Electricity Act -2003

Earlier in India, the electricity supply industry was governed and regulated by the Indian Electricity Act 1910, Electricity Act 1948 and the Electricity Regulatory Commission Act 1998. These three Acts were not able to cater to the changing times of industrialization, globalization, the economic needs of the increasing population coupled with the power sector reforms across various states and therefore, Parliament passed the Electricity Act in the year 2003.

Electricity Act, 2003 (Purpose)

The Electricity Act, 2003 was enacted to take care of the needs of the power sector in the areas of generation, transmission, distribution and trading of electricity. This Act applies to the whole Indian territory except Jammu & Kashmir. It was enacted so as to supplement the development of the electricity sector while promoting competition in the sector. It aims to protect the consumers and rationalizing the electricity tariffs.

Significant features of the Act

·         Provision for private Transmission licenses;

·         No license for generation of electricity (except hydro-projects);

·         Distribution licensees can undertake generation;

·         Transmission utility at both central and state level;

·         Establishment of Central Electricity Authority (CEA), Central Electricity Regulatory Commission (CERC), State Electricity Regulatory Commission (SERC), Central Advisory Committee (CAC) & State Advisory Committee (SAC);

·         Establishment of fund at both central and state level;

·         Captive generation is permitted by a group of people to meet their own needs;

·         Open access may be permitted by the SERC in distribution in phases;

·         Introduction of Multi-Year Tariffs;

·         Direct nexus between the consumer and the generating company or a trader;

·         Provision for transfer scheme;

·         Metering of electricity is mandatory;

·         Caps put on trading margins;

·         Generation and distribution to be allowed in rural and remote areas;

·         Establishment of Appellate Tribunal to adjudicate upon the issues faced by the consumers;

·         Penalties and punishments have been prescribed for offences including but not limited to the theft of electricity, stolen property, damaging work, etc.;

·         Jurisdiction of Civil court is excluded for speedy disposal of electricity disputes;

·         National Electricity Policy and Tariff Policy to be tabled out by the Central Government;

·         Establishment of special courts for speedy trials;

·         There is also provision for arbitration to avoid consumption of time and resources.

Landmark Judgments

Tata Power Company Vs Maharashtra Electricity Regulatory Commission 2009 ELR (SC) 246

Brihanmumbai Electric Supply & Transport Undertaking (BEST) v. Mahrashtra Electricity Regulatory Commission (MERC) & Ors. CIVIL APPEAL NO.4223 OF 2012

U.P Power Corporation Ltd. & Others v. Anis Ahmad (2013) 8 SCC 491

T.N. Generation & Distribution Corporation v. PNP Power Gen Co. CIVIL APPEAL NO. 4126 OF 2013

M/s. Sesa Sterlite Ltd Vs. Orissa Electricity Regulatory Commission & Ors. CIVIL APPEAL NO. 5479 of 2013

Hindustan Zinc vs Rajasthan Electricity Regulatory Commission CIVIL APPEAL NO.4417 OF 2015

Shareholder Agreement (SHA)

A company having equity investors must have an SHA which acknowledges their contribution in a safe and secure manner. A Shareholder Agreement is a contract between the shareholders of a company which helps to establish a fair professional bridge between the stakeholders and the operation of the company.

Key Terms & Conditions of a Shareholder Agreement

• Parties to be defined;

• Business activity and its scope to be outlined clearly;

• Authorized and Paid Up capital to be defined;

• Issuance of further capital must be through the written consent of the shareholders;

• Rights and Obligations of the shareholders;

• Rights of the shareholders to appoint and remove the Board of Directors. They can also appoint themselves to be the Directors;

• Board Meetings & Shareholders’ Meetings;

• Rights to appoint a Quorum, voice a VETO, etc;

• Resolutions regarding nature and business activity undertaken by the Company, taking up loans, declaration of dividends, etc. should be taken through the written consent of the Board of Directors and Shareholders only;

• Appointment of auditors by the shareholders and their removal;

• Shareholding Threshold for enjoyment of rights under SHA;

• The power to sell the shares should not be over-amplified but also shouldn’t be undermined – the shareholder desiring to sell his shares should first express his desire to the other shareholders and if they are not interested, he should be allowed to sell it to any other interested party;

• Transfer of shares and lock-in period including right of first refusal, preemptive rights, buy-back rights, right of the first offer, etc;

• Governing Laws and jurisdiction of competent court;

• Non-compete and non-solicitation clause;

• Dispute Resolution – preferably arbitration clause.

Statutory Law References

Indian Contract Act, 1872

The Companies Act, 2013

Securities Contracts (Regulation) Act, 1956

Depositories Act, 1996

Landmark Judgments

V. B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453

Messer Holdings Limited v. Shyam Madanmohan Ruia, [2010] 159 Comp. Case 29 (Bombay High Court)

Russell v Northern Bank Development Corporation Ltd, [1992] 1 WLR 588

Important Do(s) & Don't(s)

• Lawyer consultation or online legal advice should be the preferred way of drafting an SHA.

• Neatly draft the Articles of Association while your company’s incorporation and not just copy-paste them.

• SHA does not bind third parties unless their affairs form part of public domain.

What is a Founder Agreement (FA)?

When a startup company comes into existence, it requires a set of rules between the founders/promoters of that company. “Founder Agreement” is a contract which is drawn between the founders/promoters of a company on key issues in regards to their company.

Why do we need it?
• To outline mutual understanding, responsibilities, rights and obligations of each party to the FA and align their goals.
• To keep a record which will prevent ambiguities in future.
• To provide for allocation and distribution of resources.

When to enter such agreement?
 At the time of tabling the idea;
 At the time of incorporation;
 At the time of capitalization.

Standard Terms & Conditions of a FA
• Equity Investment and Shareholding Structure: Who should hold how much shares? Equity should be divided on the basis of contribution of each of the founders respectively.
• Board Management and Governance: How many founders to be on the Board and why? How the company is to be governed?
• Salary: Compute the salaries of the Founders and their increments.
• Roles & Responsibilities: Divide roles and responsibilities at the top management.
• Shareholders’ Meeting: Frequency of meetings, authorized people in the meetings.
• Fresh Issue and Transfer of Shares: Issues such as Lock-in periods, founder selling his stakes, Right of First Refusal, transfer upon death, etc.
• Approval of Debts: What will be the procedure to approve action which might incur debts to the company?
• Appointment and Removal of a CEO: It should be agreed as to how founder(s) will appoint and remove the CEO.
• Vesting: Right of the company to buy back its shares upon some contingencies is mentioned.
• Confidentiality, Non-Compete and Non-solicit: A founder not to engage in any activity (espionage, breach of confidentiality) with any other entity which would jeopardize or be adverse to the company’s interests or would directly compete with the company.
• Representation and Warranties: Founders are restricted from entering into any other contracts which would limit their obligation towards the company and also, prevent any third party rights over the Intellectual Property of the founder(s)/company.
• Amicable Exit from business: A strategy as to how to exit from the business should be devised.
• IP Rights: Intellectual Property Rights should be accorded to the company and in case of partnership, to all the partners.
• Indemnity: Founders to indemnify the investors for the loss caused by misrepresentation or warranties given to them.
• Governing Law and Dispute Resolution: The FA should mention the laws to be followed and the process of dispute resolution.

Statutory Law References
Sec. 2(h) of the Indian Contract Act, 1872.

Important Do(s) and Dont(s)
• It should be a written agreement to remove ambiguities,
• It should be entered into at the time of incorporation of the company,
• Ensure the legality of the contract and its proper execution,
• Do not provide for severability of clauses as it is not recognized under Indian laws,
• Articles of Association should contain the provisions of FA.
• Above all, lawyer consultation is necessary to draft the agreement so as to review the legalities.