Monday, 12 February 2018

Regulatory and Judicial Review of Entry of Foreign lawyers and Law firms in India

There has been an ongoing debate in India regarding whether International Lawyers/ International Firms can practice law and whether they can advice the clients in India.  Under Advocates Act, 1961, the Bar Council of India recognizes law degree on reciprocal basis and legal academics can teach and engage in legal research without any bar. However, foreign national are prohibited from practicing in India as per the said Act.  In accordance with section 24 of the said act certain conditions have been mentioned for persons who may be admitted on the State roll of advocates.
Section 29 of the Act clearly specifies that only 'advocates' as defined under the Act are entitled to practice the profession of law in India. An advocate is defined as a person who enters into the rolls of a State Bar Council under the provisions of the Act. Persons may enroll with a State Bar Council if:
(a) He/she is a citizen of India
(b) He/she has completed 21 years of age.
(c) He/she has obtained a degree in law from any University in India recognized for the purposes of the Act by the BCI or has obtained such other foreign qualification in law as is recognized by the BCI for the purpose of admission as an advocate.

However, Section 24(1)(c)(iv) lays down an exception that subject to other provisions of the Act, a national of any other country may be admitted as an advocate on the rolls of the State Bar Council, if Indian citizens who are duly qualified are permitted to practice law in that other country. Further, provisions pertaining to reciprocity as provided under Section 47 of the Act stipulate that where any country prevents Indian citizens from practicing the profession of law or subjects them to unfair discrimination in that country, then no subject of that country shall be entitled to practice law in India.
There have been various cases which have been filed in the court of law in India dealing with the same subject matter.
1.       Lawyers' Collective v. Bar Council of India & Ors
In 2009, the Bombay High Court (State of Maharashtra, India) pronounced a judgment on the matter,where RBI had granted permission to White & Case, a foreign law firmu/s 29 of Foreign Exchange Regulation Act (FERA) to open a liaison office in India.
Facts of the case:-
Foreign Law Firms (namely White & Case, Chadbourne & Parke and Ashurt Morris Crisp) had sought permission from RBI under S. 29 of Foreign Exchanges Regulation Act, 1971 (“FERA”), since repealed, to set up a liaison office in India to conduct the activities of, amongst other, “coordination, communication between its head office, clients, various governments; establish business contacts, explore foreign investment opportunities in India and other administrative functions”. The RBI granted permission under FERA, with certain restrictions, such as, the liaison office shall not enter into contracts on its own name; its expenses shall be met by its head office.
Subsequently, A Public interest Litigation (PIL) was filed before Bombay High Courtcontending that such permission was in contravention to section 29 of the Advocates Act.  
Issues Raised:-
(a) Whether RBI had the authority to grant permission to foreign law firms.
(b) Whether such permission will be in violation of section 29 of the AdvocatesAct, 1961 wherein, it has been clearly specified that Advocates to be the only recognized class of persons entitled to practice law.
(c) Whether the above-mentioned Act will apply on persons practicing in non- litigious matters.
Hon’ble Bombay High Court had stated that the expression ‘to practise the profession of law’ as specified under Section 29 of Advocates Act, 1961 is wide enough to cover the persons practising in litigious matters as well as non- litigious matters and, therefore, to practise in non-litigious matters in India, the respondents (foreign law firms) were bound to follow the provisions contained in the 1961 Act.
In the case, the Hon’ble High Court was of the view that as the foreign law firms were not enrolled under the Advocate Act, 1961 they could not open liaison offices in India.  It was further held that the RBI was not justified in granting permission to the foreign law firms to open liaison offices in India u/s 29 of FERA . It had been clearly stated that u/s 29 of FERA, RBI has power to grant permission for carrying on “activities of a trading, commercial or industrial nature”. There is a fundamental distinction between professional activity and the activity of a commercial character. As the liaison activities of the foreign law firms related to the profession of law, no permission could be granted to the foreign law firms under section 29 of FERA.
The Bombay High Court had held that such permission could not have been granted as it was contrary to the Advocates Act and the BCI Rule.
2.       A.K Balaji v  Bar Council of India and Ors
Pursuant to this case some other issues were raised before the Madras High Court (State of Tamilnadu, India) in the year 2012.
Facts of the Case:-
A PIL had been filed to seek direction to Union of India, RBI and BCI to take action against 32 foreign law firms which had been allegedly practicing in India.
The main issue which had been addressed in the said matterwas the principle of reciprocity and to whether Foreign Advocates shall be allowed to fly-in-fly-out in India to provide legal advice to its Clients.
The Court had restrained foreign law firms and lawyers from practicing as an Advocate in India. However, it stated that foreign lawyers could visit India for a temporary period to render legal advice.
The court had adopted the concept of flying in and flying out (FIFO) wherein, the foreign legal experts shall visit India, to offer advice to their clients on their laws as there is no specific provision in the Advocates Act to prohibit a foreign lawyer from visiting India for a temporary period to advice his or her clients on foreign law.

Appeal to Supreme Court

Bar Council of India and Ors v. A.K Balaji (SLP(C) -17150-17154/2012)
Bar Council of India in this case has appealed against the said judgment of Madras High Court and prayed that foreign lawyers and law firms shall not be allowed to render legal advice in seminars or conferences or even participate in arbitration proceedings.

Global Indian Lawyers (GIL) v. Bar Council of India( SLP (C)-11263/2015)
Another appeal had been filed before the Supreme Court by the Global Indian Lawyers (GIL) group of interveners who have challenged this view of Bombay High Court.
On September 14, 2015 the petitioner before the Bombay High Court, the NGO Lawyers Collective, argued before the Supreme Court that the petition filed by Global Indian Lawyers (GIL) should be dismissed as the same is not maintainable. They contended that they should not be allowed to challenge the Bombay High Court verdict after a gap of six years to which they were not even a party therefore, the bench should decide the maintainability of its appeal, at the threshold stage.
Supreme Court on 14 September, 2015 decided to grant leave in two appeals against the Madras High Court judgment and the Bombay High Court judgment against foreign law firms.
Current Judicial Scenario
An application had been in July 2017 by the Ministry of Law and Justice, India for urgent hearing by Hon’ble Supreme Court on the issue of entry of foreign lawyers and law firms in India. The aforesaid matter had been listed for hearing the contentious issue of entry foreign law firms and lawyers in India in the month of January, 2018
On 1stFebruary, 2018, Supreme Court heard the parties and reserved the its Judgment. In the case now taken up by the Supreme Court, the Petitioners have argued on the following points:
(a) That the Advocate Act, 1961 applies to individual lawyers and not law firms
(b) That the Advocate Act, 1961 does not prevent an Indian lawyer from becoming dual qualified.
(c) That the expression practices the profession of law under the Advocate Act, 1961 implies only Indian Law.

 In view of the contentions forwarded by the petitioner, the two-Judge Bench of the Supreme Court raised an intriguing concern while remarking- “If we bar the foreign law firms and lawyers would that not stop India from becoming the hub of activities? Even the Madras High Court has taken exception to the Bombay High Court judgment in respect of international commercial arbitration services on a fly-in and fly-out basis?”
Indian Government View
With a view to pushing the liberalization of the Indian legal market, the Union of India had only moved an application in the Supreme Court in the matter BCI vs. AK Bajaj & Ors for an early hearing of the matter. 

The application states that the Bar Council of India (BCI) has already drafted the Rules for the entry of foreign lawyers, but is waiting for the outcome of the case. It had further specified that the matter being utmost importance in the present time, it is necessary to be decided at the earliest possible.
The government has also recommended a phased entry for foreign lawyers spread over a period of five to seven years. This process will be enabled by:
(a) Domestic reforms. These include the removal of restrictions on marketing and advertising of legal services, entering into fee-sharing agreements and using corporate entities like LLPs to practice law which shall enable competition amongst Indian and Foreign Lawyers.
(b) Opening international arbitration and mediation services to foreign lawyers.  Recognition to the right of foreign lawyers to temporarily enter India on a “fly-in and fly-out” basis to conduct arbitrations and advise their clients on foreign and international law. However, there exists a need to amend the said Act to address some of the loopholes in the Act (for example, the issues of “reciprocity” and the regulation of the “practice of foreign law).
(c) Allowing foreign lawyers to provide non-litigious and advisory services on issues of foreign and international law.Recent reports have suggested that India is likely to follow Singapore’s model of liberalisation by giving access to a limited number of foreign law firms in select areas of law through licenses and joint ventures (with local firms).

Although the nuances of the proposal are still being worked out, BCI have expressly stated that they will not support foreign direct investment in the legal sector or allow multi disciplinary practices to provide legal services in India.
In order to embark liberalization in the legal market,the Governmenthas revoked a ban on the practice of law from special economic zones (SEZs), by issuing a notification in the Gazette of India amending the Special Economic Rules governing Special Economic Zones on 3 January 2017.
Vide the amendmentthe Special Economic Zone Rules could make Legal and accountancy services from foreign entities possible in the Special Economic Zones.Under Rule 76 of the SEZ Rules, “services” has been defined which includes various services including Professional Services. Although Legal services and accounting is a Professional Service, the earlier Rules had explicitly exempted it from the ambit of ‘Services’. That means, according to the earlier Rules, legal and accountancy services are excluded from ‘services’ which can be outsourced from overseas entities in the Special Economic Zones.  However, vide this amendment, the said amendment has been undone.
However, Bar Council of India (BCI) have been in opposition to their entry as if the same has been allowed it would be a risky proposition for Indian legal market since the SEZ rule amendment does not explicitly mention foreign law firms at all.
BCI’s View
The Bar Council of India (BCI) have already drafted rules that may allow foreign lawyers to practice in India, if ratified. The rules are yet to be discussed before the law ministry. Following are the key highlights of the rules:-
(a) Foreign lawyers and law firms shall be allowed to set up offices in India after registering with the BCI and paying the required registration fees.
(b) Foreign lawyers would be allowed to do all non-Indian legal transactional work and hire Indian lawyers or go into partnership with Indian lawyers — activities that are all currently forbidden under the Advocates Act 1961 that only allows persons who are Indian nationals to practice law in India.

Bar Council of India: BCI have agreed ‘in- principle’ with the government’s proposal to gradually open Indian Legal Market to Foreign Lawyers but however, the same should be done on reciprocal basis.
Government of India; The governmenthas amended SEZ rules related to restriction on hiring of foreign lawyers and accountants for the smooth functioning of International Financial Services Centres and further is willing to amend the BCI Rules in order to clear the stand of Foreign Laws Firms. The Government of India every now and then has been taking efforts to liberalise the legal market, alongside the law ministry.
Supreme Court of India: Further, the hearing in the aforesaid matters has ended on 2ndFebruary, 2018 with the Supreme Court reserving its verdict on the issue, which will be landmark judgment about entry of foreign lawyers/ law firms in India.

Tuesday, 19 December 2017

To strengthen the Corporate Governance standards, initiate strict action against defaulting companies and help improve the ease of doing business in the country The Companies (Amendment) Bill 2017 was passed by the Lok Sabha on 27th July 2017.

Rajya Sabha gave its nod to the Companies (Amendment) Bill that seeks to bring major amendments in the Companies Act, 2013 on 19th December 2017.

Now, only the President’s assent is pending to give it the statute of ‘Companies (Amendment) Act, 2017’.

The major amendments proposed include simplification of the private placement process, providing for maintenance of register of significant beneficial owners and filing of returns in this regard to the ROC, removal of requirement for annual ratification of appointment or continuance of auditor, streamlining of provisions related to loan to directors etc. The amendments proposed in the Bill are expected to simplify disclosure and compliance requirements for companies.

Friday, 24 November 2017

BENEFICIAL OWNERSHIP - Proposed Amendment & Implication

The Government of India in order to strengthen the transparency norms has proposed an altogether new section 90 in the Companies (Amendment) Bill, 2017 which proposes to identify significant beneficial owner(s) of a company as any person or trust. The ministry, addressing the recommendation as given by financial action task force (FATF), has proposed a new amended section 90 which aims to identify the natural personcontrolling a corporate entity, directly or indirectly, in order to curb various money laundering, corrupt illegal practices and other tax evasion activities.
The concept of beneficial interest usually comes into picture when the certain interest or right accrues to the registered owner/legal owner but may be vested in some other party i.e. beneficial owner.

Generally, registered owner and beneficial owner are one and the same person, however, in certain cases they may be different i.e. there may be a case where the person whose name is entered in the register of members of a particular Company is different and the person who actually enjoys the right of ownership is different.  This article covers the implications of the proposed section and the questions which still remain unanswered.

The  definition of beneficial interest has been proposed to be included vide amended section 89which will widen the scope of beneficial interest and includes right & entitlement of a person alone or together with any other person to exercise rights attached to such share or receive or participate in any dividend or distribution in respect of such share.

The term Significant beneficial ownership has been defined under section 90 where every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control.

 Implications of the Proposed Amendment
Prior to the proposed amendment section 90 prescribed provisions regarding investigation of beneficial ownership of shares in certain cases.However, the proposed amendment will widen the scope of this new substituted section and will cast various responsibilities on the company as well as significant beneficial owner ( Individuals).

What implications will it have on significant beneficial owners?
Every individual who together with other person or trust exercises or holds not less than 25 % of shareholding of such company, either individually or jointly, will now have to give declaration about the nature of interest in prescribed manner to the concerned company.
ü Further if the beneficial owner does not disclose the information as required by company, the tribunal may restrict the rights attached with the shares.

What implications will it have on the companies?
ü The companies are now mandated to maintain register of significant beneficial owners.
ü Each company would be required to ask details of individual, holding or exercising rights over 25% of shareholding in the company from its corporate / trust /body corporate members.
The requirement on the part of companies to file a return of significant beneficial owners and changes therein with the Registrar of Companies.
ü Further the Companies have now been provided wide powers to seek information from any person where the company has reasonable cause to believe such person to be a beneficial owner of the company.
ü Companies also now have the power to approach the Tribunal in case of non-receipt or inadequate response from the members and non-members;
ü If a company, required to maintain register and file the return fails to do so or denies inspection as provided therein, the company and every officer of the company who is in default shall be punishable with a fine.

The proposed section 90 although will certainly bring the transparency and reveal the true identity of the real owner under the complex structures, however certain questions still remain unanswered, which is expected to be resolved through rules as may be prescribed by government after notification of this amendment:
(i)    The proposed amendment has nowhere defined any criteria with respect to disclosure of change in the significant beneficial ownership, so the question which arises is as under

What percentage of change in significant beneficial ownership is to be disclosed or whether even a minor change say less then 1 % in significant beneficial ownership is to be reported?

(iii) Also no provision or penalties have been specified, if companies purposely do not cause to conduct any enquiry with respect to significant beneficial ownership.
What are implications which the company will have to face if it does not conduct an enquiry where it has reasonable cause to believe a person to be significant beneficial owner?

(iv) Also, nothing in the section has been specified about the transition period i.e. if the companies will be provided time to understand the intricacies of such amendment:
Whether any transition period will be provided to the companies in order to comply with the requirements of this section or whether such requirement needs to be complied with immediate effect?

(v)   Further it is not clear from the proposed amendment that :
Where more than one individual jointly holding significant beneficial interest in a company through another company , in such case whether each individual has to give disclosure along with other individuals or only that individual holding majority shares will be required to disclose ? 
 For instance, if there is a company XYZ ltd. which has three shareholders A, B and DEF Private limited, where DEF Private ltd. holds 26% of total paid up share capital of XYZ ltd. and Mr. E and F holds 40% and 60% respectively in DEF Private Ltd.  

Now question which arises here is that in this case, whether Mr. E and F both have to disclose to the company about its beneficial interest or only Mr. F would be required to disclose being a majority shareholder of DEF Private Limited ?

It is expected that rules to be prescribed by government of India will clarify the position and resolve most of pending issues. But for sure, this provision will impact each company operating in India with complex shareholding structure, where it has been almost impossible for government to know the real natural persons controlling the company.

Tuesday, 1 August 2017

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Monday, 29 May 2017


By maintaining its persistence efforts in making India as an active participant in development of world economy, the Central Government (Ministry of Corporate Affairs), has notified section 234 of the Companies Act, 2013 with effect from April 13, 2017 which states provisions for cross boarder merger. In order to supplement the said section, the MCA has also notified corresponding amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules 2016, by inserting a new Rule 25A to be effective on and from 13 April 2017. Through this article we try to provide you a quick peep into the newly notified section 234.

Cross Boarder Merger- newly permitted arena for Indian Company:

With effect of this notification, an inbound merger as well as outbound merger will be possible, while the former covers a merger of foreign company into an Indian company, where an Indian company turned out to be the continuing company and the later covers the merger of an Indian company into foreign company, where the foreign company will be the continuing company.

The permitted jurisdiction for cross border merger:
The notified section 234 has permitted certain jurisdictions where the Indian company may merger with the surviving foreign company, these include:

    •  whose securities market regulator is a signatory to the International Organisation of Securities Commission's Multilateral Memorandum of Understanding (MoU) (Appendix A signatories) or a signatory to the bilateral MoU with Securities and Exchange Board of India (SEBI); or
o  Whose central bank is a member of the Bank for International Settlements; and a jurisdiction which is not identified in the public statement of Financial Action Task Force (FATF) as:
                                                              i.      a jurisdiction having strategic 'Anti-Money Laundering or Combating the Financing of Terrorism' deficiencies to which counter measures apply; or
                                                            ii.      a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

The prominent provisions of section 234:

The provisions as provided under Sections 230 to 232 of 2013 Act (which are applicable in case of a merger of Indian companies) and the corresponding provisions under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 to be complied with in the case of cross border mergers.

Key Compliance checks for cross border merger:
a.      the transferee company should ensure that its valuation is:
  • conducted by such valuers who are members of recognised professional body in their country, and
  • in accordance with internationally accepted principles on accounting and valuation.
b.      The valuation declaration has to be filed along the application to Reserve Bank India for prior approval.
c.       Prior approval of Reserve Bank of India, before filing an application with the National Company Law Tribunal under section 230-232 of the Act.
d.      The consideration for merger to the shareholders of the Indian merging company may be paid in cash or depository receipts or partly in cash and partly in depository receipts.
e.       Other compliances pertaining to conducting meeting of shareholders/creditors, notification to Income-tax authorities along with other sector specific regulators etc.

In Conclusion:

The Central Government has positively addressed the need of letting the Indian company to merge or amalgamate with the foreign company for exploring new avenues of business, however, there are still some points which need a consideration in the notified section and rules thereunder, for instance there is a requirement of introduction of necessary changes in the Income Tax Act, Foreign Exchange Management Act and provisions relating to Indian Depository Receipt to enable merger of an Indian Company with foreign entity. Secondly, the tax implication on capital gains arising out of outbound merger need to be introduced in Income tax law. Lastly, the notified section speak much about cross border merger, however, there is no provision for effectuating the demerger of such foreign company. Nonetheless, the ministry may introduce the appropriate changes after encounter them in eventual face of implementation of notified section.

The link to the notification effecting section 234 of the Companies Act, 2013-

The link to the relevant rule 25A in the Companies (Compromises, Arrangements and Amalgamations) Rules 2016-