The resident investee company has to follow the relevant disclosure norms prescribed by the Securities Exchange Board of India (SEBI); and

Corporate Law Alert J. Sagar Associates advocates and solicitors Vol.17 May 31, 2011 RBI PLEDGE OF SHARES FOR BUSINESS PURPOSES The Reserve Bank of India (RBI) vide A.P. (DIR Series) Circular No.57 dated May 02, 2011 has delegated the power to AD Category I Banks to allow the pledge of shares of an Indian company held by non-resident investor(s) in accordance with the Foreign Direct Investment Policy (FDI Policy) in the cases set out below subject to compliance with the conditions stated therein: Shares of an Indian company held by the non-resident investor can be pledged in favour of an Indian bank in India to secure the credit facilities being extended to the resident investee company for bonafide business purposes subject to the following conditions: (ii) (iii) (iv) In case of invocation of the pledge, the transfer of shares should be in accordance with the FDI policy in vogue at the time of creation of the pledge; Submission of a declaration/annual certificate from the statutory auditor of the investee company stating that the loan proceeds will be/have been used for the declared purpose; The resident investee company has to follow the relevant disclosure norms prescribed by the Securities Exchange Board of India (SEBI); and The pledge of shares in favour of the lender (bank) will be subject to compliance with Section 19 of the Banking Regulation Act, 1949. The shares of an Indian company held by the non-resident investor can be pledged in favour of an overseas bank to secure the credit facilities being extended to the non-resident investor/non-resident promoter of the Indian company or its overseas group, subject to the following conditions: (ii) (iii) (iv) The loan is availed from an overseas bank; The loan is utilised for genuine business purposes overseas and not for any investments either directly or indirectly in India; Overseas investment should not result in any capital inflow into India; In case of invocation of the pledge, the transfer should be in accordance with the FDI Policy in vogue at the time of creation of the pledge; and For Private Circulation Only 1

(v) Submission of a declaration/annual certificate from a Chartered Accountant/Certified Public Accountant of the non-resident borrower stating that the loan will be/has been utilised for the declared purpose. OPENING OF ESCROW ACCOUNTS FOR FOREIGN DIRECT INVESTMENT TRANSACTIONS The RBI vide A. P. (DIR Series) Circular No. 58 dated May 02, 2011 has permitted AD Category I Banks to open and maintain, without the prior approval of RBI, non-interest bearing Escrow accounts in Indian Rupees in India on behalf of residents and/or non-residents, towards payment of share purchase consideration and/or provide Escrow facilities for keeping securities to facilitate FDI transactions subject to the satisfaction of the terms and conditions set out below and SEBI authorised Depository Participants, to open and maintain, without prior approval of RBI, Escrow accounts for securities subject to the terms and conditions set out below. These facilities will be applicable for both the issue of fresh shares to the non- residents as well as transfer of shares from / to non- residents. The conditions to be satisfied are as follows: (d) (e) The Escrow account in INR will be maintained only with an AD Category I Bank in India. The Escrow account may be opened jointly and severally. Further, securities kept / linked with such Escrow accounts may be linked with the demat account maintained with SEBI authorised Depository Participants. The account will be non-interest bearing. No fund or non-fund based facilities will be permitted against the balances in the Escrow account. The following credits will be permitted: (ii) Receipt of foreign inward remittance as consideration towards issue or transfer of shares through normal banking channels; or Receipt of rupee consideration through the normal banking channels from India by the resident acquirers of shares who propose to acquire them from non-resident holders by way of transfer. (f) The following debits will be permitted: Remittance of consideration for issue of shares or transfer of shares directly into the bank accounts of the beneficiary (issuer in India or transferor of shares in India or abroad); or (ii) Remittance of consideration for refund to the initial remitter of funds in case of failure / non-materialization of the FDI transaction for which the Escrow account was opened. (g) The underlying FDI transaction for which the Escrow account is opened should be compliant with the extant provisions of the Foreign Exchange Management Act, 1999 (FEMA). Further, for the purposes of FDI reporting, date of transfer of funds into the bank account of the issuer or transferor of shares, will be the relevant date of remittance. For Private Circulation Only 2

(h) (j) (k) (l) Where the transaction is governed by SEBI guidelines/regulations, operation of the Escrow accounts will also be in accordance with the relevant SEBI regulations. Balance in the Escrow account, if any, may be repatriated at the then prevailing exchange rate (i.e., the exchange rate risk will be borne by the person resident outside India acquiring the shares), after all the formalities in respect of the said acquisition are completed. In cases, where proposed acquisition/ transfer does not materialise, the AD Category I bank may allow repatriation/ refund of the entire amount lying to the credit of the Escrow account on being satisfied with the bonafides of such remittances. The Escrow account will remain operational for a maximum period of six months only and the account will be closed immediately after completing the requirements as outlined above or on completion of six months from the date of opening of such account, whichever is earlier. In case the Escrow account is required to be maintained beyond six months, specific permission from RBI will have to be sought. Compliance with KYC guidelines issued by RBI/SEBI will rest with the AD Category I Bank/ SEBI authorised Depository Participants. The terms of the Escrow account will be laid down strictly in the Escrow agreement, Share purchase agreement, conditions of issue of shares, etc. Prior to the aforesaid circular, escrow accounts could be opened only for the purpose of acquisition/transfer of shares/ convertible debentures of an Indian company through open offers/ delisting/ exit offers, subject to compliance with the relevant SEBI [Substantial Acquisition of Shares and Takeovers (SAST)] Regulations, 1997 and other applicable SEBI regulations and in all other cases of opening/maintaining of Escrow accounts for FDI related transactions, prior approval from RBI was required. OVERSEAS DIRECT INVESTMENT REGULATIONS AMENDED The RBI vide A. P. (DIR Series) Circular No. 69 dated May 27, 2011 with a view to provide greater operational flexibility to Indian corporates with investments abroad, has decided to further liberalise / rationalise the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004 (ODI Regulations) relating to overseas direct investment by Indian corporates. The aforementioned circular amends the ODI Regulations in the manner set out below: Performance Guarantees issued by the Indian Party: At present, financial commitment of the Indian Party includes contribution to the capital of the overseas Joint Venture (JV)/ Wholly Owned Subsidiary (WOS), loans granted to the JV/WOS and 100 per cent of guarantees issued to or on behalf of the JV/WOS. The RBI pursuant to the aforesaid circular has decided that only 50 per cent of the amount of the performance guarantees may be reckoned for the purpose of computing financial commitment to its JV/WOS overseas, within the 400 per cent of the net worth of the Indian Party as on the date of the last audited balance sheet. Further, the time specified for the completion of the contract may be considered as the validity period of the related For Private Circulation Only 3

performance guarantee. The Indian Party may report these performance guarantees in ways similar to which financial guarantees are being presently reported. In cases where the invocation of the performance guarantees breaches the ceiling for the financial exposure of 400 per cent of the net worth of the Indian Party, the Indian Party is required to seek the prior approval of RBI before remitting funds from India, on account of such invocation. Restructuring of the balance sheet of the overseas entity involving write-off of capital and receivables The Indian promoters who have set up a WOS abroad or have at least 51 per cent stake in an overseas JV, may write off capital (equity / preference shares) or other receivables, such as, loans, royalty, technical knowhow fees and management fees in respect of the JV/WOS, even while such JV/WOS continues to function as under: Listed Indian companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Automatic Route; and (ii) Unlisted companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV/WOS under the Approval Route. The aforesaid write-off/restructuring is required to be reported to RBI through the designated AD bank within 30 days of such write-off/ restructuring. The write-off/restructuring will be subject to the condition that the Indian Party should submit the following documents for scrutiny along with the applications to the designated AD Category I bank under both, the Automatic Route and the Approval Route: (ii) A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring. Prior to the aforesaid amendment, the Regulations did not provide for the restructuring of the balance sheet of the overseas JV/WOS not involving winding up of the entity or divestment of the stake by the Indian Party Disinvestment by the Indian Parties of their stake in an overseas JV/WOS involving write-off Currently, Regulation 16 of the ODI Regulations provides that all disinvestments involving write off, i.e., where the amount repatriated on disinvestment is less than the amount of original investment, need prior approval of RBI and in the following cases, no prior approval of RBI is required: (ii) In cases where the JV/WOS is listed on an overseas stock exchange; In cases where the Indian promoter company is listed on a stock exchange in India and has a net worth of not less than Rs.100 crores; and For Private Circulation Only 4

(iii) Where the Indian promoter company is an unlisted company and the investment in the overseas venture does not exceed USD 10 million. Pursuant to the aforesaid circular, listed Indian promoter companies with net worth of less than Rs.100 crores and investment in an overseas JV/WOS not exceeding USD 10 million can disinvest under the Automatic Route provided the Indian Party reports the disinvestment through its designated AD Category-I Bank within 30 days from the date of disinvestment. It has been further clarified that disinvestment cases falling under the Automatic Route would also include cases where the amount repatriated after disinvestment is less than the original amount invested, provided the corporate falls under the above mentioned categories. (d) Issue of guarantee by an Indian Party to step down subsidiary of JV /WOS under general permission Currently, Indian Parties are permitted to issue corporate guarantees on behalf of their first level step down operating JV/WOS set up by their JV/WOS operating as a Special Purpose Vehicle (SPV) under the Automatic Route, subject to the condition that the financial commitment of the Indian Party is within the 400% limit for overseas direct investment. The RBI has granted permission to the Indian promoter entity to extend corporate guarantee on behalf of its first level step down operating company under the Automatic Route, within the 400% limit for overseas direct investment. Such guarantees will have to be reported to the RBI in Form ODI, through the designated AD Category-I Bank. Further, an Indian Party may also issue corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries under the Approval Route, provided the Indian Party directly or indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued. NBFC HOLDING IN INSURANCE COMPANIES Pursuant to Circular DNBS.(PD).CC.No.13/02.01/99-2000 dated June 30, 2000, RBI had permitted Non-Banking Financial Companies (NBFCs) registered with it, which satisfied the stipulated eligibility criteria, to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. In terms of this circular, an NBFC can hold a maximum of 50% of the paid up share capital of a joint venture insurance company. The said circular also stated that a subsidiary or company in the same group of an NBFC or of another NBFC engaged in the business of a nonbanking financial institution or banking business will not be allowed to join the insurance company on risk participation basis. The RBI vide Circular RBI/2010-11/549 dated May 27, 2011 has clarified that in case, more than one company (irrespective of undertaking financial activities or not) in the same group of an NBFC wishes to invest in an insurance company, the contribution by all companies in the same group will be counted for the limit of 50 percent prescribed for the NBFC in an insurance company. The RBI has further clarified that the term "Companies in the same group will mean an arrangement involving two or more entities related to each other through any of the following relationships: Subsidiary - parent (defined in terms of Accounting Standard 21), Joint venture (defined in terms of Accounting Standard 27), Associate (defined in terms of Accounting Standard 23), Promoter- For Private Circulation Only 5

Promotee (as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997) for listed companies, a related party (defined in terms of Accounting Standard 18), Common brand name, and investment in equity shares of 20% and above. FDI FDI IN LIMITED LIABILITY PARTNERSHIPS PERMITTED The Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India (GOI) vide Press Note 1 of 2011 dated May 20, 2011 has amended the FDI Policy and permitted foreign direct investment (FDI) in Limited Liability Partnerships (LLPs) with the prior approval of the Foreign Investment Promotion Board (FIPB) subject to the following conditions: (d) (e) (f) (g) (h) (j) FDI in LLPs will be allowed, through the Government approval route, only for LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and that there are no FDI-linked performance related conditions (which are applicable in sectors such as 'Non Banking Finance Companies' or 'Development of Townships, Housing, Built-up infrastructure and Construction-development projects' etc.). LLPs with FDI will not be allowed to operate in agricultural/plantation activity, print media or real estate business. An Indian company, having FDI, will be permitted to make downstream investment in an LLP only if both-the company, as well as the LLP- are operating in sectors where 100% FDI is allowed under the automatic route and there are no FDI-linked performance related conditions. LLPs with FDI will not be eligible to make any downstream investments. Foreign Capital participation in the capital structure of LLPs will be allowed only by way of cash consideration, received through inward remittance, through normal banking channels or by debit to NRE/FCNR account of the person concerned. Investment in LLPs by Foreign Institutional Investors and Foreign Venture Capital Investors will not be permitted. LLPs will also not be permitted to avail External Commercial Borrowings. In case an LLP with FDI has a body corporate that is a designated partner or nominates an individual to act as a designated partner in accordance with the provisions of Section 7 of the Limited Liability Partnership Act, 2008 (LLP Act), such a body corporate should only be a company registered in India under the Companies Act, 1956 (Act) and not any other body, such as an LLP or a trust. For such LLPs the designated partner "resident in India", as defined under the 'Explanation to Section 7(1) of the LLP Act, would also have to satisfy the definition of "person resident in India", as prescribed under Section 2(v) of FEMA. The designated partners will be responsible for compliance with all the above conditions and also liable for all penalties imposed on the LLP for their contravention, if any. Conversion of a company with FDI, into an LLP, will be allowed only if the above stipulations are met and with the prior approval of FIPB/Government. For Private Circulation Only 6

The Press Note has defined Limited Liability Partnership" as a Limited Liability Partnership firm, formed and registered under the LLP Act. COMPANY LAW MARKING COMPANIES AS HAVING MANAGEMENT DISPUTES The present MCA-21 system allows the Registrar of Companies (ROC) to mark a company as having management disputes, on the basis of complaints received at its office. As a result, documents received at the office of the ROC are not approved and remain in the registry as a work in progress until the company is demarked by the ROC. In order to establish uniform practices across all the ROC s, the MCA has vide General Circular 19/2011 dated May 2, 2011 clarified that the ROC will use the facility in the manner prescribed herein below: The ROC will mark a company as having management disputes in only those cases where a Court or the Company Law Board (CLB) has issued directions to maintain the status-quo with reference to e-forms, including the status of Directors; If a Court or the CLB has granted any injunction or stay in taking a document on record and the ROC is a party to such proceedings and/or directions have been issued to the ROC; In other matters, where orders have been passed and the ROC is not a party to such proceedings and such orders have not been served to the ROC, it is for the company to comply with such orders. In the event of non-compliance by the company, the law will take its own course. FILING OF CONFLICTING RETURNS BY CONTESTING PARTIES- E-FORM 32 In order to cut timelines and increase transparency in the workings of the ROC, the MCA vide General Circular No. 20/2011 dated May 2, 2011 has declared that Form 32 will also be taken on record under the Straight Through Process (STP). Therefore, Form 32 will be taken on record by the ROC through electronic mode purely on the basis of the statement of correctness given by the filing company and further verification by the practicing professional i.e., chartered accountants, cost accountants and company secretaries. The said Circular also clarifies that all particulars filed by companies in Form 32 are being placed on records of the ROC through the STP process, without prejudice to the rights of the parties to settle any dispute in a court of competent jurisdiction. The MCA had earlier, vide, a Circular dated May 4,1993, clarified that it was neither desirable nor possible for the ROC to sit in judgment to ascertain the rightful claims of Directors in the case of a dispute and it was for the parties concerned to settle their disputes by approaching a court of competent jurisdiction. For Private Circulation Only 7

APPROVAL OF MINISTRY OF CORPORATE AFFAIRS FOR APPOINTMENT OF AGENCY FOR PROVIDING ELECTRONIC VOTING PLATFORM UNDER THE COMPANIES ACT, 1956 The MCA vide Circular No. 21/2011 dated May 2, 2011 has appointed agencies for providing a secured electronic platform for electronic voting under the Act. Section 192 of the Act read with the Companies (Passing of the Resolution by Postal Ballot) Rules, 2001 recognizes voting by electronic mode for Postal Ballot. In order to have a secured electronic platform for capturing electronic votes accurately, the MCA has clarified that the agency so appointed for providing and supervising the electronic platform will be an agency duly approved by the MCA. In this regard, the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL) have been approved by the MCA subject to the condition that the NSDL and the CDSL will obtain a certificate from the Standardization, Testing and Quality Certification Directorate, Department of Information Technology, Ministry of Communications & IT, GOI. ATTACHMENT OF SUBSIDIARY S ACCOUNTS WITH HOLDING COMPANY S ACCOUNTS Pursuant to General Circular 2/2011 dated February 08, 2011, the MCA had granted general exemption to the applicability of Section 212(8) of the Act to subsidiaries of companies which fulfilled the following conditions: (d) (e) The Board of Directors of the company has by resolution given consent for not attaching the balance sheet of the subsidiary concerned; The company shall present in the annual report, the consolidated financial statements of the holding company and all subsidiaries duly audited by its statutory auditors; The consolidated financial statement shall be prepared in strict compliance with applicable Accounting Standards and, where applicable, Listing Agreement as prescribed by the Security and Exchange Board of India; The company shall disclose in the consolidated balance sheet the following information in aggregate for each subsidiary including subsidiaries of subsidiaries:- capital reserves total assets (d) total liabilities (e) details of investment (except in case of investment in the subsidiaries) (f) turnover (g) profit before taxation (h) provision for taxation profit after taxation (j) proposed dividend; The company shall undertake in its annual report that the annual accounts of the subsidiary companies and the related detailed information shall be made available to shareholders of the holding and subsidiary companies seeking such information at any point of time. The annual accounts of the subsidiary companies shall also be kept for inspection by any of the shareholders in the head office of the holding company and of the subsidiary companies concerned and a note to the above effect will be included in the annual report of the holding company. The holding company shall furnish a hard copy of details of accounts of subsidiaries to any shareholder on demand; For Private Circulation Only 8

(f) (g) The holding as well as subsidiary companies in question shall regularly file such data to the various regulatory and Government authorities as may be required by them; The company shall give Indian rupee equivalent of the figures given in foreign currency appearing in the accounts of the subsidiary companies along with exchange rate as on closing day of the financial year The MCA vide General Circular 22/2011 dated May 2, 2011, has clarified that companies which want to be exempted under General Circular 2/2011 have to fulfil the aforementioned conditions even if they are unlisted companies. LOANS TO PUBLIC COMPANIES UNDER SECTION 295 OF THE COMPANIES ACT, 1956 The MCA vide General Circular No. 24/2011 dated May 12, 2011 has issued a clarification with respect to loans made to public companies under Section 295 of the of the Act. The MCA has clarified that when the beneficiary of a loan/guarantee/security is a public limited company, approval of the Central Government should only be sought if the provisions of sub-section (d) or (e) of Section 295 of the Act are attracted. The MCA further clarified that the application for approval should also clearly bring out the facts in this regard. This clarification was issued in light of companies making applications for obtaining the prior approval of the Central Government when making any loan to, giving any guarantee to or providing any security in connection with a loan made by any other person to a public limited company even when the proposal fell outside the scope of Section 295(d) and Section 295(e) of the Act. CLARIFICATION - FILING OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT IN XBRL MODE The MCA vide General Circular No. 25/2011 dated May 12, 2011 has clarified that all companies listed in India and their subsidiaries having a paid up capital of Rs. 50,000,000 and above or a turnover of Rs. 1,000,000,000 or above, (excluding banking companies, insurance companies, power companies, Non Banking Financial Companies (NBFCs) and overseas subsidiaries of these companies), will be required to file their balance sheet and profit and loss account in extensible Business Reporting Language (XBRL) mode. APPLICABILITY OF SECTION 108A TO 108I OF THE COMPANIES ACT, 1956 The MCA vide General Circular No. 30/2011 dated May 23, 2011 has clarified that Sections 108A to 108I of the Act were inserted pursuant to the Monopolies and Restrictive Trade Practices (Amendment) Act, 1991. Section 108G (applicability of sections 108A to 108F) and Section 108H (construction of certain expressions used in sections 108A to 108G) of the Act refer to the applicability of sections 108A to 108F in reference to various requirements under the Monopolies and Restrictive Trade Practices Act, 1969. Since the Monopolies and Restrictive Trade Practices Act, 1969 stands repealed; sections 108A to 108I of the Act have become redundant and will have no legal force. For Private Circulation Only 9

LIMITED LIABILITY PARTNERSHIP NOT BODY CORPORATE FOR LIMITED PURPOSE The MCA vide General Circular No. 30A/2011 dated May 26, 2011 has clarified that a limited liability partnership of chartered accountants, incorporated under Section 3(1) of the LLP Act, for the limited purpose of Section 226(3) of the Act will not be considered as a body corporate. Section 226(3) of the Act sets out the entities that will not qualify for appointment as an auditor of a company. DRAFT UNLISTED PUBLIC COMPANIES (PREFERENTIAL ALLOTMENT AND PRIVATE PLACEMENT) RULES 2011 The MCA vide notification dated May 24, 2011 has introduced Draft Unlisted Public Companies (Preferential Allotment and Private Placement) Rules, 2011 (Preferential Allotment Rules). The Preferential Allotment Rules inter-alia provide the following: (d) (e) (f) (g) The Preferential Allotment Rules will be applicable to all unlisted public companies in respect of preferential issue of equity shares, fully convertible debentures, partly convertible debentures or any other financial instrument which would be convertible into or exchanged with equity shares at a later date. No issue of shares on a preferential basis can be, made by a company unless authorized by its articles of association and unless a special resolution is passed by the members in a General Meeting authorizing the Board of Directors to issue the same. The Special resolution will be acted upon within a period of 12 months. Where warrants are issued on a preferential basis with an option to apply for and get the shares allotted, the issuing company is required to pre-determine the price of the resultant shares. There should not be a gap of more than 30 days between the opening and closing of an issue of private placement. There should be a minimum gap of 60 days between two issues i.e., closing of one issue and opening of another issue. For issue of debentures, convertible debentures or any other financial instruments which are convertible into or exchanged with equity shares at a later date under private placement and which may result into cumulative amount of Rs. 5 crores or more, a company has to seek prior approval of the Central Government in the prescribed e-form. However, no approval of the Central Government is required for issue of equity shares under private placement. After every issue of security under private placement, the company will file with the ROC a return of allotment within 30 days of the allotment in the prescribed e-form duly verified by the practicing professional. For Private Circulation Only 10

(h) All securities issued under preferential allotment or private placement is required to be kept in Dematerialized form as required under Depositories Act, 1996. Every company having made private placement or preferential allotment under these rules will be required to file a compliance certificate by practicing chartered accountant/ company secretary/ cost accountant with the office of the ROC along with a return of allotment which will certify that the preferential allotment/ private placement made is in accordance with these rules. The proposed Rules prescribe more disclosures vis-à-vis the Unlisted Public Companies (Preferential Allotment Rules), 2003 and make it compulsory to have securities in dematerialised form. This legal update is the copyright of J. Sagar Associates. The update is not intended to be a form of solicitation or advertising. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate thereafter. No person should act on such information without appropriate professional advice based on the circumstances of a particular situation. advocates & solicitors Corporate Law Practice Group DELHI MUMBAI GURGAON BANGALORE HYDERABAD For Private Circulation Only 11