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(Editor's note: This guest column is written by Shantanu Surpure, partner at Economic Laws Practice, a Mumbai-based law firm specialised in venture capital, private equity and cross border transactions. Yashojit Mitra and Devyani Singh, associates at ELP, assisted in writing this article.)

As we continue our discussion of some comparative legal issues between the US and India, I thought it would be helpful to further analyse some of the minimum shareholding threshold amounts under Indian Law.

Foreign investment in India occurs through either the automatic route or approval route. The automatic route does not require further government approval. Investments in the approval route require further government approval such as from the Reserve Bank of India or the Foreign Investment Promotion Board.

Regardless of whether investment occurs through the automatic route or requires governmental approval, certain “sectoral caps” exist which serve to limit the amount of foreign investment in a company engaged in a particular section of the economy. Examples include: banking 10%, insurance 26%, telecommunications 49%, trading 51%, single brand retailing 51%. Why are these particular numbers important in Indian law? Is there a particular rationale?

The importance of shareholder thresholds

One of the key differences between Indian law and US law (i.e. Delaware) is that whereas pursuant to Delaware General Corporation Section 216, the Certificate of Incorporation or Bylaws of the company may specify the number of shareholder votes that may be necessary for the transaction of any particular item of business - under Article 189 of the Indian Companies Act, 1956 (the “Act”), certain actions require ordinary or special resolutions.

Therefore, there are certain shareholder percentage thresholds that one needs to consider in making investments in India because they result in certain rights or the ability to block certain actions. It is these specific shareholder thresholds that are critical in analyzing the sectoral caps.

The following are generally applicable to both public and private companies.

At 10% - the approval of at least 10% of the shareholders is required for the requisition of an Extraordinary General Meeting or for an application to the company Law Board for relief in the event of minority oppression or mismanagement of the company

At 26% - the approval of at least 75% of the shareholders (a special resolution) is required in order to inter alia:

- alter the Memorandum and Articles of the company

- change the name of the company

- repurchase the company’s shares

- change the registered office

- liquidate the company

At 51% - the approval of at least 50% of the shareholders (an ordinary resolution) is required in order to inter alia:

- alter/increase the share capital

- declaration of dividend

- to increase or reduce the number of directors

- to remove directors

- to appoint officers

Grey areas

Investors engaged in venture capital and private equity transactions in India generally insist on shareholders affirmative rights embodied in protective provisions in the definitive agreements and subsequent amendments of the Articles of Association of the investee company. This continues to remain a grey area in Indian law.

Pursuant to obiter dicta i.e. non binding language of the court in Re. Jindal Vijaynagar Steels Limited, if the shareholders in a company are permitted under law to transact any particular item pursuant to an ordinary or special resolution, the shareholders cannot restrict the ability of the company from so acting by placing such restrictions in its Articles of Association.

Therefore, it becomes critical when negotiating affirmative shareholders rights in an Indian transaction or in investing in sectors of the Indian economy in which there are sectoral caps, to consider the importance of certain shareholders threshold limits.

About the author

Shantanu Surpure is a partner at Economic Laws Practice (ELP) in Mumbai. He focuses on venture capital and private equity transactions. He has previously practiced law with a large US law firm in Silicon Valley. Shantanu holds a BA from Brown University/London School of Economics, an MA Juris from Oxford University and a Juris Doctor from Columbia Law School. Shantanu is admitted to practice law in India, California, New York and England and Wales. He can be reached at shantanusurpure@elp-in.com.

Read Shantanu Surpure's Past Columns

Incorporating A Company In Delaware Vs. India (Part II)

Incorporating A Company In India Made Easier (Part I)

Foreign Investment In Retail May Need Creative Structuring

(Editor's note: This guest column is written by Shantanu Surpure, partner at Economic Laws Practice, a law firm specialised in venture capital, private equity and cross border transactions. Yashojit Mitra and Devyani Singh, associates at ELP, assisted in writing this piece. This is part II of a two-part series on incorporating companies. The Part I here)

Today’s start-up is a multinational company from day one. Founders can choose to incorporate in a number of jurisdictions based on tax, funding, customer and employee considerations. Common choices include Delaware, Cayman Islands, Mauritius and India. The previous blog discussed how the Indian Registrar of Companies has recently implemented e-filing in order to speed up the incorporation process in India.

One key difference between US and Indian law is that the major body of corporate (company) law in India is a central (federal) government function, i.e. governed by the Indian Companies Act, 1956, whereas corporate law in the US is a state subject governed by each respective state, i.e. Delaware General Corporation Law or California Corporation Code. Most venture capital backed companies in the US are incorporated either in California or in Delaware and between the two, Delaware is the more popular jurisdiction for incorporation.

More than half a million business entities have their legal home in Delaware including more than 50% of all US publicly traded companies and 60% of the Fortune 500 due to Delaware’s long and established history of corporate laws.

Delaware Vs India

Efficiency and Speed: The Division of Corporations in Delaware offers a number of services including "1-Hour", "2-Hour", "Same Day" and "24-Hour" for incorporating a company. The Division of Corporation accepts filings until 9pm. Incorporation of an Indian company takes approximately 35 days (although this may speed up due to e-filing).

Shareholder: Delaware requires only one shareholder. At least two subscribers are necessary to incorporate a private company in India whereas seven subscribers are required to establish an Indian public company.

Capital: There are no minimum capitalization requirements in Delaware. The minimum capitalization for an Indian private company is Rs. 1 lakh and for a public company is Rs. 5 lakh.

Books and Records: A Delaware corporation may keep all of its books and records outside of Delaware. An Indian company must keep all its books and documents at its registered office.

Directors: Delaware allows a corporation to have only one director. Further, the Board of Directors can alter the number of directors on the Board. An Indian private company requires two directors on its Board and a public company requires three directors.

Delaware also provides certain tax advantages to its corporations including no sales tax in Delaware, no state corporate income tax in Delaware on goods or services provided by Delaware corporations operating outside of Delaware and no value added tax.

It is not a requirement that one live in Delaware in order to establish a Delaware company. One can appoint an agent for service of process in Delaware. There are immigration and other visa requirements in order to visit the US, but in general there is no restriction on foreign citizens being shareholders of a Delaware “C corporation” or limited liability company (“LLC”). However, one must be a US citizen or permanent resident in order to establish an “S” corporation. The different types of Delaware corporations will be discussed in a future blog.

The world is becoming truly flat and today’s start-up can think about being a global company from day one.

(Note: The above guest column is meant for public discussion and informational purposes only and is not to be construed as legal advice.)

About the author

Shantanu Surpure is a partner at Economic Laws Practice (ELP) in Mumbai. He focuses on venture capital and private equity transactions. He has previously practiced law with a large US law firm in Silicon Valley. Shantanu holds a BA from Brown University/London School of Economics, an MA Juris from Oxford University and a Juris Doctor from Columbia Law School. Shantanu is admitted to practice law in India, California, New York and England and Wales. He can be reached at shantanusurpure@elp-in.com.

Read Shantanu Surpure's Past Columns

Legal Guest Column: Incorporating A Company In India Made Easier (Part I)

The Legal Column: Foreign Investment In Retail May Need Creative Structuring

(Editor's note: This guest column is written by Shantanu Surpure, partner at Economic Laws Practice, a law firm specialised in venture capital, private equity and cross border transactions. Yashojit Mitra and Devyani Singh, associates at ELP, assisted in writing this piece. This is part I of a two-part series on incorporating companies. The Part II will appear on Wednesday about Delaware vs India incorporation.)

In this new cross-border era, even start up companies are multinationals and consider their options in incorporating in Delaware, India, Mauritius, Cayman, etc. Delaware in particular is noted for its efficiency and customer service oriented Division of Corporations.

The World Bank in its report “Doing Business in 2007” recently ranked India at 134th place in the list of countries of “Ease of Doing Business”- much below countries such as Singapore (1st place), United States (5th place), Lithuania (16th place) and Mongolia (45th place), etc. India ranked 88th for “Starting a Business” and not surprisingly, 155th in the category of “Dealing with Licenses”. The report noted that incorporating a company in India takes approximately 35 days compared to five in the US.

In an effort to speed up the incorporation process, the Ministry of Company Affairs (“MCA”) recently announced that all filings with the Registrar of Companies (“ROC”) after September 15, 2006 must be made as e-filings and that all authorized signatories must have Digital Signature Certificates.

While this process is being implemented at ROC offices across India, there remain practical problems such as low bandwidth speeds (try uploading files on a dial-up connection- broadband is not easily outside the major cities) and time for staff to adjust to the new filing procedures.

The process of incorporation of a company in India inter alia includes:

• Obtaining of a Directors Identification Number for the proposed directors

• Obtaining name approval from the ROC

• Filing the Memorandum and Articles of Association with the ROC and getting them printed, stamped and registered appropriately

• Obtaining a company seal, permanent account number and tax account numbers

• Filing further forms with the ROC regarding the registered office and directors

Only after the ROC is satisfied with the above does the ROC issue a Certificate of Incorporation. The recent MCA mandated e-filing process is a step in the right direction and perhaps the World Bank will recognize this in its next report.

(Note: The above guest column is meant for public discussion and informational purposes only and is not to be construed as legal advice.)

About the author

Shantanu Surpure is a partner at Economic Laws Practice (ELP) in Mumbai. He focuses on venture capital and private equity transactions. He has previously practiced law with a large US law firm in Silicon Valley. Shantanu holds a BA from Brown University/London School of Economics, an MA Juris from Oxford University and a Juris Doctor from Columbia Law School. Shantanu is admitted to practice law in India, California, New York and England and Wales. He can be reached at shantanusurpure@elp-in.com.

Read Shantanu Surpure's Past Column

The Legal Column: Foreign Investment In Retail May Need Creative Structuring

A Bombay High Court order plugs a tax saving loophole in M&A. There is a practice of profit making companies being amalgamated into loss-making entities, and then avoiding the taxes like income tax, sales tax, excise and customs duties. That may not be possible from now on. A Bombay HC order has directed the regional director of the Department of Company Affairs to inform the court of taxes payable by merging companies. The Economic Times reports quoting legal experts that the "order will go a long way in putting an end to the practice employed by certain businessmen who avoid taxes by merging a profit-making company with the entities that made huge losses in their books".

Now the amalgamation can be cleared only after the regional director of DCA ascertains that the statutory dues to the government are cleared by the company in question. The order was passed during the hearing of an amalgamation scheme filed by Pratibha Fabrics with Kamdar Fab.

Read: HC plugs tax evasion leak in M&A formula (The Economic Times)

Abrar Hussain has quit leading law firm Greenberg Traurig. Hussain, a lawyer who has been focusing on Indo-US cross border deals, has joined another leading law firm Akin Gump Strauss Hauer & Feld as senior counsel in the firm

I was offline for the entire last week. Since I myself wanted to catch up with the headlines, here is a quick recap:

Fortis close to sealing Rs 250 cr pvt equity deal

The Delhi hospital chain is said to be close to raising Rs 200-250 crore ($55.5 million) from private equity investors, reports The Economic Times. The funds are expected to pick a 8-10% stake in the company through a preferential allotment. It's also planning an IPO in the next 12 months. Currently, Malvinder Singh and Shivender Singh, also the promoters of Ranbaxy Laboratories, hold a 92% equity stake in Fortis and Ranbaxy holds 8%.

Ex-Progeon CEO Akshaya Bhargava moves to private equity fund 3i

The flow of operational managers to private equity continue. 3i announced that it had hired Akshaya Bhargava to head its BPO vertical. Bhargava

It looks like Delhi law firm J Sagar & Associates is becoming stronger and stronger. It has managed to sign up some hotshot lawyers at other law firms. Akshay Chudasama of Zia Mody's AZB Partners is moving to Sagar. The other partners who have joined Sagar include Dina Wadia, a partner of Little & Co., and Nitin Potdar of Amarchand Mangaldas. The corporate law firm Lex Inde has also signed up with J Sagar. The firm's managing partner is Jyoti Sagar, a prominent corporate lawyer based in Delhi. The firm, which earlier was a one-man show, now has a battery of lawyers to show of.