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The GDPR Era – First impression and observations

The European Union’s General Data Protection Regulation (the “GDPR”) that came into effect on 25 May 2018, is touted as the most widespread and robust change to data privacy and protection law in the world. Many entities around the world have been engaged for many months trying to put in place processes and mechanisms to ensure their compliance with the GDPR. Now that the regulation is effective, it will be interesting to evaluate whether on the basis of purposive interpretation, the letter and spirit of the GDPR has in fact been followed by those under its jurisdiction. In the course of this article, we will take a look at some of the most common changes and announcements made by companies around the world in order to be compliant with the GDPR and compare these changes with the corresponding GDPR principles/requirements that they have been made in response to.

GDPR

Obtaining Explicit Consent

One of the core requirements of the GDPR is to ensure that companies and entities take the explicit and active consent of all data subjects prior to collecting, storing and/or using any of their personally identifiable information (“PII”). This is in line with the GDPR’s underlying principle of ensuring that the data subjects always take priority and are the most important stakeholders. Additionally, prior to introduction of the GDPR, many experts in the field of data privacy and protection who reviewed the regulation contended that in order to take a data subject’s explicit consent, it seemed like the regulation specifically required some action or activity on the part of the data subject, such as clicking a button or an option. This is believed to be necessary to clearly and unambiguously show their agreement to a company’s usage of their PII. Consequently, if this requirement is indeed mandatory, the established practice of implying a data subjects acceptance of terms through their continued usage of a website/service, would not be sufficient any more.

However, over the last two months, as many users around the world have received communications regarding service providers’ updates to their Terms of Service and Privacy Policy, we have noticed that very few service providers have actually followed the above method of taking consent. Instead, the previous practice of implying consent has continued to be followed. The majority of the emails and the communications have contained information regarding how a company/entity has altered its Terms and/or Privacy Policy, and how it is ensuring compliance with the GDPR, but without actually asking the data subjects for their explicit consent to the changes. This may not be in conformity with the GDPR, which mandates that every data subject, whether existing (that is, before the regulation came into effect) or new, is required to provide their explicit consent before a company/entity can collect or use their PII. Only a minority of companies have been asking their data subjects to re-confirm their acceptance of the revised terms/privacy policy before continuing to use the services.

Full Disclosure

Another important requirement of the GDPR is ensuring that all companies and entities disclose all information to their data subjects, specifically with respect to any of their PII. This includes, but is not limited to, what data is being collected, how it is being stored, how it is being used, how long it is required for, whether it is/will be shared with any third-party, why such sharing is necessary etc. This requirement is important to ensure that data subjects are at all times aware of exactly how their PII is being treated, and so that they can take an informed decision regarding accepting or rejecting a company’s terms and/or privacy policy.

On a plain reading of the regulation, it would seem like all of the above-mentioned information will need to be specifically be provided by the companies/entities to the data subjects. However, most companies/entities have only been making the above disclosures in vague language. For example, instead of specifying which/what kinds of third-parties the PII is or may be shared with, many companies have simply included a blanket statement stating that the PII will be shared with third-parties/service providers ‘as may be necessary to provide the services’. Such statements provide no information as to who the PII is being shared with, what functions the third-parties are performing on the PII etc., things that the GDPR seems to hold as critical. Further, companies have used such vague language in other disclosures as well. It is possible that this may defeat the very purpose of the disclosures, as the data subjects are not truly aware of how and where their PII is being used, preventing them from being able to take informed decisions regarding the same.

Providing Data Subjects with Options

The GDPR recognises that many companies need to use and rely on multiple third-party service providers in order to provide their own end-service to the customers. Further, in the course of using such third-party service providers, many companies start adding and offering fringe/additional features and services to their customers. However, a lot of these features are often not connected or related to the core service being provided by the company – for example, Facebook may provide its users with targeted advertising on its platform, which is not connected to the main function of social networking. Yet, as the number of features available grew, in an effort to generate greater revenues companies started to club and offer all features together to their customers. This effectively meant that customers had no options with respect to which features they felt were useful and which ones weren’t – they could either subscriber to and use all features or use none.

Many data privacy experts around the world found the above situation to be unfair, as it may force users to either have their PII used for additional unnecessary purposes, or to pay for additional features that are not required by them. The GDPR sought to address this problem by stipulating that companies should stop bundling products and features together, instead specifying which features and services are necessary or critical to the core service. Any add-on features or services should explicitly be communicated to the users, and the users should have the option of deciding whether they want to subscribe to these or not, and whether their PII should be used for the same or not.

Unfortunately, it seems like this is another requirement of the GDPR that has not been followed. Companies are either continuing to club features and services or are devising ways to skirt the stipulations by arguing that even certain add-on features are critical to the core service. One of the prime examples of this is Facebook, which continues to make the usage of PII for the purposes of displaying personalised advertisements, games, application suggestions etc., mandatory for all users. In effect, one cannot use Facebook’s social networking platform unless they agree to their PII being used for all of the above purposes as well. This matter has already been acted on by Max Schrems, a prominent Austrian data privacy campaigner. He has filed a case worth USD 3.9 billion before the European regulator, contending that Facebook continues to use coercive tactics to collect unnecessary PII regarding its users, which it then uses to conduct automated profiling (an activity which requires the specific, separate, explicit consent of data subjects under the GDPR).

Way Forward

In principle, it seems as though the GDPR contains some extremely strict and robust stipulations. Yet, as has been shown above, there are many interpretations of this regulation, and companies around the world are already starting to find ways to read and implement the law in different ways. While it remains to be seen if these practices are in fact in contravention of the GDPR or not, if these practices continue the GDPR could be rendered no more effective than existing data protection laws, potentially failing to protect data subjects in the way that was initially expected. Thus, the way the above cases are handled, specifically the lawsuit filed against Facebook, could set the tone for how seriously companies take the need to adhere to the GDPR’s requirements. In our opinion, it will be more beneficial for the European regulator to take a strict view of the stipulations under the GDPR and set a precedent that pushes other companies to ramp up their compliance activities as well.

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Early Stage Valuations: Legislative Context and Continuing Saga of Angel Tax

The last couple of months have been quite interesting in the startup ecosystem in India, given the legislative changes in the context of Section 56(2)(viib) of the Income Tax Act, 1961, or what we know as the ‘Angel Tax’ provision. This post is an attempt to analyse the legislative context and critically evaluate the current situation.

Angel tax

Credit: MoneyControl

Introduction of Angel Tax

The legislative context of Angel Tax, introduced through the Finance Act 2012, is rather fascinating. The then Minister of Finance Mr. Pranab Mukherjee introduced his Budget Speech of 2012 – 2013, on a reformative note mentioning the various challenges of a global recession that the Indian economy was striving not to get affected by at the concerned point of time in reference. The tone was very clear on how the Indian economy was then at a juncture to take hard decisions. One of the five objectives that the Union Ministry sought to address was “… the problem of black money and corruption in public life”. A series of measures were therefore proposed “to deter the generation and use of unaccounted money”, including “increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value”, taxable at the  highest rate, irrespective of the slab of income.[1]

There are some views that this proposal was also made in the aftermath of certain money laundering investigations launched about the same time, where bribe money was allegedly laundered by routing it through various individuals and companies and getting investments at a high premium.[2]

Interestingly, investments in a private limited company at that point of time was being governed primarily under the Companies Act, 1956, which lacked the severity and rigour brought in by the private placement mechanism and preferential allotment modes, under the Companies Act, 2013, in a bid to provide better protection to stakeholders by enforcing accountability and transparency.

Industry Woes and Consequences

  • The language of Section 56(2)(viib), as introduced by the Finance Act 2012, provides for taxation of consideration received by private limited companies for issue of shares, in excess of fair market value (FMV) of the shares. Exemption under the same is available if such consideration is received from ‘venture capital undertaking’ or ‘venture capital company’ or ‘venture capital fund’ and any other ‘class of persons’ as may be notified by the Central Government in this behalf.
  • FMV would be as determined in accordance with Rules 11U and 11UA of the Income Tax Rules, 1962 or as may be substantiated by the company to the satisfaction of the Assessing Officer based on value of assets (including intangible assets, goodwill, intellectual property, business or commercial rights, etc.), whichever is higher.
  • Rule 11UA provided for the computation of valuation of unquoted equity shares under Section 56(2)(viib), either as per a mathematical formula, or as determined by a merchant banker or an accountant as per the Discounted Free Cash Flow (DCF) method, at the option of the assessee.

As a consequence, early stage companies started moving ahead with chartered accountant determined valuations for investments raised from resident angel investors, following the DCF method. This was also in parity with the requirement for the private placement process under Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014. However, the risk still remained to the extent the same could not be substantiated to the satisfaction of the Assessing Officers, upon receipt of a notice in this regard.

Assessment to the satisfaction of the Assessing Officer, on a literal interpretation, may be considered as taking a step towards understanding the business perspective while putting in place right checks and balances for curbing money laundering and corruption. However, any element of satisfaction, has its own nuances and brings in a certain amount of discretion that is required to be exercised with caution, especially in the context of varied business ideas and models that could be novel in the Indian context and therefore would require a greater understanding and knowledge of the intellectual property or goodwill or business or commercial rights thereof. The understanding would also have to be basis different commercial contexts, such as the implementation of anti-dilution rights. Such rights are typically available to financial investors and often entail issuance of additional shares at minimum price, to give effect to commercially agreed upon rights.

Much has been written on the multiple incidents of startups receiving notices under Section 56(2)(viib), having to justify commercially driven business decisions. This has led to various representations to the Government by industry bodies, to take a re-look and if possible bring down Section 56(2)(viib).

The Plethora of Subsequent Legislative Changes

The first sign of relief came with the introduction of the Startup India Action Plan launched by Prime Minister Narendra Modi on 16 January 2016 (the “Action Plan”), as part of a flagship initiative of the Government of India for boosting the startup ecosystem in India.

  • The Action Plan brought forth a definition of ‘Startup’ and conditionalities based on which a Startup could be considered for recognition under the Action Plan. The Action Plan also recognised that it is difficult to determine FMV of shares in the context of Startups, which might very well be just at conceptualization or development stage and in most cases capital investments in Startups would be made at much higher valuations than what could be traditionally considered as FMV, which is the exact scenario that falls under the ambit of Section 56(2)(viib).
  • With this background, the Action Plan extended the exemption under Section 56(2)(viib) to investments made by incubators in Startups as well.
  • What followed a few months later is a notification dated 14 June 2016, issued by the Central Board of Direct Taxes (CBDT) that further extended the exemption, in the context of recognised Startups to ‘person’ as defined under Section 2(31) of the Income Tax Act, 1961. This includes individual, hindu undivided family, company, firm, association of persons, local authority, and any other artificial juridical person.

This led many early stage companies to strive for recognition under the Action Plan. Unrecognised startups/early stage companies, however, continued to struggle with the woes of the Angel Tax regime.

Amidst all of this, the Department of Industrial Policy and Promotion (DIPP) has now issued a  notification dated 11 April 2018 that introduces the following additional nuances for recognised ‘Startups’ also:-

  • Any ‘Startup’ falling under the ambit of the definition provided as such in the notification and being a private limited company, can now be considered for an ‘approval’ for the purposes of Section 56(2)(viib), if certain conditionalities are fulfilled.
  • The conditionalities include – (a) the aggregate amount of paid up share capital and share premium after the proposed issue, not exceeding Rs. 10 Crores;

‘Proposed’ could be read as ‘prior approval’, meaning a recognised ‘Startup’ would now have to wait for an approval before they can raise seed level funds from resident angel investors, which are many a times, crucial for jet-setting the business. Speedy execution and implementation being the foremost criteria for raising such seed level funds by early stage companies, introducing an element of ‘prior approval’ could be massively counter-productive.

Further, the process appears to be each investment based and not a one time approval.

(b) The investor/proposed investor has to have an average returned income of at least Rs. 25 Lakhs for the 3 preceding financial years or the net worth of at least Rs. 2 Crores on the last date of the preceding financial year;

Although this might be akin to the general theme of deterring the generation and use of unaccounted money, the question that one might have is whether the intent is to then tax and therefore, restrict angels, friends and family driven or similar early stage investments,  below the given threshold.

Quite interestingly, the form in which a Startup has to apply for the approval not only includes disclosure of such details of the investor, as mentioned above, but it also requires the name, PAN and address of the existing shareholders (without any qualification as to resident or non-resident) along with the price point at which they had invested.

(c) the Startup also has to obtain a report from a merchant banker specifying the FMV in accordance with Rule 11UA.

Early stage investments raised from resident angels, most often, are not very significant amounts and mainly utilised for helping businesses get a footing till such time that they reach validation stages and therefore seek larger amounts as venture capital funding or other forms of institutional funding. Introducing a ‘merchant banker valuation’ justification for such investments, would not only mean increase in cost to companies but also be a deterrent to raising small funds.

Within a couple of months from the above-mentioned DIPP notification, the CBDT issued 2 notifications dated 24 May 2018, one omitting the word ‘or an accountant’ from Rule 11UA, and the other extending the exemption under Section 56(2)(viib) to consideration received in accordance with the approval granted by the Board[3] under the DPP notification.

Current Position

With all of the above changes, the current position with respect to valuations and Section 56(2(viib) stand as follows:-

  • Receiving Investments from Resident Investors by Recognised Startups – Approval mechanism, requiring merchant banker valuation, unless investment is being received from exempted categories.
  • Receiving Investments from Resident Investors by Unrecognised startups/private limited companies – No approval mechanism However, merchant banker valuation would still be required, unless investment is being received from exempted categories.
  • Receiving Investments from Non-Resident Investors by Unrecognised startups/private limited companies – Section 56(2)(viib) is not applicable and therefore companies could still make do with a chartered accountant valuation report that works well both under the Foreign Exchange Management related regulations and under the Companies Act, 2013.

In our view, the situation detailed above needs a closer evaluation by the Government, so that while curbing corruption and money laundering, business is also facilitated. The general theme in the country currently being ensuring ease of doing business, a more balanced approach is required with respect to taxation also. More importantly, direct taxation being a concept linked with direct gains, the question that really needs to be evaluated here is whether at all early stage “investments” can be construed as direct gains.

Author: Sohini Mandal, Associate Partner

[1] Budget 2012-2013, Speech of Pranab Mukherjee, Minister of Finance, March 16, 2012, as available at https://www.finmin.nic.in/sites/default/files/bs1.pdf?download=1 (visited on June 12, 2018)

[2] Nakul Saxena and Siddharth Pai, Policy Expert Council Members, iSpirt Foundation, The History and Future of Angel Tax, February 12, 2018, as available at http://pn.ispirt.in/the-history-and-future-of-angel-tax/ (visited on June 11, 2018)

[3] The DIPP notification dated 11 April 2018 also provides for approvals to be provided by an Inter Ministerial Board of Certification (the “Board”), to be formed with 8 members from the DIPP, Ministry of Corporate Affairs, Reserve Bank of India, Securities and Exchange Board of India, CBDT, etc.

 

Externalisation: Many Indian Startups are Choosing to have their Holding Entity Outside India

Indian companies have been facing issues in doing business, without any ease. Compliances have become complex and are becoming harder to meet all the compliances though there is full intent in complying with the various laws. While foreign direct investment has been eased, obtaining the registration number for such investment by Reserve Bank of India (RBI) takes quite some time, even though all these filings are now online. Without these registration number, the secondary sale of shares is difficult. Investment by early-stage resident Indian angels is subject to issues of valuation by merchant banker, with prior approval for the proposed investment by the Inter-Ministerial Board of Certification or valuation is proven to the satisfaction of tax officer. Else, there is a possibility that the investment can be taxed as income.

Offshore entities

Many startups have global businesses. Startups that get selected for global accelerator programs are asked to have a holding company, primarily in the USA.

Restrictions on Exit Price (Put Option), under the Foreign Direct Investment Policy, the Indian entities cannot determine or assure the exit price to its non-resident investors. This restriction would impact where the investors require optionality clauses, which allows investors to sell their shares at a predetermined price after a predetermined period.

The new disruptive, technology companies find it easier to find exits such as Initial Public Offer, become attractive targets for acquisition/ merger. It is also believed that there is an inherent premium to valuation in being a non-Indian company.

Running a global business from India is most Indian entrepreneurs dream. However, the above and many other factors are making the Indian promoters to move their holding entity ie., the value-creating entity outside of India.

These and many other factors are the triggers for the promoters to move their holding entity outside of India (“externalize”). The Indian legislations are not easy to comply even during externalization.

Incorporation of an Offshore Entity

Firstly, the Founders are required to incorporate an offshore entity as per the governing law in the host country. The Founders shall also consider the restrictions/compliances under Liberalised Remittance Scheme (LRS) as notified by RBI.

LRS facilitates Indian resident individuals to remit funds abroad for permitted current or capital account transactions or combination of both without prior approval of RBI. While the RBI has relaxed the individuals from seeking approval, it is pertinent to note that the outward remittance towards the share capital of overseas entity is allowed only in case if such entity is an operating entity and not have any step-down subsidiary. Further, LRS does not permit remittance towards incorporation of an entity.

Incorporation of Indian Subsidiary

Should the promoters wish to have a wholly owned subsidiary in India, (assuming there is no LRS), the subsidiary will primarily operate as a cost center, wherein the intellectual property is with the holding company. The employees of the subsidiary are eligible for ESOP of the holding company. The services agreement between the holding and subsidiary company should adhere to the transfer pricing regulations. Every care has to be taken to ensure that there is no round-tripping of funds. 

If an Investment is Raised

If the promoters had raised investment in the Indian entity earlier, then externalizing to ensure that the economic interest of the investors are protected has to be undertaken with care. There are processes such as transfer of shares, swap of shares that can be considered, while ensuring that the valuation of the Indian entity is an important matter to evaluate from tax perspective.

Some of the matters to consider is customer revenue, intellectual property, ESOP granted to employees etc.

The ODI Regulation as prescribed by the RBI is applicable in case of acquisition/transfer of shares of an offshore entity from Person Resident in India to Person Resident outside India[1] or vice versa.

Intellectual Property (IP) Licencing Agreement

If the Indian subsidiary enters into any customer agreements, then it is essential that the Indian subsidiary is appointed as a distributor or reseller or is a licensee of the IP in order to have the rights to sell the products to customers.

Applicability of Place of Effective Management (POEM) under Income Tax Act 1962

For the purpose of identifying the tax incidence, POEM plays a key role. POEM considers amongst other aspects, determination of active business outside India; identifying key persons where management and commercial decisions are taken and determination of place where those decisions are taken; location of the meeting of the Board; location of the head-office of the company and the like. However, POEM is applicable to those companies whose total turnover during the year is more than INR. 50 Crore.

We are witnessing many Indian startups move out of India and it is time that Indian regulators pay attention to actually ease doing business in India.

Author: Ashwin Bhat, Junior Partner

[1] Definition of Person Resident in India and Person Resident outside India is as captured under section 2(v) and 2(w) of the Foreign Exchange Management Act, 1999

Change in Levy of Additional Fee for Delay in Annual Filings with Ministry of Corporate Affairs

Background

The Ministry of Corporate Affairs (the MCA) on 8 May 2018, notified the Companies (Registration Offices and Fees) Second Amendment Rules 2018. With this notification, all annual filings filed post 30 June 2018, would incur a penalty of Rs. 100 per day for the period of delay. The MCA has notified these amendment rules in pursuance of an amendment made in section 403 of the Companies Act 2013 (the “Act”), vide the Companies (Amendment) Act, 2017.

With this amendment, the delay in filing of Annual return under section 92 of the Act or Annual Financial Statements & Boards’ Report under section 137 of the Act would result in late filing fee of Rs. 100 per day with effect from 1 July 2018.

The levy of penalty/additional fee after the expiry of 30 June 2018 shall be as provided in the below table:

 

Particulars

Additional Filing fees

If the due date is after 30 June 2018

If the due date is prior to 30 June 2018

Form 23 AC, 23 ACA, 23AC- XBRL, 23 ACA- XBRL, 20 B, 21B under the Companies Act, 1956 Not applicable (As the due date would have expired under the Companies Act 1956)
Sl. No. Period of delay Additional fee payable (in Rs.) up to 30 June 2018
1 Up to 30 days 2 times of normal filing fees
2 More than 30 days and up to 60 days 4 times of normal filing fees
3 More than 60 days and up to 90 days 6 times of normal filing fees
4 More than 90 days and up to 180 days 10 times of normal filing fees
5 Beyond 180 days 12 times of normal filing fees

 

Plus

 

Rs. 100 per day with effect from 1 July 2018

Form MGT-7 under section 92 of the Act

OR

Form AOC-4, AOC-4 CFS, AOC-4 XBRL under Section 137 of the Act

Rs. 100 per day
Sl. No. Period of delay Additional fee payable (in Rs.) up to 30 June 2018
1 Up to 30 days 2 times of normal filing fees
2 More than 30 days and up to 60 days 4 times of normal filing fees
3 More than 60 days and up to 90 days 6 times of normal filing fees
4 More than 90 days and up to 180 days 10 times of normal filing fees
5 Beyond 180 days 12 times of normal filing fees

 

Plus

 

Rs. 100 per day with effect from 1 July 2018

Author: Ms. Shivani Handa is a qualified company secretary and works as an Associate at NovoJuris Legal.

Operating Business in Renewable Energy (RE) Sector: Applicable Laws to Consider

Rapid economic growth demands progressive measures in the Electricity or Power Sector. Power shortages and depletion of non-renewable energy resources coupled with distribution channel challenges have forced the economy to look forward to renewable energy creation and distribution. India’s commitment to United Nations Framework Convention on Climate Change on Intended Nationally Determined Contribution (INDC) is to achieve 40% of its power installed capacity from non-fossil fuel energy by 2030.  The power sector (Electricity) is a concurrent subject provided in the Seventh Schedule of the Indian Constitution and hence both Centre and State have the power to regulate this domain. The Central Electricity Regulatory Commission and the respective State Electricity Regulatory Commission govern this domain. Earlier the Electricity Sector only witnessed public participation but gradually private players have also started taking interest in the same.

Checklist of applicable laws:

The main legislation governing the energy sector are as follows:

  • Electricity Act, 2003:

The Electricity Act, 2003 (“Act”) is regarded as the main governing legislation in this domain inter-alia consolidating the laws relating to generation, transmission, distribution, trading, and use of electricity and generally for taking measures conducive to the development of electricity industry. Over the years, there has been a significant change in which the government functions making it merely a facilitator for licensing, control over transmission, capacity generation, and tariff fixation. The Electricity Commission (EC) established under the Act functions as a watchdog wherein it puts a tab on the cost of generation thereby regulating tariff and supply of electricity from a generating company to the licensed distributors. The Electricity Act, 2003 thus framed by the central legislature governs:

  1. Generation: The Electricity Act, does not provide for a specific license for generation except where expressly provided. The generators are permitted to sell electricity to any trading and distribution licensee and to the consumer directly (subject to getting open access approvals).
  2. Transmission is a regulated activity unless exempted. The Central Transmission Units (CTUs) and the respective State Transmission Units (STUs) are deemed transmission licensee. The transmission as an activity is heavily regulated and requires approval from the appropriate regulatory commission (Central Electricity Regulatory Commission (CERC) /State Electricity Regulatory Commission (SERC)) for the tariff. It must also adhere to Central Electricity Regulatory Commission (Indian Electricity Grid Code) Regulations 2010 and Central Electricity Authority (Grid Standards) Regulations 2010 along with the directions that may be issued by the National Load Despatch Centre, the Regional Load Despatch Centre or the State Load Despatch Centre to ensure availability of the transmission system is maintained. In addition to above laws, there are state-specific grid transmission and tariff laws for governing inter-state transmission.
  3. Trading means the purchase of electricity for resale for any purpose and includes wholesale and retail supply. This is also a licensed activity and appropriate licenses have to be taken for CERC (for inter-state trading) and SERC (for intra-state trading).
  4. Distribution and supply are regulated and a licensed activity but a holder of distribution and supply license can undertake to trade without any separate license. A license has to be obtained from CERC (for inter-state distribution and supply) and SERC (for intra-state distribution and supply).
  5. Other Applicable Laws: In any of the abovementioned activities, in addition to license under the Electricity Act, 2013, the generator, transmitter, trader or the distributor or supplier has to ensure that their activities are compliant with other acts and statutes as well, these include:
  6. Environmental Permits: in form and manner of licenses, clearance certificate, no objection certificates, compliance with waste disposal, record keeping etc.
  7. Environmental clearance from the Ministry of Forest and Environment (MOEF) before a power plant is set up (except for solar power project). Clearance certificate has to be obtained from the Pollution clearance board of the state where the project will be undertaken.
  8. Consent to establish from the respective state pollution control board (Section 25 of Water (Prevention and Control of Pollution) Act 1974and Section 21 of the Air (Prevention and Control of Pollution) Act 1981).
  9. Other Clearances: i) Forest clearance, in case the developer wants to use forest land for non-forest purposes than the developer will have to obtain clearance from the forest department and ii) Coastal regulatory zone clearance if the project falls within the coastal regulatory zone. (Forest (Conservation) Act 1980, (Environment Protection Act 1986and Coastal Regulation Zone Regulations).)
  10. Fire safety certificate to be obtained from the concerned source as stated by the fire department of the state.
  11. Licenses for usage and storage of fuel oil storage tanks, explosive and inflammable liquids, and chemicals along with authorization for storage of hazardous waste. (Explosives Act 1884 read with Explosives Rules 2008, Petroleum Act 1934 read with Petroleum Rules 2002, Hazardous Waste (Management and Handling) Rules 1989). The Company may also need to check the applicability of the waste handling laws for proper disposal of hazardous waste.
  12. Other Approvals: Based on the business model, there will be other ongoing labor, health and safety, environmental and land and construction approvals such as:
  13. For acquisition of land: this largely depends on the type of land being acquired (that is government revenue land, forest land, agricultural land). Conversion of forest, agriculture land will require special clearance.
  14. A no-objection certificate (NOC) from Gram Panchayat (village level entity)/local administrative body as may be required for the development of the power project (depending on the location of the project).
  15. An allocation/approval of electric supply for bulk construction power supply.
  16. An approval/NOC in accordance with the Electricity Act from the Chief Electrical Inspector of the respective state for plant layout for electrical equipment operational safety
  17. There must also be adherence to respective technical and safety standards as prescribed for generation, transmission and distribution activities which include building the transmission, distribution and supply systems and laying electrical lines.

  • FDI and Import-Export

100% FDI under automatic route is permitted under the renewable energy sector subject to the provisions of Electricity Act, 2003 (except atomic energy). This includes generation, transmission, and distribution of electricity, as well as power trading.[1] Special license for PTC (Power Trading Corporation) is required to import electricity along with a trading license.[2] An Import-Export Code is required for import of equipment for the development of the power project.

  • Conclusion
  • The Regulatory framework for Electricity Sector is vast and scattered. The Renewable Purchase Obligation (RPO) notified under the National Tariff Policy, 2006 makes it’s obligatory for certain companies to meet part of their energy needs through green energy and therefore there is a great importance attached to promotion and development of the renewable energy sector. The government has also formulated the draft Renewable Energy Act, 2015 that provides for a clear institutional financial, structural and policy roadmap at a national level and renewable energy development coordination between State and Centre. The proposed enactment is significant in laying down mandatory national targets for RPO within one year of it coming into force and also provides for a centralized RPO compliance monitoring mechanism. The draft act also details penalties which can be imposed by the SERCs for non-compliance of RPO which includes a fine of up to 1 crore and/or imprisonment up to 3 months for each continuing contravention.

Please note that this post is a general overview of the laws applicable to the renewable energy sector for reference purposes only. Every business will require customized diligence on applicable laws and readers are requested to kindly seek professional advice in this regard.

[1] The Ministry of Power via a press release dated: 13th December 2012; available at:

http://www.pib.nic.in/newsite/PrintRelease.aspx?relid=90578

[2] Power Exchanges have permitted 49% FDI under automatic route available at http://pib.nic.in/newsite/PrintRelease.aspx?relid=87788

Power trading is the purchase of electricity for resale thereof, while a power trading exchange provides an organized platform for fair, neutral, efficient and robust price discovery; extensive and quick price dissemination; and price risk management for the generators, distributors, traders, consumers and other stakeholders in the power sector.

Authors:  Ms Ayushi Singh, Associate at NovoJuris Legal and Ms Sohini Mandal, Associate Partner at NovoJuris Legal.

Images Courtsey: Creative Commons

Operating Business in Renewable Energy (RE) Sector: Applicable Laws to Consider

Rapid economic growth demands progressive measures in the Electricity or Power Sector. Power shortages and depletion of non-renewable energy resources coupled with distribution channel challenges have forced the economy to look forward to renewable energy creation and distribution. India’s commitment to United Nations Framework Convention on Climate Change on Intended Nationally Determined Contribution (INDC) is to achieve 40% of its power installed capacity from non-fossil fuel energy by 2030.  The power sector (Electricity) is a concurrent subject provided in the Seventh Schedule of the Indian Constitution and hence both Centre and State have the power to regulate this domain. The Central Electricity Regulatory Commission and the respective State Electricity Regulatory Commission govern this domain. Earlier the Electricity Sector only witnessed public participation but gradually private players have also started taking interest in the same.

Checklist of applicable laws:

The main legislation governing the energy sector are as follows:

1. Electricity Act, 2003:

The Electricity Act, 2003 (“Act”) is regarded as the main governing legislation in this domain inter-alia consolidating the laws relating to generation, transmission, distribution, trading, and use of electricity and generally for taking measures conducive to the development of electricity industry. Over the years, there has been a significant change in which the government functions making it merely a facilitator for licensing, control over transmission, capacity generation, and tariff fixation. The Electricity Commission (EC) established under the Act functions as a watchdog wherein it puts a tab on the cost of generation thereby regulating tariff and supply of electricity from a generating company to the licensed distributors. The Electricity Act, 2003 thus framed by the central legislature governs:

  • Generation: The Electricity Act, does not provide for a specific license for generation except where expressly provided. The generators are permitted to sell electricity to any trading and distribution licensee and to the consumer directly (subject to getting open access approvals).
  • Transmission is a regulated activity unless exempted. The Central Transmission Units (CTUs) and the respective State Transmission Units (STUs) are deemed transmission licensee. The transmission as an activity is heavily regulated and requires approval from the appropriate regulatory commission (Central Electricity Regulatory Commission (CERC) /State Electricity Regulatory Commission (SERC)) for the tariff. It must also adhere to Central Electricity Regulatory Commission (Indian Electricity Grid Code) Regulations 2010 and Central Electricity Authority (Grid Standards) Regulations 2010 along with the directions that may be issued by the National Load Despatch Centre, the Regional Load Despatch Centre or the State Load Despatch Centre to ensure availability of the transmission system is maintained. In addition to above laws, there are state-specific grid transmission and tariff laws for governing inter-state transmission.
  • Trading means the purchase of electricity for resale for any purpose and includes wholesale and retail supply. This is also a licensed activity and appropriate licenses have to be taken for CERC (for inter-state trading) and SERC (for intra-state trading).
  • Distribution and supply are regulated and a licensed activity but a holder of distribution and supply license can undertake to trade without any separate license. A license has to be obtained from CERC (for inter-state distribution and supply) and SERC (for intra-state distribution and supply).

2. Other Applicable Laws: In any of the abovementioned activities, in addition to license under the Electricity Act, 2013, the generator, transmitter, trader or the distributor or supplier has to ensure that their activities are compliant with other acts and statutes as well, these include:

  • Environmental Permits: in form and manner of licenses, clearance certificate, no objection certificates, compliance with waste disposal, record keeping etc.
    • Environmental clearance from the Ministry of Forest and Environment (MOEF) before a power plant is set up (except for solar power project). Clearance certificate has to be obtained from the Pollution clearance board of the state where the project will be undertaken.
    • Consent to establish from the respective state pollution control board (Section 25 of Water (Prevention and Control of Pollution) Act 1974and Section 21 of the Air (Prevention and Control of Pollution) Act 1981).
    • Other Clearances: i) Forest clearance, in case the developer wants to use forest land for non-forest purposes than the developer will have to obtain clearance from the forest department and ii) Coastal regulatory zone clearance if the project falls within the coastal regulatory zone. (Forest (Conservation) Act 1980, (Environment Protection Act 1986and Coastal Regulation Zone Regulations).)
  • Fire safety certificate to be obtained from the concerned source as stated by the fire department of the state.
  • Licenses for usage and storage of fuel oil storage tanks, explosive and inflammable liquids, and chemicals along with authorization for storage of hazardous waste. (Explosives Act 1884 read with Explosives Rules 2008, Petroleum Act 1934 read with Petroleum Rules 2002, Hazardous Waste (Management and Handling) Rules 1989). The Company may also need to check the applicability of the waste handling laws for proper disposal of hazardous waste.

3. Other Approvals: Based on the business model, there will be other ongoing labor, health and safety, environmental and land and construction approvals such as:

  • For acquisition of land: this largely depends on the type of land being acquired (that is government revenue land, forest land, agricultural land). Conversion of forest, agriculture land will require special clearance.
  • A no-objection certificate (NOC) from Gram Panchayat (village level entity)/local administrative body as may be required for the development of the power project (depending on the location of the project).
  • An allocation/approval of electric supply for bulk construction power supply.
  • An approval/NOC in accordance with the Electricity Act from the Chief Electrical Inspector of the respective state for plant layout for electrical equipment operational safety
  • There must also be adherence to respective technical and safety standards as prescribed for generation, transmission and distribution activities which include building the transmission, distribution and supply systems and laying electrical lines.

FDI and Import-Export

100% FDI under automatic route is permitted under the renewable energy sector subject to the provisions of Electricity Act, 2003 (except atomic energy). This includes generation, transmission, and distribution of electricity, as well as power trading.[1] Special license for PTC (Power Trading Corporation) is required to import electricity along with a trading license.[2] An Import-Export Code is required for import of equipment for the development of the power project.

Conclusion

The Regulatory framework for Electricity Sector is vast and scattered. The Renewable Purchase Obligation (RPO) notified under the National Tariff Policy, 2006 makes it’s obligatory for certain companies to meet part of their energy needs through green energy and therefore there is a great importance attached to promotion and development of the renewable energy sector. The government has also formulated the draft Renewable Energy Act, 2015 that provides for a clear institutional financial, structural and policy roadmap at a national level and renewable energy development coordination between State and Centre. The proposed enactment is significant in laying down mandatory national targets for RPO within one year of it coming into force and also provides for a centralized RPO compliance monitoring mechanism. The draft act also details penalties which can be imposed by the SERCs for non-compliance of RPO which includes a fine of up to 1 crore and/or imprisonment up to 3 months for each continuing contravention.

Please note that this post is a general overview of the laws applicable to the renewable energy sector for reference purposes only. Every business will require customized diligence on applicable laws and readers are requested to kindly seek professional advice in this regard.

[1] The Ministry of Power via a press release dated: 13th December 2012; available at:

http://www.pib.nic.in/newsite/PrintRelease.aspx?relid=90578

[2] Power Exchanges have permitted 49% FDI under automatic route available at http://pib.nic.in/newsite/PrintRelease.aspx?relid=87788

Power trading is the purchase of electricity for resale thereof, while a power trading exchange provides an organized platform for fair, neutral, efficient and robust price discovery; extensive and quick price dissemination; and price risk management for the generators, distributors, traders, consumers and other stakeholders in the power sector.

Authors:  Ms. Ayushi Singh, Associate at NovoJuris Legal and Ms. Sohini Mandal, Associate Partner at NovoJuris Legal.

Images Courtesy: Creative Commons

National Company Law Tribunal (NCLT) Merger/Amalgamation : Steps to think through and how to go about it.

Click through the link below to access the article:

National Company Law Tribunal Merger/Amalgamation : Steps to think through and how to go about it.

Through a notification dated December 7th, 2016 Ministry of Corporate Affairs has notified various provisions of the Companies Act, 2013. The notified provisions mainly compromised of proceedings related to arbitration, compromise, arrangements and reconstruction and winding up of companies as per provisions of the Companies Act, 2013.

As a result of such provisions getting notified all the pending cases related to merger/amalgamations before the respective District courts and the High courts were transferred to National Company Law Tribunal (NCLT). As per the enactment of the notified provisions now any proceedings related to merger/amalgamation an application has to be made to NCLT.

The author Mr Ashwin Bhat, Junior Partner at NovoJuris Legal, under this article has captured various nuances related to mergers/amalgamation in India, pre-merger processes, post-merger processes, difference in swap ratio/ exchange ratio, difference between appointed date versus effective date and many more interesting aspects related to mergers/amalgamations.