Legal & Regulatory

Roundup
December 2015

VERUS Legal & Regulatory Roundup

December 2015

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The VERUS Legal & Regulatory Roundup is a monthly feature which

covers important Indian legal and regulatory developments of the
previous calendar month, aiming to keep the reader updated with
the Indian legal and regulatory landscape. This month we are
providing a consolidated update from the months of October and
November.
The December 2015 issue of the VERUS Legal & Regulatory
Roundup covers some key regulatory updates from the Reserve
Bank of India (RBI) as well as legislative reforms proposed by
Department of Industrial Policy and Promotion (DIPP). The Update
also covers highlights of a recent important judgments / orders
passed by the Supreme Court.
We would be happy to receive any feedback or comments you may
have on this edition, or the following issues of the VERUS Legal &
Regulatory Roundup.

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VERUS Legal & Regulatory Roundup

December 2015

I. DIPP
1. Reform of existing Foreign Direct
Investment (FDI) Policy: Liberalizes
fifteen sectors
The DIPP vide Press Note dated 10
November 20151 (Press Note) has
decided to further liberalise the FDI in
fifteen sectors of the Indian economy
which includes enhancement of the
sectoral caps. The changes introduced
inter alia include:
i.
In the Construction Sector, the
Government has removed the restriction
of:
a) minimum floor area of 20,000 sq.
m in construction development
projects and;
b) minimum capitalization of US $5
million to be brought in within the
period of six months of the
commencement of business.

The Government has also permitted

100% FDI under automatic route in
completed projects. Further, each
phase of the construction development
project would be considered a separate
project for the purposes of FDI Policy.
ii.

The Government has now allowed up to

49% FDI in the Defence Sector under
the automatic route but in case such
foreign infusion results in the transfer
of stake by existing investor to new
foreign investor, Government approval
will be required. However, proposals in
excess of 49% will be considered by the
Foreign Investment Promotion Board
(FIPB).

iii.

In the Broadcasting Sector, new sectoral

caps have been introduced.
a) Broadcasting Carriage Services:
FDI up to 100% is now permissible
in broadcasting carriage services
outlined in the FDI Policy, viz.,
teleports, Direct-To-Home, Cable
Networks, Mobile TV and HeadendIn-The-Sky. Within this sphere, FDI
up to 49% is permissible under
automatic route and above 49%
under approval route.
b) Terrestrial Broadcasting
FDI up to 49% is now permissible
under Government route in case of
terrestrial broadcasting FM (FM
radio), up-linking of news and
current affairs TV channels
whereas
FDI up to 100% is
permissible under automatic route
in case of up-linking of non-news
and current affairs TV channels and
down-linking of TV channels.

iv.

The Government has decided to

introduce full fungibility of foreign
investment in the Banking-Private
sector. Hence, Foreign Institutional
Investors/Foreign Portfolio Investors/
Qualified Foreign Investors following due

Further, a foreign investor will now be

permitted to exit and repatriate foreign
investment before the completion of a
project, subject to a lock-in period of
three years. However, the lock-in period
condition will not apply:
a) in case where there is a transfer of
stake from one non-resident to
another non-resident
without
repatriation and;
b) to hotels, hospitals, special
economic
zones,
educational
institutions, old age homes and
investment by Non Resident
Indians (NRIs)
Additionally, earning rent/income on
lease of property (not amounting to
transfer), shall not be regarded as real
estate business which is prohibited from
receiving FDI.

http://www.dipp.nic.in/English/policies/fdi_revie
w_10112015.pdf

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procedure can now invest up to the

sectoral limit of 74%, provided there is
no change of control and management
of the investee company.
v.

In addition to tea plantation, pursuant to

the Press Note, coffee, rubber,
cardamom, palm oil tree and olive oil
tree plantations are also eligible for
100% foreign investment.

vi.

Earlier, the investments made by NRIs

under Schedule 4 of FEMA (Transfer or
issue of Security by Persons Resident
Outside India) Regulations,2000 which
are deemed to be domestic investment
at par with investment made by
residents was only possible through
incorporated entities. For investments
made by NRIs on non-repatriation basis,
special dispensation for investment is
allowed in construction development (i.e.
FDI-linked conditions are not applicable)
and civil aviation sector (there are no
caps). However, the Government of India
realised that larger investments can be
attracted not through individuals but
largely through corporate entities.
Pursuant to the Press Note, the abovementioned special dispensation is also
extended to companies, trusts and
partnership
firms,
which
are
incorporated outside India but are owned
and controlled by NRIs. Henceforth,
such entities owned and controlled by
NRIs will be treated at par with NRIs for
investment in India.

vii.

Under the Single Brand Retail Trading

(SBRT) sector, the new reforms have
relaxed sourcing norms by calculating
the sourcing requirement from the
opening of the first store as opposed to
the date of receipt of the FDI. It has also
relaxed sourcing norms for single brand
entities in the realm of state-of-art and

cutting edge technology subject to

government approval.
An entity which has been granted
permission to undertake SBRT would be
permitted to undertake e-commerce
activities. Indian manufacturers are
permitted to sell their own branded
products in any manner, i.e, wholesale,
retail as well as e-commerce platforms.
Furthermore, it is now permitted for the
same entity to carry out both wholesale
and SBRT activities provided that the
conditions
of
FDI
policy
on
wholesale/cash & carry and SBRT are
complied by both the business arms
separately. Manufacturers are now
permitted to undertake wholesale and/or
retail trading including through ecommerce
without
Government
approval.
viii.

100% FDI is now permitted under

automatic route in Limited Liability
Partnerships operating in sectors/
activities where 100% FDI is allowed,
through the automatic route.

ix.

In the Airport Transport Services Sector,

in addition to Domestic Scheduled
Passenger Airline (SOP), Regional Air
Transport Service will also be eligible for
foreign investment upto 49% under
automatic route.

x.

For infusion of foreign investment into

an Indian company which does not have
any operations and no downstream
investment, Government approval is now
not required for undertaking activities
which are under automatic route and
without any FDI linked performance
conditions.

xi.

Henceforth,
establishment
and
ownership/control of the Indian company
will require Government approval only if
the company concerned is operating in
sectors/activities which are under
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December 2015

Government approval route as opposed

to capped sectors.
xii.

with the FEMA Regulations may

pledge such units to secure credit
facilities being extended to the nonresident investor.

The threshold limit for FDI approvals

that may be considered by FIPB will be
increased from Rs. 3000 Crores to Rs.
5000 Crores. FDI proposals above Rs.
5000 Crores will be placed for
consideration of Cabinet Committee on
Economic Affairs (CCEA).

II.

Among the changes introduced pursuant

to the said notification, the most
important is one which enables a person
resident outside India (other than an
individual who is a citizen or any entity
registered in Pakistan or Bangladesh),
including Registered Foreign Portfolio
Investor or an NRI to invest in units of
Investment
Vehicle3.
Downstream
investments made by such Investment
Vehicles shall be regarded as foreign
investment if neither the Sponsor nor
the Manager not the Investment
Manager
is
Indian-owned
and
controlled. For this purpose, ownership
and control of companies is to be
determines in accordance with the
regulations laid down in this regard. For
entities other than companies, SEBI
shall determine whether or not the entity
is foreign owned and controlled.

RBI

1.

Foreign
Exchange
Management
(Transfer or Issue of Security by a
Person Resident outside India) (Eleventh
Amendment) Regulations, 2015 (FEMA
Regulations)
The RBI vide a notification dated 16
November 20152has notified the muchawaited regulations enabling foreign
investments under the automatic route
in Alternative Investment Funds (AIF).
Real Estate Investment Trusts (REIT),
Infrastructure
Investment
Trusts
(InvIT) and other entities regulated by
the Securities Exchange Board of India
(SEBI) or any other authority
designated for such purpose (collectively
referred to as Investment Vehicles).
Pursuant to the said notification, the
following changes have been introduced:
a) Two new terms have been defined
viz.Investment Vehicle and Unit.
b) Provisions in relation to transfer of

shares or convertible debenture or

warrants of an Indian company shall
now be applicable to shares or
convertible debentures or warrants
of an Indian Company or units of an
Investment
Vehicle
with
the

c)

exception of minimum lock-in

provisions.
Any person holding units of an
Investment Vehicle in accordance

However, certain anomalies may have

crept into the notification. As a result of
the said notification,
a pooled
investment vehicle (i.e. AIF) in India can
have majority or even almost the entire
money from offshore investors and still
buy into businesses where foreign
ownership is restricted, as the AIF will
be considered as domestic in nature as
long as its sponsors and managers, who
control the AIF , are Indian.
2.

Revision of External Commercial

Borrowings (ECB) Policy

i.

As a means to attract flow of funds, the

RBI vide notification dated 30 November

https://rbi.org.in/Scripts/NotificationUser.aspx?I
d=10130&Mode=0

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December 2015

20154 has revised ECB framework based

on the following overarching principles:
a. A more liberal approach, with fewer
restrictions on end uses, higher allin-cost ceiling, etc. for long term
foreign currency borrowings as the
extended term makes repayments
more
sustainable
and
also
minimizes roll-over risks for the
borrower.
b. A more liberal regime for INR
denominated ECBs where the
currency risk is borne by the
lender.
c. Expansion of the list of overseas
lenders to include long-term
lenders, such as, Insurance
Companies,
Pension
Funds,
Sovereign Wealth Funds.
d. Only a small negative list of enduse restrictions applicable in case
of long-term ECB and INR
denominated ECB.
e. Alignment
of
the
list
of
infrastructure entities eligible for
ECB with the Harmonised List of
the Government of India.
ii.

The Annex to the said notification inter

alia includes the (a) Forms of ECB; (b)
Terms used in the ECB framework; (c)
Parameters for ECBs; (d) Procedure of
raising
ECB;
(e)
Reporting
arrangements; (f) Powers delegated to
AD Cat I banks to deal with ECB cases;
(g) Borrowing by entities under
investigation; (h) ECB by entities under
Joint Lender Forum (JLF) or
Corporate Debt Restructuring (CDR) ;
and (i) Participation of overseas
branches/subsidiaries of Indian banks.
These parameters will apply in totality
and not on standalone basis.

Average Maturity viz. (a) Medium term

foreign currency; (b) Long term foreign
currency and; (iii) Indian Rupee
denominated ECB. These guidelines will
be reviewed after one year based on the
experience and evolving macroeconomic situation.
iv.

ECB details will be put on the RBIs

website, on a monthly basis, with a lag
of one month to which it relates.

v.

Entities raising ECB under extant

framework can raise the said loans by
March 31, 2016 provided the agreement
in respect of the loan is already signed
by the date the new framework comes
into effect. Further, raising of ECB for
(a)
working
capital
by
airline
companies; (b) consistent foreign
exchange earners under the USD 10
billion Scheme and; (c)
low cost
affordable housing projects as defined
in the FDI Policy, the borrowers will
have time up to 31 March 2016 to sign
the loan agreement.

vi.

Overseas branches/subsidiaries of
Indian banks will not be permitted as
lenders under Track II and III.

III.

IMPORTANT JUDGMENTS

1.

Fab-Tech Works & Constructions Pvt.

Ltd.5, while determining the validity of
an order passed by the Single Judge
restraining the encashment of an
unconditional bank guarantee in a
petition under Section 9 of the
Arbitration and Conciliation Act, 1996
(Act) has held that invocation of a

The revised framework will comprise of

three tracks based on their Minimum

iii.

Invocation of bank guarantee cannot be

restrained unless existence of fraud,
irretrievable injury or special equities
proved
A Division Bench of the Delhi High
Court in Zillion Infra Projects (P) Ltd. V.

https://rbi.org.in/Scripts/NotificationUser.aspx?I
d=10153&Mode

FAO (OS) 537 OF 2015

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Chemicals Industries Ltd v. Coal Tar

Refining Co. 6 allowed the appeal inter
alia observing that since none of the

bank guarantee cannot be restrained

unless fraud, irretrievable injury/
injustice or special equities is proved.

three mandatory pleas of fraud,

irretrievable injury/injustice or special
equities have been pleaded, the
respondent no. 1 is not entitled to any
order of restraint from invocation of a
bank guarantee.

The Appellant in the case at hand had

issued a Letter of Intent in favour of
Respondent no. 1 for commissioning a
power plant project near Nagpur. The
said Respondent thereafter, in terms of
the letter of intent, had submitted a
Bank Guarantee with the Appellant in
lieu of Cash Deposit against Security
and due and faithful performance of the
contract. The Appellant invoked the
bank guarantee alleging that the
Respondent had failed to honor the
terms of the work contract. The same
was challenged by the Respondents in a
petition under Section 9 of the Act
wherein the Ld. Single Judge, vide the
impugned order, was pleased to
restrain the encashment of the said
bank guarantee. It was this order of the
Ld. Single judge which was challenged
by way of an Appeal.
The Honble Court held that to restrain
the operation of an irrevocable or
confirmed letter of credit or bank
guarantee there should be a serious
dispute and there should be a good
prima facie case of fraud and special
equities in the form of preventing
irretrievable injustice between the
parties. The Honble Court further
observed that the bank giving such a
guarantee is bound to honour it as per
its terms irrespective of any dispute
which is raised by its customer and the
same is necessary to ensure that the
fabric of trading is not jeopardized. The
Courts should be reluctant in granting
an injunction to restrain realization of
bank guarantee as the same is a
separate contract and is absolute in
nature. The Ld. Division Bench placing
reliance on the judgment rendered by
the Honble Apex Court in Himadri

2.

Owner under Section 2 (30) of the

Motor Vehicle Act, 1988 interpreted
A Division Bench of the Honble
Supreme Court in Managing Director,

K.S.R.T.C vs. New India Assurance

Company7 while dealing with the
question as to whether, in the wake of a
lease agreement entered into between
the registered owner and Karnataka
State Road Transport Corporation
(KSRTC), the registered owner and
insurer along with KSRTC can be
fastened with the liability to make
payment to the claimants and that
whether KSRTC can recover the amount
from registered owner and its
entitlement to seek indemnification
from insurer, has held that the owner of
the vehicle, KSRTC as well as the
Insurer would jointly and severally be
liable to pay compensation to the
claimants and KSRTC thereafter, in
terms of the lease agreement entered
into with the registered owner, would
be entitled to recover the amount paid
to the claimants from the owner as
stipulated in the agreement or from the
insurer.
The Court observed that it was the
liability of the registered owner to
provide the bus regularly, to employ a
driver, to make the payment of salary to
the driver and the driver was required
to be duly licensed and not disqualified
as provided in the agreement though
6
7

(2007) 8 SCC110
Civil Appeal no. 5293 of 2010

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December 2015

buses were to be plied on the routes as

specified by the KSRTC and hiring
charges were required to be paid to the
registered owner. Accordingly, in the
absence of any stipulation prohibiting
such an arrangement in the insurance
policy, in view of agreement of lease,
the registered owner owned the liability
to pay.
With regard to the liability of the
insurer, the Court observed that even if
there is a transfer of the vehicle by sale,
the insurer cannot escape the liability
as there is deemed transfer of the
certificate of insurance. In the instant
case there was no complete transfer of
the vehicle as it was given on hire for
which there is no prohibition and no
condition/policy of insurance was
shown to prohibit plying of vehicle on
hire. The vehicle was not used for
inconsistent purpose. Thus, in the
absence of any legal prohibition and any
violation of terms and conditions of the
policy, more so, in view of the
provisions of Section 157 of the Act of
1988, it was held that the insurer cannot
escape the liability.
Furthermore, the Court observed that
KSRTC can also be treated as owner for
the purposes of Section 2(30) of the Act
as it was plying the buses under the
lease agreement.
However, when
KSRTC has become the owner of the
vehicle during the period it was on hire
with it for the purposes of Section 2(30)
of the Act and by virtue of Section 157 of
the Act, the insurance policy shall be
deemed to have been transferred. As
such, insurer is liable to make the
indemnification and cannot escape the
liability so incurred by KSRTC. The
Appeals were accordingly allowed.

IN-HOUSE OVERVIEW
Collaboration Agreement with ISTSL &
GTL
ISSL Settlement and Transaction
Services Limited (ISTSL), a step down
subsidiary of Infrastructure Leasing
and Financing Services Limited,
collaborated with Geojit Technologies
Limited (GTL), to combine ISTSLs
offering of IT infrastructure with GTLs
software to provide services to the
operators in the securities market. The
collaboration will enable operators in
the securities market like brokers to
obtain unique end to end infrastructure
and software solutions for their
business. VERUS advised ISTSL on the
collaboration arrangement and the
documentations with the prospective
clients .
Coal Indias appeal to CCI
VERUS is representing the Competition
Commission of India (CCI) before the
Honble Competition Appellate Tribunal
(COMPAT), and defending CCIs
imposition of a penalty of Rs. 1,7773.05
Crores (USD 270 Million approximately)
on Coal India Limited (CIL). CIL has
accused the CCI of being violative of the
principles of natural justice since two
members of CCI who were signatories
to the final order were not present at
the time of oral arguments. CCI
submitted that oral arguments are only
one facet of the process envisaged
under the Competition Act, 2002 and
further that no prejudice has been
caused to CIL by the manner in which
proceedings were conducted.

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