Parvathi Bakshi

B.A.,LL.B. | 2015-2020
Section B
Part II

INSIDER TRADING
- Insider trading laws prohibit trading a security on the basis of material non-public
information, where the trader has breached a duty of trust or confidence owed to either an
issuer, the issuer’s shareholders, or the source of the information and where the trader is
aware of the breach.1
- Does not prohibit trading when in possession of non-public information. Only prohibits
trading on the basis of such possession

Classic theory Tipper-tippee theory

- insider trades in securities of the company on
the basis of non-public information.
- a person who is not an insider but who learns
of material non-public information and uses
that to trade, is not guilty of insider trading.
The classical theory requires that the person
accused of insider trading be an actual insider
— an officer or employee of the company
whose securities he/she is buying or selling.
- Under this theory, only the corporate insider
owes a fiduciary duty to the corporation and
its shareholders not to engage in buying or
selling the corporation's securities using
material non-public information.
- The outsider who happens across some
material non-public information does not owe
that fiduciary duty and cannot be guilty of
insider trading.
Misappropriation theory
- not insider but some principal. Acquires the
information legally.
- Under misappropriation theory, however, the
outsider who happens across some material
non-public information of a corporation may
not use that
- The tipper “has breached his fiduciary duty2
to the shareholders by disclosing the
material non-public information to the
tippee”
- The tippee “knows or should know that
there has been a breach”
- The tippee uses the information in
connection with a securities transaction, and
- The tipper receives some personal benefit in
return
Affirmative misrepresentation
- – can exist without fiduciary duty (SEC v.
Dorozhko)
An example of affirmative
misrepresentation could be a statement of fact
that is purposely misleading
- extended the reach of the SEC’s policing
power by adopting a new theory
- of insider, which eliminates the fiduciary
duty requirement in cases
- involving an affirmative misrepresentation
rather than a nondisclosure.

1
Unlike RTP, it is only w.r.t. securities. Information doesn’t impact the governance of the company as
in the case of RTP.
2
It forms the basis of the theory, without which, proving insider trading is very difficult. Essentially,
insider trading is a breach of fiduciary duty owed.
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Non-public Information
- “unpublished price sensitive information” means any information, relating to a company
or its securities, directly or indirectly, that is not generally available which upon
becoming generally available, is likely to materially affect the price of the securities –
2(n)
- “generally available information” means information that is accessible to the public on a
non-discriminatory basis – 2(e)
- Not included –
o Pubic information – news article
o Inferences from public information
- Materiality – mosaic theory of investment
- Liability of employers (US) – ‘knew or recklessly failed/disregarded’

Regulation 3 - Communication offence

• Prerequisites:
i. Access to UPSI
ii. An insider
• Exception:
o When takeover code is triggered (once acquirer crosses 25%, a public offer
by the acquirer to the public is triggered, where the acquirer must disclose to
the public their intention to acquire and offer to buy the existing
shareholders’ shares)
o If there is no public offer, you need to disclose the information to the public

Regulation 4 – Trading prohibitions

- Blanket prohibitions – presumption shifting to the defence to show that you didn’t have
UPSI u/clause 2
- Pre-requisites:
i. Access to UPSI
ii. Trading
iii. Proof of trading on UPSI
- Safe harbour provisions
o Off-market trade between promoters with same information
o In case of “non-individual insiders” – Chinese wall. No violation or transfer
of UPSI. (Chinese wall is an artificial separation of employees based on
whether they have information or not)
o In accordance with trading plans (R5) + 6 months cooling (e.g. mutual funds)
§ 20th day to end of financial period
§ not less than 12 month plan
§ not for “market abuse”
- Presumption of access to UPSI(2)
o In case of connected persons – presumption is that you have access to UPSI
o In case of others – prosecution has to prove, how you had access to UPSI
- Consequences: Criminal Prosecution

Safe harbor provisions for due diligence

One issue that has exercised the minds of corporates and the regulators relates to whether a
due diligence exercised can be permitted when an acquirer takes up shares in a listed
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company. During the due diligence process, the acquirer may come into possession of UPSI
that has been disclosed by the company. This creates some incongruence because while due
diligence is an essential process to enable acquisition transactions that may be beneficial to
shareholders, it results in a potential violation of the insider trading regime.
Hence, in the 2015 regulations, SEBI has introduced specific safe harbor provisions that
permit due diligence under controlled circumstances. The regime is bifurcated into two parts
– (1) where the acquisition results in a takeover offer for the company, and (2) where there is
no such offer.

CORPORATE LENDING, BORROWING AND INVESTMENT

§ Section 180 – Prohibition on loan

Ø Kumar Krishna Rohatgi and others v. State Bank of India
§ Section 185 – Loan to directors
§ Section 186 – Loan of companies
Ø Convertible Debentures – Narendra Kumar Maheshwari v. Union of India and
Orhers
§ Floating charge – what it is and when it crystallises?
Ø Illingworth v. Houldsworth
Ø Bank of Baroda v. Shivdasani
§ S.179(3)(d) – board resolution

If there is no express authorization and the director takes a loan, the company can ask take the
defense that the director is acting in breach of his powers and we are not responsible.

Borrowing by a company where the company borrows in spite of no power to borrow, or

borrows beyond the limit fixed by the MoA or AoA, such a loan is null and void and does not
create an actionable debt. Accordingly, any securities giving will be inoperative and so the
lender cannot sue. When a director breaches it powers/goes beyond the power granted, the
company is no longer liable and the loan is not actionable qua the company. – Ultra Vires
Borrowing

AoA, MoA and Board resolutions are the three sources of power to take loan.

Remedies available to the lender:

1. Injunction and recovery.
2. Right of subrogation in case of multiple lenders.
3. Suit against directors (keeping constructive notice in mind)
4. Intra vires companies authority but ultra vires the directors authority, the company
can ratify it and where they don’t, the doctrine of indoor management will still
protect the lender provided it can be proved that the money was lent in good faith.
The power given to the directors is not to give them power per se just to ensure the interest of
the company. It is not given to him because he is director, it is given so that there doesn’t
have to be an AGM every time a loan needs to be passed. So, if the director has an upper limit
of 1cr and the company 10cr, if the director takes a loan of 5cr, the company can either
renounce or ratify it. Its basically given to ensure smooth functioning of the company and
avoid the need to have an AGM every time a loan transaction needs to be carried out.

Section 185 – Loan to Directors

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§ People covered: Directors; directors of holding company; Relative/partner of such
director; firm in which director is partner
§ No Loan to directors except –
Ø Through Special Resolution passed by company
o Full details of loan and director in the notice
Ø Utilized by borrowing company in principal business activity
§ “interested director” defined in explanation

Loan to Companies

Section 186 + Companies (Restriction on Number of Layers) Rules, 2017

Ø Not more than two layers of subsidiaries
Ø Not more than two layers of investment company

Types of Charges
Fixed charge – A charge which is identifiable with specific and clear asset/property at
the time of creation of charge. The Company cannot transfer such identified and defined
property unless the charge holder (creditor) is paid off his dues.

Floating charge - It covers the floating and circulating nature of properties of a company,
like sundry debtors, stock in trade etc., The nature of the property charged may change
from time to time .The floating charge crystallizes into fixed charge if the Company
crystallizes or the undertaking ceases to be a going concern.
Ø Not a future charge
Ø Remains dormant unless crystallises

§ Registration of all charges compulsory under section 77, Companies Act 2013.

1. It is a charge not on an asset but on a class of assets which can be in the present or in
the future.
2. The class of assets charged is one that in the ordinary course of business is changing
from time to time.
3. Until some steps are taken to enforce the charge, the company may continue to deal
with the assets which have been charged in the ordinary course of business without
talking any consent from the lender.
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Instances when the charge becomes fixed (crystallizes):
1. When the company goes into liquidation.
2. When the company ceases to carry on the business.
3. When the creditors/debenture holders take steps to enforce the charge (by
approaching the court).
4. On the happening of an event specified in the loan document.
To create a fixed charge over an asset, you have to specify the asset. The language is more
significant than the intention.

Section 332 – Effect of winding up on floating charge – The charge becomes invalid if the
charge was created 12 months preceding the winding up unless proven that the company was
solvent immediately after creating the charge. This is excluding cash paid to the company at
the time of or subsequent to the creation of and in consideration for the charge together with
interest on that amount a@ 5%/annum or as notified.

Rule 6 of the Companies (Registration of Charges) Rules, 2014

(3) Notwithstanding anything contained in any other law for the time being in force, no
charge created by a company shall be taken into account by the liquidator appointed under
this Act or the Insolvency and Bankruptcy Code, 2016, as the case may be, or any other
creditor unless it is duly registered under sub-section (1) and a certificate of registration of
such charge is given by the Registrar under sub-section (2).

(4) Nothing in sub-section (3) shall prejudice any contract or obligation for the repayment of
the money secured by a charge – i.e., it can always be recovered as an unsecure debt.

CORPORATE SOCIAL RESPONSIBILITY

Regulations:
S 135, 2013 Act + Schedule VII and CSR Rules . 2014

Self-regulation keeping in mind the societal, moral and ethical standards. In India, there is
regulated CSR, ironical in its own way but it is an idea of developmental economics that what
may work in one country make not in another. In India, there are country specific concerns
that the government must address which is why it is different from the globally followed
CSR. CSR is termed as “Triple-Bottom-Line-Approach”, which is meant to help the company
promote its commercial interests along with the responsibilities it holds towards the society at
large. CSR is different and broader from acts of charities like sponsoring or any other
philanthropic activity as the latter is meant to be a superficial or surface level action as part of
business strategy, but the former tries to go deep and address longstanding socio-economic
and environmental issues. 2009 & 2011 guidelines urdge firms to embrace the idea of CSR as
a part of business strategy which should include concerns for natural and social environment.

§ Voluntary CSR Guidelines, 2009

§ Which companies-
Ø The net worth of the company should be Rupees 500 crores or more
Ø The annual turnover of the company should be Rupees 1000 crores or more
Ø Annual net profits of the company should be at least Rupees 5 crores.
• CSR Committee – 3 directors with at least 1 independent director
• Allocation requirement -
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Ø The creation of a Corporate Social Responsibility Committee; and
Ø The mandatory expenditure of two percent of the previous three years’ average
net profits.
• Reporting Requirement - If the same is not done, the directors have to explain in the
AGM why the company failed to make CSR Contribution

Power of CSR Committee –

• Creation of an elaborate policy to implement its legally mandated CSR activities. CSR
acts should conform to Schedule VII of the Companies Act, 2013.
• The committee will allocate and audit the money for different CSR purposes.
• It will be responsible for overseeing the execution of different CSR activities.
• The committee will issue an annual report on the various CSR activities undertaken.
• CSR policies should be placed on the company’s official website, in the form and format
approved by the committee.
• The board of directors is bound to accept and follow any CSR related suggestion put up
by the aforementioned committee.
• The aforementioned committee must regularly assess the net profits earned by the
company and ensure that at least 2 percent of the same is spent on CSR related activities.
• The committee must ensure that local issues and regions are looked into first as part of
CSR activities.

General

§ CSR programmes and activities that solely benefit employees and their families would
not be considered as CSR activities within the meaning of Section 135 – 2014 Rule 5
§ Any activities undertaken outside India are excluded – R. 4
§ entries in the said Schedule VII must be interpreted liberally so as to capture the essence
of the subjects enumerated in the said Schedule. The items enlisted in the amended
Schedule VII of the Act, are broad-based and are intended to cover a wide range of
activities as illustratively mentioned in the Annexure
§ One-off events are excluded from being part of CSR
§ Expenses incurred in compliance with statutes and legislation are excluded
§ Rule 6 – Collaboration with NGOs etc. which have been operating for over 3 years.

Penalty

§ No specific penalty
§ Can impliedly be punished under S 450 – Punishment where no specific penalty is
prescribed under the Act
Ø 10,000 Rs
Ø If a continuing offence then 1000/- per day

Benefits of CSR-
1. Triple bottom effect – If you have a good CSR policy, you are making the people
happy, the planet happy and the shareholders happy (by making profit).
2. Human resources – The need of good human resource management is necessary
because if they are happy, you are happy and you can make others happy. They are
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simply resources (and not looked at as humans which is why you HR comes within
CSR).
3. Risk management – Managing risk is an important executive responsibility.
Reputations that take decades to build up can be ruined in hours through corruption
scandals or environmental accidents. These draw unwanted attention from regulators,
courts, governments and media. CSR can limit these risks.
4. Brand differentiation (loyalty) – Because people want to have brand loyalties.
When people buy products from Body Shop, there is an effect that you are also
contributing to animal welfare (since they do not test on animals) and these products
will still be bought irrespective of cost price and selling price. Create a good image
and people will buy your product (McDonalds and Chipotle).
5. Reduced scrutiny – Interference with business through taxation or regulation can be
avoided by a CSR program that promotes health and safety, environment etc. on as
projects are less likely to be scrutinized.
Criticisms of CSR –
1. Nature of Business – Imposition of outside values on local communities with
unpredictable outcomes.
2. Motive – People do whatever business they like and whenever they are in trouble,
they start giving back to society in an attempt to shift focus of people to the good they
are doing rather than the trouble they caused. Kaisak took over a village and started
producing textile, without doing any CSR. Suddenly found itself in the middle of
environmental lawsuits. They began donating to NGOs for environmental
development. Ronald McDonald is a McDonalds NGO that organizes healthy youth
campaigns (marathons, exercise)
3. Misdirection linked to motive.
4. Controversial industries (Marlboro donating to cancer research)

MINORITY PROTECTION AND MISMANAGEMENT

§ Section 241 – Application to tribunal for relief

§ Section 242 – Powers of Tribunal
§ Section 243 – Consequence of termination or modification of certain agreements
§ Section 244 – Rights to apply under 241
§ Section 245

Section242

Just oppression in itself is not a cause of action that can be pursued in court. 242 (a) and (b)
have to be read together. The oppression must be enough to lead to the winding up of a
company. However, winding up is not just and equitable to the company so if there are
extraneous circumstances which does not allow winding up of a company, it will not be.
Litmus test for accepting application of oppression (prima facie threshold to be met by
applicant)
1. Affairs of the company are being conducted in a manner oppressive to some part of
the members/shareholders INCLUDING the petitioner (theory of direct harm) but
need not be the minority.
2. The facts pleaded justify the making of a winding up order on just and equitable
ground.
3. To wind up the company would unfairly prejudice the oppressed.
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Section 242(2)

(e) and (f) – The tribunal has the power to modify or terminate any contracts that seem
improper. This section is needed for contracts which are intra vires and so cannot be hit by
illegality. So the only recourse is using 242 to declare it oppressive.
Section 243 – No tribunal can grant leave to reinstate you as director before the expiry of the
5-year period without the central govt. first being notified that you are approaching the
tribunal and only then can the tribunal consider your application.
242 (4) and (5) also powers of the tribunal in addition to 242 (2)

CLASS ACTION

Refers to a lawsuit wherein one or several persons join together and sue on behalf of larger
groups of persons. It is suitable when the issues in question are common to all affected and
the number of persons affected is very large, making it impracticable for all of them to join
hands.

Section 245 of the Act talks about the relief that can be sought, who can file and the
considerations of the tribunal and the procedure.

APPLICATION UNDER APPLICATION UNDER

SECTION 241 / 244 SECTION 245
Members of the company; Central Members and Depositors of the
WHO CAN APPLY Government. company.
Company, management, experts,
Company and its management. auditors or other advisors,
AGAINST WHOM
consultants, etc.

Not Required. Required in the prescribed manner.

PUBLIC NOTICE
Oppression and mismanagement that
MATTERS FOR is prejudicial to any member,
Any violation or improper conduct.
WHICH RELIEF members or interest of the company
Past, present and future.
MAY BE or prejudicial to public interest.
REQUESTED Past and Present.

CORPORATE RESTRUCTURING

§ Section 230 – Scheme of arrangement with creditors and members

§ Section 231 – Tribunal approval of scheme of arrangement
§ Section 232 - Merger and amalgamation of companies
§ Section 235 – power to acquire shares of shareholders dissenting from scheme or
contract approved by majority
§ Section 236 - Purchase of minority shareholding

COMPROMISE/ARRANGEMENT

Just before the end is near, arrange the debts and liabilities in such a way that no one’s
interest is dented.
Two instruments to restructure a company – Arrangements and Compromises (Sec. 230).
Arrangements > Compromises because there cannot be any compromise unless there is some
dispute.
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Section 230

Two sorts of arrangement –

(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them
§ Application to be made to the Tribunal
§ S.230(1) – directors cannot enter into a compromise since they are mere employees.
§ Information to be included in Application – 230(2) [PB Note: 230(2)(c)(i) and (ii)
important and applies to corporate debt restructuring only]
§ S.230(2) – liquidity test
§ S.230(3) – notice of meeting to be sent to all creditors and debenture holders/ notice
on website/ notice in an advertisement
§ S.230(4) – Allows poxy voting or postal ballot. To dissent 10% of shareholding of
5% of outstanding debt. Voting can be done within one month of receiving notice.

Precondition for approval of scheme of arrangement

§ Requires 75% approval of class of

Ø Creditors
Ø Shareholders
§ Tribunal approval
§ Certificate of auditor – Proviso to S. 230(7)

Procedure
§ Section 230(3) to 230(6) applies –
Ø Notice
Ø Holding of meeting
Ø Voting and approval of Tribunal
§ Additional information like details about the proposed scheme, valuation of shares etc.
§ Penalty - twenty-five lakh rupees and every officer of such transferor or transferee
company who is in default, shall be punishable with imprisonment for a term which may
extend to one year or with fine which shall not be less than one lakh rupees but which
may extend to three lakh rupees, or with both.

Section 233
§ Mergers and amalgamation of certain companies –
Ø Small companies
Ø Holding and wholly-owned subsidiary companies
§ Does not require Tribunal approval if 90% of shareholders and creditors agree +
solvency report of each company filed along with the Scheme of Arrangement.

S. 235 Drag Along Rights

§ Within 4 months
§ Approved by 90%
§ other than shares already held at the date of the offer by, or by a nominee of the
transferee company or its subsidiary companies,
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§ the transferee company may give notice in the prescribed manner to any dissenting
shareholder that it desires to acquire his shares
§ Send a copy of the notice to the transferor company together with an instrument of
transfer, to be executed on behalf of the shareholder by any person appointed by the
transferor company and on its own behalf by the transferee company, and pay or
transfer to the transferor company the amount or other consideration representing the
price payable by the transferee company for the shares which, by virtue of this
section, that company is entitled to acquire, and the transferor company shall—
(a) thereupon register the transferee company as the holder of those shares; and
(b) within one month of the date of such registration, inform the dissenting
shareholders of the fact of such registration and of the receipt of the amount or other
consideration representing the price payable to them by the transferee company.
§ Any sum received by the transferor company under this section shall be paid into a
separate bank account, and any such sum and any other consideration so received
shall be held by that company in trust for the several persons entitled to the shares in
respect of which the said sum or other consideration were respectively received and
shall be disbursed to the entitled shareholders within sixty days.

Procedure

1. Finalization of documents relating to Merger

2. Scheme of Amalgamation
3. Valuation
4. Board meeting for approval of scheme
5. Company summon for Direction
6. Minutes of Order-Direction By Court
7. Company summon for petition
8. Hearing – Minutes of Order
9. Submission to RoC/RD/OL
10. Service of Notice to various Authorities
11. Final Hearing
12. INC-28
13. Scheme related compliances & Adjudication of Stamp Duty

WINDING UP

Under Companies Act 2013, the Company may be wound up in any of the following
modes:
- By National Company Law Tribunal ( the Tribunal); IBC 2016
- Voluntary winding up IBC 2016 section59
- Under company act – s.271
Grounds S.271

§ Special Resolution for winding up by company

§ Acted against the sovereignty and national interests of India etc.
§ Company being conducted fraudulently or for an unlawful purpose
§ Default in filing financial documents with Registrar for 5 years
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§ Tribunal considers that it would be “just and equitable” for the company to be wound
up

Section 272 – who may file for winding up?

Just & Equitable grounds:

Ø Deadlock
Ø Loss of substratum
Ø Losses
Ø Oppression of minority
Ø Fraudulent purpose
Ø Quasi-partnership
Ø Public interest
Ø Existence of alternative remedy

Loss of substratum- not same as losses. Continuing impossibility.

Test: Subject matter of company is gone
o Object of company has substantially failed
o Impossible to carry on business except at loss
o Existing assets not enough to pay liability