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Published : June 13, 2010 | Author : juhibansal
Category : Company Law | Total Views : 4402 | Unrated

Juhi Bansal, 5th Year student at Gujarat National Law University, Gandhinagar

Controversial IPL 2010: Sweatly Bid Rigged?

A can of worms was unbolted by Lalit Modi when in his twitter account he revealed details of owners of Kochi Franchise. One of the owners, Sunanda Pushkar was offered 70 crore worth of sweat equity. This was not in accordance with the provisions of the Companies Act under which provisions related to issue of sweat equity shares are mentioned. Further the issue of bid-rigging was also exposed.

Bid rigging is a form of fraud in which a commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid. It is a form of price fixing and market allocation. It is often practised where contracts are determined by a call for bids, for example in the case of government construction contracts. This form of collusion is illegal in most countries. The nature of allegations against Modi is primarily of rigging of bids. It was done by league bosses as well as collusion among bidders which falls directly within the domain of the competition regulator that was set up in 2003.

Rendezvous Sports World Private Limited is a private limited company and it has granted 70 crore worth equity to Sunanda pushkar[2] claiming that she has a professional expertise, expertise in event management and brand management. This limited company has brought other investors together to form a consortium for bidding for IPL Kochi Franchise. It has been brought to limelight by the media that Rendezvous Sports has violated all the provision of the Companies Act, 1956 in granting sweat equity to Sunanda Pushkar. This made her to surrender her share claiming that she is deeply hurt. To set the issue more complicated, BCCI claims that there is a clause in the bidding document that no information is to be revealed public and they are claiming it as a “confidential clause”. The Central Government has decided to look into the issue in public interest. Finance Ministry is looking into the issue of sources of funds and Corporate ministry is looking into other issues like non-compliance of corporate regulations etc.

An Emergent Story / Pertinent Sections:
Competition Act 2002 (Issue of Bid Rigging):
Section 3(3) of the Competition Act, 2002, defines bid rigging as any pact between “enterprises or persons engaged in identical or similar production of trading of goods or provision of services that has the effect of eliminating or reducing competition for bid or adversely affecting or manipulating the process for bidding.’’ Section 3 (3)(d) reads as, ‘‘Any agreement which directly or indirectly results in bid rigging or collusive bidding shall be presumed to have an appreciable adverse effect on competition.” Significantly, Section 18 of the Act empowers the Commission to ‘‘inquire either by itself or enlist the services of any investigating agency, including a foreign one, with Centre’s approval.”

Companies Act, 1956 & Sweat Equity Rules[3] (Issue of Sweat Equity):
Section 79A of the Companies Act, 1956, authorizes a company to issue sweat equity shares, subject to guidelines issued by the Department of Company Affairs, i.e. the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003 (hereinafter referred as Sweat Equity Rules).

a) In spirit, “sweat equity shares are issued by a company to its employees or directors at a discounted rate or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights (IP) or other value additions.”[4] It is, therefore, necessary for the issue of sweat equity shares that the concerned director or employee either provides the know-how, intellectual property rights or other value additions to the company.In the present context, Ms. Pushkar may well have to justify the sweat equity given to her in terms of her role/contribution to RSW in the form of Intellectual Property or know how or other value additions but taking into consideration the aforesaid definition of sweat equity, wherein only an employee or director of the company is entitled to such a stake, her purported role of a sales and marketing consultant with Rendezvous Sports may be a clear question mark. Even the board of Rendezvous Sports will be accountable vis-à-vis issuance of sweat equity.

b) Rule 6 of Sweat Equity Rules bars a company from issuing sweat equity shares of more than 15% of total paid up equity share capital in a year or shares in excess of the value of Rs. 5 crore, whichever is higher, Prior approval of the central government would be required in case the intention is to exceeded the threshold level. In the case at hand, the issue of sweat equity to the tune of Rs. 70 crore is clearly not in favor of the rules as no prior approval of Central Government was taken.

c) Rule 9 of the Sweat Equity Rules makes the appointment of auditors or chartered accountants to carry out valuations of the Intellectual Property or know-how or other value additions in order to justify such issuance of sweat equity mandatory. Such an act does not seem to have taken place in the instant case.

d) Rule 10 of the Sweat Equity Rules prescribes a minimum lock-in period of three years for sweat equity, which means that the equity so issued cannot get cashed out before the expiry of three years from the date of allotment. In the case instantneous case, the sweat equity issued had a lock-in period of just 2 years. This is again in opposition to the laid down Rules.

e) Under Section 79A of the Companies Act, 1956, a company may issue sweat equity shares of a class of shares already issued, if such issue is after expiry of one year from the date on which the company was entitled to commence business.[5] Rendezvous Sports reportedly became operational only in March 2010. Further sweat equity shares should be of the same class as already issued by the company and such an issuance is required to be authorized by a special resolution passed in the general meeting. Thus, again in violation of the Companies Act provisions.

f) Sweat equity issued to Ms. Sunanda was supposedly “undilutable in perpetuity” and that it, whereas the Companies Act nowhere provides for “undilutable sweat equity in perpetuity”.

This is a classic example of complications in restrictive trade practices issues and corporate dispute. Bone of contention chiefly revolves around the issues of bid rigging on one side and issue of sweat equity shares flouting the provisions of Companies Act and Sweat Equity Rules, on the other side. Closer scrutiny by Central Government and Competition Commission are essential so as to bring the complicated issues at rest. Many questions related to the matter are till now unanswerable. Few among those are the validity of confidential clause as claimed by BCCI, legal status of IPL and its constitution, authority of BCCI etc. Issues of corporte governance have again once again come to the fore. Hopefully, their answers are unearthed someday.
[2] Dubai-based businesswoman had given up her stake in the IPL Kochi franchise following a row involving her friend and Minister of State for External Affairs Shashi Tharoor who is under pressure to quit.
[3] Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003.
[4] As per Companies Act 1956 and Sweat Eqity Rules.
[5] Sub-section (c) of section 79A of the Companies Act, 1956.

Authors contact info - articles The  author can be reached at: juhibansal@legalserviceindia.com

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