Category Archives: Articles

Capital Gains Tax on Conversion of Compulsorily Convertible Preference Shares – The Current Scenario

The question of taxability on conversion of compulsorily convertible preference shares (CCPS) has come up for consideration quite a few times in the recent past. There seemed to be ambiguity regarding whether an event of conversion amounts to ‘transfer’ under Section 2(47) of the Income Tax Act, 1961 (the “Act”), thereby triggering capital gains tax under Section 45 of the Act.

As early as 12 May 1964, the Central Board of Direct Taxes (CBDT) in its Circular F. No. 12/1/64-IT(A) (the “Circular”) had stated that where one type of share is converted into another type of share, there is no ‘transfer’ of capital asset within the meaning of Section 2(47) of the Act. However, there have been many instances when assessments have still been framed adversely. The matter of Periar Trading Company Limited v Income Tax Officer[1] (the “Periar Case”) is one such instance where the conversion of preference shares was sought to be taxed and the above question again came up for consideration. The decision in this case pronounced by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) further consolidates the position that CCPS would not attract any capital gains tax upon conversion. In this post, we look into the facts of the Periar Case and the reasoning adopted by Hon’ble Justice Mahavir Singh for pronouncing the judgment.

Factual Matrix of the case:

  • Perirar Trading Company Pvt Ltd (the “Assessee”) was engaged in the business of investment activities.
  • During the financial year 2010-11 relevant to the assessment year 2011-12, the Assessee had made investment in 51,634 CCPS of Series A of Trent Ltd. on a rights issue basis. The entire issue price of the said CCPS was paid on application itself.
  • As per the terms of the scheme for issue of CCPS, one CCPS of Series A would compulsorily and automatically get converted into one fully paid up equity share. Accordingly, on 10 September 2011, the Assessee was allotted one equity share of Trent Ltd. for every preference share held in Trent Ltd., i.e. 51,634 CCPS. The conversion was compulsory and automatic.
  • The Assessing Officer (the “AO”) noted from the schedule of non-current investment forming part of the balance sheet of the Assessee for the previous year 2011-12 that the Assessee company had its 51,634 CCPS Series A of Trent Ltd into equity shares and thus, during the assessment year 2012-13, sought to tax the Assessee, treating the conversion of CCPS into equity shares as a ‘Transfer’ within the meaning of the definition provided in section 2(47)(i) of the Act.
  • The Assessee brought the matter before the Commissioner of Income Tax (Appeals) [the “CIT(A)”], which accepted the AO’s arguments and relied on rulings in Re: The Nizam’s Second Supplementary Family Trust[2] and CIT v Santosh L Chowgule[3] to reject the Assessee’s appeal holding that the conversion of the CCPS amounted to a ‘transfer’ by way of exchange.
  • Aggrieved by the same the Assesee preferred appeal to the Mumbai bench of the ITAT.

Main Issue before the ITAT:

The ITAT was primarily faced with the question of, “Whether the action of CIT in confirming the action of AO to treat the conversion of Cumulative Compulsory Convertible Preference Shares (CCPS) into equity shares as transfer within the meaning of section 2(47) of the Act on the said conversion, was proper in law?” In dealing with the issue the decision also touches upon the following points:

  • Modality of calculating period of holding in the case of conversion and subsequent sale/transfer of the converted CCPS? and
  • The distinction between exchange and conversion of shares.

Arguments of the Assessing Officer (AO):

It was contended by the AO that the difference of,

  • (i) the market value of converted number of equity shares of Trent Ltd. and
  • (ii) the cost of the acquisition of equal number of CCPS Series A of Trent Ltd

is taxable as capital gains on account of transfer of shares by way of exchange of ‘assets’. The AO also relied on the definition of ‘exchange’ as per the Black’s Law Dictionary in support of his reasoning.

Reasoning adopted by the CIT(A):

Before the CIT (A), the AO relied on the case of Re: The Nizam’s Second Supplementary Family Trust[4], in which Hon’ble Andhra Pradesh High Court categorically held that conversion of preference shares into equity shares is nothing but a barter, which constitute transfer by way of exchange within the meaning of Section 45 of the Act. The CIT-A therefore held that the ratio of the above case should be applicable to the case of the Assessee and that the Assessee must pay the amount as long term taxable capital gain.

Arguments of the Assessee before the ITAT:

The Assessee contended that the legislative scheme emanating from the provisions of the Act also did not require such transaction to be taxable. The Assessee relied on section 55(2)(b)(v)(e) of the Income Tax Act which states that where the newly converted share is transferred at a later date, then, the cost of acquisition of such share for the purpose of computing the capital gain tax shall be calculated with reference to the cost of acquisition of the original share from which it is derived. Thus, the legislative intent seems to be clear that conversion ought to be regarded as tax neutral.

Rulings of the ITAT:

The ITAT held that the CBDT vide the Circular has clarified the position that where one type of share is converted into another type of share, there is no transfer of capital asset within the meaning of Sec. 2(47) of the Act. It also noted that the provisions of the circular have also been adopted in the tribunal’s earlier judgment in ITO v Vijay M Merchant[5].

The ITAT further relied on the ruling in Gillanders Arbuthnot & Co[6] and Texspin Engineering and Manufacturing Works[7] to hold that the market value of the converted equity shares on the date of conversion shares resulting from the conversion cannot be treated as ‘full value of consideration’ of the CCPS, even if such conversion was treated as a transfer, for the purpose of determining capital gains under section 48 of the Income Tax Act, 1961. The Supreme Court in Gillanders[8] faced a similar case where the value of asset transferred in lieu of shares was sought to be the ‘full value of consideration’, the Apex Court had observed that ‘full value of consideration’ is inherently different from ‘fair market value of the capital asset transferred’. Further in Texspin[9], the Bombay High Court had held that one has to read the expression ‘full value of consideration’ under section 48 dehors section 45 and that the expression cannot be used to mean the market value of the capital asset on the date of the transfer.

The ITAT further observed that the present case was not a case where “one form of share has been exchanged, bartered, swapped for other form of share. In the present case, one type of share was converted into other type and the earlier type of share has ceased to exist. Thus, there is no exchange of any share as the pre-conversion security has ceased to exist. From the above, it is evident that mere conversion of one type of share to other type of share will not be a transfer of a capital asset within the meaning of Sec. 2(47) of the Act.” ITAT further pointed out that AO’s reliance on the ruling of the Hon’ble Supreme Court in the CIT v Motors & General Stores Pvt Ltd[10] was unfounded, as the Court therein had held the exchange of cinema house to preference shares is to be considered as a transfer for the purpose of taxability. The facts of the matters are, therefore, entirely different.

The ITAT accepted the interpretation of the Assessee, claiming this to be in furtherance to the legislative intention, that mere conversion of one type of share to other type of share will not be a transfer of a capital asset within the meaning of Sec. 2(47) of the Income Tax Act, 1961, which would also make the provision of capital gains work smoothly, in synchronization with other provisions, without any conflict with other provisions. If the view is adopted that capital gain tax liability arose upon conversion, then the same would be not only against the legislative intention but also would make the composition of capital gains unworkable and would bring conflict with other provisions of the Act. In fact, it would lead to instances of double taxation, as having taxed the capital gain upon such conversion, at the time of computing capital gain upon sale of such converted shares, the Assessee would be still taxed again, as the cost of acquisition would still be adopted as the issue price of the CCPS and not the consideration adopted while levying capital gain upon such conversion. The tribunal in this regard noted “by no stretch of imagination, such interpretation process is permissible”.

Key Takeaways:

Although now there is a specific provision in the form of Section 47(xb) (with effect from 1 April, 2018), the decision comes as a boon for matters where conversion took place even before the Finance Act, 2017 came into force. Further, to consolidate the mandate under Section 55(2)(b)(v)(e), the Finance Act, 2017 has also introduced new provisions in form of Sections 2(42A)(hf) and 49(2AE) that provide that holding period of equity shares resulting from conversion of preference shares start from the date of acquisition of original preference shares. The position of law with respect to taxability of conversion events now seems to be well settled therefore.

Authors: Mr. Avaneesh Satyang and Ms. Sohini Mandal

[1] ITA No. 1944/Mum/2018 decided on 09 November 2018

[2] (1976) 102 ITR 248 (Andhra Pradesh)

[3] (1998) 234 ITR 787 (Bombay), wherein the Bombay High Court held that preference shares and equity shares are different.

[4] Supra note 2

[5] (1986) 12 ITD 510 (Bombay)

[6] 66 ITR 622 (Supreme Court)

[7] 263 ITR 345 (Bombay)

[8] Supra note 6

[9] Supra note 7

[10] (1967) 66 ITR 692 (SC)


Basics of capital table and different capital instruments

The capital table is a reflection of the shareholding pattern of a company, shareholder names, percentage of shareholding.  This shareholding should ideally reflect the voting percentage in the company. But does it? What if the ESOP percentage has to be included while there is no voting on ESOP?

Founders should also consider the number of people on the capital table, though the maximum number in a private limited is 200, for various reasons including logistics of execution of documents, distribution of the annual accounts & annual report etc.

In this post, we have captured some of the key aspects to be considered while structuring the capital table.

At the time of Incorporation: It may be noted that the subscription of shares at the time of incorporation will be at face value and cannot be issued at a premium. The initial subscribers are usually the founders themselves.

The shareholding pattern amongst the founders is a function of many factors, such as roles and responsibilities and what each of them would bring to the table, whether investment is in cash or in terms of performance and service, for example, as a technical expert or a marketing expert. It certainly helps in decision making if one of the founders have majority shareholding. It is highly recommended that the founders enter into a founders’ agreement wherein the number of shares, percentage shareholding, future investment, vesting schedule, if any; roles and responsibilities of each founder, treatment of shares upon termination, etc. This would help in setting expectations as well as helpful in easing the founder terminations / resignations.

Employees Stock Option Pool (“ESOP”): A great team is instrumental and vital to the growth of an early stage company. However, the company may not have the finances to compensate with market salary to its employees at early stages (unless well funded). Thus, issuing stock options becomes very attractive – not only as compensation mechanism but also as building ownership and responsibility in the company. Stock options are notional unless they are exercised and shares are allotted. They represent a right to purchase a specified number of shares at a specific (exercise) price. When an employee exercises the Options and issued shares, then they became part owners in the company and can also sell the shares. Stock Options cannot be transferred or sold. Please see our previous post on Ten Frequently Asked Questions on Exercising Employee Stock Options in Private Limited Companies for more details in this regard.

Though Stock Options are not shares yet, it still forms a part of the capital table. External investments into the company, be it angel or institutional investment, are on a fully diluted basis. Ie. a shareholding pattern, as if all the outstanding share allotments regardless of vesting, assuming all stock options are converted, assuming all convertible securities are converted into common shares. Hence, Stock Options also form part of the capital table. In such a scenario, the percentage captured in the cap table is not necessarily the percentage of voting.

At the time of Investment: Whenever new investors subscribe to the shares of the company, the capital table undergoes a change. All the earlier shareholders’ percentage holding dilute, while the number of shares that they hold remains. If ESOP is set aside before the new investors coming in, then ESOP percentage dilutes, while the number of options set aside, remain the same.

Issuance to Advisors: Issuance of shares has to be at fair market value. Many a time, it is convenient for the founders to transfer their shares to the advisors. However, tax impact has to be evaluated for such transfers.

In India, we have different kinds of shares:
Equity share capital (common stock): (i) with voting (ii) with differential rights, such as dividend or voting. Founders typically have equity shares. ESOP is also typically granted as equity share class.

Preference share capital, which carry a preferential right over the equity shares to be paid dividend and a preference for repayment of capital in case of winding up. Investors typically have preference shares.

Preference shares can be:
Cumulative preference shares, which means that the holders are entitled to receive dividend even when a company does not make (adequate) profit, in which case the dividend is accumulated and paid when the company does have sufficient profits.
In Non-cumulative preference shares, the holders get the dividend only when a company makes sufficient profits, else the dividend lapses and cannot be carried forward.
Participating preference shares, means that the holders are eligible to receive surplus profits or dividends in addition to being entitled to their fixed dividend.
In Non-participating preference shares, the dividend paid is only to the extent of the agreed fixed dividend.
Convertible preference shares are those that are converted into equity within the maximum period of 20 years. Non-convertible preferences are those that do not get converted into equity shares.
Redeemable preference shares or optionally redeemable preference shares are those that have to be paid back within the maximum period of 20 years. We don’t have irredeemable preference shares.

The other form of investment is as debentures, which is primarily a debt. But the debt can convert into shares through the issuance of Compulsorily Convertible Debentures (CCD). You can read our post on CCD on the nuances related to its issuance.

Investors also invest through CCD, especially when the valuation of the company is not clear. Here’s how it is done

You can share your thoughts or email your questions to

Data Protection and the many facets of it: Inter-collegiate Essay Competition

NovoJuris Legal is proud to announce the Inter-collegiate Essay Competition on Data Protection and its various facets. 

Data Protection has taken very high importance not only in India but across the World. The Personal Data Protection Bill, 2018 (“Bill”) and the Data Protection Committee’s (“Committee”) Report (released on 27 July 2018) provides for the framework and the policymakers’ insight on protection of individual’s privacy and personal data in India. The Bill has set high expectations particularly after the European Union’s General Data Protection Regulation (“GDPR”) came into force on 25 May 2018. It is also essential to note the important judgments including the now famous “Aadhar case” of Justice Puttaswamy (Retd.) V. Union of India.

Reserve Bank of India (RBI) in April this year has mandated that all data generated by the payment systems in India, is to be stored in India. The Ministry of Health and Welfare has also published the draft legislation called Digital Information Security in Healthcare Act, to safeguard e-health records and patients’ privacy.

Thus, all these new rules/policies/regulations (collectively referred as “the Data Protection Framework”) indicate a very strong direction that the Government wishes to undertake on protection of data including but not limited to data localisation, which helps in enforcing data protection, nation’s security and protect its citizen’s data, better control on transmission of data outside the country and more.

Topics for the Essay Competition:

The following sub-themes have been identified as requiring academic consideration:

  1. General Data Protection Regulation in European Union has raised the bar on legislation on data protection across the world. Would this be beneficial or would it stunt technological growth and innovation?
  2. Is our Privacy safe under the Aadhar scheme? A critical analysis of change in the privacy law regime post Aadhar case in India.
  3. Implication and critical analysis of the Data (Privacy and Protection) Bill, 2017.
  4. Do we need a stronger consumer centric data protection law in India like the Customer Online Notification for Stopping Edge – Provider Network Transgressions (CONSENT Act), USA in the aftermath of the Facebook data breach incident?
  5. With all the industry specific regulator (RBI, TRAI, MHoW and etc.) providing various regulations, guidelines and draft policy notes with regards to Data Protection Framework in India, what do you think the outcome will be? Is India formalizing a uniform law for data protection?

Important Dates

▪ Submission Date – The essays must be submitted on or before 11:59 PM on 30 January 2019.

▪ Declaration of the Result on 31 March 2019.  – The winners of the competition shall be notified by email and by declaration of results of the competition on this website.

Details about the prizes, guidelines for submission and other details can be found here.  Intercollegiate-Data Privacy Essay-Competition-NovoJuris


Social media, Fake news: Govt is proposing amendments to Intermediary Guidelines under Information Technology Act

The Ministry of Electronics and Information Technology on 24 December, 2018 released the Draft Information Technology (Intermediary Guidelines) (Amendment) Rules, 2018 (the “Draft Intermediary Rules”) and has invited comments and suggestions from all stakeholders on the same.

An ‘Intermediary’ under the Information Technology Act, 2000 is any person who on behalf of another person stores or transmits that message or provides any service with respect to that message. An Intermediary cannot knowingly host, publish or initiate the transmission, select the receiver of transmission, or select or modify the information therein. Thus, this would include telecom service providers, internet service providers, web-hosting service providers, search engines, online-payment sites, online auction sites, online market places, and also social media platforms, which seem to be the primary subject of the proposed amendment.

The Draft Intermediary Rules seeks to address the calling attention motion on “Misuse of Social Media Platform and spreading of fake news” admitted in the Rajya Sabha during the monsoon session this year. Thus, in order to strengthen the legal framework and make the social media platforms accountable the following amendments and new provisions are proposed under the Draft Intermediary Rules. Whilst the changes bring in more strict compliance from intermediaries and might drive the cost of compliance fairly high as well, it remains yet to be seen how many of these proposed changes make it to the final amendments.

Due Diligence obligations of the Intermediaries:

The Draft Intermediary Rules prescribes the following due diligence measures to be taken by Intermediaries:

Restriction on the proliferation of certain information by users

  • The Draft Intermediary Rules already requires Intermediaries to publish rules and regulations, privacy policy and user agreement, and such rules must inform the users[1] not to host, display, upload, modify, publish, transmit, update or share such information. The Draft Intermediary Rules however includes information which promotes cigarettes or any other tobacco products or consumption of intoxicant including alcohol and Electronic Nicotine Delivery System (ENDS) & like products that enable nicotine delivery in the list except to the extent permissible under the Drugs and Cosmetics Act, 1940.
  • The Intermediary is also required to inform its users at least once every month that in cases of non-compliance with rules and regulations, the Intermediary has the right to immediately terminate the access or usage rights of the users and remove non-compliant information.

Intermediaries to assist Government Agencies

  • Intermediaries with more than 50 Lakh users in India, or those Intermediaries specially notified by the government must be a registered company in India, have a permanent registered office in India, and appoint a nodal person of contact and alternate senior designated functionary for 24×7 coordination with law enforcement agencies in India.
  • The Intermediary must assist any government agency, security of the state, cyber security agency (those legally authorised) in matters of cyber security; or investigation or detection or prosecution or prevention of offence(s); protective or cyber security and those upon a lawful order. Such assistance must be provided within 72 hours and can be extended to tracing out the originator of information on its platform.
  • The government can seek the information about unlawful acts from the intermediaries by court order or by being notified by the government itself and the parameter to judge unlawful activities would be Article 19(2) of the Constitution, which would include inter alia, interests of the sovereignty and integrity of India, security of state, friendly relations with foreign states public order, decency or morality, etc. The timeline to comply with this is 24 hours, and such information and records must be preserved by the Intermediaries for at least 180 days for investigational purposes (or longer if court or government agency prescribes).

Intermediaries to develop internal mechanisms to tackle unlawful information

  • The Intermediary is required to use the help of technology based automated tools or appropriate mechanisms that should be deployed with appropriate controls for a proactive identification and removal or disabling of unlawful information or content.

Author: Mr. Avaneesh Satyang

 Sources: Invitation for Comments/Suggestions:

Draft Intermediary Rules:

[1] A ‘User’ under the Draft Intermediary Rules means any person who accesses or avails any computer resource of intermediary for the purpose of hosting, publishing, sharing, transacting, displaying or uploading information or views and includes other persons jointly participating in using the computer resource of an intermediary.

New Wave in Digitizing Registration, Licenses and Reporting under various Labour Laws in India: The Growing Importance of Shram Suvidha Portal

About the Portal:

The Ministry of Labour & Employment developed a single unified Web Portal in Shram Suvidha Portal (Portal) for online registration of units, reporting of inspections and submissions of annual returns. As an initiative on pilot basis, the Ministry has selected the Chief Labour Commissioner (Central) organization, the Employees State Insurance Corporation (ESIC), Employees Provident Fund Organisation (EPFO) and Directorate General of Mines Safety (DGMS) to utilize the portal covering 16 Labour Laws. As of now 8 State Governments and NCR of Delhi have voluntarily adopted registration under the Portal for return filing and filing inspection reports under various labour laws (which also includes returns under the Factories Act, 1948).

Services offered by the Portal:

This integrated portal operates through a common Unique Labour Identification Number (Shram Pehchan Sankhya) for each establishment. The employers are allotted Labour Identification Number (LIN) after registration on web portal. The enforcement agency uploads the data of inspection on the web portal which is updated periodically. This web portal also provides for filing of single harmonized annual return by the employers.

Registration under the following legislations is provided under the Portal:

  1. Contract Labour (Regulation and Abolition) Act 1970; [Mandatory]
  2. Building and Other Construction Workers Act 1996; [Mandatory]
  3. Inter-State Migrant Workmen Act 1979; [Mandatory]
  4. Employees Provident Funds and Miscellaneous Provision’s Act 1952; and
  5. Employees’ State Insurance Act 1948.

For ease of compliance of Labour Laws, the portal reduces the number of registers to be maintained to 5 in place of 56 registers which were earlier provided under the following central labour/rules:

  1. The Building and Other Construction Workers (Regulation of Employment & Conditions of Service) Act, 1996
  2. The Contract Labour (Regulation & Abolition) Act, 1970
  3. The Equal Remuneration Act, 1976
  4. The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
  5. The Mines Act, 1952
  6. The Minimum Wages Act, 1948
  7. The Payment of Wages Act, 1936
  8. The Sales Promotion Employees (Conditions of Service) Act, 1976
  9. The Working Journalists and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955.

Necessary amendments in various rules via the Ease of Compliance to Maintain Registers under various Labour Laws Rules, 2017 were made to give effect to the services of the Portal. The Registers can be maintained in a software available for download at the Portal. Annual Returns under the Factories Act, 1948 for participating states can also be filed online on the Portal.

The Portal also offers self-certification/declaration by start-ups recognized by the Department of Industrial Policy & Promotion (DIPP) under the start-up action plans of various state governments and also the central start-up action plan.

Further Amendments being rolled out to make registration through the Portal mandatory for;

  1. Contract Labour (Regulation and Abolition) Act, 1970

Vide notification number G.S.R. 829(E) dated September 4, 2018, the Ministry of Labour and Employment has published the Draft Contract Labour (Regulation and Abolition) Central (Amendment) Rules, 2018 which states that the registration of principal employer, and the procurement of licence for a contractor are now to be mandatorily done through the Portal.

Apart from this payment of the registration or licence fees, renewal fees etc shall be made by the e-payment system. the Certificate of registration shall also be generated electronically. Further under the notification number S.O. 4259(E) dated September 4, 2018, applications regarding registration and licensing under the said Act must be made online through the Portal till the said draft rules are finalized.

  1. Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979

Changes sought to be made vide the Draft Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Central (Amendment) Rules, 2018 [G.S.R. 830(E) dated September 4, 2018] also make registration through the Portal mandatory. Further under the notification number S.O. 4260(E) dated September 4, 2018 registration through the Portal is mandated till the draft rules are finalized for this legislation as well.

  1. Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996

Similarly, compliances under the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 are also made to be mandatorily carried out on the Portal. The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Central (Amendment) Rules, 2018 [G.S.R. 828(E) dated September 4, 2018] has been notified to this effect.

Benefits under the Pradhan Mantri Rojgar Protsahan Yojana to employers registering through Shram Suvidha:

The Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) Plan Scheme seeks to incentivise employers for generation of new employment. All employees earning wages less than INR 15,000/- are made eligible for this benefit wherein originally, the Government of India (GoI) would pay the employer’s contribution towards the Employees’ Pension Scheme (EPS) for three consecutive years. However, effective from April 1, 2018, GoI will pay the full employer’s contribution under EPS and also Employees’ Provident Fund (EPF) for a period of three years for all such employees.

To avail this benefit, it has been made mandatory to obtain registration under EPFO and also have a LIN allotted to the establishment under the Shram Suvidha Portal, the LIN shall be the primary reference number for all communication to be made under the PMRPY Scheme.

Our thoughts:

It is not difficult to foresee that the gradual push towards digitization of labour law compliances is gaining momentum in India, and several incentives are being offered for early adapters of the same.

Author: Mr. Avaneesh Satyang


Notifications G.S.R. 828-830(E):

Notifications S.O. 4259 (E) and 4260 (E):

Ease of Compliance to Maintain Registers under various Labour Laws Rules, 2017:

Pradhan Mantri Rojgar Protsahan Yojana Plan Scheme:

Shram Suvidha Portal:

BSE Startup Platform and Revised Listing norms at National Stock Exchange

Many initiatives have been undertaken in the recent years for facilitating direct listing and consequent public trading of startup securities in India. In January 2010, Prime Minister’s Task Force recommended to set up a dedicated stock exchange for small and medium enterprises[2], which eventually led to the genesis of the SME Exchanges, NSE EMERGE and BSE SME platform. In our earlier Handbook on Initial Public Offering: SMEs, we have provided an overview of various SME platforms, benefits of SME listing and SME IPOs, list of documentation and comparatives of fees.

The rationale behind boosting SME listing could be manifold, from the perspective of all stakeholders in the ecosystem, i.e. the investors, growth stage companies, and the exchanges. The biggest impetus would be the greater access to sophisticated investors and wider portfolio base and investment opportunities for investors of both ‘Main Board’ and SME Exchange Platforms. This is also attractive from the perspective of providing exit opportunities to eligible existing investor base. As mentioned by the Managing Director of NSE, Mr. Vikram Limaye, “… a lot of money has been invested in start-ups and some investors in these companies may want to exit in the next 12-14 months…it is only appropriate for them to list in India and give an opportunity for the domestic investors to participate in their growth,”[3]

However, for various reasons, the SME platforms have not taken off or seen the traction that was envisaged during their formation. The eligibility criteria of companies with less than INR 25 crore in equity capital and those which have raised less than USD 4 million in external funding have been often cited to be the most crucial one of them. Many of the Startups[4] would have already raised large amounts of external funding from the now extensive venture capital and private equity fund base. Minimum promoter holding requirement is another set back as more often than not, a post Series B or Series C entity would have a diversified capital table where the initial subscribers’ holding could be much lesser than the required norms, with investors collectively or individually holding largest single block stakes in these companies. However, these companies might still not be matured enough to have met the eligibility criteria of the traditional IPO routes for accessing capital markets.

It is in this background that discussions around revising the listing criteria for Startups started at various levels. On 27 November and 28 November 2018, BSE and NSE, respectively, released the revised norms. We have provided the details of these below.

BSE Notice No. 20181127-23 dated 27 November 2018 on Introduction of BSE “StartUp Segment”.

The applicability seems to be for “Start-up Companies” in the identified sectors of “IT, ITES, Bio-technology and Life Science, 3D Printing, Space technology, E-Commerce, Hi- Tech Defense, Drones, Nano Technologies, Artificial Intelligence, Big data, Enhance/Virtual Reality, E-gaming, Exoskeleton, Robotics, Holographic Technology, Genetic Engineering, Variable Computers Inside body computer technology and other Hi-tech based companies”.

The criteria as notified by BSE are as follows:

  • Company should be registered as start-up with Ministry of Small and Medium Enterprises / Department of Industrial Policy and Promotion (MSME/DIPP). If not registered as Start-up with MSME/DIPP then the company’s paid-up capital should be minimum Rs. 1 crore.
  • Company should be in existence for a minimum period of 2 years on the date of filing the draft prospectus.
  • Preferably there should be an investment for a minimum of 2 years (at the time of filing draft prospectus) in the Company by:
    • Qualified Institutional Buyer or QIB[5]; or
    • Angel Investors/ Accredited Investors[6]
  • Company should have a positive net-worth.
  • Company should not have been referred to National Company Law Tribunal (NCLT) under Insolvency and Bankruptcy Code, 2016.
  • No winding-up petition must have been accepted against the Company by the NCLT.
  • None of the promoters/directors of the Company must have been debarred by any regulatory agency/agencies.

However, in addition to the above, compliance with LODR requirements and Chapter IX of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 [SEBI (ICDR) Regulation] is also mandated, with respect to conditions applicable for listing of SME Companies, viz. minimum application size, number of allottees etc.

NSE Circular No. 2/2018 dated 28 November 2018 on Listing Criteria for the Technology Startups on the SME Platform.

As mentioned in the Circular, “In order to facilitate technology startups with potential growth business model, to raise equity and list on Stock Exchange, NSE has formulated a criteria for listing such technology startups. These listed companies shall be operating within the regulatory framework as specified under Chapter IX of SEBI ICDR Regulations, 2018 and LODR requirements as applicable to SME Exchange.”

The major criteria as listed in the Circular are as follows:

  • As conditions precedent adherence must have been made to the provisions of Securities Contract (Regulation) Act, 1956; Companies Act, 2013; SEBI Act, 1992 and regulations prescribed therein.
  • Company must be incorporated in India under the Companies Act.
  • The post issue paid up capital of the company (at face value) shall not be more than Rs. 25 crores.
  • There must be a 3 years of track record of either:
    • applicant seeking listing; or
    • promoters/promoting company, incorporated in or outside India with at least 3 years of experience in the same line of business and shall be holding at least 20% of the post issue equity share capital individually or severally; or
    • Proprietary / Partnership firm and subsequently converted into a Company
  • Annual revenue of at least Rs. 10 crores and the issuer must have shown growth of at least 20% in the past one year. (Annual growth may be exhibited in the form of number of users/revenue growth/customer base)
  • Net-worth of issuer must be positive.
  • Must meet one of the following criteria:
    • At least 10% of pre-issue capital to be held by QIBs as on the date of filing of draft offer document; or
    • At least 10% of its pre-issue capital should be held by a member of the angel investor network[7] or private equity firms and such angel investor network or Private Equity Firm should have had an investment in the start-up ecosystem in 25 or more start-ups their aggregate investment is more than 50 crores as on the date of filing of draft offer document.

The criteria of minimum QIB, angel network or private equity holding is interesting as this now could give a clear pathway to the Startups from very early stages on who to raise funds from. A diligence on the investors would also become necessary in such scenarios.

  • The Company must not have been referred to the erstwhile Board for Industrial and Financial Reconstruction (BIFR).
  • No petition for winding up must have been admitted by a court against the Company.
  • No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years must have been brought against the Company.
  • Further the following disclosures will be required to be made:
    • Any material regulatory or disciplinary action by a stock exchange or regulatory authority in the past one year in respect of promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) of the applicant company.
    • Defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders, banks, financial institutions by the applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) during the past three years. In this regard, an auditor’s certificate shall also have to be provided.
    • Litigation record, the nature of litigation, and status of litigation pending against the applicant company, promoters/promoting company(ies), group companies, or companies promoted by the promoters/promoting company(ies).
    • Status of criminal cases filed or nature of the investigation being undertaken with regard to alleged commission of any offence by any of the Company’s directors and its effect on the business of the company, where all or any of the directors of issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences etc.

As may be noted, both the BSE and NSE Notice and Circular refer to the applicability of the SEBI (ICDR) Regulations.

Under Chapter IX of the SEBI (ICDR) Regulations, 2018 certain common criteria, irrespective of the SME Exchange sought to be listed in must be met. These are:

  • the amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document and the offer document should not exceed 25% of the amount being raised in the issue;
  • promoters must hold at least 20% of the post-issue capital of the Company. However, if the post-issue shareholding of promoter is less than 20% then alternative investment funds, foreign venture capital investors, banks, or public financial institutions may contribute to meet the shortfall in the minimum contribution. In any case, the promoter cannot hold less than 10% of the post-issue capital;

This brings back the concerns related to minimum promoter holding as discussed above.

  • the minimum promoters’ contribution as mentioned above shall be locked-in for 3 years; any promoter shareholding in excess of the above shall be locked in for 1 year;

This could be a major concern for QIBs given their internal constraints, for instance, fund exit requirements.

  • apart from promoters’ pre-issue capital, the entire pre-issue capital held by persons other than promoters shall be locked in for 1 year, however this lock in period will not apply to share allotted to employees, shares held in an ESOP trust, and equity shares held by a venture capital fund or alternative investment fund (categories I and II) or foreign venture capital investor, provided that such equity shares must be locked in for a period of at least 1 year from the date of purchase by such investor.
  • entering into an agreement with a depository for dematerialisation of its specifies securities already issued and proposed to be issued;
  • all existing equity share capital must be fully paid up or forfeited;
  • all securities held be promoters must be in dematerialised form;

SEBI’s intent to relax listing norms for Startups seems to be in the pipeline[8] and it remains to be seen whether the realities of the Startup ecosystem are considered and reflected in the revised norms.

Authors: Ms. Sohini Mandal and Mr. Avaneesh Satyang

[1]BSE Circular dated November 27, 2018: Available at

NSE Circular dated November 28, 2018: Available at

[2] As defined and categorized under the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

[3] Yuvraj Malik, “NSE in talks with Sebi to tweak start-up listing norms”, as reported in on 2 March 2018

[4] As registered with DIPP under the Startup India Action Plan

[5] As defined in Regulation 2(ss) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018: includes venture capital fund, alternative investment fund, scheduled commercial bank, foreign portfolio investor, et al.

[6] The concept of accredited investor is found in US securities law, which is similar to angel investors in India, only persons meeting the minimum net-worth criteria, professional experience and expertise requirements are recognised as accredited investors.

[7] By angel investor networks, the notice makes reference to angel funds, which are a sub-category of category-I alternative investment funds registered with SEBI, and angel investors are persons who propose to invest in angel funds and meet the net-worth, expertise, and experience criteria as specified under the SEBI (AIF) Regulations, 2012.

[8] PTI News, “SEBI To Relax Listing Norms For Startups, Rename it ‘Innovators Growth Platform’”, as reported in on 9 December 2018

99 problems of the Music Industry- Can Blockchain technology be a panacea?

The music industry peaked in 1999, owing to sales of CDs and DVDs. The music industry had been on a downward spiral till the last couple of years but the Global Music Report released by IFPI (International Federation of the Phonographic Industry) reported a growth of 8.1% in 2017, expanding it to 17.3 billion Dollars.[1] According to the report the streaming industry was the frontrunner in the growth of the industry, accounting for around 29% of the total revenue at 6.6 billion Dollars. All forms of digital revenue combined amounted to around 9.4 billion Dollars.[2] While these numbers should curb the claims that the Internet and digitization are killing the music industry, it cannot be denied that certain music industry troubles from the vinyl era still plague the music industry.

While the number of people accessing and streaming music has gone up exponentially, the industry’s revenue and the royalty earned by the artist have not increased proportionately. Various factors could be attributed for the same. Given the peculiar nature of legal rights in a song, there are multiple rightful owners of royalty revenue in a song, the record label, the artists involved and the lyricists. In many suits regarding non-payment of the royalty due, the defendants have claimed that it was the inability of the defendants to figure out the right holders which resulted in the non-payment of royalty. In the Spotify case[3] it was highlighted that as there is no single or uniform database with respect to music and right holders, it was difficult for players like Spotify to pay the royalties, leading to lengthy litigations which affect the music label as well as the artists involved. Further, at times funds end up being paid to the wrong party.[4]

It is noteworthy that often the artists involved in creating music are unaware till the release of tracks (and even beyond that) whether their work was ultimately used in the released music or not. Since the specific details of the streaming deals are shrouded through non-disclosure agreements, the artists and their managers find it difficult to ascertain if they are being paid their fair share.[5] Given the fact that a listener just needs a few taps on his phone to access the music of his choice, it is preposterous that there is so much friction involved in the artists getting their due.

In early 2000s, the music industry fought tooth and nail, to fight peer to peer file sharing platforms such as Napster and Limewire as such platforms were being used to distribute illegal copies of music. In fact, Napster saw the highest user growth for any company owing to such practices, leading to massive losses for the music industry.[6] While the bigger culprits such as Napster and Pirate Bay have been ‘nabbed’ the music industry is still reeling under the effects of digital piracy. The digital restrictions (or rights) management system introduced in the early 2000s has been largely ineffective even though scrambling of DRM is prohibited under the law.[7] For example, the Section 65A And 65B were inserted in the Indian Copyright Act, 1957 through the 2012 amendment restricting people from circumventing any such digital rights management systems or tampering/removing of any such information contained in the copyrighted works.[8]

Lastly, lack of funds is a major concern for budding artists and independent record labels. Younger artists claim that big record labels are unwilling to nurture new artists, rather they are interested in picking up already established artists. Hence, an artist is required to be ‘big’ even before record labels notice them. Further, even independent record labels which initially grew with the motto of helping budding artists, are now unwilling to share the revenue with the artists because of lack of funds.[9]

Is Block-chain the Panacea?

Blockchain has been the buzzword across the globe since Satoshi Nakamoto published his paper on Bitcoin and block-chain in 2008. Tech enthusiasts, private entities and even regulatory bodies (such as India’s TRAI) have been lapping up block-chain as a solution to many problems. The popularity of the idea of block-chain can be gauged from the fact that a company’s shares surged by around 400% just because it added the term “blockchain” to its name.[10]

A blockchain is a distributed ledger or database that is not stored centrally (a departure from the tradition hub and spoke model); it can have duplicate copies on multiple devices across the world.  Information is added to this database in so-called blocks, each of which holds a unique code, that is generated cryptographically on the basis of older blocks and a timestamp. Once the data is recorded, the new block is linked to the ‘chain’ of older blocks. A blockchain can take various forms. It can be permissioned, i.e. one may not be allowed to join the network as a node unless specifically permitted to do so. Similarly, the rights granted to a node could vary, while some could be allowed to just view the data, others could be allowed to modify the information on the ledger.

A distributed database could be an answer to the lack of transparency in the music industry and the corresponding issues. The digital rights information along with the metadata for any piece of music could be updated by a permissioned node (say a record label or a copyright society). Information on the blockchain could be updated instantly that is, the same information would also be available to all nodes automatically. Some initiatives like Mycelia also allow for storing of meta-data such as tempo, key etc, hence a piece of music can easily be differentiated from its cover or ‘radio edit’ version.[11] The information contained in the blockchain could be freely accessible to everyone while only select participants would be allowed to modify the data. This could lead to drastic improvements in transparency and hence the quantum of royalties received.

The blockchain discussed above could be coupled with a content distribution network (CDN) thereby decreasing the friction as well as the number of middlemen involved. Further smart contracts or blockchain 2.0 could be used for smooth licensing and distribution of music. Smart contracts can be used to establish and enforce IP licenses and allow the transmission of payments in real time to the right holders. The information about IP rights a song or an image, could be encoded in digital form. For example, Ujo uses Ethereum blockchain for payments, rights management, and identity storage for artists. Effective digital rights management would involve a threefold approach a) access control, b) cryptography to restrict the data from being saved in a plain text format and c) digital watermarking techniques to identify legitimate copies of files. The same could be achieved through a well-designed blockchain based CDN. Attempts at achieving the same through various pilot projects such as Mycelia have demonstrated limited success as the acceptability of a particular crypto-currency, seriously limits the target audience. Yet, the limited success of such progress is proof of the fact that such ideas are becoming mainstream.

It has been widely accepted that people resort to pirated versions of a work, primarily when they are unable to access the content (preferably at a reasonable price) as evidenced from the fact that the leak of the Orange Is The New Black episode had no significant impact on Netflix. While the subscription model of Netflix could be the primary reason behind the failure of such ransom demand, yet it cannot be denied that allowing for micro payments on a content distribution network would expand the audience base of such networks.  A digital ecosystem could allow for micro-metering for viewing/accessing content and the user could pay for the same though micro-payments. The micro-metering could be achieved by the blockchain recording the components of the work that were used, defining the tiniest consumable unit of the work.[12] Low transaction costs in involved in blockchain couple with permissibility of really small denominations using the corresponding crypto-currency would allow for micro-payments.

Lastly, funding / investment –a crucial step between start-up and venture capital investment – is a major challenge in the music industry. Blockchain technology promises to solve some of these issues. Through tokenization, artists can crowdfund their projects by issuing/selling tokens to fans. The artists can use these funds to cover the expenses related to recording, touring, marketing and producing music videos instead of relying on traditional music labels for the same. As the fans own tokens issued by the artist, they would benefit from the success their favourite artist achieves. The transparency inherent in distribution of music through a blockchain based platform would improve investor’s ability to monitor the artists’ activities, sales figures and also the opinions of the fans. The possibility of having an accelerator model for artists would open up the sector to new sources of capital seeking highly scalable businesses for seed or venture capital.

Rights holders, especially music labels and copyright societies find it difficult to enforce their IP rights due to other factors such as difficulty in identifying acts of infringement as well the costs and efforts required follow the legal procedures for enforcement of rights. These issues are exacerbated for independent labels. A few start-ups such as Binded are helping photographers enforce their rights in the digital space. When a photographer uploads an image on Binded’s[13] portal, the same is registered with the copyright office and times-tamped on Binded’s blockchain. Similarly, other start-ups allow for reverse image searches to look for infringement of images online. Copytrack[14] would even take control of the legal proceedings on behalf of the photographer whose work has been infringed (in consideration of a share to be received from the damages/settlement amount). Old players like Kodak have managed to capture the minds of the new-age audience through the launch of their image protection, distribution and licensing solution KodakOne[15]. KodakOne makes use of its native token, KodakCoin (using the Ethereum hash function).

Needless to say, given the complexity of music as a work of art, having similar procedures in place to track infringement of musical is a tougher task. But given the success of music recognition apps such as Shazam, it is not difficult to imagine a world in which management of rights of music artists and the enforcement of their rights can be done in a smoother fashion.

While, it cannot be denied that blockchain technologies can revamp the music industry take care of the artists’ woes, but there are multiple challenges that need to be tackled to make practical use of the technology in the music space. Global Repertoire Database (backed by music labels and tech giants from across the globe) which sought to create an alternate and comprehensive database for the music industry had a spectacular failure, clearly establishing that ideas which look great on paper might have little or no impact in the real world[16].

Unlike conventional means for digital rights management, where only the hub was required save the massive amounts of data, in the distributed ledger system, each node would be required to store a copy of the data. New standards and models have to be developed and widely accepted to make the blockchain based model tenable. Similarly, to achieve interoperability of various databases, common standards need to be accepted among the parties involved. Similarly, users (non-artists) have to deal with user registration and sharing of payment details to take advantage of micro-metering and micro-payments. The privacy of the user needs to be handled in a transparent manner, to make sure that the users are confident of the privacy/security measures. Lastly, resistance from existing aggregators and intermediaries who might end up losing their piece of the pie needs to be dealt with to ensure the successful acceptance of the blockchain technology by the music industry.

Author: Mr. Asis Panda

[1] Global Music Report 2018 available at–

[2] Ibid

[3] Wixen Music Publishing, inc v Spotify USA inc. 2:17-cv-09288-GW-GJS

[4] Fair Music: Transparency and Payment Flows in the Music industry, Rethink Music available at page 3

[5] Cooke C, Dissecting the Digital Dollar Part One: How Streaming Services are Licensed and the Challenges Artists Now Face (2015) Music Managers Forum report.

[6] Roxanna Maddahi, The Music Industry: From Piracy To Profits available at

[7] What happens with digital rights management in the real world? available at

[8] Also see Article 19 of the WIPO Performances and Phonograms Treaty, 1996 (WPPT)

[9] Richard Smirke, Beggars Group’s Martin Mills on Why He’s Abandoning the 50/50 Streaming Split, Billboard available at


[11] Catherine Jewell, Mycelia: shaping a new landscape for music April 2016 available at

[12] Jack Loechner, The Forces Of Blockchain available at




[16] Klementina Milosic, The Failure Of The Global Repertoire Database available at