal. Hence, under this process, the person/entity committing default will file an application to the compounding authority accepting that it has committed the Contravention and such Contravention shall be condoned by paying up the penalty as imposed by RBI after offering an opportunity of personal hearing to the said contravener.

This concept of Compounding has been framed by Government of India empowering the RBI to compound contraventions under FEMA except Section 3(a) of FEMA in the manner provided under Foreign Exchange (Compounding Proceedings) Rules, 2000 as amended from time to time, with an objective to provide comfort to individuals and corporate community by minimizing transaction costs, while taking severe view of willful, malafide and fraudulent transactions, which will not be compounded by RBI. Further, in terms of the proviso to rule 8 (2) of Foreign Exchange (Compounding Proceedings) Rules, 2000 inserted vide GOI notification dated February 20, 2017, if the Enforcement Directorate (ED) is of the view that the compounding proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, such cases will not be compounded by the RBI. All the provisions relating to compounding is updated in the RBI Master Direction-Compounding of Contraventions under FEMA, 1999. The process of compounding can be administered by the ED as well and thereby the contravener can approach any agency i.e., RBI or ED.

Following are few advantages of compounding of offences:

1. Simplified and short cut process to avoid litigation and thereby reduces the burden of judiciary;

2. Multiple offences, if any committed under FEMA can be compounded under one application;

3. No further inquiry/investigation/adjudication/proceeding will be initiated.

This process of compounding has been amended by the RBI and they have brought in significant changes in such process pursuant to the relevant A.P. (DIR Series) Circular, which is a welcome move and we have analysed the relevant A.P. (DIR Series) Circular in detail under this article.

Analysis of the RBI’s A.P. (DIR Series) Circular

With the above backdrop and further as we are all aware that the erstwhile Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (“TISPRO Regulations”) had been superseded by Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (“NDI Rules”) and FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (“MPR Regulations”), RBI has updated the references of the erstwhile TISPRO Regulations in line with the NDI Rules and MPR Regulations vide the RBI/2020-21/67 A.P. (DIR Series) Circular No. 06 dated November 17, 2020 (“Compounding Circular”) and following are the changes brought in by RBI in the said Compounding Circular:

a. The power to compound contraventions under TISPRO Regulations has been delegated to the Regional Offices/ Sub Offices of the RBI for the enhanced customer service and operational convenience, has now been aligned with corresponding provisions under NDI Rules and MPR Regulations, respectively are as follows:

Compounding of Contraventions under NDI Rules
Rule No. under NDI Rules Brief description of the Rules Corresponding Regulation No. under TISPRO Regulations Brief Particulars of the Contravention
Rule 2(k) read with Rule 5 Permission for making investment by a person resident outside India (Equity Instruments) Regulation No. 5 Issue of ineligible instruments.
Rule 21 Pricing guidelines Regulation No.11 Violation of pricing guidelines for issue/transfer of shares.
Paragraph 3 (b) of Schedule I Sectoral Caps – for total foreign investment Regulation 16.B Issue of shares without approval of RBI or Government respectively, wherever required.
Rule 4 Restriction on receiving investment; Regulation 4 Receiving investment in India from non-resident or taking on record transfer of shares by investee company.
Rule 9(4) Transfer by way of gift to person resident outside India by person resident in India of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank. Regulation 10(5) Gift of capital instruments by a person resident in India to a person resident outside India without seeking prior approval of the Reserve Bank of India.
Rule 13(3) Transfer by way of gift to person resident outside India by NRI or OCI of equity instruments or units of an Indian company on a non- repatriation basis with the prior approval of the Reserve Bank
Compounding of Contraventions under MPR Regulations
Rule No. under MPR Regulations Brief description of the MPR Regulations Corresponding Regulation No. under TISPRO Regulations Brief Particulars of the Contravention
Regulation 3.1(I)(A) Inward remittance from abroad through banking channels; Regulation 13.1(1) Delay in reporting inward remittance received for issue of shares.
Regulation 4(1) Form Foreign Currency-Gross Provisional Return (FC-GPR); Regulation 13.1(2) Delay in filing form FC (GPR) after issue of shares.
Regulation 4(2) Annual Return on Foreign Liabilities and Assets (FLA); Regulation 13.1(3) Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA).
Regulation 4(3) Form Foreign Currency-Transfer of Shares (FC-TRS); Regulation 13.1(4) Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident or from Non-resident to Resident.
Regulation 4(6) Form LLP (I); Regulations 13.1(7) and 13.1(8) Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by Limited Liability Partnerships (LLPs)/ delay in reporting disinvestment / transfer of capital contribution or profit share between a resident and a non-resident (or vice-versa) in case of LLPs
Regulation 4(7) Form LLP (II);
Regulation 4(11) Downstream Investment Regulation 13.1(11) Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity (which is considered as indirect foreign investment for the investee Indian entity in terms of these regulations), to Secretariat for Industrial Assistance, DIPP.

b. Discarding the classification of a Contravention as “Technical” contravention:

There are 3 types of contraventions pursuant to relevant circulars issued earlier by RBI:

(i) Technical and/or minor in nature and such nature of contravention can be dealt by RBI by way of an administrative/ cautionary advice;

(ii) Material in nature and that is required to be compounded for which the necessary compounding procedure has to be followed

(iii) Issues of sensitive / serious in nature and need to be referred to the ED.

Prior to this Compounding Circular, contravention of technical nature used to be dealt with by way of an administrative/ cautionary advice and the same is being done away with this Circular i.e., the RBI has decided to discard the classification of a contravention as ‘technical’ and regularize such contraventions by imposing minimal compounding amount as per the compounding matrix as contained in the Master Direction – Compounding of Contraventions under FEMA, 1999 as amended from time to time. In other words, the Reprimand and Condonation of any type of contravention, as a form of punishment in lieu of monetary penalty is totally dispensed with.

c. Public disclosure of compounding order:

Compounding orders issued by RBI can be accessed in its website. RBI has now decided that in respect of the compounding orders passed on or after March 01, 2020, only a summary information of such compounding orders, in lieu of the entire compounding orders, shall be published in the format, as mentioned below, in order to balance between the objectives of ensuring transparency & greater disclosure to the public and respecting confidentiality of the contravener:

No. Name of the Applicant Details of contraventions (provisions of the Act/Regulation/Rules compounded) Date of compounding order Amount imposed

Conclusion

From the foregoing presentation one may conclude that this circular amendment has facilitated

1. Inclusion and alignment of all contraventions resulting out of non-compliance with NDI Rules.

2. The publication of compounding orders passed by RBI will be in an abridged Form respecting the confidentiality of the contravener; and

3. The form of Reprimand and condonation now followed for certain contraventions have been totally dispensed with resulting in levy of monetary penalty for all cases of contraventions.

Authored by Deepika Venkataraman

The needs and wants of consumers are constantly changing and this plays a pivotal role in creating new products and services. All these changes spell opportunity for various business entrepreneurs thereby giving room to new business ideas. It is inevitable that with the advent of new emerging businesses, laws also needs to evolve. Given the fact that Trade Mark laws directly deal with important facets of a business, the classification and description of goods and services for filing of trademark applications and protection of brands also needs to be updated from time to time to include new lines and niche areas of businesses that are shaped by demands of consumers. In this regard, it is pertinent to note that the description of goods and services that are provided during the filing of trademark applications in India needs to be in accordance with an international system of classification of goods and services commonly knowns as the Nice Classification, which India is a party to.

The Nice International Classification System for trademarks was established by the Nice Agreement in 1957 as a way to categorise goods and services pertaining to the registration of a trademark. It basically distinguishes between goods and services. Every 5 years, a new Edition of the classification was published up until 2013. Since 2013, a new version of each edition is released annually. Nice Classifications help businesses to identify the nature of the related goods or services and seek adequate intellectual property protection.

The Nice Classification facilitates the search by organizing information concerning trademarks into indexed classes thereby making it easier to conduct a thorough search which helps in identifying the trademark registrations with specificity. The classification makes the trademark easy to be acknowledged, recognized and categorises among all signatory countries. These classifications exist so that businesses registering a trademark can identify the nature of the related good or service and seek adequate intellectual property protection.

Changes in the business eco-system and advancement of technology has made certain well-known businesses a relic of the past. For example, trademark registrations which dealt with goods such as video cassettes, floppy discs, phonograph records and with respect to services by telephone or facsimile. Given such development in technology, the owners of those trademark registrations may still continue to provide goods or services that may have the same function, content or subject matter, but in different formats, such as downloadable music files, electronic publications or digital/online services. It is for this reason that the Nice Classification of goods and services are continually reviewed and updated to include within its fold new areas of businesses and services that helps brand owners to seek protection in such new areas.

The Eleventh Edition, Version 2021 of the Nice Classification will come into force on 1 January 2021.The current Eleventh Edition, Version 2020 of the Nice Classification shall continue to apply to all applications filed from 1 January 2020 to 31 December 2020. Thereafter, applications filed from 1 January 2021 will be classified in accordance with NCL (11-2021).

In light of the various changes made to the Class Headings, it is important to adopt the updated Class Headings (in parts or in whole) if the same needs to be claimed in the application.

A copy of the Class Headings and Explanatory Notes of NCL (11-2021) and updated NCL can be accessed at WIPO under following link: https://www3.wipo.int/classifications/nice/nclef/public/en/project/NC021/annex/2.

https://www3.wipo.int/classifications/nice/nclef/public/en/project/NC021/annex/4.

The following table captures the list of various changes in the Nice classification description that have been added, deleted and changed.

Class Added description of goods and services Deleted description of goods and services Changed description of goods and services
1 Bio-stimulants for plants

 

NA NA
2 NA coatings for tarred felt [paints]

 

NA
3 body glitter,

double eyelid tapes

 

NA NA
4 NA NA paper spills for lighting fires,

wood spills for lighting fires

 

5 deodorizers for litter trays,

deodorisers for litter trays

 

 

NA seawater for medicinal bathing

 

6 horticultural frames of metal,

cold frames of metal

 

braces of metal for load handling,

harness of metal for load handling,

preserving boxes of metal

 

bottles [containers] of metal for compressed gas or liquid air

 

7 cheese slicers, electric,

vegetable peelers, electric

 

 

NA NA
8 NA NA vegetable slicers, hand-operated,

vegetable shredders, hand-operated,

vegetable peelers, hand-operated

 

9 NA NA ignition batteries,

life-saving apparatus and equipment

 

10 oxygen concentrators for medical purposes,

support bandages,

laser therapy helmets for treating alopecia

 

 

NA orthopaedic bandages for joints

 

11 dehumidifiers

 

NA lampshades

 

12 horse-drawn carriages,

amphibious vehicles,

all-terrain vehicles

 

 

NA handcars

 

16 protective covers for books,

colouring books,

coloring books

 

NA fingerstalls for office use

 

18 backpacks for carrying infants

 

NA NA
19 cold frames, not of metal

 

NA NA
20 drawers for furniture, luggage lockers

 

 

NA NA
21 abrasive mitts for scrubbing the skin NA shoe brushes,

fruit bowls

25 studs for football shoes

 

trouser straps

 

NA
28 bags especially designed for surfboards,

fidget toys

skating boots with skates attached

 

party balloons,

table-top games,

bags especially designed for skis

30 tea beverages with milk

 

NA seawater for cooking

 

33 NA NA digestifs [liqueurs and spirits]

 

35 NA NA website traffic optimization,

website traffic optimisation,

providing business information via a website

36 NA NA providing financial information via a website

 

40 NA NA window tinting treatment being surface coating

 

41 NA NA language interpretation

 

42 NA NA creating and maintaining websites for others,

website design consultancy,

providing information relating to computer technology and programming via a website

44 dietary and nutritional advice,

rental of surgical robots

NA NA
45 NA NA personal bodyguarding

Authored by Padma Akila

The Intellectual Property Appellate Board (IPAB) has stayed the operation of registration of ‘N95’ as trademark. The IPAB while considering a Rectification application filed by SASSOON FAB International Pvt. Ltd., (“Sassoon” / “Company”) held that N95 is a generic term in the mask industry and the same cannot be registered or protected as trade mark nor can it can be appropriated by any one person.

Sassoon which is engaged in the business of selling masks, had filed a rectification application under Section 57 of Trademark Act, 1999, for Removal of the “N95” label under Reg. No. 4487559 in class 10 registered in favour of one Mr. Sanjay Garg (“Respondent”). The Company submitted that it checked through the Respondent’s website, www.maya123.com and found that he was running a business of various Audio & Video accessories like cables, connectors, smart watches, speakers etc. On being contacted the Respondent claimed that he shall only allow those business houses to use N95 as a term on their products who share their profits with him. He further claimed that he was in the process to totally block the business of the Petitioner and other traders and threatened the petitioner’s representatives that they should advise the directors of the petitioner to contact him for a “business deal” within 2 days, else he will totally destroy the business of the Company. The Company submitted that Sanjay Garg had frivolously and fraudulently obtained an unlawful registration of the generic term N95 in class 10. As a result, the Company’s N95 masks were removed from www.amazon.in on the basis of complaints lodged by Sanjay Garg.

The IPAB observed that a generic expression can never be granted registration as a trade mark and/or no protection to the proprietor is provided under the trademark law. It opined that the wording N95 in the registered mark is descriptive of a characteristic of the masks, specifically that they filter at least 95% of airborne particles and are not strongly resistant to oil, is a standard and is a class of respiratory devices and thus a generic term. The IPAB further observed that the term N95 is in use worldwide ever since early 1970 having reference to  single respirator face masks which were designed to filter 95% of dust particles to enter the nose or mouth and was initially designed by the famous 3M Company for industrial uses and announced the same as an industry standard. It was held that the same is on the face of record a generic and/or a descriptive mark which is used extensively not only by members of the trade but also by various government authorities, institutions to refer to a particular type of the respiratory mask, which are in huge demand by hospital authorities, healthcare workers, and even general public due to ongoing COVID-19 pandemic.

The IPAB further stated that the term N95 serves as an indicator in the trade to designate the kind, quality, intended purpose and other characteristics of the particular product which is non-proprietary in nature. Hence the IPAB held that the registration of the mark was thus barred under the absolute grounds of refusal under Section 9 (1) (b) of the Trade Marks Act, 1999. In this regard, the IPAB referred to recent Madras High Court judgment in which it was observed that the terms ‘Magic’ and ‘Masala’ are commonly used terms by different manufacturers in the packaged food industry and it would be unfair to confer monopoly over the same expression. IPAB further observed that Sanjay Garg is a squatter and has got registered the generic term N95 as a trade mark to blackmail the bonafide users of the said term and to extract illegal monies. It was observed that he is not even using the said term nor was he dealing in the masks or any goods for that matter for which he had applied the said mark. The IPAB while staying the operation of the registration of the “N95” trademark registered under application 4487559 in class 10 stated that given the current public sentiment during this global public health crisis, and since the dishonesty factor holds the cardinal principle it is justified in staying the operation of the registration of the trademark until the Rectification Petition is finally decided. The application is now posted for further consideration on 5/3/2021.

Authored by Padma Akila

India bowls its first ball to become a global player by signing a MOU on intellectual property cooperation with the USA on 2nd December 2020. The MOU was signed between the Commerce Ministry’s Department for Promotion of Industry and Internal Trade (DPIIT) and the United States Patent and Trademark Office (USPTO), with an aim to increase IP cooperation between the two countries. The MOU was signed by way of a virtual signing ceremony conducted by DPIIT secretary Dr Guruprasad Mohapatra and USPTO director Andrei Iancu. According to the DPIIT, “The MoU will go a long way in fostering cooperation between India and USA, and provide opportunities to both countries to learn from the experience of each other, especially in terms of best practices followed in the other country. It will be a landmark step forward in India’s journey towards becoming a major player in global innovation and will further the objectives of National IPR Policy, 2016.

This MoU is expected to increase the IP cooperation between India and the US in many ways, according to a statement released by the government. This agreement will aid in conducting programs and events to provide details of the best practices, experiences and more such knowledge on IP to the public as well as the industry, universities, Research and Development (R&D) and small and medium-sized enterprises. It is also expected to motivate collaboration in training programs, exchange of experts, technical exchanges. The MoU provides for knowledge on processes for registration and examination of applications for patents, trademarks, copyrights, geographical indications, and industrial designs, as well as the protection, enforcement and use of intellectual property rights. It will also help in the exchange of information on the development and implementation of automation and modernisation projects, new documentation and information systems in IP and procedures for management of IP office services. Both the countries will come up with a Biennial Work Plan to implement the MoU and to carry out cooperation activities. The work plan will also include a detailed procedure to carry through the terms of cooperation.

Further details of this MOU can be accessed at: https://dipp.gov.in/sites/default/files/pressRelease-MoU-IP-03December2020.pdf

 

Authored by Adit N Bhuva

Brief background on data bank of independent directors:

The Ministry of Corporate Affairs (“Ministry”) had with effect from 1st December 2019, for the following category of persons, introduced the requirement of registering with the Institute Indian Institute of Corporate Affairs at Manesar (“Institute”) for the purpose of inclusion of their name in the data bank for the independent directors:

(i) Persons who are already independent directors in a company, are required to get their name included in the data bank within 13 months from 1st December 2019 i.e., on or before 31st December 2020;

(ii) Persons intending to be appointed as independent directors have to get their name included in the data bank, prior to their appointment.

Requirement of an online proficiency self assessment test:

In addition to getting their name included in the data bank, the Independent Directors, will have pass an online proficiency self assessment test conducted by the Institute within a period of 1 year form the date of inclusion of their name in the data bank.

Relaxations provided:

The Ministry, on 18th December 2020, has provided the following relaxations with respect to the requirement of online proficiency self assessment test:

S.No. Particulars

 

(Column A)

Earlier requirement

(Column B)

Relaxation provided

 

(Column C)

1. Time limit for passing the online proficiency self-assessment test Time period of one year (from the date of inclusion of name in the data bank) was provided to pass an online proficiency self-assessment test. This time limit has been extended to 2 years.
2. Exemption from requirement of the online proficiency self-assessment test Exempted, if an Individual has served as a director or key managerial personnel for a total period of not less than 10 years in any of the following:

 

(a) listed public company; or

(b) unlisted public company having a paid-up share capital of Rs. 10 crore or more; or

(c) body corporate listed on a recognized stock exchange

 

(“herein after referred to as “Prescribed Entities”)

The time of serving in the Prescribed Entities has been reduced from 10 years to 3 years and in addition to the list of entities provided in Column (B), the following list of entities have been added:

 

(A) Director or key managerial personnel in a:

 

(i) body corporate listed on a stock exchange in a country which is a member state of the Financial Action Task Force on Money Laundering and the regulator of the securities market in such member state is a member of the international organization of securities commission;

(ii) Bodies Corporate incorporated outside India having a paid-up share capital of US$ 2 million or more;

(iii) Statutory Corporations set up under an Act of parliament or any state legislature carrying on commercial activities; or

(B) If a person was in a pay scale of Director or above in the Ministry of Corporate Affairs or the Ministry of Finance or Ministry of Commerce and Industry or the Ministry of Heavy Industries and Public Enterprises and having experience in handling the matters relating to corporate laws or securities laws or economic laws; or

(C) If a person was in a pay scale of Chief General Manager or above in the SEBI or RBI or IRDAI or Pension Fund Regulatory and Development Authority and having experience in handling the matters relating to corporate laws or securities laws or economic laws

3 Pass percentage for clearing the online proficiency self-assessment test The pass percentage was 60%. Now the pass percentage has been reduced to 50%.

Authored by Adit N Bhuva

The Ministry of Corporate Affairs has on 17th December 2020, extended the time from which the Companies (Auditor’s Report) Order, 2020 (hereinafter referred to as “CARO 2020” or “Order”) will be applicable. After this extension, CARO 2020 will be effective from the financial year 1st April 2021-2022 onwards. This means that the auditor’s report of the Companies to whom CARO, 2020 is applicable, will have to contain the matters provided in the CARO, 2020, from Financial year 2021-22 onwards.

Brief background on CARO, 2020:

CARO, 2020 was introduced by the Ministry on 25th February 2020 and the same was to replace the CARO, 2016. As per the Order, the same was applicable from 1st April 2019 onwards. However due to the Covid-19 pandemic situation, the Ministry had on 24th March 2020 provided an extenstion on applicability from 1st April 2020 onwards.

Companies exempted from applicability of CARO, 2020:

1. A banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;

2. An insurance company as defined under the Insurance Act,1938;

3. A company licensed to operate under section 8 of the Companies Act;

4. A One Person Company as defined in clause (62) of section 2 of the Companies Act;

5. A small company as defined in clause (85) of section 2 of the Companies Act; and

6. A private limited company, which is not a subsidiary or holding company of a public company, and:

a. having a paid up capital and reserves and surplus not more than 1 crore rupees as on the balance sheet date; and

b. which does not have total borrowings exceeding 1 crore rupees from any bank or financial institution at any point of time during the financial year; and

c. which does not have a total revenue as disclosed in Scheduled III to the Companies Act (including revenue from discontinuing operations) exceeding 10 crore rupees during the financial year as per the financial statements.

Authored by Padma Akila

On 17th December 2020, the Copyright office (CO) released a Public Notice, wherein it has introduced a new e-filing facility for registration of changes in particulars of copyright entered in the register of copyrights through form XV. The CO in its notice has stated that in its endeavour to enhance transparency and digital empowerment of users it has decided to introduce this e-filing facility.

Users may choose the “Change in RoC (Form XV)” option under the head ‘e-filing of application’ in ‘online services’ available at the CO’s official website. This much needed convenience provided by the CO at the time of a global pandemic is expected have a positive effect towards all the users who can now record any changes in the particulars of a copyright ownership electronically, which will also lead to efficient management of copyright portfolios. The Notice also gives payment details of Change in Particulars (Form XV), relevant documents to be submitted along with the Application and a detailed step by step, picturised guidelines for filing Change in particulars (Form XV). This public notice can be accessed on https://copyright.gov.in/Documents/PublicNotice47.pdf 

Authored by Lakshmi Rengarajan

SEBI had issued a circular stating the cut-off date of re-lodgment of transfer as 31st March 2021 beyond which all the transfer of shares will be made in demat mode.

In this regard, SEBI has issued the following set of operational guidelines for crediting the transferred shares into the demat account of the transferee.

Step 1: After the transfer of shares, the Registrar and Share Transfer Agent (“RTA”) shall retain the physical shares and intimate the transferee of the execution of transfer through letter of confirmation (“LOC”) through registered post/ speed post/ email.

Step 2: The transferee should submit the demat request within 90 days of issue of LOC to the depository participant. At the end of 60 days from the date of issue of LOC, RTA should also inform the transferee to submit the demat request.

Step 3: Depository participant on the basis of LOC will process such demat request.

Step 4: In case of non-receipt of demat request from transferee within 90 days of LOC, the shares will be credited to the suspense escrow demat account of the company.

In case where shares are transferred by RTA pursuant to the non-cooperation or inability of the transferor, the RTA, at the time of approving the demat request, should intimate the depository and the shares will be in locked in for a period of six months from the date of registration of transfer in demat mode.

This circular can be read here: https://www.sebi.gov.in/legal/circulars/dec-2020/operational-guidelines-for-transfer-and-dematerialization-of-re-lodged-physical-shares_48336.html

Authored by Padma Akila R

Date of Order  12th November 2020
Grievance based on which Appeal was filed The Appellants’ demat accounts were frozen by Central Depository Services (India) Ltd. on the instructions given by BSE for non-compliance of Reg. 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) by the company, Subway Finance and Investment.
Appellants Manisha B. Kadhi (“Appellant 1” and Promoter of Subway Finance and Investment), Bhupendra Kadhi (“Appellant 2”and Promoters of Subway Finance and Investment) and Harhit Kadhi & Heer Kadhi (“Appellants 3” and children of Appellants 1 & 2)
Persons against whom the Appeal was filed SEBI (“Respondent 1”), BSE Ltd (‘BSE’, “Respondent 2”), Subway Finance and Investment (“Respondent 3”), Central Depository Services (India) Ltd. (“Respondent 4/company”)

FACTS THAT LEAD TO FILING THE APPEAL

1. The Respondent 3 had failed to submit the financial results and audit reports for its quarterly results for two consecutive quarters viz: September 2018 and December 2018.

2. Stock exchange pursuant to the circular dated May 3, 2018 pertaining to standard operating procedure for suspension and revocation of trading for non-compliance of certain provisions of LODR Regulations, issued notices on 4 different dates requiring the Respondent 3 to comply with Regulation 33[i] and also pay the fine.

3. Respondent 3 did not comply with the same, and hence BSE directed suspension of trading and also directed freezing of entire shareholding of promoter and promoter group.

4. The Appellant 1 and 2 held small stake of 2% shares each and the children held demat account jointly with Appellant 1, and were not involved in the day to day management of Respondent 3.

5. The Appellants were informed by Respondent 3 that it has complied with the order, a week prior to the freeze order was to take effect.

6. Letters written by the Appellants to the stock exchange did not yield result, which led to filing the appeal.

GROUNDS OF APPEAL

a) The Appellants challenged the circulars dated November 30, 2015 and October 26, 2016 (specified as October 20, 2016 in the SAT Order), both of which were issued under Regulations 97 and 98 of the LODR Regulations, as arbitrary as they override the LODR Regulations.

b) The Appellants held on 2% shares, and as the non-compliance is by the company, only the directors should be penalised and not the promoters, and hence the circulars were arbitrary.

c) Since, the Respondent 3 has subsequently complied with Reg. 33 and also deposited fine, continuing the freezing of their demat account was arbitrary and illegal.

DECISION OF SAT:

1. In view of the decision of the Hon’ble Supreme Court in National Securities Depository Ltd. vs. Securities and Exchange Board of India [(2017) 5 SCC 517], it was not open for SAT to question the veracity and / or legality of a circular issued by SEBI and that the validity and legality of such a circular could only be challenged by a party in a writ jurisdiction under Article 226 of the Constitution of India. Thus, SAT concluded that the prayer of the Appellants for quashing of the circulars dated November 30, 2015 and October 26, 2016 which was superseded by the circular dated May 3, 2018 did not arise.

2. With regard to the contention that they were promoters to the extent of 2% of the company, and were not involved in the day to day management was not accepted. SAT held that a promoter plays a vital role in the raising of the capital for a company and, therefore, the role of a promoter is subject to greater scrutiny irrespective of his shareholding and his position in the management of the company. SAT further held that it was immaterial that the appellants were not actively involved in the management of the company. Further, Regulation 98[i] of the LODR Regulations read with the circular dated May 3, 2018 allowed BSE to freeze the demat accounts of the promoters and promoter group for non-compliance of the LODR Regulations.

3. As regard the continuation of the freeze of the demat accounts even after compliance and payment of the fine, the stock exchange had contended that Respondent 3 had defaulted under other provisions of the LODR Regulations and consequently, till such time compliances of the other provisions of the Regulations were not made by the company, the freezing of the demat accounts of the appellants would continue.

4. SAT dismissed the above contention of the stock exchange, and held that once the non-compliance of Regulation 33 of the LODR Regulations was subsequently complied by the company on April 30, 2019, the freezing of the demat accounts should come to an end there and then. SAT further said, if the Respondent 3 has violated any other provisions of the LODR Regulations, it would be open to BSE to issue notice to the company requiring them to comply with the provisions and if they failed to comply within the stipulated period, it was open to BSE to proceed against the company, Directors, promoters in accordance with law, but the freezing of the demat accounts cannot continue when the initial violation of the provision stood complied with and came to an end. The freezing of the demat accounts of the Appellants pursuant to the order of BSE dated April 16, 2019 was set aside by SAT

[i] Regulation 33 requires that financial results and audit reports of the company to be uploaded on the platform of the stock exchange on a quarterly basis after being approved by the Board of Directors of the company

[i] Regulation 98 talks about the consequences to be faced by a listed entity or any other person who contravenes any of the provisions of the LODR regulations.

Authored by Aishwarya Lakshmi VM

On 23rd November 2020, the Securities Exchange Board of India [SEBI] issued a consultation paper on “The reclassification of promoter/promoter group entities and disclosure of the promoter group entities in the shareholding pattern” inviting comments on the proposed amendment to the policy framework from stakeholders on or before 24th December, 2020.

Understanding Regulation 31A:

Considering the need for re-classification of promoter/promoter group entities as public and vice versa, a discussion paper of SEBI in 2018 analysed various scenarios and came up with the said concept, which was consequently codified under Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015.

As per the said Regulation 31A, a promoter/promoter group entity seeking reclassification shall make an application to the board of directors of the Listed Entity. The directors are to analyse the same and decide on placing it before the shareholders in a general meeting for their approval by an ordinary resolution. The timelines here are:

a) There shall be a gap of minimum 3 months and not exceeding 6 months between the board meeting and general meeting.

b) Post approval in the general meeting, the application to the stock exchange shall be made within 30 days.

There are also additional conditions, the violation of which will result in the applicant to be reclassified back as promoter/promoter group entity itself. These include:

i. not holding more than 10% of the total voting rights;

ii. not exercising control over the affairs of the listed entity, directly or indirectly;

iii. not having any special rights through formal / informal arrangements;

iv. not to be represented on the Board (including appointing Nominee Director);

v. not act as a KMP of the listed entity;

vi. not be a ‘Willful Defaulter’ as per RBI Guidelines;

vii. not be a fugitive economic offender.

While conditions (i) to (iii) are perpetual, (iv) and (v) are subject to a cooling-off period of 3 years from the date of reclassification.

Need for change:

Since the current regulatory framework is hard to comply with, several entities have obtained case-to-case basis relaxations. The matter was discussed by the Primary Market Advisory Committee (‘PMAC’) of SEBI in its meeting held on November 11, 2020 to reduce the number of exemptions.

Proposals and Rationale:

S. No. Relevant Requirement Existing Proposed Rationale for proposing the change
1 Condition pertaining to minimum threshold of voting rights – by promoters seeking reclassification and those related to promoters seeking reclassification. 10% 15% Persons who may have been promoters but are no longer in day-to-day control having shareholding of less than 15% may “opt-out” from being classified as “promoters”, without having to reduce their share-holding.
2 Minimum time period between board meeting and general meeting 3 Months 1 Month The minimum time gap of three months is too long increasing the total time taken in the process.
3 Reclassification pursuant to an order / direction of Government or regulator Applicable to Resolution Plan under S.31 of the IBC, 2016. Expanding the scope to order / direction of Government / regulator Since it’s a natural consequence to undergo reclassification pursuant to an order / direction of Government or regulator the proposed limit eases the process.
4 Reclassification of existing promoter pursuant to open offer under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2015 [SAST Regulations] No existing provision 1.

The intent of the existing promoter(s) to re-classify is disclosed in the letter of offer

 

 

2. Reclassification if the promoter is non-traceable or non-cooperative and the Company has taken efforts to contact the promoter.

1. The requirement of promoter making an application for reclassification is a mere procedural formality since the fact is disclosed in the Letter of Offer and the information is already present in the public domain.

 

2. The non-traceability and non-cooperation of promoters results in the continued classification of the concerned as promoter despite losing actual control of the company.

5 Time period to place the reclassification request before the board of directors No existing provision Within one month of receiving the request from the promoter / promoter group. There are cases where the request is not placed before the Board thus ceasing the process in its initial phase itself.
6 Disclosure of Names of Promoter Group Entities in the shareholding pattern. No existing provision All entities falling under promoter / promoter group shall be disclosed even in case of “NIL” Shareholding.

 

 

 

Listed entities to obtain quarterly declaration from their promoters specifying the names of entities / persons that form part of the ‘promoter group’.

Though Regulation 31 clearly prescribes the disclosure of ‘all entities’ there are cases where listed companies have not been disclosing names of persons in the promoter / promoter group with “Nil” Shareholding.

Authored by Ammu Brigit

Under the Drugs and Cosmetics Act 1940 (DCA) and Drugs and Cosmetics Rules 1945 (DCR), the Central Drug Laboratory (CDL) is designated with the responsibility of analysing and testing the samples of drugs as sent to it, and to carry out other functions entrusted to it by the Central Government or by a State Government after consultation with Drugs Technical Advisory Board. Central Drug System Control Organisation (CDSCO) has recognised seven CDLs which are in Kolkata, Mumbai, Guwahati, Chandigarh, Kasauli, Hyderabad and Chennai along Indian Veterinary Research Institute, Ghaziabad, National Institute of Biologics Noida (NIB Noida) and Indian Pharmacopoeia Commission, Ghaziabad.

Out of these, CDL Kasauli, Himachal Pradesh  is responsible for the testing of the vaccine, and  National Institute of Biologics, Noida (NIB Noida), an autonomous institute under the control of Ministry of Health and Family Welfare (MoHFW) is responsible to  carry  out the function of the CDL in respect of blood grouping reagents and diagnostic kits for HIV, Hepatitis B surface antigen, and Hepatitis C Virus pursuant to Rule 3 of DCR.

Since the outbreak of Covd-19, CDL Kasauli has been undertaking the evaluation of vaccine for Covid-19 as instructed by Central Drug System Control Organisation (CDSCO). Recently, MoHFW vide a notification dated 24th November 2020 (Notification) has decided that NIB Noida will act as an additional facility to perform the functions of the CDL with respect to Covid-19 vaccines along with its existing functions.

The Director of NIB Noida shall perform the functions of the Director of CDL in relation to Covid-19 vaccine. MoHFW has notified NIB Noida as a CDL with respect to Covid-19 vaccine  by  MoHFW after the consultation with Drug Controller of India and by exercising its power under DCA and DCR to prescribe the functions of CDL to any laboratory with respect to any drug or class of drug(Section 6) and to regulate or restrict the manufacture, sale or distribution of a drug which is essential to meet the requirement of an emergency and which is expedient and necessary for public interest(Section 26B).

This Notification was released by MoHFW in the wake of Covid-19 to regulate the testing and supply of Covid-19 vaccine and shall remain effective till 30th November 2021.

Authored by Lakshmi Rengarajan

SEBI vide circular dated November 3, 2020, amended its previous circular dated March 10, 2017, updating the information that is required to be submitted by listed entities to the stock exchange, before submitting the scheme of arrangement to National Company Law Tribunal (“NCLT”). In this article, we consolidate the two circulars and summarise the information that is required to be provided to the stock exchanges.

Applicability

Listed Entities which intend to restructure-whether by way of merger, demerger, reduction of share capital, or any other scheme of arrangement with its members or creditors are required to file the Scheme with the stock exchanges pursuant to the provisions of SEBI (Listing Obligations and Disclosure Requirements), 2015 [“SEBI LODR”], and obtain a No-objection letter (“NOC”) from it before filing the restructuring proposal with NCLT.

There are also compliances to be carried out after the restructuring proposal is approved by NCLT.

Exemption

The requirement under SEBI LODR is not applicable to:

a) restructuring proposal that is approved as part of resolution plan under section 31 of the Insolvency and Bankruptcy Code, 2016;

b) merger of a wholly owned subsidiary company with its parent company.

I. Information to be filed with stock exchange before filing the Scheme with NCLT

1. To designate one of the stock exchange with nation-wide terminal for coordinating with SEBI.

2. Documents to be provided to the stock exchange, and also to be uploaded on website of the Company:

(a) Draft scheme of arrangement/ amalgamation/ merger/ reconstruction/ reduction of capital (“Scheme”);

(b) Valuation Report from Registered Valuer (Valuation report not required when there is no change in shareholding pattern of the resultant company);

(c) Report from the Audit Committee recommending the Scheme taking into consideration the valuation report. The report should contain comments on:

i. Need for the merger/demerger/amalgamation/arrangement

ii. Rationale of the scheme

iii. Synergies of business of the entities involved in the scheme

iv. Impact of the scheme on the shareholders.

v. Cost benefit analysis of the scheme

(d) Fairness opinion by a SEBI Registered merchant banker on valuation of assets / shares;

(e) Auditor’s Certificate to the effect that the accounting treatment contained in the Scheme is in compliance with all the Accounting Standards;

(f) Compliance Report certified by the Company Secretary, Chief Financial Officer and the Managing Director, confirming compliance with various regulatory requirements;

(g) Report from the Independent Directors committee recommending the draft Scheme;

(h) Undertaking certified by the board and certified by its auditor, if the situations specified in para VII 2 (a) to (e) below is not applicable to the Scheme.

II. Merger of unlisted entity with listed entity

1. Where the Scheme involves unlisted entities, the following additional matters are also required to be fulfilled:

Information submission:

The information to be provided under the previous paragraph, should also include the following information:

i. Pre and post amalgamation shareholding pattern for the unlisted entity.

ii. Audited financials of last 3 years for the unlisted entity

iii. Certificate by merchant banker certifying the accuracy and adequacy of the disclosure to shareholders as given below.

Disclosure to shareholders

The explanatory statement or notice or proposal accompanying the resolution for seeking the approval of the Scheme from the shareholders, should include the applicable information from the format of abridged prospectus as in Part D of Schedule VII of ICDR Regulations.

2. Post merger shareholding pattern

The post-merger shareholding, of the public shareholders and that of QIB’s of the unlisted company, in the merged entity should be greater than or equal to 25%.

III. Report on complaints

Simultaneous with the submission of information with the stock exchange, the listed entity is also required to upload the details on its web site. In the event the listed entity receives any comments or complaints on the draft scheme, such information is also required to be submitted to the stock exchange (designated for coordinating with SEBI) within 28 days from the date of filing the Scheme with the stock exchange.

IV. Dissemination of the observation letter

The listed entity should upload on its website the observation letter of the stock exchange within 24 hours of receiving the same.

V. Changes to the Scheme

Once the Scheme is filed with the stock exchange, no change is permitted, except those that required by any regulator or the tribunal.

VI. Information to be contained in the notice/explanatory statement to be sent to members while convening the meeting for approval of the Scheme:

 In addition to the information that is required to be specified under section 230(3) of the Companies Act, 2013, r/w rule 6 of the Companies (Compromises, Arrangements and Amalgamations) Rule, 2016, in the notice/explanatory statement that is sent in Form No. CAA 2, the following should also be included:

(a) Observation letter

(b) Pre and post arrangement capital structure and shareholding pattern

(c) Fairness opinion

VII. E-voting and simple majority of Public/Non-Promoter shareholders

1. The shareholders should be provided with the facility to vote on the Scheme through electronic voting.

2. Also, the Scheme can be acted upon only if the votes cast by public shareholders in favour of the Scheme is greater than the votes cast against it by other public shareholders, in the following situations:

(a) When additional shares are allotted to Promoters/ Promoter Group, Related Parties of Promoter / Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group of the listed entity (“Promoter shareholders”).

(b) When the Scheme is between a listed entity and another entity involving the Promoter shareholders.

(c) When a holding listed entity acquires equity shares of its subsidiary from the Promoter shareholders and the subsidiary is merged with the holding entity under the Scheme.

(d) Merger of unlisted entity with listed entity, where the resulting voting rights of pre- scheme public shareholders of listed entity will reduce by more than 5% after the merger.

(e) Scheme results in transfer of whole or substantially whole of the undertaking of a listed entity and consideration is not in the form of listed equity shares.

VIII. Compliances subsequent to approval of Scheme by NCLT

The following documents are to be submitted to the stock exchange, after the Scheme is approved by NCLT:

i. Approved Scheme;

ii. Result of voting by shareholders approving the Scheme;

iii. Statement explaining the changes carried out in the Scheme, if any;

iv. Status of compliance of NOC from stock exchange;

v. Application seeking exemption under rule 19(2)(b) of Securities Contract (Regulation) Rules, 1957;

vi. Report on complaints.

Authored by Aishwarya Lakshmi VM

The Securities Exchange Board of India (SEBI) has issued a consultation paper soliciting public comments on or before 10th December 2020, towards the proposed amendments in SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015 (“SEBI LODR”) regarding the applicability and role of Risk Management Committee. Though the Amendments made pursuant to Shri. Uday Kotak Committee’s recommendation fortified the existing Risk Management structure; SEBI has in the backdrop of Covid-19 felt a need for a more robust framework for businesses to manage the multitude of risks faced by them.

The following are the salient features of the Consultation Paper issued by SEBI –

1. Applicability: The Risk Management Committee (hereinafter “RMC”) is proposed to be expanded and made applicable to top 1000 listed entities based on market capitalization, from the existing number at top 500.

2. Number of Meetings: The RMC shall meet at least twice in a year in contrast to the existing requirement of meeting once a year.

3. Quorum for RMC Meetings: Making the quorum to be uniform with that of the audit committee and NRC (Nomination and remuneration committee), SEBI seeks to bring in mandatory quorum for RMC to be two members or one third of the members of the RMC, whichever is greater; with at least one member of the board of directors in attendance.

4. Seeking Information and Expert Opinion: Just as the audit committee has the power to seek information from any employee and seek outside assistance, the consultation paper enables the RMC also to obtain information from employees and also obtain outside legal or other professional advice and secure attendance of outsiders with relevant expertise, wherever necessary.

5. Roles and Responsibilities: Codification of every aspect seems to be flavor of the season and SEBI has proposed to list out in Schedule II Part D of SEBI LODR, the following as a inclusive list of roles and responsibilities of RMC:

a. Formulating a detailed risk management policy including the framework for identification of risks with a special focus to financial, operational, sectoral, ESG and cyber risks; measures for risk mitigation; systems of internal control and business contingency plans.

b. Monitoring and overseeing the implementation of the policy.

c. Ensuring that systems and processes are in place to monitor and evaluate the risks.

d. Reviewing the policy annually considering the changing dynamics.

e. Keeping the Board informed about nature and content of discussions, recommendations and actions to be taken.

f. Appointing, removing and fixing the remuneration of the Chief Risk Officer (CRO), if any, subject to joint review with the Nomination and Remuneration Committee.

Giving hereunder a comparative snapshot of the four committees under the SEBI LODR:

  Audit Committee

(Reg.18)

Nomination & Remuneration Committee

(Reg.19)

Stakeholder Relationship Committee

(Reg.20)

Risk Management Committee

(in present form –consultation paper is still a proposal)

(Reg.21)

Applicability Every Listed entity. Every Listed entity. Every Listed entity. Top 500 listed entities based on market capitalization.
No. of Members Minimum 3 directors.

 

Minimum 3 directors.

 

Minimum 3 directors. No specification as per SEBI LODR.
Constitution At least 2/3rd being Independent Directors.

 

For a listed entity having outstanding SR Equity Shares: Only independent Directors.

 

All members financially literate.

 

At least one member having financial or accounting or financial management exposure.

 

Chairperson shall be an independent director.

All directors to be Non-Executive directors.

 

At least 50% of the directors shall be independent directors.

 

For a listed entity having outstanding SR Equity Shares, 2/3rd shall be independent directors.

 

Chairperson shall be an independent director.

At least 1 being an independent director.

 

For a listed entity having outstanding SR Equity Shares, 2/3rd shall be independent directors.

 

Chairperson shall be a Non-Executive Director.

Majority shall consist of Board of Directors.

 

For a listed entity having outstanding SR Equity Shares, 2/3rd shall be independent directors.

 

Chairperson shall be a member of the Board; senior executives may be members of the Committee.

Brief outline of the roles and responsibilities Oversight of financial reporting;

 

recommendation of appointment, remuneration and terms of appointment of the Auditors;

 

approval of payment to statutory auditors;

 

reviewing annual financial statements and auditor’s report; reviewing quarterly financial statements;

 

reviewing statement of application of funds;

 

approval for related party transactions;

 

scrutiny of inter-corporate loans and investments; valuation of undertakings or assets etc.

Formulation of a criteria to determine qualifications, positive attributes and independence of directors;

 

recommend a policy to the Board relating to remuneration of Directors and KMP;

 

formulating criteria for evaluation of performance of Independent Director and board;

 

devising a policy on diversity of the Board;

 

recommend remuneration for senior management.

Resolving grievance of security holders;

 

review of measures taken for effective exercise of voting rights;

 

review of adherence to service standards by the Registrar and Share Transfer Agent etc.

No specification as per SEBI LODR.
Minimum number of meetings At least 4 times in a year; not more than 120 days gap between two meetings. At least once a year. At least once a year. At least once a year.
Quorum for meetings 2 Members or 1/3rd of the Members of the Audit Committee whichever is greater, with at least 2 minimum Independent Directors. 2 Members or 1/3rd of the Members of the Audit Committee whichever is greater, with at least 1 Independent Director in attendance. No specification as per SEBI LODR. No specification as per SEBI LODR.
Powers To investigate activities within its scope;

 

To obtain outside expertise and information from employees.

Chairperson may be present at the AGM to answer the questions.

 

However, Chairperson of the AGM to decide who answers the questions.

Chairperson shall be present at the AGM to answer the questions.

 

Subject to delegation by the Board, monitoring and reviewing the risk management plan and other functions, including cyber security.

CONCLUSION: While codification is necessary, SEBI will do well to specify the principles that are to be followed by the RMC and the other committees that are to be constituted under SEBI LODR. The absence of specifying the principles, will only make these committees into a box ticking approach, rather than serving the real objective that they intend to serve.

Authored by Deepika & Priyadharshini

In Pursuance of the Patent (Amendment) Rules 2020 (Revised Rules 2020), the provisions with respect to Priority document and Statement of working were amended and our newsletter on the same can be accessed here: http://eshwars.com/blog/the-department-for-promotion-of-industry-and-internal-trade-dpiit-amends-the-patent-rules-2002/

In furtherance to the revised rules 2020, wide Notification No. G.S.R. 689(E) dated November 4, 2020, Patents (2nd Amendment) Rules, 2020 has come into effect.

In summary, the key amendments have an impact primarily on the following matters and the same has been set out in comparison with that of the previous rules:

1. Rule 7 and Sub rule 3 – Fees- Small entities are no longer required to pay any difference in scale of fees if they cease to be a small entity due to the lapse of period after filing a patent application. It is pertinent to note that startup entities already had this privilege. Hence sub-rule (3A) and sub-rule (3B) has been omitted and new explanation has been inserted accordingly.

2. Table I of the FIRST SCHEDULE– The applicable fees with respect to small entities for filing and prosecuting Indian Patent applications have been significantly reduced and it has been made at par with that of natural persons/ startup entities.

3. Sub-rule (5) of rule 24C– A request for expedited examination filed by a Small entity shall not be questioned merely on the ground that it ceases to be a small entity due to lapse of period or crossing of the financial threshold limit as notified by the competent authority. It is pertinent to note that startup entities already had this privilege.

According to the recent Patents (2nd Amendment) Rules, 2020, the privileges offered to startups are extended to small entities too.

Authored by Ammu Brigit

On 6th July 2020, the National Consumer Disputes Redressal Commission (NCRDC) in Vinod Khanna vs. R.G Stone Urology and Laparoscopy Hospital & Ors (NCRDC Order), pronounced that obtaining consent in a pre-printed consent form is an unfair trade practice. Our article on analysing this NCRDC Order can be read at http://eshwars.com/blog/use-of-pre-printed-consent-forms-by-hospitals-and-doctors-time-to-relook/.  This NCRDC Order was of great concern to medical fraternity as it was uncertain as to how the consent of the patients needs to be obtained. RG Stone Urology and Laparoscopy Hospital (“Petitioner”) filed a civil appeal before Hon’ble Supreme Court to set aside the NCRDC Order. The Petitioner challenged the NCRDC Order on the basis of the following issues:

a. Whether pre -printed consent forms used by hospitals be considered as an unfair trade practice under Consumer Protection Act 1986?

b. Whether NCRDC has the jurisdiction to pass an order in relation to pre-printed consent forms when the complaint filed was for medical negligence?

c. To what extent can hospital/doctor disclose the risk involved in a medical procedure?

The Hon’ble Supreme Court heard the contentions of the Petitioner on 18th November 2020 and has stayed the direction in the NCRDC Order with regard to the pre-printed forms pending the adjudication of the appeal. The copy of the order of the Hon’ble Supreme Court is available at  https://main.sci.gov.in/supremecourt/2020/16143/16143_2020_41_11_24729_Order_18-Nov-2020.pdf .

Authored by Ammu Brigit

The Insurance Regulatory and Development Authority of India (IRDAI) released few guidelines and circulars in relation to health insurance with the intention to bring in uniformity in the health insurance industry and to include certain illness within the cover of health insurance.

Time limit for settlement of insurance claims

IRDAI released Guidelines on Standardisation of General Terms and Clauses in Health Insurance Policy Contracts (hereinafter referred to as “Guidelines”) on 11th June 2020 under the Insurance Act 1938 along with IRDAI (Health Insurance) Regulation 2016 for bring in uniformity in with regard to general terms and clauses in health insurance industry. The Guidelines is applicable to all general and health insurers offering indemnity-based health insurance. Effective from 1st October for all the health insurance filing on or after 1st October 2020, the Guidelines requires the insurers settle or reject a claim within 30 days from the date of receipt of the last necessary document. In case of delay in payment of the claim amount, the health insurance company to pay interest of 2% to the policyholder from the date of receipt of last necessary document. The Guidelines also provides that the insurer cannot reject a claim of a policyholder who has paid a premium for eight years except for proven fraud and permanent exclusions.  The Guidelines also contains provisions regarding multiple polices, termination of policy by the policyholder or the insurers, policy portability, revision of terms of policy contract with prior intimation to the policy holder etc. The Guidelines document is available at   https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo4157&flag=1 .

Inclusion of Mental Illness, HIV/AIDS, Physical Disability under Health Insurance Cover

IRDAI through its circular dated 2nd June 2020 informed all insurers to comply with the IRDAI (Health Insurance) Regulation 2016 to comply with HIV and AID Prevention and Control Act 2017 and Mental Healthcare Act 2017 and instructed all insurers to include policies for persons with disabilities, persons affected with HIV/AID and persons with mental illness diseases.

Telemedicine to be covered under Health Insurance

In a circular dated 11th June 2020, IRDAI has asked all insurers to allow telemedicine wherever medical consultation with a medical practitioner is allowed in the terms and conditions of the policy contract and to make telemedicine a part of the claim settlement policy of the insurers. This is pursuant to the release of Telemedicine Practice Guidelines by Medical Council of India on 25th March 2020.

Authored by Vignesh Kumar

INTRODUCTION:

The Securities and Exchange Board of India (hereinafter “SEBI”) vide order dated 23rd October 2020 debarred Birla Pacific Medspa Ltd. (hereinafter “the Company”), its Directors and key managerial personnel (hereinafter collectively referred to as “the Noticees”) from accessing the securities market and dealing in securities directly or indirectly for a period of two years in connection with diversion, misutilisation and siphoning of funds raised through Initial Public Offer (“IPO”). This comes at the backdrop of the investigation by SEBI conducted covering the period July 07, 2011 to July 15, 2011 (hereinafter “Investigation Period”).

THE IPO:

The Company which operated health care centres made an IPO in 2011 for establishing 55 more healthcare centres which was expressly stated as the primary object in prospectus. The issue size of Rs. 65.17 crores issue was oversubscribed by 1.18 times, and the shares on day of trading i.e. 7th July 2011 increased by 154% more than the opening price.

ALLEGED VIOLATION:

1. IPO proceeds worth Rs. 14 Crores were diverted and mis-utilized by the Company to support the price of its own shares on the listing day. The proceeds were channelled through two layers of entities.

2. IPO proceeds worth about Rs. 33.4 Crores were disbursed to certain entities under the pretext of advances towards work contracts for IPO objectives, but in fact, no substantial work contracts were executed, rather the funds disbursed remained unreturned to the Company and thus it was alleged that the said proceeds were mis-utilized and siphoned off.

3. Proceeds of IPO worth about Rs. 31 Crores were disbursed to group companies as ICD’s [at interest of 15% repayable on demand in seven (7) days], the decision for which was taken at a board meeting held four (4) days after the IPO, [citing adverse macro-economic factors as reason for not establishing 55 more health care centres] which was in contrast to the objects of IPO or the interim use of funds as stated in the Prospectus. The Prospectus permitted interim deployment of proceeds as investment in liquid instruments only and did not permit such deployment of funds as ICD’s. Hence, it was alleged that the act of approving the deployment of funds as ICD’s in the board meeting held 4 days after the IPO tantamounted to mis-statement in prospectus and diversion and mis utilisation of IPO proceeds.

4. Thus, it was alleged that the conduct of the Company amounted to mis-statement in prospectus to defraud the investors and the Company and signatories to the Prospectus were alleged to have violated Regulation 57(1)[1], Regulation 57(2)(a)[2] r/w Clause 2 (XVI) (B) (2) of Part A of Schedule VIII[3] of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 [ “SEBI (ICDR) Regulations”].

[Note: With respect to the alleged violations specified in 1 and 2 above, separate adjudication proceedings were commenced by SEBI, and in this Order was limited to examine if there was a violation of the above provisions in respect of the decision taken at the board meeting to provide ICDs to group companies.]

DEFENCE OF THE NOTICEES:

1. There were 12 Noticees in all in the SCN. The Company did not respond on the merits of the SCN, the Chairman had raised certain contentions to the allegations in the SCN. It was only the other Noticees amongst whom was a MD, General Counsel of the group companies, Independent Directors & Company Secretary, who had responded to the SCN on merits.

2. The summary of defences here are those by the 10 Noticees who responded to the SCN.

3. ICD’s can be construed as a liquid instrument since they are issued on the condition that such ICD’s are repayable on demand by giving notice of 7 days.

4. As stated in the prospectus money pending utilisation from IPO would be invested in interest or dividend bearing liquid instruments including deposits with banks etc. The word “including” in the IPO objects bear a wider meaning and include all types of instruments which can have character of liquidity and thus the objects of the IPO should be understood and construed with wider interpretation.

5. Some of Noticees contended that the “Risk Factors” heading in prospectus contemplated that IPO proceeds can be deployed by the management of the Company as ICDs to the group companies.

6. Few Noticees who were non-executive directors defended that they were not involved in the day to day decision making of the Company, and that SEBI (ICDR) Regulations does not provide vicarious liability (on acts of the company) on independent or non-executive directors, and it is only section 27 of SEBI Act, which provides vicarious liability in respect of criminal offences.

FINDINGS IN THE ORDER:

1. The SCN relied on the prospectus and minutes of the board meeting as the principal evidence to level the charge on mis-statement in prospectus, the contents of which were not disputed by the Noticees.

2. The Prospectus had contained a statement that the management doesn’t intend to provide loans to group companies, except in case of exigencies.

3. Financial exigency ought to be seen from the perspective of the group company and thus advancing ICD’s to group companies citing macro-economic factors did not substantiate a crisis of exigency.

4. The board of the Company, citing macro-economic conditions decided to defer setting up of healthcare centres, within 12 days of signing the Prospectus.

5. The Prospectus did not state the fact that unutilised funds shall be invested in ICD’s of companies, and it was only in the minutes the term corporates was used.

6. ICD’s do not qualify to be liquid assets and financial instruments, and they are private lending and borrowing arrangements between entities.

7. 50% of the IPO proceeds were deployed as ICD’s.

8. The allegation in the SCN pertains to matters decided at the board meeting, and it is not necessary for a director to be involved in the day to day affairs of the Company.

9. For the years 2011-12 and 2012-13, the board of the Company has as part of its financial results submitted report on progress of utilisation of the IPO proceeds, and shows as if expenditure was being incurred towards fulfilling the IPO objects. This statement did not reveal that ICD’s were made by the Company.

10. The auditor of the Company has stated in his report that there was no sufficient audit evidence to verify end use of funds.

11. The audit committee which under Clause 49(II)D5A of the erstwhile Listing Agreement had the specific responsibility of reviewing the statement of utilisation of funds raised through public issue, and the audit committee had also reviewed the quarterly financial results. Hence those directors who were on the audit committee cannot claim that they did not have knowledge of diversion of funds by the executive management.

12. The Company was to have set-up 15 healthcare centres by March 2012, but it had not set-up even one. None of the Independent /Non-executive directors had raised any concern about this at the board meetings, nor reported the same to the auditors or the regulators.

13. The Noticees were not being held responsible vicariously but were held responsible for having signed the Prospectus that contained mis-statements, and for failure to make material disclosures in it.

14. One of the Directors had resigned from the board in about 40 days of the IPO. The Company Secretary was found to have had knowledge about the irregularities in the IPO fund deployment, but was found not to have had the decision making power to approve resolutions of the board, and hence was considered on a different footing from other Noticees.

CONCLUSION:

1. The Whole-time Member distinguished the reliance placed by few Noticees to the decision of SAT in P.G. Electroplast Ltd. v. Securities and Exchange Board of India (Appeal No. 281 of 2017 decided on August 2, 2019), wherein specific non-disclosure of ICD’s in interim use of funds was construed to be `partial non-disclosure of material information’ and a mere technical violation, inter alia on the ground that the merchant banker who was informed of the same failed to incorporate it in the prospectus, which was not the case in the Company, as the board had passed a resolution to give ICD’s.

2. The Whole-time Member concluded that the statements made in the Prospectus relating to `Objects of issue’ were not true, as no healthcare centre was set-up, even though Prospectus specified setting up such centres, and that the Prospectus was materially deficient on disclosure of `interim use of funds’, he held that the Prospectus contained untrue statements to that extent.

3. Except for the director who had resigned in about 40 days of the IPO, the WTM restrained the other directors from accessing the/dealing in the securities market for a period of 2 years. The company secretary was also restrained for a shorter duration of 6 months, and hence guilty of violation of Regulation 57(1), Regulation 57(2)(a) r/w Clause 2 (XVI) (B) (2) of Part A of Schedule VIII of SEBI (ICDR) Regulations, 2009.

[1] Regulation 57(1)The offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision.

[2] Regulation 57(2)(a)  – The red-herring prospectus, shelf prospectus and prospectus shall contain the disclosures specified in Schedule II of the Companies Act, 1956 and the disclosures specified in Part A of Schedule VIII, subject to the provisions of Parts B and C thereof.

 [3] Clause 2 (XVI) (B) (2) of Part A of Schedule VIII – The signatories shall further certify that all disclosures made in the offer document are true and correct.

 

Authored by Aishwarya Lakshmi VM

Applicant: Redington (India) Ltd. Date of the guidance: 22.10.2020

Factual Background:

i. The Applicant has 57 overseas subsidiaries, of which 2 are wholly owned subsidiaries (WOS) and the remaining 55 are step-down subsidiaries. Few step-down subsidiaries are not required to get annual financial statements audited and some subsidiaries / step-down subsidiaries did not have the requirement to constitute a board, and few did not have the requirement to conduct board meetings and prepare minutes for them.

ii. The Applicant had submitted in the context of regulation 46 of the SEBI (LODR) Regulations, 2015, two of its foreign WOS which are required by their national laws to prepare Consolidated Financial Statements (CFS) in accordance with International Financial Reporting Standards and get them audited.

Guidance sought:

a) Citing the relaxation under S. 136(1) of the Companies Act, 2013, wherein the MCA has specified that it would suffice if the unaudited financial statements are placed on the website in case of absence of regulatory requirement of having the financial statements audited, the Applicant sought to know, if it would be sufficient compliance under Reg. 46(2)(s) of SEBI LODR, if it places the CFS of the two foreign WOS on its website.

b) Likewise, the Applicant had sought to know, in the context of regulation 24(3) of SEBI LODR, if the two of its foreign WOS prepare minutes of their board meetings, considering and including therein the significant or material issues and events, which would have a bearing on the interest of investments made in these subsidiaries, and provide the same to the Applicant, for it to be placed before its board.

Provisions Involved

Regulations 24[i] and 46[ii] of SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015.

Informal Guidance by SEBI:

i. With respect to the adequacy of compliance under Reg. 46 of SEBI LODR, the guidance referred to an earlier informal guidance dated 30th May 2019 sought by HCL Technologies Limited, and required the Applicant to follow the same, as its query was substantially similar.

ii. To the queries of HCL Technologies, SEBI had with respect to Reg. 46, in respect of the financial statements of a foreign subsidiary, specified:

a) 46(2)(s) would be complied, where the CFS of the foreign subsidiary that is required to consolidate its financial statements, is placed on its website.

b) If the law of incorporation of the foreign subsidiary does not require its financial statements to be audited, then it would suffice if unaudited financial statements are placed on its website.

c) Where the financial statement is in a language other than English, then a translated copy of the same shall also be placed on the Website.

iii. With regard to the query of the Applicant in respect of Reg. 24(3), specified that if a listed entity has a foreign subsidiary:

a) if the laws of incorporation of the foreign subsidiary require board meetings to be conducted, it is sufficient if the minutes of such board meetings are placed before the board of the listed entity;

b) if the laws of incorporation of the foreign subsidiary does not require board meetings to be conducted, it is sufficient if there is periodic reporting of all significant transactions and arrangements entered into by the subsidiary.

The letter of SEBI can be read at: https://www.sebi.gov.in/enforcement/informal-guidance/oct-2020/informal-guidance-issued-to-redington-india-ltd-regarding-reg-46-and-24-of-sebi-lodr-regulations-2015_47980.html

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[i]Regulation 24, LODR:

(2) The audit committee of  the  listed  entity  shall  also  review  the  financial  statements,  in particular, the investments made by the unlisted subsidiary.

(3) The minutes  of  the  meetings  of  the  board  of  directors  of  the  unlisted  subsidiary  shall  be placed at the meeting of the board of directors of the listed entity.

(4)The  management  of  the unlisted subsidiary  shall  periodically  bring  to  the  notice  of  the board of  directors  of  the  listed  entity,  a  statement  of  all  significant  transactions  and arrangements entered into by the unlisted subsidiary.

Explanation.-For  the  purpose  of  this  regulation,  the  term  “significant  transaction  or arrangement” shall mean any individual  transaction  or  arrangement  that  exceeds  or  is likely to exceed ten percent of the total revenues or total expenses or total assets or total liabilities,  as  the  case  may  be,  of  the  unlisted subsidiary  for  the  immediately preceding accounting year.

[ii]Regulation 46, LODR: (2)The listed entity shall disseminate the following information under a separate section on its website:

(a) to (r) …..

(s)  separate audited financial statements of each subsidiary of the listed  entity in respect of  a relevant financial year, uploaded at least 21 days prior to the date of the annual  general meeting which has been called to inter alia consider accounts of that financial year.

Authored by Padma Akila R

Date(s) of Order  20th October 2020
Purported contravention committed 1.     Promoters and directors of Kirloskar Brothers Limited (“KBL”) had traded in the scrip of KBL while in possession of unpublished price sensitive information (“UPSI”) and got wrongfully benefitted by avoidance of losses

2.      Promoters and directors of KBL had submitted incorrect undertakings/ declarations to KBL

Persons charged and who are they Alpana R Kirloskar, Arti Atul Kirloskar, Jyotsna Gautam Kulkarni, Rahul Chandrakant Kirloskar, Atul Chandrakant Kirloskar and late Gautam Achyut Kulkarni. – “Noticee set 1

[Promoters and/or Directors of KBL]

Nihal Gautam Kulkarni, AR Sathe and AN Alawani – “Noticee set 2”

[All Directors of Kirloskar Industries Limited (“KIL”)]

Sanjay Kirloskar (As Trustee of Kirloskar Brothers Ltd. Employees Welfare Trust Scheme) [CMD of KBL], Pratima Sanjay Kirloskar [Wife of CMD]- “Noticee set 3”

Prakar Investments Private Limited, Karad Projects and Motors Limited (formerly known as Kirloskar Construction and Engineers Ltd.) – “Noticee set 4”

[Promoters of KBL]

Companies in which insider trading and fraud had been committed Kirloskar Brothers Limited, Kirloskar Industries Limited

BACKGROUND OF THE CASE:

1. SEBI had received various complaints alleging insider trading and bad corporate governance practices in the context of KBL. Pursuant to this, SEBI conducted investigation during March 2010 to April 2011 in the matter relating to dealings in the scrip of KBL to ascertain possible violation of the insider trading rules and prohibition of fraudulent and unfair trade practices regulations.

2. UPSI: SEBI identified the following two as UPSI, on the basis of which the Noticees had committed wrongful insider trading were:

(i) Capital loss of the investment i.e. loans / advances given to Kirloskar Construction and Engineers Ltd. (“KCEL”), a wholly owned subsidiary of KBL (“UPSI 1”).

The loan to KCEL was written off in the financial results of quarter and year ended 31st March 2011, and the results was published on 26th April 2011.

At KBL’s board meeting held on 8th March 2010, a board note was presented about KECL, which was incurring losses for last 3 years, based on which a viability report was prepared and circulated amongst the promoters of KBL. At the board meeting held on 3rd September 2010, the board of KBL after considering three (3) options decided to sell KECL, and thereafter at the meeting held on 26th April 2011, the loan to KECL was decided to be written off.

Hence, SEBI considered the time period of UPSI  1 was from March 8, 2010 to April 26, 2011.

(ii) The Financial results for the quarter July – September 2010 August 06, 2010 to October 28, 2010 (UPSI 2). The time period of UPSI 2 was from August 06, 2010 to October 28, 2010.

3. As per SEBI’s investigation, four (4) from the Noticee set 1, had obtained pre-clearance for their trades, while in possession of the above UPSI, however had given undertaking that they had no access to UPSI. Hence, SEBI alleged that the declarations / undertakings given by them were incorrect, and they had violated Part A, of clause 3.3 of Schedule 1 i.e. Model Code of Conduct for Prevention of Insider Trading, specified in Regulation 12(1) of PIT Regulations 1992.

4. The allegation was that Noticee set 1, had sold their shares to KIL, another promoter entity of KBL, after obtaining pre-clearance while they were in possession of the above identified UPSI. Likewise, Noticee set 3 had sold their shares to Noticee set 3 – who were also promoters of KBL.

5. The other allegation of fraud was that the Noticees set 1 and 2 had induced KIL to buy shares from KBL’s promoters, thereby aiding them to sell the shares of KBL to KIL at a time disadvantageous to KIL and its minority shareholders.

Note: The regulation that was prevalent at the time of commission of the above purported offence was PIT Regulations, 1992 and not PIT Regulations, 2015.

CONTENTION OF THE NOTICEES:

1. The Noticees had submitted that the decision to sell KCEL and the decision to write off advances were completely distinct and therefore the information about write off came into existence only on April 26, 2011 and not on March 08, 2010 and that the option to write-off the loans advanced to KCEL was considered or discussed by the KBL for the first time in its Board meeting dated April 26, 2011. Therefore, the discussions pertaining to capital loss of investment/advances given to KCEL during the period from March 8, 2010 to April 26, 2011 cannot be alleged to be UPSI.

2. Few among the Noticees had submitted that, the SCNs did not even allege that the said Noticees have dealt in the shares of KBL “on the basis of” any UPSI following this the Noticees had placed reliance in the matter of Mrs. Chandrakala vs Adjudicating Officer SEBI dated January 31, 2012 wherein Hon’ble SAT had held that the prohibition contained in Regulation 3 of the PIT Regulations, 1992 applies only when the insider has traded “on the basis of” any unpublished price sensitive information. Noticees had also placed reliance in the case of Manoj Gaur vs SEBI dated October 03, 2012, wherein the Hon’ble SAT had set aside the Order of SEBI since the trading pattern in that case reflected that the trades could not be said to be “on the basis of” the alleged UPSI.

3. The Noticees had submitted that both buyers and sellers had the same UPSIs i.e, KIL was a shareholder and promoter of KBL, and KBL was a promoter of KIL a fact that was publicly disclosed and since both buyers and the sellers in the October 06, 2010 transaction were all promoters of KBL, it could not be alleged that there was any suppression or deception or fraud involved at all.

4. With regards to UPSI 2 the Noticees had submitted that PSI included “periodic financial results” of a company computed only on completion of each quarter and not monthly financial position or interim monthly financial information of a company and that any other information which could be connected and eventually become part of the financial results cannot be considered to be equivalent to the financial results.

5. The Noticees had argued that, Section 372A of the Companies Act, 1956 permitted the company to use 60% of its paid capital and free reserves or 100% of its free reserves, whichever was more, to acquire the shares of any other body corporate and that there was no allegation that KIL acquired the shares in breach of Section 372A of the Companies Act, 1956. It was further argued that what was permissible by law cannot therefore, be a device, scheme or artifice which was fraudulent within the meaning of Regulation 2(1)(c) of PFUTP Regulations.

6. It was argued by the Noticees, that said pre-clearance was sought in a bonafide manner believing that they were not in possession on any UPSI. they had further submitted that the compliance officer of KBL had erred in granting the pre-clearance to the said Noticees.

FINDINGS BY THE WOLE TIME MEMBER (“WTM”):

1. The Whole-time Member (“WTM”) noted that the Noticees’ interpretation of the SCN was erroneous in terms of what UPSI 1 was alleged to be, and that the SCN had clearly articulated that the information on the capital loss of the investment/advances given to KCEL was alleged to be UPSI. However, the Noticees had interpreted that the write off of the loans to KCEL in the books of accounts of KBL to be UPSI, which was not the case. The WTM clarified that the UPSI was not the information on the event of writing off the loan or the event of deciding to sell KCEL, but the information / knowledge that a significant part of the capital was lost and asking for a viability report on KCEL before finally deciding as to how to deal with it, did not detract from KBL’s knowledge / understanding that a significant part of the capital invested in KCEL was lost. The WTM further stated that the capital loss of investment/ advances given to KCEL by KBL had occurred much earlier than claimed by the Noticees and the directors of KBL had access to this information in March 2010 itself when the note on KCEL outlining its extremely poor financial health and estimated sale value (at a loss) was circulated to the directors of KBL and thus, there was no merit in the argument of the Noticees that the UPSI came into existence for the first time in April 2011.

2. The WTM noted that, for the purpose of imposition of penalty under Section 15G of SEBI Act, 1992, the requirement was to prove that insider had traded not only “while in possession of” any UPSI but also “on the basis of” any UPSI. However, there was a presumption, albeit rebuttable, that if trading had been done “while in possession of” UPSI, then it was being done “on the basis of” UPSI. Also, Supplementary SCNs dated July 24, 2020 had referred to the Section 15G of SEBI Act, 1992. The WTM distinguished this matter with that of Chandrakala case and Manoj Gaur case on the that the trading pattern of the Noticees was not similar to the specific trading pattern of entities referred in Chandrakala case and Manoj Gaur case.

3. The WTM noted that said exemptions from violation of insider trading i.e. inter-se transfer between promoters and transactions between buyer and seller, who have the same UPSI is not available under the PIT Regulations, 1992 and the same was given under the PIT Regulations, 2015 subject to certain conditions. The WTM further noted that the transaction in question in this matter had happened in the year 2010 when PIT Regulation, 1992 was in effect and upon perusal of Regulation 3 of PIT Regulations, 1992, the said regulations do not exempt any inter-se transfer between promoters or transactions between buyer and seller, who have the same UPSI.

4. With respect to the submissions made by the Noticees with regard to UPSI 2, the WTM reasoned that PSI meant any information which related directly or indirectly to a company and which if published was likely to materially affect the price of securities of the company. Several price sensitive pieces of information relating to the financials of the company may arise prior to the publication of the financial results and at the stage of publication, several price sensitive pieces of information relating to the financial condition of the company were integrated and were published as quarterly results which in itself was deemed to be PSI. The WTM observed that any particular piece of PSI, after its origin, may have been in possession of various persons for legitimate purpose and that the publication of such PSI may happen only after a period of time but it did not take away the fact that the pieces of information may have been price sensitive on their own, even while they were unpublished in the form of periodic financial results and It was for these reasons that Promoters / Directors were often being referred to as “perpetual insiders” because they had continuous access to flow of information that had a bearing on the periodic financial results disclosed to the public.

[Note: This observation is to be taken note of, and in the context of the record keeping that has been mandated by SEBI in PIT Regulations, 2015, assumes significance.]

5. The WTM noted that the basis of allegation against the directors of KIL is that before the KIL board meeting on July 28, 2010 (wherein the decision to buy KBL shares from Promoter/directors of KBL was taken by KIL), the directors of KIL had been aware of the precarious financial condition of KCEL & its impact on the financials of KBL in terms of capital loss (UPSI 1) and yet they had induced KIL to buy shares of KBL from the promoters of KBL as well as of KIL. Therefore, concluding that Noticee set 2 had teamed up with each other and had committed fraud on KIL and public / minority shareholders of KIL.

6. The WTM noted that while the law has permitted certain activity, the said activity had to have been performed as permitted by law and that the PFUTP Regulations prohibited also the permissible activity if done in a fraudulent manner. The WTM rejected the contentions of the Noticees in this regard and stated that in this case, permissible activity of investment was prevented as the same was being done while in possession of the non-public information of capital loss. The WTM further reasoned that the board of directors were vested with the widest powers to make corporate policy, take decisions on investments, appointments of directors etc. if they found that such an action is for the benefit of and in the interest of the company, which also involve the interest of the minority shareholders and such powers are to be discharged in good faith. Further, directors performed functions similar to trustees in respect of the assets of the company as well and If a decision was not taken in good faith and not for the benefit of / in interest of the company, then the director, was liable for inducing the company to act to its own detriment and was also liable for treating minority shareholders in an unfair manner.

7. As far as the argument related to pre-clearance was concerned, the WTM noted that the question of determination whether the compliance officer of KBL had erred in granting the pre-clearance did not arise as the same was not part of the allegation in the SCN and that the Noticees had applied for pre-clearances on September 28, 2010 i.e. prior to the transaction dated October 06, 2010. The WTM rejected the Noticees, arguments by stating that it was irrelevant and what was relevant for determination of violation of code of conduct relating to pre-clearance was whether the said application for pre-clearance was made at the time when the applicant did not have the UPSI and an undertaking to that effect was given for application to get the pre-clearance, which clearly wasn’t the case as the Noticees were in possession of UPSI and had also submitted incorrect declaratons thereby violating Part A, of clause 3.3 of Schedule 1 i.e. Model Code of Conduct for Prevention of Insider Trading, specified in Regulation 12(1) of PIT Regulations 1992.

DECISION OF THE WTM:

a) Noticees set 1 and 3, were disgorged of the gains made by them and they were restrained from dealing in the securities market for different periods of time.

b) Noticees set 2 were held to have induced KIL to buy shares from the promoters of KBL and thereby aided the promoters to sell the shares of KBL to KIL to the detriment of KIL at least in terms of timing of the trade in KBL shares (before public disclosure of UPSI). Thus, Noticees had caused unfair treatment to the minority shareholders of KIL in a fraudulent manner and violated the provisions of Section [1]12A (a), (b), (c) of SEBI Act, 1992 read with [2]Regulations 3 (a), (b), (c), (d) and [3]4(1) PFUTP Regulations as alleged in the respective SCN and they were also restrained to deal in the securities market for different periods of time.

c) With respect to the few Noticees in set 1, and Noticee set 3, they were held to have submitted incorrect declarations / undertakings to KBL while obtaining pre-clearances for their transaction and therefore, violated Part A, of clause 3.3 of Schedule 1 i.e. Model Code of Conduct for Prevention of Insider Trading, specified in [4]Regulation 12(1) of PIT Regulations 1992.

[1] 12A- No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or

proposed to be listed on a recognized stock exchange, any manipulative or deceptive

device or contrivance in contravention of the provisions of this Act or the rules or the

regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in

securities which are listed or proposed to be listed on a recognised stock exchange;

(c) engage in any act, practice, course of business which operates or would operate as fraud

or deceit upon any person, in connection with the issue, dealing in securities which are

listed or proposed to be listed on a recognised stock exchange, in contravention of the

provisions of this Act or the rules or the regulations made thereunder;

[2] 3- Prohibition of certain dealings in securities

No person shall directly or indirectly—(a)buy, sell or otherwise deal in securities in a fraudulent manner;

(b)  use or employ, in connection with issue, purchase or sale of any security listed or proposed  to  be  listed  in  a  recognized  stock  exchange,  any manipulative  or  deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;

(c)  employ any device, scheme or artifice to defraud in connection with dealing in or issue  of  securities  which  are  listed  or  proposed  to  be  listed  on  a  recognized  stock exchange;

(d)  engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under

 [3] 4- Prohibition of manipulative, fraudulent and unfair trade practices

  • Without prejudice to the provisions of regulation 3, no person shall indulge in a 3[manipulative,] fraudulent or an unfair trade practice in securities [markets].

[4] 12- (1) All listed companies and organisations associated with securities markets

(a)…

(b)…

(c)…

(d)…

(e)…

shall frame a code of internal procedures and conduct as near thereto the Model Code specified in

Schedule I of these Regulations 45[without diluting it in any manner and ensure compliance of the

same].

Authored by Aishwarya Lakshmi VM

Applicant: KP Capital Advisors Pvt. Ltd. Date of the guidance: 19.08.2020

Factual Background

 (i) The Applicant is a Category I Merchant Banker and thus an ‘Intermediary’ within S.12 of the SEBI Act, 1992.

(ii) Under the Applicant’s Code of Conduct pursuant to the SEBI (Prohibition of Insider Trading) Regulations, 2015, the compliance officer maintains a ‘Restricted List’ containing companies who are their clients.

(iii) The employees and designated persons of Applicant can trade in the ‘Restricted List’ companies, only as per its Code of Conduct and the PIT Regulations.

Guidance sought

1. Can trades in scrips other than in the `Restricted List’ be outside the purview of PIT Regulations?

2. Can Compliance Officer share the ‘Restricted List’ with Designated persons, so that they can know the scrips that they can trade?

Provisions Involved

 Regulations 9(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015[1] (“PIT 2015’) read with Clause 5 of Schedule C[2] of PIT 2015.

Informal Guidance by SEBI

1. Interpreting the provisions involved, SEBI in its informal guidance stated that the Compliance Officer is bound to monitor trading of Designated Persons in all kinds of securities. Such trading is subject to the pre-clearance by the Compliance Officer(s) above a certain value threshold as decided by the board / head of the organization of the intermediary.

2. With respect to sharing of the list, SEBI on a reading of clause 5 of Schedule C, stated that sharing the restricted list with the designated persons would undermine the requirement of maintaining confidentiality of restricted list as stipulated in PIT Regulations, as it is to be maintained by the Compliance Officer on a confidential basis for approving / rejecting applications made for pre-clearance of trade.

The letter of SEBI can be read at: https://www.sebi.gov.in/sebi_data/commondocs/aug-2020/IG%20Let%20by%20SEBI%20KP_p.PDF

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[1] Reg. 9(1), SEBI (PIT) Regulations, 2015: The  board  of  directors  of  every  listed  company  and the  board  of  directors  or head(s) of the organisation of every intermediary shall ensure that the chief executive officer or managing director shall formulate a code of conduct with their approval to regulate, monitor and  report  trading  by  its designated  persons  and  immediate  relatives  of  designated  persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B (in case of a listed company) and Schedule C (in case of an intermediary) to these regulations, without diluting the provisions of these regulations in any manner.

Explanation – For  the avoidance  of  doubt  it  is  clarified  that  intermediaries,  which  are  listed, would be required to formulate a code of conduct to regulate, monitor and report trading by their  designated  persons,  by  adopting  the  minimum  standards  set  out  in  Schedule  B  with  respect  to trading in their own securities and in Schedule C with respect to trading in other securities.

[2] Clause 5, Schedule C, SEBI (PIT) Regulations, 2015: The compliance officer shall confidentially maintain a list of such securities as a “restricted list” which shall be used as the basis for approving or rejecting applications for pre-clearance of trades.

Authored by Lakshmi Rengarajan

SEBI had issued the Frequently Asked Questions (“FAQs”) on SEBI (Prevention of Insider Trading) Regulations, 2015 (“PIT Regulations”) on 08th October 2020. The FAQs provide the following clarifications on various aspects under PIT Regulations.

1. No Pre clearance required for excise of employee stock options

It is clarified that the issue and exercise of employee stock option is covered under the provision of SEBI (Share Based Employee Benefits) Regulations, 2014, hence pre clearance under PIT Regulations is not required to be complied with in case of the exercise of the option. However this exemption does not include the sale of shares by the employees after the exercise of the stock option.

2. Foreign designated persons, are required to comply with PIT regulations while trading in ADRs and GDRs

 Clarifying that the provisions of PIT Regulations, 2015 are applicable to the trading of American Depository Receipts (ADRs) and/ or Global Depository Receipts (GDRs) of an Indian Listed Company by a designated person(s) of that company who is foreign national. SEBI has clarified that such designated person(s) should also comply with the code of conduct under the PIT Regulations. Further SEBI also suggests the usage of a unique identifier analogous to PAN for the purpose of requisite disclosures in relation such foreign designated person(s).

3. Information that is to be maintained about designated person who is a fiduciary or an intermediary, in the digital database.

 With respect to designated persons who are either fiduciaries or intermediaries, SEBI has clarified to maintain the following information in the structured digital database:

(i). Details of the Unpublished Price Sensitive Information (“UPSI”);

(ii). Details of persons with whom such UPSI is shared (along with their PANs/other unique identifier) and details of persons who have shared the information.

It has also clarified that the fiduciary or intermediary of the Listed Companies should also maintain digital database internally containing the above mentioned details of designated person.

4. Collection and maintenance of information in case of a designated person who resigns from the company.

SEBI has required listed companies to make efforts to maintain updated address of a resigned designated employee for a period of one year after his resignation and preserve the data of such persons for a period of five years.

Authored by Aishwarya Lakshmi VM & Padma Akila R

Forum Madurai Bench of the Hon’ble Madras High Court,

Order passed by Hon’ble Justice G. R. Swaminathan.

Purported contravention committed Credit Rating Agencies downgrading client’s rating while disregarding the Covid-19 relaxation norms provided by SEBI and RBI.
Persons against whom the petition was filed Union of India (1st Respondent),

Reserve Bank of India (2nd Respondent),

India Rating and Research Private Ltd. (3rd Respondent),

SEBI (4th Respondent) (Suo motu impleaded by the Hon’ble Judge).

BACKGROUND OF THE CASE:

1. Writ petitioner, Mahasemam Trust is a registered public trust and a Non-Banking Finance Company (NBFC)and its activities included micro-financing women Self Help Groups. The petitioner is a client of the 3rd respondent which is a credit rating agency(CRA) which had downgraded the petitioner’s bank loans’ rating to ‘IND BB+’ from ‘IND BBB-‘The Petitioner alleged that their track record was not taken into consideration and the downgrading of rating will result in deviations from the prospective targets of the Petitioner.

2. Since COVID outbreak had caused widespread disruption, RBI came out with its policy package vide circular dated 27.03.2020 which permitted the lending institutions to grant a moratorium of three months on payment of all instalments falling due between 1st March 2020 and 31st May, 2020, which was further extended from 31st May 2020 to 30th September, 2020.

3. SEBI had also issued policy Circular dated 30.03.2020 setting out relaxation norms. Pursuant thereto, the petitioner had also granted the benefit of the moratorium to all the joint liability Self Help Groups, in order to enable them to tide over the economic fallout arising out of the pandemic disruption.

4. According to the petitioner, the 3rd Respondent had downgraded the petitioner’s rating disregarding the relaxation norms contained in RBI’s circular which would consequently have a direct bearing on the capacity of the petitioner to raise loans from the banking institutions. Aggrieved by the downgraded rating this writ petition was filed.

ARGUMENTS PUT FORTH BY THE PETITIONER:

1. The Petitioner argued that CRAs discharge public functions and therefore they are clearly amenable to Writ jurisdiction. The dispute between the parties seemingly contractual in nature, substantially throws up questions of public law. The Counsel for the petitioner also stated that no ouster clause in the rating agreement can resist the jurisdictional reach of the Court under Article 226 of the Constitution of India.

2. It was argued that even a bare textual reading of the circulars issued by RBI and SEBI clarify that the events that have taken place during the moratorium period cannot be factored into the rating process.

3. The Petitioner further argued that the impugned action of the 3rdRespondent was not in consonance with the policy announcements made by RBI and SEBI and had called upon the court to strike down the actions of the 3rd Respondent.

ARGUMENTS PUT FORTH BY THE RESPONDENTS:

1. The 3rd Respondent pleaded the court to dismiss the petition as infructuous and submitted that it could not be considered as a “State” within the meaning of Article 12 of the Constitution of India. Hence, it was not amenable to writ jurisdiction.

2. The 3rd Respondent stated that the relationship between the petitioner and the 3rdRespondent is purely contractual in nature and that the agreement between the parties was called a rating agreement and any dispute arising out of rating agreement cannot be resolved in writ proceedings. It was further argued that the petitioner also has effective alternative remedies both under the contract as well as under the SEBI (Credit Rating Agencies) Regulations, 1999.

3. SEBI submitted that the petitioner’s understanding of circular was incorrect. It was also pointed out that the instant case pertains to rating of bank loans of the petitioner and does not pertain to rating of debt securities and that in the case of bank loan rating; relevant guidelines issued by RBI would be applicable.

4. Regarding the circular issued by RBI, which was repeatedly invoked by the petitioner, RBI took the position that the circular was merely permissive in character and that it could not be read otherwise.

DECISION OF THE HIGH COURT:

a) Relying on the judgment of the Supreme Court in Rabjit Surajbhan Singh V. The Chairman, Institute of Banking Personnel Selection, Mumbai [(2019) 14 SCC 189], the Court reiterated that a Writ Petition was maintainable against a private body discharging public functions. Such function should be administratively dominated by or under the control of the Government. Such control should be specific and pervasive, and not merely regulatory. A control which is merely regulatory under the statute or otherwise would not make the body ‘State’ Under Article 12.

b) Rating was an evaluation and assessment of creditworthiness of an individual or company and that the debtor’s ability to repay the debt was analysed and based on the same, credit-risk associated with lending was projected and that these were normal corporate functions. The High Court further stated that

“Merely because they have implications for the general public and lending institutions tend to go by them, credit rating agencies cannot be considered as discharging public function or public duty. Secondly, SEBI has only regulatory and supervisory control over the credit rating agencies”.

Applying the aforesaid decision of the Apex Court, the Court held that the 3rd Respondent cannot be characterised as “State” within the meaning of Article 12 of the Constitution of India and that it was not discharging any public function.

c) Rating being an expert job performed by financial analysts, the said experts would be in a better position to handle issues than a Writ Court. If there arises any grievance against the CRA, the options of in-house appeal and complaint before SEBI are efficacious alternative remedies available to the aggrieved.

d) More significantly, the court stated that credit rating indicates the fiscal health of the person or the institution concerned. It would be one thing to state that notwithstanding the actual position ameliorative relief must be provided and that loans should be provided despite the downgrading, but it would be a completely different matter to say that rating should not reflect the actual state of affairs. The court metaphorically added that:

“Any remedial treatment must be preceded by correct diagnosis. If the patient is going to insist that the symptoms should be disregarded, then there can be no proper diagnosis, not to speak of the resulting treatment”

OBSERVATIONS FROM THE ORDERS OF HON’BLE JUDGE:

1. Credit Rating Agencies are not performing any public duty and therefore a Writ Petition does not lie against them.

2. Any person aggrieved by the acts of the CRA shall prefer an in-house appeal or shall file a complaint before SEBI.

Authored by Lakshmi Rengarajan

The High Court of Madras passed an order dated 09th October 2020, setting aside the order (‘Impugned Order’) passed by the Single Bench dismissing the writs that were filed to quash the respective disqualification by the Registrar of Companies (‘ROC’) vide list uploaded by ROC on 17.12.2018 and for consequential reactivation of the DIN or permission for appointment/reappointment as a director.

Section 164(2)(a) of the Companies Act, 2013 prescribes that a person who is or has been a director of a company which has not filed financial statements or annual returns for any continuous period of three financial years is not eligible to be re-appointed as a director of the company or appointed as a director of any other company for five years from the date of default. Relying on the aforesaid provision, the ROC has published multiple lists containing the details of the directors disqualified for a period of five years pursuant to the non-filing of the financial statements or annual returns of a Company for a continuous period of three years and consequently, the DIN of such disqualified directors were also deactivated.

The Division Bench of the Hon’ble High Court of Madras after considering the submissions made by the appellants and respondent, set aside the Impugned Order on the following reasons:

1. That prior notice is required to be issued by the ROC to the director of the defaulting company before taking actions against the disqualification under section 164(2) of the Companies Act, 2013 for the purpose of determining whether the Company has committed the default and for the attribution of the default to particular set of directors and that the prior notice requirement will not be an empty formality as held in the Impugned Order.

2. That the ROC is not empowered to deactivate the DIN as:

(a)  the relevant Companies [Appointment and Qualifications of Directors] Rules, 2014 (‘AQD Rules’) do not provide for the cancellation or deactivation upon disqualification under section 164(2) of the Companies Act, 2013; and

(b)  the same would be in contrary to Section 164 (2) read with section 167(1) of the Companies Act, 2013, which states that the director of the defaulting company will cease to be a director in all other companies wherein he is a director except in the defaulting Company for the purpose of making the requisite filings which would necessarily require the use of his DIN.

In light of the above, the Division Bench allowed the appeals and consequently quashed the publication of the list of disqualified directors by the ROC and deactivation of the DIN. Further, the court directed reactivation of DIN within a period of 30 days from receipt of the order.

Authored by N V Saisunder

The IPAB has, vide its recent decision on 25th August 2020, directed the Registrar of Trademarks to publish that “NOKIA” is a well-known trademark in India.

The said order was passed by the IPAB in an appeal filed by Nokia Corporation arising out of an order dated 27th March 2017 passed by the Registrar of Trademarks (“Impugned Order”), refusing to allow the request filed by Nokia Corporation for incorporating “NOKIA” in the list of well-known trademarks in India.

Nokia Corporation (“Appellant”) had, originally on 5th June 2014, filed a representation before the Learned Controller of Patents, Designs and Trademarks for inclusion of Nokia in the list of Well-known marks as maintained by the Trademarks Registry. It was argued by the Appellant that the said representation was disallowed by the Trademarks Registry despite the Appellant adducing sufficient documents and records evidencing:

a. Its global presence and market recognition since 1865.

b. Prior, long, continuous, and extensive use of trademark, NOKIA, which had acquired worldwide and tremendous reputation and goodwill amongst the purchasing public and traders, and was thus exclusively associated with the Appellant

The Appellant had also, in its original representation, relied upon an ex-parte ad-interim injunction passed by the High Court of Delhi in Nokia Corporation & Ors., v. Movie Express & Ors., in 2012 whereunder the trademark “NOKIA” was held as well-known.

The IPAB while disposing the appeal, based on the arguments and evidences placed by the Appellant, set aside the Impugned Order and held that:

a. The Trademarks Registry had passed the Impugned Order without affording the Appellant an opportunity of being heard in the matter and thus was passed in violation of the principles of natural justice and in contravention of mandatory provisions of the law.

b. The Impugned Order has been passed in a most casual manner without looking into the true facts and background of the matter.

c. The Impugned Order is based on conjectures, surmises and presumptions which are absolutely contrary to the record. Therefore, it cannot be considered that the Trademarks Registry has acted in a just and fair manner prior to passing the Impugned Order.

d. Based on the documentary evidence and supporting documents submitted along with the representation the said mark “NOKIA” is entitled to be included in the list of well-known marks in India by virtue of provisions of Section 11(8) of the Trademarks Act.

e. NOKIA is well-known trade mark in India also.

Further, the IPAB in disposing off the instant appeal, referred a decision of the Delhi High Court in the matter of Tata Sons Ltd. Vs. Manoj Dodia and Others in 2011 wherein it was held that a well-known trademark is a mark which is widely known or recognized by the relevant general public in India and the Indian Trademark Act, 1999 recognises this principle pursuant to the provisions of Article 16 of the TRIPS Agreement, to which India is a signatory party since 1994.

In the light of the above the IPAB directed the Trademarks Registry to publish that the trademark “NOKIA” is a well-known trademark in India.

Authored by N V Saisunder

The Department for Promotion of Industry and Internal Trade (DPIIT) of the Ministry of Commerce and Industry, vide notification dated 19th October 2020, has amended certain rules under the original Patent rules 2003, pursuant to the Patents (Amendment) Rules, 2020.(“New Rules”). The New Rules have been brought into force by the DPIIT to boost the aspect of “Ease of doing business” in India and reduce compliance hassles.

As per the New Rules:

1. PRIORITY DOCUMENT:

Rule 21, which contains provisions on filing of priority document has been substituted as follows:

“21. Filing of priority document – (1) Where the applicant in respect of an international application designating India has not complied with the requirements of paragraphs (a), (b) or (b-bis) of rule 17.1 of the regulations under the Patent Cooperation Treaty, and subject to paragraph (d) of the said rule 17.1 of regulations under the Treaty, the applicant shall file the priority document referred to in that rule before the expiration of the time limit referred to in sub-rule (4) of rule 20 in the Patent Office.

(2) Where sub-paragraph (i) or sub-paragraph (ii) of paragraph (e) of rule 51bis.1 of the regulations under the Patent Cooperation Treaty is applicable, an English translation thereof duly verified by the applicant or the person duly authorised by him shall be filed within the time limit specified in sub-rule (4) of rule 20.

(3) Where the applicant does not comply with the requirements of sub-rule (1) or sub-rule (2), the Patent Office shall invite the applicant to file the priority document or the translation thereof, as the case may be, within three months from the date of such invitation, and if the applicant fails to do so, the claim of the applicant for the priority shall be disregarded for the purposes of the Act.”

2. STATEMENT OF WORKING

The furnishing of working of patents required by the patents office under section sub-section (2) of section 146 would now have to be done once in respect of every financial year starting from the financial year commencing immediately after the financial year in which the patent was granted, and shall be furnished within six months from the expiry of each such financial year, as opposed to the previous deadline of furnishing the workings within three months of the end of each calendar year.

3. Form 27, in the second schedule is amended and now one form may be filed for multiple patents, provided all of them are related patents, wherein the approximate revenue / value accrued from a particular patented invention cannot be derived separately from the approximate revenue/value accrued from related patents, and all such patents are granted to the same patentee(s). The amended Form 27 has also dispensed with the requirement of: (a) identifying licenses/sub-licenses in a given year and (b) as to whether a public requirement out of a patent has been met at a reasonable price. Also, the amended form requires the patentee to provide details of the patent(s) that are worked or not worked in 500 words.

Authored by Lakshmi Rengarajan

Promoters, directors and designated employees (“Identified Persons”) of a Listed Company (“Company”) are [under SEBI (Prohibition of Insider Trading) Regulations, 2015,] required to disclose (to the Company) their trading in the Company’s share, if the aggregate traded value exceeds Rs. 10 Lakhs in a calendar quarter (“Transaction”), within two days of such Transaction. The Company in turn is required to intimate within two days of receipt of details of such Transaction to the stock exchanges where the securities are listed

With trading being carried out only in Demat mode, the information of such trading is an information that is available with the depositories and having automated, the disclosure under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI is now extending it to the PIT Regulations too.

Vide circular SEBI/HO/ISD/ISD/CIR/P/2020/168 dated 9th September 2020, SEBI has brought in a system driven process to identify and publish the Transaction executed by Identified Persons of Listed Company in its website.

The provisions of this circular is applicable to Transaction by the Identified Persons, both in equity shares of the Company and in the F&O Segment.

Companies are required to provide the PAN/ investor’s demat account number of the Identified Persons to depositories to track the Transaction made by them in the Company in all the exchanges and publish details of such Transaction in its website. The said dissemination will be made by the stock exchanges on T+2 day basis.

Transition

The stock exchange shall commence the publishing of the details of Transaction made by the Persons on and from 01st October 2020.

The obligation of the Identified Persons to make disclosure to the Company continues, so does the obligation of the Companies to disclose to the stock exchanges the disclosure made by the Identified Persons in the existing prescribed formats till 31st March 2021.

 One need to wait to see if SEBI does away with the requirement of dual disclosure after 31st March 2021.

Authored by Vignesh Kumar & Padma Akila

Date(s) of Order  29th May 2020, 4th June 2020, 15th June 2020 & 16th June 2020
Purported contravention committed Leak of Unpublished Price Sensitive Information (“UPSI”) through electronic medium viz; WhatsApp.
Persons charged and who are they Individuals employed in stock broking companies viz; Ms. Shruti Vishal Vora, Mr. Aditya Omprakash Gaggar, Mr. Neeraj Kumar Agarwal & Mr. Parthiv Dalal (“Noticees”)
Companies whose information were being circulated Bata India Limited, Asian Paints Limited, Mindtree Limited & Wipro Limited (“the Companies”).

BACKGROUND OF THE CASE:

1. On November 17, 2017, a news article was published in a newspaper which reported that UPSI pertaining to the financial results of some major companies were circulated through electronic medium viz. WhatsApp, prior to the disclosure of financial results to the stock exchanges by the Companies.

2. Consequent to the news article becoming public and raising concern among the investors, the Securities Exchange Board of India (hereinafter referred to as “SEBI”) conducted search and seizure operations, during which several mobile phones and devices were seized from members of the private WhatsApp group viz; “Market Chatter” in which the Noticees were members.,

3. Although SEBI had been unable to trace the original source of UPSI, upon the scrutiny of the WhatsApp chats from the devices seized, it was SEBI’s allegation that financial information (that were near accurate to that of the subsequently published results, with the variance as per SEBI being very minimal) of certain companies were received by the Noticees, and circulated in the said WhatsApp group prior to disclosure by such companies to the stock exchange, and also forwarded by them to various other individuals who were not connected directly with the Noticees and the Companies.

CONTENTION OF THE NOTICEES:

1. The information circulated through WhatsApp does not qualify to be UPSI, as there is no connection between them and the Companies or its promoters/management. SEBI has accepted the submissions of the Companies, its promoters, directors, employees and auditors who had access to the financial results that they haven’t leaked the information in the financial results to anyone. Hence, the Noticees cannot be construed to be Insiders.

2. The Noticees had circulated the information to other individuals based on the estimates projected by stock broking companies which is available in the public domain and thus the circulated information fails to be qualified as UPSI. Also, the information cannot be UPSI in the absence of any connection between the Company and the person who shared the information.

3. SEBI regulations prohibit communicating UPSI. By the very definition, it is imperative to understand that the said section prohibits only sharing of information and not mere market gossip or speculation. The messages shared through WhatsApp are merely Heard on Street (“HOS”) and not UPSI.

4. SEBI has cherry picked the HOS that closely matched, and has ignored those that have been preposterously incorrect, and post facto analysis of after declaration of results is useless.

5. The Noticees are employed in stock broking companies. It is a part of their work profile to communicate the market expectations, price movements and speculative information based on certain parameters to their clients for making informed decisions.

6. Neither the Noticees nor their family members had traded in the shares of any of the Companies.

FINDINGS BY THE ADJUDICATING OFFICER (“AO”):

1. The leaked information, was the same as the announcements subsequently made by the companies to the stock exchanges, and the inability to trace the source of the leaked information within the companies is irrelevant in the determination of such information being UPSI or otherwise.

2. There was no evidence implying that the information circulated was based on market research which was in turn based on generally available information, and that such market research was accessible to the public on a non-discriminatory basis and hence concluded that the leaked information qualified to be UPSI.

3. Although the Noticees were financially literate and associated with the securities market, who were reasonably expected to be aware of the nature of information shared on the electronic medium, continued to be an instrument in the chain of circulation of PSI and did not  report the leak of information to SEBI but instead they accepted such PSI and thereafter passed it on to other unconnected individuals to the Companies.

4. The information in this case was not generally available in a public domain but was being circulated in a closed group which would lead to discriminatory access and thus cannot be HOS information. The Noticees being well acquainted with the working of the securities market and sensitive information couldn’t have been negligent over the materiality of an information received. Moreover, no alarm was raised even when they found out that the circulated information matched the announced financial results accurately. Therefore, the Noticees have deliberately circulated the information by taking advantage of its price sensitive nature.

5. Though it was a part of the work profile of the Noticees to inform their clients regarding the speculative financial information, in the present case, such information was shared to individuals who were not connected to the stock broking companies in which the Noticees were employed in and the Companies to whom such information pertains to.

DECISION OF THE AO:

a) [1]Regulation 2(1)(g) of SEBI (Prohibition of Insider Trading) Regulations, 2015 (“SEBI (PIT) Regulations) elucidates who is considered as an insider. Any person in possession or having access to UPSI is construed to be an insider irrespective of how such UPSI was transmitted to the Noticees. The Noticees are deemed to be insiders regardless of the fact that the link to the leak of PSI could not established.

b) [2]Regulation 3(1) of SEBI PIT Regulations prohibits the communication of UPSI by an insider. The law does not grant excuse to the Noticees from the guilt of communicating PSI merely because the recipients of the information did not deal with the securities of the Company.

c) In order to safeguard the integrity of the securities market, it is not considered appropriate to give a liberal thought and benefit of doubt to the conduct of the Noticees considering the recurring act of the leak of information over WhatsApp.

d) The Noticees had communicated UPSI to other individuals which tantamount to the exploitation of the other investors who do not have access to UPSI to make informed decisions.

e) The Noticees had violated the provisions of Sections [3]12A(d) & [4]12A(e) of the SEBI Act, 1992 and Regulation 3 (1) of SEBI (PIT) Regulations, 2015

OBSERVATIONS FROM THE ORDERS OF AO: 

1. The obligation to maintain a structured digital data base as mandated under SEBI (PIT) Regulations will act as a safe harbour for companies in tracking any leakage of UPSI.

2. One needs to see if these decisions are being appealed, as the reasoning of the AO without establishing a link with the source of information sets a precedent that goes beyond the stated intent of the regulation.

[1] Regulation 2(1)(g) – “insider” means any person who is:

  1. A connected person, or
  2. in possession of or having access to unpublished price sensitive information

[2] Regulation 3(1)No insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.

[3] Regulation 12A(d) – No person shall directly or indirectly engage in insider trading

[4] Regulation 12A(e)No person shall directly or indirectly deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder.

Authored by Aishwarya Lakshmi VM

Applicant: Raghav Commercial Ltd. Date of the guidance:  04.06.2020

Factual Background

1. HEG Ltd. [Company] has its equity shares listed in BSE and NSE. There are around 23 promoters, comprising of both individuals and non-individuals, in the company.

2. Certain Non-individual Promoters of the Applicant intend to carry out inter-se transfer of shares not exceeding 5%, by block deal mechanism, among the Promoter / Promoter Group.

Guidance sought

1. Whether the contra-trade restrictions under PIT Regulation applies to each Promoter(s), or whether the entire Promoter Group is considered for this provision?

2. Whether the proposed transaction will attract trading window restrictions under PIT Regulation?

3. Whether exemptions for obligation to make Open Offer under the SAST Regulations are required for the proposed transaction?

Provisions Involved

1. Proviso (ii) to Regulation 4(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015.[1]

2. Regulation 9 (1) of SEBI (Prohibition of Insider Trading) Regulations, 2015.[2]

3. Clause 3, Schedule B, SEBI (Prohibition of Insider Trading) Regulations, 2015.[3]

4. Regulation 3(2) of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011.[4]

5. Regulation 10 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011.[5]

Informal Guidance by SEBI

a. SEBI clarified that contra-trade restrictions, that is required to be specified in the code of conduct under Reg. 9(1) of PIT Regulations, apply only to trades made by promoters individually and not the entire promoter group.

b. SEBI confirmed that when the parties to the block deal trade without being in breach of Reg. 3 of PIT Regulations, and made a conscious and informed decision, the transaction will not attract trading window restriction, but would be subject to clearance by the compliance officer.

c. The proposed transaction, as intimated by the Applicant, wasn’t to exceed 5% of the gross acquisitions. Hence, SEBI clarified that there would be no necessity to make an open offer. However, SEBI brought to the attention of the Applicants that while construing the limits of 5%, all the acquisitions by the concerned parties in the financial year must be taken into account.

The letter of SEBI can be read at: https://www.sebi.gov.in/sebi_data/commondocs/sep-2020/SEBI%20let%20Raghav%20IG_p.pdf

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[1] Proviso (ii) to Reg 4(1)(ii), PIT Regulations: The provisos to Reg. 4(1), specify certain instances that an `Insider’ may demonstrate to prove his innocence, even if he had traded while in possession of UPSI, and proviso (ii) gives one such instance. It reads as “The transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision; Provided that such unpublished price sensitive information was not obtained by either person under sub-regulation (3) of regulation 3 of these regulations.”

[2] Reg 9(1), PIT Regulations: The board of directors of every listed company and the board of directors or head(s) of the organization of every intermediary shall ensure that the chief executive officer or managing director shall formulate a code of conduct with their approval to regulate, monitor and report trading by its [designated persons and immediate relatives of designated persons] towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B [(in case of a listed company) and Schedule C (in case of an intermediary)] to these regulations, without diluting the provisions of these regulations In any manner.

[3] Clause 3, Schedule B, PIT Regulations: Designated Persons and immediate relatives of designated persons in the organization shall be governed by an internal code of conduct governing dealing in securities.

[4] Reg 3(2), SAST Regulations: No acquirer, who together with persons acting in concert with him, has acquired and holds in accordance with these regulations shares or voting rights in a target  company  entitling  them  to  exercise  twenty-five  per  cent  or  more  of  the  voting rights  in  the  target  company  but  less  than  the  maximum  permissible  on public shareholding,  shall  acquire  within  any  financial  year  additional  shares  or  voting rights in such target company  entitling them to exercise more than five per cent of the voting rights, unless the acquirer makes a public announcement of an open offer  for  acquiring  shares  of  such  target  company  in  accordance  with  these regulations.

[5] Reg. 10, SAST Regulations: The following acquisitions shall be exempt from the obligation to make an open offer under regulation 3 and regulation 4 subject to fulfillment of the conditions stipulated therefor acquisition pursuant to inter se transfer of shares amongst qualifying persons, being (ii) persons named as promoters in the shareholding pattern filed by the target company in terms of the listing regulations or as the case may be, the listing agreement or these regulations for not less than three years prior to the proposed acquisition.

Authored by Aishwarya Lakshmi VM

In the matter of: TRADING ACTIVITIES OF PANKAJ J. SHAH HUF AND CONNECTED ENTITIES IN THE SCRIPS OF

      i.         L&T FINANCE HOLDINGS LTD.,

     ii.         TREE HOUSE EDUCATION LTD. AND

   iii.         FUTURE VENTURES INDIA LTD.

Date of the order: 31stAugust, 2020.

Provisions invoked

(a) Sections 12A (a), (b) and (c) of the SEBI Act, 1992.[i]

(b) Regulation 3 (a), (b), (c), (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 [ii]

(c) Regulation 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.[iii]

(d) Section 2(i)(a) read with Sections 13, 16 and 18 of the Securities Contract Regulation Act, 1956.[iv]

(e) Section 15HA of the SEBI Act, 1992.[v]

(f) Section 23H of the SCRA, 1956.[vi]

(g) Section 15J of the SEBI Act, 1992 r/w rule 5(2) of the AO Rules, 1995 and Section 23J of the SCRA, 1956 r/w rule 5(2) of the AO Rules, 2005.[vii]

Facts of the case:

1. SEBI received a Suspicious Transaction Report (“STR”) from the Financial Intelligence Unit (FIU) stating that one of the Noticees to whom show cause notice was issued (“Noticee 36”) received 19,431 shares from L&T Finance Holdings Ltd. through off-market transactions from 55 entities who were allotted shares at the time of IPO of L&T Finance Holdings.

2. Investigating Authority (IA) was appointed and investigation was carried on in this matter from May 10, 2011 to December 31, 2011, and it was concluded that Pankaj J Shah HUF (“Noticee 1”) was used as a tool by Noticee 2-the Karta of the HUF, and father of Noticee 36, to corner the shares meant for Retail Individual Investor(“RII”) category in the IPO of L&T Finance Holdings Ltd., Tree House Education Ltd. and Future Ventures India Ltd.

3. Noticees 3 to 37 were all, either family friends or relatives of Noticee 2.

4. The allegation was that Noticee 2 provided minimal interest loans to Noticees 3 to 37, opened demat accounts in their names, and purchased shares in the IPO under the RII category, and later, the shares or the proceeds of the sale of the shares were transferred to Noticee 36.

5. The report of the IA contained details that

a. date of opening of demat accounts were just before the IPOs;

b. the KYC was done using the same address and phone number; and

c. the same person (who was a clerk in the school run by Noticee 2) was appointed as an agent to operate the demat accounts for majority of the Noticees.

Noticee’s defence

(a) Delay in initiation of proceedings: Noticee 1 and 2 in their reply had stated that the transactions purporting to 2011 were rekindled by SEBI in 2019 – 2020 which is almost more than nine years. Since most statutes mention a document retention period of only 7 to 8 years, the Noticees were gravely jeopardized from responding accurately, with evidential backing.

(b) Lack of opportunity to inspect supporting documents: SEBI did not permit the Noticees to examine the (i) investigation report, (ii) suspicious transaction report received by SEBI from Financial Intelligence Unit, and (iii) authority letters of various noticees authorizing the clerk to operate the demat accounts. This is neither fair nor just and fundamentally impairs the ability of a person to defend himself.

(c) Contrary to Principles of Natural Justice: Levying charge on both the HUF and Karta of the HUF in individual capacities when in fact, HUF is only a legal fiction tantamounts to the contravention of natural justice principles.

(d) Common Practice in Security Markets: Commonly, the head of the family funds the accounts of their children/ spouse/ in laws to participate in the securities market. Extrapolating any other view i.e. SEBI holding that a head of family funding account of the family is in violation of PFUTP Regulations, then the securities market will come to a standstill.

(e) Standard of Proof to establish Fraud: Fraud being a serious offence the standard of proof is of a higher degree and mere conjectures and surmises will not be sufficient to hold a person liable for fraud. However, SEBI has not established fraud beyond reasonable doubt.

(f) Element of Intent: The precondition to fraud, i.e. ill-intent is not established by SEBI.

(g) Shares re-transferred by Noticee 36: Since Noticee 36 wanted to trade in F&O, she was obliged to offer collaterals for which she used the shares lent by Noticee 1 (the HUF she was a part of), and Noticee2, (her father).However, she was not able to arrange the margin money and hence she re-transferred the shares. This clearly indicates that there was no actual buying.

(h) Refuting the allegation: A handful of Noticees refuted the allegation that they authorised the clerk to operate their bank account. They argued that they personally operated or engage their spouse to operate the respective accounts.

(i) Transaction between Family Members: Some of the Noticees were blood relatives to Noticee 36 like mother, grand-mother and brother hence the requirement of consideration is not needed.

Decision of the AO

1. The Adjudicating Officer accepting only the defence of natural justice rejected all other defences taken by the Noticees stating that:

a. There is no prescribed time limit under the SEBI Act, 1992 or the SCRA, 1956 to initiate proceedings.

b. The contents of the STR have not been referred to in the SCN at all, and hence there is no duty cast upon the AO to disclose or provide all the documents in his possession especially when such documents are not being relied upon.

c. The KYC details contradict the contention that there is no connection between the parties and therefore fraud is not established. Whether an act or practice is unfair is to be determined by all the facts and circumstances surrounding the transaction. In this case all available evidence points to the contravention.

d. Once contravention is established penalty is sure to follow.

e. Shares transferred by the family friends and relatives were higher in value than what was owed by them to Noticee 1. Also there was no entry in the ledger showing that their loan had been repaid by transfer of shares. Moreover, neither Noticees 1, 2 nor Noticee 36 had paid the price for the spot delivery contract on the day of the transaction or the next day. Hence, it is an outright violation of the SCRA, 1956.

2. The contraventions having been established clearly, the AO levied penalty considering the lack of disproportionate gain or unfair advantage, relatively lesser amount of loss caused to an investor or group of investors and previous track record.

3. Penalty of Rs.35,00,000/- (Rupees Thirty Five Lakh Only) was levied jointly and severally on all the 37 Noticees. In addition, Noticee 36 was levied penalty of Rs.2,50,000/- (Rupees Two Lakh and Fifty Thousand Only) and all other Noticees were individually levied a penalty of Rs.25,000/- (Rupees Twenty Five Thousand Only).

Regulatory issues that are to be noted from this decision of AO
1. Law of limitation is not applicable for SEBI to initiate proceedings in case of allegation of any fraud.

2. KYC norms stand proof to the authenticity of the person trading. Hence, it is to be followed diligently.

3. HUF cannot be used as a tool to commit fraudulent and unfair trade practices.

 

[i]Section 12A, SEBI Act, 1992: Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control: No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a RSE, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) Employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a RSE;

(c) Engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder.

[ii]Section 3, PFUTP Regulations, 2003: Prohibition of certain dealings in securities: No person shall directly or indirectly—

(a) buy, sell or otherwise deal in securities in a fraudulent manner;

(b), (c) and (d) are respectively similar to (a), (b) and (c) of S.12A, SEBI Act, 1992 as provided above.

[iii]Section 4(1), PFUTP Regulations, 2003: Prohibitionof manipulative, fraudulent and unfair trade practices: Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.

[iv]Section 2(i) SCRA, 1956: “spot delivery contract” means a contract which provides for, — (a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality; Sections 13, 16 & 18 empower the Central Government to regulate such contracts.

[v]Section 15HA, SEBI Act, 1992: If any person indulges in FUTP relating to securities, he shall be liable to a penalty twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher.

[vi]Section 23H, SCRA, 1956: Whoever fails to comply with any provision of this Act, the rules or articles or byelaws or the regulations of the RSE or directions issued by SEBI for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

[vii]Section 15J, SEBI Act, 1992 and Section 23J, SCRA, 1956: While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely: – (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; (c) the repetitive nature of the default

Authored by Ammu Brigit

Introduction:

Section 31D, which was introduced into the Indian Copyright Act, 1957 (the Act) in the year 2012, deals with statutory licensing for broadcasting of literary and musical works and sound recordings. Section 31D has recently been in news in the context of broadcasting of sound recordings and musical works over the internet, when Spotify made an application to Intellectual Property Appellate Board(IPAB) for seeking a statutory license on musical works and sound recordings from Warner Chappell Music Limited in relation to its operation of internet music streaming broadcast services in India. Our article analysing the scope and applicability of statutory licensing under Section 31D of the  Act in relation to broadcasting of sound recordings and musical works in the internet in the context of the Spotify-Warner Chappell dispute can be read at https://www.lexology.com/library/detail.aspx?g=cd73f9de-0681-4d55-8b3c-9b7d42b0340f.

In yet another very recent development relating to statutory licensing under the provisions of Section 31D, in the context of radio broadcasting, a public notice, which can be accessed at https://www.ipab.gov.in/public_notice/PUBLIC-NOTICE-on-18-09-2020.pdf was issued by IPAB for fixing the royalties for radio broadcasting of sound recordings and musical works, based on the applications filed by a few radio broadcasting organisations before IPAB.  In this article, we will look into the statutory provisions under the Act and Copyright Rules 2013(“Rules”) and also the recent Interim Order passed by IPAB in relation to the applications filed by the radio broadcasting organisations.

Statutory Provisions

Section 31D of the Act read with Rules 29, 30 & 31 of the Rules enable broadcasting organisations to broadcast or perform any literary or musical works and sound recordings by issuing a prior notice of such intention to broadcast the said works and by paying royalty to the rights holder, as fixed by the Intellectual Property Appellate Board (IPAB). According to Rule 31 of the Copyright Rules, IPAB has to publish in the Official Gazette and re-publish in two daily newspaper as well as in the website of IPAB and Copyright Office,  a public notice after the receipt of the application under Section 31D, inviting suggestions from the public for fixing the royalties for broadcasting of literary or  musical work or sound recordings. Upon the publication of such public notice, any interested person including copyright owners, broadcasting organisations may give suggestions for the fixing of royalties within thirty-days and IPAB within two months from the last day of receipt of the suggestions shall fix the royalty rates to be paid to the copyright owners for television or radio broadcasting.

Recent Public Notice & Interim Order by IPAB

On 22nd September 2020, IPAB published a public notice on its website wherein it informed all stakeholders its intention to fix the royalties for broadcasting of the sound recordings through radio. This public notice was released consequent to an interim order of IPAB dated 18.09.2020 (“Interim Order”) in the applications filed by Music Broadcast Ltd, Entertainment Network India Pvt Ltd, DB Corp Ltd, Next Radio Ltd, Digital Radio(Mumbai) Broadcasting Ltd, South Asia FM Ltd, Reliance Broadcast Network Ltd (“Applicants”) under Section 31 D of the Act  read along with Rule 31 of  Rules. In this context, it is pertinent to note that the erstwhile Copyright Board vide an order 25th August 2010 (“CB Order”) had fixed the royalty for radio broadcasting to be 2% of the net advertisement earning of each FM radio station accruing from the radio business from that radio station to be distributed to the content owners on a pro rata basis and this CB Order is due to expire on 30th September 2020. Hence, in the wake of ensuing expiry of the CB Order, the  radio broadcasting organisations had filed applications before IPAB seeking an extension of the CB Order contemplated hereinabove and for the various copyright holders such as Tips, Eros, Saregama, etc., to maintain the status quo of the CB Order until the fixation of royalty and the final disposal of the applications

Interim Order by IPAB

IPAB, in the Interim Order states that the hearing of the seven applications shall be held once the procedure under Rule 31 for determining royalties is complied with. As an interim relief, after hearing the contentions of both sides, IPAB ordered the maintenance of status quo of the CB Order even after its expiry on 30th September 2020, till IPAB determines an equitable royalty rate based on the submissions and hearing as well as after completion of statutory provisions under section 31D of the Act. This Interim Order was passed by IPAB taking into consideration the proposals from the music label to radio broadcaster of the new royalty rates through voluntary license agreements, suit filed by music labels for copyright infringement even when the compulsory license is valid till 30th September 2020. The Interim Order further clarifies that status quo order shall be applicable to all parties who are covered in the CB Order including the parties who were members of the respondent Phonographic Performance Limited(PPL), the copyright society for composers, lyricists and publishers of music, but left the membership of PPL after the CB Order date i.e.25.09.2010.

The Interim Order for the maintenance of status quo of the CB Order was granted by IPAB to prevent the stoppage of the broadcasting of musical works and sound recordings by established radio broadcasting organisations immediately. It is to be noted that the IPAB will fix a royalty rate, either higher or lower to the rate fixed by the CB Order after the detailed submissions by the parties and hearing the rival contentions. The Interim Order also clarified that the rate fixed by the IPAB shall be retrospectively effective from 1st October 2020. It will be interesting to see how the IPAB determines the royalty rate taking into account the business interests of all stakeholders concerned in this regard.

NAME OF THE SCHEME:  Limited Liability Partnership (LLP) Settlement Scheme 2020.

PURPOSE OF THE SCHEME:

a. To provide LLPs with an opportunity to make good the default by filing of pending documents.

b. To reduce the burden of LLPs

c. To promote ease of doing business, and to act as a compliant LLP in the future.

BENEFITS UNDER THE SCHEME:

      I. Waiver Additional filing fees waived for the period of delay.
     II. Immunity Immunity from prosecution pertaining to filing of belated documents with the Registrar.

DURATION OF THE SCHEME:  1st April 2020 to 30th September 2020

SCHEME APPLICABLE TO:  LLP which has made default in filing of any documents / forms within the due dates.

SCHEME NOT APPLICABLE TO:  LLPs which have made application for striking off their name from the Register.

IS THERE ANY APPLICATION FOR IMMUNITY THAT HAS TO BE MADE BY THE LLP:  No.  If the LLP has filed any document / form under this scheme, no prosecution shall be initiated by the Registrar.

The Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, has recently notified the Geographical Indications of Goods (Registration and Protection) (Amendment) Rules, 2020 (“GI Rules”), which came into force on 26th August, 2020. The primary focus of the amendments are in relation to the simplification of procedures regarding the registration of Authorised Users under the GI Act and the GI Rules.

It is to be noted that under the GI Act and GI Rules, any person can apply to his products a Geographical Indication (GI) registered and recognised under the GI Act, only when he is specifically authorised as per the extant provisions prescribed thereunder. A producer of goods can apply for registration as an authorised user in respect of a registered geographical indication by filing an Application along with the prescribed fee with the GI Registry.

Following are the highlights on the amendments made in Geographical Indications of Goods Rules:

Sl.No. Amended Rule The Geographical Indications of Goods (Registration and Protection) (Amendment) Rules, 2020

 

Remarks
1. Rule 56 – Authorised User The Application for registration of Authorised user can be made only by the proposed authorised user in Form GI-3.

 

Under the earlier GI Rules this application was to be made jointly by the person seeking to be registered as an Authorised User along with the registered proprietor of the GI, which has now been dispensed with.

 

Pre-requisites/supporting documents for filing the Application:

 

–          A statement of case

–          the copy of application made to be forwarded to the registered proprietor and intimation to be sent to the Registrar.

 

 

Under the earlier GI Rules, there was a requirement of filing an affidavit along with consent letter of the registered proprietor and where such consent letter was not furnished the application for seeking registration as an Authorised User was to be forwarded to the registered proprietor under intimation to the Registrar. All these procedures have now been done away with under the new GI Rules and the applicant has to merely file the statement of case along with copy of application forwarded to the registered proprietor under intimation to the Registrar.

 

2. Rule 59 – Registration of an authorised user entry in the Register. The Registrar shall enter the authorised user in Part B of the Register and shall issue a registration certificate with the seal of Geographical Indication Registry:

–          Where there is no notice of opposition filed to an application advertised or re-advertised in the Journal within the period specified under sub-clause (e) of sub-section (3) of Section 17

–          where an opposition is filed and it is dismissed.

 

The Registrar need not wait for the completion of appeal period as well as for a separate request for the issuance of the registration certificate.
The prevailing rules omitted Sub-rule 2 (f) & 2 (g) of Rule 59.

 

As per Sub rule (3) The Registrar may issue a duplicate or further copy of the certificate of registration as an authorised user on a request in Form GI-7 accompanied by prescribed fee. The requirement to file an unmounted representation of the geographical indication exactly as shown in the form of application for registration thereof at the time of registration has been dispensed with.

 

3 First Schedule Fees for filing Application for registration and renewal of an authorised user has been reduced to Rs. 10. Under the earlier GI Rules the fee for registration of an authorised user was INR 500 and the fee for renewal of authorised user was Rs. 1000.

 

 

On 22nd September 2020, Intellectual Property Appellate Board(IPAB) released a public notice, which can be accessed on https://copyright.gov.in/Documents/PublicNotice43_1.pdf   wherein IPAB informed all the stakeholders its intention to fix the royalties for broadcasting of the sound recordings through radio and has invited suggestion for the same within 30 thirty days of the publication of the said notice. The notice was issued pursuant to Section 31D of the Copyright Act 1957(“Act”) read with Rule 31 of the Copyright Rules 2013. Section 31D deals with statutory licensing for broadcasting of literary and musical works and sound recordings and enables broadcasting organisations to broadcast or perform any literary or musical works and sound recordings by issuing a prior notice of such intention to broadcast the said works and by paying royalty to the rights holder, as fixed by the Intellectual Property Appellate Board (IPAB). This public notice was issued by IPAB subsequent to the application filed by the radio broadcasting organisations – Music Broadcast Ltd, Entertainment Network India Pvt Ltd, DB Corp Ltd, Next Radio Ltd, Digital Radio(Mumbai) Broadcasting Ltd, South Asia FM Ltd, Reliance Broadcast Network Ltd(“Applicants”) before IPAB seeking the fixation of royalties to be paid to various copyright holders under Section 31D of the Act. In this context, it is pertinent to note that the erstwhile Copyright Board vide an order 25th August 2010 (“CB Order”) fixed the royalty for radio broadcasting to be 2% of the net advertisement earning of each FM radio station accruing from the radio business from that radio station to be distributed to the content owners on a pro rata basis and this CB Order is due to expire on 30th September 2020. Hence, the radio broadcasting organisations had filed applications before IPAB seeking an extension of the CB Order contemplated hereinabove and for the various  copyright holders such as Tips, Eros, Saregama, etc., to maintain the status quo of the CB Order until the fixation of royalty and the final disposal of the applications filed. The IPAB vide an interim order dated 18.09.2020 has ordered maintenance of status quo of the CB Order and has further stated that the royalty rate fixed by the Copyright Board after the final disposal of the application shall operate retrospectively with effect from 1st October 2020.

Authored by Lakshmi Rengarajan

Promoters of listed companies that do not expeditiously redress investor complaints will have their shareholding frozen as per SEBI’s circular SEBI/HO/OIAE/IGRD/CIR/P/2020/152 dated 13th August 2020, (to be effective from 1st September 2020) in respect of complaints specified in List 1 below.

By this circular, SEBI has shifted the responsibility of monitoring the complaint redressal to the designated stock exchange (“DSE”), in respect of complaints received on the SCORES platform (“Scores”), that are not redressed within a period of 30 days of its receipt. The DSE is now empowered to decide if the compliant has been redressed adequately.

In cases where the DSE views that a complaint is not adequately redressed, or is pending for more than 30 days, the DSE is required to give a reminder to the company to resolve within another 30 days and file an Action Taken Report (“ATR”).

If by the 60th day there is no redressal/ATR, then the DSE is empowered to impose a penalty of Rs. 1,000/- for each day of delay in redressal. Where the penalty is not paid within 15 days of the notice for payment and/or no ATR filed for the complaint, then DSE is to escalate it to the promoters of the company for compliance within the 86th day of receipt of the complaint.

Even after escalation to the promoters, there is no resolution/payment of the penalty, then DSE will intimate the depositories where the promoter/promoter group shares are held to freeze not just their holding in the defaulting company, but also their other shareholding.

With respect to companies having pending complaints exceeding 20 or value of which is more than Rs.10 lakhs, the DSE is required to transfer the matter to SEBI for further actions.

Company will be treated as compliant, and the demat accounts of the promoter will be unfrozen only upon the redressal of the complaint and the payment of the outstanding fines.

LIST – 1

Nature of complaints for which the circular is applicable

1. Non updation of address /Signature or Corrections etc

2. Non-receipt of Bonus

3. Non receipt of Dividend

4. Non receipt duplicate debt securities certificate

5. Non-receipt of duplicate share certificate

6. Non receipt of fractional entitlement

7. Non receipt of interest for delay in dividend

8. Non receipt of interest for delay in payment of interest on debt security

9. Non receipt of interest for delay in redemption proceeds of debt security

10. Non receipt of interest for delay in refunds

11. Non receipt of interest on securities

12. Non receipt of redemption amount of debt securities

13. Non receipt of refund in Public/ Rights issue

14. Non receipt of Rights Issue form

15. Non receipt of securities after conversion/ endorsement/ consolidation/ splitting

16. Non receipt of securities after transfer

17. Non receipt of securities in public/ rights issue

18. Non receipt of shares after conversion/ endorsement/ consolidation/ splitting

19. Non receipt of shares after transfer

20. Non receipt of shares after transmission

21. Non receipt of shares in public/ rights issue (including allotment letter)

22. Non-receipt of interest for delay in dispatch/credit of securities

23. Receipt of refund/ dividend in physical mode instead of electronic mode

24. Receipt of shares in physical mode instead of electronic mode

25. Demat/Remat

Rule based governance of Indian companies was ushered in by the Companies Act, 2013 and the related rules. The rules even went to the extent of prescribing matters to be stated by directors if they were to attend meetings by video conferencing. The rules traversed into areas that the law did not, and at times the law stated matters that were increasing duplication of information.

One such requirement was to append an “Extract of Annual Return” in the board’s report. This only contributed to the size of the annual reports of companies by adding some 10 pages. The primary information in an extract of annual return was the information about shareholding pattern and indebtedness of the Company.

For listed companies, the information about shareholding is  already available in public domain. For unlisted and private companies, the information on the format provided by MCA had more NIL’s than data, which only resulted in companies having to use more paper!.

The Companies Law Committee [“2016 CLC”], by its report in February 2016, recommended to omit the provisions relating to extract of annual return, and suggested to provide the annual return on the website of the company, if it has one, and provide the weblink in its board’s report. With email annual reports becoming the norm, access from such electronic documents to the data contained in the annual return to a shareholder becomes easy.

This recommendation of the 2016 CLC, found way into the Companies (Amendment) Act, 2017, which also received the Presidential assent on the 3rd January 2018.

However MCA chose to notify the provision amending this on the 28th August 2020, well after most of the listed companies had finished holding their AGM after sending the annual reports.

With this, the enactment does away with the concept of “Extract of Annual Return”, and any format prescribed by the rules for this is beyond the scope of the law.

But there seems to be a conundrum in the minds of the decision makers in the MCA with regard to the extracts, and despite the law doing it away, instead of deleting the provision prescribing the format for the “extracts”, MCA has chosen to retain the provision in the rules and also added a proviso to that rule, and the language of which has now added a new dimension into discussion, what about companies that have no web-site?

It is now a settled law, that the delegated legislation cannot go beyond the statute, and since, the provision in sub-section (3) of section 92 of Companies Act, 2013, that mandated an extract of annual return to be in the format prescribed and form part of the board’s report, stands replaced with the new provision, it would be sufficient compliance for companies that do not have a website, to file it with the registrar of companies within 60 days of their annual general meeting.

One has to thank MCA for contributing to the environment by doing away with this requirement, so that all companies – listed, unlisted public companies and private companies can reduce the size of their board’s report.

Authored by R. Padma Akila

In the matter of:  Insider Trading in the scrip of Indiabulls Real Estate Limited (“Company” / “IBREL”) Date of the order: 10.07.2020

Provisions invoked:

Section 12A[1] (d) and (e) of SEBI Act, 1992, read with Regulation 4(1)[2] of SEBI (PIT) Regulations, 2015

Facts of the case:

1. SEBI, on analysing the trading activity in the scrip of the Company had found the trading pattern of its CFO (“Noticee”), suggesting that he may have sold 10,000 shares (on 12.06.2017) of the Company, on the basis of unpublished price sensitive information (UPSI).

2. The alleged UPSI in this case was the decision to sell 4.25 Crore shares held by its promoter entity IBREL IBL Scheme Trust (“Trust”) to raise funds for its ongoing businesses and general corporate purposes.

3. The decision to sell the shares held by the Trust (the sole beneficiary of the Trust was the Company) was taken at a meeting of the operation committee of the Company on 08.06. 2017, which was attended by the Noticee, as an invitee.

4. When the information about the sale of shared by the promoter Trust became public (on 22.06.2017), the scrip fell by 9.80% on NSE and 9.76% on BSE in a single day.

Noticee’s defence:

1. He was not a `Connected Person’ as the decision to sell the shares was taken by the Trust, and that he had no relationship with the Trust.

2. He had obtained pre-clearance from the compliance officer of the company before selling the shares.

3. He had sold the shares received on the exercise of the ESOP provided by the Company.

4. The sale of his shares was not “motivated” by any information/UPSI, and he had wanted to sell the shares in 2017, to generate liquidity, but got to sell it only then.

Decision of the AO:

1. The AO, after considering the submissions of the Noticee, and the information available from the investigation (which were also shared with the Noticee) recorded the following findings:

(a) The information about the sale of shares by the Trust, was UPSI, which originated on 08.06.2017, the date the operations committee of the Company authorised the trustees of the Trust to sell the shares, and that it remained UPSI till 22.06.2017.

(b) The CFO of the Company was a `Connected Person’, and hence an `Insider’ within the meaning of the SEBI (PIT) Regulations, 2015, and he was in possession of the UPSI, having attended the meeting of the operations committee, where the UPSI emerged.

2. Regulation 4(1) of the SEBI(PIT) Regulations, 2015, makes it clear that a trade executed by an `Insider’ while being in possession of UPSI shall be presumed to be motivated by the knowledge of such UPSI, and the legislative note to Regulation 4(1), reaffirms the same.

3. The AO’s orders states that the only way to prove the insider’s innocence against the violation of Regulation 4(1) would be by establishing that any of the circumstances under the proviso (i), (ii) or (iii) [as it stood at the time of the purported offence] had existed for the insider to trade while being in possession of UPSI.

4. With respect to the Noticee, proviso (i) wasn’t applicable as he wasn’t a promoter; proviso (ii) [as it stood then, and now proviso v] was also not applicable to him, as he is an individual; proviso (iii) [as it stood then, and now proviso vi] – the sale by him was not pursuant to a trading plan.

5. The application for pre-clearance was made by him only on 12th June 2017, wherein he had declared that he did not possess any UPSI. Clause 6 of the Code of Conduct specified under Schedule B read with Regulation 9(1) and (2) of the SEBI (PIT) Regulations, 2015 says that no designated person shall apply for pre-clearance of any proposed trade if such designated person is in possession of UPSI, even if the trading window is not closed.

6. The AO concluded that, clearance received on the basis of misrepresentation of a vital fact, is neither a valid clearance nor a valid defence.

7. The AO also drew reference to SEBI’s Guidance Note dated August 24, 2015 on SEBI (PIT) Regulations 2015[1], where it was made clear that the sale of shares received through the exercise of ESOP was not an exception to the general rule under Regulation 4(1) and thus was not a valid defence.

[By amendment to the PIT Regulations, 2015 w.e.f. 01.04.2019, the exercise of ESOP has been incorporated as a defence in proviso (iv) in Reg. 4(1)]

8. The Noticee had violated Section 12A (d) and (e) of SEBI Act, 1992 read with Regulation 4(1) of the SEBI (PIT) Regulations, 2015 and has been imposed with a penalty of Rs. 10,00,000 for his violation of Regulation 4(1) of the SEBI (PIT) Regulations, 2015.

Regulatory issues that are to be noted from this decision of AO
1. To bring a charge on an insider, it would suffice that he traded when in possession of UPSI.

2. It is for the person so charged to show that one of the 6 situations specified in the proviso to sub-regulation (1) of regulation 4, of the PIT Regulations, 2015, are applicable to him.

3. Pre-clearance obtained on the basis of misrepresentation of vital fact, is not a valid clearance/defence.

4. It is only the exercise of ESOP while in possession of UPSI which is exempt and not sale of the shares exercised under ESOP.

[1] 12A. No person shall directly or indirectly—

(d) engage in insider trading;

(e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder;

[2] 4(1) states that “No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information”, Provided that the insider may prove his innocence by demonstrating the circumstances including (i), (ii) or (iii) along with an explanatory note stating that a trade conducted by an insider while being in possession of an UPSI shall be presumed to be motivated by the knowledge of such UPSI

[1] Paragraph quoted by the AO from SEBI’s guidance “the Exercise of ESOPs shall not be considered to be “trading” except for the purposes of Chapter III of the Regulations. However other provisions of the Regulations shall apply to the sale of shares so acquired”.

Authored by Aishwarya Lakshmi VM.

Applicant: Way to Wealth Brokers Pvt. Ltd. Date of the guidance: 20.07.2020

Factual Background

(i) The Applicant is a stockbroker registered with SEBI. They have received a proposal from a listed company to fund the RSU (Restricted Stock Unit) issued by the listed company to its employees, to enable the employees to exercise the RSUs without paying for the same upfront.

(ii) The amount that will be funded by the Applicant is the face value of the share plus the additional perquisite tax @ 36% of the fair value.

(iii) Within two days of receipt of credit of the shares in the DP A/c of the employee, the Applicant will sell the RSUs to the extent of cashless funding plus transaction charges and cover the amount spent by them.

Guidance sought

In the light of the contemplated transaction, the Applicant sought informal guidance as to whether as a SEBI registered broker they are eligible to fund RSUs and if yes, to what maximum extent.

Provisions Involved

Regulations 9(2) of SEBI (Share Based Employee Benefit) Regulations, 2014.[i]

Informal Guidance by SEBI

(i) Interpreting Regulation 9(2) which allows cashless funding of ESOS or SAR and corresponding adjustment with sale proceeds, SEBI in the informal guidance stated that if the listed company permits, the Applicant may fund the cashless transaction at the exercise price, and adjust the same against the sale proceeds of some or all of the shares.

(ii) Also, SEBI went on to state that the SBEB Regulations do not have any maximum limit on amount per unit/security that may be funded.

The letter of SEBI can be read at: https://www.sebi.gov.in/sebi_data/commondocs/jul-2020/Informal%20Guidance%20Letter%20by%20SEBI%20W2W_p.pdf

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[i] Regulation 9(2), SBEB: No person other than the employee to whom the option, SAR or other benefit is granted shall be entitled to the benefit arising out of such option, SAR, benefit etc.

Provided that in case of ESOS or SAR, under cashless exercise, the company may itself fund or permit the empaneled stock brokers to fund the payment of exercise price which shall be adjusted against the sale proceeds of some or all the shares, subject to the provisions of the applicable law or regulations.

 

Authored by Aishwarya Lakshmi V. M.

Applicant: RS Software (India) Ltd. Date of the guidance: 17.09.2019

Factual Background

(i) R S Software (India) Ltd. had started an employee Trust in the name ‘R S Software Employee Welfare Trust’ with the objective of aiding the employees in the form of medical facilities, scholarships, housing etc.

(ii) The Trust acquired shares of the company from October 2012 to January 2013 and held 4.47%. However, pursuant to the proviso to Reg. 3(12)[i] of SEBI (Share Based Employee Benefit) Regulations, 2014 there was a regulatory obligation on the Trust to sell the shares.

(iii) The Promoters (40.47% holding), Executive Directors and Independent Directors [two persons, each of them holding 0.27% and 0.19%] of the Applicant Company were desirous of acquiring the shares held by the Trust, through the stock exchange.

Guidance sought

(i) Whether shares held by the Trust if purchased by the Promoters or Promoters Group or Independent Directors of the Company will be within the limits and not in contravention of SEBI (SAST) Regulations, 2011 and SEBI (PIT), Regulations 2015 and SEBI (LODR) Regulations, 2015?

(ii) Whether the purchase of shares by way of Block Deal through the Stock Exchange is in compliance with the relevant Regulations as these are being acquired on the grounds of regulatory requirement?

(iii) Whether Regulation 5 of the SEBI (PIT) Regulations, 2015 puts any restraint on this transaction?

Provisions Involved

a. Regulation 3(2) of SEBI (SAST) Regulations, 2011.[i]

b. Regulation 16(1)(b)(vi)(c) of SEBI (LODR) Regulations, 2015.[ii]

c. Regulations 3, 4 and 5 of SEBI (PIT) Regulations, 2015.[iii]

Informal Guidance by SEBI

(i) With regard to the compliance of SEBI (SAST) Regulations, SEBI in its guidance stated that the Promoter group may acquire the shares without making a public announcement of an open offer, provided that the overall acquisition does not exceed 5% of Voting Rights of the Applicant company in a financial year.

(ii) As regard the compliance of and SEBI (LODR) Regulations, the guidance stated that the Shareholding of Independent directors together with their relatives should not be 2% or more of the total voting rights in the Applicant.

(iii) As regard, the query on compliance of SEBI (PIT) Regulations, and whether block deal is a safe harbour to prove their innocence, the guidance observed that the proviso (ii) in Reg. 4(1) of SEBI (PIT) Regulations, can be a safe harbor only when the block deal is done without being in breach of Reg. 3 and both the parties had made a conscious and informed decision. The guidance concluded that a person will be treated as an insider for all purposes and has to demonstrate his innocence in case he trades while in possession of UPSI.

(iv) The guidance also stated that the SBEB Regulations do not stipulate the purchase of shares by the Promoters as the compliance. Hence, the purchase via block deal cannot be regarded as statutory compliance.

(v) Regulation 5 is regarding formulation of Trading Plan. Since purchase of shares by the promoters is not a regulatory requirement, the query becomes redundant.

The letter of SEBI can be read at: https://www.sebi.gov.in/sebi_data/commondocs/dec-2019/SEBI%20IG%20letter.pdf_p.pdf.

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[i] This provision required un-appropriated inventory of shares not back by stock options acquired from the stock market to be appropriated before FY 2015 or after disclosing to the stock exchange within a period of 5 years (i.e) 27th October 2019.

[i] Regulation 3(2) of SEBI (SAST) Reg., 2011: No acquirer, who together with persons acting in concert with him, has acquired and holds in accordance with these regulations shares or voting rights in a target company entitling them to exercise twenty-five per cent or more of the voting rights in the target company but less than the maximum permissible non-public shareholding, shall acquire within any financial year additional shares or voting rights in such target company entitling them to exercise more than five per cent of the voting rights, unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations:

Provided that such acquirer shall not be entitled to acquire or enter into any agreement to acquire shares or voting rights exceeding such number of shares as would take the aggregate shareholding pursuant to the acquisition above the maximum permissible non-public shareholding.

[ii] Regulation 16(1)(b)(vi)(c) of SEBI (LODR) Reg., 2015: “independent director” means a non-executive director, other than a nominee director of the listed entity who, neither himself, nor whose relative(s) holds together with his relatives two per cent or more of the total voting power of the listed entity.

[iii] Regulation 4 of SEBI (PIT) Reg., 2015 – Proviso to Reg. 4 specifies instances that can be shown by a person alleged to have engaged in Insider Trading, and proviso (ii) reads as – “the transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision;

Provided that such unpublished price sensitive information was not obtained by either person under sub-regulation (3) of regulation 3 of these regulations.

Authored by Aishwarya Lakshmi VM

Applicant: Mirza International Ltd. Date of the guidance: 10.06.2020

Factual Background

(i) The Managing Director of the Company who individually holds 11.27% shares in the company is desirous of gifting his shares to his daughters. The daughters are married and leading a separate life, away from the father.

(ii) The daughters who are prospective recipients of the shares do not want themselves to be falling within the ‘Promoter/Promoter Group’ definition of SEBI (LODR) Regulations, 2015 since it would attract Trading Window restrictions.

Guidance sought

The daughters are seeking reclassification of their status from ‘Promoter/Promoter Group’ to ‘Public’.

Provisions Involved

Regulations 31A of SEBI (LODR) Regulations, 2015.

1. Analysis of Definition: As per the definition of ‘Promoter Group’ [Reg.2(1)(pp) of SEBI (ICDR) Regulations, 2018][i] the daughters of the promoter are immediate relatives and they already fall under the ‘Promoter Group’ irrespective of the fact they are married an leading a separate life or not.

2. Effect of Gift: As per Regulation 31A (6) of SEBI (LODR) Regulations, 2015[ii] in case of gift of shares by the Promoter, immediately on such event, the recipient of such gift shall also be classified as ‘Promoter/Person belonging to the Promoter Group’. Hence, upon gift the daughters will still be under the ambit of ‘Promoter Group’.

3. Satisfaction of the Conditions relating to Reclassification: As per Regulation 31A (3)(b)(i) of SEBI (LODR) Regulations, 2015[iii] upon reclassification the promoter who is seeking reclassification along with the persons related to such promoter shall not together hold more than 10% of the total voting rights of the company. Since, the total voting rights would be greater than 10% (i.e., 11.27 %) they cannot reclassify themselves to the ‘public’ category.

The letter of SEBI can be read at https://www.sebi.gov.in/sebi_data/commondocs/jun-2020/SEBI%20Informal%20guidance%20Mirza_p.pdf.

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992

[i] Regulation 2(1)(pp), ICDR: “Promoter Group” includes:

  1. i) The Promoter,
  2. ii) An immediate relative of the Promoter (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and …

[ii] Regulation 31A(6), LODR: In case of transmission, succession, inheritance and gift of shares held by a promoter/ person belonging to the promoter group:

(a) Immediately on such event, the recipient of such shares shall be classified as a promoter/ person belonging to the promoter group, as applicable

[iii] Regulation 31A(3)(b)(i), LODR: The promoter(s) seeking re-classification and persons related to the promoter(s) seeking re-classification shall not:

(i) together, hold more than ten percent of the total voting rights in the listed entity;

(ii) exercise control over the affairs of the listed entity directly or indirectly…

 

SEBI has released a Consultation Paper, proposing three (3) options, with respect to listed companies that have a resolution plan approved by the NCLT, in respect of the minimum pubic shareholding (“MPS”) in such companies, and also suggestions of additional disclosures by such companies pursuant to the approved resolution plan.

Here we look at the proposed options and also the present relaxations to listed companies that have an approved resolution plan. The present exemptions have been given to ensure revival of the corporate debtor pursuant to resolution plan, and also to provide any listing gains over the next three years to shareholders of corporate debtor.

Existing regulatory relaxations:

a. Relaxations have been provided from all provisions of Chapter V of the SEBI (Issuer of Capital and Disclosure) Requirements, 2018 (‘ICDR Regulations’) pertaining to preferential issue such as conditions for eligibility, pricing, conditions for consideration and allotment, etc. except lock-in provisions.

  • This results in the shares being allotted through a preferential issue, to the successful Resolution Applicant, to be under lock-in for a period of at least 1 year (for allotment more than 20% of the total capital of the company).

b. Relaxation has also been provided in Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’).

  • This allows the successful Resolution Applicant to breach minimum public shareholding norms.

c. With respect to fall in public shareholding below the present 25%, due to implementation of the resolution plan approved under IBC, 2016, the relaxation under SCRR is as follows:

(i) In cases where the public shareholding falls below 10 percent, then such listed company shall bring public shareholding to at least 10 percent within a period of eighteen months, and to 25 percent within three years from the date of such fall.

(ii) In cases where the public shareholding falls below 25 percent, but is above 10 percent, such listed company shall bring its public shareholding to 25 percent within three years from the date of such fall.

d. Relaxation has also been granted from applicability of delisting regulations in case of delisting arising out of resolution plan approved under the IBC, 2016. The minimum value that the shareholder can receive in such cases is the liquidation value, or the price at which existing promoters/ shareholder are being granted exit.

  • It is possible in case of delisting under the resolution plan, the shareholders may not get sufficient/any value as compared to the potential value that may be realised over a period of time after the implementation of the resolution plan if the shares continue to remain listed.

Concerns pertaining to permitting such exemptions:

a. Allowing lower limit for minimum public shareholding in post- CIRP cases, resulted in an instance where the public shareholding was extremely low, and the less floating stock hampered the efficiency in the price discovery process of the scrip, and thereby volatility in the scrip, which in turn resulted in increased surveillance measures.

b. Any increased surveillance measures may act as a deterrent for a successful Resolution Applicant to continue the listing of the scrip.

c. In case, the resolution plan involves allotment to the successful Resolution Applicant, who will be the new promoter, then in terms of Regulation 167(1) of the ICDR Regulations the shares are to be locked-in for a period of at least 1 year, which will not facilitate dilution of promoter shareholding to achieve immediate compliance with at least 10 percent public shareholding.

In light of the above, SEBI is now considering recalibration of the threshold for minimum public shareholding norms, and in its Consultation Paper (inviting comments on the same by 18th September 2020), has proposed the following options:

Options proposed for MPS in the consultation paper:

a. The Resolution Applicant to achieve MPS of 10% within 6 months, and 25% in 3 years from the date of breach in MPS;

b. Mandate post CIRP listing to be with a minimum of 5% MPS, and require them to achieve 10% MPS in 12 months, and in 36 months from the date of breach of MPS reach 25% public shareholding;

c. Mandate 10% MPS at the time of relisting after approval of resolution plan, and be allowed a period of 3 years to reach 25% public shareholding.

LOCK IN REQUIREMENTS:

Generally, in case of issuance of preferential shares to the Resolution Applicant under the resolution plan, such shares would be under lock-in for at least 1 year in terms of ICDR Regulations. SEBI has proposed doing away with the lock-in period of 1 year for the Resolution Applicant, to the extent of complying with the MPS norm.

DISCLOSURES RELATING TO RESOLUTION

Under the IBC, while the order approving the Resolution Plan is a public document, the plan is not made available to the public. Hence, SEBI in the Consultation Paper has proposed standardising the disclosures, including details of funds infused, amounts paid to creditors, impact on the investors such as revised Price to Earnings ratio, Return on Net Worth, and also the resolution plan without the confidential information and commercial secrets.

Authored by Shrutakeerti

This is in continuation to our article on the highlights and salient features of the Consumer Protection Act, 2019, (‘Act’), and we now delve into the offences and penalty provisions of the Act.

The basic and primary mechanism under the Act is to restore justice to the complainant in the form of liquidated damages or replacement of goods/services and for certain offences, punitive damages may also be awarded to the consumer. However, the Consumer Protection Act, 2019 is not in its entirety a civil legislation as it provides for retributive justice in the form of imprisonment, and also constitutes a central regulatory authority for protection of consumer rights.

Central Consumer Protection Authority

The Act establishes a Central Consumer Protection Authority (CCPA) for the purpose of regulating matters relating to the violation of rights of consumers, unfair trade practices and false or misleading advertisements that are prejudicial to the interests of public and consumers.

Power to investigate

CCPA is empowered to investigate complaints relating to the violation of consumer rights, unfair trade practices or false or misleading advertisements, which can be initiated in 3 ways:

i. Suo-motu investigation by CCPA;

ii. On complaint received by CCPA or to the District Collector;

iii. On directions from the Central Government.

Orders post investigation:

The CCPA is empowered to order recall of unsafe goods and services (Section 20), order discontinuance of unfair trade practices and misleading advertisements, prohibit the endorser from making any endorsement of a product or service for a certain time period, impose civil penalties on manufacturers/endorsers/publishers of misleading advertisements (Section 21). The penalty that can be imposed on a manufacturer or endorser or publisher for false and misleading advertisements can extend to Rs.10,00,000 and for subsequent contraventions, the penalty can extend to Rs.50,00,000.

While determining the quantum of the civil penalty that is to be imposed against offenders the CCPA has to take into consideration:

a) the population and the area impacted or affected by such offence;

b) the frequency and duration of such offence;

c) the vulnerability of the class of persons likely to be adversely affected by such offence; and

d) the gross revenue from the sales effected by virtue of such offence.

Safe harbour for brand endorsers and advertisement publishers

The defence that a brand endorser in a misleading advertisement, and that a publisher of a misleading advertisement can take to avoid monetary penalty is specified in Act.

For an endorser – if due diligence had been exercised by him to verify the veracity of the claims made in the advertisement regarding the product or service being endorsed by him;

For a publisher – if he had published the false or misleading advertisement in the ordinary course of his business. However, this defence would not be available to the publisher, if he had previous knowledge about the order passed by the CCPA regarding the withdrawal or modification of such advertisement.

e) Other offences and penalties:

Section 72(1) Failure to comply with order of District/State/ National Commission Imprisonment- period of not less than 1 month extendable upto 3 years (or) fine- not less than Rs. 25,000/- upto Rs.1,00,000/- (or) both
Section 88 Failure to comply with order of CCPA under s.20, 21

A complaint can be filed by the Central Consumer Protection Authority or any officer authorised by it in this behalf.

Imprisonment which may extend upto 6 months (or) fine which may extend upto Rs. 20,00,000/- (or) both
Section 89 False and misleading advertisement, by any manufacturer or service provider

 

A complaint can be filed by the Central Consumer Protection Authority or any officer authorised by it in this behalf.

Imprisonment which may extend to 2 years (and) fine which may extend to Rs. 10,00,000/-

Subsequent offences – imprisonment which may extend to 5 years and with fine which may extend to Rs.50,00,000.

 

Section 90(1)(a) Manufacture for sale, or storing, selling or distributing or importing products containing an adulterant, but does not result in an injury to the consumer Imprisonment which may extend to 6 months (and) fine which may extend to Rs. 1,00,000/-
Section 90(1)(b) Manufacture for sale, or storing, selling or distributing or importing products containing an adulterant, causing injury but not grievous hurt to the consumer Imprisonment which may extend to 1 year (and) fine which may extend to Rs. 3,00,000/-
Section 90(1)(c) Manufacture for sale, or storing, selling or distributing or importing products containing an adulterant, causing injury resulting in grievous hurt to the consumer Imprisonment which may extend to 7 years (and) fine which may extend to Rs. 5,00,000/-

Such an offence shall be cognizable and non-bailable

 

Section 90(1)(d) Manufacture for sale, or storing, selling or distributing or importing products containing an adulterant, resulting in death of consumer Imprisonment not less than 7 years which may extend to life imprisonment (and) fine not less than Rs. 10,00,000/-

Such an offence shall be cognizable and non-bailable

 

Section 91(1)(a) Manufacturing for sale, or storing, selling or distributing or importing spurious goods, causing injury not amounting to grievous hurt to the consumer Imprisonment which may extend to 1 year (and) fine which may extend to Rs. 3,00,000/-
Section 91(1)(b) Manufacturing for sale, or storing, selling or distributing or importing spurious goods, causing injury resulting in grievous hurt to the consumer Imprisonment which may extend to 7 years (and) fine which may extend to Rs. 5,00,000/-

Such an offence shall be cognizable and non-bailable

 

Section 91(1)(c) Manufacturing for sale, or storing, selling or distributing or importing spurious goods, resulting in death of the consumer Imprisonment not less than 7 years which may extend to life imprisonment (and) fine not less than Rs. 10,00,000/-

Such an offence shall be cognizable and non-bailable

Compounding of offences:

An offence punishable under Section 88 and 89 of the Act is compoundable on payment of such amount as may be prescribed (such amounts cannot exceed the maximum amount of fine imposed under the Act). However, the option to compound the offence is not available to a repeat offender committing the same or similar offence within 3 years from the date the first offence was compounded.

With the rapid growth of internet and dilution of geographical boundaries, marketing of products and services through websites and domain names are becoming an increasingly important mode of brand building and channels of commerce for trademark owners. Domain name/website names forms an essential part of the trademark assets and represent the virtual address of an organisation in the internet space in relation to its brand that is the subject matter of such domain name.

The domain names indicating source from Indian jurisdiction is “.IN”. For example, domain name of the official intellectual property website owned by Indian Government is “www.ipindia.nic.in”. In the recent years India has witnessed various cases of people unlawfully holding websites containing trademark of others, commonly referred to as “cybersquatting”, in relation to the .”IN” domain names. The Indian Domain Dispute Resolution Policy (INDRP) was formulated and is administered by the National Internet Exchange of India (NIXI), for filing of any cybersquatting complaints pertaining to “.IN” domain names held by any cyber squatter and the decisions based on the outcome of such proceedings are binding and enforceable under the provisions of the Arbitration and Conciliation Act, 1996 as arbitral awards.

In order to succeed in a complaint under the INDRP the complainant being the trademark owner has to prove the existence of all the three following essential elements in respect of the .IN domain under dispute:

a. the domain name of the Respondent is identical or confusingly similar to a name, trademark or service mark in which the Complainant has rights;

b. the Respondent has no rights or legitimate interests in respect of the domain name; and

c. the domain name has been registered and is being used in bad faith

On receiving complaint from the Complainant, NIXI shall appoint an arbitrator out of the list of arbitrators maintained by the registry, who shall conduct the arbitration proceedings in accordance with the Arbitration & Conciliation Act 1996 as amended from time to time and also in accordance with the INDRP and the Rules made thereunder. The arbitrator shall forward its decision on the complaint to NIXI within sixty calendar days of commencement of the arbitration proceedings.

Under the INDRP, the remedies available to a complainant pursuant to any proceeding before an arbitrator shall be the following:

(i) cancellation of the domain name held by a third party or

(ii) the transfer of the disputed domain name registration to the complainant.

(iii) Costs as may be deemed fit may also be awarded by the Arbitrator

INDRP has been very effective in disposing of cases pertaining to domain name disputes including those owned by well-known personalities, public figures and world-renowned brand owners. Some of the notable domain name decisions under the INDRP include well-known brands such as aditybirla.in, subway.in, Instagram.co.in, ibmglobal.in, vogueindia.co.in etc

In India it is common practice for brand owners to engage third parties as domain name registration service providers who sometimes may wrongfully hold back the domain name and may also get their name entered as the “Registrant” (owner) of the domain name in the “whois” data. An INDRP action may be pursued, in those peculiar instances against such “Registrants”. However, in such cases it may become difficult for the complainant to establish the third essential element of the INDRP pertaining to- “the Registrant’s domain name has been registered in bad faith”, as the said domain name has been registered under the behest or express authorisation of the complainant itself. Accordingly, in such instances it is important for brand owners and complainants to carefully strategize and record the various correspondences exchanged with such “cybersquatters” that would go a long way in establishing “bad faith” of the respondent in the registration and usage of the domain name, which will eventually help the complainant in a successful INDRP action.

In the light of the COVID-19 pandemic situation prevailing in the country, the CGPDTM has decided to conduct show cause hearings for trademark matters pursuant to the Trademarks Rules, 2017, through video conferencing and in this regard, a public notice was issued on 26th August 2020 that has requested the Applicants and Trademark Agents/Attorneys to give their consent and confirm their participation for hearings through video conferencing. Accordingly, Applicants/Trademark Agents/Attorneys have been directed to provide their consent by sending an email to tlahearing-tmr@gov.in with the subject “consent for Show-cause Hearing through Video Conference” on or before 05/09/2020. If no such consent is provided, it is to be noted that the Applications will be kept in abeyance to schedule hearing in-person as and when hearing with physical presence are commenced in the future. This is indeed a good initiative of the CGPDTM that will go a long way in reducing the backlog of the trademarks that have been pending in the examination stage since the lockdown situation in the country owing to the pandemic.

The CGPDTM has been issuing public notices[1]  as part of the Trademark Journals bearing numbers 1928 to 1939, published since 20th July 2020, intimating closure of the opposition window for the Trademarks published in the said Journals and thereby allowing the unopposed trademarks published under the said journals for registration. It is to be noted that the limitation period for filing of trademark oppositions advertised in the aforesaid journals end beyond March 15th 2020. In this regard, it is pertinent to note that the Hon’ble Supreme Court had taken suo moto cognizance of the pandemic situation prevailing in the country since March 2020 and had passed orders directing an extension of all statutory limitations in respect of all proceedings, under general law or special laws since 15th March 2020. The said order continues to be effective until further orders of the Hon’ble Supreme Court. Accordingly, it will be interesting to see if the legality of the aforesaid public notices issued by the CGPDTM, closing the opposition windows, will be challenged in the light of the above referred order of the Hon’ble Supreme Court granting time extensions on all statutory limitations, despite the fact that the limitation period for the trademarks published thereunder fall beyond the effective date of the Supreme Court order viz., 15th March 2020. It is also further pertinent to note that the CGPDTM was earlier directed by the Hon’ble High Court of Delhi in a writ petition filed by the INTELLECTUAL PROPERTY ATTORNEYS ASSOCIATION (IPAA) to withdraw one of its earlier public notice dated 18th May 2020, as the same was found to be violative of the aforesaid order of the Hon’ble Supreme Court and in pursuance of the same the CGPDTM had issued a public notice dated 19th June 2020 withdrawing the 18th May 2020 public notice.

Though the said initiative by the CGPDTM benefits the larger group of stakeholders for seeking registration without further delay, however, the same being violative of the order passed by the Apex Court in respect of extension of statutory limitations, the Proprietors may face the risk of their registrations being invalidated as and when the aforesaid public notices issued by the CGPDTM are successfully challenged before and struck down by a Court of law.

[1]  Public Notice dated 20/07/2020

Public Notice dated 27/07/2020

Public Notice dated 03/08/2020

Public Notice dated 10/08/2020

Public Notice dated 17/08/2020

Public Notice dated 24/08/2020

Vide this notification, CSR Rules and Schedule VII of the Act has been amended, to enable the R&D expenditure incurred by companies in R&D of Covid-19 vaccine, drug(s) and medical devices in their normal course of business, to account it as CSR expenditure, for financial years 2020-2021, 2021-2022 and 2022-2023, so long as these companies carry out their R&D in collaboration with the institutes or organisation mentioned in item (ix) of Schedule VII to the Act- such as Central/State Government/Public Sector Undertaking funded incubators, IITs, National Laboratories established by certain Central Government Departments – Department of Biotechnology, AYUSH etc.

In addition, such companies, should specify the details of the activity carried out on such research and development, in their CSR report as part of their Board’s Report to the shareholders.

Ministry of Corporate Affairs (MCA) vide aforementioned circulars had enabled conducting general meetings of members through video conference (VC) or through other audio-visual means (OVAM).

As per provisions of Companies Act 2013, all special resolutions are required to be filed with the Registrar of Companies (ROC) within 30 days of passing of the resolution.  In respect of resolutions, both ordinary or special resolutions, passed using the VC or OVAM facility (meetings held pursuant to the above circulars), the time limit for filing with the Registrar of Companies (ROC) has been extended to 60 days from date of passing such resolution.  The resolution to be filed with ROC has to be accompanied by a declaration to the effect that the company has complied with the process and instructions mentioned in the circulars along with other provisions of the act and the rules.

Authored by Ammu Brigit

Patanjali Ayurveda Limited (Patanjali) along with Divya Pharmacy Limited in its recent press conference launched ayurvedic medicines claiming to be the first ayurvedic cure medicines with 100% recovery within seven days for Covid-19. Taking notice of this announcement, Ministry of Ayurveda, Yoga, Neuropathy, Unani, Siddha and Homeopathy (Ministry of AYUSH) instructed Patanjali to stop advertisements, and sought from it the name and composition of the medicines, site/hospital where the research study was conducted, protocol, sample size, Institutional Ethics Committee (IEC) clearance, Clinical Trial Registry-India (CTRI) registration, result data of the study. In the context, in this article we look into the legal position with regard to the research, manufacturing and advertising of Ayurvedic medicines in India.

Manufacturing of Ayurvedic Medicines

Under section 33EEC of Drugs and Cosmetics Act,1940 (DCA) read together with Part XVI of Drugs and Cosmetics Rules 1945 (DCR), a person intending to manufacture any ayurvedic medicine should obtain appropriate license after fulfilling the conditions of license under DCA and DCR.

The AYUSH ministry taking note of the gap in DCR as it does not contain specific regulatory provision requiring conduct of clinical trials for Ayurveda, Siddha, Unani and Homeopathic drugs (AYUSH Drugs), and recognising the need for scientifically generated clinical data for validation and credibility of drugs for Covid-19, came up with a notification dated 21st April 2020.

Under this notification, the AYUSH Ministry required scientists, researchers, clinicians of any recognised systems of medicine under Indian Medicine Central Council Act 1970 (IMCC Act), National Medical Commission Act, 2019 (NMC Act), and Homeopathy Central Council Act 1973 (HCC Act) undertaking research on cure or prevention of Covid-19 through Ayurveda, Siddha, Unani and Homeopathy systems (“AYUSH System”) for Covid-19 to generate evidence of their claim. The notification without being exhaustive of the areas of research, included the following too within the ambit of generation of evidence: (i) intervention during quarantine, (ii) research on asymptomatic and symptomatic cases of Covid-19, (iii) public health research, (iv) survey, (v) lab based research etc.

According to this notification, it is necessary to obtain IEC approval; register with CTRI for conducting clinical trial and have statistical justification for sample size; conduct clinical research complying with AYUSH and ICMR guidelines for clinical research and Good Clinical Practices; comply with National Ethics Guidelines for Bio-Medical and Health Research on Human Participation; have an  AYUSH registered practitioner or expert as a part of the study team, at each site. The notification has also required those conducting research and clinical trials to keep the Ministry of AYUSH informed about the research development and outcomes.

The Ministry of AYUSH by an order dated 28th July 2020, has centralised the power to verify results of clinical trial and research study before issue by the state regulators of approval and license to manufacture after clearance by the central government. The regulators in each state are required to the applications along with the results of the trials to the AYUSH Ministry for verification and clearance.

Advertisements of AYUSH Medicines

Section 4 of the Drugs and Magical Remedies (Objectionable Advertisements Act), 1954 (DMROA)  prohibits a person to participate in the publication of any advertisement (which means any notice, circular, label, wrapper or other document, and any announcement made orally or by any means of producing or transmitting light, sound, or smoke) relating to a drug if the advertisement contains any matter which directly or indirectly give a false impression regarding the true character of the drug; or makes a false claim for the drug or is otherwise false or misleading in any material particular.

The Drugs and Cosmetics Rules, 1945 (“DCR”) was specifically amended in 2018 with respect to the advertisement of AYUSH medicines, and it now prohibits the participation of the manufacturer of AYUSH medicines or his agent in the publication of any advertisement relating to any drugs for the use of diagnosis, cure, mitigation, treatment or prevention of any disease, disorder, syndrome or condition. For any AYUSH medicine other than for the above purpose, advertisement is permitted after obtaining an unique identification number for such advertisement by making an application with the State Licensing Authority or the Drug Controller, in Form 26 E-4. This amendment to DCR implies that no manufacturer can claim therapeutic claims on AYUSH products.

Owing to the outbreak of Covid-19, the Ministry of AYUSH vide an Order dated 21st April 2020 instructed all state AYUSH regulatory authorities to stop and prevent publicity and advertisement of AYUSH related claims for Covid-19 treatment in print, TV and electronic media and take necessary actions against the agencies/persons involved in contravening the relevant provisions and the guidelines given by National Disaster Management Authority (NDMA) under the order of Ministry of Home Affairs dated 24th March 2020.

Conclusion

 At a time when researchers from every field of medicine are engaged in the  development of the cure for Covid-19, it is imperative to ensure that the research for such cure is carried on based on the guidelines of the government authorities and advisory bodies. It is a welcome move by the government to centralise the power to verify and clear AYUSH drugs for Covid-19, and also on its advertising to avoid dubious therapeutic claims of Ayurvedic medicines and thereby protect public health. These, together with civil penalties having been brought under the Consumer Protection Act 2019 with regard to the misleading advertisements has also become an additional legislative support to ensure that AYUSH drugs are not marketed or sold with misleading claims.

Authored by Vishaka

In a recent development, triggered by the release of a web-series titled “XXX uncensored- Season 2” that was telecasted on an Over the Top (OTT) platform,  an advisory letter dated 27th July 2020 has been issued by the Secretary to the Ministry of Defence (“MOD”), to the regional officer of the Central Board of Film Certification (“CBFC”), raising concerns on how certain movies/web-series based on “Army” theme are causing disrepute to the Indian Army. A copy of the said letter was marked to the attention of Ministry of Electronics & Information Technology (“MeitY”) and Ministry of Information and Broadcasting (“MIB”) as well. The MOD has suggested in the letter to the CBFC to direct the producers of such web-series or movies to obtain a ‘No Objection Certificate’ from MOD before airing of such movie, series, documentary etc on the public domain.

At this juncture, it is relevant to look at the detailed guidelines issued by MOD on its website pertaining to submission of proposal to the MOD for seeking assistance in connection with making of film, serial, documentary etc. The following are the highlights of the guidelines as provided by the MOD:

1. Producer of any film, TV serials or documentary which is themed around Army or requires assistance of Army in the form of location, manpower or equipments shall preliminary be required to submit a proposal in the form of an affidavit along with details as per the format provided under the guidelines, including the script, tentative schedule, details of crew and type of requirement.

2. The guidelines also require the authorised signatory responsible for the production to given an undertaking as per the prescribed format.

3. Such a proposal shall be examined by the department considering all necessary factors including the reputation of the Army.

4. Once clearance is given by the Army, the producer shall deposit a certain amount of money in lieu of the assistance provided thereunder.

5. Further, producer needs to enter into an agreement with the ADG PI covering aspects of indemnity, insurance cover and refundable bank guarantee.

6. After completion of the film or the serial or documentary, the same shall undergo two tier preview before it is made available for public domain.

It is to be noted that the said guidelines of the MOD is a system of practice envisaged by the MOD, which indirectly is also aimed at avoiding any kind of disrepute to the Army and uphold the dignity of the officials.

The letter issued by MOD raises concerns relating to both the cinematograph films and web-series. It is to be noted that CBFC is statutorily empowered under the Cinematograph Act 1952 for regulation and sanctioning of contents of only cinematograph films and is not empowered to regulate any content that is broadcasted exclusively under OTT platforms. It is pertinent to note that regulation of OTT platforms fall under the purview of MeitY and MIB and hence, CBFC will not be entitled to undertake any actions as advised by the MOD in the said letter in respect of such web series broadcast in OTT platforms.

It is to be noted that as of today there are no regulations notified either by the MeitY or the MIB to regulate the contents being broadcasted under OTT platforms. The contents and standards of the contents being broadcast on such OTT platforms in India are all primarily self-regulated by owners and operators of such OTT platform. It would definitely be interesting to see if the MeitY or MIB take the initiative and requisite steps in order to have certain statutory guidelines and regulations in place in order to regulate the OTT platforms and its contents considering the sudden rise in the viewership of such content over the OTT platforms.

Authored by Ammu Brigit

Informed consent being one of the fundamental principles of good clinical practice is a legal requirement prior to conduct of surgeries or other medical procedures by doctors/hospitals. Failure by a  doctor to obtain consent from the patient or the guardian before the conduct of an operation is a violation and is considered to be misconduct under Chapter 7 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2012.In Samira Kohli vs. Dr. Prabha Manchanda & Ors (2008 2 SCC 1) (“Samira Kohli Judgement”), the Hon’ble Supreme Court of India emphasised that importance of obtaining informed consent from the patients and how the responsibility is upon the doctor to disclose necessary information to the patient to obtain his consent. The law does not provide a standard form for obtaining consent. The known and widely accepted way of obtaining the consent from the patients or the guardian is getting signature on the pre-printed consent forms. Recently in Vinod Khanna vs. R.G Stone Urology and Laparoscopy Hospital & Ors (Order), National Consumer Disputes Redressal Commission (NCDRC) pronounced that obtaining consent in a pre-printed consent forms is an unfair trade practice.

Background and Decision

Vinod Khanna, a patient with abdominal and urologic difficulties approached Fortis Hospital, New Delhi and owing to financial difficulties then approached RG Urology and Laparoscopy Hospital (RG) for treatment. The patient could not get complete treatment for his disease and further suffered injury and complications. Pursuant to which, he filed a complaint in State Consumer Disputes Redressal Commission and the then in NCRDC.

NCRDC took reference to standard books on Surgery, Urogenital Pathology, constituted a board constituted of three independent doctors and also perused the informed consent forms taken from the patient at RG prior to the surgery and other medical records. Pursuant to which, NCRDC held that there was no deficiency of service or medical negligence on part of the both the hospitals.

Regarding Informed Consent in the Order

NCDRC particularly noticed the nature of informed consent obtained from the patient in this case and noted it to be an act of administrative arbitrariness. Quoted below is the NCRDC’s opinion on the pre-printed consent forms:

“We but note that a pre- printed and fixed ‘informed consent cum undertaking’ form, with blank spaces for limited select handwritten entries and for the signatures has been used by the hospital. The main body of the form is pre-printed and fixed. It can fit into any procedure, any doctor, and any patient, after filling up the blank spaces for the limited select handwritten entries and getting / affixing the signatures. We note this to be administrative arbitrariness and one-sided high handedness, and to be unfair and deceptive, on the part of the opposite party no. 1 (hospital), for which, though, the complainant has not been prejudiced in this particular case”.

NCDRC held that the pre-printed consent form is an unfair trade practice section 2(1) (r) under Consumer Protection Act 1986. It also instructed the hospital to deposit with Consumer Legal Aid Account of NCDRC a sum of Rs. 10 lakhs as cost for such unfair trade practice, and directed it to discontinue the use of pre-printed consent forms with immediate effect.

Impact of the Order

The NCDRC Order calling out the pre-printed informed consent form, will require doctors and hospitals to have a relook at the way their informed consent have to be structured going forward. One needs to see that the reason why NCDRC struck down the pre-printed informed consent form was that it is a form that could fit into any procedure, any doctor, and any patient. A good consent that is obtained from the patient should have information about the medical condition of the patient, the planned diagnosis, name and details of the patient, guardian and the doctor.

In Samira Kohli Judgement, the Hon’ble Supreme Court of India laid down the following with regard to the informed consent:

a. A “real and valid consent” [(i.e.)capacity and competence to consent] should be obtained from the patient prior to the commencement of the treatment, who accords consent voluntarily after being furnished with adequate information such as nature and procedure of the treatment, its purpose, benefit and effects, alternatives available, substantial risks and the adverse consequences of refusing the treatment to the patient.

b. A consent obtained for a diagnostic procedure will not act as consent for therapeutic treatment, and a consent given for a specific treatment procedure will not be valid for conducting some other treatment procedure. Any additional surgery without consent can be performed only to save the life of the patient or preserve the health of the patient.

c. A common consent can be obtained diagnosis and operative procedures which are contemplated and also for a particular surgical procedure that may become necessary during the course of the surgery.

d. The nature of the information furnished should depend upon the physical and mental condition of the patient, nature of treatment and risks and consequences attached and should be of the extent which is accepted as normal and proper by skilled and experienced men in the particular field of medicine, and the American standard for consent is not used by Indian courts as of now.

Reading together the above guidelines on informed consent by Hon’ble Supreme Court with the NCDRC’s Order which held the use of pre-printed consent forms that fits in any procedure, any doctor and any patient as an unfair trade practice, hospitals and doctors need to revisit their consent forms, re-format them so that the consents are procedure specific, and record therein the elements outlined by the Supreme Court in Samira Kohli Judgement.

Where in a particular case the procedure specific consent form would not apply, then a patient specific forms may get necessitated. Hospitals may have to commence using electronically generated specific consent forms for each patient rather than using pre-printed consent forms, so as to avoid issues like the one in the matter of R.G Stone Urology and Laparoscopy Hospital.

Authored by Ammu Brigit

The home delivery of medicines has become a necessity especially during the when everyone is staying safe at their own homes.  Do Indian laws permit the delivery of medicine at your doorstep? Is the functioning of online pharmacies adequately regulated in India? How have various courts dealt with the regulation of online pharmacies? The primary legislation which govern the sale of drugs is Drugs and Cosmetics Act 1945 (“DCA”) and its related rules. Section 18(c) of DCA read together with Rule 65 of Drugs and Cosmetics Rules 1945(‘DCR”) prohibits the manufacturing, distributing, selling, stocking, exhibiting of any drug unless an appropriate license in accordance with the conditions given under DCA is obtained.

DCA does not contain a separate provision for the online sale of drugs and therefore it can be construed that the license to sell under Rule 65 of DCR has to be procured from the licensing authority for the online sale of medicines too. However, the internet-based platforms which facilitates the sale of medicines take aegis under Information Technology Act 2000(IT Act) and have viewed themselves as they coordinate between the customers and pharmacies, and thereby an intermediary network service provider. Under section 79 of IT Act, these intermediaries are protected from any liability, for any third-party information or data made available by them.

Draft Rules with respect to E-Pharmacy

With respect to the regulation of sale of drugs through e-pharmacies in India, the Ministry of Health and Family Welfare (MoHFW) issued draft rules in relation to sale of drugs by e-pharmacy (“Draft Rules”) vide a notification dated 28th August 2018. This Draft Rules proposes a regulatory framework for any business of distribution, sale stock, exhibit or offer for sale of drugs through web portal or any other electronic mode. It mandates the registration of e-pharmacy in accordance with the procedure laid down in the e-pharmacy rules. The Draft Rules envisage delivery of medicines through online web portal or any such electronic mode only against a prescription by a Registered Medical Practitioner (RMP), and also require compliance of privacy and data protection under IT Act. However, the rules have so far remained in draft form and is yet to be notified as an amendment to the DCR by MoHFW.

Disputes and decisions

With many e-pharmacies doing business, led to few disputes by way of writ petitions arraying the government and the e-pharmacies. One such writ petition was filed by Association of Tamil Nadu Chemists and Druggists [Tamil Nadu Chemists and Druggists Association v. Union of India and Ors (WP/28716/2018) decided on 17th December 2018] for blocking the link of websites from India which is engaged in the sale of Schedule H, H-1 and Schedule X drugs in violation of Rule 65 and 97 of DCR. The petitioner contended that the online platforms continue to sell medicines through web portal even though the regulation is not passed by the Central Government. Further, the petitioner contends that the online sale of medicines would defeat the purpose of the DCA which regulates the quality and availability of drugs through prescribed pharmacists. The recalling of drugs, if it is found to have side effects, may not be possible in case of online sale of medicines as tracing the movement of medicines is difficult. The Hon’ble Madras High Court directed on 17th December 2018, the Central Government to notify the proposed amendment rules with respect to sale of drugs through e-pharmacy at the earliest not later that 31st January 2019 and also held that online portals are bound not to proceed with the online business of sale of drugs till the amended rules are published and the appropriate license is procured. However, an order was passed by Hon’ble Madras High Court on 20th December 2019 lifting of the ban of online sale of medicines till further orders.

Similarly, a writ petition was filed in the Hon’ble Delhi High Court by a dermatologist, Dr. Zaheer Ahmed [Dr. Zaheer Ahmed vs. Union of India & Ors {W.P.(C) 11711/2018}] against the online sale of medicines contending that it violated the provisions of DCA. The Hon’ble Delhi Court banned the sale of medicines online and also advised Central Government to pass the amendment rules with regard to the e-pharmacy. Pursuant to injunction order by Hon’ble High Court, the Drug Controller General of India (DCGI), through a letter dated 28th December 2018 instructed all the state regulators to ban online drug sales operating without license.

In these two judgements, the both the courts highlight the need of the Draft Rules to be notified.

Recent Notification by MoHFW on Doorstep Delivery of Medicines

Post the announcement of lockdown in March 2020, MoHFW by notification dated 28th March 2020, allowed the sale of drugs including the drugs specified in Schedule H, Schedule H1 and Schedule X (except narcotics, psychotropic and controlled substances as defined in Narcotics Drugs and Psychotropic Substances Act 1985) delivery at doorstep by any person holding a license in Form 20 (drugs other than those in Sch. C, C(1) & X), or Form 21 (drugs other than those in Schedule X) of DCA. The notification places the following conditions for delivery of Schedule H:

1. The sale to be effected based on the receipt of prescription physically or through an e-mail;

2. The license holder to submit the email id for registration with licensing authority of prescriptions are to be received through email;

3. The drugs to be supplied at the doorstep where the patient is located within the same revenue district where the licensee is located;

4. In case of chronic diseases, the medicine is to be dispensed only if it is presented to the license holder within 30 days of the date of prescription, and in acute cases, the medicine is to be dispensed only if it is presented to the license holder with 7 days of its issue;

5. The bill or cash memo shall be sent by return email and records of all such transactions shall be maintained by the license holder.

Conclusion

It is clear that the notification dated 28th March 2020 by MoHFW, which permits the delivery of medicines at home, helps to improve the business of a pharmacist who has a physical medical store and holds a valid license to sell the drugs. However, this notification does not contain any regulation on the intermediary web portals/platforms which provide the online sale and delivery of medicines. The need of the hour is the passing of the amendment rules to DCA in relation to the sale of medicines via e-pharmacy to regulate the intermediary service providers. A regulated e-pharmacy system would help in the smooth delivery of medicines to the needy at the right times and would also adequately complement the telemedicine practice recommended by the Medical Council of India.

The Ministry of Corporate Affairs has vide notification dated 26th May 2020 and 23rd June 2020 included the spends towards the following activities as expenditure towards CSR activities:

(i) contribution to Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES FUND); and

(ii) any amount spent for the benefit of Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans and their dependents including widows.

i. BOARD MEETINGS – BUSINESS CONTINUITY THROUGH VIDEO CONFERENCING

Ministry of Corporate Affairs (MCA) had Vide notification dated 19th March 2020 waived the requirement of physical presence of directors in the board meeting, in respect of matters which required the quorum (minimum number of directors to constitute a valid meeting) to be present in one place. This relaxation was available till 30th June 2020.

MCA had Vide notification dated 23rd June 2020 extended the aforesaid relaxation by further period of 3 months; 30th September 2020.

ii. HOLDING OF EXTRA ORDINARY GENNERAL MEETINGS THROUGH VIDEO CONFERENCING (VC) OR OTHER AUDIO-VISUAL MEANS (OAVM) (“REMOTE EGM”):

Amidst the COVID-19, Ministry of Corporate Affairs (MCA) vide its General Circulars No.14/2020 dated 08th April 2020 and No.17/2020 dated 13th April 2020 had, with respect to matters requiring approval of shareholders, requested the Companies, to obtain shareholders’ approval through postal ballot/e-voting till 30th June 2020, in order to avoid holding a general meeting which requires physical presence of the shareholders at a common venue and if the extra ordinary general meetings is considered unavoidable, then the said EGM was allowed to be conducted through Video Conferencing (VC) or other audio-visual means (OAVM) (“Remote EGM”), to obtain approval from the shareholders on various urgent matters.

The MCA vide its circular dated 15th June 2020 has allowed the Companies to conduct their extra ordinary general meetings through VC or OAVM till 30th September 2020.

The detailed procedure for conducting the meeting through VC or OAVM has been discussed in our blog   http://eshwars.com/blog/clarification-on-passing-of-shareholder-resolutions-during-covid-19-conduct-extra-ordinary-general-meeting-egm-of shareholders-remotely/

iii. COMPANIES ACCEPTING DEPOSITS:

 The Companies accepting deposits, are required to deposit at least 20 percent of the amount of its deposits maturing during the following financial year (Deposit Repayment Reserve), in a scheduled bank in a separate bank account. Such sum is to be transferred on or before 30th April each year.

MCA vide circular dated 24th March 2020 extended the date by which the amount of the Deposit Repayment Reserve can be transferred to a separate bank account to 30th June 2020.

The Ministry has vide its circular dated 19th June 2020 further extended the time for meeting this requirement till 30th September 2020.

iv. COMPANIES HAVING OUTSTANDING NON-CONVERTIBLE DEBENTURES:

The Companies which have issued Non-convertible debentures are required to invest or deposit atleast 15% of the amount of debentures maturing in specific methods of investments or deposits before 20th April 2020.

MCA had extended the date for this compliance till 30th June 2020.  It has further extended the time for meeting this compliance till 30th September 2020, vide its circular dated 19th June 2020.

v. EXTENSION OF TIME FOR INDEPENDENT DIRECTORS TO INCLUDE THEIR NAME IN THE DATA BANK OF INDEPENDENT DIRECTORS:

The Ministry has vide its notification dated 23rd June 2020, extended the time for the independent directors to include their name in the data bank of independent directors till 30th September 2020.

As the concerts and events are conducted virtually now in the wake of COVID-19, Indian Performing Rights Society (IPRS), the registered copyright society in India for artists proposed a  new tariff scheme applicable to public performances of  live streaming of online events of musical and literary works by way of live performances or music videos and disc jockey earlier this month. According to this new tariff schemes by IPRS, any free, advertisement supported or ticketed events without sponsor and any sponsored or ticketed event with sponsor were to be charged Rs.20000/- and Rs.60000/- respectively for each event with duration of up to 2 hours. The tariff scheme further lays down the condition on the licensee to take additional applicable licenses required for the exploitation of such works.  As mentioned in the document released by IPRS, the tariff scheme was subject to the approval of the members of IPRS in the general meeting. However, there was no further statement by IPRS on whether the tariff scheme was approval in its general body meeting. As a result of which concerns were raised by the artist group on the charging of royalties for a free or non- sponsored programme.

To address the concerns raised by the artist groups, IPRS on 25th July through a press release explained that the proposed tariff scheme was subject to the approval of IPRS general body and was released ahead of its general meeting inviting comments from its stakeholders. The press release clarified the following:

1. Any live online events which is sponsored, branded, co-branded, ticketed or paid in any form should pay royalties to the authors and creators.

2. The payment of royalty is not applicable for any free events on Facebook, Youtube and Instagram which are not sponsored/branded or co-branded/paid for in way or form during the lockdown or COVID-19, classical, devotional, or folk music events.

IPRS through the press conference also informed that a revised and rationalised tariff scheme which balances the interests of the copyright owners and creators shall be released soon and highlighted that it is not charging the tariff proposed earlier.

A trademark is understood in common parlance as any word or words or a logo used in relation to any trade or business that is primarily intended to indicate source from which any goods or service offerings have originated. Trademarks also help such businesses and brand owners to differentiate their products and services from other persons and business owners.

However, over the years the concept of branding has constantly evolved owing to changing consumer choices and ease of availability of competitive products and services, which has led to brand owners innovating and infusing fresh thoughts in their branding to keep consumers engaged. This has consequentially also led to brand owners become very conscious about protection of their novel branding ideas to create exclusivity in their favour in respect of such trademarks. Brand and trademark owners have constantly tested the law relating to trademarks in seeking legal protection of these novel and unconventional trademarks and have over the years been successful in securing such protection. The trademark law has also evolved over the years to accommodate such brand and trademark protection strategies adopted by trademark proprietors.

The Trademarks Act, 1999 (the “Act”) defines the word trademark as a mark capable of being “represented graphically” and hence registration can be sought on any mark that is capable of being registered graphically. In this note we provide hereinbelow a brief overview of the kinds of unconventional trademarks that are capable of being protected under the Act. Such unconventional trademarks may be in the nature of:

a. SOUND MARKS- Sound marks, in the context of a trademark, are extremely rare. Accordingly, a trademark may consist of a sound and represented by a series of musical notes with or without words. The acceptability of a sound mark depends upon whether the sound has become a distinctive mark that even an average consumer will perceive the sound as being exclusively associated with one person. Some common and popular illustrations of such marks include the 4 bell musical note of Britannia, Yahoo’s yodel, roar of a lion in MGM productions. Recently in India Mastercard successfully secured in its favour a sound mark registration over its Mastercard acceptance tone. Also, Eicher Motors Limited has secured a registration over the thunderous engine sound of Bullet moto bikes.

b. COLOUR MARK- A colour or combination of colours, as applied to the goods or their packaging or as used in relation to their services, may be protected as a trademark, as a colour mark. This is common in relation to a particular colour combination of capsules or tablets adopted by pharmaceutical companies. Recently, Nivea Blue- Pantone 280 C has been granted protection as a in Germany as colour mark. Few other instances of colour marks are the distinctive shade of purple (Pantone 2865C) on the wrappers packaging of milk chocolates of Cadbury, green and yellow colour combination used uniquely on the tractors of Deere & Co.

c. MOTION MARKS- Any moving or animated object or logo that is adopted as a trademark, which is capable of being recognised as a unique source identifier to a particular brand owner is capable of being registered as a trademark under the Act. A popular example of a motion mark is that of the Microsoft windows logo that one notices in the opening screen of a windows PC or laptop.

d. HOLOGRAM MARKS- A hologram is a three dimensional graphical representation technique of an image that was conventionally used primarily for adding authenticity to a particular product or document as having originated from a particular source and to prevent counterfeits and fake products. In India no hologram marks have been registered until date. American Express has been able to secure a trademark registration in the USA in respect of a hologram that is applied by it on the surface of its credit cards.

There are also other instances of unconventional trademarks are: (a) Taste Marks, (b) Smell Marks, (c) Texture Marks. But these marks are today not capable of being registered as a trademark under the Indian trademark law owing to the fact that these marks are incapable of being represented graphically. Nevertheless, some jurisdictions permit registration of such unconventional marks though not capable of being represented graphically.

Few other important kinds of trademarks include Shape marks (for e.g.: Shape or outline of Coca-Cola bottle, Shape of Zippo Lighters, Triangle shape of Toblerone chocolates, etc.,)

FLUID TRADEMARKS- Another evolving area of branding that is relevant in the context of trademark laws is the increase in the usage of “Fluid Trademarks”. Fluid trademarks are marks that are based on an original popular and well-known trademark but which have been rejigged intentionally to appear as a number of variants while retaining some basic and important elements and features of the original mark in order to maintain brand recognition and source identification. Google ‘Doodle’ is the quintessential “fluid trademark”.  While its primary mark and logo remain intact, from time to time–and for one day only – Google changes its conventional, static mark for a colorful, whimsical, and often dynamic alter-ego. Some of the other famous fluid marks are Perrier bottles, Absolut Vodka, MTV Channel logo, etc.,

Authored by Aanchal M Nichani

The Consumer Protection Act, 2019 (‘Act’) came into force on 20th July 2020 and the Act aims to provide for protection of interests of consumers by introducing an effective and timebound administration and settlement of consumer disputes. The digital era and boom in the e-commerce industry had increased the challenges related to consumer protection and disputes which were not covered in the 30-year-old Consumer Protection Act, 1986. Thus, the said Act is a welcome, much needed and comprehensive move and approach by the Department of Consumer Affairs, which aims at addressing such difficulties.

Salient features of the Act:

– E-commerce:

The definition of ‘consumer’ has been widened so as to include offline or online transactions through electronic means by teleshopping or direct selling or multi-level marketing. Further, it also lays down obligations wherein every e-commerce entity is required to provide information relating to return, refund, exchange, warranty and guarantee, delivery and shipment, modes of payment, grievance redressal mechanism, payment methods, security of payment methods, charge-back options, etc. including country of origin which are necessary for enabling the consumer to make an informed decision at the pre-purchase stage on its platform.  Further, e-commerce platforms have to acknowledge the receipt of any consumer complaint within forty-eight hours and redress the complaint within one month from the date of receipt under this Act.

– Establishment of Central Consumer Protection Authority (CCPA):

The said authority shall be the central authority to regulate matters relating to violation of consumer rights, unfair trade practices and false or misleading advertisements and promote, protect, and enforce the rights of consumers.  The CCPA will be empowered to conduct investigations into violations of consumer rights and institute complaints / prosecution, order recall of unsafe goods and services, order discontinuance of unfair trade practices and misleading advertisements, impose penalties on manufacturers/endorsers/publishers of misleading advertisements.

The gazette notification for establishment of the Central Consumer Protection Authority and rules for prevention of unfair trade practice in e-commerce are under publication.

– Pecuniary jurisdiction:

i. The Act has revised and enhanced the pecuniary limits of the Consumer Forums. The District Forum shall have the jurisdiction to entertain consumer complaints where the value of the goods or services paid as consideration does not exceed one crore rupees.

ii. The State Commission Forum shall have the jurisdiction to entertain consumer disputes where the value of the goods or services paid as consideration exceeds one crore rupees and in addition, it is empowered to adjudicate complaints against unfair contracts, where the value of goods or services paid as consideration does not exceed ten crore rupees.

iii. The National Commission Forum shall have the jurisdiction to entertain consumer disputes where the value of the goods or services paid as consideration exceeds ten crore rupees and in addition, it is empowered to  adjudicate complaints against unfair contracts, where the value of goods or services paid as consideration exceeds ten crore rupees. Appeals from orders passed by CCPA shall also lie before this forum.

– Simplification of filing and adjudication process of consumer complaints:

In order to simplify the adjudication process of consumer disputes, the Act enables a consumer to file complaints electronically and file complaints in the Consumer Forums that have jurisdiction over the place of his residence or work. In addition, the amendment enables videoconferencing for hearing and deemed admissibility of complaints if the question of admissibility is not decided within the specified period of 21 days.

– Concept of product liability:

The Act introduces the concept of product liability and brings within its scope, the product manufacturer, product service provider and product seller, for any claim for compensation for any harm caused by a defective product. The Act lays down the instances a product manufacturer/ product service provider/ product seller shall be held liable.

– Alternate dispute resolution:

The Act introduces an alternate dispute resolution mechanism of mediation to simplify the adjudication process.  Under this mechanism, a complaint will be referred by a Consumer Forum for mediation, wherever scope for early settlement exists and parties agree for it.

– Penal punishments:

The Act introduces penal punishments for various offences such as:

1. On the manufacturer or service provider who causes a false or misleading advertisement to be made;

2. On any person for manufacturing for sale or storing, selling or distributing or importing products containing adulterant;

3. On any person for manufacturing for sale or for storing or selling or distributing or importing spurious goods.

Authored by Vishaka

Did you know that the song “Happy Birthday to You” that is sung indispensably at every birthday party was a subject matter of copyright and was claimed to be registered and owned by Warner/Chappell music and its affiliates dating back to 1935, which received millions of dollars as copyright royalties for the same. It was later in the 2013 that the issue was challenged and finally decided by the American courts in 2016 and the song came to public domain. Copyright vests even in the architecture of buildings at common places of public attraction and any photography of such buildings by a common passer-by or a tourist, attracts the payment of royalty to the owner of the copyright in the architectural design under Copyright Laws. But do such people actually pay royalty to the owner of such work of architecture for clicking picture of such building and is the owner entitled to demand such royalties or claim copyright infringement on such photographs or will it be construed to be fair use as an exception to Copyright Infringement? This article analyses these questions in the light of the principle of “De Minimis Non Curat Lex” (law does not concern itself with trifles and the law cares not for small things/ law will not resolve petty or unimportant dispute) and its admissibility as a valid ground of defense in matters of copyright infringement and how the Indian Courts have viewed this principle in its application to decide on issues involving copyright infringement claims

In the year 2011, when the defence of “De Minimis” was taken by the respondents in the case of Super Cassettes Industries Limited and Ors v. Chintamani Rao and Ors., in a combined order for interim relief with respect to three suits, the single bench rejected the defense and allowed interim relief of injunction on the grounds that just as the Copyright Act lays down the specific right vested in each party, the exceptions also are prescribed under the Act specifically and hence a general principle cannot be applied by the courts in the case in hand. One of the parties in the three suits, affected by the interim order preferred an appeal to the divisional bench of the Delhi High Court in India TV Independent News Service Pvt. Ltd. and Ors v. Yashraj Films Pvt. Ltd, [MANU/DE/3928/2012], in which the court, pointed out that copyright law invites the maximum trivial violations, as everyday activities, be it clicking picture of a sculpture or singing birthday songs on a birthday party, are instances of frequency with which minor violations of copyright takes place day after day, throughout the world, and that if each of such action is charged with infringement, the courts would be marooned with litigations only on such trivial violations.

The courts in India while adjudicating cases involving trivial copyright violations, have been very cautious and careful so as not to send an adverse message to the public that trivial violations are always exempted.

The Delhi High Court, laid down five factors for applying ”De Minimis” while adjudicating the matter, where a TV channel was sued for copyright violation by a Bollywood producer when the TV channel had broadcasted a chat show in which the performer/singer had sung a bit from seven songs in which the producer had copyrights. The court after referring to various foreign judgements laid down the factors to be considered on a case to case basis while applying the rule of De Minimis, viz:

    • the size and type of the harm,
    • the cost of adjudication,
    • the purpose of the violated legal obligation,
    • the effect on the legal rights of third parties, and
    • the intent of the wrongdoer.

    In the above case, the court observed that the performances from the life of a performer could not be separated and in the natural setting of a chat show if she were to sing more than a wee bit, but not substantially the full songs, as long as the singing duration is limited to a minute or so at a time, it would be a case of De Minimis use, and hence the appropriation of the lyrics would not constitute an actionable violation of the copyright in the sound recording. However, the court also observed that where in case the same show had lesser amount of discussion with the performer, and more of singing songs, then the issue would have had to be dealt differently considering the change in intention of the broadcaster, which would be construed to broadcast the sound recording to the public.

    Similarly, in 2013, in Saregama India Ltd. v. Viacom 18 Motion Pictures and Ors., the High Court of Calcutta while dealing with a question of copyright infringement in lyrics, wherein four or five words out of a famous Hindi song were rendered by the actor in the film, the Court held that there were no copyright over those four or five words, and that even by assuming that the rendition amounted to copyright infringement of the plaintiff’s lyrics, it had no impact, effect or loss caused to anybody and thus was construed as trivial, minimal and ignored by the court by application of the principle of De Minimis.

    Recently, in 2019 the Delhi High Court in Super Cassettes Industries Ltd. v. Shreya Broadcasting Pvt. Ltd, the court relied on the five factors laid down by the divisional bench of the same court in India TV case (discussed above). The court perused the cue sheets submitted by plaintiff, and found that there was atleast 500 minutes of infringement, and hence the defence of De Minimis was not accepted by the court and further compensatory damages were granted in favour of the plaintiff.

    While the Delhi High Court in the case of India TV rendered a detailed order as to the application of the principle/doctrine of De Minimis, one should also note the case of Super Cassette Industries Ltd. v. Hamar Television Pvt. Channel, (2011) wherein the single judge of the Delhi High Court, while observing that it is neither possible nor advisable to define the exact contours of fair dealing as the term is not defined in the Copyrights Act, summarised the broad principles to determine “fair dealing”, as below:

    (i) It is a question of fact, degree, and at the end of the day overall impression carried by the court;

    (ii) In ascertaining whether extracts taken from copyrighted work have been put to fair use, the extent and the length of the extracts may be relevant. Long extracts followed by short comments may in certain circumstances be unfair, while short extracts followed by long comments may be fair. In certain circumstances even small extracts, which are taken, on regular basis may point to unfair use of the copyrighted work.

    (iii) While examining the defence of fair dealing, the length and the extent of the copyrighted work which is made use of, is important, however, it cannot be reduced to just a quantitative test without having regard to the qualitative aspect. In other words, enquiry ought to be made as to whether the impugned extract forms an essential part of the work of the person in whom inheres the copyright. This may be particularly true in the case of musical works where a few notes may make all the difference

    (iv) The motive of the user shall play an important role in assessing as to whether injunction ought to be granted;

    (v) Commercial use of copyrighted work cannot simplicitor make it unfair.

    It would be important to apply the above principles for determining De Minimis also.

    Most people, engage in trivial copyright violations, which if not for the doctrine of De Minimis, would technically be construed as a violation of law. Though the application of this doctrine is not widespread among the Indian judiciary, the same can be considered as easy and quick mode to resolve trivial copyright violation disputes before the court. However, the application of this doctrine, which on the face of it appears to be a subset of “fair dealing” needs to be ascertained on the facts of each case, for it is not just the quantity of violation that is taken into consideration but all the surrounding aspects including the intention of the violating party, circumstances in which the copyrighted work is used et all. Without discounting the fact that rampant usage of the doctrine without detailed analysis may lead to injustice to the copyright holder and dilute the very purpose of the Copyright Act, well founded decisions by application of the doctrine of De Minimis to the case in hand shall help in speedy resolution of cases possessing trivial copyright infringement issues.

Authored by Sri Vidhya Kumar

Micro, Small and Medium Enterprises (“MSME”s) have always been in focus as they contribute about 29% in the GDP of India. With Government of India (“GoI”) focussing on self-reliance, the Ministry of Micro, Small and Medium Enterprises notified on 26th June 2020 (“Notification”), a comprehensive document laying down classification criteria and form & procedure for registration of enterprises in the micro, small and medium enterprises categories.

Classification criteria

The Notification does away with the distinction between manufacturing sector and services sector, and a composite criteria taking into account both investment in plant and machinery and turnover has been introduced.

The table below depicts the classification criteria.

           Composite criteria for manufacturing and services sector
                 Both these conditions to be satisfied
Classification Investment in Plant & Machinery/equipment Turnover
Micro Enterprise ≤ Rs. 1 crores/10 million ≤ Rs. 5 crores/ 50 million
Small Enterprise ≤ Rs. 10 crores/100 million ≤ Rs. 50 crores/500 million
Medium Enterprise ≤ Rs. 50 crores/500 million ≤ 250 crores/2500 million

Computation of investment in plant and machinery or equipment and turnover

The Notification read with the provisions of the Micro, Small and Medium Enterprises  Act, 2006, explains what is to be taken and not be taken for computing the amount of investment in plant & machinery / equipment, and aligns the meaning of the term plant & machinery to the Income-tax Rules.  It is the Income-tax Act, 1961, that defines the term “Plant”, and there is no definition found in the Income-tax Rules for the term “plant and machinery” or even “machinery”.  Whether this would lead to any litigation, one would have to wait to see them.

Having said this, the Notification is clear on the inclusions and exclusions while computing the total investment in plant & machinery/equipment. The cost of all tangible assets (other than land and building and furniture and fittings) are to be included, and the amount of taxes/GST paid on the asset, cost of pollution control equipment, research and development, industrial safety devices are to be excluded.

Also, the investment amount would be determined based on the gross block that is shown in the books of accounts of the enterprise as had been clarified by the Ministry of MSME, by its Office Memorandum (OM) F. No. 12(4)/2017-SME dated March 8, 2017.  So, it would not be the written down value of the plant and machinery/equipment at the end of each year, but only their original cost that will be taken into account for the computation.

Also, for the purpose of determining turnover, only domestic sales is to be taken into account and the export turnover is to be excluded.

Udyam (hindi term for “enterprise”) registration of enterprises

 Unlike the earlier change in the year 2015 introducing Udyog Aadhar Memorandum (“UAM”), when it was not necessary for those enterprises that were registered under the Entrepreneurship Memorandum-II (“EM-II”), under the present Notification, it is necessary for all existing enterprises that have registered under EM-II and UAM to once again register on the portal www.udyogaadhaar.gov.in. This registration can be done from the 1st July 2020. [The portal is not accessible as this piece is being written and is being readied for the new udhayam registration].

All existing registered enterprises are required to once again register themselves on this portal, and their present registration will be valid only till 31st March 2021.

Registrations to start with will be based on self-certification basis and going forward the eligibility for an enterprise to remain in its category will be determined by data analytics.

Use of big data

Since, the classification of an enterprise as micro, small or medium is based on the investment the enterprise has made in plant and machinery/equipment, and also the turnover it generates, both being dynamic, the information of gross block of plant and machinery furnished by it in its income-tax return (“ITR”), and turnover in the return filed under the Goods and Services Tax Act, will be used for determining the enterprises’ eligibility to continue in the category, by linking these return to Udyam registration.

Income-tax return and GST returns

While existing enterprises when they register afresh on the portal, are required to furnish details of their ITR and also GST returns for the previous financial year, new enterprises that do not have prior ITR, the computation of their investment in plant and machinery/equipment will be based on self-declaration. The self-declared information will be valid till the enterprise files its first income tax return, after which the same will be linked to the income tax return and GST return filed by the enterprise.

Intimation of change in category

An enterprise that crosses the limits under either criterion will then be placed in the next higher category of enterprise, but for it to be able to move down, then it would have to satisfy both the criteria. This computation will be based on the ITR and also GST returns. When there is a change in status of the enterprise based on its returns, then a communication will be sent to the enterprise about their change in status.  The change from one category to the other will be only after the end of the financial year, and even in case of crossing of either of the limits during the year, the enterprise gets to maintain its category, till the end of that year.

Determination of export turnover

Since, export turnover is not taken into account for computation of turnover, the ITR / GST returns will provide information to GoI for computation purposes.

Conclusion

Electronic filing of information and returns to GoI commenced when the Ministry of Corporate Affairs introduced MCA21, which was sometime in the year 2006. Over a period of time, e-filing initiative has been stepped up and GoI is now using data analytics of information filed with different authorities in order to determine status of enterprises.

Also, since there are many benefits that are being given to MSMEs, with data getting linked to ITRs and GST returns, to avail these benefits, an enterprise needs to be compliant on both these statues and it should not come as a surprise, when information from these returns will be provided on a `need-to-know basis’ to lenders and other financial institutions as presently financial information from MCA21 is limited to corporate form of organisations and does not include proprietorships and partnerships.

Authored by Aanchal M Nichani

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

On 5th June, 2020, the Insolvency and Bankruptcy Code (Amendment) Ordinance was promulgated to amend the provisions of the Insolvency and Bankruptcy Code (“Code”). The rationale for the said amendment is to prevent corporate persons experiencing financial distress on account of the unprecedented Covid-19 situation from being pushed into insolvency proceedings.

New Section 10A

The said ordinance enables the government to notify a period of 6 months to a maximum of one year, during which the initiation of corporate insolvency resolution process (“CIRP”) under Sections 7, 9 and 10 of the Code, for any default in payment to creditors, arising on or after 25th March 2020 can be suspended (‘Suspension Period’). This is done by way of inserting a new section 10A in the Code, which has the effect that no application shall ever be filed for initiation of CIRP for a default occurring during the Suspension Period. However, if the default in payment occurred prior to 25th March 2020, there is no bar on invoking the provisions of the Code.

The insertion of Section 10A provides for a permanent immunity against initiation of insolvency proceedings against any debtor committing a default of payment of debts from 25th March 2020 for the period that may be notified (i.e) a minimum period of 6 months and a maximum one year. This step by the government will act as a breather for debtors who are unable to meet their debts given the on-going Covid crisis.

Areas that would get settled with judicial intervention

The language adopted in the newly inserted provision adds ambiguity with respect to defaults that are committed during the Suspension Period and continue beyond the Suspension Period, or if the new provision will act as a blanket and permanent immunity against such defaults. The Ordinance also fails to address the aspect of initiation of insolvency proceedings against personal guarantors of corporate debtors, while corporate debtors are exempted/protected under the said ordinance. It is only judicial interpretation and precedents that will settle these questions.

Avenue for closure by Corporate Debtor themselves

The Ordinance also prevents filing for insolvency proceedings by corporate applicants under Section 10 of the Code. As an alternative, corporates will now have to consider winding up proceedings under the Companies Act, 2013 if they are insolvent, and voluntary liquidation under the Code, if they are solvent.

Personal liability of Directors

The Ordinance also limits the power of a Resolution Professional, during the Suspension Period, to be able to file an application seeking an order from NCLT, to require the director of a corporate debtor to be personally liable for the liabilities of the corporate debtor, if such director knew that the CIRP could have been avoided by the corporate debtor, if he had not exercised reasonable due diligence as a director, in minimising the potential loss to creditors.

Protection from CIRP

The Ordinance does act as a saviour to corporates, from initiation of CIRP, who are battling and struggling to cope with the unprecedented situation and can now breathe a sigh of relief, and enables the promoters to hold on to their companies, and not be pushed into insolvency for defaults committed during the Suspension Period. Just as any other enactment, judicial interventions when these provisions are called into question, as situations that may arise due to Covid are not within comprehension of everyone today, will test the extent of protection the amendments under this Ordinance has sought to provide.

Conclusion

The provisions of Section 10A with respect to defaults occurring during the Suspension Period deal with suspension of initiation of CIRP of the debtor company. It is not the end of the road for creditors, who can still avail alternative legal recourse remedies such as:

a. Financial creditors may pursue restructuring/rearrangement schemes, initiate actions under the SARFAESI Act, 2002, and

b. Operational creditors can explore options such as reference to arbitration if terms of the agreement permit for the same, filing of summary suits, civil suits for recovery of debts, dispute resolution mechanism provided under Section 18 of the Micro, Small and Medium Industries, Act, 2006.

The CGPDTM had issued a Public Notice dated 18th May 2020 with respect to due dates for completion of various acts/proceedings, filing of reply/document, payment of fees, etc. In the said Public Notices the CGPDTM notified that the deadlines falling between 15.03.2020 and 17.05.2020 stand extended to 01.06.2020. It is worthwhile to note that the Hon’ble Supreme Court of India vide its order dated 23rd March 2020, took suo moto cognizance of the difficulties and challenges faced by litigants in filing petitions/appeals /suits and other proceedings within the timelines laid down by various Statutes extended the limitation prescribed under the General Law or the Special Law with effect from the 15th March 2020 until further orders. While this was the case the Public Notice issued by the CGPDTM, which extended the deadlines falling between 15th March 2020 and 17th May 2020 only until the 1st June 2020 was felt to be grossly violative of the aforesaid orders of the Hon’ble Supreme Court and hence aggrieved by these Public Notices the validity of the same was challenged before the Hon’ble High Court of Delhi by the INTELLECTUAL PROPERTY ATTORNEYS ASSOCIATION (IPAA) vide a writ petition. Consequently the Hon’ble High Court of Delhi vide its interim order dated 21st May 2020 stayed the operation of the aforesaid Public Notice and issued notice to the CGPDTM. The said matter came up for hearing on the 17th June 2020 through video conferencing and the Hon’ble High Court of Delhi vide its order dated 17th June 2020 confirmed the continued operation of its earlier interim order dated 21st May 2020 staying the Public Notice of the CGPDTM and thereby directed the CGPDTM to take necessary steps by issuing appropriate notifications on its website intimating the public of the stay of operation of its earlier Public Notice. Consequentially the CGPDTM has issued a Public Notice dated 19th June 2020 withdrawing the Public Notice dated 18th May 2020 and thereby the timelines/periods for the completion of various acts/proceedings, filing of any reply/document, payment of fees, etc. falling due after 15.03.2020, shall be the date as decided/ordered by the Hon’ble Supreme Court. On the above similar lines, the Copyright Office has also issued a Public Notice dated 19th June 2020 withdrawing its earlier public notice and thereby confirming that the timelines for completion of various acts shall be as ordered by the Hon’ble Supreme Court.

The definition of “Drugs” under Section 3(b)(iv) of the Drugs and Cosmetics Act 1940 (“DCA”) also includes medical devices intended for internal or external use in the diagnosis, treatment, mitigation or prevention of disease or disorder in human beings or animals, as may be specified from time to time by the Central Government by the notification of Official Gazette. The definition of medical devices given under Medical Devices Rules 2017 (“MDR”), which is consistent with the definition of drugs under DCA, also includes such devices notified by Central Government from time to time as “Drugs”. Further, the Ministry of Health and Family (“MOHFW”) based on the recommendation of the Drugs Technical Advisory Board, which recommended proposal to notify surgical gowns, surgical drapes and incision drapes as “drugs” under the provisions of Section 3(b)(iv) of DCA issued a notification under the provisions of Section 3 (b) (iv) of the DCA, on 11th February 2020, stating that-

“All  devices including an instrument, apparatus, appliance, implant, material or other article, whether used alone or in combination, including a software or an accessory, intended by its manufacturer to be used specially for human beings or animals which does not achieve the primary intended action in or on human body or animals by any pharmacological or immunological or metabolic means, but which may assist in its intended function by such means for one or more of the specific purposes of: 

    • diagnosis, prevention, monitoring, treatment, or alleviation of any disease or disorder;
    • diagnosis, monitoring, treatment, alleviation, or assistance for, any injury or disability;
    • investigation, replacement or modification or support of the anatomy or of a physiological process.
    • supporting or sustaining life;
    • disinfection of medical devices; and
    • control of conception

     will be construed as “drugs” within the meaning of the provisions of the DCA.”

    This notification has been made effective from 1st April 2020. This notification would imply that, effective from 1st April, 2020 each medical device need not be specifically notified by Central Government pursuant to the definition of “drugs” under the DCA in order to be regulated under DCA and MDR. The implication of this notification is that all medical devices with the intended function as listed above will fall under the purview of DCA and MDR.

    Simultaneous to this notification which regulated all medical devices under DCA, the Central Government introduced Medical Devices Amendment Rules 2020. This Amendment requires the manufacturers and importers to register all medical devices (except the medical devices already notified and regulated) on the Online System for Medical Devices, the online portal established by Central Drugs Standard Control Organisation (CDSCO). This registration is voluntary for a period of eighteen months from the date of commencement of the amendment i.e. till 30th September 2021, after which the registration becomes mandatory.

    Further, the Drugs Controller General of India, CDSCO, Directorate General of Health Services under the MOHFW has issued an advisory notice dated 22nd May 2020 advising the manufacturers of Personal Protection Equipment (PPE) Coveralls to voluntarily consider getting themselves registered with the CDSCO, as a benchmark for their quality management system. This note also states that the PPE is an important medical device for healthcare professionals and in handling of COVID-19 patients.

    On a conjoint reading of the above definition of “drugs” under the DCA, the definition of “medical devices” under the MDR, the notification dated issued by the MOHFW and the advisory note issued by the CDSCO, the inclusive nature of the notification and the broad terminology employed therein stating that a “device” includes any “instrument, apparatus, appliance, implant, material or other article” used “for the prevention of a disease”, gives sufficient grounds to interpret that any article or material such as a  PPE or N95 masks will also be construed to be a “medical device” under the MDR and thus fall within the purview of the provisions of the DCA and the MDR. The amendments to DCA and MDR to construe medical devices as drugs and its regulation has come into effect amidst the spread of the pandemic COVID -19 in India, the subsequent increase in the demand of PPEs and the increase in the number of domestic manufacturers of medical devices especially PPEs. The government has filled the gap in the regulatory framework with respect to the regulation of all medical devices, begetting the manufacture and sale of quality medical devices and effective healthcare.

Authored by Shyamolima Sengupta & Saisunder N.V

In the recent judgement of Imagine Marketing Pvt Ltd v. Exotic Mile, the plaintiffs who are  owners of the trademark “BOAT” in relation to electronic gadgets and such as earphones, headphones, speakers etc., sought permanent injunction restraining the defendants for use of their mark “BOULT” claiming it to be deceptively similar to the plaintiffs registered trademarks BOAT /boAt, and hence amounting to infringement of the plaintiffs trademark and copyright as well as passing of the goods of the defendant’s as that of the plaintiffs.

The plaintiff claimed that the reason for adoption of the word “BOAT” as its brand name ‘boAt’ is that “when you take a boat, you leave everything behind, you plug into a new zone”. The plaintiff thus also adopted the tagline ‘Plug into Nirvana’. The plaintiff had also obtained copyright registration in the mark/logo  and alphabet ‘A’ in ‘boAt’ – , displaying a boat within the letter ‘A’. The plaintiff had also secured registration for the trademarks boAts, with the stylized ‘A’, boAt along with the word ‘nirvana’ in class 9, 11 and 35. The plaintiff claimed that it had put in a lot of effort and investment to promote and advertise its products under the boAt trademark by entering into contracts with various celebrities as its brand ambassadors and were also the licensing partner to various sporting events.

The plaintiff submitted that they first learnt about the defendant’s trademark in February 2019 when the plaintiff received an email from Myntra regarding a customer complaint of the defendant’s product. Thereafter, the plaintiff has been regularly receiving complaints by emails from various customers and distributors regarding sub-standard quality of defendant’s products which have been reported to the plaintiff as plaintiff’s products, clearly evidencing that the customers were getting confused between the plaintiffs and defendant’s products. The defendant was selling its product on the same platform on which the plaintiff was selling its products i.e. Amazon and Myntra.

The plaintiff alleged that the defendant had dishonestly adopted the trademark BOULT which is phonetically and deceptively similar to that of the plaintiffs mark BOAT, with the same opening and closing syllables as well as the logo ‘A’ despite the fact that the defendant’s brand name BOULT does not have the letter ‘A’. In addition, the defendant had also adopted the tagline i.e. ‘UNPLUG YOURSELF’ which is deceptively similar to the plaintiff’s tagline ‘PLUG INTO NIRVANA’. Apart from that the defendant also copied the names of the plaintiffs product like ‘Boult BassBud’ which is deceptively similar to that of plaintiffs product ‘boAt BassHeads’. It was also claimed that by adopting and using the elements of the plaintiff’s registered trademark, the defendant was trying to piggyback on the plaintiff’s goodwill and popularity.

The defendant had argued that it is a proprietorship firm engaged in the business of audio gadgets specializing in headphones and speakers and have started its operation in the year 2017. The defendant submitted that they coined and adopted the trademark/trade name, BOULT and BOULT AUDIO ‘’ in the year 2017 which were also registered in their favour under Class 9. As regards logo they submitted that their trade name ‘BOULT AUDIO’ was mentioned in the logo. The defendant contented that there is no similarity between the two marks and that the trademark of the plaintiff, if any that is used in a standalone manner is actually, which is completely different from the plaintiff’s logo and the defendant’s logo. Further the tagline of the plaintiff and defendant are also not similar, the only common word being ‘PLUG’ which is common to trade. The defendant also claimed that since the defendant was selling its product under the trademark BOULT since the year 2017, plaintiff was not entitled to any injunction in view of the delay.

The Court while ruling in favour of plaintiff in the matter held as under:

1. The Court rejected the defendant’s plea regarding delay in filing of the suit for the reasons that firstly in a case of dishonest adoption mere delay in bringing the action is not sufficient to defeat the claim of grant of injunction, as also, the delay if any by the plaintiff in bringing the action for injunction does not amount to acquiescence by the plaintiff. The Court relied on Supreme Court’s judgement in Midas Hygiene Industries (P) L td. Vs. Sudhir Bhatia & Ors wherein it was held that mere delay in bringing the action is not sufficient to defeat the grant of injunction. Further reliance was placed on the case of M/s. Hindustan Pencils Pvt. Ltd. V. M/s. India Stationery Products Co. & Anr wherein the Delhi High Court held that inordinate delay would not defeat an action for the grant of a temporary injunction especially where the use by the defendant of the mark was fraudulent.

2. The Court noted that plaintiff was the prior user of the trademark BOAT for similar goods and had an established market when the defendant’s son acted as a consultant for a distributor of the plaintiff’s product even as per its own submission. Thus, the defendant was aware of the mark of the plaintiff.

3. The Court considered the phonetic similarity in the rival marks and held defendant’s mark BOULT to be deceptively similar to the plaintiff’s mark ‘BOAT’. In this connection, the Court placed reliance on the Supreme Court judgement Chinna Krishna Chettiar v.Shri Ambal and Co., Madras & Anr wherein it was held that the resemblance between the two marks must be considered with reference to the ear as well as the eye. Also, reliance was placed on the judgement of Encore Electronics Ltd. v. Anchor Electronics and Electricals Pvt. Ltd. wherein the Court considered the mark ‘Anchor’ to be similar to ‘Encore’ and held that “The overall impression conveyed by a mark as a whole, has to be assessed in evaluating whether the mark of the Defendant is deceptively similar to the mark of the Plaintiff. Phonetic similarity constitutes an important index of whether a mark bears a deceptive or misleading similarity to another. The phonetic structure indicates how the rival marks ring in the ears”.

4. The Court also observed that the class of users of the products sold by the plaintiff and defendant were from all sections of the society including children as well. Accordingly, BOAT and BOULT being quite phonetically similar, a consumer would not have a correct complete and reflection when he goes to buy the product whether the product is of BOAT or BOULT because of the first two and the last alphabet of the two words being the same. Further, the logo of the two products is also similar in the form of a triangle. The tagline also uses the word PLUG in both so as to cause a deception. In this regard, the Court relied on the judgement in Hindustan Sanitaryware (supra) wherein it was held that a mark has to be looked into as a whole and on looking at it as a whole, if there is a phonetic similarity resulting in every likelihood of deception the plaintiff would be entitled to grant of injunction. The Court decided to overlook the defendant’s usage since 2017 and also the expenses invested in promotion and advertising given the dishonest intentions in adoption of the mark ‘BOULT’, the logo containing the alphabet ‘A’, the tagline as well as deceptively similar product names along with similar get up and colour scheme for its products and packaging.

Accordingly, the Court decided in favour of the plaintiff by granting an interim injunction and restraining Exotic Mile from using the trademark ‘BOULT’ as well as the tagline ‘UNPLUG YOURSELF’ until the disposal of the suit.

Authored by Shyamolima Sengupta & Saisunder N.V

Heraclitus, the well-known Greek philosopher rightly said that- “The only constant in life is the change”. These thoughtful words have become more relevant than ever in today’s rapidly growing markets, where consumer behavior is ever-changing, which is attributable largely to the availability of information readily on any aspect of procurement and also further because of the plethora of product and service choices in the market. This ever-changing landscape in consumer choices and behavior has also led to innovation in branding of products and services and has challenged the conventional principles of branding that a trademark should be static to become stronger.

It is in this context that “Fluid Trademarks” have come into existence as a dynamic marketing tool and are becoming an increasingly popular mode of branding where brand owners adopt novel ways to grab the attention of their consumers by way of a brand rejuvenation in order to retain consumer engagement but nevertheless bearing in mind the all-important aspect and fundamental purpose of trademark viz., “Source Identification”.

Fluid trademarks are marks that are based on an original popular and well-known trademark but which have been rejigged intentionally to appear as a number of variants while retaining some basic and important elements and features of the original mark in order to maintain brand recognition and source identification. While browsing and surfing through the internet, we often encounter many popular traditional trademarks / brands in different variations. These are the new age trademarks as they are eye catching and ever changing which are created more likely to attract the public’s attention in the commercial space in this digital era. These marks prove to be a big hit for the brand owners to connect with people with the changing trends in the market and by customizing the traditional marks as per the current occasion, festival, season, weather, etc. to leave a message.

Fluid marks can take several forms, including logos, graphic symbols, verbal elements, or a combination thereof (i.e. any type of identifier that qualifies as a trademark). Google ‘Doodle’ is the quintessential “fluid trademark”.  While its primary mark and logo remain intact, from time to time–and for one day only – Google changes its conventional, static mark for a colorful, whimsical, and often dynamic alter-ego. Some of the other famous fluid marks are Perrier bottles, Absolut Vodka, MTV Channel logo, etc.

It is pertinent to mention that people should not confuse fluid trademarks as daily updates or family of marks or mere presenting a mark in different colours. The different ways in which a traditional trademark can be represented as a fluid trademark are (a) by ornamenting the trademark, (b) changing background of the trademark, (c) filling a frame like the icons of the television channels, (d) employing moving designs and (e) adopting multiple and ever-changing designs.

Why do companies go for Fluid trademarks?

    • Fluid marks are more eye catching than a mark that stays the same.
    • To maintain interest in the brand. Capture consumer attention – particularly online.
    • Strengthen brand awareness by interacting with consumers.

    While fluid trademarks present a novel way of marketing their trademarks to sustain customer engagement and interest in a brand, such trademarks also present a challenge to brand owners from a legal perspective in terms of their protection under the trademark laws. Some of the potential challenges for a brand owner in using fluid trademarks are as under:

      • There is risk of cancellation based on a claim of abandonment if the original mark is not used as registered.
      • It is not cost-effective to have all the variants of the mark registered.
      • In case the trademark owner has not applied for trademark protection for its variants, he cannot initiate a procedure when a third party uses one or more signs that correspond to these variants. The protection only extends to his registered underlying mark.

      Accordingly, it is important for brand owners to bear in mind the following important legal aspects from a trademark protection perspective while adopting fluid trademarks as a branding tool:

        • It is prudent to first register the original trademark, as it may not be practical to register every single variant especially since they have a very short shelf life that serve a limited purpose.
        • Marks should already be established marks with a history of use and consumer recognition, so that the trade and public can understand and relate to the variant form.
        • The primary mark should be used continuously and uninterruptedly.
        • The main characteristics of the original mark should remain intact in the variant mark; otherwise the trade and public may fail to recognize it in its variant form, thus defeating the purpose of the marketing strategy.
        • It is essential to conduct due diligence before adopting the respective fluid theme to avoid imitating other’s existing brand/concept/idea.
        • Protecting each variation through copyright registration, when appropriate.
        • The variant marks can also be protected as Series trademarks.

        Summary

        The trademarks perform as a source identifier by extensive usage. However, in the rapidly changing world, the brand owners adopt every possible approach to keep up with the competition and grab the consumer’s attention. The fluid trademarks though help to popularize the mark by adopting a new and trending approach, it should be used wisely in the Indian market given that the concept of fluid trademarks is yet to be tested in the Indian Courts and can be safeguarded only though common law protection and by placing reliance on the original registered mark. If used judiciously, the owners can make most out of the same for their brands.

        “If we don’t change, we don’t grow. If we don’t grow, we aren’t really living” – as quoted by Author Gail Sheeshy.

         

Authored by Sharadaa

Letter of Undertaking (LUT) is a document submitted by the exporter in order to export goods or services without payment of taxes under the Goods and Services Tax regime.

On due consideration of the difficulties faced by the exporters in submission of an LUT for exporting goods/services without payment of tax in the earlier tax regime, the Central Board of Excise and Customs vide Notification No. 37/2017 – Central Tax dated 4th October, 2017 extended the facility of LUT to all registered exporters subject to certain conditions and safeguards.

The following are to be noted upon furnishing an LUT:

1) Eligibility to export under an LUT:

All registered suppliers who intend to export goods or services without payment of integrated tax except:

i. person(s) prosecuted for an offence under GST Act or any of the existing laws and

ii. the amount of tax evaded in such cases exceeds Rs. 250 lakhs

2) Validity of an LUT:

An LUT shall be valid for the whole financial year in which it is tendered. It must be tendered fresh for every financial year.

3) How and when to furnish an LUT?

Through Form RFD-11 on GST portal (www.gst.gov.in), before exporting the goods/services. No document needs to be physically submitted to the jurisdictional office.

4) Time period for acceptance of an LUT

An LUT shall be deemed to have been accepted as soon as an acknowledgment bearing Application Reference Number (ARN) is generated on furnishing the same online.

5) Declarations given in an LUT

a) To export goods/services without payment of Integrated Goods and Service Tax (IGST) within the time specified in rule 96A(1) of CGST Rules

b) To observe all the provisions of the GST Act and Rules, in respect of export of goods/services

c) In the event of failure to export the goods/services, to pay IGST along with interest @ 18% p.a on the tax unpaid, from the date of invoice till the date of payment

6) Consequences of non-compliance of export within the specified time under rule 96A(1) of CGST Rules

An exporter has an option to export goods/services without payment of IGST under an LUT. However:

    • if the goods are not exported out of India within three months from the date of issue of invoice for export; or
    • if the exporter has not received payment for the services rendered, within one year from the date of issue of invoice for export

    then such exporter shall be bound to pay IGST due along with interest @ 18% p.a within a period of 15 days.

    Also where the goods/services are not exported within the time specified in rule 96A(1) of CGST Rules and the registered person fails to pay IGST along with interest, the facility of export without payment of tax under an LUT shall be deemed to have been withdrawn. Subsequently, post payment of IGST due along with interest, the facility of export under an LUT shall be restored.

    7) Application to Special Economic Zone (SEZ):

    All the above provisions with regards supply of goods and/or services without payment of IGST under an LUT shall apply in respect of supply of goods and/or services to SEZ developer or SEZ unit

    Conclusion:

    Export of goods/services is an integral part of foreign currency inflow into the Indian economy. Relaxing the cumbersome and time-consuming process of manual application of LUT and extending the facility to all registered tax payers is a welcome move which facilitates increasing the foreign currency inflow into the economy and availability of additional working capital to the individual exporter. Thus, a win-win situation to both the economy and the individual exporter.

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