Legal Status of a Child Marriage: Madras HC Decides

Recently, a Full Bench of the Madras High Court decided on the legal status of a marriage concluded in contravention with the prohibition of Child Marriage Act, 2006. The Full Bench held that such a marriage was valid unless it is annulled by a competent court. The decision arose out of a Habeas Corpus petition filed by T Sivakumar, for the production before the court of his minor daughter. Against the petition, the minor daughter filed an affidavit stating that she had left her parental home on her own accord and married the Second Respondent. The Division Bench hearing the matter had doubts over the decision of a Division Bench of the Madras High Court in G Saravanan v the Commissioner of Policy, Trichy where it was held that child marriage was valid and the husband of the child was entitled to the child's custody. The following questions were referred to the Full Bench:

"(1) Whether a marriage contracted by a person with a female of less than 18 years could be said to be valid marriage and the custody of the said girl be given to the husband (if he is not in custody)?

(2) Whether a minor can be said to have reached the age of discretion and thereby walk away from the lawful guardianship of her parents and refuse to go in their custody?

(3) If yes, can she be kept in the protective custody of the State?

(4) Whether in view of the provisions of Juvenile Justice (Care and Protection of Children) Act, 2000, a minor girl, who claims to have solemnized her marriage with another person would not be a juvenile in conflict with law and whether in violation of the procedure mandated by the Juvenile Justice (Care and Protection of Children) Act, 2000, the Court dealing with a Writ of Habeas Corpus, has the power to entrust the custody of the minor girl to a person, who contracted the marriage with the minor girl and thereby committed an office punishable under Section 18 of the Hindu Marriage Act and Section 9 of the Prohibition of Child Marriage Act, 2006 ? and

(5) Whether the principles of Sections 17 and 19(a) of the Guardians and Wards Act, 1890, could be imported to a case arising out of the alleged marriage of a minor girl, admittedly in contravention of the provisions of the Hindu Marriage Act?"

The Full Bench answered these questions as follows:

Nature of a marriage in Contravention of Prohibition of Child Marriage Act

"The marriage contracted by a person with a female of less than 18 years is voidable and the same shall be subsisting until it is annulled by a competent court under Section 3 of the Prohibition of Child Marriage Act. The said marriage is not a 'valid marriage' stricto sensu as per the classification but it is 'not invalid'. The male contracting party shall not enjoin all the rights which would otherwise emanate from a valid marriage stricto sensu, instead he will enjoin only limited rights."

Status of the Adult Husband vis-a-vis the Minor

The adult male contracting party to a child marriage with a female child shall not be the natural guardian of the female child in view of the implied repealing of Section 6(c) of the Hindu Minority and Guardianship Act, 1956."

"The male contracting party of a child marriage shall not be entitled for the custody of the female child whose marriage has been contracted by him even if the female child expresses her desire to go to his custody. However, as an interested person in the welfare of the minor girl, he may apply to the court to set her at liberty if she is illegally detained by anybody."

Legal Status of the Married Minor Girl

"A minor girl whose marriage has been contracted in violation of Section 3 of the Prohibition of Child Marriage Act is not an offender either under Section 9 of the Act or under Section 18 of the Hindu Marriage Act and so she is not a juvenile in conflict with law."

Rights of Parents vis-a-vis Married minor Girl

"The minor girl cannot be allowed to walk away from the legal guardianship of her parents. But, if she expresses her desire not to go with her parents, provided in the opinion of the court she has capacity to determine, the court cannot compel her to go to the custody of her parents and instead, the court may entrust her in the custody of a fit person subject to her volition."

"If the minor girl expresses her desire not to go with her parents, provided in the opinion of the court she has capacity to determine, the court may order her to be kept in a children home set up for children in need of care and protection under the provisions of the Juvenile Justice (Care and Protection) Act and at any cost she shall not be kept in a special home or observation home meant for juveniles in conflict with law established under the Juvenile Justice (Care and Protection) Act, 2000."

"Whether a minor girl has reached the age of discretion is a question of fact which the court has to decide based on the facts and circumstances of each case."

Considerations in a Habeas Corpus Petition Similar to the Instant Case

"In a habeas corpus proceeding, while granting custody of a minor girl, the court shall consider the paramount welfare including the safety of the minor girl not withstanding the legal right of the person who seeks custody and grant of custody in a habeas corpus proceeding shall not prejudice the legal rights of the parties to approach the civil court for appropriate relief."

"While considering the custody of a minor girl in a habeas corpus proceeding, the court may take into consideration the principles embodied in Sections 17 and 19(a) of the Guardians and Wards Act, 1890 for guidance."

Decision: Sivakumar v the Inspector of Police, Thiruvallur MANU/TN/3959/2011: 2011-5-LW 1

SAT Upholds SEBI Ruling in the Sahara Case

The Securities Appellate Tribunal has upheld SEBI's ruling in the Sahara Case. In line with SEBI's ruling, SAT has also found that optionally fully convertible debentures (OFCDs) issued by the two Sahara Group Companies ( SIRCL and SHICL) are securities and that the issue was a public issue requiring mandatory listing and that SEBI has the jurisdiction under the SEBI Act to deal with all kinds of companies, whether listed or not.

The SAT order is available here. The impugned SEBI order is available here.

National Competition Policy

Shri Dharmendra Kumar committee which was constituted by the MCA for framing the National Competition Policy (NCP) has submitted a draft policy. At first blush one may question the rationale for a National Competition Policy considering that we have a Competition Law (Competition Act, 2002) already in place. Perhaps the answer to this ticklish question lies in the Raghavan Committee Report which observed as follows:

“An effective competition policy promotes the creation of a business environment which improves static and dynamic efficiencies and leads to efficient resource allocation, and in which the abuse of market power is prevented mainly through competition. Where this is not possible, it requires the creation of a suitable regulatory framework for achieving efficiency. In addition, competition law prevents artificial entry barriers and facilitates market access and complements other competition promoting activities. Trade liberalisation alone is not sufficient to promote competition and there is a need for a separate competition policy”

In other words Competition Law is only a subset of an overarching Competition Policy. Be that as it may, the committee lays down the NCP as under:

-Rule bound, fair, transparent and non discriminatory market regulatory procedures.

-Independence of the regulatory body.

-Establishing a ‘level playing field’ for both the government enterprises and the private sector.

-Fair pricing of public utilities and third party access to ‘essential facilities’. In other words it requires the dominant infrastructure owners (electricity, communications etc.) to grant to third parties access to their infrastructure on reasonable and competitive terms and conditions.

-Promotion of competition through regional, national and international co-operation.

The draft policy also mandates the Central and the State Government to undertake a Competition Impact Assessment of the existing policies, statutes, regulation that prima facie undermines competition (an illustrative list of parameters for conducting Competition Impact Assessment has been provided). Further for the implementation of the policy the government is mandated to set up a National Competition Policy Council (NCPC). The role of the NCPC is primarily to provide technical assistance in conducting the Competition Impact Assessment.

The NCP is indeed a necessary and welcome move. However, one may question the legal relevance of such policies i.e. extent to which they are legally enforceable. 

Takeover Code Revamp: Update

In a recent board meeting SEBI considered and accepted most of the recommendations of the TRAC. Some of the major recommendations that has been accepted by SEBI includes the following:

-Initial trigger threshold increased to 25 % from the existing 15 %

-scrapping of non compete fee. (the issue of non compete fee has been discussed on this blog previously and is available here and here)

-In cases of competitive offers, the successful bidder can acquire shares of other bidder(s) after the offer period without attracting open offer obligations.

-Voluntary offers have been introduced subject to certain conditions.

-A recommendation on the offer by the Board of Target Company has been made mandatory.

The two important recommendations that has not been accepted in totality are:

-offer size increased from a minimum 20% to 26% of the total issued capital. It is to be noted that TRAC had recommended an offer size of 100%.

-existing definition of 'control' retained. TRAC had proposed a broader definition of 'control' i.e. not just the right but also the ability to manage the company and appoint majority directors.

A summary and initial reaction on the development is available here.

Convertible Debentures: New Rules

The MCA has recently released the Draft Public Companies (Terms of Issue of debenture and of raising loans with option to convert such debentures or loans into shares), 2011. The rule if and when becomes effective will supersede the Public Companies (Terms of Issue of debenture and of raising loans with option to convert such debentures or loans into shares), 1977. 

The 2011 rules are more or less similar to the 1977 rules albeit one significant difference. As per the 2011 rules a public financial institution or a bank can now only convert all or any part of the debentures, if (a) the company has defaulted in the repayment of, or payment of interest on, such loans and debentures; and (b) the bank or public financial institution has given the company a notice of its intention to convert the debentures at least 30 days prior to the intended date of conversion.     

Micro Finance Institutions: Draft Bill

Micro Financial Institutions (MFIs) are entities which provide small credits to individual(s) or groups. Typically MFIs provide micro credit facilities, assist in remittance of funds, provide pension and insurance services etc. MFIs do not strictly fall within the category of a banking company or a co operative society engaged primarily in agricultural operation or industrial activity. The MFIs are seen more as an extended arm of the banking system which provides credit or other financial services to the poor households and their micro enterprises.

Last year the Andhra Pradesh Government introduced the Micro Finance Institutions (Regulations and Money Lending) Act, 2010 which had thrown the industry into crisis by imposing several restrictions. As a result the Reserve Bank of India appointed an expert committee lead by Y.H. Malegam. The Malegam Committee submitted its report on January 19, 2011 and based on the recommendations of the committee the government has introduced the Micro Finance Institutions (Development and Regulation) Bill, 2011. The object of the bill is “to provide a formal statutory framework for the promotion, development, regulation and orderly growth of the micro finance sector and thereby to facilitate universal access to integrated financial services for the unbanked population.”

Some of the salient features of the Bill are as follows:

-Establishing a Micro Finance Development Council which will advice and assist the government in framing policies for the sector. The bill also seeks to establish a State Advisory Council.

-The MFIs can only operate business after obtaining a certificate of registration from the Reserve Bank of India. The existing MFIs will also have to apply for the registration within three months from the commencement of the Act.

-Any MFI which becomes ‘systemically important’ will have to convert its institution into a Company registered under the Companies Act, 1956. An MFI can become ‘systemically important’ if it deploys a certain amount of funds for providing micro credit to a minimum number of clients. The exact figures relating to the amount and the clients are not specified in the bill and rightly so. The RBI has been delegated the power to frame rules in this regard.

-The Bill gives wide powers to the RBI. Some of the specific powers conferred on the RBI are (i) to formulate policies (ii) to prescribe minimum standards required to be followed by MFIs in relation to method of operation, recovery, management and governance (iii) calling for information and data from the MFIs, among others.

-Any restructuring of the MFIs will require the prior approval of the RBI.

-The Bill mandates the establishment of a Micro Finance Development Fund. The fund will be applied towards providing the MFIs with financial assistance.

-The Bill once it comes into force will override the provisions of all other existing laws. Further, the Bill provides that any MFI registered with the RBI under the provisions of this Act (now bill) will not be treated as a money lender for the purposes of any state enactment. In effect this implies quite clearly that the Andhra Pradesh Micro Finance Institutions (Regulations and Money Lending) Act, 2010 would not be applicable to the MFIs holding a certificate of registration under the provision of this Act/Bill.

The Bill is of immense socio economic importance. The views of the Industry and further analysis of the Bill is available on live mint and the Wall Street Journal.

Pledge of Shares, FDI

In recent times Government/RBI has made several attempts to liberalize, rationalize and simplify the processes associated with FDI flows to India and reduce the transaction time. In furtherance of this, the RBI vide a circular dated May 2, 2011 has delegated its powers to AD Category-I banks to allow non resident investors to pledge their shares held in an Indian Company, subject to certain conditions. The conditions prescribed are as follows:

In case shares are pledged in favour of an Indian bank the following conditions are applicable:

1. In case of invocation of pledge, the transfer of shares should be in accordance with the FDI Policy existing at the time of creation of pledge.
2. A declaration from the statutory auditor that the loan proceeds would be applied for the declared bona fide  business purpose.
3. The Indian company whose shares are pledged will have to comply with the SEBI disclosure norms. In other words the Indian Company would have to comply with Regulation 8A of the Takeover Code and Clause 35/41 of the Listing Agreement.  
4. The lender bank will have to comply with the provisions of S. 19 of the Banking Regulation act, 1949. In other words the lender bank cannot hold shares as a pledge of an amount exceeding thirty percent paid up share capital of that company or thirty percent of its own paid up share capital and reserves, whichever is less.

In case shares are pledged in favour of an overseas bank the following conditions are applicable:

1. Loan is utilized for genuine business purpose overseas and not for any investments either directly or indirectly in India.
2. Overseas investment should not result in any capital inflow into India.
3. In case of invocation of pledge, the transfer of shares should be in accordance with the FDI Policy existing at the time of creation of pledge.
4. A declaration from the statutory auditor that the loan proceeds would be applied for the declared bona fide business purpose.

A VCCIRCLE article analyzes the effect of the circular in detail. On a parting note though, the circular comes at a time when pledging of shares may not be commercially viable due to the prevailing market prices of these shares.

Rights Issue, Unsecured Loan Adjustment

In SRM Energy Limited v. SEBI, SAT has adjudicated upon the issue of adjustment of unsecured loans against the price to be paid for the shares allotted in the rights issue. The brief facts of the case are as follows. The appellant company borrowed a certain sum of money from the promoter group upon an oral understanding that if and when the appellant company came out with a rights issue, the unsecured loans would be adjusted against the share price. Subsequently, the appellant company came out with a rights issue and further sought to give effect to the aforementioned oral understanding entered into with the promoter group.

SEBI objected to such an adjustment on the ground that the unsecured loan advanced by the promoter group did not comply with the conditions prescribed u/s 81(3) of the Companies Act, 1956 [hereinafter “the Act”]. On the other hand the appellant company argued that shares were proposed to be allotted in accordance with the provisions of S. 81(1) of the Act and that the conditions incorporated in S. 81(3) were not applicable to the dispute in question. Before discussing the ruling of SAT, it is only appropriate to discuss the relevant provisions of the Act.

S. 81(1) of the Act empowers the Board to issue shares to the existing body of shareholders of the company in the same proportion in which they already hold shares of the company, without any special resolution or government approval. S. 81(1A) further empowers the Board to issue shares to non existing shareholders. However, as a condition precedent, such an issue has to approved by the shareholders vide a special resolution. S. 81(3) stipulates that S. 81 would not apply (a) to a private company (b) when the loans/debentures have a stipulation attached thereto that the lender will be entitled to exercise an option to convert the loans/debentures into shares at a future date. Such a conversion is however subject to two conditions (a) the terms of the loan has to be approved by the central government or is in conformity with the rules made in this behalf; and (b) a special resolution has to passed by the shareholders sanctioning the terms of the loan. 

SAT, while taking a pragmatic view allowed the adjustment. The reasoning adopted by SAT was that the entire transaction fell within the purview of S. 81(1) of the Act in that the additional shares were sought to be issued to the existing body of shareholders in the same proportion and that the transaction was not a mere conversion of debt into equity in the strict sense. Additionally, SAT noticed that as per the terms of the loan it was open for the promoter group to demand the immediate payment of the loans from the appellant company and hence, it was meaningless for the promoters to first demand the payment of the loan and then forward the very same amount towards the price of the shares allotted in the rights issue. 

  

Non Compete Fee, Takeover Code: Part 2

In my previous post I had briefly discussed the concept of non-compete fees and the legal issues surrounding it. In this post I shall discuss the prevailing position of law with regard to non-compete fees. The present position of law is clearly articulated in E Land Fashion China Holdings Limited v. Securities Exchange Board of India wherein the SAT while reversing the order of SEBI allowed the acquirer to pay the additional non compete fees to the exiting promoters.

Facts

The appellant entered into a share subscription agreement and a share purchase agreement with the target company and its promoters whereby it was inter alia agreed that the appellant would acquire 51% of the equity capital of the target Company at a price of Rs. 75 per share inclusive of a non-compete fee of Rs. 15 per share. The appellant and the target company and its promoters also executed a shareholders agreement. Since, the equity shares acquired by the appellant pursuant to the aforesaid agreements were in excess of 15% of the voting rights in the target company, the provisions of Regulation 10 and 12 of the Securities and Exchange Board (Substantial Acquisition of Shares and Takeovers) Regulation 1997 [Hereinafter “takeover code”] got triggered. Accordingly, the appellant made an open offer to acquire 20% of the voting capital of the target company at a price of Rs. 60 per share. The offer price did not include the additional Rs. 15 which was offered to the promoter group. Thereafter, SEBI directed the appellant to add  the non-compete fee paid to the promoters to the offer price.                                         

        

SEBI's Contention

SEBI argued that the non compete fee should be added to the offer price as (i) the existing promoters were still continuing to hold substantial shares (post offer shareholding) in the company and that they were not exiting completely (ii) the promoters had the right to appoint two directors and jointly select two independent directors in the company (iii) the shares of the promoters had a lock in period of 3 years i.e. the promoters were not entitled to transfer their shares without the written approval of the acquirer. The crux of SEBI's argument was that the exiting promoters even post offer would continue to hold substantial shares in the company and also control the company. In such a scenario, SEBI argued, it was unlikely that the promoters would totally exit the target company and offer competition.

SAT's Ruling

The SAT allowed the payment of the non compete fee to the promoters of the target company on the ground that the promoters had the experience and expertise to compete with the target company at a future point in time. In arriving at this conclusion SAT heavily relied on its earlier ruling in Tata Tea Ltd. v. Securities Exchange Board of India. In tata tea the tribunal had held that if the payment of non compete is based on a strong business rationale and is not a mere tool to reduce the cost of acquisition to discriminate against the public shareholders, the Board or the tribunal is not entitled to intervene.

Analysis

It is now fairly well settled that an acquirer is entitled to pay the promoter group of the target company an additional non-compete fee. However the non-compete fee can only to paid when there is a “lurking fear of competition”. The question as to what amounts to “lurking fear of competition” is a factual one and will have to be determined on a case to case basis. Additionally, the validity of a non-compete fee is not dependent on the extent of the threat of competition from the selling promoters i.e. even if the threat is remote it is not open for the Board or even the tribunal to intervene. The Board can intervene only when the non-compete fee is used as a design to reduce the cost of acquisition to discriminate against the public shareholders.

Although the controversy surrounding non-compete fee and the takeover code is clear (at least for the time being), several commentators (here and here) believe that non-compete agreements are in violation of S. 27 of the Indian Contract Act, 1872. The commentators argue that a SEBI Regulation cannot allow what the parliament expressly prohibits.      

  

Preferential Allotment/Private Placement, New Rules

Recently the MCA released the Draft Unlisted Companies (Preferential Allotment) Rules, 2011. The draft rules seeks to substitute the Unlisted Companies (Preferential Allotment) Rules, 2003. The Draft rules inter alia requires more disclosures and also mandates the securities to be kept in a demat form. Here is a comparative table of both the rules:

Point	Current 2003 Rules	Proposed 2011 Rules
Applicability	Applies only to 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 share at a later date.	Identical
Special Resolution	The issue of shares can be only made, if (i) the AoA of the company authorizes to do so and (ii) a special resolution is passed at the general meeting authorizing the allotment. The special resolution has to acted upon within a period of 12 months.	Additional Requirements The company has to make disclosures in the offer document as prescribed. The offer document has to be approved by way of a special resolution. Both the copy of the special resolution and the offer document has to be filed with the RoC.
Condition for the issue of Private Placement	Does not prescribe any such condition.	The following conditions are prescribed: Not more than 30 day gap between opening and closing of the issue. Minimum 60 days gap between two issues. Any financial instrument which is convertible into equity shares at a later date and resulting into a cumulative amount of Rs. 5 Crores or more will require the prior approval of the central government. After the issue, the company has to file a return of allotment with the RoC within 30 days.
Dematerialization of Securities	No such requirement	All securities issued under preferential allotment or private placement has to be kept in a demat form.
Compliance Certificate	A Similar audit certificate was only required to be placed before the shareholders.	The compliance certificate has to be filed with the RoC.
Disclosures in the offer document	Not applicable. However disclosures are to be made in the explanatory statement to the notice for the general meeting.	The 2003 rules only prescribed that the object of the issue had to be disclosed. The 2011 rules requires disclosures with regard to the object of the issue, brief detail of the project and statutory clearances required and obtained for the project. Apart from this the two rules are more or less the same in this regard.

It is quite clear that the new rules, if they become operational, would increase the compliance burden on the companies. It will also increase the paper work and possibly the transaction cost. Moreover, fund raising through the issue of convertible financial instruments would be hit severely as now all such transactions resulting into a cumulative amount of Rs. 5 Crores or more will require Central Government approval.

The rationale for these new rules is unclear. However, initial reports suggest that the rules are a fallout of the Sahara-Sebi Controversy.