Breve evaluación del impacto del ATPDEA en las exportaciones ecuatorianas.

capital of the company.

Where a foreign investor has any differential rights as to voting, such voting rights will be considered towards calculating the permitted foreign investment limits.

Veto rights

Negative veto rights in respect of identified “reserved matters” are commonly drafted in shareholders’ agreements for private and unlisted public limited companies and these rights are enforceable as a matter of Indian law. Any negative veto rights which a foreign investor may have in an Indian private or unlisted public limited company will not be considered towards foreign investment limits, ie, the investor will not be deemed to be in “control” for the purposes of foreign investment laws. “Control” is defined as the power to appoint a majority of the directors in a company for purposes of foreign investment laws. However, specific advice should be taken as a broader “control” test may be relevant in certain regulatory contexts.

Governance

There are no statutory nationality or residency requirements relating to the directors of a company incorporated in India, although there may be certain industry specific regulations which require the management of the relevant company to be in “Indian hands” (for example, the telecommunications sector). While there are no nationality requirements applicable to company secretaries, the Company Secretaries Act, 1980 stipulates that the Central Government or the Institute of Company Secretaries in India may stipulate certain additional requirements for non-residents desiring to practise as company secretaries in India.

The general scope of directors’ duties is not codified. However, the principal duties of directors have been recognised under common law and, among others, include duties to:

Singapore are currently the main offshore jurisdictions from which investment into India is routed. It is less common to see offshore structures where the joint venture company (in which the foreign shareholder has an interest) itself is situated outside India.

Vodafone International Holdings B.V. vs. Union of India & Anr. is a recent case which is relevant in the context of the offshore structures described above. The main issue in the Vodafone Case was, where a transfer of shares of a company (holding an indirect shareholding interest in an Indian company) takes place outside India and between two non- residents – whether such transfer would be subject to capital gains tax (on any capital gains arising on such transfer) on the basis that such company holds a direct or indirect interest in an Indian company. On a strict reading of the law applicable at the time of the Vodafone case, capital gains tax was only payable on a direct transfer of Indian shares. The Bombay High Court held that capital gains tax would arise on the basis that the subject matter of transfer in this case was not just the shares of the non-resident companies but underlying assets situated in India. This was reversed by the Supreme Court in its recent verdict. The Court ruled that Indian authorities cannot bring to tax the consideration in respect of a sale of offshore assets from one person resident outside India to another such person merely because the offshore asset relates to shares of an Indian company. However, the Government has now amended the tax laws to make such offshore transactions taxable in India with retrospective effect.

Managing the investment

Veto rights, reserved matters and weighted voting

rights

Differential voting rights

Whilst an Indian public limited company can have only two types of share capital, ie, equity share capital or preference share capital, a private company may have more than two classes of shares, carrying varying rights as to voting, dividend and liquidation preference. Equity share capital of a public limited company, with differential rights in respect of voting and dividend is subject to the Companies Issue of Share Capital with Differential Voting Rights Rules, 2001 (the Rules). The Rules require the following conditions (among other conditions) to be complied with in order for equity shares to carry “differential voting rights” which is defined as rights as to dividend or voting:

companies. In the case of a joint venture company, the board of directors will generally comprise appointees or nominees of the shareholders.

It is common for a company’s articles to delegate the management of its affairs to its board of directors. However, certain decisions must be taken by the general meeting of shareholders. The board can also specifically delegate some of its powers to committees comprising of one or more directors or other authorised personnel to manage certain operations.

The Companies Act requires that every company must disclose certain key business and financial information to its shareholders. Every shareholder of a company is entitled to receive a copy of the balance sheet, including the profit and loss account and auditors’ report, at least twenty-one days prior to the date that it is laid before the company in general meeting. The Companies Act also provides that other books and records of the company such as the registers of directors and charges should be kept open for inspection by any shareholder of the company.

There are other circumstances where a company must disclose information to its shareholders, the public and/or to regulatory bodies. Some of these disclosure obligations are periodic while others are triggered by specific events or developments. Disclosure obligations which are applicable to all companies include the following:

• every company must disclose information relating to its

assets and liabilities, financial results, money expended and received, and such other information specifically provided for in the Companies Act

• changes in the company’s capital structure, memorandum

and articles must be made public

• the appointment and resignation of directors

• the creation of a charge over the company’s assets, and

any modification or satisfaction of that charge, must be notified to the specified authorities

• all material information in relation to any special

resolution to be passed at a general meeting must be made available to all shareholders eligible to attend the meeting.

• exercise due skill, care and diligence

• not compete against the company and to act bona fide in

the best interests of the company

• disclose conflicts of interest

• maintain confidentiality

• not to make secret profits and to make good losses, if they

occur due to breach of duty, negligence, etc

• comply with statutory or other regulatory requirements

(including special requirements applicable to that company)

• not abrogate responsibility.

Directors also have fiduciary duties towards the company and must act in the interest of and for the benefit of the company.

Breach by the director of his duties may make him/her liable to the company for both civil and criminal consequences depending on the nature of the breach and the statutory provisions involved.

No agreement or the articles can exempt a director from or indemnify him against any liability which would attach to him at law, for negligence, breach of trust, or the like. However, the articles can permit the company to indemnify a director against any liability incurred by him in defending any proceedings, civil or criminal if any of the following apply:

• the proceedings are decided in his favour

• he is acquitted or discharged by the court or

• the court relieves him of liability on the basis that he acted honestly and reasonably and that having regard to all the circumstances of the case, including those connected with his appointment, he ought to be excused.

Board management and supervisory structures: every company in India has a unitary board structure. Although the boards of listed companies are required to comprise a certain proportion of non-executive and independent directors, no such constraints apply to private limited

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Where bank finance is sought from foreign lenders,

regulations on external commercial borrowings (ECB) would be applicable, which prescribe restrictions on the principal amount of the loan and interest as well as eligibility criteria for lenders/borrowers.

Non-compete undertakings

Section 27 of the Indian Contract Act 1872 states that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void, provided that where the goodwill of a business is sold, the seller may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer carries on a similar business and provided that the limits appear to the court to be reasonable, regard being had to the nature of the business.

The Indian courts have held that where the restriction protects a legitimate interest and where the restraint is reasonable (with reference to the parties and the interests of the public), the restraint may be allowed. Thus, restrictions which are reasonably necessary to protect the legitimate interests of contracting parties may be allowed.

Realising the investment

Deriving income

Dividends cannot be declared or paid by a company for any financial year except out of profits of the company for that year after providing for depreciation; or out of profits of the company for any previous financial year or years after providing for depreciation and remaining undistributed; or out of both. No dividend can be declared or paid by a company for a relevant financial year out of the profits of the company for that year except after transferring an amount up to ten per cent of the profits of such year to the reserves of the company. Exchange control restrictions: Dividends paid by Indian companies to non-resident shareholders as well as the proceeds of sale of securities issued by an Indian company are freely repatriable (net of taxes payable) through an authorised dealer bank subject to certain sector specific policies (for example, proceeds from a divestment of shares in the construction and development sector may not be repatriated for a period of three years from the date of the original investment, ie, the date on which the entire amount was brought in as foreign direct investment).

Notwithstanding these statutory obligations, it is common for shareholders’ agreements to specify periodic financial and operations information to be generated by the joint venture company and supplied to its shareholders. Just as with all companies regulated by the Companies Act, there is an implicit duty on the directors of an Indian joint venture company to act in the best interests of the joint venture company. This may result in a conflict of interest between a director’s duty to the joint venture company and his or her duty to the shareholder which nominated him for appointment. It is common to include a provision in the shareholders’ agreement which requires certain key matters (where there may be a potential conflict of interest) to be approved at shareholder level. The Companies Act does not restrict the inclusion of such a provision.

Capital calls and pre-emption rights

Section 81 of the Companies Act provides for any shares offered in a further issue of shares by a public limited company to be first offered to all the existing shareholders of the company on a pro-rata basis. However, these pre- emption rights can be disapplied and shares can be allotted to any person, whether an existing shareholder or not, if a special resolution of the shareholders (by a three – fourths majority) is passed to this effect or where no such resolution is passed, the votes cast in favour of such proposal are more than the votes against it and Central Government’s approval is obtained in that respect. This rule is not applicable to a private limited company which, by a resolution of its board of directors, may freely issue shares to any person.

If the company is engaged in a sector where the permissible foreign investment is capped, then the minority non-resident shareholder may not be able to participate in a further issue of shares by the Company to all the shareholders unless all shareholders take up their shares according to their pro-rata entitlement. Also, certain sectoral and foreign exchange regulations impose restrictions on the issue of certain instruments such as non-convertible debentures and warrants to foreign shareholders of a company, despite the rights available to such shareholders under Section 81 of the Companies Act.

Where a majority shareholder is able to pass a special resolution (by a 75 per cent majority), it would be able to procure the issue of further shares and thereby dilute the minority shareholder’s interest (unless the minority shareholder has a veto right on a further issue of shares).

equity shares of the issuing company (including on the basis of equity related warrants attached to such FCCB).

• Warrants: generally, instruments which are convertible

into equity shares. Prior approval of the FIPB is required for the issue of warrants, irrespective of the sector. Whilst granting approval, the FIPB generally stipulates that the warrants should be exercised within twelve months of their issue.

Realising capital (transfer restrictions)

Whilst Indian law imposes no restrictions on the transfer of shares (leaving aside FDI or regulatory constraints), any restrictions on a transfer of shares which are not specified in the articles of association do not bind the company,

the shareholders and third parties (V.B. Rangaraj vs V.B.

Gopalakrishnan and Others AIR 1992 SC 453). This principle applies to public companies and private companies. There has been a recent decision of the Bombay High Court which held that a private arrangement imposing a restriction on transfer is enforceable unless barred by the Articles. However the Supreme Court’s decision in Rangaraj is still the law on this point.

Any approvals which may be required for transfers of shares from a resident to a non-resident in certain situations (described in the section on Foreign ownership and control above) should be considered. Also, restrictions on the price at which shares can be transferred between residents and non-residents (described below) should be considered in the context of transfer restrictions.

Acquisitions of shares or other instruments convertible into equity by a non-resident investor are subject to restrictions on the price at which such shares or convertible securities may be acquired.

Acquisition of shares in a joint venture company by a non-resident through a subscription for new shares

Indian law stipulates a minimum price at which a non- resident investor can acquire shares in an Indian company by subscription. Different rules apply to companies listed on the Indian Stock Exchange, but in the case of an issue of shares by an unlisted company: the price is arrived at on the basis of a fair valuation of shares undertaken by a category 1 merchant banker registered with the Securities Exchange Board of India or a chartered accountant, using the “discounted free cash flow” methodology (the Unlisted Share Price).

The maximum permissible dividend that can be paid on preference shares is 300 basis points above the State Bank of India’s prime lending rate from time to time. The prime lending rate system is no longer in use in India and base rates are now used. However, since the provisions of the FEMA have not been amended, it is not clear as to whether calculation will be made with reference to base rate. Foreign investment is typically made in the following types of instruments:

• Equity shares: defined as all shares which are not

“preference shares”.

• Preference shares: the two characteristics of preference

shares are: (a) they carry a preferential right to a fixed amount or a fixed rate of dividend; and (b) they carry a preferential right to repayment of capital on a winding up or repayment of capital.

• Compulsorily convertible preference shares (CCPS):

CCPS are preference shares which are compulsorily convertible into equity shares after a specified time period. The maximum permitted tenure for CCPS is 20 years. The general view is that CCPS cannot be redeemed, the rationale being that redemption would result in the CCPS being extinguished prior to conversion (though there are differing views on this). Investment in CCPS is treated as investment in the equity share capital of a company for the purposes of FDI and the FEMA Regulations and is therefore, subject to the same investment restrictions as applicable to investment in the equity share capital of Indian companies. It should be noted that optionally convertible, partially convertible or non-convertible preference shares are treated as debt instruments and are subject to various restrictions applicable to ECB, imposed by the RBI. Investment in optionally convertible, partially convertible or non-convertible preference shares is not included for the purposes of calculation of FDI limits.

• Compulsorily convertible debentures/fully convertible

debentures (CCD/FCD) which are subject to the same FDI conditions/restrictions as CCPS (as described above).

• Foreign currency convertible bonds (FCCB): these are

bonds (denominated in foreign currency) issued in accordance with the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993. FCCBs are issued to non- residents in foreign currency and are convertible into

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Given that approvals may be required for transfers of shares from a resident to a non-resident in certain situations and there are restrictions on the price at which shares can be transferred between residents and non-residents, there is limited flexibility for structuring put and call options in India. Put and call options are generally structured by providing a mechanism for the appointment of an independent valuer by parties who will determine the price at which the put or call option will be exercised. However an additional condition is generally imposed contractually, stating that the price that is determined by the independent valuer will have to be above the minimum prescribed price where the transfer is between a resident to a non-resident and that such price will be subject to a maximum cap where the sale is from a non resident to a resident.

Transfer of existing shares from a resident to a non- resident

Indian law also stipulates a minimum price at which a non- resident investor can acquire existing shares in an Indian unlisted company from a resident transferor, being the Unlisted Share Price, as described above.

Transfer of existing shares from a non-resident to a resident

Indian law stipulates a maximum price at which a resident investor can acquire existing shares of an Indian company from a non-resident transferor, being the Unlisted Share Price, as described above.

Pricing of convertible instruments

The conversion price or the formula for conversion (taking future performance into consideration) for any convertible instruments should be determined at the time of issue of such