RESEARCH NOTE 18

(I) Foreign Corrupt Practices Act (“FCPA”)

The FCPA has two parts. The first prohibits U.S. persons and U.S. firms, or those listed on a
U.S. stock exchange, from making and offering to make payments to foreign government
officials to obtain, or retain, business or a business advantage. The second requires that
companies maintain accurate books and records. The FCPA is enforced by the US
Department of Justice (DOJ) and the Securities and Exchange Commission (SEC).

The FCPA is applicable to (a) entities listed on a national securities exchange in USA, or
trading in the over-the-counter market in USA and the company is required to file SEC
reports, and (b) entities registered in USA or has its principal place of business in USA.

Such an entity may also be held liable for infractions committed by its foreign subsidiaries,
as evidenced by the precedents cited below:

Precedents

(1) GlaxoSmithKline PLC

In 2016, pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange
Act”), the Securities and Exchange Commission (“SEC”) making findings, and
imposing remedial sanctions and a cease-and-desist order.
GSK’s common stock is registered with the Commission under Section 12(b) of the
Securities Exchange Act and trades on the New York Stock Exchange under the
symbol ‘GSK’.

GlaxoSmithKline (China) Investment Co Ltd (“GSKCI”) is operated from Shanghai,

China. GSKCI operations include the sale and marketing of pharmaceutical products.
GSKCI is a wholly-owned indirect subsidiary of GSK. Sino-American Tianjin Smith
Kline & French Laboratories Ltd (“TSKF”) is a public-private joint venture with Tianjin
Zhong Xin Pharmaceutical Group Corporation Ltd and Tianjin Pharmaceutical Group
Co Ltd. GSK indirectly owns 55 percent of TSKF.

Employees and agents of GSKCI and TSKF engaged in corrupt practises to influence
foreign officials in China to increase sales of pharmaceutical products, such as corrupt
payments including gifts, improper travel and entertainment with no or little educational
purpose, shopping excursions, family and home visits, and cash. The costs associated
with these payments were recorded in GSK’s books and records as legitimate
expenses, such as medical association sponsorships, employee expenses,
conferences, speaker fees, and marketing costs. It is stated in the SEC order that as a
result of this conducted, GSK violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the
Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)], and a
civil money penalty of $20,000,000 was imposed on GSK.

(2) Oracle Corporation

Oracle Corporation (“Oracle”) is a Delaware corporation with headquarters in Redwood

Shores, California. Its shares are registered with the SEC pursuant to Section 12(b) of
the Exchange Act and the company files reports pursuant to Section 13 of the
Exchange Act. Its shares are listed on the NASDAQ National Market under the symbol
 “ORCL”. Oracle operates in India through its wholly-owned subsidiary Oracle India
Private Limited ("Oracle India").

It was alleged by the SEC that from 2005 to 2007, certain employees of Oracle India
secretly "parked" a portion of the proceeds from certain sales to the Indian
government and put the money to unauthorized use, creating the potential for bribery
or embezzlement. These Oracle India cmployees structured more than a dozen
transactions so that a total of around $2.2 million was held by the Company's
distributors and kept off Oracle India’s corporate books. The Oracle India employees
would then direct its distributor to disburse payments out of the unauthorized side
funds to purported local "vendors." Several of the "vendors" were merely storefronts
that did not provide any services. Oracle failed to accurately record these side funds
on the company's books and records, and failed to implement or maintain a system of
effective internal accounting controls to prevent improper side funds in violation of the
FCPA, which requires public companies to keep books and records that accurately
reflect their operations.
Oracle agreed to pay a $2 million penalty to settle the SEC's charges.

(3) Diageo PLC

Diageo, headquartered in London, United Kingdom, is a leading producer and/or

distributor of premium branded spirits, beer, and wine, including Johnnie Walker,
Smirnoff, J&B, Baileys, Captain Morgan, Tanqueray, and Guinness. Through its
various direct and indirect subsidiaries, Diageo maintains operations in more than 180
countries. Diageo’s American Depository Shares are registered with the Commission
pursuant to Section 12(b) of the Exchange Act and trade on the New York Stock
Exchange under the symbol DEO. As a foreign private issuer, Diageo files annual
reports with the Commission on Form 20-F. Diageo India Pvt. Ltd. (“DI”) is a wholly-
owned indirect subsidiary of Diageo, and is based in Mumbai, India. Throughout the
relevant period, Diageo incorporated DI’s financial results into the consolidated
financial statements that it filed with the Commission.

For many years, Diageo, through DI, engaged in a pervasive practice of making illicit
direct and indirect payments to government officials throughout India to obtain and
retain liquor sales. As a result, Diageo was unjustly enriched by $11,306,081 from
increased sales.

Section 13(b)(2)(A) of the Exchange Act requires public companies to make and keep
books, records, and accounts that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the issuer’s assets. Diageo’s books and records did
not accurately reflect illicit payments that it made, through its subsidiaries, to Indian,
Thai, and South Korean government and military officials. Instead, Diageo, through DI,
DT, and DK, disguised the improper payments as legitimate vendor expenses or
recorded them under misleading rubrics such as “factory expenses,” “telephone
expenses,” “shareholder stake,” and “sales support.” In several instances, the illicit
payments were not recorded at all. As a result, Diageo violated Section 13(b)(2)(A) of
the Exchange Act.

Section 13(b)(2)(B) of the Exchange Act requires companies to devise and maintain a
system of internal accounting controls sufficient to provide reasonable assurances that
transactions: (i) are executed in accordance with management’s general or specific
authorization; and (ii) are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles or any other
criteria applicable to such statements, and to maintain accountability for assets.
 As evidenced by the extent and duration of the wrongful payments and their improper
recordation, Diageo failed to devise and maintain sufficient internal accounting
controls. Accordingly, Diageo violated Section 13(b)(2)(B) of the Exchange Act.

A disgorgement of $11,306,081 and prejudgment interest of $2,067,739 was imposed

on Diageo.

15 USC § 78(m)(b)(6) limits an Issuer’s responsibility for FCPA violations by its subsidiaries
in situations where the Issuer holds 50% or less of the voting power of the subsidiary and
acts in good faith to comply with the FCPA; in such case the Issuer only has to ensure that it
proceeds in good faith to use its influence, to the extent reasonable under the Issuer's
circumstances, to cause such domestic or foreign firm to devise and maintain a system of
internal accounting controls consistent with 15 USC § 78(m)(b)(2). Such circumstances
include the relative degree of the issuer's ownership of the domestic or foreign firm and the
laws and practices governing the business operations of the country in which such firm is
located. An issuer which demonstrates good faith efforts to use such influence shall be
conclusively presumed to have complied with the requirements of 15 USC § 78(m)(b)(2).

The defines Securities Exchange Act of 1934 “issuer” as follows: “The term ‘‘issuer’’ means
any person who issues or proposes to issue any security; except that with respect to
certificates of deposit for securities, voting-trust certificates, or collateral-trust certificates, or
with respect to certificates of interest or shares in an unincorporated investment trust not
having a board of directors or of the fixed, restricted management, or unit type, the term
‘‘issuer’’ means the person or persons performing the acts and assuming the duties of
depositor or manager pursuant to the provisions of the trust or other agreement or
instrument under which such securities are issued; and except that with respect to
equipment-trust certificates or like securities, the term ‘‘issuer’’ means the person by whom
the equipment or property is, or is to be, used.”

(II) PLEDGING OF PROMOTER’S SHARES TO AN FVCI

As per Section 172 of the Indian Contract Act, 1872, pledge is the bailment of goods as
security for payment of a debt or performance of a promise.

Clause 7 of the RBI Master Direction on Foreign Investments in India provides for ‘transfer of
capital instruments of an Indian company by or to a person resident outside India’. Clause
7.11 provides for ‘transfer by way of pledge’. Clause 7.11 reads thus:

7.11.1 Any person being a promoter of a company registered in India (borrowing

company), which has raised external commercial borrowing (ECB) in compliance
with the Foreign Exchange Management (Borrowing and Lending in Foreign
Exchange) Regulations, 2000 may pledge the capital instruments of the borrowing
company or that of its associate resident companies for the purpose of securing the
ECB raised by the borrowing company subject to the following conditions:
(a) the period of such pledge shall be co-terminus with the maturity of the
underlying ECB;
(b) in case of invocation of pledge, transfer shall be in accordance with
Regulations laid down in FEMA 20(R);
(c) the Statutory Auditor has certified that the borrowing company will utilise/ has
utilised the proceeds of the ECB for the permitted enduse/s only;
(d) no person shall pledge any such capital instruments unless a no-objection has
been obtained from an Authorised Dealer bank that the above conditions have
been complied with.
7.11.2 Any person resident outside India holding capital instruments in an Indian company
or units may pledge the capital instruments or units, as the case may be:
(a) In favour of a bank in India to secure the credit facilities being extended to
such Indian company for bona-fide purposes subject to the following
conditions:
(i) in case of invocation of pledge, transfer should be in accordance with
instructions in vogue at the time of creation of pledge;
(ii) submission of a declaration/ annual certificate from the statutory auditor
of the investee company that the loan proceeds will be/ have been
utilized for the declared purpose;
(iii) the Indian company has to follow the relevant SEBI disclosure norms, if
any; and
(iv) pledge in favour of the lender (bank) would be subject to compliance
with the Section 19 of the Banking Regulation Act, 1949.
(v) the conditions at (i) to (iv) above will apply suitably for units.

(b) In favour of an overseas bank to secure the credit facilities being extended to
such person or a person resident outside India who is the promoter of such
Indian company or the overseas group company of such Indian company,
subject to the following conditions:
(i) loan is availed only from an overseas bank;
(ii) loan is utilized for genuine business purposes overseas and not for any
investments either directly or indirectly in India;
(iii) overseas investment should not result in any capital inflow into India;
(iv) in case of invocation of pledge, transfer should be in accordance with
the policy in vogue at the time of creation of pledge; and
(v) submission of a declaration/ annual certificate from a Chartered
Accountant/ Certified Public Accountant of the non-resident borrower
that the loan proceeds will be/ have been utilized for the declared
purpose;
(vi) the conditions at (i) to (v) above will apply suitably for units.

(c) In favour of a Non-Banking Financial Company registered with the Reserve

Bank to secure the credit facilities being extended to such Indian company for
bona fide purposes, subject to the following conditions:
(i) in case of invocation of pledge, transfer of capital instruments should be
in accordance with the credit concentration norm as stated in the Master
Direction – Non-Banking Financial Company – Non-Systemically
Important Non-Deposit taking Company (Reserve Bank) Directions,
2016 (Para 22) and Master Direction – Non-Banking Financial Company
- Systemically Important Non-Deposit taking Company and Deposit
taking Company (Reserve Bank) Directions, 2016 (Para 22)
(ii) The AD may obtain a board resolution ‘ex ante’, passed by the Board of
Directors of the investee company, that the loan proceeds received
consequent to pledge of capital instruments will be utilised by the
investee company for the declared purpose;
(iii) the AD may also obtain a certificate ‘ex post’, from the statutory auditor
of investee company, that the loan proceeds received consequent to
pledge of shares, have been utilised by the investee company for the
declared purpose;
(iv) the Indian company has to follow the relevant SEBI disclosure norms,
as applicable;
 (v) under no circumstances, the credit concentration norms should be
breached by the NBFC. If there is a breach on invocation of pledge, the
capital instruments should be sold and the breach shall be rectified
within a period of 30 days from the date of invocation of pledge.
7.11.2.1 The Authorised Dealer bank should satisfy itself of the compliance of the
stipulated conditions.

7.11.3 Capital instruments of an Indian company or units transferred by way of pledge

should be unencumbered.

7.11.4 The company shall obtain no-objection certificate from the existing lenders, if any.

7.11.5 In case of invocation of pledge, transfer of capital instruments of an Indian company

or units pledged shall be in accordance with entry routes, sectoral caps/ investment
limits, pricing guidelines and other attendant conditions at the time of creation of
pledge.

7.11.6 Any other transfer by way of pledge would require the prior approval of the Reserve
Bank. Cases may be forwarded to the Reserve Bank with the following documents:
(a) A copy of the Board Resolution passed by the non-resident company/ies
approving the pledge of security acquired in terms of FEMA 20 (R) (number/
percentage of securities to be pledged) of Investee Company held by them for
securing the loan facility in favour of the lender/s.
(b) A copy of the Board Resolution passed by the investee company approving
pledge of securities acquired in terms of FEMA 20 (R) in favour of the lender
for the loan facility availed by the investee company.
(c) A copy of the loan agreement/ pledge agreement containing security clause
duly certified by the company secretary, requiring the pledge of shares of
Investee Company.
(d) The details of the facility availed/ proposed to be availed.
(e) The details of reporting of the acquisition of the security as prescribed in
terms of FEMA 20 (R), if any.

Therefore, for the transfer of promoter’s shares to an FVCI by way of pledge (excluding
pledge for the purpose of securing ECB raised by the borrowing company), prior approval of
the RBI is required. Additionally, capital instruments of an Indian company transferred by
way of pledge should be unencumbered.