Column: Legal

LEGAL
Going By The Book

By Diljeet Titus, Titus & Co. Advocates

We are a wholly-owned subsidiary of a US company. What options do we have to compensate our parent technology provider?

Depending on facts and circumstances, one or more of the following options can be effectively implemented in compliance with regulations to compensate your parent for use of its proprietary technology: (I) lumpsum payment for use of technology for a specified period or for outright transfer of technology, (ii) royalty with reference to quantum of production or sales, (iii) fees for technical services, including training, and research and development.

Lumpsum payment upto $2 million is allowed under the automatic route, and does not require approval from the Secretariat for Industrial Assistance. Your company being a wholly-owned subsidiary can pay royalties upto 8 per cent on exports and 5 per cent on domestic sales under the automatic route without any restriction on duration of royalty payments. Royalties may be paid as a percentage of sales value, usually calculated on the basis of ex-factory value of total sales or gross value of production, exclusive of excise duties (minus the cost of the standard bought out components, and the landed cost of imported components, including ocean freight, insurance, custom duties, etc). Fees for technical services can be paid on per diem or lumpsum plus expenses or a combination of both.

What methods can we legally adopt to restrict transferability of shares in our private company by our foreign partner?

While a private company must by its Articles of Association (AOA) restrict transferability of its shares, a public company cannot provide for restrictions on the right to transfer shares in its AOA. An effective method to restrict your foreign partner's right to transfer its share is to create a right of pre-emption in favour of the other shareholders. Under a pre-emption right whenever a shareholder wishes to sell some or all of its shares, it would need to first offer such shares to the other shareholders. Under a typical pre-emption provision, a selling shareholder must first serve a transfer notice to the other shareholders specifying the number of shares and the price per share (the value of the shares would need to be determined in accordance with the valuation norms prescribed by the Reserve Bank of India). The notice should also specify the time period within which the right of pre-emption is to be exercised by other shareholders. Once the shareholders choose to purchase such shares they can be allocated pro-rata to their existing shareholding. Since any restriction on transfer of shares, which is not specified in the AOA of your company would not be binding either on your company, its members, or on the transferee of the shares, you must record the pre-emptive provision in your AOA.

Some of our employees have been transferred to the payroll of an unrelated company, which is asking us to provide them with originals of all previous employment related records of our transferred employees. What should we do?

Under Indian labour legislation, an employer is required to maintain certain records, documents, and statutory registers relating to its employees, for a period of three to five years from the date of the last entry in such records. If an employer fails to maintain and/or produce for inspection the required documents, then there may be pecuniary as well penal consequences on the employer/person in charge of the affairs of the company at the relevant time. Moreover, in the event of any claim for settlement of dues or a claim by legal heirs, in litigation by any ex-employee or enquiries etc., you may be asked to produce relevant legal records in original, unless it is proved that the originals were lost/disposed of without any neglect or default on your part. You must retain the originals of the employment related documents of your ex-employees and provide certified copies of such documents to the new employer with the understanding that the originals would be made available for inspection or production on written request from the new employer.

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