VHVK E Newsletter December 2020
Dec 2020
Volume IV Issue 4
VHVK Law Bulletin
We are pleased to bring you this fourth and final issue of VHVK Law Bulletin for 2020, as life returns to normal in the aftermath of the COVID 19 pandemic lockdown earlier in the year. This issue features the following:
- Packaged Commodities Rules apply to direct sellers, Government clarifies
- National Company Law Tribunal permits liquidator to sell assets under attachment
- Government of India revamps industrial, labour and employment related laws
- Capital gains tax relief for “indirect transfer” retrospective, ITAT rules
- SEBI recognizes commercial realities in enforcing takeover rules
- Unitholders’ approval mandatory to terminate mutual fund schemes, Karnataka High Court affirms
Packaged Commodities Rules to apply to direct sellers, Government clarifies
Packaged Commodities Rules, 2011 require disclosure of specified product information on packages. This includes retail price, identity of manufacturer/packer and instructions for use. With the ongoing trend of e-commerce and sellers directly selling products to consumers, the Government has acted to expand the reach of Packaged Commodities Rules to make them also applicable to direct sellers.
Packaged Commodities Rules framed under the Legal Metrology Act, 2009 aim to protect consumers by providing key information on products. With the emergence of e-commerce and direct sale of products to consumers outside conventional retail stores, the Government has extended regulation to this category of sellers also. Deputy Director, Legal Metrology Department recently instructed direct sellers to comply with the following conditions under the Packaged Commodities Rules, 2011.1
- Registration of selling entities (Rule 27)
- Mandatory declarations on products:
- Name and address of manufacturer/importer/packer
- Country of origin
- Generic name(s) of product(s) included in packages
- Quantity (units/weight/measure)
- Month and year of manufacture
- Expiry/best before date
- Maximum retail price including all taxes
The Government’s timely move will cover an important segment of retail sellers of products.
To facilitate business rehabilitation, NCLT permits sale of assets under legal attachment
In SBER Bank v Varrsana Ispat Ltd (in liquidation),2 the National Company Law Tribunal (NCLT), Kolkata Bench, permitted the liquidator to sell the plant of a Corporate Debtor despite an order of attachment operating against the assets under the Prevention of Money Laundering Act, 2002. In permitting the sale, NCLT observed the purchaser can move for lifting the attachment order at the appropriate time.
In the case before NCLT Kolkata, the Corporate Debtor’s assets were under attachment from proceedings against the company’s promoters under the Prevention of Money Laundering Act, 2002 (PMLA). With the evidence gathered in those proceedings, the Enforcement Directorate had procured attachment of the assets of the Corporate Debtor as proceeds of crime, given the links to the promoter group.
In NCLT, insolvency resolution efforts for the Corporate Debtor failed and it was placed in liquidation. The Liquidator made efforts to sell the assets of the Corporate Debtor as a going concern, as this would both assure best value for the assets and continuity of operations at the plant. The sale effort was opposed by the Enforcement Directorate. It argued that the attachment of assets under PMLA precluded sale. Overruling the objection, NCLT permitted sale of the Corporate Debtor’s assets reserving liberty to the purchaser to seek lifting of the attachment when appropriate. NCLT’s approach in the matter was clearly pragmatic. The endeavour was to facilitate sale of the plant and assure continuity of operations. This is in line with the rehabilitative philosophy of the Insolvency & Bankruptcy Code, 2016.
Government of India revamps industrial, labour and employment related laws
In a major overhaul, Government of India completed consolidation and revision of several laws relating to industries, labour unions, workplace safety and employment benefits. Legislative procedure for the following laws, including President’s assent, is complete. The new laws will go into effect when the government issues necessary notifications for the purpose:
- Industrial Relations Code, 2020
- Social Security Code, 2020
- Occupational Health, Safety and Working Conditions Code, 2020
The new Codes replace several laws enacted in the post-independence decades when India embarked on the path of industrialization. The new laws seek to modernize industrial, employment and occupational safety laws and better align them with the needs of the present.
The three new Codes replace several piecemeal legislation on industrial, labour and employment related issues. The exercise is mostly to consolidate and modernize, rather than introduce sweeping changes. The laws to be replaced by the new Codes are listed in the table below.
| New Legislation | Existing Legislation to be Repealed |
| Industrial Relations Code, 2020 | Industrial Disputes Act, 1947 |
| Trade Union Act, 1926 | |
| Industrial Employment (Standing Orders) Act, 1946 | |
| Social Security Code, 2020 | Employees’ Compensation Act, 1923 |
| Employees’ State Insurance Act, 1948 | |
| Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 | |
| Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959 | |
| Maternity Benefit Act, 1961 | |
| Payment of Gratuity Act, 1972 | |
| Cine Workers Welfare Fund Act, 1981 | |
| Building and Other Construction Workers Welfare Cess Act, 1996 | |
| Unorganised Workers’ Social Security Act, 2008 | |
| Occupational Safety, Health and Working Conditions Code, 2020 | Factories Act, 1948 |
| Mines Act, 1952 | |
| Dock Workers (Safety, Health and Welfare) Act, 1986 | |
| Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 | |
| Plantations Labour Act, 1951 | |
| Contract Labour (Regulation and Abolition) Act, 1979 | |
| Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979 | |
| Working Journalist (Fixation of Rates of Wages) Act, 1958 | |
| Working Journalist and Other Newspaper Employees (Conditions of Service and Miscellaneous Provisions) Act, 1958 | |
| Motor Transport Workers Act, 1961 | |
| Sales Promotion Employees (Conditions of Service) Act, 1976 | |
| Beedi and Cigar Workers (Conditions of Employment) Act, 1966 | |
| Cine Workers and Cinema Theatre Workers Act, 1981 |
The new Codes, as noted, are yet to be implemented. We will provide summaries of the Codes and the proposed rule changes in the coming issues of VHVK Law newsletter in 2021.
ITAT clarifies that relief from capital gains tax for “indirect transfer” is retrospective
Transfers of shares in overseas companies that hold significant assets in India are subject to capital gains tax in India. This is subject to the “small shareholder” exception. Shareholders with 5 percent or less voting power and not exercising management powers are exempt from the tax. In Augustus Capital Pte Ltd v DCIT,3 the Income Tax Appellate Tribunal applied the small-shareholder exception retrospectively and quashed the levy for an earlier year before the Income Tax Act permitted the exception.
“Indirect transfer” tax was introduced in the Income Tax Act in 2012, retrospectively from 1961. Capital gains tax is levied on transfer of shares in overseas companies that hold substantial assets in India. For this purpose, substantial assets mean assets in India valued at Rs 10 crores or more and they represent at least a majority the total assets of the company. The “small shareholder” exception, inserted in 2015, exempts shareholders with 5 percent or less voting power and not exercising management powers.
In Augustus Capital, the sale of shares occurred in 2014, a year before the “small shareholder” exception was included in 2015. The Appellate Tribunal held that the exception was also retrospective in effect, similar to the “indirect transfer” tax itself, which dates back to 1961. On this ground, the Appellate Tribunal quashed the tax applying the “small shareholder” exemption claimed by the overseas investor that sold the shares.
In enforcing takeover bid regulations, SEBI recognizes business realities
In re Dakshin Mercantile Pvt Ltd and LKP Finance Ltd,4 Securities & Exchange Board of India (SEBI) had to consider the financial difficulties of a bidder that had launched a takeover bid but could not complete acquisition of the target. Failure to complete the acquisition within the permitted time was in breach of SEBI (Substantial Acquisition of Shares and Takeover Rules, 2011 (SAST Rules). Recognizing the ground realities and the difficult financial position of the bidder, Dakshin Mercantile, SEBI levied a nominal penalty of Rs. 5 lakhs on it for the default.
In launching the bid to acquire controlling interest in LKP Finance Ltd, the bidder entered into a Share Purchase agreement with the promoters that held sizable shares in the target. Promoters’ shares were to be purchased by Dakshin by 31 Dec 2018. Dakshin also launched a takeover bid and received tender offers for about 25 percent of LKP shares. Dakshin purchased the tendered shares and completed the payment for them.
Dakshin, however, failed to purchase shares from the promoters under the Share Purchase Agreement. A complaint was made to SEBI that Dakshin breached the time limit of 26 weeks stipulated under Regulation 22 of SEBI (SAST) Regulations, 2011 for completing transactions. In response, Dakshin pleaded financial problems that prevented it from buying shares from the promoter group and that it had lost Rs. 41 crores in the transaction.
SEBI regulations permit “extraordinary and supervening circumstances” to be considered in completing acquisitions. Making use of the flexibility, SEBI imposed a nominal penalty of Rs. 5 lakhs on Dakshin for its failure to complete the takeover transaction. The case underscores the importance of financial preparation by purchasers in launching takeover bids and substantial share acquisitions.
Unitholders must approve termination of mutual fund schemes, Karnataka High Court affirms
In SEBI v Franklin Templeton,5 Karnataka High Court ruled that unitholders must approve winding up of mutual fund schemes. The approval is mandatory under SEBI (Mutual Funds) Regulations, 1996. The High Court considered a challenge to Franklin Templeton financial group’s decision in April 2020 to terminate six debt mutual funds in the wake of the COVID-19 lockdowns and high demand for redemptions.
Blaming the situation, Franklin Templeton decided to wind up six debt schemes that had assets under management over Rs. 25,000 crores. Franklin Templeton stated the market had become illiquid in the COVID-19 lockdown situation and the schemes were unable to meet high demand from unitholders for redemption of units. The decision was challenged by several unitholders and also by SEBI, the market regulator.
The Karnataka High Court declined to interfere with the decision made by the fund trustees to terminate the schemes, but held that implementing the decision would require majority support from the unitholders. This is a requirement under SEBI Mutual Funds Regulations. In effect, the trustees cannot unilaterally make and implement the decision to terminate the schemes.
Significantly, the Karnataka High Court also held that trustees of mutual funds perform public duties and are amenable to the high courts’ writ jurisdiction. This has important ramifications. This new line of legal development can strengthen remedies for investors. It remains to be seen whether Franklin Templeton will carry the issue in appeal to the Supreme Court.
SEASON’S GREETINGS AND BEST WISHES FOR THE NEW YEAR 2021
******
VHVK Law Partners
#3 & #4 Lakeside Residency
4 Annaswamy Mudaliar Road
Bangalore 560 042 INDIA
www.vhvklaw.com
Ph: +91 80 2536 6518
Fax: +91 80 2556 2353
VHVK Law Bulletin is issued for information purposes only and does not constitute legal advice. For more information on any of the material covered here and/or their implications for your situation, please obtain competent legal advice.