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16 January 2020
July 2019 marked the 50th anniversary of the first moon landing and Neil Armstrong's immortal words "that's one small step for man; one giant leap for mankind". Looking back at 2019 through an Indian private client lens, an interesting parallel can be drawn with that historic event. Over the past year, Indian private client law took a number of small steps which were potentially giant leaps for the legal regime. That is to say, although no noteworthy legislation was enacted, a number of amendments and rules were introduced to existing laws which mark a significant shift in the legal position.
This article examines three key legal developments which took place in the Indian private client space in 2019 and the main trends expected in 2020.
In 2018, following the recommendations of the Financial Action Task Force (FATF), the Companies Act 2013 was amended to introduce provisions on the disclosure of significant beneficial owners (SBOs) of companies incorporated in India. The detailing of the law was left to the executive through the drafting of rules. As the initial rules of 2018 lacked clarity, they were significantly amended in February 2019 following stakeholder feedback.
Under the rules, an 'SBO' is an individual who holds interests of at least 10% in the shares, dividends or voting rights of a company or significant influence or control through one or more intermediate entities. An SBO must disclose their status to the company, which in turn must disclose the same to the registrar of companies (ROC). The disclosures are public documents, available for inspection for a nominal fee. After a series of extensions, 31 March 2020 has been set as the last date to make such disclosures to the ROC (for further details please see "Significant beneficial ownership – India's pivot towards disclosure").
Failure to report or an incorrect disclosure could lead to a monetary penalty and the suspension of certain rights attached to the shares, including voting, dividend and transfer rights.
The amended SBO rules marked a paradigm shift towards transparency in India. With the prospect of SBO information becoming available to regulators and the public, promoters were prompted to carefully review their onshore and offshore holding structures, particularly to ensure that disclosures were aligned to actual beneficial ownership and information supplied under other laws.
Private client lawyers were kept busy resolving the interpretive ambiguities that still exist in the SBO rules despite the 2019 amendments, including in relation to trusts. Further guidance and clarifications resolving some of these issues will hopefully be made available before 31 March 2020.
Insolvency regime extended to personal guarantors
The Insolvency and Bankruptcy Code 2016 (IBC) is a landmark piece of legislation which codifies the Indian law on insolvency and bankruptcy. While the IBC provisions relating to corporate debtors were made enforceable earlier, the provisions relating to individuals who are personal guarantors to corporate debtors did not take effect until 1 December 2019.
The extension of the IBC to personal guarantors to corporate debtors is expected to have two key consequences:
In India, it is common for promoters of family businesses to guarantee the debt of the business. As such, any estate planning exercise for such promoters must factor in these IBC developments.
Shift in CSR approach
India is the only country to impose statutory corporate social responsibility (CSR) obligations. Certain companies which meet identified thresholds must contribute 2% of their net profits to CSR (Section 135 of the Companies Act). When this provision took effect in 2014, it was understood to be of a 'comply or explain' nature (ie, companies which did not spend the prescribed amount would not be penalised or forced to spend, but rather would have to explain the lapse in the annual report of the board of directors).
Concerned that companies were not spending the prescribed share of their profits on CSR, in 2019 the government adopted a stance departing from this understanding. Accordingly, in July 2019 Section 135 of the Companies Act 2013 was amended to provide as follows:
These amendments are significant for private client lawyers dealing with charities for two key reasons:
Given the events of 2019, a few trends to watch for in 2020 are as follows:
Moreover, every estate and succession planning exercise will need to analyse the SBO rules to align the need for transparency with a family's desire for confidentiality.
For further information on this topic please contact Radhika Gaggar, Shaishavi Kadakia or Priyattama Bhanj at Cyril Amarchand Mangaldas by telephone (+91 22 2496 4455) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Cyril Amarchand Mangaldas website can be accessed at www.cyrilshroff.com.
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