India Regulatory Brief: Commercial Dispute Resolution Eased, New Rules On Insider Trading

December 28, 2015 Posted by India Briefing Reading Time: 5 minutes

Key Reform Bills yet to be Passed, but Resolution of Commercial Disputes Made Easier

The turbulent winter session of Parliament ended on December 23 after considerable political deadlock, cross-party rhetoric and lack of legislative debate.

Key reforms such as the GST, bankruptcy, and real estate bills did not get passed despite assurances from the Prime Minister. This is because the ruling Bharatiya Janata Party (BJP) does not hold a majority in the Rajya Sabha (upper house) and has been unable to garner the support of opposition parties. The bankruptcy bill will now be sent to a Joint Parliamentary Committee to avoid being voided as the land bill or go the route of a temporary ordinance.

Nonetheless, the winter session was more productive than the preceding Monsoon term as the Lok Sabha (lower house) passed 13 bills while the Rajya Sabha passed nine. Two important bills – Arbitration and Conciliation Amendment Bill, 2015, and Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill, 2015 – were cleared by the Rajya Sabha, and only need President Pranab Mukherjee’s assent to become law. Both bills aim to create a business friendly system where there is a fast and easy settlement of commercial disputes. The arbitration amendment seeks to ensure that case proceedings get completed within 12 months. As per the Law Commission’s recommendations, commercial courts will hear disputes related to shareholders, franchising, joint venture agreements and subscription and investment agreements in the service industry, technology, intellectual property and insurance.

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Finance Ministry Draft Guidelines to Tighten Tax Norms for MNCs

Multinational companies (MNCs) will now gain clarity on their residency status as the Income Tax department has released draft guidelines regarding place of effective management (PoEM) rules. PoEM has been defined by the Finance Act, 2015 as “a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.” This means that businesses will be liable to pay taxes in India if meetings related to key decision-making take place in India.

According to the proposed rules, MNCs will be subject to a two-stage test. The first stage will identify the important decision-makers in these companies – managing director, CEO, financial director, chief financial officer, chief operating officer, heads of various divisions or departments such as chief information officer, chief technology officer, or director for sales or marketing. The second stage will determine the place where these decisions are made. Further, the rules call for a test of active company, i.e. identifying if the company’s passive income — royalty, dividend, capital gains, interest or rental besides income from sale and purchase from associated companies — is more than 50 percent of the total income. Authorities will also examine if more than half of the company’s assets and total employees are situated in India or are Indian residents. The average of data from the three previous years will be taken into account to determine the PoEM.

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SEBI Issues New Rules on Insider Trading

The Securities and Exchange Board of India (SEBI) has called for companies to adopt a ‘need to know’ strategy while communicating on important business issues. SEBI’s insider trading code of 2015 now judges close relatives, members of the board of directors and people connected with a price-sensitive decision to be ‘connected persons’. The new regulations prohibit any communication of such information by these individuals. The prohibition applies regardless of any trading or wrongdoing being committed. Higher levels of scrutiny will now require companies to maintain a record of information to refute potential allegations of the misuse of sensitive information.

SEBI also issued new regulations related to the due-diligence clause for deals that do not trigger an open offer of equity. While the regulator clarifies the treatment for deals that get closed, it remains silent on deals that fail to culminate. This has led Indian companies to question what happens to the ‘unpublished price-sensitive information’ already shared with the potential acquirer in an aborted transaction. SEBI, however, has maintained that its new regulations aim to get companies in India to adopt global best practices. Meanwhile, companies in India have deemed the new SEBI regulations restrictive and confusing.

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